DISTANCE LEARNING CENTRE

AHMADU BELLO UNIVERSITY

ZARIA, NIGERIA

COURSE MATERIAL

FOR

Course Code & Title: ACC 101/ INTRODUCTION TO

ACCOUNTING & FINANCIAL REPORTING 1

Programme: [Link]. ACCOUNTING

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 COPYRIGHT PAGE
© 2018 Distance Learning Centre, ABU Zaria, Nigeria

All rights reserved. No part of this publication may be reproduced in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise without the prior
permission of the Director, Distance Learning Centre, Ahmadu Bello University, Zaria,
Nigeria.

First published 2018 in Nigeria.

ISBN:

Published and printed in Nigeria by:

Ahmadu Bello University Press Ltd,
Ahmadu Bello University,
Zaria, Nigeria.

Tel: +234

E-mail:

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COURSE WRITERS/DEVELOPMENT TEAM
Editor
Prof. M. I. Sule
Course Materials Development Overseer
Dr. Usman Abubakar Zaria
Subject Matter Expert
Dr. Aisha Nuhu Mohammed
Subject Matter Reviewers
Dr. M. M. Bagudo
Chat Lot Kogi
Language Reviewer
Ene Adakole
Instructional Design/Graphics
Nasiru Tanko
Fatima Kabir
Proposed Course Coordinator
Nafisa Abubakar
ODL Expert
Prof. M. H. Sabari

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 TABLE OF CONTENT

Course Title Page - - - - - - 1

Copyright Page - - - - - - 2
Course Writers/Development Team - - - 3
Table of Content - - - - - - 4
Information - - - - - - -- 5
Course Introduction and Description - - - 5
Course Prerequisites - - - - - - 6
Course Learning Resources- - - - - 6
Course Objectives and Outcome- - - - - 7
Activities to Meet Course Objectives- - - - 7
Time (To study and Complete Course)- - - -- 8
Grading Criteria and Scale-- - - - - 8
Course Structure and Outline- - - - - 11

STUDY MODULES
1.0 Module 1: - - - - - - - - 14
Study Session 1: Introduction - - - - - - 14
Study Session 2: Conceptual Framework - - - - 21
Study Session 3: Accounting Concept - - - - - 32
Study Session 4: Subsidiary Accounts - - - - - 39

2.0 Module 2 -- - - - - - - - - 46
Study Session 1: The Ledger- - - - - - - 46
Study Session 2: Trial Balance - - - - - - 60
Study Session 3: Final Account (Income Statement) - - - 70
Study Session 4: Final Account (Statement of financial Position) - - 88

3.0 Module 3: - - - - - - - - - 103

Study Session 1: Adjustment of Final Accounts - - - - 103
Study Session 2: Manufacturing Accounts- - - - - 132
Study Session 3: Control Accounts - - - - - - 151
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 Study Session 4: Accounting of non-treading operations- - - 161
Study Session 5: Single entry and incomplete Records- - - 169
Glossary - - - - - - - - - 193

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 COURSE STUDY GUIDE
i. COURSE INFORMATION
Course Code: ACC 101
Course Title: Introduction to Accounting and Financial Reporting I
Credit Units: 3
Year: 1
Semester: First semester

ii. COURSE INTRODUCTION AND DESCRIPTION

ACCT 101 is a first semester coursework of three-credit units offered by all
students of the B. Sc. Accounting Programme. Financial Accounting and
Reporting I provides solution to the need to have ready information to take
appropriate financial decisions in business and nonbusiness organisations. It
speaks to the process of collecting, recording, presenting, and
analysing/interpreting financial information. It reports, in aggregate financial
terms and during a given period, the overall results of the operations of an
economic entity/ organisation, highlighting especially; the financial strengths
and weaknesses of the entity. A good manager should therefore be equipped
with the knowledge and tools required to present and analyse financial reports.

iii. COURSE PREREQUISITES

You should note that although this course has no subject pre-requisite, you are
expected to have:
1. Satisfactory level of English proficiency
2. Basic Computer Operations proficiency
3. Online interaction proficiency
4. Web 2.0 and Social media interactive skills

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 iv. COURSE LEARNING RESOURCES
Anao, A.R. (1989). An Introduction to Financial Accounting. Ibadan:
Longman Nigeria Limited.
Igben, R.O. (2004). Financial Accounting Made Simple. (Volume 1). Lagos:
ROI Publishers.
Text authored by professional bodies such as ICAN and ANAN.
Any other text on Financial Accounting and Reporting.

v. COURSE OBJECTIVES AND OUTCOME

After studying this course, you should be able to:
• highlight the objectives and scope of accounting
• explain the various branches of Accounting
• state the objectives of general purpose financial statements
• highlight fundamental qualitative characteristics of financial reporting
• explain the cost constraints of useful financial reporting
• define accounting concept
• explain various accounting concepts, conventions and principles
• highlight the advantages of using subsidiary books
• know the procedures for preparing subsidiary books
• know the importance of ledger Account
• understand the various types of ledger
• be able to prepare a ledger account
• define a Trial Balance
• extract the Trial Balance
• know the procedures for preparing Income Statement
• identify items that will appear in the Statement of Financial Position
• prepare a Statement of Financial Position
• explain why adjusting entries are necessary

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• show the treatment of bad debts, provision for doubtful debts,
depreciation and provision for discount on receivables and payables
• explain and pass entries in respect of accruals, prepayments and record
increases and decreases in provisions and reserves
• define depreciation and explain why accountants provide for
depreciation in the final accounts
• explain the causes of depreciation
• outline methods of depreciating fixed assets
• calculate depreciation using the various methods
• define and explain a manufacturing account
• prepare final accounts of a manufacturing company
• explain control accounts
• discuss the advantages of control accounts
• prepare control accounts from given information
• explain incomplete and single entry records
• calculate profit of an enterprise using the accounting equation from
available information
• derive proprietor’s cash drawings or additional capital as a missing
figure, where all other information relating to cash payments and
receipts are known
• derive expenses incurred and revenue earned from incomplete records
• differentiate between final accounts of non-profit organisations and
those of commercial enterprises
• prepare receipts and payments account
• prepare income and expenditure account
• prepare a Statement of Financial Position for non-profit making
organisations

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 vi. ACTIVITIES TO MEET COURSE OBJECTIVES
At the end of this course, you will be able to achieve the following:
• Understand conceptual framework in accounting
• Understand accounting concept
• Understand subsidiary accounts
• The ledger
• Address the issue of trial balance.

Specifically, this course shall comprise of the following activities:

i. Studying courseware
ii. Listening to course audios
iii. Watching relevant course videos
iv. Course assignments (individual and group)
v. Forum discussion participation
vi. Tutorials (optional)
vii. Semester examinations (CBT and essay based).

vii. TIME (TO STUDY AND COMPLETE COURSE)

For you to be able to study and complete this course, you will need to study
this course material from study session one to the thirteenth study session. You
will also need to put in at least 3 hours of study per week and 39 hours for the
13 study sessions.

viii. GRADING CRITERIA AND SCALE

Grading Criteria
A. Formative assessment
Grades will be based on the following:

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Individual assignments/test (CA 1,2 etc) 20
Group assignments (GCA 1, 2 etc) 10
Discussions/Quizzes/Out of class engagements etc 10

B. Summative assessment (Semester examination)

CBT based 30
Essay based 30
TOTAL 100%

C. Grading Scale:
A = 70-100
B = 60 – 69
C = 50 - 59
D = 45-49
F = 0-44

D. Feedback
Courseware based:
1. In-text questions and answers (answers preceding references)
2. Self-assessment questions and answers (answers preceding references)

Tutor based:
1. Discussion Forum tutor input
2. Graded Continuous assessments

Student based:
1. Online programme assessment (administration, learning resource,
deployment, and assessment).

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 IX. COURSE STRUCTURE AND OUTLINE
Course Structure
WEEK MODULE STUDY SESSION ACTIVITY

1 Study Session 1 1. Read Courseware for the corresponding Study Session.

Introduction 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube
[Link]
[Link]
[Link]
[Link]

2 Study Session 2 1. 1. Read Courseware for the corresponding Study Session.

STUDY Conceptual 2. Listen to the Audio on this Study Session
MODULE 1 Framework 3. View any other Video/U-tube
[Link]
sgheSZmY0awyYUT5jM6fd4Vjtqy
[Link]

3 Study Session 3 1. Read Courseware for the corresponding Study Session.

Accounting Concept 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube :
[Link]
[Link]

4 Study Session 4 1. Read Courseware for the corresponding Study Session.

Subsidiary Account 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube
[Link]
[Link]

5 STUDY Study Session 1 1. Read Courseware for the corresponding Study Session.
The Ledger 2. Listen to the Audio on this Study Session

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 MODULE 2 3. View any other Video/U-tube:
[Link]
[Link]

6 Study Session 2 1. Read Courseware for the corresponding Study Session.

Trial Balance 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube:
[Link]
[Link]

7 Study Session 3 1. Read Courseware for the corresponding Study Session.

Final Account 2. Listen to the Audio on this Study Session
(income statement ) 3. View any other Video/U-tube:
[Link]
[Link]

8 Study Session 4 1. Read Courseware for the corresponding Study Session.

Final Account( 2. Listen to the Audio on this Study Session
statement of Financial 3. View any other Video/U-tube
position ) [Link]
[Link]

9 Study Session 1 1. Read Courseware for the corresponding Study Session.

Adjustment of final 2. Listen to the Audio on this Study Session
Accounts 3. View any other Video/U-tube :
[Link]
[Link]

10 Study Session 2 1. Read Courseware for the corresponding Study Session.

STUDY
Manufacturing 2. Listen to the Audio on this Study Session
MODULE 3 Accounts 3. View any other Video/U-tube :
[Link]
[Link]

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 11 Study Session 3 1. Read Courseware for the corresponding Study Session.
Control Accounts 2. Listen to the Audio on this Study Session
3. View any other Video/U-tube :
[Link]
[Link]
Study Session 4 1. Read Courseware for the corresponding Study Session.
Accounting of non- 2. Listen to the Audio on this Study Session
treading operations 3. View any other Video/U-tube :
[Link]
[Link]
12 Study Session 5 1. 1. Read Courseware for the corresponding Study Session.
Single entry and 2. Listen to the Audio on this Study Session
Incomplete Records 3. View any other Video/U-tube :
[Link]

Week 13 TUTORIALS/REVISION

Week 14 & 15 SEMESTER EXAMINATION

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Course Outline
1.0 Module 1:
Study Session 1: Introduction
Study Session 2: Conceptual Framework
Study Session 3: Accounting Concept
Study Session 4: Subsidiary Accounts

2.0 Module 2
Study Session 1: The Ledger
Study Session 2: Trial Balance
Study Session 3: Final Account (Income Statement)
Study Session 4: Final Account (Statement of financial Position)

3.0 Module 3:
Study Session 1: Adjustment of Final Accounts
Study Session 2: Manufacturing Accounts
Study Session 3: Control Accounts
Study Session 4: Accounting of non-treading operations
Study Session 5: Single entry and incomplete Records

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 MODULE 1
Contents
Study Session 1: Introduction
Study Session 2: Conceptual Framework of Financial Reporting
Study Session 3: Accounting Concepts
Study Session 4: Subsidiary Accounts

STUDY SESSION 1
Introduction
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0Main Content
2.1 Brief History of Accounting
2.2 Objective and Scope of Accounting
2.3 Branches of Accounting
3.0Tutor Marked Assignments
4.0Summary
5.0Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to this study session. This session re-introduces students to
the history of accounting and how accounting as a profession evolved, it also
captures the objectives and scope of accounting. It finally states the various
branches of accounting which include amongst others financial accounting,
management accounting, tax accounting etc.

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1.0 Learning Outcome
After studying this session, you should be able to do the following:
1. briefly highlight the history of accounting
2. highlight the objectives and scope of accounting
3. explain the various branches of Accounting

2.0 Main Content

2.1 Brief History of Accounting
I especially welcome you to this interesting course. This is the first study
session and I hope you find it captivating. The name that looms largest in early
accounting history is Luca Pacioli, who in 1494 first described the system of
double-entry bookkeeping used by Venetian merchants in his “Summa de
Arithmetica, Geometria, Proportioni et Proportionalita.” Of course,
businesses and governments had been recording business information long
before the Venetians. But it was Pacioli who was the first to describe the
system of debits and credits in journals and ledgers that are still the basis of
today's accounting systems as we know.
The industrial revolution spurred the need for more advanced cost accounting
systems, and the development of corporations created large groups who were
not part of a firm’s management but had a vested interest in the company’s
results- namely, shareowners and bondholders who provided external
financing. The rising public status of accountants helped to transform
accounting into a profession, first in the United Kingdom and then in the
United States. In 1887, thirty-one accountants joined together to create the
American Association of Public Accountants. The first standardised test for
accountants was given a decade later, and the first CPAs were licensed in
1896.
The Great Depression led to the creation of the Security and Exchange
Commission (SEC) in 1934. All publicly-traded companies were required to
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file periodic reports with the Commission which had been certified by
members of the accounting profession. The American Institute of Certified
Public Accountants (AICPA) and its predecessors had responsibility for
setting accounting standards until 1973, when the Financial Accounting
Standard Board (FASB) was established. The accounting industry thrived in
the late 20th century, as the large accounting firms expanded their services
beyond the traditional auditing function to many forms of consulting.
However, as their responsibilities expanded beyond that of financial watchdog,
accounting firms also began to get embroiled in corporate scandals.
The Enron scandal in 2001 had broad repercussions for the accounting
industry. One of the top accounting firms, Arthur Andersen, went out of
business and, under the Sarbanes-Oxley Act, accountants faced tougher
restrictions on their consulting engagements. One of the paradoxes of the
profession, however, is that accounting scandals generate more work for
accountants, and demand for their services continued to boom throughout the
early part of the 21st century.

2.2 Objectives and Scope of Accounting

Let us go through the main objectives of Accounting.
1. To keep systematic records - We engage in accounting to keep systematic
record of financial transactions. The primary objective of accounting is to help
us collect financial data and to record it systematically, to derive correct and
useful results of financial statements.

2. To ascertain profitability - With the help of accounting, we can evaluate

the profits and losses incurred during a specific accounting period. With the
help of a Trading and Profit and Loss Account, we can determine easily the
profit or loss of a firm.

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3. To ascertain the financial position of the business - A balance sheet or a
statement of affairs indicates the financial position of a company as on a
particular date. A properly drawn balance sheet gives us an indication of the
class and value of assets, the nature and value of liability, and also the capital
position of the firm. With the help of that, we can easily ascertain the
soundness of any business entity.

4. To assist in decision-making - To take decisions for the future, one

requires accurate financial statements. One of the main objectives of
accounting is for you to take right decisions at the right time. Thus, accounting
gives you the platform to plan for the future with the help of past records.

5. To fulfill compliance of Law - Business entities such as companies, trusts,

and societies are being run and governed according to different legislative acts.
Similarly, different taxation laws (direct and indirect tax) are also applicable to
every business house. Everyone has to keep and maintain different types of
accounts and records as prescribed by corresponding laws of the land.
Accounting helps you in running a business in compliance with the law.
In-text question 1
The name that looms largest in early accounting history is?

2.3 Branches of Accounting

We can divide Accounting into several areas of activity. These often overlap
and they are often closely intertwined. But it is still useful for us to distinguish
them not least because accounting professionals tend to organise themselves
around these various specialties.

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 1. Financial Accounting and Reporting
Financial accounting and reporting involves summarising and reporting
information about the organisation, mainly to external stakeholders. These
stakeholders include shareholders, creditors and government/regulatory
agencies among others.
We do a Periodic reporting of a company's financial position and the results of
operations to external parties through financial statements that ordinarily
include the statement of financial position, income statement and the statement
of cash flows. A statement of changes in owners' equity is also often prepared.
Financial statements are relied upon by suppliers of capital such as
shareholders, bondholders and banks. Customers, suppliers, government
agencies and policymakers also use this information.
2. Management Accounting
Where financial accounting and reporting focuses on external users,
management accounting emphasises the preparation and analysis of accounting
information for use within the organisation. According to the Institute of
Management Accounting, it includes "…designing and evaluating business
processes, budgeting and forecasting, implementing and monitoring
internal controls, and analysing, synthesising and aggregating
information…to help drive economic value."
Reports are tailored to the needs of individual managers or functional areas of
the organisation such as manufacturing, distribution, sales, marketing or
others. The information is usually presented in a fashion that highlights
relevant information that aids operational managers in managing their
operation.
The discipline of management accounting arose out of what was originally cost
accounting; the allocation of costs to the proper area of the manufacturing and
distribution process of an industrial company. In recent years, management
accountants have developed new approaches like activity-based costing
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(ABC) and target costing, but they continue to debate how best to provide and
use cost information for management decision-making.
3. Auditing
Auditing is the examination and verification of company accounts and the
firm's system of internal control. There are both external and internal auditors.
External auditors are independent firms that inspect the accounts of an entity
and render an opinion on whether its statements conform to GAAP and present
fairly, the financial position of the company and the results of operations. In
the U.S., four huge firms known as the Big-Four- Price water house Coopers,
Deloitte Touche Tomatsu, Ernst and Young, and KPMG - dominate the
auditing of large corporations and institutions worldwide.
4. Tax Accounting
Tax accounting is based on laws enacted through the legislative process. Tax
accountants help entities minimise their tax payments. Within the corporation,
they also assist financial accountants with determining the accounting for
income taxes for financial reporting purposes.
In large, multi-national corporations, tax issues can drive business decisions
such as; where to domicile certain operations due to differences in the tax rates
paid in various countries around the globe versus those assessed in the U.S. At
the state level, companies may decide to relocate operations in one state over
another due to differences in tax rates and tax-breaks provided as incentives by
some states.
5. Fund Accounting
We use Fund accounting for nonprofit entities, including governments and not-
for-profit corporations. Rather than seek to make a profit, governments and
nonprofits deploy resources to achieve their objectives. It is standard practice
to distinguish between a general fund and special purpose funds. The general
fund is used for day-to-day operations, like paying employees or buying
supplies. Special funds are established to fund specific objectives, like building
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a new wing of a hospital. Segregating resources this way helps the nonprofits
maintain control of its resources and measure its success in achieving its
various missions.
While non-profits do not necessarily look to generate a profit, timely and
accurate accounting information is needed to ensure that often-scarce financial
resources are properly managed, and that cash shortfalls that could cause the
organisation to scale back operations do not occur.
6. Forensic Accounting
Forensic accounting is a relatively new branch of accounting that deals with
the use of accounting in legal matters; including litigation support,
investigation and dispute resolution. There are many kinds of forensic
accounting engagements: bankruptcy, matrimonial divorce, falsifications and
manipulations of accounts or inventories, and so forth. Forensic accountants
investigate and analyse financial evidence, give expert testimony in court and
quantify damages. Forensic accountants are key players in the investigation of
fraud and may be called in, if any red flags are detected by a company’s
internal financial group or as a result of a routine audit.

3.0 Tutor Marked Assignments

1. Discuss the objectives and scope of accounting
2. Differentiate between financial accounting and reporting and management
accounting.

4.0 Summary
To understand the accounting profession better, there is always need to revisit
the history of how it evolved from just an activity to a discipline and from
being a discipline to a profession. We realise that throughout the evolving
stages, the accounting profession has consisted of different branches that have
developed according to the needs of the time.

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5.0 Self-Assessment Question.
State the objectives of financial accounting.
Self-Assessment Answer.
a. To keep systematic records
b. To ascertain profitability
c. To ascertain the financial position of the business
d. To assist in decision-making
e. To fulfill compliance of Law
6.0 Additional Activities (Video, Animation & Out of Class Activities)
a. visit YouTube: [Link]
[Link]
[Link]
[Link] Watch the video & summarise in

1 paragraph

ITQ Answer 1
Luca Pacioli

7.0 References / Further Reading

Igben, R.O. (2007). Financial Accounting made simple. Lagos: ROI
Publishers.
Longe, O. A. & Kazeem, R. A. (2006). Essential Financial Accounting for
Senior Secondary Schools. Jos: Tonad Publishers Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London:
Prentice Hall
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 STUDY SESSION 2
Conceptual Framework
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Objective of General Purpose Financial Statement
2.2 Fundamental Qualitative Characteristics of Financial Reporting
2.3 Enhancing Qualitative Characteristics of Financial Reporting
2.4 The Cost Constraint on Useful Financial Reporting
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to this study session. This session introduces you to the
objective of general purpose financial statements. It also explains the
fundamental qualitative characteristics of financial reporting. This is
followed by an explanation on the enhancing qualitative characteristics of
financial reporting. It ends by acquainting you with how costs constrain the
usefulness of financial reporting.

1.0 Learning Outcome

After studying this session, you should be able to do the following:
1. state the objectives of general purpose financial statements
2. highlight fundamental qualitative characteristics of financial reporting
3. explain the cost constraints of useful financial reporting
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2.0 Main Content
2.1 Objectives or General Purpose of Financial Statements
The objectives of financial statements are to provide information about the
i. Financial position,
ii. Financial performance and
iii. Cash flows of an entity that is useful to a wide range of users in making
economic decisions.

These users include existing and potential investors, lenders and other
creditors.
Users of financial statements make economic decisions based on their
evaluation of the ability of the entity to generate cash and cash equivalents
and of the timing and certainty of their generation.
This ability ultimately determines, for example, the capacity of an entity to pay
its employees and suppliers, meet interest payments, repay loans and make
distributions to its owners.
Users are better able to evaluate this ability to generate cash and cash
equivalents if they are provided with information that focuses on the financial
position, financial performance and cash flows of an entity.

Information provided
General purpose financial statements provide information about the financial
position of the entity which includes information about economic resources
and the claims against them.

They also include any changes in its financial position, which could be due to
factors such as financial performance or other issues like raising debt.

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This allows users of the financial statements to identify the strengths and
weaknesses of the entity, and also to assess the entity’s liquidity and solvency,
plus any other need for additional financing.
Financial performance
Accrual accounting shows the effects of transactions and other events on an
entity’s assets and liabilities in the periods in which those effects occur, even if
the cash is received or paid in a different period. This allows users to more
relevant information regarding an entity’s financial performance than using a
cash receipts basis.
Information provided by an entity’s financial performance allows users of the
financial statements to assess:
a. management performance
b. an entity’s ability to generate cash
c. the risks associated with a business, and how they could affect the entity

Cash flow management

Cash flow management is another important part of performance that you
need to understand. Under the accruals concept, transactions such as sales and
purchases are recoded in the period they are incurred. This does not show us
information about when the money is due to be received from customers, or
paid to suppliers.
By reviewing cash flow information, users can assess the entity’s ability to
generate cash inflows, and how it spends cash. Cash is connected to the
solvency of a company; a profitable company could be insolvent if it does not
have enough money to pay its debts.
This could happen if it gives more credit than it receives, and does not have
enough cash to bridge the difference.

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2.2 Fundamental Qualitative Characteristics of Financial Reporting
The fundamental qualitative characteristics of financial reporting are relevance
and faithful representation.

1. Relevance
It is important for you to note that relevant financial information is capable of
making a difference in the decisions made by users. Information may be
capable of making a difference in a decision, even if some users choose not to
take advantage of it or are already aware of it from other sources. Financial
information is capable of making a difference in decisions if it has predictive
value, confirmatory value or both.
We say that financial information has predictive value if it can be used as an
input to processes employed by users to predict future outcomes. Financial
information need not be a prediction or forecast to have predictive value.
Financial information with predictive value is employed by users in making
their own predictions.
Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations. The predictive value and
confirmatory value of financial information are interrelated. Information that
has predictive value often also has confirmatory value. For example, revenue
information for the current year, which can be used as the basis for predicting
revenues in future years, can also be compared with revenue predictions for the
current year that was made in past years. The results of those comparisons can
help a user to correct and improve the processes that were used to make those
previous predictions.
2. Faithful representation
Financial reports represent economic phenomena in words and numbers. You
should understand that to be useful, financial information must not only
represent relevant phenomena, but it must also faithfully represent the
26
phenomena that it purports to represent. To be a perfectly faithful
representation, a depiction would have three characteristics. It would be
complete, neutral and free from error. Of course, perfection is seldom, if
ever, achievable.
A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations. For example, a complete depiction of a group of
assets would include, at a minimum, a description of the nature of the assets in
the group, a numerical depiction of all of the assets in the group, and a
description of what the numerical depiction represents (for example, original
cost, adjusted cost or fair value). For some items, a complete depiction may
also entail explanations of significant facts about the quality and nature of the
items, factors and circumstances that might affect their quality and nature, and
the process used to determine the numerical depiction.
A neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised, de-
emphasised or otherwise manipulated to increase the probability that financial
information will be received favourably or unfavourable by users. Neutral
information does not mean information with no purpose or no influence on
behaviour. On the contrary, relevant financial information is, by definition,
capable of making a difference in users’ decisions.

By free from error we mean, there are no errors or omissions in the description
of the phenomenon, and the process used to produce the reported information
has been selected and applied with no errors in the process. In this context, free
from error does not mean perfectly accurate in all respects. For example, an
estimate of an unobservable price or value cannot be determined to be accurate
or inaccurate. However, a representation of that estimate can be faithful if the
amount is described clearly and accurately as being an estimate, the nature and
27
limitations of the estimating process are explained, and no errors have been
made in selecting and applying an appropriate process for developing the
estimate.
A faithful representation, by itself, does not necessarily result in useful
information. For example, a reporting entity may receive property, plant and
equipment through a government grant. Obviously, reporting that an entity
acquired an asset at no cost would faithfully represent its cost, but that
information would probably not be very useful. A slightly more subtle
example is an estimate of the amount by which an asset’s carrying amount
should be adjusted to reflect impairment in the asset’s value. You need to note
that the estimate can be a faithful representation if the reporting entity has
properly applied an appropriate process, properly described the estimate and
explained any uncertainties that significantly affect the estimate.

However, if the level of uncertainty in such an estimate is sufficiently large,

that estimate will not be particularly useful. In other words, the relevance of
the asset being faithfully represented is questionable. If there is no alternative
representation that is more faithful, that estimate may provide the best
available information.

2.3 Enhancing Qualitative Characteristics of Financial Reporting

Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented. The enhancing qualitative characteristics may also help
determine which of the two ways we should use to depict a phenomenon if
both are considered equally relevant and faithfully represented.

