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COURSE CODE:-BHM 107
COURSE TITLE:GENERAL ACCOUNTING II
GENERAL ACCOUNTING II
COURSE GUIDE BHM 107 GENERAL ACCOUNTING II
Course Writer/Developer Sani U. Gurowa Dept. of Accounting University of Abuja, Abuja Dr. O. J. Onwe National Open University of Nigeria S. O. Israel-Cookey National Open University of Nigeria
Programme Leader Course Coordinator
NATIONAL OPEN UNIVERSITY OF NIGERIA
GENERAL ACCOUNTING II
National Open University of Nigeria Headquarters 14/16 Ahmadu Bello Way Victoria Island Lagos Abuja Office No. 5 Dar es Salaam Street Off Aminu Kano Crescent Wuse II, Abuja Nigeria e-mail: firstname.lastname@example.org URL: www.nou.edu.ng
National Open University of Nigeria Printed 2009 ISBN: 978-058-906-6 All Rights Reserved
It is prepared and made available to all the students who are taking the Bachelor Degree in Entrepreneurial and Small Business Management in the School of Business and Human Resources Management. accounting equation and concept of double entry book-keeping. profit and loss account. covering areas such as the evolution of accounting. cash book. depreciation of fixed assets. There will be tutorial sessions during which your instructional facilitator will take you through your difficult areas and at the same time rub minds with your fellow learners. cash book. accounts of iv . The course is a useful material to you in your academic pursuit as well as in your workplace. bank reconciliation. book-keeping to the trial balance. balance sheet. and ratio analysis. accounting equation and concept of double entry book-keeping. container accounts. depreciation of fixed assets. book-keeping to the trial balance... Assignment …………………………………………… Tutor-Marked Assignment…………………………….BHM 107 GENERAL ACCOUNTING II CONTENTS Introduction…………………………………………… Course Contents……………………………………. Course Aims…………………………………………… Course Objectives……………………………………… Course Materials………………………………………. The course is made up of twenty one units. Also included in this course guide are information on how to make use of your time and information on how to tackle the tutor-marked assignment questions. trading account. The course guide is meant to provide you with the necessary information about the course. balance sheet. profit and loss account. trading account. department accounts. the nature of the materials you will be using and how to make the best use of the materials towards ensuring adequate success in your programme. partnership accounts.. bank reconciliation. accounts of non-trading organizations. Study Units…………………………………………….. Course Contents The course consists of the evolution of accounting. Final Examination and Grading………………………. consignment account. Summary……………………………………………… PAGE 1 1 1 2 2 3 4 4 4 5 Introduction BHM 107: General Accounting is a core course which carries two credit units.
0 10.0 Explaining the evolution of accounting. accounts of non-trading organizations. consignment account. balance sheet. partnership accounts. Explaining and preparing bank reconciliation.0 discuss the accounting equation and concept of double entry book-keeping. Explaining and working examples of trading.BHM 107 GENERAL ACCOUNTING II non-trading organizations.0discourse and prepare ratios from any given accounts records such as the final accounts and balance sheet. container accounts. Explaining and working examples of partnership accounts.0 analyze the evolution of accounting.0 5. and dissolution of partnership business. admission of new partners. Explaining and preparing book-keeping to the trial balance.0 explain and prepare the cash book and the book-keeping to the trial balance. department accounts.0 explain and prepare the final accounts and the balance sheet. consignment account.0 explain the nature of and prepare the bank reconciliation and treatment of depreciation of fixed assts. department accounts. v . Course Objectives After completing this course.0 3. 8.0 4. you should be able to: 5. container accounts. trading account.0 6.0 9. 9.0operations. Describing and preparing the cash book.0 8. profit and loss account. depreciation of fixed assets. cash book. and balance sheet. The aims of the course will be achieved by: 2. bank reconciliation.0explain and prepare the partnership accounts. and 12. trading account. Also included in the course is the ratio analysis. 6. and ratio analysis. and Explaining and working examples of ratios. book-keeping to the trial balance. accounting equation and concept of double entry book-keeping. retirement of partners. 7. profit and loss account.0 7. Discussion accounting equation and concept of double entry bookkeeping. 10. Explaining and working examples of depreciation of fixed assets. Course Aims The main aim of the course is to expose you to the nature of evolution of accounting. 11. The course is also meant to introduce you to the treatment of partnership accounts in the areas of preparation of partnership accounts.
