AS ACCOUNTING – (LAYOUTS & THEORY)

S. No. LIST OF TOPICS

1 ACCOUNTING CONCEPTS

2 ACCRUALS AND PREPAYMENTS

3 IRRECOVERABLE DEBTS

4 BANK RECONCILIATION STATEMENT

5 DEPRECIATION

6 CAPITAL AND REVENUE EXPENDITURE\INCOME

7 CORRECTION OF ERRORS

8 FINANCIAL ANALYSIS

9 FINANCIAL STATEMENTS (SOLE TRADER)

10 BUSINESS FINANCING

11 COMPUTERISED ACCOUNTING SYSTEM

12 CONTROL ACCOUNTS

13 SINGLE ENTRY SYSTEM OR INCOMPLETE RECORDS

14 PARTNERSHIP ACCOUNTS

15 LIMITED COMPANIES

16 COST CLASSIFICATION

17 OVERHEADS

18 INVENTORY VALUATION

19 JOB COSTING

20 MARGINAL COSTING

21 ABSORPTION COSTING

22 BREAKEVEN ANALYSIS

23 DECISION MAKING

1
 ACCOUNTING CONCEPTS

Matching Concept: It states that revenue should be matched with its corresponding expenses.

Prudence Concept: It states that profits and assets should not be overstated. However, losses should be anticipated

Going-Concern Concept: It states that financial statements are prepared assuming that the business will continue to
operate in the foreseeable future. That is, there is no intention for the business to close down.
(Going concern: Assets valued at NBV. Non-going concern: Assets valued at NRV)

Materiality Concept: It states that the way of recording transactions depend on its materiality (significance). For example,
a calculator is treated as an expense despite having a lifetime of more than 1 year.

Consistency Concept: It states that the way of recording transaction should be consistent each year so that financial
statements can be compared easily over the years.

Realisation Concept: It states that revenue should be recognised when the ownership, risks and rewards have been
transferred to the buyer.

Duality Concept: It states that for all transactions, there are 2 entries. A Dr and Cr entry.

Money Measurement Concept: It states that only items with a monetary value should be recorded in the financial
statements.

Business Entity Concept: It states that transactions of a business should be kept from transactions of the owner, since
the business has an identity separate from its owner.

Historical Cost Concept: It states that transactions should be recorded at the price initially paid for.

Substance Over Form: It states that the economic substance of the transaction must be recorded in the financial
statements rather than its legal form.

Objectivity: It states that financial statements of an organisation should be prepared based on factual
evidence and be free of personal opinions and biases.

2
 ACCRUALS AND PREPAYMENTS

Accrued expense: An expense relating to the current financial year but not yet paid at the end of the year.
Double entry: Dr Expense Account
Cr Other Payables Account

Prepaid expense: An expense paid during this financial year but relates for future financial years.
Double entry: Dr Other Receivables Account
Cr Expense Account

Expense Account

Date Details $ Date Details $

Jan 1 Balance b/d (Prepaid at start) xxx Jan 1 Balance b/d (Owing at start) xxx
Cash\Bank (Payment during the year) xxx Statement of Profit & Loss (Balancing xxx
Dec 31 Dec 31 figure)
Balance c/d (Owing at end) xxx Balance c/d (Prepaid at end) xxx
xxx xxx

Accrued income: Income relating to the current financial year but not yet received at the end of the year.
Double entry: Dr Other Receivables Account
Cr Income Account

Prepaid income: Income received during the financial year while relating to future financial years.
Double entry: Dr Income Account
Cr Other Payables Account
Income Account

Date Details $ Date Details $

Jan 1 Balance b/d (Owing at start) xxx Jan 1 Balance b/d (Prepaid at start) xxx
Statement of Profit & Loss (Balancing xxx Receipt (Bank\Cash) xxx
Dec 31 figure) Dec 31

Balance c/d (Prepaid at end) xxx Balance c/d (Owing at end) xxx
xxx xxx

Statement of Financial Position as at

Current Assets $ $ $
Inventory xxx
Trade receivables xxx
Other receivables: Expenses prepaid xxx
Income Owing

Current Liabilities
Trade payables xxx
Other payables: Expenses owing xxx
Income prepaid

3
 IRRECOVERABLE DEBTS

Irrecoverable debt: It refers to a sum of money / debt that the business is certain that the customer will not be able to pay
Double entry:
1) Writing off a debt
Dr Irrecoverable Debt Account
Cr Customer Account
2) Transfer irrecoverable debt to end of financial year
Dr Statement of Profit or Loss
Cr Irrecoverable Debt Account
Cause of irrecoverable debt:
 Bankruptcy of customer
 Death of customer
 Customer has left the country permanently

Irrecoverable Debts Account

Date Details $ Date Details $

2024 2024
Dec 31 Trade receivables xxx Dec 31 Statement of Profit & Loss xxx

xxx xxx
2025 2025
Dec 31 Trade receivables xxx Dec 31 Statement of Profit & Loss xxx

xxx xxx

Irrecoverable debt recovered: It refers to a situation where money is being received in respect of a debt that had been
previously written off.
Double entry:
1) Recovery of the debt
Dr Cash\Bank Account
Cr Irrecoverable Debt Recovered Account
2) Transfer irrecoverable debt recovered to SOPL
Dr Irrecoverable Debt Account
Cr Statement of Profit or Loss

Irrecoverable Debts recovered Account

Date Details $ Date Details $

2024 2024
Dec 31 Statement of Profit & Loss xxx Dec 31 Bank xxx

xxx xxx
2025 2025
Dec 31 Statement of Profit & Loss xxx Dec 31 Bank xxx

xxx xxx

4
Allowance for irrecoverable debt: It refers to an amount set aside to provide for a reduction in the value of trade
receivables which should appear in the SOFP

Reasons for recording the allowance:

 Prudence concept – It is a possible loss and therefore must be recorded now itself
 Matching concept – It is an expected loss related to credit sales for the current period and therefore both must
appear in the same SOPL when calculating PFTY

Factors to consider when making the allowance:

 Rate of irrecoverable debts for previous years
 Actual state of the economy
 Specific information about customers in difficulty
 The average rate of the allowance for irrecoverable debts in the industry
 Age of debts

Double entry:
1) Creation\Increase in allowance
Dr Statement of Profit or Loss
Cr Allowance for Irrecoverable Debts Account
2) Decrease in allowance
Dr Allowance for Irrecoverable Debts Account
Cr Statement of Profit or Loss

Allowance for irrecoverable debts Account

Date Details $ Date Details $

2024 2024
Dec 31 Balance c/d xxx Jan 1 Balance b/d xxx

Dec 31 Statement of Profit & Loss xxx

(increase)
xxx xxx

2025 2025
Dec 31 Statement of Profit & Loss xxx Jan 1 Balance b/d xxx
(decrease)

xxx xxx
2026
Jan 1 Balance b/d xxx

5
 $ $
Gross Profit xxx
+ Decrease in allowance for irrecoverable debt xxx
Gross Income xxx
Expenses
Irrecoverable debts xxx
Increase in allowance for irrecoverable debt xxx

Current Assets $ $ $
Trade receivables xxx
- Allowance for irrecoverable debt (xxx) xxx

6
 BANK RECONCILIATION

Reasons for differences between cashbook and bank statement:

1) Transactions recorded in the cashbook but not by the bank
 Uncredited deposits – Cash and cheques deposited at the bank but not yet recorded by the bank.
 Unpresented cheques – Cheques issued by the business but not yet presented at the bank

2) Transactions recorded by the bank but not in the cashbook

 Bank charges
 Direct Debit and Standing Order
 Dishonoured or Unpaid Cheques
 Credit Transfer
 Interest and Dividend Received

ADJUSTED CASH BOOK (BANK COLUMNS ONLY)

$ $
Balance b/d xxx Balance b/d (if overdraft) xxx
Credit transfer xxx Bank charges / Service charges xxx

Dividends xxx Standing order (Bankers’ order) xxx

Interest (if credited by the bank) xxx Direct debit xxx
Recording error (made by the cashier) xxx Interest (if debited by the bank) xxx
Dishonoured cheques xxx
Recording error (made by the cashier) xxx
Balance c/d (if overdraft) xxx Balance c/d xxx
xxx xxx
Balance b/d xxx Balance b/d (if overdraft) xxx

BANK RECONCILIATION STATEMENT (METHOD # 1)

$ $
Balance as per adjusted cash book xxx
(+) Unpresented cheques xxx
(-) Uncredited deposits
(xxx)
(+) / (-) Recording error (made by the bank) xxx

Balance as per bank statement xxx

7
 BANK RECONCILIATION STATEMENT (METHOD # 2)

$ $
Balance as per bank statement xxx
(+) Uncredited deposits xxx
(-) Unpresented cheques
(xxx)
(+) / (-) Recording error (made by the bank) xxx

Balance as per updated cashbook xxx

Advantages of Bank Reconciliation Statement:

 Allows the business to ascertain its correct bank balance
 Helps to detect errors in cashbook and on the bank statement
 Allows the business to identify unpresented cheques so that reminders can be sent to the suppliers
 Makes the business aware of dishonoured cheques for the purpose of remedial actions
 Acts as a deterrent against fraud

Limitations of preparing the Bank Reconciliation Statement:

 It can be very time consuming especially when there are a large number of bank transactions
 It may be expensive in terms of labour and other resources required
 Difficulty in identifying same items appearing on both records because of difference in date and wording
 The costs involved may outweigh the benefits especially in case of small businesses

State the differences between a standing order and direct debit

 Standing order is for a fixed amount; amount of direct debit varies
 Bank triggers payment of standing order; recipient triggers payment of direct debit
 Standing order is paid at fixed intervals; direct debit payments occur irregularly

8
 DEPRECIATION

Depreciation: It refers to the expense for using the economic benefits of a non-current asset.
It refers to the systematic allocation of the depreciable amount of an asset over its useful life.
Double entry:
Dr Statement of Profit or Loss
Cr Provision for Depreciation

Reasons for recording depreciation:

 Prudence Concept – To avoid overstating profits and assets.
 Matching Concept – To charge an expense for using the benefits of an asset in generating revenue when
calculating profits.
 Going concern concept – To allow calculation of net book value of the asset which must appear in the SOFP.