28
Comparability
Your decisions involve choosing between alternatives, for example, selling or
holding an investment, or investing in one reporting entity or another.
Consequently, information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables us to identify and
understand similarities in, and differences among, items. Unlike the other
qualitative characteristics, comparability does not relate to a single item. A
comparison requires at least two items.

Consistency, although related to comparability, is not the same. Consistency

refers to the use of the same methods for the same items, either from period to
period within a reporting entity or in a single period across entities.
Comparability is the goal; consistency helps to achieve that goal.
Comparability is not uniformity. For information to be comparable, like things
must look alike and different things must look different. Comparability of
financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different.

Some degree of comparability is likely to be attained by satisfying the

fundamental qualitative characteristics. A faithful representation of a relevant
economic phenomenon should naturally possess some degree of comparability,
with a faithful representation of a similar relevant economic phenomenon by
another reporting entity.
Although a single economic phenomenon can be faithfully represented in
multiple ways, permitting alternative accounting methods for the same
economic phenomenon diminishes comparability.

29
Verifiability
Verifiability helps assure us that information faithfully represents the
economic phenomena it purports to represent. Verifiability means that
different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related
probabilities can also be verified.

Verification can be direct or indirect. Direct verification means verifying an

amount or other representation through direct observation, for example, by
counting cash. Indirect verification means checking the inputs to a model,
formula or other technique and recalculating the outputs using the same
methodology. An example is verifying the carrying amount of inventory by
checking the inputs (quantities and costs) and recalculating the ending
inventory using the same cost flow assumption (for example, using the first-in,
first-out method).

It may not be possible for us to verify some explanations and forward-looking

financial information until a future period, if at all. To help users decide
whether they want to use that information, it would normally be necessary to
disclose the underlying assumptions, the methods of compiling the information
and other factors and circumstances that support the information.

Timeliness
Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. Generally, the older the information
is the less useful it is. However, some information may continue to be timely

30
long after the end of a reporting period because, for example, some users may
need to identify and assess trends.
Understandability
Classifying, characterising and presenting information clearly and concisely
make it understandable. Some phenomena are inherently complex and cannot
be made easy to understand. Excluding information about those phenomena
from financial reports might make the information in those financial reports
easier to understand. However, those reports would be incomplete and
therefore potentially misleading.
You must understand that financial reports are prepared for users who have a
reasonable knowledge of business and economic activities and who review and
analyse the information diligently. At times, even well-informed and diligent
users may need to seek the aid of an adviser to understand information about
complex economic phenomena.
In-text question 1
What is verifiability?

2.4 The Costs Constraint on Useful Financial Reporting

We say that Cost is a pervasive constraint on the information that can be
provided by financial reporting. Reporting financial information imposes costs,
and it is important that those costs are justified by the benefits of reporting that
information. There are several types of costs and benefits to consider.
Providers of financial information expend most of the effort involved in
collecting, processing, verifying and disseminating financial information, but
users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the
information provided. If needed information is not provided, users incur
additional costs to obtain that information elsewhere or to estimate it.

31
You should also note that reporting financial information that is relevant
and faithfully represents what it purports to represent, help users to make
decisions with more confidence. This results in more efficient functioning of
capital markets and lower cost of capital for the economy as a whole. An
individual investor, lender or other creditors also receive benefits by making
more informed decisions. However, it is not possible for general purpose
financial reports to provide all the information that every user finds relevant.
In applying the cost constraint, the Board assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to
provide and use that information. When applying the cost constraint in
developing a proposed financial reporting standard, the Board seeks
information from providers of financial information, users, auditors, academics
and others about the expected nature and quantity of the benefits and costs of
that standard. In most situations, assessments are based on a combination of
quantitative and qualitative information.

For the reason of inherent subjectivity, different individuals’ assessments of

the costs and benefits of reporting particular items of financial information will
vary. Therefore, the Board seeks to consider costs and benefits in relation to
financial reporting generally, and not just in relation to individual reporting
entities. This does not mean that assessments of costs and benefits always
justify the same reporting requirements for all entities. Differences may be
appropriate because of different sizes of entities, different ways of raising
capital (public or private), different users’ needs or other factors.

3.0 Tutor Marked Assignments

1. Discuss the cost constraints of useful financial reporting

32
4.0 Study Session Summary
In this study session we discussed the objective of general purpose financial
statement and we got to understand that it provides information about financial
position, financial performance and Cash flows of an entity that is useful to a
wide range of users in making economic decisions. We went further to
highlight fundamental qualitative characteristics of financial reporting.

5.0 Self-Assessment Question

State the objective or general purpose of financial statement.
Self-Assessment Answer
The objectives of financial statements are to provide information about the
i. Financial position,
ii. Financial performance and
iii. Cash flows of an entity that is useful to a wide range of users in making
economic decisions.

6.0 Additional Activities.

a. watch YouTube links:
[Link]
awyYUT5jM6fd4Vjtqy [Link]
and summarise the videos

ITQ Answer 1
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent.

7.0 References/Further Reading

Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.

33
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London:
Prentice Hall

34
 STUDY SESSION 3
Accounting Concepts
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Definition
2.2 Accounting Concepts
2.3 Significance of Accounting Concepts
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
In the previous session, you have studied the meaning and nature of business
transactions and objectives of financial accounting. In order to maintain
uniformity and consistency in preparing and maintaining books of accounts,
certain rules or principles have been evolved. These rules/principles are
classified as concepts and conventions. These are foundations of preparing
and maintaining accounting records. In this session, we shall learn about
various accounting concepts, their meaning and significance.

1.0 Learning Outcome

After studying this session, you should be able to do the following:
1. define accounting concepts
2. explain various accounting concepts, conventions and principles
3. highlight the significance of accounting concepts
35
2.0 Main Content
2.1 Definition
Accounting Concepts are a set of broad conventions that have been devised to
provide a basic framework for financial reporting. As financial reporting
involves significant professional judgments by accountants, these concepts
and principles ensure that the users of financial information are not mislead
by the adoption of accounting policies and practices that go against the spirit of
the accountancy profession. Accountants must therefore actively consider
whether the accounting treatments adopt are consistent with the accounting
concepts and principles.

2.2 Accounting Concepts

The important accounting concepts which underpin the preparation of any set
of accounts are explained below.

1. Going Concern
Accountants assume, unless there is evidence to the contrary, that a company
is not going broke. This has important implications for the valuation of assets
and liabilities.

2. Consistency
Transactions and valuation methods are treated the same way from year to
year, or period to period. Users of accounts can therefore, make more
meaningful comparisons of financial performance from year to year. Where
accounting policies are changed, companies are required to disclose this fact
and explain the impact of any change.

3. Prudence
Profits are not recognised until a sale has been completed. In addition, a
cautious view is taken for future problems and costs of the business (they are
36
"provided for in the accounts" as soon as there is a reasonable chance that
such costs will be incurred in the future.

4. Matching (or "Accruals")

The matching concept states that the revenue and the expenses incurred to earn
the revenues must belong to the same accounting period. So, once the revenue
is realised, the next step is to allocate it to the relevant accounting period.

5. Accrual Concepts
The meaning of accrual is something that becomes due, especially an amount
of money that is yet to be paid or received at the end of the accounting period.
It means that revenues are recognised when they become receivable. Though
cash is received or not received and the expenses are recognised, when they
become payable though cash is paid or not paid. Both transactions will be
recorded in the accounting period to which they relate. Therefore, the accrual
concept makes a distinction between the accrual receipt of cash and the right to
receive cash as regards revenue and actual payment of cash and obligation to
pay cash as regards expenses.
The accrual concept under accounting assumes that revenue is realised at the
time of sale of goods or services irrespective of the fact of when the cash is
received.
In-text question 1
What are accounting concepts?

6. Realisation Concept
This concept states that revenue from any business transaction should be
included in the accounting records only when it is realised. The term
realisation means creation of legal right to receive money. Selling goods is
realisation, receiving order is not. In other words, it can be said that, Revenue

37
is realised when cash has been received or right to receive cash on the sale of
goods or services or both have been created.

7. Duality Concept
Dual aspect is the foundation or basic principle of accounting. It provides the
very basis of recording business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects of the transaction must be
recorded in the books of accounts.

8. Periodicity Concepts
All the transactions are recorded in the books of accounts on the assumption
that profits on these transactions are to be ascertained for a specified period.
This is known as accounting period concept. Thus, this concept requires that a
balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit,
ascertaining financial position, tax computation etc.

9. Money Measurement Concept

This concept assumes that all business transactions must be in terms of money,
which is in the currency of a country. In our country such transactions are in
terms of Naira.

10. Business entity concept

This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities. Thus, the business and
personal transactions of its owner are separate.

38
11. Cost concept
Accounting cost concept states that all assets are recorded in the books of
accounts at their purchase price, which includes cost of acquisition,
transportation and installation and not at its market price. It means that non-
current assets like building, plant and machinery, furniture, etc. are recorded in
the books of accounts at a price paid for them.

2.3 Significance of Accounting Concepts

The following are the significance of accounting concepts:
i. They guide how the expenses should be matched with revenue, for
determining exact profit or loss for a particular period;
ii. They are very helpful for the investors/shareholders to know the exact
amount of profit or loss of the business;
iii. They help in making the accounting information more objective;
iv. They provide that the transactions should be recorded only when goods
are delivered to the buyer;
v. Concepts help the accountant in detecting error;
vi. They encourage the accountant to post each entry in opposite sides of
two affected accounts;
vii. They also require assets to be shown at the price it has been acquired,
which can be verified from the supporting documents;
viii. They help in calculating depreciation on non-current assets. The effect
of cost concept is that if the business entity does not pay anything for an
asset, this item will not be shown in the books of accounts.

3.0 Tutor Marked Assignments

1. Elucidate the significance of accounting concept in any organization of your
choice.

39
4.0 Study Session Summary
In this study session we discussed the topic accounting concept and we defined
accounting concept as a set of broad conventions that have been devised to
provide a basic framework for financial reporting.

5.0 Self-Assessment Question

State and explain the various accounting concepts known to you.
Self-assessment Answer
a. Going Concern: Accountants assume, unless there is evidence to the
contrary, that a company is not going broke.
b. Consistency: Transactions and valuation methods are treated the same way
from year to year, or period to period.
c. Prudence: Profits are not recognised until a sale has been completed.
d. Matching (or "Accruals"): The matching concept states that the revenue
and the expenses incurred to earn the revenues must belong to the same
accounting period.
e. Accrual Concepts: The meaning of accrual is something that becomes due,
especially an amount of money that is yet to be paid or received at the end of
the accounting period.
f. Realisation Concept: This concept states that revenue from any business
transaction should be included in the accounting records only when it is
realised. g. Duality Concept: This concept assumes that every transaction has
a dual effect, i.e. it affects two accounts in their respective opposite sides.
h. Periodicity Concept: All the transactions are recorded in the books of
accounts on the assumption that profits on these transactions are to be
ascertained for a specified period.
i. Money Measurement Concept: This concept assumes that all business
transactions must be in terms of money, which is in the currency of a country.
In our country such transactions are in terms of Naira.
40
j. Business entity concept: This concept assumes that, for accounting
purposes, the business enterprise and its owners are two separate independent
entities.
k. Cost concept: Accounting cost concept states that all assets are recorded in
the books of accounts at their purchase price, which includes cost of
acquisition, transportation and installation and not at its market price.

6.0 Additional Activities

a. Visit YouTube: [Link] [Link] Watch the
video & summarise in 1 paragraph

ITQ Answer 1
Accounting Concepts are a set of broad conventions that have been devised to provide a
basic framework for financial reporting.

7.0 References/Further Reading

Damagum, Y.M. (1999). Introduction to Financial Accounting. Kaduna: O.G.
Ventures.
Longe, O. A. & Kazeem, R. A. (2006). Essential Financial Accounting for
Senior Secondary Schools. Jos: Tonad Publishers Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London:
Prentice Hall

41
 STUDY SESSION 4
Subsidiary Books
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Definitions
2.2 Types of Subsidiary Books
2.3 Advantages of Subsidiary Books
2.4 Format of a Subsidiary Book
2.5 Preparation of Subsidiary Books
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to this study session. There are numerous transactions which
occur so many times in a day. It is inadequate and inconvenient to record all
the transactions in one book or journal, as doing so will make it thick, bulky,
tedious and will consume more time, labour and money. Consequently, the
transactions which are of repetitive nature are recorded in a separate book
through special journal. Such separate books or journals maintained for
recording the similar and repetitive types of transactions are known, as books
of original entry or subsidiary books of account. These subsidiary books
include purchases day book, sales day book, purchase return book, sales return
book and cash book.

42
1.0 Learning Outcome
After studying this session, you should be able to do the following:
1. Define subsidiary book
2. Highlight the advantages of using subsidiary books
3. Demonstrate the procedures for preparing subsidiary books

2.0 Main Content

2.1 Definition
We shall begin by stating that Subsidiary books are the books of original
entry which are maintained under the modern methods of book-keeping, for
initially recording the numerous transactions that occur in a business. They are
also referred to as primary records because the first entry of transaction is done
in subsidiary books. Base on subsidiary books, postings are later made into
concerned accounts. In other words, it is known as books of prime entry or
books of original entry as all the transactions are recorded in their original
form. In these books the details of the transactions are recorded as they take
place from day to day in a classified manner.

2.2 Types of Subsidiary Books

There are various types of subsidiary books. In this section, each of them is
considered and explained one after the other.

i. Purchases day book

Purchases day book is used for recording credit purchases of goods only.
Purchases in accounting refer to goods that have been bought for resale.
Therefore, credit purchase of any plant, property or equipment is not
considered as purchases and is not recorded in the purchases day book.
Furthermore, any cash purchase is not recorded in the purchases day book. The
43
term goods mean all the commodities and services in which the company deals
in its day to day activities. The preparation of purchases day book requires:
Date column, Particulars column, Invoice number column, Ledger folio
column, inner amount column and Amount column.

ii. Sales day book

Sales day book is mainly used for recording credit sales of goods and services
in an organisation. This will not record any cash sales or non-current assets
sales. The ruling for the preparation of this book is the same as the Purchases
day book. That is to say it includes the Date column, Particulars column,
Invoice number column, Ledger folio column, Inner amount column and
Amount column.

iii. Purchases returns book

Otherwise referred to as the returns outwards journal. This is maintained to
record the transactions of goods returned to the supplier when purchases have
been made on credit. The returns outwards journal is also prepared in a similar
format with the other day books. It therefore includes columns for Date,
Particulars, Debit note number, Ledger folio and Amount column.

iv. Sales returns book

We use this book to record the goods returned by the customer the goods sold
on credit. It is also referred to as the returns inwards journal. The ruling or the
preparation of Sales return book or returns inward journal also include; Date,
Particulars, Credit note number, Ledger folio and Amount columns.

v. Cash book
Like other books, we use the cash book to record all receipts and payments in
cash. The different forms of cash book are as follows.
44
a) Simple Cash book: this is the simple form of cash book that has one
amount column.
b) Two column cash book: this type of cash book has two amount
columns; one for cash transactions and the other for transactions via the bank.
c) Three column cash book: this has three columns; one for cash, another
for bank and an additional column to record any cash discounts.
d) Petty cash book: this is used to record expenses that are often recurring
in the day to day business activities and are of meager (petty) amounts. These
may include items such as postages, carriages, printing and stationery etc.

2.3 Advantages of subsidiary books

The following are the advantages of subsidiary book.
1. They enable the division of work among accounting personnel by
assigning with separate books and it increases efficiency of personnel as they
perform same activities daily.
2. They help to save time and labour by recording similar type of
transactions in a separate book.
3. They make it easy to access the detailed information relating to a
particular transaction as the transactions relating to one head are recorded in a
separate book.
4. They help to install internal check system as the subsidiary book
maintained by a clerk is automatically checked by another clerk.
5. They help to maintain accounts and thus avoid the necessity of journal
entries.
6. The existence of separate books helps in the detection of errors fast in case
of disagreement of the trial balance.

45
2.5 Format of Cash Book
Title
CASH BOOK (Single Column)
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount

Double Column Cash Book

When one more column of Bank is added in both sides of the double column
cash book to post all banking transactions, it is called double column cash
book. All banking transactions are routed through this cash book and there is
no need to open a separate bank account in ledger.

CASH BOOK (Two Column)

Dr. Cr.
Date Particulars F. Cash Bank Date Particulars F. Cash Bank

Triple Column Cash Book

Here, we have an additional Discount column on each side of the cash book.
The debit side column of discount represents the discount allowed to
Receivables of the company and the credit side of the discount column records
the discount received from our suppliers or creditors while making payments.
You should note that the two discount columns are not to be balanced off
against each other. Rather, the total of discount column on the debit side of the
cash book is posted in the ledger account of ‘Discount Allowed to
Customers’. Similarly, the credit column of cash book is posted to the ledger
account of ‘Discount Received’ as ‘By total of cash book’.

46
Purchases Day Book
Purchases Day book is prepared to record all the credit purchases of an
organisation. You should note that Purchase book is not a purchase ledger.
FORMAT
PURCHASES DAY BOOK
Date Particulars Inward Invoice No. F. Amount

Sales Day Book

The features of a sale book are same as a purchase book, except for the fact
that it records all the credit sales.

Purchases Returns Book

Sometimes goods are retuned back to the supplier, for various reasons. The
most common reason being defective goods or poor quality goods. In this case,
a debit note is issued.
Format
PURCHASES RETURN BOOK
Date Particulars Debit Note No. F. Amount

Sales Returns Book

The reason of Sales returns is the same as for purchases returns. Sometimes
customers return the goods if they do not meet the quality standard promised.
In such cases, a credit note is issued to the customer.
Format
SALE RETURN BOOK
Date Particulars Debit Note No. F. Amount

In-text question 1
What are the different forms of cash book?

47
3.0 Tutored marked assignment
1. Differentiate between purchase day book and sales day book.

4.0 Study Session Summary

In this study session we discussed the topic subsidiary book and we understood
that Subsidiary books are the books of original entry which are maintained
under the modern methods of book-keeping, for initially recording the
numerous transactions that occur in a business.

5.0 Self-assessment question.

1. What are the advantages of subsidiary books?
Self-Assessment Answer.
a. They enable the division of work among accounting personnel by assigning
with separate books and it increases efficiency of personnel as they perform
same activities daily.
b. They help to save time and labour by recording similar type of transactions
in a separate book.
c. They make it easy to access the detailed information relating to a particular
transaction as the transactions relating to one head are recorded in a separate
book.
d. They help to install internal check system as the subsidiary book maintained
by a clerk is automatically checked by another clerk.
e. They help to maintain accounts and thus avoid the necessity of journal
entries.
f. The existence of separate books help in the detection of errors fast in case of
disagreement of the trial balance.

48
6.0 Additional Activities
a. Visit YouTube: [Link] , [Link] . Watch the
video & summarise in 1 paragraph

In-text Answer 1
Simple Cash book, two column cash book, three column cash book, petty cash book

7.0 References/Further Reading

Damagum, Y.M. (1999). Introduction to Financial Accounting. Kaduna: O.G.
Ventures.
Longe, O. A. & Kazeem, R. A. (2006). Essential Financial Accounting for
Senior Secondary Schools. Jos: Tonad Publishers Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London:
Prentice Hall

49
 MODULE 2
Contents:
Study Session 1: The Ledger
Study Session 2: Trial Balance
Study Session 3: Final Accounts (Income Statement)
Study Session 4: Final Accounts (Statement of Financial Position)

STUDY SESSION 1
The Ledger
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Definitions
2.2 Characteristics of the Ledger
2.3 Importance of Ledger
2.4 Types and Forms of Ledger
2.5 Preparation of Ledger Account
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to this study session. While the day books provide an initial
listing of the daily transactions of a business, they do not provide information
about a specific account in one place. They also do not tell you whether
individual transactions are to be debited or credited. To better clarify matters,
50
the debit and credit of journalised transactions are therefore transferred to
ledger accounts. Thus, all the changes for a single account are located in one
place - in a ledger account. This makes it easy to determine the current balance
of any account.

1.0 Learning Outcome

After studying this session, you should be able to do the following:
1. Define a Ledger
2. Enumerate the importance of Ledger Account
3. Explain the various types of ledger
4. Prepare a ledger account

2.0 Main Content

2.1 Definition
A ledger is an accounting book that facilitates the transfer of all journal
entries in a chronological sequence to individual accounts. The process of
recording journal entries into the ledger is called posting. A ledger records,
classify and summarise financial information from journals (the 'books of
first entry') as debits and credits, and shows their current balances.

2.2 Characteristics of Ledger Account

The ledger has the following main characteristics.
1. It has two identical sides - left hand side (debit side) and right hand side
(credit side).
2. Debit aspect of all the transactions are recorded on the left-hand side and
credit aspects of all the transactions are recorded on the right-hand side
according to date.
3. The difference of the total of the two sides represents a balance. The
excess of debit side over credit side indicates a debit balance, while excess of
51
credit side over debit side indicates a credit balance. If the two sides are equal,
there will be no balance.
4. Generally, the balance is drawn at the year end and recorded on the
lesser side to make the two sides equal. This balance is known as closing
balance.
5. The closing balance of the current year becomes the opening balance of
the next year.

2.3 Importance of Ledger Account

The following are the important utilities of ledger accounts.
1. Ledger account keeps a permanent record of all financial transactions in
a classified manner.
2. Ledger account shows detailed financial information of a business
regarding Receivables and creditors, assets, and incomes and expenses.
3. Ledger account helps to prepare a trial balance, in order to check the
arithmetical accuracy of the recording of the financial transactions, of the
business.
4. Ledger account helps to prepare Income statement, so as to ascertain the
profit or loss of the business.
5. Ledger account helps to prepare the balance sheet with a view to show
the financial position of the business.
In-text question 1
What is a ledger?

2.4 Types and Forms of Ledger

There are mainly three types of ledgers which are; the general ledger, sales
ledger and purchases ledger. These are explained below.

i. General Ledger or Nominal Ledger: the purpose of the General

Ledger is to organise and summarise the individual transactions; other than
52
those of credit sales and purchases. All real and nominal accounts are therefore
found in the general ledger.
ii. Receivables Ledger or Sales Ledger: this accumulates information
from the sales journal. The purpose of the sales Ledger is to provide
knowledge about which customers owe money to the business, and how much.
iii. Payables Ledger or Purchases Ledger: this accumulates information
from the purchases journal. The purpose of the purchases Ledger is to provide
knowledge about which suppliers the business owes money, and how much.

2.5 Preparation of Ledger Account

Transferring information i.e. entries from journal to ledger accounts is called
posting. The procedure of posting from journal to ledger is as follows.
1. Locate the ledger account from the first debit in the journal entry.
2. Record the date in the date column on the debit side of the account. The
date is the date of transaction and not the date of the posting.
3. Record the name of the opposite account (account credited in entry) in
the particular (also known as reference column, description column etc.)
column.
4. Record the page number of the journal in the journal reference (J.R)
column from where the entry is being posted.
5. Record the amount of the debit in the "amount column"
6. Locate the ledger account for the first credit in the journal and follow
the same procedure.

The rules for determining the balance is as follows:

Total debit = More than total credit = Debit balance
Total credit = More than total debit = Credit balance
Total debit = Total credit = Nil balance

53
You may note that at the time of balancing an account debit balance is placed
on the credit side and credit balance on debit site. This balance is known as
closing balance. What is closing balance in this year, is the opening balance of
the next year.

Illustration I
Assume the following details in respect of the Business of Zuru Enterprises.
Started business with the following balances on 1/1/2016:
N
Cash 100,000
Bank 80,000
The following transactions took place during the month:
2/1/16 Bought a typewriter N 20,000 paying cash
3/1/16 Paid rental expenses N 2,000 cash
4/1/16 Bought goods N 70,000 for resale from UTC on credit
6/1/16 Sold goods N 15,000 to FCT on credit
7/1/16 Cash sales N 30,000
9/1/16 Introduced N 50,000 cash as additional capital
10/1/16 Returned goods N 6,000 to UTC
11/1/16 Paid UTC N 50,000 in cash
12/1/16 Paid for expenses as follows: N
Stationary 3,000
Telephone 2,500
Wages 2,800
Sundries 4,000
All the payments were in cheque
Required: Open the necessary books of account to enter the individual
transactions.

