POA Book Notes

Principles of Accounts

CSEC Ms Fergusson

1

ST. MARY’S COLLEGE CSEC REVISION NOTES

TABLE OF CONTENTS

PAGE

INTRODUCTION TO ACCOUNTING 3

ACCOUNTING CONCEPTS AND CONVENTIONS 4

INTRODUCTION TO THE BALANCE SHEET 5

SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET 9

ACCOUNTING CYCLE 10

JOURNALS 12

LEDGERS 17

TRIAL BALANCE 22

CORRECTION OF ERRORS 23

ADJUSTING ENTRIES 24

FINAL A/CS OF SOLE TRADERS 28

CONTROL SYSTEMS 30

BANK RECONCILIATION STATEMENT 32

CONTROL A/CS 35

SUSPENSE A/CS & CORRECTION OF ERRORS 38

FINAL A/C FORMATS 43

RATIO ANALYSIS 63

2

INTRODUCTION TO ACCOUNTING

The Purpose of Accounting :

Definition of accounting

o Accounting is the process of classifying, summarizing, recording, interpreting and communicating financial information.

Identifying: Establishing the essential characteristics or features of. Classifying and summarizing: sorting out data in a useful order.

o To Classify - to arrange or place items into categories or groups. o To Summarize – To create a short description that gives the main facts in a condensed form.

Measuring: placing a value; assigning numbers; determining the size Recording: make an official note of in writing, printing, or such. Interpreting: explain the meaning of something in clear, understandable terms. Communicating / Reporting: Presenting data to stakeholders like internal management and external users.

The purpose of accounting

o The purpose of accounting is to provide information about financial situation of an organization, so that informed decisions can be made.

Difference between accounting and bookkeeping

o Definition of Bookkeeping – Bookkeeping is the recording of the accounting of a business.

Bookkeeping consists of entering transactions into the journals, making adjustments, maintaining precise and accurate records, and preparing reports that keep management up to date on the financial condition of their company.

Bookkeeping is, therefore, a part of accounting, the part concerned with recording information and preparing accounts. Accounting involves interpreting the information recorded by the bookkeeper, and preparing reports in a way that management can use for decision making.

o Accountants are responsible for the design and management of the financial systems that bookkeepers use. They prepare monthly financial statements and tax returns at year end. Accountants may also prepare budgets for management and loan proposals for bankers; They may also perform cost analysis for the company’s products or services.

Users of Accounting :

The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities

Internal Users

o Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources o Management: - need to know profitability & liquidity of business - decision-making o Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.

External Users

o Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment o The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans o Suppliers – credit sales

The Types of Business Organizations :

The various forms of business organizations are:

Sole Trader: 1 owner Partnership: 2 – 20 owners / partners Limited Liability Companies

o Private Limited Companies: 2 – 50 owners / shareholders o Public Limited Companies: 7 – unlimited owners / shareholders

Cooperative Societies (purpose is furthering the economic welfare of its members): open membership Non-Profit Organizations

3

Accounting Concepts and Conventions

Accounting Concepts and Conventions are the accounting rules that are followed when recording transactions in the books.

The Cost Concept states that assets are valued and shown in the accounts at their cost price (the amount asset is purchased for).

The Money Measurement Concept states that only transactions that can be measured in monetary terms should be recorded in the books.

The Going Concern Concept states that the business is assumed to be in operation in the foreseeable future.

The Business Entity Concept

states that the items recorded in the business’ books are transactions that affect the business (business transactions). The owner (s)’ private transactions are kept separate from business transactions.

The Realization Concept (Revenue Recognition Concept)

states that revenue is realized/recognized/earned and recorded as revenue when the goods or services are passed to the customers and a liability is incurred. It is NOT based on when cash has been received.

The Accrual Concept (Matching Concept)

states that the expenses incurred or used up in an accounting period must be matched to the revenues earned in that period, and therefore, recorded in the accounting period incurred.

ACCOUNTINGCONCEPTS

Therulesthatstatehow

transactionsaretoberecorded.

The Dual Aspect Concept

states that there are two aspects of accounting, and both aspects are always equal to each other. Assets must always equal Capital plus Liabilities (Accounting Equation). “Double entry” is the method of recording the transactions for the dual aspect concept.

Materiality

states that only relevant information, which has the ability to influence decisions, is reported. Small amounts are not considered material and may either not be reported, or do not have to follow accounting concepts.

Prudence / Conservatism

states that, in times of uncertainty, the figure that understates profit should be reported, rather than the figure that overstates profit. Expenses should be overstated rather than understated, and revenue should be understated rather than overstated.

ACCOUNTINGCONVENTIONS

Thesearetherulesthatstandardizethe

accountingmethodsusedtoassurethat

similaritemsaredealtwithinsimilarw

ays.

Consistency

states that the same method should be used for the accounting treatment of similar items, and the same method should be used from year to year. If the method is changed, the change should be disclosed.

4

INTRODUCTION TO THE BALANCE SHEET

The Five classes/categories of Accounts :

ALICE: Assets, Liabilities, Income, Capital, and Expenses.

A – Assets L – Liabilities I – income / Revenues C – Capital / Owner’s Equity E – Expenses

• Assets

Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. Simply, they are a company’s resources i.e. things the company owns.

• Liabilities

Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business i.e. amounts the business owes.

• Income

Income / revenues are amounts earned during the accounting period from the daily operations of the business. Simply, they are what the business earns for providing goods and services.

• Capital / Owner’s Equity

Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.

• Expenses

Expenses are the costs incurred by a business in its daily operations in earning income. In other words, they are the cost of assets used by the business to generate revenues.

A company’s financial position The financial position of a company is measured by:

1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity

N.B. Every business transaction will have an effect on a company’s financial position.

5


The Balance Sheet and its major components :

Definition of Balance Sheet

• The Balance sheet is a financial statement that is produced in order to show the financial position of the enterprise shows

• It is produced in order to show the assets of a business in relation to its liabilities and capital at a particular point in time.

The major components of the Balance Sheet

The financial position of a company is measured by:

1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity

Assets, Liabilities and Capital are, therefore, Balance Sheet accounts

• Assets

Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business.

There are two types of assets: o Fixed Assets: assets used to carry on the business and generate profit.

They are not purchased for resale but intended to be retained permanently for the purpose of carrying on the business e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.

o Current Assets: assets consisting of cash and other assets that would be consumed or easily converted into cash within one year.

• Liabilities

Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business (the money owed by the business).

There are two types of liabilities:

o Long Term Liabilities: These are any debts or obligations owed by the business that are due more than one year from the current date e.g. Mortgages, Bank Loans etc.

o Current Liabilities: These are any debts or obligations owed by the business that are due within one year from the current date e.g. Creditors (suppliers, short term loans), bank overdrafts etc.

• Capital / Owner’s Equity

Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.

Capital is considered a special kind of liability. It is a loan by the owner to the business and is, therefore, money owed by the business to the owner.

N.B. For accounting purposes, a business is regarded as being a separate entity from its owner(s).

(the business entity concept)

6


The Accounting Equation :

The Accounting Equation (also called the balance sheet equation.)

• The Accounting Equation is the basic equation of double entry accounting that reflects the relationship between a company's assets, liabilities, and equity.

• It shows how assets were financed: either by borrowing money from someone (liability) or by paying your own money (ownership equity).

• It is expressed as: Assets = Liabilities + Capital

The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.

Additional Information The Expanded Accounting Equation :

o The expanded accounting equation includes two components of Closing Capital: Revenue and Expenses

Revenue – Expenses = the business’ Profit or Loss

If Revenues > Expenses, there is a Profit If Revenues < Expenses, there is a loss

The owner of the business also has the option to withdraw capital from the business for personal use: Drawings

The expanded accounting equation is, therefore:

Assets = Liabilities + Capital + Revenues – Expenses – Drawings

o Revenues increase Capital / Owner’s Equity o Expenses decrease Capital / Owner’s Equity o Drawings decrease Capital / Owner’s Equity

The Simple Balance Sheet :

o An elaborate form of the Accounting equation is presented in a Balance Sheet, which lists all assets, liabilities, and equity, as well as totals to ensure that it balances.

The Format of a simple Balance Sheet (Horizontal)

Balance Sheet as at

Assets

$

X

Capital

Liabilities

$

X

X

XX XX

Balance Sheet as at

Fixed Assets

Current Assets

$

X

X

Capital

Long Term Liabilities

Current Liabilities

$

X

X

X

XX XX

7


The Balance Sheet – Arrangement of Assets and Liabilities

The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in the balance sheet is called 'Marshalling of assets and liabilities'. There are two systems of arrangement of assets and liabilities in the balance sheet:

(a) Order of Liquidity. (b) Order of Permanence.

The Balance Sheet – Order of Permanence: PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life.

ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e. land first, then buildings, then equipment etc).

Balance Sheet as at

Fixed Assets

Current Assets

$

X

X

Capital


Current Liabilities

$

X

X

X

XX XX

The Balance Sheet – Order of Liquidity:

LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss

ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…).

Balance Sheet as at

Current Assets

Fixed Assets

$

X

X

Current Liabilities


Capital

$

X

X

X

XX XX

N.B. The most permanent assets are the least liquid.

Assets and Liabilities in Order of Permanence and Liquidity :

FIXED ASSETS CURRENT ASSETS LONG TERM LIAB. CURRENT LIAB.