Causes of depreciation:
 Wear and tear
 Passage of time
 Depletion
 Obsolescence

Factors to consider when selecting method of depreciation:

 Pattern in which the benefits will be consumed over the useful life
 Pattern in which revenue will be generated by the asset
 Nature of the asset
 Useful life of the asset
 Repairs and maintenance costs of the asset
 Depreciation policy commonly used within the industry in which the business is operating
 Complexity of keeping records and calculations involved

Explain why Land is less likely to have depreciation provided for: Normally, land has unlimited life so there is nothing
within land to depreciate unless it has a value due to the existence of natural resources, then it may be subject to
depletion when land erodes or minerals are extracted.

Reasons for decreasing depreciation rates:

 Profits would increase in the short term
 The asset base of the company will rise in the short term

Reasons against decreasing depreciation rates:

 The change would not be in accordance with the accounting concept of consistency
 The change would not be in accordance with the accounting concept of prudence
 Assets could be overstated
 Lower depreciation charges would mean higher losses on disposal
 The change would not help profit in the long term

Explain why the revaluation method of depreciation is appropriate for assets such as loose tools
 Its cost may not be material and are difficult to keep track of. Therefore, it is written off as an expense on purchase
 If there are a large number of items and costs are significant, the business should use the revaluation method
 They are easily broken, damaged or lost and have to be regularly replaced

9
Depreciation Method:

1) Straight Line Method

Depreciation = [Cost – Residual Value] / Useful Life

OR
Depreciation = Rate (%) x Cost

Advantages:
 Easy to calculate depreciation
 Useful where benefits of the asset are consumed evenly over its useful life
Disadvantages:
 Requires estimating useful life and residual value which can be difficult
 Various information on each asset has to be kept which may be time consuming and costly
 Ignores the actual rate at which the non-current asset will lose its market value

2) Reducing Balance Method

Depreciation = Rate (%) x Net Book Value

Advantages:
 Applies the matching concept by charging an amount of depreciation which reflects the benefits
consumed in generating revenue
 Useful where more benefits of the asset are consumed during the early stage of its useful life
Disadvantages:
 Calculation of depreciation is quite difficult
 Various information on each asset has to be kept which may be time consuming and costly
 Ignores the actual rate at which the non-current asset will lose its market value
 The depreciation has to be recalculated every year

3) Revaluation Method

$
Cost/Value of NCA at Start xxx

+ Value of NCA bought xxx

- Value of NCA disposed xxx

- Value of NCA at End xxx

Depreciation for the year xxx

Advantages:
 Easy to calculate depreciation
 Less information has to be kept as compared to other depreciation methods
 Takes into account the actual loss in the market value for the asset
Disadvantages:
 An expert is required to assess the market value of the asset at the end of each account period
 The market value may be subjective
 Cannot be used in case the market value of an asset is increasing
 Amount of depreciation may not reflect the actual benefits consumed in generating revenue

10
Disposal of Non-Current Assets
Double entry:
1) Eliminate the cost of the asset being disposed
Dr Disposal Account
Cr Non-Current Asset Account
2) Eliminate the accumulated depreciation of the asset being disposed
Dr Provision for Depreciation Account
Cr Disposal Account
3) Record the sales proceed
 Cash received
Dr Bank Account
Cr Disposal Account
 Allowance on part exchange
Dr Non-Current Asset Account
Cr Disposal Account
4) Balannce off the disposal account to obtain the profit or loss on disposal
 Balancing figure on debit side means profit on disposal
Dr Disposal Account
Cr Statement of Profit or Loss
 Balancing figure on credit side means loss on disposal
Dr Statement of Profit or Loss
Cr Disposal Account

Revaluation of non-current assets: It is the process of increasing or decreasing the carrying value of non-current assets
in case of major changes in their market value.
Double entry:
1) Revaluation surplus
 Transfer the accumulated depreciation of the asset to the asset account
Dr Provision for depreciation Account
Cr Non-current asset Account
 Record the amount of revaluation gain
Dr Non-current asset Account
Cr Revaluation Reserve Account
2) Revaluation loss
 Transfer the accumulated depreciation of the asset to the asset account
Dr Provision for depreciation Account
Cr Non-current asset Account
 Record the amount of revaluation loss
Dr Statement of Profit or Loss
Cr Non-current asset Account

Non - Current Asset Account (At Cost)

Date Details $ Date Details $
2024 2024
Jan 1 Balance b/d xxx Dec 31 Disposal at cost xxx
Dec 31 Revaluation gain xxx Revaluation downwards xxx
Additions (Purchase of NCA) xxx
Part exchange (disposal account) xxx
Bank loan (if full payment not made xxx Balance c/d xxx

xxx xxx
2025
Jan 1 Balance b/d xxx

11
 Accumulated Depreciation Account
Date Details $ Date Details $
2024 2024
Dec 31 Disposal depreciation xxx Jan 1 Balance b/d xxx
Revaluation gain xxx Dec 31 Statement of Profit & Loss xxx
Balance c/d xxx Dec 31 Revaluation loss xxx
xxx xxx
2025
Jan 1 Balance b/d xxx

Disposal Account (At Cost)

Date Details $ Date Details $
2024 2024
Dec 31 NCA account (Disposal cost) xxx Dec 31 Accumulated depreciation xxx
Statement of Profit & Loss xxx Bank / Cash xxx
(profit on disposal)

Part exchange value xxx

Statement of Profit & Loss xxx
(loss on disposal)
xxx xxx

12
 Classification of incomes and expenditures

Capital expenditure: These include expenditures on resources from which a business will derive benefits over several
accounting periods.
Examples:
 Purchase Price
 Tax and custom duty on the purchase of NCA
 Transport costs incurred in bringing the newly bought assets into the business
 Legal costs of buying property
 Installation and inspection costs incurred on the newly bough assets

Revenue expenditure: These refer to the expenditures incurred for the day to day running of the business
Examples:
 Purchase of goods for resale
 Carriage inwards and carriage outwards
 Rent and rates
 Repainting of NCA
 New tyres for van

Capital receipt: These are cash received from the disposal of non-current assets, capital invested by the owner and
loans.

Revenue receipt: These are incomes derived in the normal course of business such as revenue from sale of goods,
interest received, rental income, insurance received.

Incorrect treatment of expenditures

Effect on PFTY Effect on Assets

Capital expenditures treated as revenue expenditures Decrease Decrease

Revenue expenditures treated as capital expenditures Increase Increase

13
 Correction of errors

Errors not affecting the trial balance:

Errors Description

Error of omission A transaction has not been recorded at all in the books.

Error of commission An entry has been made in a wrong account of the same category

Error of principle An entry has been made in a wrong account of a different category

Error of original entry A wrong amount has been used for recording a transaction

Error of reversal Both entries have been made on the wrong side of the correct accounts

Compensating error A situation where 2 errors offset each other, resulting in the trial balance to agree

Errors affecting the trial balance:

Errors Description

Error of partial omission Only one of the two entries for a transaction has been made, either the debit or credit

Error of partial reversal Both entries of a transaction have been recorded on the same side of the ledger

Error of three entries A situation where three entries have been recorded for a single transaction

Transposition error The amount recorded for a debit entry differs from the amount of its corresponding credit

Casting error Errors in calculation usually occurring when computing the totals of subsidiary books

Listing error An error arising when preparing the trial balance

Explain why a Trial Balance may be arithmetically correct even though errors have been identified:
Some errors (e.g. omission, commission) will not show in the trial balance, because the debits will still equal to credits

Uses of suspense account:

 To make the trial balance agree\to record the difference on a trial balance
 To allow preparation of draft financial statements
 To help correct errors
 To post an entry which the bookkeeper does now know where to record

Effects of correcting errors

Journal entry for correction of errors Effect on the amount after error correction

Entry on debit side of an account having a debit balance Increase

Entry on debit side of an account having a credit balance Decrease

Entry on credit side of an account having a debit balance Decrease

Entry on credit side of an account having a credit balance Increase

14
 Financial Analysis
Types of ratio analysis:
 Trend analysis – Current ratios of the business are compared to its past ratios
 Inter firm analysis – Ratios of the business are compared to those of a competitor
 Industry analysis – Ratios of the business are compared with the average ratios in the industry in which the business
is operating

Factors to consider when comparing businesses:

 Size of the businesses
 Better to have same nature of ownership (i.e. sole trader, partnership)
 Have similar accounting periods
 Better to use same accounting policies
 Involved in the same trade