54
Suggested Solution
Cash Account
DR CR
N N
1/1/16 Capital 100,000 2/1/16 Typewriter 20,000
1/1/16 Sales 30,000 3/1/16 Rental Expenses 2,000
1/1/16 Capital 50,000 11/1/16 UTC 50,000
_______ 12/1/16 Balance c/d 108,000
180,000 180,000

Bank Account
DR CR
N N
1/1/16 Capital 80,000 12/1/16 Stationery Expenses 3,000
12/1/16 Telephone Expenses 2,500
12/1/16 Wages Expenses 2,800
12/1/16 Sundry Expenses 4,000
_______ 12/1/16 Balance c/d 67,700
80,000 80,000

Capital Account
DR CR
N N
12/1/16 Balance c/d 230,000 1/1/16 Cash 100,000
1/1/16 Bank 80,000
_______ 9/1/16 Cash 50,000
230,000 230,000

Typewriter Account
DR CR
N N
2/1/16 Cash 20,000 12/1/16 Balance c/d 20,000

Rental Expenses Account

DR CR
N N
3/1/16 Cash 2,000 12/1/16 Balance c/d 2,000

55
 Purchases Account
DR CR
N N
9/1/16 UTC 70,000 12/1/16 Balance c/d 70,000

UTC Account
DR CR
N N
19/1/16 Returns Inwards 6,000 9/1/16, Purchases 3,100
11/1/16 Cash 50,000
12/1/16 Balance c/d 14,000 ______
70,000 70,000

FCT Account
DR CR
N N
5/1/16 Sales 15,000 12/1/16 Balance c/d 15,000

Sales Account
DR CR
N N
12/1/16 balance c/d 45,000 5/1/16 FCT 15,000
______ 7/1/16 Cash 30,000
45,000 45,000

Returns Outwards Account

DR CR
N N
12/1/16 Balance c/d 6,000 10/1/16 UTC 6,000

Stationery Expenses Account

DR CR
N N
12/1/16 Bank 3,000 12/1/16 Balance c/d 3,000

56
 Telephone Expenses Account
DR CR
N N
12/1/16 Bank 2,500 12/1/16 Balance c/d 2,500

Wages Expenses Account

DR CR
N N
12/1/16 Bank 2,800 12/1/16 Balance c/d 2,800

Sundry Expenses Account

DR CR
N N
12/1/16 Bank 4,000 12/1/16 Balance c/d 4,000

Illustration II
You are required to enter the following transactions for the month of
November, in the books of Zuba Enterprises and close the accounts at the end
of the month.
1Nov Started business with N 5000 in the bank
2 “ Bought goods on credit from Heywood N 1,600; Alisco N 2,300; Remi
N 4,000 and Kwali N 3,100
5 “ Cash Sales N 2,400
6 “ Paid Rent by Cheque N 800
11 “ Sold goods on credit to Musa N 480, Ameh N 320, Hilary N 11,700
17 “ Paid wages by cash N 400
18 “ Goods returned to Musa N80, Hilary N 900
20 “ Bought goods on credit from Heywood N4,000, Alisco N2000, Leventis
N 5000
21 “ Returned goods to the following; Leventis N 600, Heywood N 800.
22 “ Received Cheques from the following; Musa N 400, Ameh N 300,
Hilary N 10,000
23 “ Made payment to the following by Cheques; Heywood N 800, Alisco N
1000, Remi N 4000, Kwali N 3000.
25 “ Bought a motorcycle paying by cheque N 5000
26 “ Received a sum of N15,000 cash from Emeka
28 “ Introduced N20,000 cash as fresh capital into the business.
30 “ Bought office furniture N 6,000 paying in cash.
57
Suggested Solution II
Zuba Enterprises
Bank Account
DR CR
N N
Nov. 1 Capital 50,000 Nov. 6 Rent 800
Nov. 22 Musa 400 Nov. 23 Heywood 800
Nov. 22 Ameh 300 Nov. 23 Alisco 1,000
Nov. 22 Hilary 10,000 Nov. 23 Remi 4,000
Nov. 23 Kwali 3,000
Nov. 25 Motorcycle 5,000
______ Nov. 30 Balance c/d 46,100
60,700 60,700

Heywood Account
DR CR
N N
Nov. 20 Returns 800 Nov. 2 Purchases 1,600
Nov. 23 Bank 800 Nov. 20 Purchases 4,000
Nov. 30 Bal. c/d 4,000 _____
5,600 5,600

Alisco Account
DR CR
N N
Nov. 23 Bank 1,000 Nov. 2 Purchases 2,300
Nov. 30 Bal. c/d 3,300 Nov. 20 Purchases 2,000
4,300 4,300

Remi Account
DR CR
N N
Nov. 23 Bank 4,000 Nov. 2 Purchases 4,000

Kwali Account
DR CR
N N
Nov. 23 Bank 3,000 Nov. 2, Purchases 3,100
Nov. 30 Bal. c/d 100 _____
3,100 _3,100
58
 Purchases Account
DR CR
N N
Nov. 2 Heywood 1,600 Nov. 30, Balance c/d 22,000
Nov. 2 Alisco 2,300
Nov. 2 Remi 4,000
Nov. 2 Kwali 3,100
Nov. 20 Heywood 4,000
Nov.20 Alisco 2,000
Nov. 20 Leventis 5,000 ______
22,000 22,000

Sales Account
DR CR
N N
Nov.30 Bal. c/d 14,900 Nov. 5 Cash 2,400
Nov. 5 Musa 480
Nov. 5 Ameh 320
______ Nov. 5 Hilary 11,700
14,900 14,900

Rent Account
DR CR
N N
Nov. 6 Bank 800 Nov. 30 Bal. c/d 800

Cash Account
DR CR
N N
Nov. 5 Sales 2,400 Nov. 17 Wages 400
Nov. 26 Emeka 15,000 Nov. 30 Office furniture 6,000
Nov. 28 Capital 20,000 Nov.30 Bal. c/d 31,000
37,400 37,400

59
 Musa Account
DR CR
N N
Nov. 11 Sales 480 Nov. 18 Returns 80
____ Nov. 22 Bank 400
480 480

Ameh Account
DR CR
N N
Nov. 11 Sales 320 Nov 22 Bank 300
____ Nov 30 Bal. c/d 20
320 320

Hilary Account
DR CR
N N
Nov. 11 Sales 11,700 Nov.18 Returns 900
Nov. 22 Bank 10,000
______ Nov. 30 Bal. c/d 800
11,700 11,700

Wages Account
DR CR
N N
Nov. 17 Cash 400 Nov 30 Bal. c/d 400

Returns Outwards
DR CR
N N
Nov. 30 Bal. c/d 1,400 Nov 20 Leventis 600
Nov. 20 Heywood 800
1,400
1,400

Returns Inwards
DR CR
N N
Nov. 18 Musa 80 Nov. 30 Bal. c/d 980
Nov. 18, Hilary 900 ___
980 980
60
 Leventis Account
DR CR
N N
Nov. 20 Returns 600 Nov. 20 Purchases 5,000
Nov. 30 Bal. c/d 4,400 ____
5,000 5,000

Motorcycle Account
DR CR
N N
Nov. 25, Bank 5,000 Nov. 30 Bal. c/d 5,000

Emeka Account
DR CR
N N
Nov. 30 Bal. c/d 15,000 Nov. 26 Cash 15,000

Capital Account
DR CR
N N
Nov. 30 Bal. c/d 70,000 Nov. 1 Bank 50,000
______ Nov. 28 Cash 20,000
70,000 70,000

Office Furniture Account

DR CR
N N
Nov. 30, Cash 6,000 Nov. 30 Bal. c/d 6,000

61
 3.0 Tutor Marked Assignments
The following transactions are in relation to a sole trader for the month of
January 2009:

4.0 N
January: 1 Started business with cash 72,000
Bought goods for cash 18,000
Sold goods for cash 4,400
Paid carriage 800
8 Paid advertising account 800
9 Okon paid cash to account 3,400
13 Lent Jane Oladele 8,000
17 Cash sales 8,500
19 Purchased goods by cash 16,000
25 Paid wages 1,800
28 Cash sales 7,600
29 Jane Oladele paid to account 4,000
30 Paid rent 10,000
Required

Open ledger accounts to record the transactions and balance off on 31st
January, 2009.

4.0 Summary
We have learnt in this session that Entries from the subsidiary books are
usually transferred into ledger accounts, to represent individual related
transactions. You now know that when a ledger account is prepared, it aids the
easy preparation of a trial balance. The ledger account has two identical sides
which are the left hand side representing debit side and the right hand side
representing credit entries. We reviewed the importance of the ledger, types
and forms of ledger looked at and the preparation of the ledger accounts was
also considered.

5.0 Self-Assessment Question

1. What is meant by book of original entry?

2. What is Journal Proper?

62
Self-Assessment Answer

1. A book of original entry is nothing but an accounting book or

journal where all transactions are initially recorded. All business
transactions, their details and descriptions are first recorded in
the book of original entry.
2. Journal proper is book of original entry (simple journal) in which
miscellaneous credit transactions which do not fit in any other books
are recorded. It is also called miscellaneous journal.

6.0 Additional Activities

a. Visit U-tube add [Link]
[Link]
[Link]
[Link] Watch the video &
summarise in 1 paragraph

ITA 1: A ledger is an accounting book that facilitates the transfer of all journal entries in a
chronological sequence to individual accounts.

7.0 References/Further Reading

Damagum, Y.M. (1999). Introduction to Financial Accounting (1999).
Kaduna: O.G. Ventures.
Longe, O. A. & Kazeem, R. A. (2006). Essential Financial Accounting for
Senior Secondary Schools. Jos: Tonad Publishers Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.
Wood, F. and Alan S. (2005). Business Accounting 1 (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2 (9th Ed.). London:
Prentice Hall.

63
 STUDY SESSION 2
Trial Balance
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Definitions
2.2 Uses of Trial Balance
2.3 Rules of the Trial Balance
2.4 Errors not affecting the Trial balance
2.5 Extracting a Trial Balance
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to this study session. After the ledger has been prepared, the
balances brought down are used to prepare a statement called a “Trial
Balance”. Assets are usually entered on the debit side of an account, and the
liabilities on the credit side, all things being equal; we expect that the total
sum of the debits would agree with the total sum of the credits. This is true
because the total assets are equal to the liabilities plus the capital (L + C =
A). Also, each subsequent transaction involves one entry on the debit side, and
an equal entry on the credit side. It follows that the total debit entries are still
equal to the total credit entries provided you did not make any mistake. It is
impossible to guarantee that no mistake will ever be made. Therefore, as soon
as all transactions are double-entered in the accounts, it is standard procedure
64
that you make a preliminary check upon the accuracy of the entries by taking
out a “Trial Balance” to see if the total of all debit entries is equal to that of
all the credit entries.

1.0 Learning Outcome

After studying this session, you should be able to do the following:
1. define a Trial Balance
2. extract a Trial Balance
3. discuss Rules of a Trial Balance

2.0 Main Content

2.1 Definition
We may begin by saying that a Trial Balance is defined as a schedule or list
that shows the debit and credit balances extracted from the ledgers. Its main
purpose is to show the arithmetical accuracy of the ledgers. Furthermore, it
ensures that debit and credit balances as displayed in the ledgers are compiled
(Longe & Kazeem, 2006: 68). Thus the objective of the Trial Balance is to
prove the accuracy of the book- keeping entries made. All the ledger accounts
must be balanced off and entered in the Trial Balance.

2.2 Uses of Trial Balance

The main uses of a trial balance are:
1. it helps in testing the arithmetical accuracy of the double entries in the
ledger
2. it helps in the preparation of financial statements
3. it assists in detecting errors of posting

65
2.3 Rules of the Trial Balance
In preparing or extracting a Trial Balance to form a list of balances, items are
recorded in the following manner.
1. Capital, or Share Capital, including retained profits, should be entered in
the credit column of the trial balance.
2. Drawings, as well as accumulated losses, should be entered in the debit
side of the trial balance.
3. All assets, both non-current and current, should be entered in the debit
column of the trial balance.
4. All expenses should be entered in the debit column of the trial balance.
5. All liabilities, including debentures, should be entered in the credit
column of the trial balance.
6. All reserves and provisions, such as depreciation, should be entered in
the credit column of the trial balance.
7. All revenues, including sales and bad debt recovered, should be entered
in the credit column of the trial balance.
In-test question 1
What is a trial balance?

2.4 Errors
Errors are unintentional mistakes that we make in business transactions, be it
posting in the subsidiary books, balancing of accounts or in the extraction of a
trial balance. There are two major classifications of errors: these are errors
affecting trail balance agreement and errors not affecting a trail balance
agreement.

Errors not affecting Trail balance agreement

These are errors which irrespective of their occurrences do not stop the trail
balance from balancing. These include the following.
66
i. Error of Commission
This happens when a transaction is posted to the wrong account name but
within the same class of account. E.g. an amount paid by Aminu may be
posted to Amina’s account.

ii. Error of Omission

This happens when a transaction is completely omitted from the books of
accounts. This may be as a result of the loss of the source document for that
transaction.

iii. Error of Original Entry

This type of errors occurs when the actual or original amount is mistakenly
recorded and passed same through the double entry system. E.g. a purchase of
machinery may be wrongly recorded in the machinery account, the same
wrong amount also being posted to the credit side of the Cash account.

iv. Error of Transposition

Transposition means changing the place of two or more things or numbers.
Error of transposition means changing the place of the numerical position of
the amount in transaction. E.g. a purchase of goods of N395 may be wrongly
recorded as N935, N539 or N953.

v. Error of Principle
This occurs when a transaction is posted to a wrong class of account. E.g. an
amount for the repairs of motor van may be recorded in the motor van account.

vi. Error of Complete Reversal of Entry

This happens when the double entry principle is reversed, i.e. the account that
is supposed to be debited is credited and vice versa. E.g. a Cash sale of N5000
was debited to sales account and credited to cash account.

67
vii. Error of Compensation
This arises when an error on one account is compensated or cancelled out by
another in different account. E.g. purchases account may be under casted while
the debit side of rent account may also be under casted by the same amount.

Errors affecting Trail balance agreement

These are errors that cause trail balance not to agree. These include the
following. Casting Error: this occurs when one side of the account is over
casted or under casted.

2.5 Extracting a Trial Balance

Having closed all ledger accounts, a trial balance can be extracted by
collecting all the balances c/d from the individual ledgers and scheduling them
out as debits and credits as explained above.

Illustration 1
From the information above on Zuru Enterprise under module 2, section 2.
You are required to journalise the transactions and extract a trial balance as at
12/1/2016

Suggested Solution 1
This a very simple exercise. To ensure easy understanding of the solution, we
have chosen to first of all journalise all the transactions before extracting a trial
balance. However, in subsequent questions unless they specifically call for the
preparation of a journal, it will not be necessary to journalise all transactions
before posting to the trial balance. However, it is important to post to the
ledger account first before extracting a trial balance.
Our journal entries with regards to the given illustration will appear thus:

68
 Zuru Enterprise: General Journal
Date Particulars Folio Dr. (N) Cr. (N)
1/1/16 Cash A/c 100,000
Bank A/c 80,000
Capital A/c 180,000
Being the initial capital
introduced
2/1/16 Typewriter A/c 20,000
Cash A/c 20,000
Being typewriter bought by
cash
3/1/16 Rental Expenses A/c 2,000
Cash A/c 2,000
Being rental expenses paid by
cash
4/1/16 Purchases A/c 70,000
UTC A/c 70,000
Being credit purchases from
UTC
5/1/16 FCT A/c 15,000
Sales A/c 15,000
Being credit sales to FCT
7/1/16 Cash A/c 30,000
Sales A/c 30,000
Being cash sales made
9/1/16 Cash A/c 50,000
Capital A/c 50,000
Being additional capital
introduced
10/1/16 UTC A/c 6,000
Returns Outward A/c 6,000
Being goods returned to UTC
11/1/16 UTC A/c 50,000
Cash A/c 50,000
Being cash payment to UTC
12/1/16 Stationery Expenses A/c 3,000
Telephone expenses A/c 2,500
Wages expenses A/c 2,800
Sundry expenses A/c 4000
Bank A/c 12,300
Being expenses paid by cheque

69
Zuru Enterprises
Trial Balance as at 12th January, 2016
Dr Cr
N N
Cash 108,000
Bank 67,700
Capital 230,000
Typewriter 20,000
Rental expenses 2,000
Purchases 70,000
UTC 14,000
FCT 15,000
Sales 45,000
Returns Outwards 6,000
Stationery expenses 3,000
Telephone expenses 2,500
Wages expenses 2,800
Sundry expenses 4,000 _______
295,000 295,000
Illustration II
From the information contained in section two of module 2; you are required
to enter up the transactions of Zuba Enterprises by extracting a trial balance as
at 30th November, 2017.
Suggested Solution II
Zuba Enterprises
Trial Balance as at 30th November, 2017
Dr Cr
N N
Bank 46,100
Heywood 4,000
Alisco 3,300
Kwali 100
Purchases 22,000
Sales 14,900
Rent 800
Cash 31,000
Ameh 20
Hillary 800
Wages 400
Returns outwards 1,400
Returns inwards 980
Leventis 4,400
Motorcycle 5,000
Emeka 15,000
Capital 70,000
Office furniture 6,000 ______
113,100 113,100

70
3.0 Tutor Marked Assignments
Undertake and submit
a. Revision or specific question
b. Summaries of video clips (where indicated)

4.0 Summary
We understand from the above discussion that entries are usually made in the
Trial Balance, either directly from the ledger accounts or from a list of
extracted balances brought down. When a Trial Balance is prepared directly
from the ledger accounts, only balances brought down are considered. You
should note also that in carrying out this exercise, a debit balance brought
down is entered in the debit column of the Trial Balance while a credit balance
brought down is entered in the credit column of the Trial Balance. Any self-
balanced account is ignored.

5.0 Self - Assessment Question

Prepare a trial balance as on 31st Dec 2013 by filling in the debit and credit columns
accordingly for each ledger balance mentioned below.

Account Balance Account Balance

Capital 70,000 Carriage Inwards 1500

Opening Stock 20,000 Carriage Outwards 2000

Salaries 10,000 Plant & Machinery 17,000

Returns Inward 500 Investments 7000

Returns Outward 6000 Sales 70,000
Purchases 80,000 Patents 10,000

Sales Ledger Control 7000 Furniture 8000

Purchase Ledger Control 40,000 Discount Allowed 1000

Cash in Hand 15,000 Misc. Receipts 4000

Cash at Bank 11,000 Closing Stock 9000

71
Answer to Assessment Question.

Trial Balance from the Above Ledger (31st Dec 2013)

Particulars Debit Credit

Capital 70,000.00
Opening Stock 20,000.00
Salaries 10,000.00
Returns Inward 500.00
Returns Outward 6,000.00
Purchases 80,000.00
Sales Ledger Control 7,000.00

Purchase Ledger Control 40,000.00

Cash in Hand 15,000.00
Cash at Bank 11,000.00
Carriage Inwards 1,500.00
Carriage Outwards 2,000.00
Plant & Machinery 17,000.00
Investments 7,000.00
Sales 70,000.00
Patents 10,000.00
Furniture 8,000.00
Discount Allowed 1,000.00
Misc. Receipts 4,000.00
‘ ‘
Total 190,000 190,000

6.0 Additional Activities

a. Visit U-tube add [Link]
[Link]
[Link]
[Link] Watch the video &
summarise in 1 paragraph

ITQ Answer 1
A Trial balance simply means a list that shows the debit and credit balances extracted from
the ledger accounts, in order to show the arithmetical accuracy of the ledgers.

72
7.0 References/Further Reading
Accounting Technicians Scheme West Africa (2009). Basic Accounting
Processes and System Part 1, Study Pack. Jos: ABINA Publishers.
Baston, A. (1979). Elements of Accounts for Elementary and Intermediate
Stage Students. Jos: Ehindero (Nig.) Limited.
Damagum, Y.M. (1999). Introduction to Financial Accounting (1999).
Kaduna: O.G. Ventures.
Jat, R. B. & Jugu, Y. G. (2008). Modern Financial Accounting: Theory and
Practice. Jos: London: Cassell.
Jugu, Y. G. (2008). Financial Accounting Synopsis (2nd Ed.). Jos: Ehindero
(Nig.) Ltd.
Longe, O. A. & Kazeem, R. A. (2006). Essential Financial Accounting for
Senior Secondary Schools. Jos: Tonad Publishers Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza
Publishing Company Limited.
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London:
Prentice Hall.

73
 STUDY SESSION 3
Final Accounts
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Income Statement (Trading)
2.2 Definition of Terms
2.3 Income Statement (Profit or Loss)
2.4 Procedure for preparing Income Statement
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to yet another study session. In this session, you will increase
your understanding of the fact that accounting is a process that deals with the
identifying, analysing, recording, classifying, summarising, communicating and
interpreting of financial information for use by interested parties. You must to note
that the preparation of simple final accounts is part of the process and covers the
preparation of an Income Statement and a Statement of Financial Position. In this
study session, the final accounts of a sole proprietor or trader who deals in the
buying and selling of goods are discussed.

74
1.0 Learning Outcome
At the end of this study session, you should be able to understand the following:
1. Explain income Statement
2. definition of terms under Income Statement
3. procedure for Preparing Income Statement

2.0 Main Content

2.1 Income Statement (Trading)
We will start by stating that the main objective of preparing the trading section of
an income statement, is to determine the gross profit or loss for the period. It is
also in this account that the cost of obtaining the goods (cost of goods sold aka cost
of sales) is calculated. We usually prepare it in conformity with the rules of double
entry. Since it contains the results of operations of a business over a period, the
heading is usually titled as “Income Statement for the Year Ended ….”
The trading account section of the income statement looks at the differences
between the sales and the cost of goods sold. On the debit side are recorded
inventory at the beginning, purchases, carriage inwards, less returns outwards and
the closing inventory. Having made the deductions, what is arrived at is termed the
cost of goods available for sale or cost of sales. On the credit side are recorded
sales, less return inwards. The difference is then taken between the net sales figure
and that of cost of goods sold to arrive at the gross profit. The “T– Method” and
“Vertical Method” of preparing the income statement are shown below.

75
Income Statement (Trading Account Section) For The Year Ended
31st December, 2009
N N
Opening Inventory X Sales X
Add Purchases X Less Returns Inwards X
Add Carriage Inwards X Net Sales X
X
Less Returns outwards X
X
Less goods withdrawn for
own use X
Cost of goods available for sale X
Less closing Inventory X
Cost of goods sold X
Gross profit X
X X

Income Statement (Trading Account Section) For The Year

Ended 31st December, 2009
N N
Sales X
Less Returns Inwards X
Net Sales X
Opening Inventory X
Add: Purchases X
Add: Carriage Inwards X
Less return outwards (X)
Less goods withdrawn for use (X)
Costs of goods available for sales X
Less Closing Inventory (X)
Cost of Sales (X)
Gross profit or loss X_

Among the two formats above, the ‘vertical method’ of preparation is preferable.

76
2.2 Definition of Technical Terms
i. Purchases: these are goods bought for resale. It is the sum total of cash and
credit purchases. It however, excludes purchases of non-current (fixed) assets.

ii. Sales: this is the total of cash and credit sales during the trading period. Sales
excludes the sale of non-current (fixed) assets.
iii. Opening Inventory: these are the inventory of goods for sale at the beginning
of the accounting year.

iv. Closing Inventory: these are the balance of the inventory of goods available
for sale at the end of the trading period.

v. Returns Outwards: these are goods returned to the suppliers of such goods, as
a result of the goods either not being to specification, damaged, obsolete, late
delivery, and some other genuine reasons. Returns outwards must be deducted
from purchases of the period.

vi. Returns Inwards: these are goods returned by customers of a trading concern.
For example, goods below standard, wrong goods supplied to customers,
inability of organisation to meet with the terms of the supply, etc. may lead to
sales returns. This must be deducted from total sales for the period.

vii. Carriage Inward: this is the cost of transporting goods into the company. This
must be added to the cost of purchases as it is incurred in order to bring the
goods into a condition that is necessary for its sale. Hence, it is charged to the
trading account.

77
viii. Carriage Outwards: this is the cost of transporting goods to customers. That
is, the cost of transport that a trading concern incurs in moving goods meant for
resale out of a firm. Carriage outwards is a profit and loss account item and for
that reason is not included in the calculation of gross profit in the trading
account section of the income statement. It is seen as expenses on sales and as a
result, it is debited in the profit and loss account.
ix. Cost of Goods Available for Sale: this figure is derived by adding the opening
Inventory and purchase.

x. Cost of Goods Sold or Cost of Sales: this represents the cost of the goods that
were actually sold. It is arrived at by deducting closing inventory from the cost
of goods available for sales.

xi. Gross Profit: this is the excess of sales (less returns) over the cost of goods
sold. This could also be defined as profit before expenses are deducted.

xii. Net Profit: this is the profit figure arrived at after deducting all expenses
incurred during the trading period.

xiii. Goods Withdrawn for Own Use: the use of products or goods by a
proprietor is usually termed inventory drawings. Such goods withdrawn by
the owner of the business are deducted from the purchases figure in the
trading account section. Subsequently, in the Statement of Financial
Position, it must be added to drawings.

78
xiv. Goods stolen or destroyed: this figure is deducted from cost of goods
available for sale or purchases and posted to the expenses side of the profit
and loss account. That is: Dr: Profit and Loss A/c, Cr: Purchases Account.

In-text question 1
What is an opening inventory?

2.3 Income Statement (Profit or Loss Section)

The main function of the Income
Statement under which the profit or loss is
determined is to ascertain the net profit or
loss resulting from the trading operations
of the accounting period. Incomes or gains
are credited, while expenses are debited.
The gross loss (if any) from the Trading
Section of Income Statement is debited
while gross profit (if any) from the Trading Section of the Income Statement for
the period is credited. The net profit or loss from this account will be added to the
capital account in the statement of financial position.
In-text question 2
What is net profit?

Income Statement (Profit or Loss Section) Format

The “T” form of the profit and loss section will appear thus:
N N
Expenses Gross profit b/d X
Wages and Salaries X Discount received X
Telephone X Bank interest received X
Bad debts X Decrease in provision for bad debt X
Increase in provision for bad debt X Commission received X
Motor expenses X Profit from sales of assets X
Stationery X

79
Bank Charges X
Loss on sales of assets X
Advertising X
Light and heating X
Repairs X
Postages X
Rent X
Rates X
Discount Allowed X
Depreciation X
Directors Fees X
Carriage outwards X
Net Profit X ___
XX XX

The vertical format of the profit and loss section will appear as can be seen under:
N N
Gross profit b/d X
Discount received X
Bank interest received X
Decrease in provision for bad debt X
Commission received X
Profit from sales of assets X
X
Expenses
Wages and Salaries X
Telephone X
Bad debts X
Increases in provision for bad debt X
Motor expenses X
Stationery X
Bank Charges X
Losses on sales of assets X
Advertising X
Light and heating X
Repairs X
Postages X
Rent X
Rates X
80
Discount Allowed X
Depreciation X
Directors Fees X
Travelling expenses X
Carriage outwards X
Net Profit X
XX

You should note that the aspect where profit or loss is determined should not be
prepared in isolation. It should be prepared with the trading account aspect of the
Income Statement. You need to also note that Net Profit is usually added to capital
in the Statement of Financial Position and Net Loss deducted from capital.

2.4 Procedure for Preparing the Income Statement

i. Record revenue earned as sales on the credit side, less returns inwards.
ii. Compute cost of sales by adding opening inventory to purchases and
deducting closing inventory.
iii. The cost of sales is deducted from sales to get the intermediate or the gross
profit.
iv. Deduct operating expenses from gross profit to determine the net income or
net profit or net loss.

Illustration I
From the following trial balance of Masco Max, draw up an Income Statement for
the year ended 31st December, 2009.

81
 Dr Cr
N N 226,360.00
Capital Inventory
Carriage outwards Carriage 23,680.00
inwards Returns inwards 2,000.00
Sales 3,100.00 18,600.00
Purchases Return outwards 2,050.00
Salaries and wages Rent 8,220.00
Insurance Sundry expenses 118,740.00
Advertising General
expenses Land and 38,620.00
Buildings Furniture & 3,040.00
Fittings Motor Car 780.00
Receivables 6,640.00
Bank Creditors 2,160.00
4,800.00
50,000.00
18,000.00
3,500.00
38,960.00 17,310.00
104,820.00

Drawings 12,000.00
432,890.00 432,890.00
Inventory as at 31st December 2009 was N30, 000.00.