3.BHM 107 GENERAL ACCOUNTING II Course Materials Major components of the course are: 1. Course Guide Study Units Textbooks Assignment Guide Study Units There are twenty one units in this course. which should be studied carefully. 2. They are as follows: Module 1 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 2 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 3 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 4 Unit 1 Unit 2 Unit 3 vi The Evolution of Accounting The Accounting Equation and the Concept of Double Entry Book-keeping Book-keeping to the Trial Balance The Cash Book Bank Reconciliation Depreciation of Fixed Assets I Depreciation of Fixed Assets II The Trading Account Profit and Loss Account The Balance Sheet Accounts of Non-Trading Organizations Departmental Accounts Consignment Accounts Container Accounts Introduction to Partnership Accounts Admission of New Partners Partnership Admission II The Partnership Accounts (Retirement) . 4. and they are divided into four modules.
main content. The next unit describes the cash book. which you are supposed to attempt and submit for your Tutor's grading. The other aspect of the course borders on the tutor-marked assignment questions. objectives. Assignment There are many assignments on this course and you are expected to do all of them by following the schedule prescribed for them in terms of when to attempt them and submit same for grading by your tutor. The next unit (11) discusses the nature of the accounts of the non-trading organizations. The last two units (20 and 21) are used for the treatment of ratio analysis. you are to apply your transfer knowledge and what you have learnt in the contents of the study units.BHM 107 GENERAL ACCOUNTING II Unit 4 Unit 5 Unit 6 Dissolution of Partnership Ratio Analysis Ratio Analysis (Potential and Actual Growth) The first unit simply presents the general background on the evolution of Accounting. The next unit is used to espouse on the bank reconciliation. The next two units are used to explain the nature of depreciation of the fixed assets. By so doing. The next two units (13 and 14) are used for the treatment of the consignment and container accounts. the stated learning objectives of the course will be achieved. There are also textbooks under the references and other resources for further reading. The next unit is used for the treatment of departmental accounts. and it includes the introduction. conclusion and summary as well as references. self-assessment exercises. Tutor-Marked Assignment In doing the tutor-marked assignment. Each study unit will take at least two hours. The second unit is used to discuss the nature of double entry system of bookkeeping. The next three units are used to explain the nature of the final accounts and balance sheet. You are advised to practice the self-assessment exercises and tutor-marked assignment questions for greater understanding of the course. These assignments which are many in number are expected to be turned vii . They are meant to give you additional information if only you can lay your hands on any of them. The next five units (15 to 19) are used for the treatment of partnership accounts.
It is also exposes you to the treatment of bank reconciliation. trial balance. you would have been armed with the materials necessary for efficient and effective handling of simple business transactions and the treatment of the accounting records of the operations of the non-trading organizations. partnership accounts and ratio analysis. final accounts and the balance sheet. you will write the final examination. On the successful completion of the course. Summary The course. accounting equation and concept of double entry book-keeping. and preparation of accounts for business transactions. from the journal entries to ledger. This makes the total final score to be 100%. viii . They constitute 30% of the total score for the course. among others.BHM 107 GENERAL ACCOUNTING II in to your Tutor for grading. Final Written Examination At the end of the course. BHM 107: General Accounting exposes you to the nature of evolution of accounting. It will attract the remaining 70%.
O. of Accounting University of Abuja. Onwe National Open University of Nigeria S. Israel-Cookey National Open University of Nigeria Programme Leader Course Coordinator NATIONAL OPEN UNIVERSITY OF NIGERIA ix . J. Gurowa Dept. Abuja Dr. O.BHM 107 GENERAL ACCOUNTING II Course Code Course Title Course Writer/Developer BHM 107 General Accounting II Sani U.
Abuja Nigeria e-mail: email@example.com URL: www. 5 Dar es Salaam Street Off Aminu Kano Crescent Wuse II.BHM 107 GENERAL ACCOUNTING II National Open University of Nigeria Headquarters 14/16 Ahmadu Bello Way Victoria Island Lagos Abuja Office No.ng Published by National Open University of Nigeria Printed 2009 ISBN: 978-058-906-6 All Rights Reserved x .edu.edu.