Internal users of financial statements:

1) Owners
 Assess overall performance of the business
 Identify problem areas, i.e. poor GP Margin
 To identify areas where improvement can be done

2) Managers and Directors

 Salary and bonus is based on performance. They will be interested to know how the business has performed

3) Workers
 They will be interested in the performance of the business (profits) to have information on security of
employment and increase in salary

External users of financial statements:

1) Bank
 To assess whether a loan can be granted
 To assess if repayment of loans can be maintained

2) Investors
 To determine the return that can be received if they invest in the business and compare with other businesses

3) Suppliers
 To assess whether or not to supply the business on credit
 Assess whether they will be paid on a regular basis

4) Customers
 Assess if the business will continue to supply them in the future

5) Government
 To determine the level of tax which will be charged
 To decide or not whether to give a grant to the business

6) Public and Environmental Bodies

 Interested in whether or not the business is operating ethically towards its workers, customers and
environment

15
Ratios
1) 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = × 100

 Shows how much gross profit is made for every $100 sales
 Shows gross profit in relation to revenue

2) 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑘𝑢𝑝 = × 100

 Shows how much gross profit is made for every $100 purchases
 Shows gross profit in relation to cost of sales

3) 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = × 100

 It shows how much profit is made for every $100 sales

4) 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = × 100

 Capital Employed = Issued Shares + Reserves + Non-Current Liabilities

 NPBI = Net Profit Before Interest (Profit from Operations)
 It shows how much profit is being generated for every $100 capital employed
 It shows profit from operations in relation to capital employed

5) 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑡𝑜 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑅𝑎𝑡𝑖𝑜 = × 100

6) 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑡𝑜 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑅𝑎𝑡𝑖𝑜 = × 100

 Difference between the 2 ratios is that operating expenses should not include interest expense

7) 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =

8) 𝐿𝑖𝑞𝑢𝑖𝑑 𝑅𝑎𝑡𝑖𝑜 =

 Quick ratio shows the ability of the business to repay its short-term debts without the need of selling inventory
 A low ratio indicates liquidity problems and the business will have difficulty to pay short-term debts
 A high ratio indicates good liquidity. But that could also have been invested more fruitfully elsewhere
 If current assets consists of high closing inventory, current ratio may be good, but liquid ratio will be poor,
showing poor liquidity
 A good current ratio is 2:1, whereas a good liquid ratio is 1:1

16
 9) 𝑁𝑜𝑛 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =

 It shows the efficiency with which the business is generating revenue with its non-current assets
 Acquisition of non-current assets will worsen the ratio in the short-term. However, if the NCA are used efficiently,
revenue will increase, thus improving the ratio in the long-term.

𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
10) 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = × 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
 It shows the average time customers are taking to pay.
 A high ratio may indicate poor credit control and high risk of bad debts, which is not good for liquidity

𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
11) 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = × 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
 It shows the average time taken to pay suppliers.
 A high ratio is better for liquidity. But, if too high, it may affect relationship with suppliers and may not benefit from
cash discounts. Suppliers may also stop supplying on credit.

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
12) 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
13) 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = × 365
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
 Inventory Turnover shows the average number of days a business if taking to renew its inventory. The lower, the
better
 Rate of Inventory Turnover shows the number of times a business renewed its inventory during the year. The
higher, the better

Reasons for improvement in GP Margin and Markup:

 Reduction in competition, allowing an increase in selling price
 A reduction in the purchase price of the product
 Relocating warehouses near suppliers, reducing carriage inwards significantly
 Purchased in bulk, thus obtaining trade discount

Reasons for worsening in GP Margin and Markup:

 Reduction in selling price due to competition
 Inflation leading to an increase in purchase price, not passed onto customers
 Loss of trade discount due to change in supplier
 Introduced new products on the market at low prices

17
Reasons for improvement in Profit Margin:
 Better control over expenses
 Shift offices to area where rent is cheaper
 More control over inventory, this reducing damages and theft

Reasons for worsening in Profit Margin:

 Poor control over expenses
 Poor credit control, leading to increase in bad debts
 Increase in inventory damaged or stolen

Reasons for improvement in ROCE:

 Increase in profit level
 Repayment of loan, this decreasing capital employed

Reasons for worsening in ROCE:

 Reduction in profit level
 Issue of shares, taking long-term loan, thus increasing capital employed

Reasons for improvement in current and liquid ratio:

 Injection of capital in the business
 Receive a long-term loan
 Sale of surplus NCA
 Reduction in price and promotional campaign to reduce inventory level

Reasons for worsening in current and liquid ratio:

 Excessive cash drawings from the business
 Repayment of long-term loan
 Purchase of NCA, payment of dividend resulting in bank overdraft
 Excessive inventory

How to improve Trade Receivables Turnover:

 Give cash discount to encourage prompt payment
 Charge interest on overdue account
 Send statement of account regularly as a reminder
 Perform proper credit worthiness check before selling on credit

How to improve inventory turnover:

 Perform Just-In-Time technique, hence reducing inventory level
 Promotional campaign and marketing

Limitations of Ratio Analysis:

 Ignores the effects of inflation
 Takes no account of non-financial issues
 Ignores the time value of money
 Focuses on historical data
 Takes no account of different accounting policies
 Highlights differences, but not the causes of the differences

18
 FINANCIAL STATEMENTS (SOLE TRADER)

Statement of profit and loss for the year ended

$ $
Revenue (Sales) xxx
(-) Sales Returns (return inwards) (xxx) xxx
(-) Cost of Sales:
Opening inventory xxx
(+) Purchases xxx
(+) Carriage inwards xxx
(-) Purchase returns (return outwards) (xxx)
(-) Inventory Drawings (goods withdrawn for own use) (xxx)
(-) Closing inventory (xxx)
Cost of sales (xxx)
Gross Profit xxx
Additional incomes:
Rent received xxx
Discount received xxx
Commission received xxx
Bad debts recovered xxx
Profit on disposal of non-current assets xxx
Reduction in Provision for Doubtful Debts xxx xxx
xxx
(-) Expenses:
Wages and Salaries (+ owings) xxx
Insurance (- prepaid) xxx
Rent and rates xxx
Heating and Lighting xxx
Stationery xxx
Interest on Loan xxx
Discount allowed xxx
Carriage outwards xxx
Advertising xxx
Bad Debts xxx
Increase in Provision for Doubtful Debts xxx
Loss on disposal of non-current assets xxx
Depreciation on non-current assets xxx (xxx)
Net Profit xxx

19
 Statement of Financial Position as at

Non-Current Assets: Cost Depn. NBV

$ $ $
Property xxx xxx xxx
Machinery & equipment xxx xxx xxx
Furniture & fittings xxx xxx xxx
Motor Vehicles xxx xxx xxx
Total Non-Current Assets xxx xxx xxx

Current Assets:
Inventory xxx
Trade receivables xxx
(-) Provision for doubtful debts (xxx) xxx
Other receivables xxx
Bank xxx
Cash xxx
Total Current Assets xxx
Total Assets xxx

Capital and Liabilities:

Capital (January 1, 2025) xxx
(+) Net profit xxx
(+) Additional capital introduced during the year xxx
(-) Drawings (xxx)
Capital (December 31, 2025) xxx

Non-Current Liabilities:
10% Bank loans (xxx)

Current Liabilities:
Trade payables xxx
Other payables xxx
Bank overdraft xxx
Total Current Liabilities xxx
Total Capital & Liabilities xxx

Advantages of sole trader:

 Entitled to all profits earned in the business
 Have total control over the decisions in the business
 Sole traders work independently, so they do not have to gain the approval of anyone else
 There is no legal obligation to publish sole trader accounts

Disadvantages of sole trader:

 Limited ability to raise capital
 Unlimited liability
 Limited ideas
 Lack of continuity if the owner dies
 No sharing of responsibilities may result in increased workload and stress

20
 Business Financing
Advantages of bank loans:
 Quick means of obtaining finance
 It does not lead to a loss of control
 Less expensive than an issue of shares

Disadvantages of bank loans:

 Repayment has to be made, hence affecting cashflow
 Collateral security is required
 Increases gearing and riskiness of the business
 Interest rate can be quite high
 Interest is payable even if losses are made

Advantages of debentures:
 Control over the company remains with existing shareholders
 It is relatively less expensive to issue debentures than shares
 The issue is more likely to be fully subscribed than a share issue

Disadvantages of debentures:
 Security has to be provided
 Interest is payable even if losses are made
 Significant cashflow is required upon repayment of debentures
 Non-payment would result in seizure of security provided

Advantages of shares:
 It is a permanent source of finance which does not require repayment
 Dividend is payable only if distributable profits are available
 No security is required

Disadvantages of shares:
 It is expensive to issue shares
 It might not be fully subscribed, that is the company may not obtain the required amount needed
 Subsequent issue of shares may lead to dilution in control

Hire purchase: Allows the business to acquire non-current assets on credit, paying monthly installments. Interest has to
be paid, reducing profits

Debt-factoring: This involves selling the trade receivables of the company at a discount. This increases the cashflow of
the company, however the full amount is not received, because of the discount.

Unused non-current assets: Sale of surplus non-current assets. This allows the business to increase its cashflow. No
interest has to be paid and the cash received need not be refunded.