Suggested Solution
Mosco Max
Income Statement for the year ended 31st December, 2009.

N N N N

Opening 23,680 Sales 186,000

Inventory
Add purchases 118,740 Less Returns 2,050
Add carriage 3,100 183,950
Inwards 121,840
Less returns 3,220 118,620
Outwards 142,300
Less closing 30,000
Inventory 112,300
Gross profit 71,650

82
 183,950 183,950
Expenses: Gross profit 71,650
(b/d)
Carriage 2,000
Outwards
Salaries & 38,620
Wages
Rent 3,040
Insurance 780
Sundry 6,640
expenses
Advertising 2,160
General 4,800
expenses
Net Profit 13,610 _______
71,650 71,650
Illustration II
Wayo Business had the following balances as at 31st December, 2017.
Dr. Cr
N N
Purchases and Sales 315,000 870,000
Capital 573,410
Loan 20,000
Receivables and Payables 79,000 89,000
Land and Buildings 280,000
Motor Vehicle 320,000
Furniture and Fittings 180,000
Returns 9,000 7,500
Discounts 16,000 12,000
Bad Debt 790
Provision for bad debt (1/1/2017) 1,500
Insurance 4,500
Carriage Inwards 6,000
Salaries and Wages 21,000
Investment 290,000
Inventory (1/1/2017) 36,000
Drawings 2,120
Cash 30,000
Bank ________ 16,000_
1,589,410 1,589,410
Additional Information
i. Inventory as at 31st December, 2017 is N29,500
83
ii. Provide for depreciation as follows:
Land and Buildings 2% per annum
Motor Vehicle 15% per annum
Furniture and Fittings 10% per annum
iii. Provision for bad and doubtful debt should be reduced to N1, 000
iv. Insurance owing N500.
v. Salaries accrued N2, 000
vi. Provide for loan interest at 5% per annum
vii. The owner had withdrawn N2, 000 cash for personal use and no entry was
passed in this regard.

Required: Prepare Wayo’s Income Statement for the year ended, 31st December,
2017.
Suggested Solution
Wayo Business
Statement of Comprehensive Income as at year ended 31st December, 2017
N N N
Sales 870,000
Less return inward 9000 861,000
Opening inventory 36,000
Purchases 315,000
Carriage inwards 6000 357,000
Less return outwards 7,500
349,000
Less closing inventory 29,500
(320,000)
Gross profit 541,000
Discount received 12,000
Decrease in provision for bad and doubtful debt ___500
553,500
Less Expenses:
Depreciation of Land and Building 5,600
Depreciation of Motor Vehicle 48,000
Depreciation of Furniture and Fittings 18,000
Insurance 5,000
Salaries and Wages 23,000
Interest on Loan 1,000
Discount allowed 16,000
Bad debt 790
Total Expenses (117,390)
Net Income 436,110

84
3.0 Tutor Marked Assignments
1. DLC Enterprise is run by a sole trader. The following Trial Balance was
prepared from the business accounts on 30th September 2015.
Dr Cr
N N
Capital 185,280
Inventory 24,200
Sales 421,450
Purchases 167,350
Purchase returns 6,040
Electricity 2,230
Discounts allowed 2,420
Discounts received 4,270
Motor expenses 1,580
Drawings 32,000
Bank 24,511
Salaries 108,000
Insurance 15,400
Receivables 110,140
Irrecoverable debts 1,420
Allowance for receivables 3,153
Payables 76,288
General expenses 6,780
9% Loan (2012-2019) 150,000
Loan interest 12,000
Land and buildings 340,000
Accumulated depreciation for buildings 26,000
Equipment 22,000
Accumulated depreciation for equipment 10,300
Motor vehicles 26,000
Accumulated depreciation for motor vehicles 13,250

896,031 896,031

The following information is also available.

i) Only 10 months’ salaries are shown in the Trial Balance. An equal
amount is paid for salaries for each month of the year.

85
 ii) As at 30th September 2015, N 3,200 had been prepaid for insurance,

whilst N 410 was owing for general expenses.

iii) N 4,600 had been charged to general expenses for the owner’s private

holiday.
iv) As at 30th September 2015, inventory was valued at N22, 500.

v) A customer, owing N5, 040 has been declared bankrupt. This amount

is to be written off in full.

vi) An allowance for receivables is to be maintained at 3% of the

remaining receivables.
vii) As at 30th September 2015, the business’s land was valued at N100,

000. Land is not depreciated.

viii) Depreciation is to be provided as follows:

Buildings: 4% per annum using the straight line method.

Equipment: 25% per annum using the straight line method.
Motor vehicles: 40% per annum using the reducing balance method.

ix) There were no additions or disposals of non-current assets during the

financial year.

Required:
a) Prepare the Income Statement for the year ended 30 th September 2015.

b) Prepare the Statement of Financial Position as at 30th September 2015.

4.0 Summary
You have seen that the ultimate objective of preparing an Income Statements is to
enable the management of an organisation or individual to determine the results of
86
its operations, during a given period. Like all accounting reports, we realise that
the form of the accounts will vary according to the type of business and the
requirements of management, but the sequence of sub- heads remains unchanged.
You now know that the Income Statement must be drawn up for a period which is
usually a year.
5.0 Self-Assessment Question/Answer
From the following Trial Balance of Alh Sule Ahmed as at 31st December, 2018,
you are required to prepare Income Statement for the year ended 31st December,
2018:

Trial Balance as at 31 December 2018

Dr. Cr.
N N
Discount Allowed 410
Discount Received 506
Carriage Inwards 309
Carriage Outwards 218
Return Inwards 1,384
Return Outwards 810
Sales 120,320
Purchases 84,290
Stock 31 December 2017 30,816
Motor expenses 4,917
Repairs to premises 1,383
Pay 16,184
Sundry expenses 807
Rates and insurance 2,896
Premises at cost 40,000
Motor Vehicle at cost 11,160
Provision for depreciation motors as at 31
3,860
December 2017
Debtors 31,640
Creditors 24,320
Cash at bank 4,956
Cash in hand 48
Drawings 8,736
87
Capital 50,994
Loan from P. Holland 40,000
Bad Debts 1,314
Provision for bad debts as at 31
658
December 2017
241,468 241,468
The following should be considered on 31 December 2018
1) Stock N36,420
a) Expenses owing
b) Sundry expenses N62
2) Motor expenses N33
3) prepayments
a) Rates N166
4) Provision for bad debts to be reduced to N580
5) Depreciation for motors to be N2,100 for the year
6) Part of the premises were let to a tenant who owed N250 at 31 December 2011
7) Loan interest owing to P. Holland, N4,000

Prepare the Income Statement for the year ended December 2018.
Answer to Self-Assessment Question

Income Statement
for the year ended 31 December 2018
N N N
Sales 120,320
Less Sales Returns 1,384
Net Sales 118,936
Opening Stock 30,816
Add Purchases 84,290
Less Purchases Return 810 83,480
Add Carriage Inwards 309
COGAFS 114,605
Less Closing Stock 36,420
COGS 78,185
Gross Profit 40,751
Add Revenue
Discount Received 506

88
Rent Receivable 250
Reduction in Provision for
78 834
Bad Debts
41,585
Less Expenses
Motor Expenses 4,917
Add Motor expenses owing 33 4,950
Pay 16,184
Carriage Outwards 218
Discount Allowed 410
Repairs to Premises 1,383
Sundry Expenses 807
Add sundry expenses owing 62 869
Bad Debts 1,314
Rates and Insurance 2,896
Less prepaid rates and
166 2,730
insurance
Loan Interest 4,000
Depreciation: Motor vehicles 2,100 34,158
Net Profit 7,427

6.0 Additional Activities

a. Visit U-tube add [Link]
[Link]
[Link]
[Link] Watch the video & summarise
in 1 paragraph

7.0 References/Further Reading

Accounting Technicians Scheme West Africa (2009). Basic Accounting Processes
and System, Study Pack, Part 1. Jos: ABINA Publishers.
Bastun, A. (1979). Elements of Accounts for Elementary and Intermediate Stage
Students. Abuja: Case II Lando.

89
Garbutt, D. (1982). Carter’s Advanced Accounts: A Manual of Book- keeping
and Accounting for Students. London: Pitman Books Limited.
ICAN (2006). Fundamentals of Financial Accounting, Study Pack. : Foundation
VI. Publishing Limited.
Jat, R.B. and Jugu, G.Y. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jugu, Y. G. (2008). Financial Accounting Synopsis. (2nd Ed). Jos: Ehindero
(Nig.) Ltd.
Lange, O.A. and Kazeem, R.A. (2006). Essential Financial Accounting for Senior
Secondary Schools. TONAD Publishes Limited.
MAYO Associates Ltd. (1988). Accounting Paper1. London: BPP Publishing
Limited.
Okwoli A. A. (1993). Principles of Financial Accounting. Jos: Tamaza, Publishing
Company Limited.
Wood, F. and Alan S. (2005). Business Accounting1. (10th Ed.). London: Prentice
Hall.

90
 STUDY SESSION 4
The Statement of Financial Position
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 The Statement of Financial Position Defined
2.2 Components of the Statement of Financial Position
2.3 Fictitious Assets
3.0Tutor Marked Assignments
4.0Summary
5.0Self-Assessment Questions and Answer
6.0Additional Activities
7.0References/Further Reading

Introduction
You are welcome to study session four. In this session, you will get to understand
that owners, managers, suppliers, granters of credit and others interested in a
business enterprise are generally confronted with financial statements prepared by
the accountant. These include the Statement of Financial Position; showing the
firm’s condition on the last day of the accounting period, among others. This study
session discusses the Statement of Financial Position, its format and components.

1.0 Learning Outcome

At the end of the study session, you should be able to do the following:
1. define what the Statement of Financial Position is
91
 2. identify items that will appear in the Statement of Financial Position
3. prepare a Statement of Financial Position
4. make appropriate adjustments to the Statement of Financial Position

2.0 Main Content

2.1 The Statement of Financial Position Defined
A Statement of Financial Position is the financial statement showing the assets,
liabilities and owners’ equity (i.e. capital plus reserves) of an enterprise on a
specific date (Okwoli, 1993: 94). Longe and Kazeem (2006:162) define the
Statement of Financial Position as the statement that shows the presentation of the
summary of assets and liabilities in a well arranged form, so that the financial
position may be clearly ascertained.
The Statement of Financial Position is not an account; it is a statement showing the
balance remaining in the books. The Statement of Financial Position must be
headed as ‘The Statement of Financial Position as at a particular date”.
The Statement of Financial Position of a business just like a coin consists of two
sides – the asset side and the liabilities and owner’s equity side. All assets have
sources represented by liabilities and equity. Since all assets are financed by
liabilities and owner’s equity, the two sides must balance, hence, the term
Statement of Financial Position. The Statement of Financial Position equation is
therefore: Assets = Liabilities + Owner’s equity.
The assets are usually set out in order of permanence or liquidity. To comprehend
the rules of writing up a Statement of Financial Position, the various components
must be adequately analysed.

2.2 Components of the Statement of Financial Position

a. Assets
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i. Non-current Assets
These are tangible assets, which have a relatively long life (more than one year),
are relatively fixed (in size, shape, or form), are permanent in nature and used by a
business in its operation. These assets are held with the main aim of earning or
creating revenue and not for the purpose of sale in the normal course of business.
Examples of non-current assets are land, buildings, motor vehicles, office
equipment, furniture and fittings, premises, etc. The fact that the life of non-
current assets extends over many accounting periods makes it necessary to allocate
the cost of the asset to current and future operations on some rational basis. This
allocation is called depreciation. Hence, non-current assets are generally valued
at cost less provisions for accumulated depreciation that is sufficient to reduce the
carrying amount or book value of the asset to what is referred to as its salvage or
scrap value by the end of its useful working life.
b. Current Assets
These are assets that are acquired and held for resale, and not as agents of
production, but for the purpose of eventual conversion into cash (ATSWA,
2009:218). They are therefore not permanent in nature, but are continually
changing in the ordinary course of business. Examples are trade receivables,
inventory, bills receivable, cash in hand, cash at bank, prepaid expenses,
marketable securities, etc. that can easily be realised and are therefore, readily
available to discharge current liabilities.
Depending on the nature of business, the same asset may either be fixed or current
according to the nature of the business. Thus, investments would be a current asset
to a stock broker, but a non-current asset to an ordinary trader. Similarly,
machinery would be a non-current asset to an ordinary manufacturer, but a current
asset to a machinery trading company. Under what category the asset is classified

93
will depend on whether the asset is held merely for the purpose of resale, or it is
intended to be kept for future activity in the business.

In-text question 1
What is a current asset?

Other categorisation of assets are:

i. Intangible Assets
These are assets that cannot be seen nor touched, although they may have value
(Garbutt, 1982:0213). Examples of intangible assets are goodwill, patents,
copyright, trademark, etc.

ii. Liquid Assets

These are cash or items such as receivables, marketable securities, etc., that can
easily be converted into cash.

iii. Wasting Assets

These are non-current assets that depreciate through wear and tear, as for example,
plant and machinery; those whose value expires with lapses of time, such as
patents and leases, and also those that become exhausted or consumed through
being worked, such as mines, quarries, etc.

b. Liabilities
These are obligations or indebtedness of a business enterprise to outsiders. A
liability is any amount, which a business is legally bound to pay. It is a claim by an
outsider on the assets of a business. The best method of arranging liabilities in the
case of an old trader is in order of permanence. The usual groupings are as follows.

94
 i. Non-Current Liabilities
These are obligations that will mature in the future. That is, not within the current
accounting period. Examples are Debentures, Long-term loans, and Mortgage
loans.

ii. Current or Short-term Liabilities

These are liabilities payable within a short period of time, usually within one year.
They are events that require the enterprise to pay money and provide goods or
perform services, which are already due. Examples are accounts payable, bank
overdraft, short-term loans, accrued expenses, etc.

c. Capital
Capital represents the contribution of the proprietor of a business to the assets that
the firm has acquired. That is, the owner’s interest in the assets of the business.
This is usually referred to as owner’s equity or proprietorship.
In-text question 2
What are liabilities?

Other terminologies in relation to the statement of financial position

i. Working Capital
This is the excess of the current assets over the current liabilities. That is, current
assets – current liabilities.
ii. Capital Employed
This is a total asset less current liabilities.
iii. Overtrading

95
This is a situation whereby a firm has no working capital. The firm cannot meet its
current liabilities and it may become bankrupt. In this position, the firm is very
vulnerable, and could be forced into bankruptcy if its creditors loss faith in its
ability to pay.

2.3 Fictitious Assets

This is another category of assets which are defined as such, merely because they
are debit balances not written off as at the time of the preparation of the statement
of financial position. They are items of expenditure of unusual character which are
not recoupable. Examples are preliminary expenses, formation expenses and losses
or promoters fund which have been carried forward from one period to the next.

Statement of Financial Position Format

The Statement of Financial Position can also be presented either in “T” form or in
a vertical form. The “T” form is given below.
Statement of Financial Position as at…
N N N N
Capital X Fixed assets X
Goodwill
Add Net Profit X Land and building X
X Less Depreciation X X
Less Drawings X Plant & Machinery X
X Less Depreciation X X
Non-current Furniture & Fitting X
liabilities:
5% Debentures X Motor Van XX
Current Liabilities Current Assets
Loan X Inventory X
Payables X Trade Receivables X
Accrued expenses X Payment in advance X
Bills payable X Bills Receivable X
Income in advance X X Income in arrears X
Bank X

96
 Cash in hand X X
X X

The vertical form is given below/next page.

Statement of Financial Position as at year ended 31st December, ….

N N N
Capital and Liabilities
Capital X
Add Net Profit X X
Less Drawings X X

Non-current Liabilities
Debentures X
Loan X

Current Liabilities
Payables X
Accrued Expenses X
Income in Advance X
Bank Overdraft X
Interest on Loan X
XX
Non-Current Assets Cost Acc. Dep NBV
Land and Buildings X (X) X
Motor Vehicle X (X) X
Furniture and Fittings X (X) X
Plant and Machinery X (X) X

Intangible Assets
Investment X
Goodwill X

Current Assets
Inventory X
Receivables X
Less Provision for bad debt (X) X
Payment in Advance X

97
Income in Arrears X
Bank X
Cash X
XX
Illustration I.
Prepare Gani Fawemi’s Statement of Financial Position from the figures given in
his list of balances as at 31st December …
Dr Cr
N N
Capital 12,000
Land and buildings 9,235
Mortgage on premises 5,545
Drawings 1,500
Profit and Loss account balance 1,800
Furniture and fittings 2,560
Motor Vehicles 1,731
Closing Inventory 1,500
Receivables 5,737
Payables 3,677
Cash book balance 759
23,022 23,022
Required
(a) Show the Statement of Financial Position in all its
forms; and
(b) Answer the following questions from the above
data:
(i) What is the capital invested in the above Statement
of Financial Position?
(ii) What is the capital owned?
(iii) What is the capital employed?
(iv) What is the working capital?

(i) Order of liquidity Approach

98
Gani Fawemi
Statement of Financial Position as at 31st December…
N N N N
Current Current Assets
Liabilities Cash 759
Payables 3,677 Receivables 5,737
Non-current Inventory 1,500 7,996
Liabilities
Mortgage premises 5,545 Non-current
Assets
Capital 12,000 Motor vehicles 1,731
Add Profit Furniture and 2,560
fittings
Less drawings 1,500 13,300 Land and 9,235 13,526
building
N21,522 N21,522

(ii) Order of permanence approach

Gani Fawemi
Statement of Financial Position as at 31st December, 19 x 09
N N N N
Capital 12,000 Non-current
Assets
Add profit Land & 9,235
buildings
Less drawings 1,500 12,300 Furniture and 2,560
Fittings
Non-current Motor vehicle 1,731 13,526
Liabilities:
Mortgage premises 5,545 Current Assets

Current Liabilities Inventory 1,500

Payables 3,677 Receivables 5,737

Cash 759 7,996
N21,522 ,522

99
(iii) The Vertical Approach
Gani Fawemi
Statement of Financial Position as at 31st December, 19 x 09
N N
Capital 12,000
Add net profit

Less drawings 1,500 12,300

Non-current Liabilities
Mortgage premises 5,545

Non-current Assets
Land and buildings 9,235
Furniture and fittings 2,560
Motor vehicles 1,731 13,526

Current Assets N N
Inventory 1.500
Receivables 5,737
Cash

Less current liabilities

Payables 3,677
Working capital 4,319
N17,845

(b) ₦ ₦
(i) Capital Invested = Original Capital 12,000
(ii) Capital owned = Capital at beginning 12,000
Add net profit 1,800
13,800
Less drawings 1,500
12,300
(iii) Capital employed = Capital owned 12,300
Add Total Liabilities:
Non-current Liabilities 5,545
Current Liabilities 3,677 9,222
21,522

100
(iv) Working Capital = Current Assets 7,996
Less Current Liabilities 3,677 4,319

Illustration II. Prepare the Statement of Financial Position for Wayo Business as
at 31st December, 2017 as shown under illustration II, item 2.3.

Suggested Solution

Wayo Business
Statement of Financial Position as at year ended 31st December, 2017__
N N N
Equity and Liabilities
Capital 573,410
Net Profit 436,110 1,009,520
Less Drawings 4,120 1,005,400
Loan 20,000
Current Liabilities:
Payables 89,000
Insurance Accrued 500
Salaries Owing 2,000
Bank Overdraft 16,000
Interest on Loan 1,000
1,133,900
Non-Current Assets Cost Acc. Dep CA
Land and Buildings 280,000 (5,600) 274,400
Motor Vehicle 320,000 (48,000) 272,000
Furniture and Fittings 180,000 (18,000) 162,000
Investment 290,000

Current Assets
Inventory 29,500
Receivables 79,000
Less Provision for bad debt (1000) 78,000
Cash 28,000
1.133,900

101
3.0 Tutored Marked Assignment
1. The Statements of Financial Position for the last two years for DLC are shown
below. DLC implemented an expansion programme during the year ended 31 st
May 2015.
31st May 2014 31st May 2015
N N N N
Non-current assets (net) 380,000 530,000

Current assets
Inventory 80,000 108,000
Receivables 32,000 37,000
Bank 13,000 -
Cash 1,000 3,000
126,000 148,000
Total assets 506,000 678,000

Current liabilities 26,000 30,000

Payables 22,000 28,000
Corporation Tax - 5,000
Overdraft 18,000 21,000
Dividends 2,000 68,000 4,000 88,000
Accruals 350,000 490,000
62,000 62,000
Total liabilities - 28,000
26,000 10,000
Capital and Reserves 506,000 678,000
GH¢1 Ordinary shares
General reserve
Revaluation reserve
Profit and loss
Total capital and liabilities

Additional information:
The total depreciation provision incorporated in the statements of financial position
was N48, 000 at 31st May 2014 and N122, 000 at 31st May 2015.

102
 i) During the year ended 31st May 2015 a non-current asset costing N22,
000 with a carrying of N6, 000 was sold for N1, 000. No other disposals
took place.

ii) The revaluation surplus, represents a revaluation of premises during the

year ended 31st May 2015.

Required:
a) Prepare a Statement of Cash Flow for DLC for the year ended 31st May

2015.
b) State the effects of the expansion policy on DLC.

4.0 Summary
This study session has defined a Statement of Financial Position for us, discussed
its major components and has given the formats for its preparation. The session has
also demonstrated to us how a Statement of Financial Position can be prepared.
5.0 Self-Assessment Question/Answer
From the following Trial Balance of Alh Sule Ahmed as at 31st December, 2018,
you are required to prepare Income Statement for the year ended 31st December,
2018:

Trial Balance as at 31 December 2018

Dr. Cr.
N N
Discount Allowed 410
Discount Received 506
Carriage Inwards 309
Carriage Outwards 218
Return Inwards 1,384
Return Outwards 810
103
Sales 120,320
Purchases 84,290
Stock 31 December 2017 30,816
Motor expenses 4,917
Repairs to premises 1,383
Pay 16,184
Sundry expenses 807
Rates and insurance 2,896
Premises at cost 40,000
Motor Vehicle at cost 11,160
Provision for depreciation motors as at 31
3,860
December 2017
Debtors 31,640
Creditors 24,320
Cash at bank 4,956
Cash in hand 48
Drawings 8,736
Capital 50,994
Loan from P. Holland 40,000
Bad Debts 1,314
Provision for bad debts as at 31
658
December 2017
241,468 241,468
The following should be considered on 31 December 2018
1) Stock N36,420
a) Expenses owing
b) Sundry expenses N62
2) Motor expenses N33
3) prepayments
a) Rates N166
4) Provision for bad debts to be reduced to N580
5) Depreciation for motors to be N2,100 for the year
6) Part of the premises were let to a tenant who owed N250 at 31 December 2011
7) Loan interest owing to P. Holland, N4,000

Prepare the Income Statement and statement of financial position for the year
ended December 2018.

104
Answer to Self-Assessment Question
Income statement is as in the preceding chapter
Statement of Financial Position
as at 31 December 2018
Non-Current Assets N N N
Premises at cost 40,000
Motor Vehicle at cost 11,160
Less Depreciation to date 5,960 5,200
45,200
Current Assets
Stock 36,420
Debtors 31,640
Less Provision for Bad Debts 580 31,060
Prepaid Expense 166
Revenue owing 250
Cash at bank 4,956
Cash in hand 48
72,900
Current Liabilities
Creditors 24,320
Expenses owing 4,095 28,415
Working Capital 44,485
89,685

Financed by
Balance as at 1 January 2011 50,994
Add Net Profit 7,427
58,421
Less Drawings 8,736
49,685
Non-Current Liability
Loan from P. Holland 40,000
89,685
6.0Additional Activities
a. Visit U-tube add [Link]
[Link]
[Link]

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[Link] . Watch the video & summarise
in 1 paragraph

Answer 1
This is an asset that is acquired and held for resale, and not as agents of production, but for the
purpose of eventual conversion into cash.
Answer 2
A liability is any amount which a business is legally bound to pay.

7.0 References/Further Reading

Accounting Technicians Scheme, West Africa (2009). Basic Accounting Processes
& System, Part 1. Jos: ABWA Publisher.
Baston, A. (1979). Elements of Accounts for Elementary and Intermediate State
Students. London: Cassell.
Garbutt, D. (1982). Carter’s Advanced Accounts: A Manual of Book-
Keeping and Accountancy for Students. London: Pitman Books Limited.
Grant, A. J. (1975). Accounting made Simple. Lagos: W.H. Allen & Company
Ltd.
Jat, R.B. & Jugu, G.Y. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jugu, Y. G. (2008). Financial Accounting Synopsis. (2nd Ed). Jos: Ehindero
(Nig.) Ltd.
Longe, O.A. and Kazeem, R.A. (2006). Essential Financial Accounting for Senior
Secondary Schools. Jos: Tonad Publishers Limited.
Mayo Associates Ltd. (1988). Accounting Paper 1. Lagos: BPP Publishing
Limited.
Okwoli, A.A. (1993). Principles of Financial Accounting. Jos: Tamaza Publishing
Company Limited.

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 MODULE 3
Content
Study Session 1: Adjustments to Final Accounts
Study Session 2: Manufacturing Accounts
Study Session 3: Control Accounts
Study Session 4: Accounts of Non-Trading Organisations
Study Session 5: Single Entry and Incomplete Records

STUDY SESSION 1
Adjustments in the Final Accounts and Depreciation of Non-current Assets
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Adjustments in the Final Accounts
2.2 Provisions
2.3 Reserves
2.4 Accruals and Prepayments
2.5 Depreciation of Non-current Assets
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

107
Introduction
You are welcome to this study session. Many changes in a company’s economic
resources and obligations occur continuously. Other resources and obligations
such as employee salaries originate as service
is rendered, with payment to follow at specified
dates. The end of the accounting period
generally does not necessarily coincide with the
receipts or payments of cash associated with all
the types of resource changes. Adjusting entries
are therefore, used to record such resource
changes to ensure the accuracy of the financial statements. In this study session,
we shall consider some of the adjustments most commonly encountered in the
preparation of the final accounts. Also, the treatment of such adjustments in both
the Income Statement and the Statement of Financial Position will be examined.
We will go further to also discuss depreciation of non-current assets.