Order of Permanence

Order of Liquidity

Order of Permanence

Order of Liquidity

Order of Permanence

Order of Liquidity

Order of Permanence

Order of Liquidity

Land Buildings

Machinery Equipment

Motor Vehicles

Motor Vehicles

Equipment Machinery Buildings

Land

Land Buildings

Machinery Equipment

Motor Vehicles

Motor Vehicles

Equipment Machinery Buildings

Land

Mortgage

Bank Loan due in over

a year

Bank Loan due in over a

year

Mortgage

Creditors

Bank Overdraft

Bank Overdraft

Creditors

8

VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER

Owner’s Name Balance Sheet as at _________

$ $ $ FIXED ASSETS:

Land & Buildings X Plant & Machinery X Fixtures & Fittings X Motor Vehicles X

X CURRENT ASSETS:

Stock X Debtors X Bank * X Cash X

Total Current Assets X LESS: CURRENT LIABILITIES

Bank Loan (1yr or less) X Creditors X Bank overdraft * X

Total Current Liabilities (X)

WORKING CAPITAL X XX

FINANCED BY:

CAPITAL: Opening Capital

X

Add: Net Profit OR Less: Net Loss X OR (X) X Less: Drawings (X)

Closing Capital X LONG-TERM LIABILITIES

Mortgage X Bank Loan (more than 1 year) X

Total Long Term Liabilities X XX

9


ACCOUNTING CYCLE Ms Fergusson

10

Accounting Cycle The accounting cycle is a series of steps for recording each transaction in the accounting process, which are repeated every accounting period.

NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the cycle is done at the end of a period.

Categories and Types of Accounts

Categories of Accounts Types of Accounts

A Assets Personal Accounts – Debtors and Creditors

L Liabilities Real Accounts – Assets & Liabilities

I Income / revenue Nominal Accounts – Revenue and Expenses

C Capital

E Expenses

11

Journals (Books of Original Entry)

Transaction Journal

ALL CASH / CHEQUE TRANSACTIONS Capital: investment by owner Cash Book Receipt from Loans and repayment of Loans Cash Book Purchase / Sale of Fixed Assets for cash or cheque Cash Book Purchase of Stock with cash or cheque (Cash Purchases) Cash Book Sale of Stock for cash or cheque (Cash Sales) Cash Book Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc. Cash Book Payment of creditors (suppliers) the amount owed to them Cash Book Receipt of income/revenue e.g. interest received, rent received, etc. Cash Book Receipt of cash/cheque from debtors (customers) the amount owed by them Cash Book Drawings: money withdrawn from business for personal use Cash Book Discounts Received and Discounts Allowed Cash Book

CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS Purchase of Stock on credit (Credit Purchases) Purchases Journal Sale of Stock on credit (Credit Sales) Sales Journal Sales Returns / Returns Inwards Ret. Inwards Journal Purchases Returns / Returns Outwards Ret. Outwards Journal Purchase / Sale of Fixed Assets on credit General Journal

TRANSACTIONS ENTERED IN THE GENERAL JOURNAL

Transactions that are entered in the cash book are also entered in the GJ Capital: investment by owner General Journal Purchase / Sale of Fixed Assets for cash or cheque General Journal Payment of expenses e.g. rent, salaries, insurance, and... General Journal

- Discounts Allowed - Carriage Inwards and Outwards

General Journal General Journal

Receipt of income/revenue e.g. interest received, rent received, and... General Journal - Discounts Received General Journal

Payment of creditors (suppliers) the amount owed to them General Journal Drawings: money withdrawn from business for personal use General Journal

Non Cash Transactions are entered in the GJ Adjusting Entries

- Provision for Depreciation - Bad Debts written off - Provision for Bad Debts - Prepayments and Accruals

General Journal General Journal General Journal General Journal

OTHER ENTRIES OF THE BUSINESS Opening Entries (list of opening balances of assets, liabilities and capital a/cs) General Journal Correction of Errors General Journal Closing Entries (list of closing balances of assets, liabilities and capital a/cs) General Journal

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Name of the Business

Sales Journal

Date Details Invoice # Folio Amount $ Year

dt Debtor e.g. John Smith SL # X dt Debtor e.g. Jane Doe SL X dt Debtor SL X

End of mth Transfer to Sales account GL XX

Purchases Journal


dt Creditor e.g. Will Browne PL # X dt Creditor e.g. Alice Williams PL X dt Creditor PL X

End of mth Transfer to Purchases account GL XX

Returns Inwards Journal


dt Debtor e.g. John Smith SL # X dt Debtor e.g. Jane Doe SL X

End of mth Transfer to Returns inwards account GL XX

Returns Outwards Journal


dt Creditor e.g. Will Browne PL # X dt Creditor e.g. Alice Williams PL X

End of mth Transfer to Returns outwards account GL XX

Cash Book Date Details Folio Discount

Allowed Cash Bank Date Details Folio Discount

Received Cash Bank

Year $ $ $ Year $ $ $ dt Balance b/d X X dt Purchases GL X dt Capital GL X dt Motor Vehicle GL X dt Sales GL X dt Creditor PL X X dt Debtor SL X X dt Drawings GL X dt Interest received GL X *dt Cash GL X dt Loan GL X *dt Bank GL X

*dt Bank GL X dt Interest on Loan GL X *dt Cash GL X dt Balance c/d X X

X XX XX X XX XX dt Balance b/d X X

The Journal

Date Details Folio DR CR Year $ $

dt Account debited e.g. Motor Vehicle GL X Account credited e.g. Bank Account GL X Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle

13

TheJournal The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.

Opening Journal (opening balances for assets, liabilities and capital accounts)

At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets, liabilities and capital called an opening journal entry.

Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit balance, so these are credited in opening journal entry. Capital is credited.

It is based on accounting equation

The balances can be taken from the balance sheet of previous year.

To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side.

The Journal


dt Land and Buildings Plant and machinery Motor Vehicles Stock (Inventory) Debtors Bank Cash

GL GL GL GL GL GL GL

X X X X X X X

Mortgage Bank Loan Creditors Accrued Expenses Provision for Depreciation: Motor Vehicles

GL GL GL GL GL

X X X X X

To record assets, liabilities and capital of business at beginning of period XX XX

Correction of errors, Adjusting entries, etc.

The Journal


dt Account debited e.g. Motor Vehicle GL X Account credited e.g. Bank Account GL X Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle

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PettyCashBook

Receipts Folio Date Details Total Motor Expenses

Travel Expenses Postage Cleaning Sundry

Expenses Ledger Folio

Ledger Accounts

$ 2011 $ $ $ $ $ $ $X CB Jan 3 Cash Jan 7 Postage X X Jan 10 Motor Exp. X X Jan 14 R. King X PL X Jan 19 Travel Exp. X X Jan 25 Sundry exp. X X Jan 26 Cleaning X X X X X X X X X Jan 31 Balance c/d X

X CB X X Feb 1 Balance b/d X Feb 1 Cash

PettyCashBook




Ledger Accounts

$ 2011 $ $ $ $ $ $ $X CB Jan 3 Cash Jan 7 Postage X X Jan 10 Motor Exp. X X Jan 14 R. King X PL X Jan 19 Travel Exp. X X Jan 25 Sundry exp. X X Jan 26 Cleaning X X X X X X X X X

X CB Jan 31 Cash Jan 31 Balance c/d X

XX XX X Feb 1 Balance b/d

15

PettyCashBook




Ledger Accounts

$ 2011 $ $ $ $ $ $ $300 CB Jan 3 Cash

Jan 7 Postage 5 5 Jan 10 Motor Exp. 20 20 Jan 14 R. King 30 PL 30 Jan 19 Travel Exp. 15 15 Jan 25 Sundry exp. 12 12 Jan 26 Cleaning 14 14 96 20 15 5 14 12 30 Jan 31 Balance c/d 204

300 300 204 Feb 1 Balance b/d 96 CB Feb 1 Cash

PettyCashBook




Ledger Accounts

$ 2011 $ $ $ $ $ $ $300 CB Jan 3 Cash

Jan 7 Postage 5 5 Jan 10 Motor Exp. 20 20 Jan 14 R. King 30 PL 30 Jan 19 Travel Exp. 15 15 Jan 25 Sundry exp. 12 12 Jan 26 Cleaning 14 14 96 20 15 5 14 12 30

96 Jan 31 Cash Jan 31 Balance c/d 300

396 CB 396 300 Feb 1 Balance b/d

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Ledgers (Double entry – T accounts) A T-ACCOUNT is an individual record of business transactions that result in increases and decreases in the specific asset, liability, or capital item.

An account consists of three parts: - The Title/Name of the account - The left side (known as debit / Dr) - The right side (known as credit / Cr)

Name of account e.g. Capital Date Details Folio Dr$ Date Details Folio Cr$

• Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits.

Debit and credit, therefore, indicate on which side of a T account numbers will be recorded. • For some types of accounts debit means an increase in the account balance, while for others debit

means a decrease in the account balance, as seen below:

Category of Account Entry to Increase Entry to Decrease Assets Debit Credit Liabilities Credit Debit Income / revenue Credit Debit Capital Credit Debit Expenses Debit Credit

LEDGERS are books of final entry containing the T-accounts of the business in which transactions are posted in the form of debit and credits.

Ledgers T-Accounts

Sales Ledger Debtor a/cs (personal accounts) e.g. John Smith

Purchases Ledger Creditor a/cs (personal accounts) e.g. Alice Williams

General Ledger

Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc. Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received

Account Ledger Debtor a/cs (personal accounts) e.g. John Smith Sales Ledger

Creditor a/cs (personal accounts) e.g. Alice Williams Purchases Ledger

Sales , Purchases, Returns Inwards, Returns Outwards a/cs General Ledger Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. General Ledger Cash and Bank separate a/cs General Ledger Liability a/cs e.g. Mortgage General Ledger Capital a/c and Drawings a/c General Ledger Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc General Ledger

DOUBLE ENTRY requires that for each transaction, the amount entered into the accounting records is entered in at least two different accounts, with one account being debited and the other credited. All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.