The Cash Book…………………………… Bank Reconciliation Statement…………… PAGE 1 1 9 15 24 29 ………………………………………………… 37 Depreciation of Fixed Assets I……………. 110 118 127 143 147 154 xi .. The Partnership Account (Retirement)………. Introduction to Partnership Accounts……… 73 82 89 97 104 ………………………………………………… 110 Admission of New Partners…………………. 37 47 57 61 66 ………………………………………………… 73 Accounts of Non-Profit Organizations……. Dissolution of Partnership…………………… Ratio Analysis……………………………... Depreciation of Fixed Assets II…………… The Trading Account……………………… Profit and Loss Account…………………… The Balance Sheet…………………………. Departmental Accounts……………………. Consignment Accounts……………………. Container Accounts……………………….....BHM 107 GENERAL ACCOUNTING II CONTENTS Module 1 ……………………………………………… Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 2 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 3 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Module 4 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 The Evolution of Accounting……………. Partnership Admission II…………………….. Ratio Analysis (Potential and Actual Growth).. The Accounting Equation and the Concept of Double Entry Book-keeping…………… Book-keeping to the Trial Balance………...
0 6.4 Accounting Concepts 3.0 2. we shall study the historical development of accounting. In this unit.1 The Evolution of Accounting 3.0 5.3 Meaning of Modern Accounting 3.BHM 107 GENERAL ACCOUNTING II MODULE 1 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 The Evolution of Accounting The Accounting Equation and the Concept of Double Entry Book-keeping Book-keeping to the Trial Balance The Cash Book Bank Reconciliation Statement UNIT 1 CONTENTS 1. 1 . the practice of accounting is said to have evolved from the old practice of the Roman merchants who used to send trade delegations around the world with each trade delegations tendering accounts at the end of each trips.0 THE EVOLUTION OF ACCOUNTING 4.0 INTRODUCTION Historically.0 OBJECTIVES At the end of this unit.0 7. you should be able to: •explain the evolution of accounting •describe the basic concepts of accounting •explain the meaning of the modern accounting.5 Accounting System 3.6 The Double Entry Principle Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 3.2 Evolution of Accountability 3.0 Introduction Objectives Main Content 3. 2.
After a sheriff had been sent to a country. The Exchequer was a formidable collection of the king's commissioners made up of great men in their respective field of endeavour. at least with agency problems. eight with problems connected with loans. The idea of accounting to the people at the end of every year may be the beginning of the annual preparation of final accounts by companies today. The Roman governments of the second and third centuries BC practice of electing consuls on a yearly basis at the end of which they were obliged to account for their actions to the people. The officials who passed these audit tests were usually honoured. and one with a form of partnership. In medieval England. he was charged with the regular revenue and any other debts and paying these dues to the king.2 MAIN CONTENT The Evolution of Accounting Evolution of Accountability Accounting evolved over a long period of time. The arrangement provided that all public officials be subjected to monthly interim audits and an annual audit. The people (the citizens) have the singular power of the conferment of honours and the impositions of punishments on officials.BHM 107 GENERAL ACCOUNTING II 3. the Normandy dynasty established and developed an efficient system of royal representatives centered on the countries who were held accountable by summons to appear for judicial audit before the Exchequer.0 3. there was an arrangement whereby meritocracies held the offices of state and the people were made the sovereign body by having the power to call to account the officials. seven with deposit for safe custody. Under this system the sheriff had to account for his performance as well as for the debts of the people of the country to the Exchequer. The annual audit was divided into two parts – the first was intended to examine the officials’ handling of public funds and the second part was a review procedure intended to give the members of the public the opportunity to make open complaints about any aspect of the officials’ administration. It dates back to between 2050 BC when King Hammurabi of Babylon promulgated the earlier known set of laws dealing with methods by which owners of wealth made their workers (stewards) accountable for the utilization of assets entrusted to their care. Eleven of the laws dealt with the relations between the cultivator of the land and the owner from whom he rented it.1 3. In the classical Athens. 2 .