Trade payables: Delaying payment to trade payables benefits the cashflow of the business. However, it should be used
with caution so that relationship with suppliers are not deteriorated.

Leasing: A business may lease a non-current asset instead of buying them. Monthly rent will have to be paid which will
be charged as an expense. Monthly rental, instead of the high purchase price allows the business to conserve cash in the
short term.

Bank Overdraft: This is a temporary facility that allows the business to have a negative bank balance. Interest has to be
paid and the bank can cancel the facility at any time without notice.
21
 Computerised Accounting System

Advantages:
 Data is processed quicker
 Can storage large volumes of data in less space
 Less staff is required, hence reducing costs
 With automatic calculation, accuracy Is improved and there is less risk of errors
 It is quicker and easier to generate and modify records
 Security of information is enhanced with the use of passwords

Disadvantages:
 The initial installation cost and hardware are expensive
 Cost of software is expensive
 Training of staff required, leading to additional costs
 Long working at a computer terminal may lead to health hazards
 There may be security breaches and hackers may access confidential information
 Loss of information / data due to virus attack

Ways to keep information secure:

 Password protect all documents
 Regular backup of data
 Restrict access to certain parts of the system
 Anti-virus and firewall to prevent / minimize virus attacks
 Sharing of information should be on a need-to-know basis
 Access to the system should be password protected

22
 CONTROL ACCOUNTS
Uses of control accounts:
 Helps to locate errors
 Act as a deterrent against fraud
 Obtain total trade receivables and trade payables quickly
 Obtain a summary of information about customers and suppliers for control purposes
 To provide information quickly for the preparation of trial balance and SOFP

Limitations of control accounts:

 Errors such as omission, compensating, commission and original entry are not detected
 Duplication of work since trial balance is already worked out to find errors
 Does not guarantee that the individual accounts are 100% correct

Sales Ledger Control Account / Trade Receivables Control Account

$ $
Balance b/d (majority) xxx Balance b/d (minority) xxx

Credit Sales (total of sales journal) xxx Sales returns (total of sales
returns journal) xxx
Refunds to credit customers (from cash xxx Cash/cheques received from
book) credit customers (from cash book) xxx

Dishonoured cheques (from cash xxx Discount allowed (total of discount

book) column from cash book) xxx

Interest charged (from journal) xxx Bad Debts (from journal) xxx

Bad Debts recovered (from journal) xxx Cash from bad debts recovered
(from cash book) xxx
Balance c/d (total of credit balances in Contra / Set off – purchase ledger
sales ledger) xxx (from journal) xxx

Balances c/d (total of debit

balances in sales ledger) xxx

xxx xxx
Balance b/d (Debit balance) xxx Balance b/d (Credit balance) xxx

Reasons for credit balance in SLCA:

 Overpayment by customer
 Advance payment by customer
 Return inwards by the customer after effecting full payments
 Errors in the customer’s account

Items not appearing in the SLCA:

 Cash sales
 Return inwards in respect of cash sales
 Allowance for irrecoverable debts

23
 Purchases Ledger Control Account / Trade Payables Control Account
$ $
Balance b/d (minority) xxx Balances b/d (majority) xxx

Purchase returns (total of purchase Credit purchases (total of

returns journal) xxx purchases journal xxx

Cash / cheques paid to suppliers Refunds from suppliers (from cash

(from cash book) xxx book) xxx

Discount received (total of discount column Interest charged by suppliers (from

from cash book) xxx purchases journal) xxx

Contra / Set off – sales ledger (from journal) Balance c/d (total of debit balances
xxx in purchase ledger) xxx
Balance c/d (total of credit balances
in purchase ledger) xxx
xxx xxx
Balance b/d (Debit balance) xxx Balance b/d (Credit balance) xxx

Reasons for debit balance in PLCA:

 Overpayment to supplier
 Advance payment to supplier
 Return outwards to supplier after effecting full payments
 Errors in the supplier’s account

Items not appearing in the PLCA:

 Cash purchases
 Return outwards to suppliers in respect of cash purchases

Reconciliation of control accounts

Affecting control account only Affecting sales and purchases Affecting both ledger and control
ledger only accounts

Error in original control account Error in customer and supplier account Error of complete omission, original
entry

Error in general leger accounts such Error in list of balances, list of trade Error of posting in books of prime entry
as sales, purchases, returns receivables and payables

Casting errors in books of prime entry

Corrected in amended control Corrected in reconciliation Corrected in both amended control

account statement account and reconciliation
statement

24
Factors to consider when charging interest on account balances:
 May improve trade receivables collection period
 Improves the cash flow of the business
 Meena may lose customers
 May need tighter credit controls which increase cost

Advantages of offering cash discount:

 Encourages credit customers to pay earlier
 Assists in improving cashflow of the business
 Might help avoid irrecoverable debts and so increase profits

Disadvantages of offering cash discount:

 Cash received would be lower
 It is treated as an expense in SOPL, hence reducing profits

Advantages of cash sales only:

 Improved cashflow and business does not get low on cash
 Generates cash instantly for use in other business transactions
 Will allow the business to be free from irrecoverable debts

Disadvantages of cash sales only:

 Business may lose customers
 May need tighter credit control, hence increasing costs

Advantages of cash purchases only:

 Improved relationships with suppliers
 Higher possibility of getting trade discounts
 Smooth supplies from suppliers

Disadvantages of cash purchases only:

 Increased burden on cashflow
 No or less free cash available to meet other financial needs of the business

25
 SINGLE ENTRY SYSTEM / INCOMPLETE RECORDS

Advantages of double entry system:

 Financial statements preparation becomes easier
 Financial statements will be more accurate
 Reduces the possibility of fraud
 Decision making will be based on reliable information

Disadvantages of double entry system:

 It is time consuming
 May be costly to set up
 Not all errors will be identified
 Complex and harder to understand for non-accountants

State the benefits of preparing annual financial statements:

 Helps future planning, decision making and forecasting
 Evaluate the performance of the business through calculation of profit/loss
 Assists in mitigating errors
 Present at the bank for loan purposes

1) Calculation of Total Sales (Total Sales = Credit sales + Cash sales)

$
Trade receivables (closing balance) xxx
(+) Cheques received from credit customers xxx
Sales returns xxx
Discount allowed xxx
Bad Debts xxx
Contra / Set off xxx
(-) Refunds to credit customers (xxx)
Dishonoured cheques (xxx)
Interest charged on overdue accounts (xxx)
Trade receivables (opening balance) (xxx)
Credit Sales xxx

(+) Cash sales banked xxx

(+) Any payments from cash sales added back to cash sales banked:
Cash purchases xxx
Wages xxx
Rent & insurance xxx
Drawings xxx
(+) Increase in cash in hand during the year xxx
Total Sales for the year xxx

$ $
Balance b/d (Opening Trade Receivables) xx Receipts from customers xx
Credit Sales xx Discount Allowed xx
Irrecoverable Debts xx
Sales Return xx
Balance c/d x
xx xx
Balance b/d (Closing Trade Receivables) x
26
 2) Calculation of Total Purchases (Total Purchases = Credit Purchases + Cash Purchases)

$
Trade payables (closing balance) xxx
(+) Cheques paid to credit suppliers xxx
Purchase returns xxx
Discount received xxx
Contra / Set off xxx
(-) Refunds to credit suppliers (xxx)
Interest charged by suppliers (xxx)
Trade payables (opening balance) (xxx)
Credit Purchases xxx

(+) Cash purchases xxx

(-) Inventory drawings (xxx)
Total Purchases for the year xxx

$ $
Payment to suppliers xx Balance b/d (Opening Trade Payables) xx
Discount received xx Credit purchases xx
Purchases returns xx
Balance c/d xx
xx xx
Balance b/d (Closing Trade Payables) xx

3) Calculation of profit/loss

Capital at end x

- Capital at start (x)

- Additional capital (x)

+ Drawings x

Profit / Loss x

27
 4) STATEMENT OF AFFAIRS (CALCULATION OF OPENING & CLOSING CAPITAL)

1 Jan. 2025 31 Dec. 2025

Assets: $ $
Property xxx xxx
Motor vehicles xxx xxx
Fixtures and Fittings xxx xxx
Inventory xxx xxx
Trade receivables xxx xxx
Other receivables xxx xxx
Cash at Bank xxx xxx
Cash in hand xxx xxx
Total assets xxx xxx

(-) Liabilities:
Trade payables xxx xxx
Other payables xxx xxx
Bank overdraft xxx xxx
Long term Loans xxx xxx
Total liabilities (xxx) (xxx)
Opening / Closing Capital xxx xxx

Note: Statement of profit and loss and Statement of financial position can be prepared by using the financial statements
layout.