17

Ledgers (Double entry – T accounts)


Sales Ledger

Debtor a/c e.g John Smith

Date Details Folio Dr$ Date Details Folio Cr$ Year Year

dt Sales SJ X dt Returns Inwards RIJ X dt Cash/Bank CB X dt Discounts Allowed CB X

Debtor a/c e.g Jane Doe



Debtor a/c




Purchases Ledger

Creditor a/c e.g Will Brown


dt Returns Outwards ROJ X dt Purchases PJ dt Cash/Bank CB X dt Discounts Received CB X

Creditor a/c e.g Alice Williams



Creditor a/c



18


General Ledger

Sales a/c

Date Details Folio Dr$ Date Details Folio Cr$ Year dt

dt

Cash / Bank Total credit Sales for the month

CB

SJ

X

X

Purchases a/c

Date Details Folio Dr$ Date Details Folio Cr$ Year

dt dt

Cash/Bank Total credit Purchases for the month

CB

PJ

X

X

Returns Inwards a/c Date Details Folio Dr$ Date Details Folio Cr$ Year

dt Total Return Inwards for the month

RIJ

X

Returns Outwards a/c

Date Details Folio Dr$ Date Details Folio Cr$ Year dt Total Return Outwards

for the month

ROJ

X

Motor Vehicles a/c


dt Bank CB X

Capital a/c

Date Details Folio Dr$ Date Details Folio Cr$ Year dt Bank CB X

Bank Loan a/c Date Details Folio Dr$ Date Details Folio Cr$

Year dt Bank CB X

Rent a/c


dt Cash / Bank CB X

Commissions received a/c

Date Details Folio Dr$ Date Details Folio Cr$ Year dt Cash / Bank CB X

19

Balancing off Personal and Real accounts An account balance is the difference between the debit and credit amounts.

Bank account Date Details Folio Dr$ Date Details Folio Cr$ 2010 2010

March 1 Balance b/d 12 500 March 14 Purchases CB 1 300 March 13 Sales CB 2 000 March 20 Equipment GJ 1 000 March 25 Loan GJ 1 000 March 27 Drawings GJ 200 March 28 Rent GJ 2 000

Simple steps:

1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below:


March 1 Balance b/d 12 500 March 14 Purchases CB 1 300 March 13 Sales CB 2 000 March 20 Equipment GJ 1 000 March 25 Loan GJ 1 000 March 27 Drawings GJ 200 March 28 Rent GJ 2 000

2. Total the side with the larger amount and enter the amount in both total boxes, as seen below:


March 1 Balance b/d 12 500 March 14 Purchases CB 1 300 March 13 Sales CB 2 000 March 20 Equipment GJ 1 000 March 25 Loan GJ 1 000 March 27 Drawings GJ 200 March 28 Rent GJ 2 000 15 500 15 500

3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the difference between the debit and credit amounts (account balance), as seen below:

4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the account balance.


March 1 Balance b/d 12 500 March 14 Purchases CB 1 300 March 13 Sales CB 2 000 March 20 Equipment GJ 1 000 March 25 Loan GJ 1 000 March 27 Drawings GJ 200 March 28 Rent GJ 2 000 March 31 Balance c/d 10 000 15 500 15 500 April 1 Balance b/d 10 000

5. Account balances are entered in the Balance Sheet to show the financial position of the business.

20

Closing off Nominal accounts Nominal accounts are temporary accounts, which are closed off at the end of a period. The steps are the same as Real and Personal accounts, except that Nominal a/c balances are NOT carried forward to following period but are transferred to the Trading a/c or the Profit & Loss a/c as follows:

Nominal account Transfer to: Sales Trading a/c Purchases Trading a/c Returns Inwards / Outwards Trading a/c Expenses Profit & Loss a/c Revenue Profit & Loss a/c

Name of Business

The Journal Date Details Folio DR CR 2010 $ $

March 31 Sales X Trading a/c X

March 31 Trading a/c X Purchases a/c X

March 31 Profit and Loss a/c X Expense a/c e.g. Rent X

March 31 Revenue a/c e.g. Commissions Received X Profit and Loss a/c X

Sales a/c Date Details Folio Dr$ Date Details Folio Cr$ 2010 2010

March 13 Bank CB 2 000

March 31

Transfer to Trading a/c

GJ

24 000 March 31 Total Credit Sales for

the month of March

SJ

22 000

24 000 24 000

Purchases a/c

Date Details Folio Dr$ Date Details Folio Cr$ 2010 2010

March 14 Bank CB 1 300 March 31 Total Credit Purchases

for the month of March

PJ

22 000

March 31

Transfer to Trading a/c

GJ

24 000

24 000 24 000

Expense a/c e.g. Rent a/c Date Details Folio Dr$ Date Details Folio Cr$ 2010 2010

March 14 Bank CB 300 March 25 Cash CB 600 March 31 Transfer to P&L a/c GJ 900

900 900

Revenue a/c e.g. Commissions Received Date Details Folio Dr$ Date Details Folio Cr$ 2010 2010

March 31 Transfer to P&L a/c GJ 1 000 March 13 Bank CB 1 000 1 000 1 000

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Trial Balance The Trial Balance is a list of all the debit and credit account balances for a period.

Type of Account Balance in Trial Balance

Personal and Real accounts Balance c/d Nominal accounts Transfer to Trading or P&L a/c

The account balances for a period are entered in the Trial Balance as follows:

Category of Account Account Balances

Assets Debit Liabilities Credit Income / revenue Credit Capital Credit Expenses Debit

Trial Balance as at ___________________ Dr

$ Cr $

Asset accounts X Liability accounts X Income accounts X Capital account X Expense accounts X

XX XX

Trial Balance as at ___________________ Dr

$ Cr $

Cash X Bank * X Stock (Opening Stock) X Bank Loan X Debtors X Creditors X Sales X Purchases X Returns Inwards X Returns Outwards X Rent X Carriage Inwards X Carriage Outwards X Commissions received X Wages and Salaries X Interest Received X Discounts Allowed X Discounts Received X Interest on Loan X Motor Vehicles X Equipment X Bank Overdraft * X Capital X Drawings X XX XX

All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.

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Correction of Errors

Types of errors

There are two main classifications:

Errors NOT affecting / revealed by the Trial Balance 1. Errors of Commission (correct amount, wrong personal account) 2. Errors of Principle (correct amount, wrong type / category of account) 3. Errors of Original entry (incorrect amount entered in the journal / book of original entry) 4. Errors of Omission (no entry made in the books for transaction) 5. Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error) 6. Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c

Errors affecting / revealed by the Trial Balance • Errors of transposition in half of the double entry (resulting in overstatement or understatement of amts). • Errors caused by entries on the wrong side of one half of the double entry. • Errors caused by the omission of one half of the double entry. • Errors of calculation (miscalculation of the account balances) • Errors made in the Trial Balance.

Suspense Account (Errors affecting / revealed by the Trial Balance) A temporary account called a suspense account has to be opened in the general ledger with the difference to make the Trial Balance totals agree with each other. It is opened with a balance, on the side of the a/c that the Trial Balance is less, as seen below:

General Ledger

Suspense account Date Details Dr$ Date Details Cr$

Difference in trial balance (DR side of TB less)

X

Difference in trial balance (CR side of TB less)

X

A credit balance in the Suspense account is a Current Liability in the Balance Sheet. A debit balance in the suspense account is a Current Asset in the Balance Sheet.

N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to the ledger accounts affected by the error, including the suspense account.

The Statement of Corrected Net Profit

Name of business

Statement of corrected Net Profit for the year ended 31st March 2007

$ $

Net Profit per accounts X

Add: Expenses amount overstated Income / Revenue amount understated / omitted

X X

X Less: Income / Revenue amount overstated Expenses amount understated / omitted

X X

(X)

Corrected Net Profit for the year XX

23

Adjusting Entries Adjusting entries are entries made at the end of an accounting period to allocate revenue and expenses to the period in which they belong, as required by the Matching / Accruals Concept.

Expenses to be transferred to the Profit and Loss account is the expenses incurred in the period, whether they have been paid or not.

Revenue to be transferred to the Profit and Loss account is the revenue earned in the period, whether it has been received or not.

TYPES OF ADJUSTING ENTRIES: 1. Accruals – Accrued Expenses and Accrued Revenue 2. Prepayments – Prepaid Expenses and Prepaid Revenue 3. Provision for Depreciation 4. Bad Debts and Provision for Bad Debts

Accruals and Prepayments 1. Accruals and Prepayments adjust revenue and expense amounts in the Trial Balance as follows:

Profit and Loss Amount Trial balance Notes to accounts

Expense Transferred to P&L a/c = Expense paid + Accrued Expense

EXPE

NSE

S

Expense Transferred to P&L a/c = Expense paid - Prepaid Expense

Revenue Transferred to P&L a/c = Revenue received + Accrued Expense

REV

ENU

E

Revenue Transferred to P&L a/c = Revenue received - Prepaid Expense

ADD ACCRUALS

LESS PREPAYMENTS

2. Accruals and Prepayments are included in the Balance Sheet as follows:

CURRENT ASSETS CURRENT LIABILITIES

Prepaid Expenses Accrued Expenses

Accrued Revenue Prepaid Revenue

Bad Debts

Profit and Loss a/c Expense (amount written off)

Provision for Bad Debts

Profit and Loss a/c

Increase in Provision for Bad Debts (Expense) Decrease in Provision for Bad Debts (Revenue)

Balance Sheet Total Provision for Bad Debts (Current Assets: Debtors less Provision)

Depreciation

Profit and Loss a/c Annual Depreciation (Expense) Balance Sheet Accumulated Depreciation (Fixed Assets less Depreciation)

24

Adjusting Entries: Journal entries

ACCRUALS AND PREPAYMENTS Expenses (Rent, Salaries, Insurance, etc.)