at the end of every voyage the contributors would share all the revenue in accordance with their capital contribution ratio but soon the adventurers discovered that to finance adventures. and interpreting the result thereof. measuring and communicating economic information to permit informed judgments and decision by 3 . which were aimed at trading and profit. Modern development in accounting almost follow the direction of the development of business. an Italian clergyman and mathematician. accountants had to introduce reconstruction and smaller business thereby creating a holding and subsidiary relationships group account was introduced to deal with the problem. when companies started going bankrupt or reorganizing and winding-up. Management became separated from ownership when companies grew in size and in some cases ownership became more spread so the need for the hired managers to render stewardship accounts to the owners also became necessary. The American Accounting Association later defines accounting as the process of identifying. This provided permanent financing means of the adventures. However. transactions and events which are in part in least of a financial character. This is because he introduced the ‘double-entry system’ in 1494. When partnership business started. is the father of modern accounting. who was the first to devised system of balance sheet under the name of statement of affairs in the 1530’s. the need to prepare accounting statements showing the revenue and cost of the voyage and its consequent profits or loss became essential. partnership accounts had to be introduced. At first. also an Italian.BHM 107 GENERAL ACCOUNTING II During the so-called voyages of discovery in Europe. Another person that contributed immensely to the development of accounting in the Middle Ages is Simon Steven. the formation of limited liability companies and their growth introduced the complex accounting and auditing procedures. This was the period when the need for accounts extend from the state to private concerns. 3. a single basis was not as economical as to finance them on permanent basis.2 Meaning of Modern Accounting The American Institute of Certified Public Accountants defines accounting as the art of recording. classifying and summarizing in a significant manner and in terms of money. many people were called upon to contribute to adventures. The double-entry principle states that for any debit entry there must be a giver. Since not every contributor could go on the voyage. It is generally believed that Pacioli. Then contribution become shares which could be sold in the highly organized London market in company stocks and shares.
GENERAL ACCOUNTING II
users of the information. And in Nigeria, the users of the information define it as the process of identifying, measuring and communicating economic and financial information to permit informed judgment and decision. Generally speaking, a system is set of elements, which operate together in order to obtain a goal. Accounting as an information system consists of three elements - input, processing of the input, and the output. Accounting information system unites together Information system of other operational areas of management such as marketing, production, personnel, and research and development because information produced by these operational areas will ultimately be expressed in financial terms for planning strategy. Accounting occupies a central place in the management of modern business. Its ability to express and communicate large volume of information in a compact form has been so recognized in recent times that some authorities have begun to refer to it as true language of business. Being an il1formation system, accounting must then face the problem of precisely defining the users for who the information is being provided, their needs and how best to serve the needs. Accounting has a difficult task in an attempt to communicate information. In the first place, the quantitative dates which are the input of an accounting system must be converted into an understandable message in order for accounting to fulfil its function, and in the second, there is the problem in trying to satisfy the wide variety of interested parties who require different types of information for business decisions. The interested parties include the owners (shareholders ill the case of companies and partners in the case of partnership business), creditors, management, government employees, financial analysts, prospective investors, auditors, competitors and those interested in mergers, amalgamations and takeovers. As an attempt to solve the communication problems, the field of accounting has developed along two lines-financial Accounting and Managerial Accounting. The purpose of financial accounting is to communicate relevant information to external parties as an aid in decision making. External parties encompass anyone who is not directly involved in the day-to-day running of the activities of the concern. This goes on to explain that with the exception of management, all interested parties mentioned earlier are external parties to the business. Financial accounting information is provided to users by means of profit and loss account, the balance sheet and funds-flow statement with explanations by supporting schedules.
GENERAL ACCOUNTING II
The task of management accounting, on the other hand, is to communicate relevant information to internal parties as an aid in decision-making. Internal parties encompass anyone within an organization's system who is directly involved in the day-to-day operating activities of that organization. Management, then, is the major internal group that utilizes the output of the managerial accounting.