1.0 Learning Outcome

At the end of this session, you should be able to do the following:
1. explain why adjusting entries are necessary
2. explain and pass entries in respect of provisions
3. explain and pass entries with respect to reserves
4. explain and pass entries in respect of accruals and prepayments
5. record increases and decreases in provisions and reserves
6. calculate and make entries with respect to discounts received or given
7. prepare profit and loss account and Statement of Financial Position showing
the treatment of bad debts, provision for doubtful debts, depreciation and
provision for discount on Receivables and creditors
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8. define depreciation and explain why accountants provide for depreciation
in the final accounts
9. explain the causes of depreciation
10. outline methods of depreciating non-current assets
11. calculate depreciation using the various methods

2.0 Main Content

2.1 Adjustments in the Final Accounts
You must understand that one of the basic
tenets of accounting is that proper provision
should be made for known losses, but no profit
should be assumed until it has been realised.
In order for you to prevent higher profits than
justified being assumed and then distributed to the owners of the business, entries
in the revenue accounts should be made to reflect this conservative approach
.These fall into two main groups – the creation and maintenance of provisions and
the creation and maintenance of reserves.
You should note that Provisions are debited to the Income Statement (profit or loss
section) while Reserves are debited to retained earnings account. There have
always existed some confusion as to the precise distinction between provisions and
reserves, but the fact is that, a provision means any amount written off or retained
by way of providing for depreciation, renewals or diminution of assets or retained
by way of providing for any liability yet, the amount cannot be determined with
substantial accuracy. While reserve shall include any amount written off or
retained by providing for any known liability or any sum set aside, for the purpose
of it being used to prevent undue fluctuations in charges for taxation.

109
2.2 Provisions
You will realise that the most common reasons for creating provisions are to allow
for expected losses, such as bad debts and to provide for depreciation. The
provision accounts should be designated with their purpose (for example, Provision
for Depreciation, etc.) and deducted in the Statement of Financial Position from the
asset concerned.
Also, you know that provision for Bad debts is created and maintained to recognise
that it is unlikely for all the trade receivables to be paid. The method of deciding
on the proportion varies from business to business. Where there is a large number
of relatively small values of bills receivables, the easiest method for you is to fix
the level of the provision for bad debts at a predetermined percentage of the total
bills receivable figure. As the bill receivable figure alters, so will the provision for
bad debts, debiting or crediting the Income Statement (profit or loss section) as
appropriate. The percentage figure chosen will be established in the light of
experience, and will be based on the bill receivable figure after bad debts have
been identified and transferred to the bad debts account.
Where the number of bills receivable is small but the amounts are large, you may
reach the provision after reviewing each account receivable in turn and deciding if
there is any risk of loss. Banks use this method for their larger borrowers.
It is important for you to appreciate that when a bad debt is incurred, it is usual to
debit it to the Income Statement (via Bad Debts Account) and not the provision for
Bad Debts Account. At first, thought this seems illogical but you should be
remembered that the level of provision for bad debts have been excluded, and so it
is consistent with the general policy of taking a conservative view of the state of
the business. In any event, from a purely mathematical standpoint, if the provision
for Bad Debts Account were debited with bad debts, the amount of these would be

110
reflected in the larger amount which would have been charged to the income
statement to restore it to its proper level.

Methods of showing provisions in the Statement of Financial Position (Assets portion)

N N
Machinery at cost 70,000
Less: Depreciation at the beginning of the year 7,000
Depreciation for the year 3,500 10,500
Net Book Value (NBV) 59,500

Sundry Receivables 30,000

Less: Provision for bad debts 1,500 28,500

2.3 Reserves
These are created to conserve liquidity and/ or to enable the business to repay a
non-current liability such as a debenture or redeemable preference shares. The
reserve account is not of course a source of liquid funds but merely denotes the
extent to which past profits have been left with the business to finance the various
assets shown in the Statement of Financial Position.
Types of Reserves
1. General Reserve - will probably have been built up over a number of years
by appropriation of profits, which could otherwise have been distributed. In times
of low profitability, it is quite in order to transfer from the General Reserve so that
a dividend distribution can be maintained.

2. Capital Reserve - Any profit arising on a revaluation of property, plant or

equipment for example, will be treated as a capital reserve. Such profits are not
available for dividend purposes until it is actually realized.

111
3. Share Premium Account - arises when a company issues shares at a price
which is higher than their nominal value. This ‘profit’ cannot be distributed as a
dividend but can be used to meet the expenses arising from the issue of shares and
other purposes. The share premium Account is regarded as a capital reserve.

4. Fund and Sinking Fund – the word Fund should be restricted to those
reserves which have specific investment, made outside the business. A sinking
Fund describes a fund, which increases annually as appropriations of profit and
investment are made according to a predetermined plan by fixed installments.
Methods of showing reserves on the Statement of Financial Position (shareholders’
interests).
N N
Issued share capital 80,000
Capital Reserves-
Capital Reserves 20,000
Share Premium Account 10,000
Sinking Fund Reserve 1,000
31,000
Revenue Reserves –
General Reserve 27,500
Profit and Loss Account 6, 500
34,000

2.4 Accruals and Prepayments

The main purpose for which we prepare Income Statements and Statements of
Financial Position is to provide the owners of the business with a record of the way
in which the business is proceeding. At the date chosen for producing the figures,
the income and expenditure accounts (that is, Revenue Accounts) are ruled off and
the amounts transferred to the Income Statement (profit or loss) for the period

112
concerned. If this is to be accurate, it must be arrived at using figures for expenses
and income which relate to the current period only.
It is very seldom that items such as rates, rent and insurance premiums relate
exactly to the financial year for the business and so adjustments have to be made to
ensure that the charge to profits reflects the actual cost for the period concerned.
This involves carrying forward into the next period any payments, which may have
been made in advance, or making adjustments in respect of expenses which have
not been paid.
Whilst from a mathematical standpoint, it might appear that a business can add to
its profits and income which is accrued but not received, the prudent business will
not do this unless the income will definitely be received. Where doubt exists, the
appropriate provision will be made for the accrual.
In-text question 1
What is the reason for creating provision?

Illustration 1
Gatti Distributes Mattresses. During the four years ended 31st December 2003,
2004, 2005 and 2006, the following debts were written off as bad:
N
July 2003 1,700
June 2004 800
September 2005 750
November, 2006 1,250
On 31st December, 2003, the total bill receivable remaining was N17, 000. It was
decided that provision should be N355.
On 31st December, 2004, the total bill receivable was N25, 000. The provision
was N680.

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On 31st December, 2005, the total bill receivable remaining was N33, 000. The
provision was to be N530.
On 31st December, 2006, the total bill receivable remaining was given as
N35,000. The provision was estimated to be N750.
You are required to prepare the necessary accounts 1. Using method 1: Where
provision for doubtful debt is created.
Suggested Solution to Illustration 1
Dr. Bad Debts Account Cr

N N

Sundries 1,700 Dec. 31 IS 2003 1,700

Sundries 800 Dec. 31 IS 2004 800

Dr
Sundries 750 Dec. 31 IS 2005 750
Provision for
Sundries 1,250 Dec. 31 IS 2006 1,250 Doubtful Debts
Account Cr
2003 N 2003 N
Dec 31 balance c/d 355 Dec 31 Income State. 355
2004
Jan 1 balance b/d
Dec. 31 Income State.
2005
January1 balance b/d Dec
2004 31 Income State. 355
Dec 31 balance c/d 680 325
2005 680 2006 680
Dec 31 balance c/d 530 January 1 balance b/d 680
Dec 31 Income State. 150 Dec 31 Income State. 680
2006 680 530
Dec 31 balance c/d 750 220
Dec 31 Income State. 750 750

Dr Income Statement Cr
N N
Dec, 2003 Bad debt 1700

114
Dec, 2003 Prov. for Bad debt 355
Dec, 2004 Bad debt 800
Dec, 2004 Prov. for Bad debt 355
Dec, 2005 Bad debt 750
Dec, 2005 Prov. for Bad debt 680 Dec, 2005 Prov. for bad debt 150
Dec, 2006 Bad debt 1,250 Dec, 2006 Prov. for Bad debt 750
Dec, 2006 Prov. for Bad debt 220

Statement of Financial Position Extract

N N
2003
Receivables 17,000
Less provision for bad debts 355 16,645
2004
Receivables 25,000
Less provision for bad debts 680 4,320
2005
Receivables 33,000
Less provision for bad debts 530 32,470
2006
Receivables 35,000
Less provision for bad debts 750 34,250

Method 2
In this method, the adjustments for provisions are made on the debit of the Bad
debts account. There is no separate account for provision for doubtful debts. It is
carried down as a credit balance in the bad debts account.
The following accounts must be prepared:
1. Bad debts account
2. Income Statement
3. Statement of Financial Position
Using the question above, the ledger entries are as follows:

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Dr Bad Debts Account Cr
2003 N 2003 N
Dec 31 Sundries 1,700 Dec 31 Income State. 2,055
Dec 31 provision for doubtful debts 355 _____
2,055 2,055
2004 2004
Dec 31 Sundries 800 Jan 1 Prov. for D. Debts b/ d 355
Dec 31 provision for doubtful debts 680_ Dec. 31 Income State. 1,125
1,480 1,480
2005 2005
Dec 31 Sundries 750 Jan 1 Prov. for D. debts b/d 680
Dec 31 provision for doubtful debts 530_ Dec 31 Income State. _600
1,280 1,280

2006 2006
Dec 31 Sundries 1,250 Jan 1 Prov. for D. debt 530
Dec 31 provision for doubtful debts 750 Dec 31 Income State. 1,470
2,000 2,000

Dr Income Statement Cr
N

2003 Bad debts 2,055

2004 Bad debts 1,125

2005 Bad debts 600

2006 Bad debts 1,470

Dr Statement of Financial Position Extract Cr

N N
2003
Receivables 17,000
Less provision for bad debts 355 16,645
2004
Receivables 25,000
Less provision for bad debts 680 24,320

116
 2005
Receivables 33,000
Less provision for bad debts 530 32,470
2006
Receivables 35,000
Less provision for bad debts 750 34,250

Illustration 2
Jakande John Ltd has paid rates in advance for six months from 1 October, 2006.
The Company’s financial year ends 31 December, 2006.
The rates paid were N3, 000
Show the rate for the whole financial year, assuming that rates are paid on 1 April
and 1 October each year and have not been altered for the past two years.

Suggested Solution to illustration Two

In the Books of Jakande John Ltd
DR RATES ACCOUNT CR
Date Particular Folio Amount Date Particulars Folio Amount
2005 N 2006 N
Dec. 31 1,500 Dec. 31 Income State. 6,000
2006 Balance c/d
Apr.l Bank 3,000
Oct.1 Bank 3,000 (rates in
advance to
31/3/2007)
Balance
Dec. 31 1,500
7,500 c/d 7,500

Dec. 31 Balance b/d 1,500

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DR RENTS ACCOUNT CR
Date Particular Folio Amount Date Particulars Folio Amount
N N
Mar. 3 Bank 5,000 Dec. 31 Income State. 20,000
Jun 31 Bank 5,000
Sept.3l Bank 5,000
Dec.31 Balance 5,000

c/d 20,000 20,000

Dec. 31 Balance b/d 5,000

DR LOAN INTEREST RECEIVED ACCOUNT CR

Date Particular Folio Amount Date Particulars Folio Amount
2006 N 2006 N
Dec. 31 Balance b/d 5,000 Jan. 31 Paule Ltd. 6,000
2006
July 3l Paule Ltd 6,000
(Interest Dec. 31 Income State. 12,000
Due) (Interest Due)
Dec.31 Balance 5,000
c/d 17,000 17,000

Dec. 31 Balance b/d 5,000

As you can see, the payment made in advance is carried and brought down as a
balance on the account and so, the correct amount is charged to Profit and Loss
A/c as Rates for the financial year.
The same idea is shown in the two following examples. Due to an oversight, the
same company has not paid the one-quarter’s rent due on its premises up to 31
December, 2006. Rent is N20, 000 per annum payable on the last day in each
quarter. Show the Rent Account.
Jakande John Ltd has made a fixed loan of N12,000 to Paule Ltd, an associate
company, and interest at 10 percent per annum is payable in arrears every six

118
months on 31 January and 31 July. Jakande John Ltd prepares its annual accounts
to 31 December each year. Show the income account for the relevant period.

The Statement of Financial Position for the year 2006 will show the accrued
items in the following way:

JAKANDE JOHN LTD

Statement of Financial Position as at 31 December 2006

Current Liability: N Current assets: N

Rent due 5,000 Rates in advance 1,500
Interest accrued 5,000

2.5 Depreciation of Non-Current Assets

The process which we use to recognise the loss in the value of non-current assets is
called depreciation. The Nigerian SAS No. 9 states that deprecation “represents an
estimate of the portion of the historical cost or re-valued amount of a non-current
asset, chargeable against operations during an accounting period”. The Ghana
National Accounting Standards (GNAS 10) defines depreciation as: “the allocation
of the depreciable amount of an asset over its estimated useful life”. The standard
also recognises the fact that depreciation for the accounting period is charged to
income, either directly or indirectly. This definition implies that depreciation is
effectively an accrual technique, which matches the cost of a non-current asset
with the benefits, which are derivable from the asset (ATSWA, 2009: 153).
Unless assets are depreciated, their value may sometimes be overstated on the
Statement of Financial Position. Assets such as plant and machinery are held for
the purpose of earning income, and the loss arising on those assets through wear
and tear is undoubtedly an expense against such income. If depreciation was not

119
provided for by charges against profits, additional capital would have to be raised
whenever the necessity for replacing the asset arose. Three factors contribute in
deciding on the amount of depreciation to be charged in the final accounts:
i) Original or historical cost of the asset;
ii) Estimated life of the asset;
iii) Estimated scrap, residual or break-up value of the asset.

Causes of Depreciation
1. Physical deterioration
2. Wear and Tear: an asset may depreciate in quantity, quality and value as a
result of constant usage. Physical factors like erosion, dampness, rust and decay
can cause an asset to reduce in value.

3. Technological Obsolescence: an asset can become obsolete due to changes

in technology. When this occurs, it is due for replacement. A very good example is
the steam engine train.

4. Passage of time: depreciation occurs in some assets with the effusion of

copy rights.

5. Depletion: some natural resources like gold, oil or tin deposits become
worthless when the deposits have been depleted. They are called wasting assets.
The more they are extracted, the less the reserve.

6. Inadequacy: as a result of expansion in the productive capacity of a

company, an asset may become too small and inadequate and thus require
replacement for bigger ones.
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7. Environmental Condition: Factors like excessive heat, rainfall and other
weather related conditions can eventually reduce the value of an asset.

8. Instability in Prices: As prices fluctuate, the value of an asset becomes

affected either by experiencing a depreciation or appreciation in its value,
depending on whether prices are going upwards or downwards.

Methods of Depreciation
There are various methods of depreciating non-current assets. These are -
a. Straight Line Method
b. Diminishing or Reducing Balance Method
c. Annuity Method
d. Sinking Fund Method
e. Retirement and Replacement Method
f. Sum of the Year Digit Method
g. Depletion Unit Method
h. Insurance Policy Method
i. Revaluation Method

The method to be adopted is a matter of policy on the part of management of the

business. However, consistency must be applied. This means that all similar assets
should be depreciated using the same method and the same method should be used
every year.

121
Straight Line Method
We can estimate the life of the asset, together with any remaining scrap or resale
value at the end of that period. The scrap value is deducted from the original cost,
and the remaining figure divided by the number of estimated ‘useful life’ of the
asset. The figure arrived at is the amount of the yearly depreciation charge.

Illustration 1
A machine costs N100, 000 with an estimated ‘useful life’ of 5years. The ‘trade
in’ value or scrap value is estimated at N5000. Use the straight line method to
compute the yearly depreciation charge.

Formula to be adopted is: Cost – Scrap value

Useful Life (Years)
= 100,000 – 5000
5
Therefore, annual depreciation charge is N19, 000
As we have mentioned earlier, the depreciation charge may be credited to the asset
account (for example, machine Account) or to a separate Provision for
Depreciation of machine Account. Either way, each year, the value of the asset
shown in the Statement of Financial Position will reduce by an equal amount.
However, the latter way of treating depreciation is preferable.
The straight-line method or fixed installment (as sometimes called) is generally
favoured by a lot of businesses. It is a method recommended for the depreciation
of assets such as freehold buildings, plant and machinery, tools and equipment,
ships, transport vehicles, leases, and patents.

122
Reducing Balance or Fixed Interest Method
You will agree that the entries passed is identical to the straight-line method; the
difference is in the method of calculating the annual depreciation charge. Instead of
an equal amount being passed each year, the figure is calculated as a fixed
percentage of the reduced balance on the asset account brought forward from the
previous year.

Illustration 2
Assuming that the annual depreciation rate is 20 percent using the reducing
balance method and the cost of the machine is N100, 000 as in our example above.
Formulae:
Year I: Depreciation charge = cost x 20%
Year II: Depreciation = (Cost – Depreciation of year 1) x 20%
Year III: Depreciation = (cost – Depreciation of year 1 & II) x 20%

Hence, the calculations will appear thus:

Year I: Depreciation = 100,000 x 20% = N 20,000
Year II: Depreciation = (100,000 - 20,000) x 20% = N 16,000
Year III: Depreciation = (100,000 - 20,000-16,000) x 12% = N 12,800

Sinking Fund Method

Unless the business physically sets aside
cash when passing entries for depreciation,
there is no certainty that sufficient liquid
funds will be available when the assets need
replacement. The effect of debiting the
Income statement (profit or loss Account

123
section) with the depreciation charge, is to reduce profits and thus reduce the
ability of the owners to draw all their profit entitlements but ‘plough back’ at
least some of these to help the business grow. These liquid funds are then
absorbed so that we can enable the business to purchase extra Inventory, or
allowing Receivables to increase. The sudden withdrawal of a large sum of money
to finance the replacement of a non-current asset, even if possible, is quite likely to
cause difficulties, which the business will probably prefer to avoid.

A cash shortage problem at asset replacement time is one of the main purposes for
using the Sinking Fund Method. In effect, this is an action we carry out in addition
to the normal book entries for depreciation. The sinking fund method involves
investing cash equal to the annual depreciation charge in a fixed interest yielding
investment/stock. The interest that we accrue on the investment is reinvested and
together with the further annual investments over the life of the asset, should
produce a fund which is sufficient to replace the asset being depreciated.

Illustration 3
A machine which we purchase today at a cost N 100,000 is expected to be replaced
after 5 years. The old machine is expected to realise N20, 000 when disposed in 5
years’ time, while the new machine is anticipated to cost N120, 000. Hence, the
sum of N 100,000 will be expected to make up for the cost of the machine in 5
years’ time.
The company adopts sinking fund method of depreciation and decides to set aside
an equal annual amount which at an interest of 5% will provide N 100,000 in 5
years’ time. According to an annuity table, N 0.180975 invested annually at 5%
will provide N1 in five years’ time. Therefore, the depreciation you need on an
annual basis will be:
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 = N 0.180975 x 100,000
= N 18,097.50
Accounting entries of the sinking fund method
Profit and loss Account – debited with the annual depreciation charge
(N 18, 097.50)
Depreciation (or sinking) fund account - Credited with the annual charge (N 18,
097.50)
Depreciation (or sinking) fund Investment Account – debited with the cash
invested (N 18, 097.50)
Cash Account – credited with the cash invested (N 18, 097.50)

As interest or dividends are received

Cash Account – debited with the amount of the interest or dividend (N 904.88 at
end of year 1)
Depreciation (or sinking) fund account– credited with the amount of the interest or
dividend (N 904.88 in end of year 2)
Subsequently
Depreciation (or sinking) fund investment Account-Debited with the interest which
is invested (probably)
At the same time as the annual depreciation charge is invested) i.e. N 904.88 at
the beginning of year 2.
Cash Account- credited with the amount which is invested.
In this way at the end of each year the balances on the Depreciation fund Account
and the Depreciation fund investment Account will be equal.

Insurance Policy Method

125
This is similar in concept to the sinking fund method in that liquid funds will be
available to replace the asset. The essential difference is that, Insurance Company
will undertake to repay a stated sum of money at the end of the depreciation period
in return for an annual premium. In this case, the amount of the annual premium is
the amount of the depreciation charge to the profit and loss Account. The accounts
and entries used are -
Depreciation Policy Account – debited with annual premium Cash Account –
credited with the annual premium

Profit & Loss Account – debited with the annual depreciation amount.
Depreciation Policy Fund Account- credited with the annual depreciation amount.

Depletion Method
This method is used to depreciate a mine or quarry. The rule is that the cost of the
asset is depreciated in the same proportion as the annual amount extracted bears to
the total raw materials estimated at the outset.
For example, if the estimated yield of a quarry is 800,000 tons and 120,000 tons
(that is, 15% of the total estimated are extracted in a year, then one tenth of the
original cost) will be depreciated in the year.

Annuity Method
The principle involve is that cash invested in an asset could have been invested
elsewhere to earn a profit. To compensate for this, interest is charged to the asset
account and credited to Income Statement (profit and loss Account section), whilst
the annual charge for depreciation is debited to the Income Statement (profit or
loss account Section). As the balance of the account falls, so the interest (which is
calculated on the outstanding balance) reduces. The effect is that the net charge to
126
profits for depreciation increases over the life of the asset. The method is most
suitable for long leases involving high initial outlays, but having an accurately
determined life. The rate of interest can either be the rate expected on normal
investments or the rate the business earns on its own capital.
In-text question 2
What is depreciation?

Sum of the Year Digit (SYD) Method

This method like the diminishing balance method, also seeks to accelerate the
accumulation of depreciation. Under this method, a decreasing depreciation is
computed by a simple mathematical procedure relating to arithmetical progression.
Each year of an asset’s life should be represented by a digit. Add these digits and
charge fraction of the asset cost to the years in a reverse order.

Illustration 4
Assuming machine ‘X’ costs N10, 000 and has an estimated useful life of 5 years,
what will be the depreciation for at least the first three years using SYD method.

Suggested Solution

Step 1: SYD= 1+2+3+4+5=15

Where the number of years (n) is large SYD is given by the expression:
N (n+1)
2
Applying this formula to the data given we have:
5(5+1) = 5(6) =30 = 15
2 2 2
Step 2:
Year one depreciation charge

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= No of years remaining x cost of asset
SYD
= 5 x 10000 = N 3,333.33
15
Year two depreciation charge
= 4 x 10000 = 2,666.67
15
Year three depreciation charge
= 3 x 10000 = N 2, 000
15

You would observe that this method also yields reducing yearly charges, although
the rate of decline is less steep than is the case with the reducing balance method.
You should note that one important difference between the two methods is that the
SYD does not yield any residual (scrap) value, unless explicitly brought into the
computation.

Amortisation
Here, you will notice that Amortisation and Depreciation are related concepts, as
they both attempt to allocate costs over
different accounting periods. However, while
depreciation is concerned with allocating cost
of tangible non-current assets, amortisation is
concerned with intangible non-current
assets, such as goodwill, trademarks and
patents whose values are gradually lost within a determined period. We
usually compute it using a simple formula thus:
Value of intangible asset

128
 No. of years
The usual accounting entry is to debit Income Statement (profit or loss account
section) and credit the relevant (deferred revenue expenditure or intangible asset)
account. You should note that deferred revenue expenditure such as long term
advertising cost, preliminary or formation expenses etc. are also amortised.

Accounting for Depreciation

After we have calculated the depreciation charge for an accounting year, it is very
important that these amounts are recorded in the books of account. The process of
providing for depreciation is a record for the use of non-current assets during the
accounting period. This therefore, means that depreciation is revenue expenditure
and as such, must be recorded in the same manner that accountants record regular
business expenses.
There are two main ways of recording depreciation in the books of account of a
business organisation:
(i) The Old Method
Here, depreciation charges are recorded in the non-current asset account. The
double entry of depreciation is as follows:
First, to create the depreciation expense account:
Dr. Depreciation Expenses Account,
Cr. Non-current Asset Account.
Second, to charge the current period’s depreciation against profit:
Dr. Income Statement,
Cr. Depreciation Expense Account.

(ii) The Modern Method

129
In the modern practice of recording depreciation, the non-current asset account is
maintained at its original cost. A ledger account called “accumulated provision for
depreciation account” is opened and all depreciation calculations are credited to
that account, the corresponding entry being passed into the depreciation charge
account as a debit. The double entry is as follows:
Dr. Depreciation Charge (Expense) Account.
Cr. Accumulated Provision for Depreciation Account.
Dr. Profit and Loss Account
Cr. Depreciation Charge Account

Disposal of Non-current assets

An organisation can dispose of its non-current asset by either selling it for cash,
exchanging it for a similar asset or a different one, or merely by discarding the
asset. In all these three situations, you must remember to take out the disposed
asset from the main non-current asset account. This is carried out by opening an
account for the purpose of the disposal. Into this account, we enter the cost of the
non-current asset and its associated accumulated depreciation provision. A profit
or loss may arise from the disposal of the non-current asset depending on the
outcome of the non-current asset disposal account.

Accounting Entries
The old and new methods of depreciation can be applied as follows:
(a) Old Method
Where the depreciation has been credited to the asset account, the following
procedures must be followed:
Dr. Cash book with amount realised on sale of asset Cr. Asset Account

130
(i) If a profit is made on sale of non-current asset:

Dr. Asset Account Cr. Profit and loss account.

(ii) If a loss was sustained on disposal of non-current asset:

Dr. Profit and loss account, Cr. Assets account.

(b) Modern Method

When depreciation has been provided, for via a provision for depreciation account,
we can best deal with it by opening the disposal account to which the original cost
of the asset and the accumulated depreciation is transferred.
The procedures are:
(i) Dr. Asset Disposal Account with cost price of asset. Cr. Asset Account
(ii) Dr. Provision for depreciation account, Cr. Asset Disposal Account with the
accumulated depreciation on the asset
(iii) Dr. Cash book with cash or cheque Cr. Asset disposal account with
amount received on sale of the asset
(iv) Dr. Asset disposal account with profit on sale Cr. Income Statement.