The Journal Date Details Folio DR CR Year $ $

dt Expense a/c GL X Cash / Bank a/c CB X To record payment of expense during the year

End of yr Expense a/c GL X Accrued Expense a/c GL X To record expense incurred but still owing at the end of period

End of yr Prepaid Expense a/c GL X Expense a/c GL X To record expense not incurred but paid in advance

End of yr Profit & Loss a/c X Expense a/c GL X To close off Expense a/c and transfer to Profit & Loss a/c

Revenue (Interest received, commissions received, rent received, etc.)


dt Cash / Bank a/c CB X Revenue a/c GL X To record revenue received during the year

End of yr Accrued Revenue a/c GL X Revenue a/c GL X To record revenue earned but still owing at the end of period

End of yr Revenue a/c GL X Prepaid Revenue a/c GL X To record revenue not earned but received in advance

End of yr Revenue a/c GL X Profit & Loss a/c X To close off Revenue a/c and transfer to Profit & Loss a/c

NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC.

The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the Balance sheet as Current assets or Current liabilities.

25

Adjusting Entries: Journal entries

Bad Debts and Provision for Bad Debts


dt Bad Debts a/c GL X Debtors a/c SL X To write off Bad debts and reduce Debtor amount

End of yr Profit & Loss a/c X Bad Debts a/c GL X To close off Bad Debts a/c and transfer to Profit & Loss a/c

End of yr Profit & Loss a/c X Provision for Bad Debts a/c GL X To create a Provision for Bad debts a/c and transfer to P& L a/c

as an expense.

End of yr Profit & Loss a/c X

Provision for Bad Debts a/c GL X To transfer an increase in Provision for Bad debts to P& L a/c

as an expense.

End of yr Provision for Bad Debts a/c X

Profit and Loss a/c GL X To transfer a decrease in Provision for Bad debts to P& L a/c

as revenue.

NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off. At the end of the period, the amount of Bad Debts is transferred to the P & L account like all expenses. Bad Debts is NOT recorded in the Balance Sheet. Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet. It, therefore, has a credit balance. Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated as expenses in the P&L a/c while decreases are revenue in the P&L a/c. Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.

Depreciation


End of yr Profit & Loss a/c X Provision for Depreciation a/c GL X To transfer annual depreciation to P& L a/c as an expense.

NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the Balance Sheet. It, therefore, has a credit balance. Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense. Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset to record the Net Book Value of the Asset.

CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.

26

Adjusting Entries: Ledger entries

Accruals and Prepayments Expense a/c e.g. Rent a/c


Opening Prepaid Expense b/d X Opening Accrued Expense b/d X dt Cash / Bank CB X End of yr Transfer to P & L a/c GJ X

Closing Accrued Expense c/d X Closing Prepaid Expense c/d X XX XX Opening Prepaid Expense b/d X Opening Accrued Expense b/d X

Revenue a/c e.g. Commissions Received a/c


Opening Accrued Revenue b/d X Opening Prepaid Revenue b/d X End of yr Transfer to P & L a/c GJ X dt Cash / Bank CB X Closing Prepaid Revenue c/d X Closing Accrued Revenue c/d X XX XX Opening Prepaid Revenue b/d X Opening Accrued Revenue b/d X

Bad Debts Bad Debts a/c


Dt

Debtor X

End of yr

Transfer to P & L a/c (expense) X

XX XX

Provision for Bad Debts Provision for Bad Debts a/c


End of yr Balance c/d X End of yr P & L a/c (expense) X Beginning Balance b/d X

End of yr Balance c/d X End of yr P & L a/c (expense) X XX XX End of yr P & L a/c (revenue) X Beginning Balance b/d X End of yr Balance c/d X

XX XX Beginning

Balance b/d

X

Depreciation Provision for Depreciation


End of yr Balance c/d X End of yr P & L a/c (expense) X Beginning Balance b/d X

End of yr Balance c/d X End of yr P & L a/c X XX XX End of yr Balance c/d X Beginning Balance b/d X

27

Final Accounts: Income Statement

Owner’s Name

Trading & Profit & Loss A/c for the _______ ended _________ $ $ $ Sales X Less: Sales Returns (X) Net Sales X LESS: COST OF GOODS SOLD: Opening Stock X Purchases X Less: Purchases Returns (X)

Add: Carriage In

X X

Net Purchases X Cost of Goods Available for sale X Less: Closing Stock (X) Cost of Goods Sold (X) GROSS PROFIT (or GROSS LOSS) X or (X)

**Add: Rent Received X Interest received X Discount received

X

Decrease in Provision for bad debts X X **Less: Expenses

Wages/salaries X Utilities X Increase in provision for bad debts X Depreciation X Bad debts expense X Carriage Outwards

X

Discount allowed X Total expenses (X) NET PROFIT (or NET LOSS) X or (X)

**These are a few examples, however the list can be exhaustive in reality

NB. This is an Income Statement for a sole trader.

For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out the net profit amongst the owners and calculate profit retained in business. For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit and Loss a/c.

28

Final Accounts: Balance Sheet

Owner’s Name

Balance Sheet as at _________

FIXED ASSETS: COST $ ACC DEP. $ NBV $ Land & Buildings X (X) X Plant & Machinery X (X) X Fixtures & Fittings X (X) X Motor Vehicles X (X) X

X (X) X CURRENT ASSETS:

Stock X Debtors X Less: provision for bad debts (X) Net debtors X Prepaid expenses X Revenues owing X Bank X Cash X


Creditors X Accrued expenses X Advanced revenues X Bank overdraft X

Total Current Liabilities (X) WORKING CAPITAL X XX FINANCED BY:

Opening Capital X Add: Net Profit OR Less: Net Loss X OR (X) X Less: Drawings (X) Closing Capital X

LONG-TERM LIABILITIES

Mortgage X Bank Loan X

X XX

NB. This is a Classified Balance Sheet for a sole trader.

For other types of businesses there may be other items like proposed dividends, current a/c (partnership) etc.

29


CONTROL SYSTEMS Ms Fergusson

30

St. Mary’s College


Control Systems

Control Systems are the procedures designed and established to check, record, regulate, supervise, and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be accurate, by reducing the incidence of unintentional errors and intentional irregularities.

The need for Control Systems in Accounting.

- Control systems are needed to protect the organization’s assets and ensure the preparation of reliable and timely financial statements.

THE THREE COMMON CONTROL SYSTEMS ARE:

1. Bank Reconciliation Statements

2. Control Accounts

3. Suspense Accounts

Bank Reconciliation Statement

A Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances in the bank column of the cash book and the bank statement on any given date.

Control Accounts Control Accounts are general ledger accounts whose balances reflects the total of balances of related

subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the most commonly used control accounts, and their balances serve as a crosscheck (control) of the accuracy of the associated subsidiary records (personal accounts).

Suspense Accounts

A suspense account is an account in the general ledger in which amounts are temporarily recorded until the correct entry could be determined.

When the proper account / amount is determined, the amount will be moved from the suspense acc.

Suspense accounts are used when accounting for errors to ‘balance” the trial balances until the bookkeeper finds the errors and finishes recording the transactions.

31

St. Mary’s College Lesson Notes

Bank Reconciliation Statement:

SET INDUCTION: The Cash Book and the Bank Statement

BANK ACCOUNT

BUSINESS

Cash Book

BANK

Bank Statement

The business records all the bank account’s

cheque and cash transactions in the Cash Book.

The bank records all the bank account’s cheque

and cash transactions in a Bank Statement, which is sent to the business periodically.

The Cash Book:

• The Cash Book is the business’ record of the business’ bank account. • It consists of information regarding the bank account’s cash and cheque receipts and payments and the

balance at the end of the period, as prepared by the business.

The Bank Statement

• The Bank Statement is the bank’s record of the business’ bank account. • It is a summary that consists of information regarding the bank account’s cash and cheque receipts and

payments and the balance at the end of the period, as prepared by the bank. • A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.

Main accounting difference between the Cash Book and the Bank Statement:

Receipts / Deposits Payments / Withdrawals CASH BOOK – business’ record DR CR

BANK STATEMENT – bank’s record CR DR

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Differences / Discrepancies

between the Cash Book balance and the Bank Statement balance at the end of a specific period.

• There are usually timing differences between when the transaction information is recorded / entered in the banks systems and when it is recorded in the business’ cash book.

• Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account balance and the bank statement account balance at the end of the specific period.

Reasons for the differences between the Cash Book balance and the Bank Statement balance:

Entries recorded in the Bank Statement but not in the Cash Book

• Direct Deposits - Dividends received - Credit transfers – receipts from debtors made into the bank account directly through the bank.

• Standing Orders and Direct Payments

- These are payments made by the bank from the bank account on behalf of the business - E.g. Insurance payments

• Bank Charges (service charges on the bank account taken directly from the account by the bank)

• Interest Received (interest on the bank account deposited directly into the account by the bank)

• Dishonoured / Returned cheques

- bounced cheques that were deposited and have been returned to the bank as dishonored. - The business was not notified as yet because it takes a few days (timing difference)

Entries recorded in the Cash Book but not in the Bank Statement

These occur because of a time lag between the recording of the receipt or payment in the cash book and the recording in the bank:

• Unpresented / Outstanding Cheques - These are cheques issued by the business as payment to persons / businesses that have not been

presented to the bank for payment yet. NB The payee has 6 months to present / “cash” a cheque.

- The business has it recorded in the cash book as a payment made but the bank has not because they have not “cashed” the cheque as yet.

• Unrecorded deposits - These are mainly cheque deposits to be made in the bank account that have been recorded in the

cash book but not by the bank as they have not received the deposits as yet. - The business records the cheques as having been received / deposited on one day, while the bank

records the deposit on another day when the cheques are brought in from the business.

Errors in the Cash Book and in the Bank Statement

The most common types of errors are the overstatements and the understatements of receipts and payments due to errors in the amounts and receipts being entered as payments and vice versa.

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Bank Reconciliation :

It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that both are correct.

Bank reconciliation is the process of comparing and matching figures from the cash book against those shown on a bank statement: • to locate the reasons for the discrepancies, • adjust cash book with those items which must be included and • clarify and support any remaining difference between adjusted cash book balance and bank statement balance.

The Steps of Bank Reconciliation:

1. Compare the Bank Statement and the Bank column of the Cash Book. Check for: - Entries made in the Bank Statement but not the Cash Book. - Entries made in the Cash Book but not the Bank Statement. - Incorrect amounts. - Entries made on the incorrect side of the Cash Book.

2. Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB. - Start with the Cash Book balance at the end of the period / month in question. - Enter all the items that appear in the Bank Statement but not the Cash Book e.g. Bank Charges, Int. Rec… - Correct any errors made in the Cash Book. - Balance / Close off the Revised cash Book.

Revised Cash Book (Bank Column)

Date Details Dr$ Date Details Cr$

Balance b/d Interest received Credit Transfer (debtor personal a/c) Other Receipts not entered in CB Receipts understated Payments overstated

X X X X X X

Bank Charges Standing Order e.g. Insurance Dishonoured chqs (debtor personal a/c) Other Payments not entered in CB Receipts overstated Payments understated Balance c/d

X X X X X X X

XX XX

Balance b/d X

3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in the Bank Statement. There are two methods: - Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.

Bank Reconciliation Statement Revised Cash Book Balance Add: Unpresented cheques

$ X X

Less: Unrecorded deposits

X (X)

Bank Statement Balance XX

- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.

Bank Reconciliation Statement Bank Statement Balance Add: Unrecorded deposits

$ X X

Less: Unpresented cheques

X (X)

Revised Cash Book Balance XX

- For both methods, correct errors by adding or subtracting amounts.

34



Control Accounts

A control account is a summary account in the general ledger that shows the totals of transaction amounts entered in a subsidiary ledger such as sales or purchases ledger during the month.

Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and creditors quickly when a trial balance is being prepared.

Control accounts are an important system of control on the reliability of ledger accounts. They indicate that errors may have occurred in the ledgers they control.

Ledger Accounts Control Account

Sales Ledger debtors’ personal accounts Sales Ledger Control Account (totals of items in the sales ledger)

Purchases Ledger creditors’ personal accounts Purchases Ledger Control Account (totals of items in the purchases ledger)

The purpose of Control Accounts

The reasons for having control accounts are as follows: 1. To check on the accuracy

They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and purchase ledger. It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make. - Figures might get transposed while some entries might be omitted altogether, so that an invoice or a

payment transaction does not appear in a personal account as it should.

It is possible to identify the fact that errors have been made by comparing: • The total balance on the debtors account with the total of individual balances on the personal

accounts in the sales ledger. • The total balance on the creditors account with the total of individual balances on the personal

accounts in the purchase ledger. 2. To locate errors

By using the control account, a comparison with the individual balances in the sales or purchase ledger can be made for every week or day of the month, and the error found much more quickly than if accounts did not exist.

3. To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet. A single balance on a control account is obviously simpler and quicker than many individual balances in the sales or purchase ledger. This means also that the number of accounts in the double entry bookkeeping system can be kept down to a manageable size.

35



CONTROL ACCOUNTS

Ledger Accounts Control Account

Sales Ledger debtors’ personal accounts Sales Ledger Control Account (totals of items in the sales ledger)

Purchases Ledger creditors’ personal accounts Purchases Ledger Control Account (totals of items in the purchases ledger)

The Sales Ledger Control Account

The sales ledger control account is also known as the Debtors Control Account and the Total Debtors Account. It comprises the totals of all accounts of a similar nature related to debtors.

All items that appear in a debtor’s account are also recorded in the debtors control account. The total of each type of transaction related to debtors is entered on the relevant side of the control account.

Items / types of transactions related to debtors include:

• Total opening balances of all debtors for the period • Total credit sales for the period • Total sales returns for the period • Total cash received and cheques received from debtors for the period. • Total Discounts Allowed for the period • Total Bad Debts written off for the period • Dishonoured / Returned cheques from debtors for the period • Total closing balances of all debtors for the period

The Purchases Ledger Control Account

The purchases ledger control account is also known as the Creditors Control Account and the Total Creditors Account. It comprises the totals of all accounts of a similar nature related to creditors.

All items that appear in a creditor’s account are also recorded in the Creditors Control Account. The total of each type of transaction related to creditors is entered on the relevant side of the control account.

Items / Types of transactions related to creditors include:

• Total Opening balances of all creditors for the period • Total Credit Purchases for the period • Total Purchases Returns for the period • Cash payments and cheque payments to creditors for the period • Total Discounts received for the period • Total closing balances of all creditors for the period

Contra entries (appear in both Control Accounts)

A contra entry is an item that offsets, cancels or partially reduces another item.

There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate accounts are kept to record the relevant transactions. Instead of making a payment by cheque for the full amount owed to him as a creditor, his accounts can be settled by “setting off” the amount owed to him by the company and the amount owed by him to the company. A contra entry which is recorded in the personal accounts in the Sales and Purchases Ledger needs to be reflected in both Control accounts to ensure that they balance with the sum of the balances in the ledger accounts. The amount that is set off in the accounts would be the smaller amount.

36

CONTROL ACCOUNTS - FORMAT

Items Source Notes Opening and Closing Balances: Sales Ledger Control Account

Purchases Ledger Control Account

Sales Ledger

Purchases Ledger

A credit balance may be caused by overpayment or return of goods already paid for by debtor. Credit balances must NOT be deducted from debit balances, but shown separately on the credit side of the control account.

A debit balance may be caused by overpayment or return of goods already paid for to creditor. Debit balances must NOT be deducted from credit balances, but shown separately on the debit side of the control account.

Credit Sales Credit Purchases

Sales Journal Purchases Journal

Discounts Allowed / Discounts Received Cash Book Sales Returns Purchases returns

Sales Returns Journal Purchases Returns Journal

Cash / Cheque received and paid Cash Book Bad Debts written off General Journal Refunds from suppliers / to customers Cash Book Dishonoured cheques Cash Book

Contra Entries

General Journal

A Contra Entry in a control account is when the smaller amount is offset against the larger amount.

The Sales Ledger Control Account Date Details Dr$ Date Cr$

Balance b/d (total debtors’ debit bals from previous period) Credit Sales Refunds to debtors/customers Dishonoured cheques Interest on overdue accounts Balance c/d (if any)

X

X X X

X

Balance b/d (if any) (total debtors’ credit bals from previous period) Sales Returns Cash/Cheques received from debtors Discount allowed Bad Debts written off Contra Entries / set offs Balance c/d

X

X X X X X X

Balance b/d Balance b/d (if any)

The Purchases Ledger Control Account Date Details Dr$ Date Cr$

Balance b/d (if any) (total creditors’ debit bals from previous period) Purchases Returns Cash/Cheques paid to creditors/suppliers Discount received Contra Entries / set offs Balance c/d

X

X X X X X

Balance b/d (total creditors’ credit bals from previous period) Credit purchases Refunds from suppliers/creditors Balance c/d (if any)

X

X X X

X Balance b/d (if any) Balance b/d

37

St. Mary’s College Principles of Accounts

Suspense accounts and Correction of Errors TYPES OF ERRORS There are two main classifications of errors:

1. Errors that affect the Trial Balance (errors revealed by the Trial Balance) 2. Errors that DO NOT affect the Trial balance (errors not revealed by the Trial Balance)

Errors that affect the Trial balance

Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These include:

• Errors of transposition in half of the double entry (resulting in overstatement or understatement of amounts). • Errors caused by entries on the wrong side of one half of the double entry. • Errors caused by the omission of one half of the double entry. • Errors of calculation(miscalculation of the account balances) • Errors made in the Trial Balance.

Examples: A cash payment of $450 is entered in the Cash Book as $540. This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB. (A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)

Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit. This would result in the Trial balance Debit balance being more by $2000!!!!!

Errors that do not affect the Trial Balance

• Errors of Commission (correct amount, wrong personal account) • Errors of Principle (correct amount, wrong type / category of account) • Errors of Original entry (incorrect amount entered in the journal / book of original entry) • Errors of Omission (no entry made in the books for transaction) • Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error) • Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c

Examples: Errors of Commission (correct amount, wrong personal account) e.g. Goods sold to M. Smith on credit is entered in N. Smith’s account in error.

Errors of Principle (correct amount, wrong type / category of account) e.g. Motor expenses ( expense) were entered in the Motor vehicles’ account (asset) in error.

Errors of Original Entry (incorrect amount entered in the journal / book of original entry) e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error. As a result, the incorrect amount of $457 was posted to the ledger accounts: T. Tall and Purchases.

Errors of Omission (no entry made in the books for transaction) e.g. Rent received of $1200 was never entered in the cash book, and therefore the accounts.

Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error) e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger accounts as $300 (DR: J. Bond CR: Sales).

Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account) e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent

N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the

ledger accounts affected by the error.

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Errors that do NOT affect the Trial Balance There are certain errors that are not revealed by the Trial Balance, as the debit and credit totals are not

affected by the error so they are equal. These errors are:

• Errors of Commission (correct amount, wrong personal account) • Errors of Principle (correct amount, wrong type / category of account) • Errors of Original entry (incorrect amount entered in the journal / book of original entry) • Errors of Omission (no entry made in the books for transaction) • Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error) • Errors of Complete reversal of entries (correct amts entered in the wrong sides (DR/CR) of each a/c

When these errors are discovered, correcting the errors require double entry journal entries which will

be posted to the accounts affected by errors.

CorrectionofErrorsNOTaffectingtheTrialBalance

Errors of Commission (correct amount, wrong personal account) Correcting the error requires journal entries to be posted to:

• The account incorrectly posted to - DR if the account was credited / CR if the account was debited • The correct account – post to the correct account

Errors of Principle (correct amount, wrong type / category of account) Correcting the error requires journal entries to be posted to:

• The account incorrectly posted to - DR if the account was credited / CR if the account was debited • The correct account – post to the correct account

Errors of Original Entry (incorrect amount entered in the journal / book of original entry) 1. Identify whether the correct incorrect amount entered was overstated or understated. 2. Calculate the amount by which the entry was understated or overstated i.e. the difference. 3. Prepare the journal entry to correct the error:

If the amount was understated: DR: the account debited CR: the account credited With the difference calculated to increase the amount to the correct amount

If the amount was overstated: DR: the account credited CR: the account debited With the difference calculated to decrease the amount to the correct amount

Errors of Omission (no entry made in the books for transaction) Correcting the error requires journal entries to be posted to the relevant accounts in the double entry.

Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error) Correcting these errors require the same steps as correcting Errors of Original entry.

Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account) The journal entry to correct the error:

DR: the account credited CR: the account debited With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)

NB.Theremustbeadoubleentrytocorrecttheerrors.

39


Errors that affect the Trial Balance When the Trial Balance totals are not equal, the errors affecting the Trial Balance may not

immediately be found and corrected.

A temporary account called a suspense account has to be opened in the general ledger with the difference to make the Trial Balance totals agree with each other.

A suspense account should only be opened when all attempts to find the error(s) have been unsuccessful and the final accounts are needed urgently.

Suspense Account

A Suspense account is a temporary ‘holding’ account in the General ledger that is opened to place the difference in the trial balance to make it balance when the causes of the difference cannot immediately be found and corrected.

How to open a Suspense Account

A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less.The Suspense Account will, therefore, have a credit balance when the credit total in the Trial Balance is less and a debit balance when the debit total is less.

General Ledger


Difference in trial balance (DR side of TB less)

X


Difference in trial balance (CR side of TB less)

X

Example: S. James

Trial Balance as at 31st December 2009 DR

$ CR $

Totals (sum of all balances) Suspense a/c

100 000 99 960 40

100 000 100 000


31 Dec Difference in Trial Balance 40

The Suspense Account and the Balance Sheet

AcreditbalanceintheSuspenseaccountisaCurrentLiabilityintheBalanceSheet. AdebitbalanceinthesuspenseaccountisaCurrentAssetintheBalanceSheet.

40


Correction of Errors and the Suspense Account When the errors are discovered after a Suspense a/c has been opened, the errors have to be

corrected by movingtheamountfromthesuspenseaccounttotheproperaccount.

Correcting the errors require double entry journal entries which will be posted to:

1. The Suspense account 2. The other account(s) affected by the error

N.B. To correct the error, there MUST be an entry in the suspense account to cancel the amount entered.

Examples:

A Creditor for $95 was posted as $68 in the personal a/c. The credit side would have been less by $27 so the Suspense account would have been credited. Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR: Creditor’s personal a/c $27

Discounts Received $70 had been posted to the Purchases ledger but NOT to the Discounts Received. The credit side would have been less by $90 so the Suspense account would have been credited. The journal entry to correct the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70

Rent expense of $200 was recorded twice on the same side of the cash account, but entered correctly in the Rent expense a/c The credit side would have been more (debit side less) by $200 so the Suspense account would have been debited. The journal entry to correct the error is: DR: Cash a/c $200 CR: Suspense a/c $200

A cheque for $225 received from Jays Co had been posted to the debit side of their account. As the entry was made on the wrong side of the account, the credit side would have been less (debit side more) by $248, so the Suspense account would have been credited with $450. The journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450

Some errors do not affect the double entry and would, therefore, be corrected with a single entry in

the Suspense account. These errors include: - account balance entered incorrectly in the Trial Balance e.g. $248 entered as $284 - account balance placed on the wrong side in the Trial balance (double the amount)

Examples:

The total of the Sales a/c of $1500 had been omitted from the Trial Balance. The credit side of the TB would have been less by $1500 so the Suspense account would have been credited. Therefore, the journal entry to correct the error: DR: Suspense a/c $1500

The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200. The debit side of the TB would have been less by $200 so the Suspense account would have been debited. The journal entry to correct the error: CR: Suspense a/c $200

Discount received of $67 was entered as $76 in the Trial Balance. The credit side of the TB would have been more (debit side less) by $9 so the Suspense account would have been debited. The journal entry to correct the error: CR: Suspense a/c $200

The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance. As the entry was made on the wrong side of the account, the credit side would have been less by $3000 so the Suspense account would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500

N.B.THEBALANCEINTHESUSPENSEACCOUNTMAYBECAUSEDBYMORETHANONEERROR

• Enter each journal entry to correct the error separately. • Post each entry to the Suspense account and close off.

41


The Statement of Corrected Net Profit

Errors affect the calculation of the Net Profit if the errors affect any of the components of the Trading and Profit and Loss account. • Income and Net Profit have a direct relationship:

- When an error results in Income being overstated, Net profit is also overstated. - When an error results in Income being understated, net profit is also understated.

• Expenses and Net Profit have an inverse relationship:

- When an error results in Expenses being overstated, net profit is understated. - When an error results in Expenses being understated, net profit is overstated.

To correct Net Profit, amounts resulting in Net profit being understated have to be added, and

amounts resulting in Net Profit being overstated have to be lessened. This is done using a “Statement of Corrected Net Profit”.

Name of business

Statement of corrected Net Profit for the year ended 31st March 2007

$ $

Net Profit per accounts X

Add: Expenses amount overstated Income / Revenue amount understated / omitted

X X

X

Less: Income / Revenue amount overstated Expenses amount understated / omitted

X X

(X)

Corrected Net Profit for the year XX

Example:

• On January 17th 2010, an error was found where an invoice of $100 had been credited to the supplier’s a/c but had not been debited to the purchases account.

If Purchases was understated, then Net Profit was overstated and has to be corrected as follows:

Statement of Corrected Net profit for the year ended 31st December 2009

Net Profit per accounts Less: Purchases undercast

$ 2 120 (100)

Corrected Net Profit for the year 2020

$

42


FINAL ACCOUNTS Ms Fergusson

43

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER

Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________

$ $ $ Sales X Less: Sales Returns (X) Net Sales X LESS: COST OF GOODS SOLD:

Opening Stock X Purchases X Add: Carriage Inwards X Less: Purchases Returns

X (X)

Net Purchases X Cost of Goods Available for sale X Less: Closing Stock (X) Cost of Goods Sold (X) GROSS PROFIT (or GROSS LOSS) X or (X)

**Add: REVENUE Interest received Rent Received

X X

Discount received

X

Decrease in Provision for bad debts X X Total Revenue **Less: EXPENSES

X

Wages/salaries X Utilities X Increase in provision for bad debts X Depreciation X Bad debts expense X Carriage Outwards

X

Discount allowed X Total expenses (X) NET PROFIT (or NET LOSS) X or (X)

**These are a few examples, however the list can be exhaustive in reality

44

VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER

Owner’s Name Balance Sheet as at _________

FIXED ASSETS: COST $ ACC DEP. $ NBV $ Land & Buildings X (X) X Plant & Machinery X (X) X Fixtures & Fittings X (X) X Motor Vehicles X (X) X


Stock X Debtors X Less: provision for bad debts (X) Net debtors X Prepaid expenses X Revenues owing X Bank * X Cash X


Creditors X Accrued expenses X Advanced revenues X Bank overdraft * X


Opening Capital X Add: Net Profit OR Less: Net Loss X OR (X) Less: Drawings

X (X)




45

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP

Partnership Trading & Profit & Loss Appropriation A/c for the _______ ended ________

$ $ $ Sales X Less: Sales Returns (X) Net Sales X

LESS: COST OF GOODS SOLD: Opening Stock X Purchases X Add: Carriage In X Less: Purchases Returns

X (X)

Net Purchases X Cost of Goods Available for sale X Less: Closing Stock (X)

Cost of Goods Sold (X) GROSS PROFIT (or GROSS LOSS) Add: Revenue

X / (X)

Rent Received; Discount Rec. etc X Decrease in Provision for bad debts X X

Less: Expenses

Carriage Outwards; Discount allowed etc. X Wages/salaries etc X Increase in Provision for Bad Debts X Depreciation X (X)

NET PROFIT (or NET LOSS) X / (X)

Add: Interest on drawings Partner 1 Partner 2 X

X

X Less: Interest on Capital

Partner 1 Partner 2

X X

X Salary: Partner 1 X

(X) XX

Share in Profits: Partner 1 Partner 2

X X

XX

* The last section (starting from Net Profit) is called the Approriation A/C

46

TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS

Interest on Capital is based on number of months the capital was in use. Capital in use: Date of capital investment to Year end e.g. Capital $5000 on June 1 to Dec 31 (year end) = 7 months

Interest on capital (10%): Partner 1: ($5000 x 10%) x 7/12mths

Interest on Drawings is based on number of months the drawings was in use. Drawings in use: Date of drawings to Year end e.g. Drawings $300 on April 1 to Dec 31 (year end) = 9 months

Interest on drawings (5%): Partner 1: ($300 x 5%) x 9/12mths

PROFIT SHARING Profits or Losses may be shared according to a stated Profit Sharing ration or in proportion to Partners’ Capital (Partnership Deed). If it is not stated how to share profits, share equally according to the Partnership Act.

THE PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS

(Columnar Format)

Partnership Co.