5) Calculation of depreciation
$

Opening NBV X

+ Purchase of NCA X

- Disposal of NCA (X)

- Closing NBV (X)

Depreciation X

28
Inventory Stolen: Goods stolen is the difference between the two Cost of Sales
1) COS = Opening Inv + purchases + carriage – returns outwards – Closing Inv
2) COS is calculated using ratios.
Double entry:
 Insured
Dr Bank/Other Receivables
Cr Purchases
 Not Insured
Dr Expenses
Cr Purchases

Cash Stolen: It is calculated through the preparation of the cash account. It will be the balancing figure on
credit side.
Double entry:
Dr Expenses
Cr Cash

29
 PARTNERSHIP
Partnership: Refers to a business organization with 2 or more owners
Partnership Agreement: A written agreement between the partners, to avoid any misunderstandings and conflicts in the
future.
Partnership Agreement Contains:
 Partners’ salaries
 Interest on capital
 Interest on drawings
 Share of profit\loss
 Interest on loan from partners
 Initial capital contribution by each partner

In absence of partnership agreement:

 No salaries
 No interest on capital
 No interest on drawing
 Profits and losses to be shared equally
 Interest on loan from partner is charge at 5% per annum

Advantages:
 Access to more capital
 More knowledge, expertise and experience
 Able to offer a greater range of services to its customers
 Losses are shared
 Responsibilities are shared

Disadvantages:
 Profits are shared
 Decision making process is slower
 Partners have unlimited liability
 Partners may be legally liable for the acts of other partners
 There may be conflicts among partners

Items affecting appropriation account:

 Interest on capital
 Partners’ salaries
 Interest on drawings

Items not affecting appropriation account:

 Interest on partners’ loan
 Amount of fixed capital
 Drawings

Reasons for maintaining a separate capital and current account:

 Reduce possibility of overdrawings
 Calculation of interest on capital and drawings is easier
 To show the permanent capital of the partners
 To act as a control system against excessive drawings by partners

30
Reasons for a debit balance in the current account
 Excessive drawings
 Huge share of losses

Reasons for interest on capital:

 To encourage the partners to contribute more capital
 To compensate them for the opportunity cost when investing in the business
Double entry:
Dr Appropriation Account
Cr Current Account

Reasons for interest on drawings:

 To discourage drawings from the partnership
 To reward the partner with the lowest drawings
Double entry:
Dr Current Account
Cr Appropriation Account

Double entries:
1) Annual salary of partners
Dr Appropriation Account
Cr Current Account
2) Salary paid to partners
Dr Partners’ salary Account \ Drawings Account
Cr Bank Account
3) Share of residual profits
Dr Appropriation Account
Cr Current Account
4) Share of residual losses
Dr Current Account
Cr Appropriation Account
5) Interest on loan from partner
Dr Statement of Profit or Loss
Cr Current Account \ Interest Account

31
 Profit & Loss Appropriation account for the year ended

$ $

Net Profit xxx

(+) Interest on drawings:

A xxx
B xxx xxx
xxx

Less Appropriations

(-) Interest on capitals:

xxx
A xxx
(xxx)
B

xxx
(-) Partner’s salaries:
A xxx
B xxx (xxx)
Residual profits xxx

(-) Profit shared:

A xxx
B xxx (xxx)
-

32
 PARTNERSHIP – ADMISSION

Example: Let’s suppose A and B are existing partners and ‘C’ has joined the firm.

Revaluation Account

$ $
Non Current Assets decreases xx Non Current Assets increases xx
Inventory decreases xx Inventory increases xx
Bad debts / Discount allowed xx Decrease in provision for DD xx
Increase in provision for DD xx Trade payables decreases xx
Trade payables increases xx Other payables decreases xx
Other payables increases xx
*Gain on revaluation: *Loss on revaluation:
Capital accounts – A xx Capital accounts – A xx
B xx B xx
C xx C xx
xxx xxx

*Note: It will be either gain or loss on revaluation

Partner’s Current Account

A B C A B C
$ $ $ $ $ $
*Balance b/d xx xx xx *Balance b/d xx xx xx
Interest on Drawings xx xx xx Interest on Capitals xx xx xx
Drawings - Cash xx xx xx Interest on Partner’s Loans xx xx xx
- Inventory xx xx xx Partner’s Salaries xx xx xx
*Share of Losses xx xx xx *Share of Profits xx xx xx
*Balance c/d xx xx xx *Balance c/d xx xx xx
xx xx xx xx xx xx
Balance b/d xx xx xx Balance b/d xx xx xx

Note:

* Current account balances may be either credit or debit.

* Distribution would be either profits or losses.

* Partners may have either debit or credit balances.

33
 Partner’s Capital Account

A B C A B C
$ $ $ $ $ $
Goodwill written off Balance b/d xx xx xx
(New Ratios) xx xx xx
*Loss on Revaluation Bank ( C Investment) - - xx
(old Ratios) xx xx -
Revaluation written *Gain on Revaluation (old
off (New Ratios) xx xx xx Ratios) xx xx -
Balance c/d xx xx xx Goodwill (old Ratios) xx xx -
xx xx xx xx xx xx
Balance b/d xx xx xx

PARTNERSHIP – RETIREMENT

Example: Let’s suppose A, B and C are existing partners and ‘A’ has decided to retire from
the Partnership.

Current Accounts

A B C A B C
$ $ $ $ $ $
Balance b/d xx xx xx Balance b/d xx xx xx
Interest on Drawings xx xx xx Interest on Capitals xx xx xx
Drawings - Cash xx xx xx Interest on Partner’s Loans xx xx xx
- Inventory xx xx xx Salaries xx xx xx
* Share of Losses xx xx xx * Share of Profits xx xx xx
* Transfer to Capital a/c xx - - * Transfer to Capital a/c xx - -
Balance c/d - xx xx Balance c/d - xx xx
xxx xxx xxx xxx xxx xxx
Balance b/d - xx xx Balance b/d - xx xx

Note:

 Distribution would be of either Profits or Losses.

 At the retirement date, ‘A’ Current Account Balance would be transferred to the Capital
Account.

34
 Capital Accounts

A B C A B C
$ $ $ $ $ $
Goodwill written off (New Balance b/d xx xx xx
Ratios) - xx xx
* Loss on Revaluation (old * Gain on Revaluation (old
Ratios) xx xx xx Ratios) xx xx xx
Revaluation written off (New Goodwill (old Ratios) xx xx xx
Ratios) - xx xx
* Current Account balance xx - - * Current Account balance xx - -
* Loan from A (new) xx - - * Loan from A (old) xx - -
* Cash/ Bank xx - - * Cash/ Bank xx - -
Balance c/d - xx xx
xxx xxx xxx xxx xxx xxx
Balance b/d - xx xx

Note:

 Retiring partner’s loan would be transferred to his Capital account.

 Retiring partner can also keep his investment in the form of Loan to the partnership.

 Note that there would never be a balance remaining in the retiring partner’s Capital
Account.

35
 Partnership
Statement of Financial Position as at

Non-Current Assets: Cost Depn. NBV

$ $ $
Property xxx xxx xxx
Machinery & equipment xxx xxx xxx
Furniture & fittings xxx xxx xxx
Motor Vehicles xxx xxx xxx
Total Non-Current Assets xxx xxx xxx

Current Assets:
Inventory xxx
Trade receivables xxx
(-) Provision for doubtful debts (xxx) xxx
Other receivables xxx
Bank xxx
Cash xxx
Total Current Assets xxx
Total Assets xxx

Capital and Liabilities:

A B Total
$ $ $
Capital accounts at (31 December 2025) xxx xxx xxx
Current accounts at (31 December 2025) xxx xxx xxx
xxx xxx xxx

Non-Current Liabilities:
10% Bank loans xxx
10% Partners loans xxx
xxx
Current Liabilities:
Trade payables xxx
Other payables xxx
Bank overdraft xxx
Total Current Liabilities xxx
Total Capital & Liabilities xxx

36
 FINANCIAL STATEMENTS (LIMITED COMPANIES)

Company: A business organization owned by shareholders and managed by a board of directors.

Advantages:
 Owners have limited liability
 A company can raise more capital
 A company has continuity of existence
 Banks prefer to deal with companies rather than sole traders

Disadvantages:
 The cost of creating a company is high
 Mismanagement on behalf of directors may lead to heavy losses for shareholders
 Additional expenses are required for accountancy and auditing procedures
 There are many legal procedures to follow when setting up a company

Limited Liability: In case of bankruptcy, shareholders lose only the capital invested in the business, not personal items.

Issued Capital: This is the amount of capital that the company has issues
Called-up Capital: This is the amount of capital that the company has asked shareholders to pay
Paid-up Capital: This is the amount of capital that shareholders have actually paid

Ordinary Shares:
 Have voting rights
 Earn a variable rate of dividend
 Earn dividend after debenture interest
 Receive capital repayment after debentures

Revenue Reserve: This reserve is created by a transfer from profit. They are the profits which have not yet been
distributed to shareholders as dividend. The 2 revenue reserves are general reserve and retained earnings.

Capital Reserve: These are not normally created by a transfer from profits. Such reserves cannot be used to pay
dividend. The 2 capital reserves are share premium and revaluation reserve.

General Reserves: This is created by making a transfer from the retained earnings.

Retained Earnings: This is an accumulation of profits and losses since the company was created.

Share Premium: It is the excess of issue price and nominal value of 1 share. It arises when shares are issued at a price
above their nominal value.

Revaluation Reserve: It arises when non-current assets are revalued at an amount higher than their NBV.