You should note that where a profit on disposal is realised, it means that the
balance on the non-current asset disposal account is in credit. That is, the amount
received from the sale is more than the net book value of the non-current asset.
Conversely, where the balance on the non-current asset disposal account is a debit,
it means that the amount received from the sale of the non-current asset is less than
the net book value of the non-current asset sold. A loss on disposal would then be
recorded by:
Dr. Income Statement with loss on sale Cr. Asset disposals account.

131
3.0 Tutored Marked Assignment
1. PALLADAN ENTERPRISES bought five motor vehicles on 1st January, 2005
at a cost of N350, 000 each. They were estimated to have a useful life of 10 years
after which they would have a salvage value of N20, 000 each.
Using the straight-line method of depreciation calculate the amount of depreciation
to be written off in each of the ten years
(i) Show the entries for the First Five years if depreciation is written off directly
from the Motor Vehicles accounts. Also show the depreciation account.

4.0 Summary
In this session, we have discussed in detail the following, among others;
the need for adjusting entries; Computing and making entries for provisions;
Calculating and recording reserves, Computing and recording prepayments,
accruals and discounts, showing how these adjustments are treated under Income
statement and the Statement of Financial Position. We went further to define
depreciation; discuss the causes of depreciation and the methods of charging for
depreciation; and finally showed how accumulated depreciation is treated in
situation where assets are disposed.

132
5.0 Self-Assessment Questions/Answer

1a) “The word depreciation has been grossly overworked; it has been and is
currently used in varying senses and with different connotations”. Explain the
different meanings of the word depreciation when applied to different types of
long-lived assets.
b) What factors should an accountant take into consideration in determining
the amount to be charged as annual depreciation of non-current assets?
c) Describe the following methods of depreciation
i) Sinking Fund Method
ii) Annuity Method
Answers to Self-Assessment Questions
(1a) Depreciation is an accounting method of allocating the cost of a tangible or
physical asset over its useful life or life expectancy. Depreciation represents
how much of an asset's value has been used up. Depreciating assets helps
companies earn revenue from an asset while expensing a portion of its cost
each year the asset is in use. If not taken into account, it can greatly
affect profits.

Depreciation is an accounting convention that allows a company to write off

an asset's value over a period of time, commonly the asset's useful life.
Assets such as machinery and equipment are expensive. Instead of realizing
the entire cost of the asset in year one, depreciating the asset allows
companies to spread out that cost and generate revenue from it.

Depreciation is used to account for declines in the carrying value over time.
Carrying value represents the difference between the original cost and the
accumulated depreciation of the years.

133
 (1b) Factors Affecting Depreciation Expense

There are four main factors to consider when calculating depreciation expense:

1. The cost of the asset

2. The estimated salvage value of the asset. Salvage value (or residual value ) is
the amount of money the company expects to recover, less disposal costs, on
the date the asset is scrapped, sold, or traded in.
3. Estimated useful life of the asset. Useful life refers to the window of time that
a company plans to use an asset. Useful life can be expressed in years,
months, working hours, or units produced.
4. Obsolescence should be considered when determining an asset’s useful life
and will affect the calculation of depreciation. For example, a machine
capable of producing units for 20 years may be obsolete in six years;
therefore, the asset’s useful life is six years.

6.0 Additional Activity

a. Visit U-tube add [Link]
[Link]
[Link]
[Link]
[Link]
[Link] Watch the video & summarise
in 1 paragraph

Answer 1
The most common reason for creating provision is to allow for expected losses, such as bad
debts and to provide for depreciation.
Answer 2
Depreciation is a process of recognising the loss in the value of non-current assets.

134
7.0 References/Further Reading
Grant, A.J. (1975). Accounting made Simple. London: W.H. Allen & Company
Ltd.
Jat, R.B. and Jugu, Y.A. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jennings, A.R. (1993). Financial Accounting. London: Letts Educational.
Jugu, Y. G. (2008). Financial Accounting Synopsis. (2nd Ed). Jos: Ehindero
(Nig.) Ltd.
Longe, O.A. and Kazeem, R.A. (2006). Essential Financial Accounting for Senior
Secondary Schools. London: Tonad Publishers Limited.
Mayo Associates Ltd. (1988). Accounting Paper 1. Lagos: BPP Publishing
Limited.
Okwoli, A. A. (1993). Principles of Financial Accounting. Jos: Tamaza Publishing
Co/Ltd.

135
 STUDY SESSION 2
Manufacturing Accounts
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Definition of Manufacturing Account
2.2 Format for Manufacturing Accounts
3.0Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 References/Further Reading

Introduction
You are welcome to yet another study session. In addition to the income statement
and statement of financial position, manufacturing firms usually prepare an
additional account called Manufacturing Account, which shows the cost of goods
produced or manufactured. The cost of goods manufactured, normally called the
production costs is transferred from the manufacturing account into the income
statement (trading account section) by crediting the manufacturing account and
debiting the income statement. The production cost effectively replaces the
purchases amount found in the income statement of a retail enterprise.

1.0 Learning Outcome

At the end of this session, you should be able to do the following:
1. define and explain a manufacturing account
136
2. outline sub-heads of a manufacturing account
3. prepare a manufacturing account
4. prepare final accounts of a manufacturing company

2.0 Main Content

2.1 Definition of Manufacturing Account
In our discussion on Income Statement during the earlier module, so far, we have
considered the final accounts of sole traders who do not make the goods that they
sell. In all prior examples, the firms generate profits by purchasing inventory and
then selling this for a price higher than the cost; thereby earning a profit- i.e. the
difference between sales and the cost of those goods that were sold. However, a lot
of firms do not act in this way. Even if a firm does not make its own products, it is
likely to add something to the products themselves.
If a firm actually produces the goods that they sell then, there will be no obvious
'purchases' figure to include in the income statement. The costs incurred in the
production of goods will appear instead and these will be calculated in a
manufacturing account.
Manufacturing of goods is the transformation of raw materials into finished goods.
A manufacturing account shows the cost of producing the goods that are sold
during an accounting period. Manufacturing costs are split into the following
sections:
Prime cost - Direct costs of physically making the products which include; raw
materials costs, direct labour costs and direct expenses.

Overhead cost - Other indirect costs associated with production but not in a direct
manner.

137
You will note that the cost of manufacturing the products will be the total of the
prime cost and the overhead cost added together. This total factory cost (or
production cost) will then be transferred to the income statement (trading account
section) where it will appear instead of the 'normal' purchases figure.

Transfer Pricing
We know that the usual practice in the preparation of manufacturing account is to
transfer the production cost to the trading account at historical cost. This means
that the manufacturing account will not record any profit and for that matter, one
will not know whether the manufacturing process is profitable. However, we also
understand that in some manufacturing concerns, the market value of the goods
produced is considered in the manufacturing account. In doing so, the difference
between the market value and the cost of production; usually a profit, is transferred
to the income statement as a gain added to the gross profit on trading figure.
Suffice to say, it is the market value of goods produced that will take the place of
the purchases figure in the trading account section of the income statement.
In-text question 1
What is manufacturing?

2.2 Format for Manufacturing Accounts

Manufacturing, Income Statement of ABC Enterprises.
N N N N
Opening Inventory of raw X Cost of Production XX
materials C/d
Add purchases of raw materials X
Add carriage inward on raw materials X
X
Less closing Inventory of raw X
materials
Cost of raw materials consumed X
Add direct wages X

138
 Direct Expenses- e.g. Royalties X
Prime cost X
Factory overhead
Factory power X
Factory rent & rate X
Indirect wages X
Factory Insurance X
Depreciation of plant & machinery X
Fuel and power X
Lubricants X X
Add opening Inventory of work in X
progress X
Less closing Inventory of work in X
progress
Cost of Production XX XX
Opening inventory of finished goods X Sales XX
Add cost of production X X
Less closing inventory of finished X
goods
Cost of Goods sold X
Gross profit X
XX XX

Selling and distribution Expenses:

Carriage outwards X Gross profit b/d X
Commission on sales X Discounts received X
Salesmen Salaries X X
Administration Expenses:
Admin Salaries X
Office rent X
Office insurance X
Office lighting X
Office machine depreciation X X
Net Profit X
XX XX

The sequence and grouping of items in a manufacturing account depends on

the costing system of the firm and is usually designed to yield the maximum
amount of information on the composition of the total cost of production.
Manufacturing account is prepared using both the T-Method as in the format above
and the Vertical format as shown below.

139
The Vertical format of a manufacturing account
Manufacturing account for the year ended . . . .
Opening Inventory of raw materials XXXX
Add purchase of raw materials Xxxxx
Add carriage inwards ( if any ) Xxxxx
Xxxxx
Less Returns outwards (of raw materials) Xxxxx
Xxxxx
Less Goods drawings ( if any ) Xxxxx
Xxxxx
Less Closing Inventory of raw materials Xxxxx
Cost of Direct Materials Xxxxx
Add Direct Labour Xxxxx
Add Direct expenses (Eg: royalties) Xxxxx
Prime Cost Xxxxx
Add Factory overhead expenses
Factory lighting Xxxxx
Factory heating Xxxxx
Factory insurance Xxxxx
Factory rent Xxxxx
Factory maintenance Xxxxx
Factory indirect wages Xxxxx
Factory supervisor’s wages Xxxxx
Depreciation on plant & machinery Xxxxx
Depreciation on factory building Xxxxx
Depreciation on factory furniture Xxxxx
Depreciation on factory motor van Xxxxx
Deprecn. on other factory non-current assets Xxxxx XXXXX
XXXXX
Add Opening Inventory of work in progress Xxxxxx
XXXXX
Less Closing Inventory of work in progress Xxxxxx
Cost of production XXXXX

In a manufacturing concern usually, there are three kinds of stocks:

Stock of Raw materials (the materials which are mainly used for production of the
item)
Stock of Work in progress (the materials on which some work process have been
completed)

140
Stock of Finished goods (The materials on which all the production processes are
completed and ready for sale to the customers)
In the examination questions, the inventory figures will be given separately.

Format of Income Statement of a manufacturing concern

Sales of finished goods Xxxxx
Less Returns inwards Xxxxx
xxxxxx
Less Production cost of goods sold
Opening Inventory of finished goods Xxxxx
Add Cost of production Xxxxx
Xxxxx
Less closing Inventory of finished goods Xxxxx
Xxxxx
Less finished goods drawings by the owner Xxxxx Xxxxxx
Gross profit or Gross loss XXXXX
The Income Statement and the Statement of Financial Position preparations will be
the same as that of a sole trader’s. So you have to follow the previous method for
the preparation of these.

Key points to note

i. Carriage on raw materials means carriage inwards and it is a part of prime cost.
ii. Carriage outwards is shown under the income statement as an expense.
iii. Royalties paid are to be treated as direct expense.
iv. Depreciation on Plant and Machinery or any other factory asset is to be treated
as factory overhead expense.
v. Inventory of raw materials and work-in-progress are taken in the
manufacturing account and stock of finished goods is taken in the trading
section of the Income Statement.
vi. Inventory at the end of the year (raw materials, work-in-progress and
finished

141
 goods) are shown in the Statement of Financial Position as current assets.
vii. Owner’s raw materials drawings are shown in the manufacturing account
while calculating the prime cost.
viii. Finished goods drawings are shown in the income statement under trading
section, while calculating the cost of goods sold.
ix. The purchase of finished goods is added with cost of production in the trading
section under Income Statement.
x. The depreciation of any asset used in the office should be shown as an expense
in Income Statement, under the profit or loss section.
xi. Cost of readymade items bought for the production of items manufactured
should be treated as direct expense.

Illustration 1
Mai Magani, a Manufacturer had the following balances as at the beginning of
January 2016

N
Finished goods 3,600
Work in progress 4,000
Raw materials 12,000
For the purpose of its January operations, the company incurred the following
expenditure:

Purchase of Raw materials 86,000

Labour cost 156,000
Transportation 25,000
Administration expenses 30,000
Insurance 25,000
Discount allowed 1,000
expense 1,500
Telephone 2,100

142
Similarly, during the month, the company made a total sale of 420,000.
Note: (i) At the end of January, the company had the following balances: Raw
material inventory 26,000, finished good 50,000, work in progress 32,000
(ii) Bad debt amounted to 300
(iii) It was resolved that the following expenses should be apportioned as
insurance 1/3 to factory, transportation ¼ to factory, administration expenses ½ to
factory.

Required: Prepare the company’s Manufacturing & Income statement for the
month ended 31st January, 2016

Suggested Solution 1
Mai Magani Manufacturing & Income Statement for the month ended 31st
January, 2016
Details N Details N
Opening inventory of raw 12,000 Factory cost of
material Production transferred to 229,583
trading account
Add purchases of raw 86,000
material
Raw material available for 98,000
use
Less closing inventory of raw 26,000
material
Raw material consumed/used 72,000
Add labour cost 156,000
Add direct cost ______-
Prime Cost 228,000
Add factory overheads
Insurance 8,333
Transportation 6,250
Administrative expenses 15,000
Cost of goods manufactured 257,583
Add work-in-progress at
4,000
beginning
261,583

143
Less work-in-progress at end
32,000
_______
Production Cost 299,583
299,583
Finished goods Total Sales 420,000
Add opening inventory of
finished goods 3,600
Add cost of production 229,583
Finished goods available 233,183
Less closing inventory of
50,000
finished goods
Cost of goods sold 183,183
Gross profit c/d 236,817 _______
420,000 420,000
Insurance 16,667 Gross Profit b/d 236, 817
Transportation 18,750
Admin Expenses 15,000
Discount Allowed 1,000
Interest Expenses 1,500
Telephone 2,100
Bad debt 300
Net Profit c/d
181,500
_______
236,817
236,817

Workings N
1. Insurance 25,000
Factory 1/3 x 25,000 = 8,333
Admin 2/3 x 25,000 = 19,667

2. Transportation 25,000
Factory ¼ x 25,000 = 6,250
Admin ¾ x 25,000 = 18,750

144
3. Administrative Expenses 25,000
Factory ½ x 30,000 = 15,000
Admin ½ x 30,000 = 15,000

Illustration 2
Lawani is a member of Manufacturers Association of Nigeria. The trial balance as
at 31st December, 2017 was as follows:
Dr. Cr
N N
Capital 270,000
Factory building at cost 180,000
Factory plant 43,200
Motor vehicle 23,400
Provision for depreciation: Factory building 17,280
Factory plant 14,400
Motor vehicle 10,800
st
Inventory at January 1 2001: Raw material at cost 61,200
Finished good at cost 18,900
Receivable and Payable 32,400 37,800
Provision for doubtful debt 2,520
Purchase of raw materials and sales 329,400 648,000
Wages and salaries 178,200
Rates and Insurance (Factory N10, 440) 13,590
Sundry expenses (Factory N9, 900) 13,500
Motor expenses (Admin) 3,600
Bank Balance 103,410__ ________
1,000,800 1,000,800
Additional notes:
A. Inventory on hand at 31st December 2017 were as follows:
N
Finished goods at cost 18,000
Raw material at cost 75,600

B. Wages and salaries included the following: N

Lawani 12,600
Factory manager 13,500
Sales manager 21,600
Sales dept wages and salary 16,200

The balance represented factory wages

145
i. Provision is to be made for depreciation on the factory building, plant and
motor vehicle at 20%, 10% and 25% respectively, calculated on cost.
ii. On 31st December 2017, N1,080 was owing for sundry expenses (Admin)
and rate paid in advance amounted to N2,340 (Admin N450).
iii. Of the receivables, N540 for which provision had previously been made is to
be written off.

You are required:

1. Prepare a manufacturing account, Income Statement for the year ended 31st
December 2017
2. Prepare Statement of Financial Position as at 31st December, 2017

Lawani manufacturing, trading, Income Statement for the year ended 31st
Dec, 2017.
Details N Details N
Opening stock of raw 61,000 Factory cost of Production
material transferred to trading 501,570
account
Add purchases of raw 329,400
material
Raw material available for 390,600
use
Less closing stock of raw 75,600
material
Raw material consumed/used 315,000
Add Factory wages 114,300
Add direct Expenses ______-
Prime Cost 429,300
Add factory overheads
Depreciation-Building 36,000
-Plant 4,320
Factory manager 15,000
Sundry expenses 9,900
Rates and Insurance 8,550
Cost of goods manufactured 501,570
Add work-in-progress at ______-

146
beginning
501,570
Less work-in-progress at end
______-
_______
Production Cost 501,570
501,570
Finished goods
Sales
420,000
Add opening stock of
finished goods 18,900
Add cost of production 501,570
Finished goods available 520,470
Less closing stock of
18,000
finished goods
Cost of goods sold 502,470
Gross profit c/d 145,530 _______
420,000 420,000
Bad debt 540 Gross Profit b/d 145, 530
Depreciation-Motor vehicle 5,850
Wages and Salaries:
Lawani 12,600
Sales Manager 21,600
Sales Dept. 16,200
Sundry expenses 4,680
Rates and Insurance 2,700
Motor expenses 3,600
Net Profit c/d 77,760 _______
145,530 145,530

147
Lawani’s Statement of Financial Position as at 31st December 2017
Details N Details N N
Capital 270,000 Non-current asset
Add Net profit 77,760 Building 180,000
347,760 Less Depreciation 53,280 126,720
Less Drawings - Plant 43,200
Less Depreciation 18,720 24,480
Long term Liabilities Motor Vehicle 23,400
Loan - Less Depreciation 16,650 6,750
157950
Current Liabilities Current Assets
Trade creditors Stock-Finished
37,800
goods 18,000
Sundry expenses owing -Raw
1,080
material 75,600
Trade Receivables 32,400
Less Bad debt (540)
Less provision for
bad debt (2,520)
29340

Prepaid rates and

Insurance
2,340
______ Bank Balance
103,410
386,640
386,640

Workings
N
1 Wages and Salaries
As per trial balance 178,200
Include:
Lawani 12,600
Factory manager 13,500
Sales Manager 21,600
Sales Dept. Wages and Salaries 16,200
148
 63,900
Balance represent factory wages 114,300
178,200
ai Factory building
Cost 180,000
Depreciation charge for the year: 20/100 x 180,000 36,000

Depreciation A/C – Building

Balance as per trial balance 17,250
Add charge for the year 36,000
Total depreciation 53,280

ii Factory Plant:
Cost 43,200
Depreciation charge for the year: 10/100 x 43,200 4,320

Depreciation A/C – Factory Plant:

Balance as per trial balance 14,400
Add charge for the year 4,320
Total depreciation 18,720

iii Motor Vehicle:

Cost 23,400
Depreciation charge for the year: 25/100 x 23,400 5,850

Depreciation A/C – Motor Vehicle:

Balance as per trial balance 10,800
Add charge for the year 5,850
Total depreciation 16,650

bi Sundry expenses (Admin):

Balance as per trial balance 13,500
Add owing 1,050
14,550
Less factory portion 9,900
Sundry expenses (Admin) 4,680

ii. Rates and Insurance:

149
 Cost 13,590
Less Advance Amount 2,340
Total Rates and Insurance charge of the year 11,250

Factory rates and Insurance 10,440

Less advance amount (2,340 – 450) 1,890
Factory Rates and Insurance charge for the year 8,550

Rates and Insurance (Admin) 3,150

Less Advance Amount 450
Rates and Insurance (Admin) charge for the year 2,700

C. Provision for doubtful debt

Balance b/d 3,060 Balance b/d 2,520
____ Profit and loss 540
3060 Balance b/d 3,060

D. Bad debt a/c

Balance c/d 540 Profit and loss 540
Balance b/d 540

In-text question
Define transfer pricing.
Answer
This is the transfer of the production cost to the income statement, at a value that is different
from the actual cost of production incurred.

A technique is therefore devised with the purpose of ascertaining profit on the

manufacturing account. This is achieved by transferring from the manufacturing
account the market value of the goods produced for the period.

3.0 Tutor Marked Assignment

Undertake and submit
Prepare in vertical format, the Manufacturing & Income Statement of Crystal
Waters from the following list of balances.
150
 N
Inventory (1.1.2012)
Raw materials 200,000
Work-in-progress 120,000
Finished goods 420,000
Purchases 2,360,000
Sales 4,430,000
Office Rent 80,000
Factory Rent 170,000
Electricity: factory 98,000
Electricity: office 19,500
Machinery 1,700,000
Furniture: office 240,000
Factory wages 430,000
Factory salaries 150,000
Office salaries 260,000
Carriage outwards 85,000
Inventory (31.12.2012)
Raw materials 185,000
Work-in-progress 90,000
Finished goods 290,000
Depreciate machinery and furniture by 7.5% and 10% respectively.

4.0 Summary
We have learnt in this session that enterprises that manufacture products for sale
require an additional account called manufacturing account to record the total cost
incurred in producing the products. The manufacturing accounts are utilised to
ascertain the cost of the goods manufactured and to also ascertain the amount of
any profit on the manufacturing process.

5.0 Self-Assessment Question/Answer

DLC and Sons who are manufacturers of table graduate product had the following
balances on 30th Sept. 2019.
N
151
 DR CR
Purchases:
Raw material 180,000
Finished goods 54,000
Sales 771,036
Direct wages 62,400
Discounts 1,400 2,160
Purchases returns:
Raw materials 1,200
Finished goods 1,800
Factory expenses 7,560
Carriage 6,000
Inventory as at 1st August 2012:
Raw materials 117,600
WIP 105,000
Finished goods 122,760
Direct expenses 4,320
Lubricant 2,000
Rates 12,000
Rent received 3,600
Insurance 14,400
Factory power 6,000
Repairs on P & M 1,440
Directors’ salary 10,320
Trade receivables 14,400
P&M 144,000
Provision for depreciation on P&M 21,600
Equity 288,036
Provision for bad debt 960
Admin salaries 30,000
Office rent 13,200
Selling expenses 21,960
Office expenses 25,416
Indirect wages 19,720
Creditors 74,142
Bank 144,448
Furniture and fittings 93,600
Provision for depreciation on F&F 18,720
Provision for unrealized profit on inventory 30,690
1,213,944 1,213,944
152
Additional information:

i. Provision for bad debt is to be increased to 20% of trade receivables.

ii. N1,560 of the insurance paid was in advance for the next period. 1/3 of
insurance is to be apportioned to factory and 2/3 to Administration.
iii. Accrued rates amounted to N1,440 at the end of the period.
iv. ¾ of rate is for factory and ¼ for Admin expenses
v. 60% of the carriage expense is on raw materials and 40% on finished goods
vi. Directors’ salary is to be apportioned between factory and Admin expenses
in the ratio 3:1
vii. Depreciation is to be provided at 5% on reducing balance basis for all non-
current assets.
viii. Inventory as at 31st July 2013 was valued at :.
N

a. Raw material 38,400

b. WIP 30,000
c. Finished goods 53,640
ix. Finished output is transferred from the factory to the trading department at
cost plus mark-up of 1/4. Adjustment is to be made for unrealized profit on
closing stock.
You are required to prepare the:
i. Manufacturing A/C
ii. Income Statement for the year ended 30/9/2019 and
iii. Statement of Financial Position for DLC and Sons as at 30/9/2019

153
Self-Assessment Question-Answer

Manufacturing account and statement of Profit or loss for the period ending 31st
Dec., 2019

Notes N N N
Opening inventory of raw
materials 117,600
Purchases of raw materials 180,000
Less: Purchases return 1,200
Net Purchases 178,800
Add: Carriage inwards 3,600 182,400
Cost of raw materials available
for production 300,000
Closing inventory 38,400
Cost of raw materials used 261,600
Direct wages 62,400
Direct expenses 4,320
Prime cost 328,320
Factory Overheads
Indirect wages 19,720
Factory expenses 7,560
Rates 1 10,080
Insurance 2 8,560
Factory power 6,000
Lubricant 2,000
Director's salary 3 7,740
Repairs on plant and
machinery 1,440
Depreciation on plant and
machinery 4 6,120 69,220
Opening work-in-progress 105,000
Less: Closing work-in-
progress 30,000 75,000
Cost of production 472,540
Profit on manufacture 118,135
Market value of goods
produced 5 590,675
Sales 771,036

154
Less: Cost of Sales
Opening inventory of finished
goods 122,760
Market value of goods
produced 590,675
Purchases of finished goods 54,000
Less: Purchases return 1800
Net Purchases 52,200
Add: Carriage inwards 2,400 54,600
Cost of goods available for sale 768,035
Closing inventory 53,640 714,395
Gross Profit on trading 56,641
Add: Manufacturing profit 118,135
Decrease in Provision for
unrealized Profit 6 19,962
194,738
Other Incomes:
Rent received 3,600
Discount received 2,160
200,498
Less: Administrative Expenses:
Rates 1 3,360
Insurance 2 4,280
Director's salary 3 2,580
Depreciation on Furniture and
fittings 7 3,744
Admin. Salaries 30,000
Office rent 13,200
Office expenses 25,416 82,580
Less: Selling Expenses:
Discount allowed 1,400
Increase in provision for bad
debts 8 1,920
21,960 25,280
Net Profit 92,638

155
Statement of Financial Position as 31st Dec., 2019
Acc.
Non-Current-Assets Cost Depr. NBV
Plant and Machinery 144,000 27,720 116,280
Furniture and fittings 93,600 22,464 71,136
Total non-current assets 187,416
Current Assets
Inventory: Raw Material 38,400
Work-in-
Progress 30,000
Finished
goods 53,640
Less: Unrealized profit 10,728 42,912
Trade Receivables 14,400
Less: Provision for bad debt 2,880 11,520
Bank 144,448
Prepayment: Insurance 1,560 268,840
Total Assets 456,256
Equity and Liabilities
Equity 288,036
Net Profit 92,638
380,674
Liabilities
Trade Payables 74,142
Accrual: Rates 1,440 75,582
456,256
Notes
1 Rates 12,000
Accrual 1,440
13,440
Factory 3/4*13,440 10080
Admin 1/4*13,440 3360

2 Insurance 14,400
Prepayment 1,560
12,840
Factory 2/3*12,840 8560
Admin 1/3*12,840 4280

3 Director's Salary 10,320

156
 Factory 3/4*10,320 7740
Admin 1/4*10,320 2580

4 Depreciation Plant and Machinery

Cost 144,000
less: depr. 21,600
122,400
Current year Depr. 5%*122,400 6120

5 Mkt value of goods Produced

Cost of production 472,540
Marnufacturing
profit 1/4*472,540 118135
Mkt value of goods produced

6 Provision for Unrealized Profit on closing Inventory

Previous Year Provision 30,690
Current Year Provision 1/5*53,640 10728
Decrease in
Provision 19,962

7 Depreciation on Furniture and Fittings

Cost 93,600
Less: depr. 18,720
74,880
Current year Depr. 5%*74,880 3744

8 Provision for Bad Debt

Current Year Provision 20%*14,400 2880
Previous Year Provision 960
Increase in
Provision 1920

6.0 Additional Activities

a. Visit U-tube add [Link]
[Link] . Watch the video &
summarise in 1 paragraph

157
ITQ Answer 1
Manufacturing is the process of transforming raw materials into finished goods.

7.0 References/Further Reading

Igben, O.R. (2004). Financial Accounting made Simple. Jos: EL-TODA Venture
Limited.
Jat, R.B. and Jugu, Y.A. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jennings, A.R. (1993). Financial Accounting. London: Letts Educational.
Jugu, Y. G. (2008). Financial Accounting Synopsis. (2nd Ed). Jos: Ehindero
(Nig.) Ltd.
Essentials Financial Accounting for Senor Secondary Schools. Tonad publishers
Limited. Mayo Associate Ltd. (1988). Accounting Paper I. BPP Publishing
Limited.
Professional Examination 1. Study Pack. Lagos: VI Publishing Limited.
The Institute of Chartered Accountants of Nigeria (2006). Financial Accounting.
Lagos: VI Publishing Limited.
Wood, F. and Alan S. (2005). Business Accounting1. (10th Ed.). London: Prentice
Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London: Prentice
Hall.