Capital Account Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2

2010 $ $ 2010 S $ Jan 1 Balance b/d X X

Dec 31 Balance c/d X X Feb 1 Bank X XX XX XX XX 2011 Jan 1 Balance b/d X X

Current Account

Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2

2010 $ $ 2010 S $ Dec 31 Drawings X X Jan 1 Balance b/d X X Dec 31 P&L Appropriation: Dec 31 P&L Appropriation:

Interest on drawings X X Interest on Capital X X Salary X - Share of profits X X

Dec 31 Balance c/d X X XX XX XX XX 2011 Jan 1 Balance b/d X X

47

VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP

Partnership

Balance Sheet as at _________

FIXED ASSETS: COST $ ACC DEP. $ NBV $

Land & Buildings X (X) X Plant & Machinery X (X) X Motor Vehicles X (X) X X (X) X

CURRENT ASSETS:

Stock X Debtors X Less: provision for bad debts (X) Net debtors X Prepaid expenses X Accrued revenue X Bank X Cash X

Total Current Assets X

LESS: CURRENT LIABILITIES

Creditors X

Accrued expenses X Advanced revenues X Bank overdraft X Total Current Liabilities (X)


FINANCED BY:

CAPITAL ACCOUNTS

Partner 1 X Partner 2 X

X CURRENT ACCOUNTS

Partner 1 X Partner 2 X

X LONG-TERM LIABILITIES Mortgage X XX

48

FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS

Partnership Balance Sheet as at _________


Land & Buildings X (X) X Plant & Machinery X (X) X Motor Vehicles X (X) X X (X) X

CURRENT ASSETS:

Stock X Debtors X Less: provision for bad debts (X) Net debtors X Prepaid expenses X Accrued revenue X Bank X Cash X

Total Current Assets X

LESS: CURRENT LIABILITIES

Creditors X Accrued expenses X Advanced revenues X Bank overdraft X Total Current Liabilities (X)


FINANCED BY:

CAPITAL ACCOUNTS Partner 1 Partner 2

Opening Capital X X Capital introduced X X

X X X CURRENT ACCOUNTS

Opening balance X X Add: Interest on Capital Salary Share in Profits Less: Drawings Interest on drawings

X X X

(X) (X)

X - X

(X) (X)

X X X LONG-TERM LIABILITIES Mortgage X XX

49

FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS)

When forming a partnership by merging two sole traders, an opening journal is prepared as follows:

• State partnership name • Draw Journal with DR and CR columns, as seen below

• List the assets and liabilities of the new partnership. - Combine / Add each asset and liability of the sole traders forming the

partnership - * Bank and Bank overdrafts are combined into one net figure which is

EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability) - *The Capital of EACH partner (former sole traders) must be stated separately.

The Capital of each partner is calculated using C = A-L, using the individual sole trader figures.

• Narrative for formation of partnership • DR and CR Totals must balance (Accounting equation)

Partnership The Journal

Date Details DR $

CR $

Buildings X

Fixtures and Fittings X

Motor Vehicles X

Stock X

Debtors X

Bank * X*

Cash X

Mortgage X

Bank Loan X

Creditors X

Bank Overdraft * X*

*Capital: Partner 1 Partner 2

X X

To record assets and liabilities at formation of partnership

XX XX

50

FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS

Non Profit Organizations include:

• Associations • Clubs • Societies • Unions • Charities • Universities • Churches

Non-profit making organizations belong to their members. Members pay subcriptions.

The Cash book is called the Receipts and Payments Account and the Trading and Profit and Loss Account is called the Income and Expenditure Account.

Differences in accounting terms / procedures

PROFIT MAKING FIRMS NON PROFIT ORGANIZATIONS Cash Book Receipts and Payments a/c

Trading a/c for buying and selling of goods for profit

Trading a/c for fundraising activities only e.g. Bar Trading a/c

Profit & Loss a/c Income and Expenditure a/c

Net Profit Surplus of income over expenditure (Surplus)

Net Loss Excess of expenditure over income (Deficit)

Capital a/c Accumulated Fund

Balance Sheet Balance Sheet

_________________________________________________________________________________________

FORMAT FOR RECEIPTS AND PAYMENTS A/C

Non Profit Organization

Receipts and Payments Account for the period ended ________________________

Receipts $ Payments $ Balance b/f X Bar Purchases X Bar Sales Subscriptions Donations Received Other Receipts e.g. Rent Received Gate Receipts Raffles and other competitions Interest Received on bank a/c

X X X

X X X X

General Expenses Other Payments e.g. Insurance Purchase of refreshments Purchases of Prizes Purchase of new equipment Rent of hall for Annual Dinner Maintenance

X

X X X X X X

Sale of old equipment Balance c/f X XX XX Balance b/f X

51

THE SUBSCRIPTION ACCOUNT OF NON PROFIT ORGANIZATONS

Non Profit Organizations receive subscriptions from its members. The Subscription Account is a revenue account (credit balance).

The Subscription account must account for any Accruals and Prepayments, like all revenue accounts, as follows:


Subscription a/c Date Details Dr$ Date Details Cr$ Year Year

Dt @ start Accrual b/d X Dt @ start Prepayment b/d X Year end Income & Expenditure** X Year end Bank (Receipts) X

Prepayment c/d X Accrual c/d X XX XX

**The amount for “Income & Expenditure” is entered in the Income & Expenditure account for Subscriptions in the Income section.

___________________________________________________________________________________

LIFE MEMBERSHIP

Many clubs and societies have life membership schemes where members can pay a relatively large amount at the beginning and then never pay any more membership fees.

The payment of a life membership fee should be spread over the estimated / expected membership period.

An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the remainder would be entered in the Balance Sheet as a long-term liability.

Example: A member paid $20 000 life membership at age 20 and expected to be a member until 40 years old. Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be $20 000 / 20 years which is $1 000. In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability. In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability. …

52

FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS

The Trading a/c is prepared to calculate whether the non profit organization made a profit or a loss on its fundraising activities e.g. bar, disco, dances, etc.

The Income & Expenditure shows whether the accumulated fund (capital) has increased or decreased over the period.


Bar Trading a/c for the period ended ____________________________ $ $

Bar Sales X Less: Cost of Goods Sold Opening Stock Add: Purchases

X X

Less: Closing Stock

X (X)

(X) Gross Profit X Less: Barman’s Salary (X)

Profit / Loss transferred to Income & Expenditure a/c* XX

Income & Expenditure a/c for the period ended ____________________________ $ $

Income

Profit from bar* Subscriptions** Donations received Rent received Interest Received Receipts from Raffles etc. Any other income for period…

X X X X X X X

X Expenditure Loss from bar* Wages General Expenses Donations Depreciation of Equipment Depreciation of Furniture & Fittings Any other payments in period

X X X X X X X

(X) Surplus of income over expenditure ** XX

**If Expenditure exceeds Income, the difference is Excess of expenditure over income

N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments. Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.

53

FORMAT FOR THE BALANCE SHEET OF NON PROFIT ORGANIZATONS


Balance Sheet as at ________________

FIXED ASSETS: COST $ ACC DEP. $ NBV $ Club Premises X - X Furniture & Fittings Sports Equipment

X X

(X) (X)

X X


Bar Stock X Prepaid Expenses X Accrued Revenues e.g. Accrued Subscriptions * X Bank X Cash X


Creditors X Accrued expenses X Advanced revenues e.g. Advanced Subscriptions * X

Total Current Liabilities (X)

WORKING CAPITAL X XX FINANCED BY:

ACCUMULATED FUND

Accumulated Fund @ start of period (Opening Balance) X Add: Surplus of income over expenditure OR Less: Excess of expenditure over income

X OR (X)

Accumulated Fund @ end of period (Closing Balance) X LONG-TERM LIABILITIES

Mortgage X Life Membership Fee** X

Total Long Term Liabilities X

XX

54

FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES


Income and Expenditure Account for the year ended ___________________________________

$ $ $ Income

Membership dues Interest and Dividends Other

X X X

X Expenditure

Telephone Stationary & Office Supplies Traveling Repairs and Maintenance Motor Vehicle expense Bank Charges Interest on members deposits Interest on Loans Application: Subscriptions and dues Annual General Meeting (AGM) expenses Auditors’ fees/remuneration Provision for Depreciation

X X X X X X X X X X X X

(X) Surplus/Deficit for the year Add: Undistributed surplus at the beginning of year b/f X

X Less: Appropriations

Transfer to reserves: Statutory reserve Special reserve

X X

X

X Honoraria Proposed dividend

X X

(X)

Undistributed surplus c/f to next year XX

Note:

• Statutory Reserves – by law / statute a minimum percentage of net income should be transferred to this reserve.

• Special Reserve – a reserve for any specific named purpose e.g. Investment reserve; Building reserve

• Honoraria – voluntary payments to members of the committee of management as appreciation for services performed.

• Proposed Dividends – dividends fixed at the AGM.

55

FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES

Name of Business

Balance Sheet as at _________________________________________

Employment of Capital Fixed Assets

$ Cost

$ Accumulated Depreciation

$ Net Book

Value Premises Equipment Motor Vehicles

X X X

-- (X) (X)

X X X

X X X Current Assets

Stock Receivables: Membership dues Prepayments Bank Cash

X X X X X

X Less: Current Liabilities

Honoraria Owing Proposed Dividends *

X X

(X) Working Capital X Net Assets XX Capital Employed

Share Capital

Reserves: Statutory reserve Special reserve Undistributed surplus income

X X X

X

X XX

Note:

A Cooperative Society’s primary source of capital is from its members.