Uses of Share Premium:

 To issue bonus shares
 To write off expenses incurred when creating the company
 To write off expenses arising on the issue of shares
 To provide for premium payable on redemption of shares

Uses of Revaluation Reserve:

 To provide for a revaluation loss on non-current assets

37
Uses of General Reserve:
 Future dividend payment
 Retain part of profits for future expansion
 Retain cash in the business

Uses of Retained Earnings:

 To issue bonus shares
 To write off expenses incurred when creating the company
 To write off expenses arising on the issue of shares
 To provide for premium payable on redemption of shares
 To pay dividends

Debentures:
 Have no voting rights
 Earn a fixed rate of interest
 Earn interest before ordinary dividend
 Receive capital repayment before ordinary shares

Public Issue: It refers to an issue of shares to the general public

Double Entry:
Dr Bank
Cr Ordinary Share Capital

Rights Issue: It refers to an issue of shares to existing shareholders in proportion to their shareholding.
Double Entry:
Dr Bank
Cr Ordinary Share Capital
Cr Share Premium

Bonus Issue: It refers to a free issue of shares to existing shareholders in proportion to their shareholding.
Double Entry:
Dr Reserves (Share Premium  General Reserve  Retained Earnings)
Cr Ordinary Share Capital

Reasons for a lower balance on retained earnings than profit for the year:
 Previous loss brought forward
 Payment of dividends
 Bonus issue of shares

Difference between bonus and rights issue:

 Rights issue can be used as a source of finance whereas bonus issue cannot
 Rights issue increases equity while bonus issue does not affect equity
 Rights issue increases reserves while bonus issue decreases reserves
 Rights issue may be at a premium whereas bonus issue is always at par

Similarities between bonus and rights issue:

 Both are issued to existing shareholders
 Both do not dilute shareholdings

Disadvantages of bonus issue:

 No cash raised from issuing shares

38
Advantages of bonus issue:
 Can be issued instead of paying dividends in times of low profits
 There is no dilution of ownership of shareholders
 Allows the company to use its non-flexible reserves
 Give a positive sign to potential shareholders

Disadvantages of rights issue:

 May lead to a reduction in the share price

Advantages of rights issue:

 Quicker and easier than a public issue
 There is no dilution of ownership of shareholders
 More likely to be fully subscribed than a public issue

Dividend: It is the appropriation of profits to shareholders, that is, part of the profit for the year being distributed to
shareholders as a reward for their investment in the company.

Interim Dividend: This refers to dividend which has not been paid during the year

Final Dividend: This refers to dividend which has been paid at the end of the year or at the beginning of the next year

Proposed Dividend: This relates to dividend not yet paid and should not be recorded in the financial statements

Arguments for a low dividend rate:

 Company may be short of cash \ refrain from large cash outflows
 Directors are retaining earnings for future development
 Capital expenditure financed by retained earnings has lower cost of finance
 May lead to a higher share value in the long run

Arguments against a low dividend rate:

 Existing shareholders are dissatisfied, resulting in them selling their shares
 Low dividend policy may convey a wrong message to potential investors, leading to a possible decrease in the
share value

Factors to consider when choosing dividend rate:

 The amount of profit available must be sufficient to finance the dividends
 The amount of liquid funds will be sufficient to cover the dividend payment and avoid liquidity problems
 That shareholders will expect a dividend as a reward for their investment

39
 Statement of profit and loss for the year ended
$ $
Revenue xxx
(-) Cost of Sales:
Opening inventory xxx
(+) Ordinary goods Purchased xxx
(-) Closing inventory (xxx)
Cost of sales (xxx)
Gross Profit xxx
(-) Operating Expenses:
Distribution costs xxx
Administration costs xxx (xxx)
Profits from operations xxx
(-) Finance costs (loan Interest) (xxx)
Profit before tax xxx
(-) Taxation (xxx)
Profit for the year xxx

Note: Finance cost may include debenture interest + bank loan interest + bank
overdraft interest.
Statement of Retained Earnings

$
Retained earnings balance at start of year xxx
(+) Profit for the year xxx
(-) Revaluation downwards (xxx)
(+) Transfer from other reserves xxx
(-) Dividend paid (Interim + paid at year end unpaid from previous year) (xxx)
(-) Bonus issue (xxx)
(-) Transfer to other reserves (xxx)
Retained earnings balance at end of year xxx

40
 Statement of changes in equity
Share capital Share Revaluation General Retained
Premium Reserve Reserve earnings
Details
$ $ $ $
Balances at start of year xxx xxx xxx xxx xxx
Profit for the year xxx
Dividends paid (interim
and final) (xxx)
Public Issue xxx xxx
Rights issue xxx xxx
Bonus issue xxx (xxx) (xxx) (xxx)
Revaluation upwards xxx
Revaluation downwards (xxx) (xxx)
Transfer to reserves xxx (xxx)
Transfer from reserves (xxx) xxx
Balances at year end xxx xxx xxx xxx xxx

Statement of Financial Position as at

Non-Current Assets: Cost Depn. NBV
$ $ $
Properties xxx xxx xxx
Machinery & equipment xxx xxx xxx
Furniture & fittings xxx xxx xxx
Motor Vehicles xxx xxx xxx
Total Non-Current Assets xxx xxx xxx

Current Assets:
Inventory xxx
Trade receivables xxx
(-) Provision for doubtful debts (xxx) xxx
Other receivables (prepayments) xxx
Cash & cash equivalents xxx
xxx
Total Assets xxx
Equity:
Ordinary shares of $1 each xxx
Share premium xxx
Revaluation reserve xxx
General reserve xxx
Retained earnings xxx
xxx
Non-Current Liabilities:
10% Debentures xxx
5% Bank loans xxx xxx

Current Liabilities:
Trade payables xxx
Other payables (accruals) xxx
Taxation xxx
Bank overdraft xxx xxx
Total Equity & Liabilities xxx
41
 Cost Classification

Manufacturing costs: Costs incurred in the factory to convert raw materials into finished goods.

Direct Costs: These are costs which can be directly traced to or attributed to a product being manufactured.

Indirect Costs: These costs cannot be directly traced or attributed to a particular product.

Administration Costs: The cost involved in the management activities of an organization.

Selling and Distribution Costs: The expenditures incurred on the sales function and delivery of the goods and services
to customers.

Sunk Costs: These refer to costs of resources already acquired which will be unaffected by the choice between various
alternatives.

Variable Costs: These costs vary in direct proportion to the volume of activity.

Fixed Costs: These costs remain constant at any level of output in the short term.

Stepped Costs: These costs remain fixed within a range of output, but they eventually increase or decrease by a
constant amount at various critical activity levels.

Semi Variable Costs: This cost includes both a fixed and variable component.

Just-In-Time (JIT) Inventory Management: It involves planning purchases in such a way so that delivery is made when
they are needed to meet production requirement and customer demand.

Advantages of JIT:
 Lower risk of obsolescence since the high rate of inventory turnover keeps goods from remaining too long in store
 Leads to reduction in storage and insurance costs
 Allows reduction in wastages
 Results in lower investment for the same level of activity and therefore greater profitability
 Improves relationship with suppliers
 Reduces the risk of defects since it promotes the concept of “first time right”
 Improves production efficiency and labour productivity

Disadvantages of JIT:
 Adverse effects on production if a supplier does not deliver on time
 Significant investment in technology is required to implement the system
 May result in loss of trade discount on bulk buying
 May increase ordering and transport costs as a result of purchasing small quantities frequently
 Increases the risk of losing a massive unexpected customer order
 Occurrence of a natural disaster may disrupt supply chain and completely halt production

Methods of remuneration:
 Salary basis
 Time based pay
 Output based pay
 Overtime
 Bonus

42
 Overheads

Overhead costs: A cost which cannot be traced directly to a product, service or department.

Cost centre: A person, location or department to which costs may be attributed/allocated.

Cost unit: A unit of a product or service in relation to which cost can be ascertained.

Overheads allocation: The process of attributing overheads to a specific department which is solely for its occurrence.

Apportionment: The process of splitting overheads between various cost centres that are jointly responsible for its
occurrence.

Absorption: Refers to the process involved determining the amount of overheads to be included in the cost of a product.

Advantages of a factory-wide OAR:

 Easier and cheaper to calculate
 Avoid the necessity to allocate and apportion costs into deparrments

Disadvantages of a factory-wide OAR:

 Less accurate as some products may require more labour / machine hours in each department
 Where different products spend differing amounts of time in departments, there is a danger that product costs will
be under or over stated
 It is less realistic and therefore may lead to an inaccurate selling price

Disadvantages of using overhead absorption rates:

 Difficulty in estimating budgeted overheads and activity levels
 Use of arbitrary basis for apportionment of overhead to cost centres for calculation of departmental OAR
 Using estimated data which could be inaccurate can lead to over/under costing of products
 Over costing a product would result in higher selling price, resulting in loss of orders
 Under costing a product would lead to lower selling price, resulting in lower profits
 Problems of under / over absorption of overhead if actual activity turns out to be different than budgeted

Over-absorption = Overheads absorbed > Actual overheads

Under-absorption = Overhead absorbed < Actual overheads

Effects of over-absorption:
 Too much overheads charged to the product, resulting in a higher selling price
 Higher selling price may either increase profits, or lower demand and decrease profits

Effects of under-absorption:
 Insufficient overheads are charged to the product. A lower selling price is charged.
 The lower selling price may lead to failure in covering costs and reduce profits, or increase demand and profits

Cause of over-absorption:
 Actual overheads less than budgeted overheads
 Hours worked more than budgeted hours

Cause of under-absorption:
 Actual overheads more than budgeted overheads
 Hours worked less than budgeted hours
43
 OVERHEAD ANALYSIS
SHEET

Budgeted Basis Production Departments Service Departments

Overheads
Machining Assembly Maintenance Canteen
$ $ $ $
Machine repairs Direct machine hours xxx xxx xxx xxx
Premises repairs Area xxx xxx xxx xxx
Factory rent Area xxx xxx xxx xxx
Factory insurance Area xxx xxx xxx xxx
Machine insurance Machine cost xxx xxx xxx xxx
Indirect wages No. of employees xxx xxx xxx xxx
Heating and lighting Area xxx xxx xxx xxx
Power KW xxx xxx xxx xxx
Depreciation Netbook value xxx xxx xxx xxx
xxx xxx xxx (xxx)
Reapportionment:
Canteen No. of employees xxx xxx xxx
Maintenance Percentage xxx xxx (xxx)
Total xxx xxx

44
 INVENTORY VALUATION

Periodic inventory system:

Calculation of closing inventory in units
Opening inventory in units xxx
(+) Purchases in units xxx
Units available xxx
(-) Sales in units xxx
Closing inventory in units xxx

FIFO: This is a method under which issues are priced at the cost of the earliest delivery available in inventory.