Accounting concepts embody the rules and standard guiding the financial reporting of all enterprises. These concepts may be described as the broad rules adopted by the accounting profession (through the various statements of standard accounting practice SSAPS, in the case of the United Kingdom, Financial Accounting Standards, FASS in the USA and Statements of Accounting Standards, SASS in Nigeria) as guides in measuring, recording and reporting the financial affairs and activities of a business to its owners and other interested parties. Accounting concepts develop originally on the basis of "experience, reason, custom, usage and practical necessity". The accounting concepts are neither laws of nature nor commandments but mere consensus of opinions among accountants. In the United Kingdom, they derive their modern important backing mainly from SSAP 2 issued in 1971 under the broad heading of disclosure of accounting policies. The standard statement gave formal recognition to four main accounting concepts-the Going Concern Concept, the Accruals Concept, the Prudence Concept and Consistency Concept. The publication of the SSAP2 was a formal attempt to give a theoretical basis to traditional accounting practices since it treats concepts as the basic assumptions about the economic setting in which accounting operates. The Going Concern assumes that a business once formed, will continue in operational existence for the foreseeable future. With such a recognition of perpetual existence, accounting comes face to face with the problem of breaking such a continuous period into discrete short period for income determination. Since the determination of such income is dependent on what values are assigned to the assets of the enterprise the problem of income determination cannot be divorced from asset valuation. However, the values assigned to assets for periodic reports do not constitute any attempt to show their intrinsic worth or even realize values but only their written down values. The Accruals Concept assumes that revenues and costs should be recognized, as they are earned or incurred and not just when cash is
GENERAL ACCOUNTING II
received or paid. It also assumes that revenue and expenditure should be matched so far as their relationship can be established or justifiably assumed, that is, expenses and expired costs should be deducted from the revenue they helped to generate before reporting the residual amount either as net income or loss for the period. A good example of expired costs is the yearly depreciation of fixed assets. The Prudence Concept is the accounting rule that "revenue and profits should not be anticipated but should only be recognized for inclusion in the profit and loss account when realized in the form of either cash or other assets, the ultimate cash realization of which can be assessed with reasonable certainty. It also states that provision should be made for all known liabilities and losses when the amounts of these are known with certainty or are the best estimates in the light of the available information. This concept (formerly called the principle of conservatism) also states that the accountant should resolve uncertainties with a conservative attitude especially as they relate to the determination of net income and the valuation of assets. The conservative lead to the two very important principles of accounting – the principles of objectivity and materiality. The objectivity principle requires that, as much as possible, personal biases should be removed from all reported financial information and that such reports only be based on information that can be supported and verified by documentation. On the other hand, materiality principle is the accounting rule that all transactions and events involving insignificant amounts be treated with full regards in financial report. The objectives test of materiality is whether the disclosure or non-disclosure of an item would influence or affect the opinion fom1ed of the accounts by a reasonable person. And the consistency concept is the accounting rule requiring the application of the same selected accounting method or procedure, period after period. The concept allows management to choose one method or procedure in areas where choice is recognized such as provision for depreciation, valuation of stocks and the dividing line between capital and revenue expenditure. However, once a method is chosen it must be consistently applied in order to produce financial information that could be meaningfully compared overtime. This concept has received a fair amount of legal backing in the sense that companies are required to disclose their accounting policies. Another very important concept, which was n~ recognized by the SSAP, is the entity concept even though accountants and lawyers are religiously applying it. This concept was well defined in the case of Salomon V s. Salomon limited 1897 A.C.22. In the case, Mr. Salomon
The company ran into trouble and its assets realized a little over £6. and determination of objectives and goals. Accounting systems should be designed in such a way that they fulfil certain objectives. Salomon whose debenture was secured on the company's Salomon is not the same as Salmon limited and therefore should be treated as a separate entity. The American Accounting Associating simply summarized this development by stating that essentially. either physical or non-physical in nature that exhibits a set of interrelations among themselves and interacts together toward one or more goals. 3. And finally. including the identification of crucial decision areas. A system in general has been defined as a group of elements.4 Accounting System Accounting has been traditionally regarded as the process of recording. Despite all the protests by the other creditors. classifying. accounting is an information system. The company also obtained a floating loan of over £7. maintaining and reporting on the custodianship of resources. the systems concept had to be introduced to accounting. Accounting system differs from country to country on the basis of the differences in the technology employed and even from organizations depending on the needs of each organization.007 ordinary shares of £ 1 each.000 to the business secured on the assets of the company. summarizing and reporting business transactions. objectives or ends.000. The American Accounting Association maintains that such objectives are to provide information for the purpose of making decision concerning the use of limited resources. the court held that Mr. counting system may be loosely described as a collection of 7 . The systems are no doubt designed to serve the organizations in which they are employed. A typical accounting Information system contains only three elements – the inputs which result directly from business events.000 to the business secured on the assets of the company. In the 1960's when the system revolution started taking place. effectively directing and controlling an organization's human and materials resources.001 of the shares and the remaining six shares were distributed among his family members. Accounting system is completely financial and quantifiable in nature. He held 20. and of facilitating social functions and controls. processing of the inputs to make them meaningful and outputs which provide information to decision makers.BHM 107 GENERAL ACCOUNTING II incorporated his private business into a company with a share capital of 20. He gave personal debenture of £10.000 from outside source. This is the concept that gives legitimacy to crediting capital account in the business financing books because capital is regarded as a loan to the company and hence a liability of the business entity from its owners. The company debenture of £ 1 0.