158
 STUDY SESSION 3
Control Accounts
Section and Subsection Headings
Introduction
1.0Learning Outcome
2.0Main Content
2.1Definition of Control Accounts
2.2Advantages of Control Accounts
2.3Sources of Information for Control
Accounts
2.4Sales Ledger Control Account
2.5Creditors or Purchases Ledger Control Account
2.6 Contra Entries
2.7 Receivables Statements or Statements of Account
3.0Tutor Marked Assignment
4.0Conclusion/Summary
5.0Self-Assessment Questions and Answer
6.0Additional Activities
7.0References/Further Reading

Introduction
You are welcome to this study session. In this study session you will get to
understand that as a business grows in size, so does the problem of keeping
accurate accounting records; especially of transactions that occur too frequently.
The ledger will be split into several parts such as the Purchases, Sales and General
Ledgers. We could further arrange these alphabetically. In order for us to control

159
the accounting operations and to locate errors, each ledger will be made self-
balancing by opening what we refer to as control accounts.
In the general ledger we will record a sales ledger control account and a purchases
ledger control account. The balance in each will correspond to the total balances
outstanding on the individual accounts within the respective ledger, that is, the
total of all the Receivables’ account recorded in the sales ledger will be the same as
the debit balance on the sales ledger control account. In the sales ledger will be a
general ledger control account, which will have a credit balance equal to the debit
balance on the sales ledger control account. Each ledger is then fully self-
balancing. The totals of the items, which have been individually posted to the
respective personal accounts, will be posted periodically to the control accounts
from the books of prime entry.

1.0 Learning Outcome

At the end of this study session, you should be able to do the following:
1. explain control accounts
2. discuss the advantages of control accounts
3. itemise the sources of information for control accounts
4. prepare control accounts from given information
5. describe Receivables statement or statement of accounts
6. prepare Receivables statement or statement of accounts

2.0 Main Content

2.1 Definition of Control Accounts
A control account is an account in which the balance reflects the aggregate
balances of many related subsidiary accounts, which are part of the double entry
system.
160
It is however a memorandum record only; it does not form part of the double entry
system, but it is kept using double entry principle.
We maintain Control accounts to facilitate easy detection of errors because they act
as a check on the entries in the various ledgers. Where we do not have equal trial
balance totals, balances in each ledger can be added together and compared with
the balance in the respective control accounts. Ordinarily, the two should be equal.
Where there is a difference, rather than all the ledger accounts, only such a ledger
that fails to reconcile with the control account it relates to will be investigated.
Control accounts are classified into two main divisions: viz -
i. Total Receivables Control Account or Sales Ledger Control Account.
ii. Total Payables Control Account or Purchases Ledger Control Account

A. Advantages of Control Accounts

We can summarise the merits of using control accounts can be summarised as
follows:
a. control accounts helps in locating errors
b. it can provide a check on the accuracy of balances of the ledgers
c. fraud will become very difficult to perpetrate
d. the balances of the total Receivables and Payables can easily be calculated
e. they can be used to detect missing figures
f. they save time
g. they allow homogenous accounts to be grouped together

B. Sources of Information for Control Accounts

Information recorded in the Sales and Purchases Ledger Control accounts are
obtained from -
1. Receivables and Payables accounts
161
2. Returns inwards and outwards accounts; Bills payable and receivable accounts;
dishonoured cheques
3. cash paid to Payables and cash received from Receivables (obtained from the
cash book)
4. discount received and discount allowed accounts
5. Sales day book and purchases day book

C. Sales Ledger Control Account

This is the control account for sales ledger. It can also be referred to as Total
Receivables Account. Sales ledger control account is the account containing the
summary of all Receivables or customers’ accounts. What is posted to the debit
side of this account is the aggregate of all the items recorded on the debit side of
the Receivables’ accounts. The same thing applies to the credit side of the account.

Format for Sales Ledger Control Account

Sales Ledger Control Account
DR CR
N N
Opening Balance of receivable X Opening balance (if credit bal.) X
Sales X Cash received X
Interest charged X Discount allowed X
Bill receivable dishonoured X Return inwards X
Cheque dishonoured X Allowances X
Cash refunded X Bad debt written off X
Carriage outwards X Bill receivable accepted by cust. X
Purchase ledger contra X
Closing balance of receivable X
XX XX

162
D. Creditors or Purchases Ledger Control Account
Here, we the account containing the summary of all the accounts of the payables or
suppliers in the purchases ledger. This is the control account for the purchases
ledger. You can also refer to it as Total Payables Account.

Format for purchases ledger control account

Purchase Ledger Control Account
DR CR
N N
Bal b/f if debit bal in Purchase X Opening balance of payable X
Cash X Purchases X
Discount received X Bill payable withdrawn X
Return outwards X Transfer of contra to purchase X
Bill payable X Interest payable withdrawn X
Sales ledger contra X
Closing bal. of payable X
XX XX

In-text question 1
What is creditors account?

Illustration I
Mr. Bala Gonji had the following balances in his books on 1st July, 2004
N
Sundry Payables 9,724
Sundry Receivables 14,581
Debit Balances in Purchase Ledger 660
Credit Balances in sales ledger 902

The following transactions took place during the month of July:

N
Bad Debts Written off 627
Payment to Payables 28,368
Discount allowed 1,593
Sales Returns & Allowances 840
Bills payable accepted 15,129
Receipts from Receivables 32,708
Discounts Received 1,838
Purchases Returns & Allowances 749

163
Credit Sales 37,906
Bills Receivable Accepted 8,351
Sales & Purchases Ledger Transfers 1,498
Credit Purchases 47,317
The following balances also existed in the books on 31st July, 2004
Purchases ledger debit balance N 856
Sales ledger credit balances 1,279
You are required to prepare
a) The Sales ledger control account and
b) The Purchases Ledger control for the month of July, 2004

Suggested Solution Mr Bala Gonji

a) Sales Ledger Control For The Month Of July, 2005
DR CR
N N
Balance brought down 14,581 Balance brought down 902
Credit Sales 37,906 Bad debts 627
Balance carried down 1,279 Discount allowed 1,593
Sales Returns &
Allowances 840
Received from Receivables 32,707
Bills Receivable 8,351
Purchases transfer 1,498
Balances carried down 7,249
N53, 766 N53, 766
Balance brought down 7,249 Balance brought down 1,279

b) Purchases Ledger Control for The Month Of July, 2005

DR CR
N N
Balance brought down 660 Balance brought down 9,724
Payment to Payables 28,368 Credit Purchases 47,317
Bills Payable 15,129 Balance c/d 856
Discount Received 1,838
Purchases Returns 749
Sales Transfer 1,498
Balance carried down 9,655
57,897 57,897
Balance brought down 856 Balance brought down 9,655

164
E. Contra Entries
Contra entries occur when a supplier is also a customer. The firm can sell on credit
to a customer and buy on credit from the same person. The inter-indebtedness will
be set off against each other. At the end of the period, the smaller of the two
balances will be set off against the larger balance.

2.7 Receivables Statements or Statements of Account

Receivables’ statements are documents sent periodically, usually once a month, by
a seller to his customers, showing the position of their accounts up to a certain
date. Each statement gives the particulars of the invoices, debit notes and credit
notes that the seller has sent to the customer during a month, payment made and
how much the customer owes the seller and when the account will be due for
payments. The statement is often a copy of the customer’s account in the seller’s
books.
The statement may be kept for reference purpose or returned to the seller with the
customer’s cheque. In either case, neither the customer nor the seller records the
statement in his books.

Example
The following transactions took place between Abinbola Macaulay Enterprises of
No.3 Ilupepu, Lagos and her customer Angels & Co. of No.32 Area 10 Abuja in
January, 2009.
2nd January 2009: Invoiced goods worth N23, 120 on invoice number 426.
9th January 2009: Invoiced goods worth N16, 240 on invoice number 489.
16th January 2009: Angels & Co. paid a sum of N25, 140 with cheques.
22nd January 2009: Invoiced goods worth N52, 910 on invoice number 563.
25th January 2009: Credit note number 1326 for N6, 000 was sent.
165
Required: Prepare a Receivables Statement to show these transactions.

Suggested Solution
Abinbola Macaulay No.3, Ilupeju, Lagos
Angels & Co No.32, Area 10 Abuja

January, 2009
Date of Details Invoice/Credit Debits N Credits N Balances
Invoice N
January 2nd Goods Note No. 426 23,120 23,120
January 9th Goods 489 16,240 39,360
January 16th Payment Cheque 25,140 14,220
January Goods 563 52,910 67,130
22nd
January 25th Credit 1326 6,000 61,130
note

Amount due on 31st January, 2009 = 61,130.

In-text question 2
What is Receivables’ statement?

3.0 Tutored Marked Assignment

What goes in a sales ledger control account?
2. What is the difference between sales ledger and sales ledger control account?
3. What is the purpose of sales ledger control account?

4.0 Summary
In this study session we discussed the topic control account. We found out that a
control account is an account in which the balance reflects the aggregate balances
of many related subsidiary accounts, which are part of the double entry system.

166
5.0 Self-Assessment Question?
The following information related to Mr. William for the year ended 30 September
2019:-
N
Interest charged to Receivables 326
Carriage charged to Receivables 3,290
Cash purchases 12,735
Returns inwards 1,938
Bad debts written off 853
Cheque payments to suppliers 64,320
Discount received 1,717
Allowance to debtor for damaged goods 500
Cash sales 76,321
Debtor’s cheques dishonoured 2,639
Purchases Returns 1,222
Credit sales 132,845
Discount allowed 3,699
Transfer of debit balance in Sales Ledger to 2,850
Purchases Ledger
Credit purchases 70,394
Cheques received from Receivables 144,820
144,820
Debit balances in Purchases Ledger at 30 563
September 2019
Credit balances in Sales Ledger at 30 September 2,154
2019
Provision for Doubtful debts 4,500

Balances in the books of Mr William at 1 October 2018:

Sales Ledger Debit : N43,628
Credit: N1,240
Purchases Ledger
Debit: N324
Credit :N24,695
Required:

167
 (a) Prepare the Purchases Ledger Control Account and Sales Ledger Control
Accounts as they would appear in the General Ledger of Mr William for the year
ended 30 September 2019 ( 18 marks)
(b) Prepare a Statement of Financial Position extract showing Trade Receivables and
Trade Payables at 30 September 2019 (7 marks)
Answer to Self-Assessment Question
(a) Purchases Ledger Control Account
2018 N 2018 N
Oct 1 Balance 324 Oct 1 Balance b/d 24,695
b/d

2019 2019
Sept Bank 64,320 Sept Credit 70,394
30 30 purchases
Discount 1,717 Balance c/d 563
received
Returns 1,222
outwards
Contra 2,850
Balance 25,219
c/d

95,652 95,652
Oct 1 Balance 563 Oct 1 Balance b/d 25,219
b/d

Sales Ledger Control Account

2018 N 2018 N
Oct 1 Balance b/d 43,628 Oct Balance 1,240
1 b/d

2019 2019
Sept Interest 326 Sept Returns 1,938
30 charged to 30 inwards
debtors

168
 Allowance 500
of
damaged
goods
Carriage 3,290 Discount 3,699
charges allowed
Credit sales 132,845 Contra 2,850
Dishonoured 2,639 Bank 144,820
cheques
Balance c/d 2,154 Bad debts 853
Balance 28,982
c/d
184,882 184,882
Oct 1 Balance b/d 28,982 Oct Balance 2,154
1 b/d

(b) Mr William
Statement of Financial Position As At 30 September 2019
Current Assets
Trade debtors (N28,982-N2,154) N26,828
Less: Provision for doubtful debts N4,500
N22,328
Current Liabilities
Trade creditors (N25,219-N563) N24,656

6.0 Additional Activiti1es

a. Visit U-tube add [Link]
[Link] Watch the video &
summarise in 1 paragraph

ITQ Answer 1
This is the account containing the summary of all the accounts of the creditors or supplies in the
purchases ledger.
Answer 2
Receivables’ statements are documents sent periodically, usually once a month, by a seller to his
customers, showing the position of their accounts up to a certain date.

169
7.0 References/Further Reading
Igben, O.R. (2004). Financial Accounting made Simple. Jos: EL-TODA Venture
Limited.
Jat, R.B. and Jugu, Y. A. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jennings, A.R. (1993). Financial Accounting. London: Letts Educational.
Jugu, Y. G. (2008). Financial Accounting Synopsis. (2nd Ed). Jos: Ehindero
(Nig.) Ltd.
Essentials Financial Accounting for Senor Secondary Schools. Tonad publishers
Limited. Mayo Associate Ltd. (1988). Accounting Paper I. BPP Publishing
Limited.

170
 STUDY SESSION 4
Single Entry and Incomplete Records
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0Main Content
2.1 Definition of Single Entry and Incomplete
Records
2.2 Disadvantages
2.3 Calculating Profit from Two Statements of Financial Positions
3.0Tutor Marked Assignments
4.0Conclusion/Summary
5.0Self-Assessment Questions and Answer
6.0Additional Activities
7.0References/Further Reading

Introduction
You are welcome to this study session. This session discusses how you will
prepare the Income Statement and Statement of Financial Position for an enterprise
that has sparse records; perhaps consisting of only opening and closing net assets
figures and/ or capital as the only known figures. You will also understand and
learn how to ascertain the proprietor’s drawings and any additional capital
contribution, during an accounting period from scanty information provided by a
cashbook summary.

1.0 Learning Outcome

At the end of this session, you should be able to do the following:
171
1. explain incomplete records and single entry records
2. calculate profit of an enterprise using the accounting equation from available
information
3. derive proprietor’s cash drawings or additional capital as a missing figure,
where all other information relating to cash payments and receipts are known
4. derive expenses incurred and revenues earned from incomplete records

2.0 Main Content

2.1 Definition of Single Entry and Incomplete Records
The term ‘single entry’ refers to any system which while keeping records of
transactions, does not do so using the double-entry system of accounting. While
‘incomplete records’ refers to a situation where there are records for some
transactions, none for others and yet other records have been kept using single
entry. In other words, they are both systems of bookkeeping that do not conform
to the basic principles of double entry.
You will note that this system of record keeping is very common with small
business enterprises where the proprietors are neither trained accountants nor rich
enough to employ the services of qualified or experienced accountants. Since the
records prepared by the record keeper are incomplete or inadequate, accountants
have to use their mental ingenuity to prepare the accounts from the available
information. Incomplete records present a large amount of unsorted information.
Pure ‘single entry’ recognises only the personal aspect of transactions;
consequently, the only essential books are personal ledgers for recording
transactions with Receivables and Payables. That is, real and nominal accounts are
not kept by the business enterprises.

172
2.2 Disadvantages
i. It does not conform to the principle of double entry book- keeping.
ii. The flexibility of the double entry principle is lacking.
iii. It is difficult to obtain accurate information since the records are not
complete.
iv. It is always very difficult to arrive at the profit for the year.
In-text question 1
What do you understand by single entry?

2.3 Calculating Profit from Two Statements of Financial Position

Under this method, the assets and liabilities are given but information relating to
sales and purchases are not given. The profit or losses are ascertained under this
system by a comparison of the value of the opening capital with the value of the
closing capital. Since there is insufficient of information, the statement of affairs
method will have to be adopted.

1. Book-keeping Rules for computing profit or loss from Single Entry

i. The opening statement of affairs is prepared to show the opening capital.
The information required are all non-current assets, totals of receivables and
payables, expenses owing and payments in advance, cash in hand and bank, etc.
ii. Adjust the capital by adding any additional capital contributed either in cash
or assets and deduct drawings either cash or goods;
iii. Another statement of affairs is constructed to show the closing capital using
all the assets and liabilities at the end of the period.
iv. The opening capital is compared with the closing capital.
v. If the capital at close is greater, then there is a profit.
vi. If the capital at close is lower, then there is a loss.

173
2.4 Format for Computing Statement of Affairs
The format of computation is shown below:
Step 1:
Opening Statement of Affairs
N N
Opening Capital X Non-current Assets X
Liabilities X Current Assets X
XX XX

Note: Opening Capital = Assets - Liabilities

Step 2:
Closing Statement of Affairs
N N
Opening Capital X Non-current Assets X
Liabilities X Current Assets X
XX XX

Having arrived at the closing and opening capital, the net profit is calculated by preparing
another statement of profit or loss as follows:
Step 3
Statement of Profit or Loss for the Year

N N
Closing Capital X
Add Drawings X
X
Less: Opening capital X
Additional capital X
Net Profit or Loss X
The profit can also be calculated using the accounting equation, as seen below:
Opening capital – drawing + additional capital = New capital.
Profit = New Capital + Drawings – Opening Capital – additional Capital.

Illustration I
174
Innocent Okeke started business a year ago by placing N500, 000 cash into a bank
account and trading in a general way from rented premises.
The following information is gleaned from a detailed scrutiny of his bank
statement:
Drawings during the year were N2, 000,000
His brother in-law lent him N1, 500,000 during the year, interest free. Payments of
N6, 200, 000 have been made to his suppliers during the year.
His customers have paid him N9, 000, 000 in the year.
The bank balance is N90, 000; cash in hand N10, 000
Rent of N100, 000 is owing and so is a bill for electricity of N100, 000. Rates of N
400, 000 have been paid for the whole year and three months have still to run.
A van was acquired for N600, 000, but is now estimated to be worth N500, 000.
Inventory held is thought to have cost N600, 000, but would sell for N900, 000.
The total value of goods purchased from suppliers was N9, 000, 000. Innocent
Okeke has invoiced his customers to a total value of N 13, 100, 000 during the
year.
One customer who owes him N300, 000 has moved from the area without leaving
a forwarding address.
Prepare a statement of assets and liabilities to show the profit or loss for the year.

Suggested Solution

John Innocent, statement of assets and liabilities

Assets: N N N
Motor van 500,000
Inventory 600,000
Receivables – invoiced 13,100,000
Less bad debt 300,000
Cash received 900,000 9,300,000 3,800,000
Rates paid in advance 100,000
Bank 90,000
Cash 10,000

175
 5,100,000
Less liability
Loan 1,500,000
Payables 9,000,000
Less cash paid 6,200,000 2,800,000
Rent due 100,000
Electricity 100,000 4,500,000
Closing capital 600,000
Add drawings 2,000,000
2,600,000
Deduct capital at start 500,000
Profit for year N2, 100, 000

Obviously a statement of assets and liabilities does not show the details of how the
profit or loss was arrived at, and if this information is required, a greater depth of
investigation will have to be carried out. It may not be possible for the trader to
establish a full set of double entry records; but where he keeps a record of his
suppliers’ and customers’ accounts, together with a properly narrated cash book
preparation of the final accounts is possible. This is greatly helped by using an
Analysis Cashbook, that is, a cashbook with several columnar rulings so that
income and expenditure can be entered in accordance with the various headings
chosen.

3.0 Tutor Marked Assignment

What are the principles of ascertaining profit in a single entry system?

4.0 Summary
We understand in this session that single entry is a system of book keeping which
does not conform to the basic principles of double entry. Despite the fact that
financial records of some of these businesses are not kept in the proper double
entry system, some of them succeed in making profits from year to year and others
sustain losses too. From the scanty records kept by proprietors of such businesses,
176
trained accountants have devised a way of finding out whether a profit has been
made or a loss has been sustained. The method we use for this is known as the
increase or decrease in net worth approach.

5.0 Self-Assessment Question/Answer

Evet started business a year ago by investing N 1, 000, 000 cash into a bank
account and trading in a general way from rented accommodation. She wants to
calculate how much profit she has made during the year.
The following information is extracted from a detailed scrutiny of her bank
statement.
Drawings in the year are N4, 000, 000
Her cousin lent her N3, 000, 000 during the year, interest free. Payments of N12,
400, 000 have been made to her suppliers during the year.
Her customers have paid her N18, 000, 000 in the year.
The bank balance is N180, 000, cash in hand N20, 000
Rent of N200, 000 is owing and so is a bill for electricity of N200, 000. Rates of
N800, 000 have been paid for the whole year and three months have still to run.
A van was acquired for N1, 200, 000, but is now estimated to be worth N1, 000,
000.
Inventory held is thought to have cost N1, 200, 000, but would sell for N1, 800,
000.
The total value of goods purchased from suppliers was N18, 000, 000. Evet has
invoiced her customers to a total value of N26, 200, 000 during the year. One
customer who owes her N600, 000 has moved from the area without leaving a
forwarding address.
Prepare a statement of assets and liabilities to show the profit or loss for the year.

177
6.0 Additional Activities
a. Visit U-tube add [Link]
[Link] . Watch the video &
summarise in 1 paragraph

Answer 1
This is the system of book keeping which does not conform to the basic principles of double
entry.

7.0 References/Further Reading

Igben, O. R. (2004). Financial Accounting made Simple. Jos: EL-TODA Venture
Limited.
Jat, R.B. and Jugu, Y.A. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jennings, A.R. (1993). Financial Accounting. Lagos: Letts Educational.
Jugu, Y. G. (2008). Financial Accounting Synopsis (2nd Ed.). Jos: Ehindero
(Nig.) Ltd.
Essentials Financial Accounting for Senor Secondary Schools. Tonad publishers
Limited. Mayo Associate Ltd. (1988). Accounting Paper I. BPP Publishing
Limited.
The Institute of Chartered Accountants of Nigeria (2006). Financial
Accounting. Lagos: VI Publishing Limited.
Wood, F. and Alan S. (2005). Business Accounting 1 (10th Ed.). London: Prentice
Hall.

178
Wood, F. and Alan S. (2005). Business Accounting 2 (9th Ed.). London: Prentice
Hall.

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 STUDY SESSION 5
Accounts of Non-Trading Organisation
Section and Subsection Headings
Introduction
1.0 Learning Outcome
2.0 Main Content
2.1 Receipts and Payments Account
2.2 Income and Expenditure Accounts
2.3 Accumulated Fund
2.4 Adjustments
3.0Tutor Marked Assignments
4.0 Conclusion/Summary
5.0 Self-Assessment Questions and Answer
6.0 Additional Activities
7.0 Reference/Further Reading

Introduction
You are welcome to this study session. We shall consider the accounts of non-
trading organisation as our main topic with its attendant sub-topics. Commercial
and Industrial organisations are usually set up principally to make and maximise
profit. But Non-profit making organisations are not profit-oriented, but exist to
promote activities, which interest their members or to provide services to needy
people. There are many types of non-for-profit organisations. They include:
government owned hospitals, voluntary health and welfare organisations, religious
organisations, private and community foundations, professional associations,
research and scientific organisations, social and country clubs, trade associations,

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labour organisations, political parties, sports clubs, societies, charitable
organisations, self-held organisations and self-projects, etc.
Some of them may maintain an elaborate set of account books similar to those kept
by any major commercial undertaking; others do not appreciate the need for – or
cannot afford the cost of setting up proper double entry records. In place of
Income Statement found in trading concerns, they prepare the following accounts
to show the financial affairs to their members:
(a) Receipts and payments account
(b) Income and expenditure account
(c) Statement of Financial Position

1.0 Learning Outcome

At the end of this session, you should be able to do the following:
1. differentiate between final accounts of non-profit organisations and those of
commercial enterprises
2. prepare receipts and payments account
3. prepare income and expenditure account
4. compute the accumulated fund of non-profit organisations
5. prepare a Statement of Financial Position for non-profit making
organisations

2.0 Main Content

2.1 Receipt and Payments Account
We shall begin by stating that this is the account that shows the summary of cash
actually received and paid over a particular period of time. Receipts being debited
and payments credited. It is, in effect, a summary of the cashbook, and therefore,
shows the opening and closing balances of cash in hand, and receipts and payments
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of any kind and on any account made during the period. Here, capital receipts and
payments, revenue receipts and payments are included even if it did not relate
to the particular accounting period. However, amount owing (accruals) or any
form of arrears will not be shown in this account. A receipts and payments account
would usually take the following form:

DR. XYZ Receipts and Payments Account CR.

N N
Balance b/d X Bar purchases X
Subscriptions X Bar wages X
Bank interest X Administration expenses X
Bar sales X Rent and Rates X
Membership fee X Travelling X
Dance Tickets X Insurance X
Sales of Drinks X Stationeries and Postages X
Donations X Balance c/d _X
XX XX
The receipts and payments account usually excludes any income received in a form other
than cash, e.g. a donation of books, and any expenses that may not be paid in cash, e.g.
depreciation.