Value of closing inventory = Closing inventory in units x latest purchase price

Advantages:
 Easy to calculate the cost of closing inventory
 It is realistic since it is based on the assumption that inventories are issued in the order in which they
are actually received
 Values of inventories issued are based on prices actually paid for the goods
 Cost of closing inventory is based on prices most recently paid
 FIFO is allowed both by the Companies Act and IAS 2

Disadvantages:
 In a manufacturing business, the prices at which raw materials are issued to production may not be the
most recent prices
 Identical items of inventory may be issued to production/jobs at different prices resulting in different cost
and selling price for identical jobs
 In a period of rising prices, inventory would be valued at latest (high) prices, thereby resulting in lower
cost of sales and higher profits. This is contradictory to the prudence concept

AVCO: This is a method that calculates a weighted average price for all units in inventory and issues are priced at this
average cost.

Average cost per unit = Total value of inventory held (opening inventory + total purchases)
Total units in inventory

Value of closing inventory = Closing inventory in units x average cost per unit

Advantages:
 Variations in the pricing of materials to different jobs are minimized
 Averaging has the effect of ‘smoothing out’ the cost of production and cost of sales, hence rendering
profits of different periods more comparable
 The cost of inventory will be fairly close to its actual cost
 AVCO is allowed by both Companies Act and IAS 2

Disadvantages:
 It is difficult to calculate the average cost
 The average cost does not exist in practice

45
 Inventory Reconciliation:

Calculation of inventory reconciliation (backward method)

$ $
Value of given inventory xxx
(+) Sales at cost price xxx
Goods sent on sales or return at cost price xxx
Purchase returns xxx
Inventory drawings
Inventory undercast/omitted xxx xxx
xxx
(-) Purchases xxx
Sales returns at cost price xxx
Inventory overcast/to be scrapped xxx
Goods sold before end of financial year awaiting delivery xxx
Goods received on a sale or return basis xxx xxx
Revised value of inventory xxx

Reasons for differences in inventories:

 Inventory has been stolen/damaged
 Inventory is obsolete so it has no value in reality but might be in inventory records
 Sales have been omitted in the records, i.e. Inventory has been sent out on sale or return basis so not yet sold
 Purchases of inventory has been recorded twice, or not all inventory was counted
 Sales returns were amended in the records, but the purchases returns were not

INVENTORY VALUATIOIN:

Inventory is always valued at lower cost and net realisable value, whichever is lower in accordance
with prudence principle.

(i) Cost price = Purchase price + any other costs incurred to bring the
product (for example carriage inwards etc)

(ii) Net realisable value = Estimated selling price – any selling expenses (for
example repair costs, carriage outwards etc)

46
 JOB ORDER COSTING
Calculation of total cost of a particular order / job

Job Costing: It is a method of costing which is usually being used where the cost of a tailor made job has to be
calculated.

Batch Costing: It is a method of costing which is used where a product is being produced in large quantities.

Characteristics of Job Costing:

 Each cost is separately identifiable
 Production is based on specific customer orders
 Production is of short duration

$ $

Direct Material cost – Dept A (Kgs x per Kg) / (Litres x per Litre) xx

– Dept B (Kgs x per Kg) / (Litres x per Litre) xx

xxx

Direct Labour cost – Dept A (Hours x rate per hour) xx

– Dept B (Hours x rate per hour) xx

xxx

Variable Overheads (Production) xxx

Prime Cost xxx

Fixed Overheads (Production) - Dept A (OAR x Actual Labour Hours)* xx

- Dept B (OAR x Actual Labour Hours)* xx

xxx

Total Production Costs xxx

(+) Administration Overheads xxx

Selling & Distribution Overheads xxx

Total Cost of Sales xxx

(+) Profit mark up xxx

Selling / Quotation / Order or Tender Price xxx

47
 MARGINAL COSTING PROFIT STATEMENT

Marginal Costing: It is a basis of costing which is commonly used for short term decision making. Under this basis,
emphasis is laid on the variable cost of a product and its contribution.

Arguments for Marginal Costing:

 Provides more useful information and is an important management tool for short term decision making
 Profit under marginal costing is more realistic as it cannot be manipulated by changing inventory levels since the
latter does not include fixed production overheads
 Better suited for performance evaluation based on profits
 No need to forecast activity level for the purpose of calculating overhead recovery rates
 No problem of over \ under absorption of overheads

Arguments against Marginal Costing:

 Difficult to classify costs as either fixed or variable due to the existence of semi-variable and stepped costs
 Does not value inventory according to IAS 2
 Ignores fixed cost in decision making, hence taking greater risks

$ $

Sales (units sold x selling price per unit) xxx

(-) Variable/ Marginal Cost of Sales

Opening inventory (units x variable cost per unit) xxx

(+) Production Cost (production units x variable cost per unit) xxx

xxx

(-) Closing inventory (units x variable cost per unit) (xxx)

Variable/ Marginal Cost of Production xxx

(+) Variable overhead (selling & distribution) xxx

Variable overhead (administration) xxx

Variable/ Marginal Cost of Sales (xxx)

Contribution xxx

(-) Fixed Costs:

Fixed overhead (production) xxx

Fixed overhead (selling & distribution) xxx

Fixed overhead (administration) xxx

xxx

Marginal Profit xxx

48
 MARGINAL COSTING PROFIT STATEMENT
(DIFFERENT PRODUCTS)

Product A Product B Product C Total

$ $ $ $
Sales xxx xxx xxx xxx
(-) Variable costs:
Direct material xxx xxx xxx xxx
Direct labour xxx xxx xxx xxx
Direct expense xxx xxx xxx xxx
Production overhead (variable) xxx xxx xxx xxx
Administration overhead (variable) xxx xxx xxx xxx
Sales overhead (variable) xxx xxx xxx xxx
Total variable costs (xxx) (xxx) (xxx) (xxx)
Contribution xxx xxx xxx xxx
(-) Fixed Costs:
Production overhead (fixed) xxx xxx xxx xxx
Administration overhead (fixed) xxx xxx xxx xxx
Sales overhead (fixed) xxx xxx xxx xxx
xxx xxx xxx xxx
Profit xxx xxx xxx xxx

49
 ABSORPTION COSTING PROFIT STATEMENT

Absorption Costing: It is a basis of costing under which the fixed production overheads are also in the cost of production
and inventory valuation.

Arguments for Absorption Costing:

 Using absorption costing as a basis to take decisions ensured that the firm is taking less risk since total costs are
being considered
 Accounting standards recommend the use of absorption costing for financial reporting
 Commonly used for the preparation of financial statements and is therefore easily understood
 It values inventory in accordance with IAS 2

Arguments against Absorption Costing:

 Problems in forecasting activity level for the purpose of calculating overheads recovery rates
 Problems of over \ under absorption
 If activity level turns out to be different than forecast, an incorrect amount of overhead will be included in inventory
 Focusing on total cost for decision making may result in the firm losing out contracts which would have increases
the firm’s overall profit
 Not suitable for performance evaluation since profit can be manipulated by varying inventory levels

$ $

Sales (units sold x selling price per unit) xxx

(-)Cost of Sales:

Opening inventory (units x production cost per unit) xxx

(+) Production Cost (production units x cost per unit) xxx

Total Production Cost xxx

(-) Closing inventory (units x production cost per unit) (xxx)

Cost of Production xxx

(+) / (-) Under / (Over) Overhead absorbed xxx

Cost of Sales (xxx)

Gross profit xxx

(-) Fixed overhead (selling & distribution) xxx

Fixed overhead (administration) xxx

Variable overhead (selling & distribution) xxx

Variable overhead (administration) xxx

xxx

Absorption Profit xxx

50
Reasons for differing profit between absorption and marginal costing:
 Absorption costing will produce a different profit figure to marginal costing whenever opening and
closing inventory differ
 Absorption costing values inventory at total production cost including a portion of fixed costs
 Marginal costing values inventory at variable cost only, treating fixed costs as period costs
 When closing inventory is higher than opening inventory absorption costing will produce higher
profits. When closing inventory is lower than opening inventory, marginal costing will produce higher
profits
 Fixed overheads are treated as a period cost under marginal costing but as part of the cost of
production under absorption costing. As a result, the fixed overheads are written off in the period’s
SOPL rather than being carried forward as part of the inventory as is the case in absorption costing

Reconciliation Statement for Marginal Costing and Absorption Costing Profit

$
Marginal Profit xxx
(+) Difference in Closing inventory of finished goods (Absorption – Marginal) xxx
(-) Difference in Opening inventory of finished goods (Absorption – Marginal) (xxx)
Absorption Profit xxx

ABSORPTION COSTING (AS / A LEVEL)

(i) Overhead absorption rate (OAR) = Budgeted Overheads

Budgeted base / method*

(ii) Overhead absorbed = OAR x Actual base / method*

(iii) Over / Under absorption = Overhead absorbed – Actual Overheads

51
*Note:

There are six bases / methods for calculating OAR. A base /method vary from one
question to another; for example; it could be mentioned in a question to calculate OAR
using direct labour cost. However, most common methods are direct labour hours and
direct machine hours. Following are the six bases / methods for calculating OAR:

 Direct labour hours

 Direct machine hours

 Production units

 Direct wages (direct labour cost)

 Direct material cost

 Prime cost

52
 BREAK EVEN ANALYSIS (AS / A LEVEL)

Purpose of Cost-Volume-Profit Analysis: Determine the effect that changes in cost and volume will have on the
company’s operating income and net income.