56

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY

Limited Liability Company Trading & Profit & Loss Appropriation A/c for the _______ ended ________

$ $ $ Sales X Less: Sales Returns (X) Net Sales X

LESS: COST OF GOODS SOLD: Opening Stock X Purchases X Less: Purchases Returns (X) Add: Carriage In

X X

Net Purchases X Cost of Goods Available for sale X Less: Closing Stock (X)

Cost of Goods Sold (X) GROSS PROFIT (or GROSS LOSS) Add: Revenue

X / (X)

Rent Received; Discount Rec. etc X Decrease in Provision for bad debts X

Total revenue

X

Less: Expenses Carriage Outwards X Utilities ; Wages/salaries etc X Discount allowed X Increase in provision for bad debts X Bad debts expense X Depreciation

X

*Directors’ Remuneration *Debenture Interest

X X

Total expenses (X)

NET PROFIT (or NET LOSS) X / (X)

Add Retained Earnings b/f X

X Less: Appropriations

Transfer to General reserves X Proposed dividends:

Preference share dividends Ordinary Share Dividends

X X

(X) Retained Earnings for the year X

* The last section (starting from Net Profit) is called the Approriation A/C

57

VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY

Limited Liability Company Balance Sheet as at _________

FIXED ASSETS: COST $ ACC DEP. $ NBV $ Land & Buildings X (X) X Plant & Machinery X (X) X Motor Vehicles X (X) X X (X) X CURRENT ASSETS: Stock X Debtors X Less: provision for bad debts (X) Net debtors X Prepaid expenses X Accrued revenue X Bank X Cash X Total Current Assets X LESS: CURRENT LIABILITIES Creditors X *Debenture Interest Payable Accrued expenses

X X

Advanced revenues *Proposed Dividends: Ordinary Preference

X

X X

Bank overdraft X Total Current Liabilities (X) WORKING CAPITAL X XX FINANCED BY:

Authorized Share Capital Ordinary Shares @ $ par value % Preference Shares @ $ par value

X X

X Issued Share capital Ordinary Shares @ $ par value % Preference Shares @ $ par value

X X

X Reserves General Reserves Retained Earnings

X X

X LONG-TERM LIABILITIES

X

Mortgage X * % Debentures X X XX

58

FORMAT OF THE MANUFACTURING ACCOUNT

Manufacturing Business Manufacturing Account for the _______ ended ________

$ $ $ Opening Stock of Raw Materials X Add: Purchases of Raw Materials Carriage Inwards (Raw Materials)

X X

Less: Closing Stock of Raw Materials

X (X)

Cost of Raw Materials consumed (Direct Materials) X Direct Labour Direct expenses

X X

PRIME COST X Add: Factory Overhead Expenses

Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance… Depreciation of Plant and machinery Lubricants

X X X X X X

X PRODUCTION COST X Add: Opening Work-in-Progress X X Less: Closing Work-in-Progress (X) PRODUCTION COST OF GOODS COMPLETED C/D* X

Trading and Profit and Loss Account for the ________ended ________

$ $ $ Sales Less: Sales Returns (Finished Goods)

X X

NET SALES

Less: Cost of Goods Sold X

Opening Stock of Finished Goods Add: Purchases of Finished Goods (if any) Less: Purchases Returns of Finished Goods (if any)

Net Purchases *Add: Production cost of goods completed b/d*

X

X .

X

X X

X Less: Closing Stock of Finished goods (X)

(X) GROSS PROFIT X

Less: Administrative Expenses Administrative Staff pay Rent; Insurance; Depreciation etc

X X

X Less: Selling and Distribution

Sales Staff pay Commission on sales; Carriage Outwards, etc

X X

X Financial Charges

Bank Charges Discounts Allowed

X X

X (X) NET PROFIT X

59

MANUFACTURING ACCOUNT (INCLUDING COST OF PACKAGING)

The Cost of Production may include the cost of the packaging of the finished goods e.g. boxes, bottles, cases etc. This Cost has to be included in the Manufacturing Account in addition to the cost of Raw Materials. This can be done after Cost of Raw Materials Consumed is calculated, or in columnar format as seen below:

Manufacturing Business

Manufacturing Account for the _______ ended ________

$ Raw

Materials

$ Packaging e.g Boxes

$

Total

Opening Stock X X

Add: Purchases Carriage Inwards

X X

X X


X (X)

X (X)

Cost of Direct Materials & Boxes consumed X X XX Direct Labour Direct expenses

X X



X X X X X X

X

PRODUCTION COST X Add: Opening Work-in-Progress X X Less: Closing Work-in-Progress (X)

PRODUCTION COST OF GOODS COMPLETED C/D* X

* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even though it appears to be under the “Boxes” Column.

60

The following format is the long way of including the Cost of Packaging in the Manufacturing Account. The Packaging cost is calculated after the “Cost of Raw Materials consumed” as follows:

Manufacturing Business

Manufacturing Account for the _______ ended ________

$ $ $ Opening Stock of Raw Materials X Add: Purchases of Raw Materials Carriage Inwards (Raw Materials)

X X


X (X)

Cost of Raw Materials consumed (Direct Materials) Opening Stock of Packaging e.g. Boxes Add: Purchases of Boxes Carriage Inwards (Boxes)

X X X

X

Less: Closing Stock of Boxes

X (X)

X Cost of Direct Materials and Boxes consumed Direct Labour Direct expenses

XX X X



X X X X X X

X

PRODUCTION COST X Add: Opening Work-in-Progress X X Less: Closing Work-in-Progress (X) PRODUCTION COST OF GOODS COMPLETED C/D* X

61

FORMAT OF THE BALANCE SHEET OF A MANUFACTURING BUSINESS

The Current Asset Section is the only section that differs in the Balance Sheet for a

Manufacturing Account as Stock is now divided into THREE types: 1. Raw Materials 2. Work-in-Progress 3. Finished Goods

Manufacturing business

Balance Sheet as at ________________


Land & Buildings X (X) X Plant & Machinery X (X) X

X (X) X

CURRENT ASSETS:

Stock* Raw materials Work in progress Finished Goods

X X X

Debtors

X

X

Less: provision for bad debts (X) Net debtors X Prepaid expenses X Revenues owing X Bank * X Cash X


Creditors X Accrued expenses X Advanced revenues X Bank overdraft * X


Opening Capital X Add: Net Profit OR Less: Net Loss X OR (X) Less: Drawings

X (X)




62


RATIO ANALYSIS Ms Fergusson

63


Accounting Ratios: A ratio that expresses the relationship between one accounting result and another, intended to provide a useful comparisons.

Liquidity Ratios: assesses the business’ ability to cover its short-term debt as they become due.

Current Ratio = Current Assets . Current Liabilities

Also known as “Working Capital Ratio” Ratio expressed as the number of times

current assets can cover the current liabilities in the accounting period.

Example: Current Assets = $12 500 = 2.5:1 2.5 Current assets cover 1 Current liability Current Liabilities $5 000

Quick Ratio = Current Assets - Stock . Current Liabilities

Also known as “Acid Test Ratio” Ratio expressed as the number of times

quick assets can cover the current liabilities in the accounting period.

Example: Current Assets - Stock = $12 500 - $2 500 = 2:1 2 Quick Assets cover 1 C. Liability Current Liabilities $5 000

Debtor: Sales Ratio = Debtors / Acc. Receivable x 12mths Annual Sales

Expressed as the average no. of months debtors take to pay business amounts owed.

Example: Debtors = $3 600 x 12mths = 1.35 months Debtors take 1.35 months on average to Sales $32 000 pay business amounts owed.

Creditor: Purchases Ratio = Creditors / Acc. Payable x 12mths Annual Purchases

Expressed as the average no. of months the business takes to

pay creditors / suppliers amounts owed.

Example: Creditors = $2400 x 12mths = 1.04 months The business takes 1.04 months on Purchases $27 700 average to pay creditors amounts owed.

Debtor: Creditor Ratio = Debtor . Creditor

Measures the relationship between how much credit is granted by the business to customers and how much credit

is received from suppliers.

Example: Debtors = $3 600 = 1.5:1 …for every $1.50 owed by a debtor, the business owes $1 to a Creditors $2 400 creditor.

64


Profitability Ratios: assesses the business’ overall efficiency and performance during a specific period.

Gross Profit as a Percentage of Sales = Gross Profit x 100 Net Sales

Expressed as a % Amount of Sales that result in

Gross Profit

Example: Gross Profit x 100 = $12 900 x 100 = 40.3% The business made a Gross profit of $0.40 Net Sales $32 000 for every $1 of Sales.

Net Profit as a Percentage of Sales = Net Profit x 100 Net Sales

Expressed as a % Amt of Sales that business keeps as profits after cost of sales & expenses

Example: Net Profit x 100 = $7 200 x 100 = 22.5% The business made a profit of $0.22 for every $1 Net Sales $32 000 of Sales after deducting all costs & expenses.

Net Profit as a Percentage of Capital Employed = (Return on Capital Employed)

Net Profit x 100

Capital Employed Expressed as a

%

This ratio measures the amount of returns a business receives from resources made available to them from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are

included in capital employed as well.

There are different Formulas for Capital Employed. Most popular for CSEC: Capital Employed = Opening Capital + Closing Capital

2

Example: Net Profit x 100 = $7 200 x 100 = 33.3% The business earned $0.33 for every $1 Capital Employed $21 600 of Capital Employed.

Rate of Turnover or Stock turnover = Cost of Goods Sold . Average Stock

Expressed as the no. of times per annum stock is sold or turned over.

Rate of Turnover or Stock turnover = Average Stock x 12mths / 365dys Cost of Goods Sold

Expressed as the average no. of months or days the

stock is sold or turned over.

Average Stock = Opening Stock + Closing Stock 2

Example1: $19 100 = 8.3 times $2 300

Example2: $2 300 x 12mths = 1.45 months $19 100

65

Accounting Ratios and Incomplete Records:

MARK UP AND MARGIN (PROFIT EXPRESSED AS A % OF PRICE)

MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE

FORMULAS: MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD

Gross Profit Mark up (%) =

Cost Price / Cost of Goods Sold

X 100

NB: Sales = Cost of Goods Sold + Mark up Profit

MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE

Gross Profit Margin (%) =

Selling Price / Sales

X 100

NB: Cost of Goods Sold = Sales – Margin Profit

USING MARK UP AND MARGIN IN INCOMPLETE RECORDS

MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD

NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can be calculated as follows:

Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($)

Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up)

Example: Cost of Goods Sold = $5000 Mark up = 20%

Solution: Gross Profit = 20% x $5000 = $1000

Therefore, Sales = $5000 + $1000 = $6000

MARGIN: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD

NB: If Margin % is given and Sales Revenue, Gross Profit and Cost of Goods Sold can be calculated as follows:

Gross Profit ($) = Margin (%) x Sales ($)

Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin)

Example: Sales = $6400 Margin = 25%

Solution: Gross Profit = 25% x $6400 = $1600

Therefore, Cost of Goods Sold = $6400 + $1600 = $4800

RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary)

MARGIN = Mark-up numerator . (fraction) Mark-up numerator + Mark-up denominator

MARK UP = Margin numerator . (fraction) Margin numerator - Margin denominator

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