Illustration 1
NSA Social Club
Receipts and Payments Account for the year ended 31st December, 2006
Dr. Cr.
N N
Balance b/f 4, 900 Easter outing 12, 000
Monthly dues 30, 000 Christmas outing 15, 000
Proceeds from – Donations 3, 500
Dance (Easter) 7, 700 Stationery 1, 200
Dance (Christmas) 10, 300 Transport fare 800
Bank interest 1, 000 Assistance to members 4, 500
Free will offerings 2, 100 Swimming goggles 1, 800
Hiring of canopies 700
_____ Balance c/d 23,500
59,500 56,000
Balance b/d 23,500

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The disadvantage of a receipts and payments account is that it cannot cater for any
arrears; neither can it deal with non-cash entries such as depreciation.
In-text question 1
What is receipt and payment account?

2.2 Income and Expenditure Accounts

We use this account to calculate the excess of income over expenditure (or the
opposite) by taking account of cash, non-cash entries such as payments which are
due but not paid, and depreciation. It is the non-trading organisation’s equivalent
of an income statement of a business, and therefore excludes any capital items.
The rules are stated below:
i. Expenses are debited and incomes are credited;
ii. Capital items are excluded;
iii. All revenue items relating to the period are credited, whether actually
received or not;
iv. All expenditure items relating to the period are debited, whether actually
paid or not;
v. All items relating to previous or next periods are excluded;
vi. The balance on the account represents the excess of income over expenditure
(called a ‘surplus’) or excess of expenditure over income (called a ‘deficit’).
Differences between Receipts and Payments Account and Income and
Expenditure Account
Receipts and Payments Account Income and Expenditure Account
1. A summary of cash transactions and the 1. A balance representing the surplus or
resultant cash or bank balance deficit of income over expenditure for the
period under review
2. Contains only part of the income or 2. Contains all income and revenue
expenditure for the period, i.e., the part expenditure attributable to the period of
actually received or paid. It may also contain the account, whether received or paid or
receipts and payments belonging to preceding not.
or succeeding periods.

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3. contains both capital and revenue items 3. Contains revenue items only.
if received or paid.
4. Virtually a summarised statement of 4. Virtually an Income Statement.
cash book

Format of Income and Expenditure Account

Expenditure Income
N N
Rent X Subscriptions X
Wages X Donations X
Postage X Rent received X
Secretary honorarium X Profit on bar X
Depreciation X
Lighting X
Surplus of income
over expenditure X
XX XX

2.3 Accumulated Fund

The capital sum of a non-trading organisation is called its accumulated or capital
fund. The accumulated fund represents the difference between the assets and
liabilities of the organisation and belongs to the members of the society or club.

2.3 Adjustments
1. Membership Subscriptions in Arrears or Advance
The most common source of income for clubs, associations, societies and other
non-trading organisations is Subscription. This is a payment made by individual
members of such organisations so that they may maintain their membership. You
should note that often times, such subscription amounts may be in arrears or may
be paid in advance by members. Subscription in arrears are current assets just like
receivables because they represent amounts unpaid for services that have already
been rendered. On the other hand, subscriptions paid in advance represent a current

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liability to the organisation because they are payments for service yet to be
rendered. Overdue subscriptions subsequently received, should be included in the
current year’s income, but entered separately.

2. Life Membership
Subscriptions are often received from life members. Life members pay a once and
for all subscription, which entitles them to membership facilities for the rest of
their lives. The once and for all payments from life members are not income
relating to the year in which they are received, because the payment covers the
entire life of such members, which can of course, last a very long time. In practice,
if life member’s subscriptions are small, they are credited to income as received,
but if they are significant in amount, then they should be credited in equal
proportion over the estimated active membership of such members.

3. Trading Activities
Many associations take part in activities designed to improve their financial
positions. They can run bars, restaurants and other commercial activities. When a
club is operating a bar, it is usual to prepare a separate income statement to show
the results of its activities. The profit or loss is carried to the income and
expenditure account. If profit is made, it must be credited to the income and
expenditure account and loss will be debited.

In-text question 2
Explain Income and Expenditure Accounts.

Illustration 2
The treasurer of the Leisure Club has prepared the following receipts and payments account for
the year ended 31st December 1997:

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 Receipts and payments account
N N
Balance b/d 15,330 Bar purchases 61,250
Subscriptions 49,000 Bar wages 7,420
Bank interest 92 Administration expenses 42,270
Bar sales 97,500 Insurance 6,250
___ Balance c/d 44,732
161,922 161,922

Additional information:
(i) The following balances were extracted from the club’s books at 31 December 1996:
N
Accrued bar wages 455
Bar Receivables 1,000
Club premises 300,000
Creditors for bar supplies 8,190
Bar stock 9,425
Prepaid insurance 600
Subscriptions in arrears 2,405
Subscriptions in advance 1,120
(i) Depreciation is to be charged on the cost of club premises at 5% per annum.
(ii) Bar stock at 31 December 1997, amounted on N9 620.
(iii) Accrued bar wages, prepaid insurance, bar Receivables and creditors for bar supplies
amounted to N390, N400, N1, 200 and N7, 215 respectively at 31 December 1997.
(iv) Subscriptions in advance and in arrears amounted to N2, 600 and N1, 360
respectively at 31 December 1997.
You are required to prepare for the Leisure Club:
a) a statement showing the accumulated funds of the club as at 1st January 1997 and
b) a bar trading account for the year ended, 31st December, 1997, and
c) an income and expenditure account for the year ended 31st December, 1997,
d) a balance sheet as at 31st December, 1997.

Suggested Solution
a) A statement showing the accumulated funds of the club as at 1 January 1997:
Assets: N N
Club premises 300,000
Bar receivables 1,000
Bar Inventory 9,425
Prepaid insurance 600
Subscriptions in arrears 2,405
Cash and Bank 15,330
328,760
Liabilities:

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 Accrued bar wages 455
Payables for bar supplies 8,190
Subscriptions in advance 1,120 9,765
Balance of the accumulated funds as at1.1.1997 318,995
b)
Leisure Club
Income Statement for the year ended 31 December 1997
Opening Inventory 9,425 Sales (W1) 97,700
Purchases (W2) 60,275
69,700
Less: closing Inventory 9,620
Cost of goods sold 60,080
Gross profit c/d 37,620 ______
97,700 97,700
Bar wages (W3) 7,355 Gross profit b/d 37,620
Net profit 30,265 ______
37,620 37,620

Workings:
1.
Bar Receivables
1997 1997
Jan 1 Balance b/d 1,000 Dec 31 Cash / Bank 97,500
Dec 31 Total sales (b.f.) 97,700 31 Balance c/d 1,200
98,700 98,700
2.
Bar Payables
1997 1997
Dec 31 Cash / Bank 61,250 Jan 1 Balance b/d 8,190
Dec 31 Balance c/d 7,215 Dec 31 Total purchases (b.f.) 60,275
68,465 68,465
3.
Bar wages
1997 1997
Dec 31 Cash / Bank 7,420 Jan 1 Accrued b/d 455
Dec 31 Accrued c/d 390 Dec 31 Bar trading (b.f.) 7,355
7,810 7,810

c)
Leisure Club
Income and expenditure account for the year ended 31 December 1997
Expenditure Income

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Administration expenses 42,270 Subscription (W4) 46,475
Insurance (W5) 6,450 Bar profit 30,265
Depreciation 15,000 Bank interest received 92
Surplus of income over expenditure 13,112 ______
76,832 76,832

Workings:
4.
Subscription
1997 1997
Jan 1 In arrear b/d 2,405 Jan 1 In advance b/d 1,120
Dec 31 I&E a/c (b.f.) 46,475 Dec 31 Bank / Cash 49,000
31 In advance c/d 2,600 31 In arrear c/d 1,360
51,480 51,480

5.
Insurance
1997 1997
Jan 1 Prepaid b/d 600 Dec 31 I&E a/c (b.f.) 6,450
Dec 31 Cash / Bank 6,250 31 Prepaid b/d 400
6,850 6,850

d)
Leisure Club
Statement of Financial Position as at 31 December 1997
Non-current assets Accumulated funds
Club premises 300,000 At 1 January 1997 318,995
Accumulated depreciation 15,000 Add: Surplus for the year 13,112
285,000 332,107
Current assets Current liabilities
Bar Inventory 9,620 Bar payables 7,215
Bar receivables 1,200 Accruals 390
Prepaid insurance 400 Subscription in advance 2,600 10,205
Subscription in arrear 1,360
Cash and Bank 44,732 57,312 _______
342,312 342,312

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3.0 Tutored Marked assignment
1. The Treasurer of the International Club submitted the following receipts and
payments account to club members covering the year to 31 December 1986

Receipts and Payments Account

Receipts N Payments N
Bank b/f 62,500 Printing and stationery 110,000
Subscriptions received: Bar purchases 132,000
For current year 232,000 New equipment bought 150,000
In advance 8,000 Wages for bar staff 215,000
For previous years 10,000 Sundry expenses 110,700
Bar takings 318,600
Sale of equipment 35,000
Bank c/f 51,600 _______
717,700 717,700
Additional information:
(i) The following balances were extracted from the club’s books:
At 31.12.86 At 31.12.85
Bar stock N36,000 N28,000
Bar Receivables 4,100 5,200
Bar creditors 3,200 6,300
Stationery stock 800 600
Sundry expenses accrued 700 200

The discounts allowed, discounts received and bad debts during the year were N1,
000, N2 000 and N3 000 respectively.
(ii) On 1 January 1986 the club’s only equipment was sold. The net book value
of the equipment was N20 000.
(iii) Depreciation on the new equipment was estimated at N30 000.
(iv) The subscription in advance at 31 December 1985 was N900 and all the
subscriptions for the previous years were collected. The subscription in arrears on
31 December 1986 amounted to N3 000.
You are required to prepare for the Leisure Club:
a) A statement showing the accumulated funds of the club as at 31st December
1985, and
b) A Income Statement for the year ended 31st December 1986, and
c) An income and expenditure account for the year ended 31st December, 1986,

189
d) A Statement of Financial Position as at 31st December, 1986.

4.0 Summary
You now know that it is not only profit making organisations that make up
accounts for interested parties, Non- Profit making organisations also need to tell
their stakeholders how they have dealt with the funds they have contributed.
Components of final accounts of Non-Profit organisations consist of the Receipts
and Payments Account, Income and Expenditure Account and a Statement of
Financial Position. You must understand that the procedure for preparing final
accounts of Non-Profit organisations which do not have double-entry records is
similar to the procedure for single entry situations.

5.0 Self-Assessment Question/Answer

1. The following is the Receipts and Payments Account of Nsukka Boys Club for
the year ended 31st December, 1999.
Receipts and Payments Accounts
Receipts Amount Payments Amount
N N
Balance - 1st Jan. 120 Electricity 500
Registration fees 60 Stationery 100
Membership Sub. 4,800 Gen. Expenses 240
Rent of Club premise 600 Wages 480
Furniture & Fittings 1,500
Interest on Loan 200
Bal. - 31st December 2,560
5,580 5,580

On enquiry, the following further information is given:

i. N150 was due, but not received at the end of the previous year in respect of rent
of club premises. N140 still owes in the current year by tenants.
ii. Of the membership subscriptions, N40 is for the previous year and N160 is paid
in advance. Subscriptions of the current year which have not been paid amount to
N20.
190
iii. General expenses of N40 are due, but have not yet been paid for the current
year. N60 was outstanding at the end of the previous year.
iv. The clubs freehold property, owned for many years, cost N10, 300. There was
also an outstanding loan of N4, 000 on the same date carrying interest at 5% per
annum.
v. Depreciation is to be provided on furniture and fittings at 10% per annum.
You are required to prepare an income and expenditure account for the year ended
31st December, 1999, and a Statement of Financial Position as at that date.

6.0 Additional Activities

a. Visit U-tube add [Link]
[Link]
[Link] Watch the video &
summarise in 1 paragraph

ITQ Answer 1
This is the account that shows the summary of cash actually received and paid over a particular
period of time.
Answer 2
This account is used to calculate the excess of income over expenditure (or the opposite) by
taking account of cash, non-cash entries such as payments which are due but not paid, and
depreciation.

7.0 References/Further Reading

Igben, O.R. (2004). Financial Accounting made Simple. Jos: EL-TODA Venture
Limited.
Jat, R.B. and Jugu, Y.A. (2008). Modern Financial Accounting: Theory and
Practice. Jos: Ehindero (Nig.) Limited.
Jennings, A. R. (1993). Financial Accounting. London: Letts Educational.
Jugu, Y. G. (2008). Financial Accounting Synopsis (2nd Ed). Jos: Ehindero (Nig.)
Ltd.
Essentials Financial Accounting for Senor Secondary Schools. Tonad publishers
Limited. Mayo Associate Ltd. (1988). Accounting Paper I. BPP Publishing
191
Limited.
The Institute of Chartered Accountants of Nigeria (2006). Financial Accounting.
Lagos: VI Publishing Limited
Wood, F. and Alan S. (2005). Business Accounting 1. (10th Ed.). London:
Prentice Hall.
Wood, F. and Alan S. (2005). Business Accounting 2. (9th Ed.). London: Prentice
Hall.

192
GLOSSARY
Bookkeeping
Bookkeeping is the process of recording financial transactions in the
books of a business (= accounting records). It is also a term used as an
abbreviation for double-entry bookkeeping, a particular form of
bookkeeping.

Accounting
Accounting is a process which identifies, organises, classifies, records,
summarises amd communicates information about economic events,
usually, but not exclusively, in monetary terms. Bookkeeping is often
considered as being included within accounting, but accounting is a much
wider concept than bookkeeping, as accounting may also be regarded as a
transformative process as it turns the raw data recorded in the
bookkeeping process into useful information.

Reporting
Reporting is the communication aspect of accounting. It involves
providing information about a business to interested parties, such as
owners and managers, and is usually achieved by the production of
management information in the form of management accounts or financial
statements (income statement, balance sheet and cash flow statement).

Account
A section of a book or ledger in which a business entity will record
transactions of the same kind, e.g, sales of goods of the same type. In the
context of double-entry bookkeeping, an account will often mean a T-
account.

Double-entry bookkeeping
This is a method of recording a business's transactions/events in a set of T-
accounts, such that every transaction/event has a dual aspect and needs to
be recorded in at least two T-accounts. It was devised over five hundred
years ago, and first written about by an Italian monk called Luca Pacioli. It
is now the most commonly used method of bookkeeping.

193
Bookkeeper
A person employed to maintain the books of a business (= accounting
records) and keep them up to date.

Posting
A term used to mean recording transactions/events in T-accounts.

Balance
A balance is the amount of the difference between the debit and credit
sides of a T-account. It is inserted on the side with the lower total, and is
the figure, which, when included, makes the total of both sides the same.
If the insertion occurs on the debit side, it means that total credits have
exceeded total debits. Balances on certain asset, liability and capital
accounts may be carried forward (or down) to the next accounting period.
If, for example, a debit balances arises on such a T-account, it is carried
forward to the credit side.

Trial balance
A list of the balances extracted from all the individual accounts in an
entity's accounting records, showing all debit balances in a left-hand
column and all credit balances in a right-hand column. If the underlying
double-entry bookkeeping has been done correctly, the totals of both
columns should be the same.

Balancing off
This is the practice of summing the debit and credit sides of a T-account
and inserting a missing figure (a balance) to make both sides equal. It is
usually done at the end of an accounting period.

Accounting period
An accounting period (sometimes also referred to as a financial period,
period of account or accounting reference period) is a period of time for
which a business prepares financial results. The accounting period can be
any length of time, and the length may be determined by the reason
financial results are required, for example, providing management with

194
information (often monthly or quarterly), or producing a set of financial
statements. The latter is usually done annually, though this may vary when
a business is set up, ceases, or changes its accounting period end date.

Period of account
An accounting period (sometimes also referred to as a financial period,
period of account or accounting reference period) is a period of time for
which a business prepares financial results. The accounting period can be
any length of time, and the length may be determined by the reason
financial results are required, for example, providing management with
information (often monthly or quarterly), or producing a set of financial
statements. The latter is usually done annually, though this may vary when
a business is set up, ceases, or changes its accounting period end date.

Accounting reference date

This is the date at the end of an accounting (reference) period, most
usually the date in a year up to which an entity prepares its financial
statements. It is also referred to as a closing date. UK business entities
may choose any date in the year as the end of their annual accounting
period, but this is not always the case elsewhere in the world.

Closing date
This is the date at the end of an accounting (reference) period, most
usually the date in a year up to which an entity prepares its financial
statements. It is also referred to as a closing date. UK business entities
may choose any date in the year as the end of their annual accounting
period, but this is not always the case elsewhere in the world.

Income statement
This is one of the main components of a set of financial statements. It
shows the total costs deducted from total income to calculate the profit or
loss for an entity over a financial period. It was formerly commonly
referred to as a profit and loss statement/account.

195
Profit and loss statement/account
This is one of the main components of a set of financial statements. It
shows the total costs deducted from total income to calculate the profit or
loss for an entity over a financial period. It was formerly commonly
referred to as a profit and loss statement/account.

Statement of financial position

A statement of the total assets and liabilities of an entity at a particular
date, usually the last day of the entity's accounting period. Total assets will
always equal total liabilities, but there are various ways in which
information can be presented. Often a balance sheet is regarded as being a
'snapshot' of assets and liabilities at the balance sheet date. International
Accounting Standard 1 uses statement of financial position as a term for a
balance sheet.

Financial statements
A set of statements summarising an entity's financial activities over a
given period, usually a year. They generally comprise an income statement
(previously called a profit and loss account/statement), a balance sheet
and, if required, a cash flow statement, all with supporting notes.
Companies must provide additional statements.

Set of accounts
A term used to refer to financial statements (themselves often referred to
as a set of financial statements), that is, the income statement and balance
sheet, and commonly the cash flow statement as well.

International Accounting Standards Board (IASB)

This was set up in 2001 as the successor to the International Accounting
Standards Committee. It is an independent, privately funded body which
takes responsibility for developing, improving and promoting the use of
international accounting standards, with a particular aim to bring about
convergence of national standards with international ones.

196
International Accounting Standards (IASs)
Any of the accounting standards issued by the International Accounting
Standards Committee (IASC) between 1973 and 2001, at which date the
IASC was superseded by the International Accounting Standards Board
(IASB), which adopted all the IASs in issue, but advised that its own
standards when issued would be known as International Financial
Reporting Standards (IFRSs).

International Financial Reporting Standards (IFRSs)

Any of the accounting standards issued by the International Accounting
Standards Board (IASB).

Management information system (MIS)

This is a system within a business which provides information needed to
manage that business effectively and support the managers' decision
making process. A significant characteristic of an MIS is that it analyses
other information systems within the business, for example, those applied
in operational activities, accounting, etc.

Accounting information system (AIS)

This is a system which processes accounting data and turns them into
useful information, such as income statements and balance sheets at the
end of an accounting period, or the management accounts which are
typically produced monthly to help managers monitor and control business
activities and make decisions. It is often referred to as an accounting
system (for short). The term is also commonly used to refer to the
computer software a business may use for accounting and bookkeeping
purposes.

Accounting system
Information is data processed for a purpose. Once data have been
processed into information, that information can be used to aid decision

197
making, which will additionally require the exercise of judgement.
Meaningful decisions cannot be taken on the basis of data alone.

Agents
An agent (sometimes referred to as a steward) is a person appointed by
another person, called a principal, to act on the principal's behalf.
Directors of a company act as agents of the shareholders (principals). An
accountant may also act as an agent on behalf of shareholders in his/her
capacity as auditor, or when acting as a tax adviser to a client in dealing
with HM Revenue & Customs.

Stakeholders
All those who have an interest in an organisation. They may be users of, or
persons with a varying degree of interest in, an entity's financial
statements and dependent on or influenced by its financial performance.

External auditor
An independent, external person or firm appointed formally by
shareholders to write a report to them on the externally reported financial
results of the company in which the shareholders own shares.

Internal auditors
An internal auditor is appointed by a entity itself to carry out checks, for
example, that internal controls within an organisation are operating
satisfactorily or that the entity is complying with legislation, such as that
pertaining to health and safety. He/she is often a member of an internal
audit department within an entity and will report to an internal committee,
rather than being appointed by and reporting to shareholders.

Turnover
A term used not only to refer to the actual selling of goods/services to
customers, but also to the income or revenue derived therefrom (also
referred to as revenue, sales revenue, sales turnover and turnover).

Costs
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A cost is expenditure on goods and services required to carry out the
operations of an entity. Sometimes costs which are not directly involved in
generating sales are referred to as expenses or overheads, but these terms
are often used interchangeably without distinction of meaning, especially
in non-accounting contexts.

Profit
In an income statement, when total costs are deducted from total income,
if there is an excess of total income over total costs, then this is referred to
as a profit (sometimes also called a surplus, especially if the entity
concerned does not have a profit making motive, e.g., if it is a charity).

Loss
In an income statement, where total costs exceed total income, a loss
arises (often referred to as a deficit by non-profit-making entities). A loss
can also arise, for example, on the disposal of individual non-current
assets, if they are disposed of for less than their net book value (=
cost/value less accumulated depreciation to the date of disposal). Such a
loss is often referred to as a capital loss.

Assets
The International Accounting Standard Board (IASB) defines assets as
resources controlled by a business as a result of past events and from
which future economic benefits are expected to flow. They might be
things a business owns, such as the machinery it uses to manufacture
goods or vehicles it uses to deliver goods to customers.

Liabilities
The International Accounting Standards Board (IASB) defines liabilities
as present obligations of a business arising from past events, the settlement
of which is expected to result in an outflow from the business embodying
economic benefits. They might be sums of money owed, for example, to
lenders who have loaned money to a business or to suppliers of raw
materials for manufacturing purchased on credit.

Plant
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This is the equipment needed to operate a business. It is often used in the
phrase 'plant and machinery' as a general term to include all types of
apparatus and equipment, but there is no distinct dividing line between
what is plant and what is machinery.

Non-current assets
Non-current assets are assets for long-term use, generally speaking, for
more than one year. Capital expenditures that have been capitalised (i.e.
recognised in the balance sheet) appear on the face of the balance sheet as
non-current assets.

Tangible assets
A type of non-current assets, which have physical form and can be
touched (the latter being the basic meaning of tangible), for example,
machinery, vehicles, etc.

Intangible assets
The word tangible means something that can be touched. In terms of
assets, a tangible asset is an asset that has physical form. An intangible
asset therefore does not have physical form and cannot be touched, though
the existence of many kinds of intangible assets (e.g., copyrights, patents
and trademarks) may be evidenced by some form of documentation. This
is not the case with goodwill, however, which is probably the most
intangible of all assets.

Patents
A patent is the grant of an exclusive right (usually to an inventor or an
inventor's employer) to exploit an invention.

Copyrights
A copyright confers an exclusive legal right to reproduce, or permit others
to reproduce, literary, dramatic, artistic or musical works (e.g.,
recordings).

Trademarks

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A trademark (a type of intangible asset) is a mark that uniquely identifies a
trader's particular goods or services. It can take the form of a mark,
symbol, device or word(s), individually or in combination. In the UK, a
trader (manufacturer, dealer, importer, retailer or service provider) may
register a trademark at the Register of Trade Marks (held at the Patent
office), which will allow the trader exclusive use of the trademark,
initially for seven years. Provided that the trademark has been properly
used, and will continue to be so used, registration is then renewable.

Inventory
This is the international accounting terminology to denote trading stock,
and may comprise raw materials, work in progress (partly finished items)
or finished goods.

Current Assets

Current assets include cash, liquid assets (also called cash equivalents,
which can be converted into cash within a maximum of three months), and
assets that are normally converted into cash within the course of business
or within one year.

Work in progress

This typically refers to inventory items which are partly completed. As

manufacturing processes are often continuous, not all items will be
finished and ready for sale at the end of an accounting period.

Receivables

Receivables or trade receivables are sums owed by customers to whom a

business has sold goods or services. It is the international accounting term
now used for trade debtors.

Owner’s interest

This is money, resources or assets put into the business by owners, and
also referred to as owner's interest or equity. Capital can also mean other

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things, for example, in economic theory, physical capital (machinery) or
financial capital (money).

Non-current liabilities

This is the international accounting term now used to refer to long-term

liabilities. These are sums owed which are due for payment more than a
year after the end of an accounting period.

Current liabilities

These are amounts owed by a business to others which are payable within
one year or less at the end of an accounting period. There are several
different types of items which could be included in current liabilities, but
trade payables, accruals and short-term loans are common examples.

Horizontal format

A format used to present a balance sheet in which all the assets listed on
the left-hand side and all the liabilities (and capital) are listed on the right-
hand side.

Vertical format

A format used to present a balance sheet in which assets are shown in the
top half and capital and liabilities in the bottom half. The net assets
approach to a balance sheet is a variant vertical format, whereby current
and/or long-term liabilities are deducted from assets to derive a net assets
figure equal to the total capital shown in the bottom half.

Net assets approach

This is one possible approach to formatting a vertical balance sheet. The

top half shows assets less liabilities to derive the figure for net assets,
which is then the same as the total capital shown in the bottom half.
Opinion varies as to whether non-current (long-term) liabilities should be

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treated as capital and so not deducted in deriving the figure for net assets,
or whether they are part of the liabilities and therefore deductible.

International accounting approach

This refers to the terminology, format, presentation and disclosure to be

applied in preparation of specified company financial statements
consequent on the adoption of International Accounting Standards (IASs)
and International Financial Reporting Standards (IFRSs) issued by the
International Accounting Standards Board (IASB).

Drawings

These are resources (usually in the form of cash or goods) taken out of the
business by the proprietor of an unincorporated business or partners in a
partnership. An example might be when a sole proprietor takes some of
his/her inventory for personal use or pays a personal bill through the
business bank account.

Cash flow statement

This is a statement which shows the inflows and outflows of cash and cash
equivalents (investments easily convertible to known amounts of cash,
usually within a three month period) over a business's financial period.
International Accounting Standard 1 specifies a particular format and
headings for company cash flow statements.

Notes to the financial statements

Financial statements (income statement, balance sheet and cash flow

statement) are usually accompanied by a set of notes to the financial
statements, disclosing additional financial information, explanation and
analyses, which are more conveniently shown separately from the main
statements, or are required to be shown in notes to comply with
accounting standards, etc.

Trade payables

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Payables or trade payables are sums of money owed to persons or entities
who/which have supplied goods or services to a business. It is the
international accounting term now used for trade creditors.

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