Assumptions of Cost-Volume-Profit Analysis:

 Costs can be classified accurately as either fixed or variable
 Fixed costs remain constant
 The behavior of both variable costs and sales revenue is linear throughout the relevant range of activity, implying
that unit variable cost and selling price remain constant
 Changes in activity is the only factor affecting cost and revenue

Advantages of Cost-Volume-Analysis:
 Calculates the break-even point
 Identifies the margin of safety
 Helps with short term decision making
 Easy to understand
 Helps cost control by showing relative importance of fixed costs and variable costs
 Less complicated than absorption costing
 Quick method of calculating to show impact of decisions on profit

Disadvantages of Cost-Volume-Analysis:
 Total costs cannot always be divided into either fixed or variable because of the existence of semi variable and
stepped costs
 Fixed costs does not always remain constant
 Variable costs per unit may increase or decrease with increased production
 In practice, selling price is reduced with higher discount and on sales promotion
 It is unrealistic to assume that there is no inventory or opening and closing inventory is the same
 Volume is not the only factor affecting costs and revenue since changes in selling price and purchase price of raw
materials as a result of inflation, efficiency and technology will affect revenue and costs

Margin of Safety:
 It is the distance between break-even point and expected level of activity
 It shows the amount by which actual production can fall short of expected production. It is a measure of risk
 It can be expressed in units or as a percentage of sales

Break-Even Point:
 The point at which a product makes neither a profit nor loss
 Total costs equal total revenue
 Total contribution equal fixed costs

C/S Ratio: Shows how much contribution is earned from $1 of sales revenue.

Contribution:
 It is the amount remaining after all variable costs have been subtracted from revenue
 This amount is available to service the fixed costs
 The amount remaining after is the profit

53
Benefits of Sensitivity Analysis:
 Identifies the most significant assumptions (which therefore require closer attention)
 Helps assess risk and prepare for a less-than-favourable scenario
 Helps make the process of business forecasting more robust

Drawbacks of Sensitivity Analysis:

 Only tests one assumption at a time (many assumptions may be linked)
 Only as good as the data on which forecasts are based
 A somewhat complicated concept – not understood by all managers

List of Formulas

(i) Total Cost = Fixed Cost + Variable Cost

(ii) Total Sales Revenue = Units sold x Selling price per unit

(iii) Profit = Total Sales revenue – Total cost

OR

Margin of safety (units) X Contribution per unit

OR

Total Contribution - Total Fixed cost

(iv) Contribution per unit = Selling price – Variable cost per unit

(v) Contribution to Sales ratio = Contribution

x 100
Sales

(vi) Break-even point (in units) = Fixed Costs

Contribution per unit

(vii) Break-even point (in sales = Break-even point (in units) x Selling price
revenue)

(viii) Break-even point in value (for a Fixed Cost

multi product firm) =
Contribution to Sales ratio

(ix) Margin of safety = Current output – Break-even output

(x) Margin of safety (as percentage) = Margin of safety ( in units)

x 100
Sales (in units)

54
(xi) Level of Output / Sales (in units) Fixed cost + Target Profit
required to achieve target profit =
Contribution per unit

(xii) Level of Sales (in value) required Fixed cost + Target Profit
to achieve target profit =
Contribution to Sales Ratio

(xiii) Level of Production (in units) at = Difference in Fixed Costs

which two options show the same
net profit Difference in Contribution per unit

(xiv) Level of Production (in units) at = Fixed Costs

which total cost equals total
purchase price Purchase price - Variable costs per unit

(xv) Minimum level of production (in = Fixed Costs (highest value)

units) required to manufacture
Contribution per unit (highest value) – buying profit

55
 Decision Making

1) Limiting Factor

Advantages:
 Fewer dissatisfied customers
 Less chance of idle resources
 The company has a better chance of fulfilling customers’ orders. If the shortage of material (limiting factor) is only
short term, there is less chance of losing customers in the long terms

Disadvantages:
 Products may be dependent on each other
 Customers may cease purchasing some products if some are unavailable
 Company makes a budgeted loss if minimum demand is met
 If the shortage is long term, the company will always be operating at a loss
 Competitors may exploit the material shortage

2) Make or Buy (Buying the good from supplier instead of making)

Advantages:
 Can meet maximum demand for the goods
 Can use space saved to make another profitable product

Disadvantages:
 Quality of product may not be as good as own
 Supplier may not be reliable
 May not be able to save all the costs
 Fixed costs will now be shared among less products

3) Acceptance of a special order

Accept:
Financial Factors Non-Financial Factors

Additional profit will be earned Better utilization of spare capacity

Negligible effect on fixed costs Increase in market share

Makes a positive contribution Possibility of having repeated orders

Reject:
Financial Factors Non-Financial Factors

Below the required profit margin May cause a price war with competitors

More expensive to pay the existing workforce a premium for Possible negative reaction of existing customers of low
producing additional units price offerings to other customers

Over reliance on special orders is not a long term solution

56
Questions to be answered:
 Will accepting the order at a lower price lead other customers to demand lower price as well?
 Is this special order the best way to use the spare capacity?
 Will the special order lock-up capacity which could be used for future full price business?
 Is it absolutely certain that fixed costs will not change?
 What is the degree of risk of following price cutting approach by the competitors?

Why a special order with negative contribution might be accepted:

 To avoid redundancies
 To stimulate future orders at usual price
 To raise brand awareness
 To break into new market / to promote a new product
 To dispose of discontinued inventory

4) Dropping a product line

Financial Factors:
 The production line should not be closed unless they have a negative contribution
 The fixed costs allocated to it would have to be split between the other production lines, potentially resulting in a
loss
 The production line (running in losses) may be attracting customers to the profitable one
 The methods used to apportion the expenses, especially fixed costs should be the fairest methods
 The possibility of improving the performance of the least profitable or loss making department

Non-Financial Factors:
 Negative effect on the suppliers’ reputation in the future operations of the remaining business
 Reduction in sales of other products/departments
 Loss of staff morale and overall reputation of the business due to displacement of staff of department subject to
closure should also be considered
 Possible staff redundancies
 Increased employees turnover working in other continuing departments or for other products

Factors to consider when changing suppliers:

 Quality and reliability of goods bought may not be as good as were supplied previously
 New supplier may not be reliable on deliveries
 Services like returns, replaces and warranties offered by new supplier
 Trade discounts offered by new supplier
 The likeliness of offering a consistently lower price by the new supplier

Asking workers to work overtime:

Advantages:
 Ability of workers is well-known to the business
 Quality of work done by labour is also well-known
 Production will meet the demand

Disadvantages:
 Workers may refuse
 Efficiency of workers may be affected
 Additional other costs may be incurred

57
 MARGINAL COSTING - LIMITING FACTOR
(Calculation of Contribution per Limiting Factor)

Product A Product B Product C

$ $ $
Selling price per unit xxx xxx xxx
(-) Variable costs per unit:
Direct material per unit xxx xxx xxx
Direct labour per unit xxx xxx xxx
Direct expense per unit xxx xxx xxx
Variable overhead per unit (production) xxx xxx xxx
Variable overhead per unit (administration) xxx xxx xxx
Variable overhead per unit (selling) xxx xxx xxx
Variable costs per unit xxx xxx xxx
Contribution per unit xxx xxx xxx
*Material per kg /litre xxx xxx xxx
*Contribution per material per kg /litre xxx xxx xxx
Rank order - - -

*Note: In case if material quantity is the limiting factor. Also, it could be:
▪ Labour hours
▪ Variable overheads
▪ Sales demand
▪ Machine hours
▪ Space

Revised Production Budget (based on Limiting Factor)

Products Units Material per unit Total available

(kg / litres) material quantity
(kg / litres)
A xxx xxx xxx
B xxx xxx xxx
C xxx xxx xxx
xxx

58
 Profit Statement – Limiting Factor

Product A Product B Product C Total

Revised production units xxx xxx xxx -

x Contribution per unit ($) xxx xxx xxx -
Total contribution ($) xxx xxx xxx xxx
(-) Fixed costs ($) xxx xxx xxx xxx
Profit ($) xxx xxx xxx xxx

59