In the same vein. SELF ASSESSMENT EXERCISE 1. procedures and policies used to transform economic data into useful information.0 CONCLUSION In this unit. The principle states that for every debit entry) there must be a corresponding credit entry. a creditor is defined as one to whom something in being owed. there must be a giver. 8 . As far as double entry principle is concerned.BHM 107 GENERAL ACCOUNTING II business forms.0 REFERENCES/FURTHER READINGS Birds (1973). The issuing of standards also help in uniform reporting accounting information worldwide. financial record. but the accounting concept is a unifying factor were accountants all over the world accept the concept dogmatically. a debtor is defined as one who is owing. which in everyday English means that for every receiver. 2.5 The Double Entry Principle Among the oldest known and indisputable principles of accounting is the Double-Entry principle. Standard in Financial Reporting.0 SUMMARY Accounting systems differ from country to country on the basis of the differences in the technology employed. (Accountancy Age Book). In the case of accrued transactions such as credit sales and purchase. there must always be two parties to a transaction so when a transaction's accounting entries are to be made they must appear both at the debit and credit side for the creditor or giver. The receiver is always regarded as the debtor while the giver is regarded as the creditor under this principle.0 TUTOR-MARKED ASSIGNMENT List and discuss the accounting concepts or conventions. the Evolution of accounting from the days of King Hammuarbi of Babylon to present day of detailed information disclosure period was highlighted. The various accounting systems and concept were also discussed. 3. Define the term accounting What are the elements of the accounting system? 4. 7. what a business owns are its assets while what it owes and is liable to pay its liabilities. 6. 5.
0 5. Subsequently.1 The Accounting Equation 3.3 Double Entry Principle Conclusion Summary Tutor-Marked Assignment References/Further Readings 4. 2. you should able to: •explain the different versions of the accounting equation •explain the meaning of concepts like assets. what ever goes into one account must equally go into the other pair of account so as to maintain the desired balance. 9 . However. there is the general belief that the assets possessed by a business at any point in time must equal the amount of capital injected into the business. etc •describe the rational behind the double entry book-keeping and the procedures followed. The desire to keep the accounting equation balanced at every point in time is what gave rise to the concept of double entry book-keeping.0 6.BHM 107 GENERAL ACCOUNTING II Damagum.0 3. Malthouse Press Ltd. as the business grows older some other resources in the form liabilities may be injected therein. Introduction to Financial Accounting.0 2. Thus.0 7.0 1. liabilities. (2003). there still has to be equality between the total assets on one hand and the liabilities plus the capital on the other.0 Introduction Objectives The Accounting Equation and the Concept of Double Entry Book-Keeping 3. capital. M. UNIT 2 THE ACCOUNTING EQUATION AND THE CONCEPT OF DOUBLE ENTRY BOOKKEEPING CONTENTS 1.0 OBJECTIVES By the end of the unit.2 Double Entry Book-Keeping 3.0 INTRODUCTION In accounting. Y.
e.000 to finance the business further.1 MAIN CONTENT The Accounting Equation The simplest form of the equation provides that: A=C Where: A = Assets C = Capital Putting it in practiced terms.000 = N100.000 Let us assume further that the trader used N20.000 = N100.000 + N20.000 of the each to buy furniture.000 Or N220. Assets Cash + Furniture = Capital N80.000 + N20.000 10 . the equation A = C + L. holds as follows: Cash + Furniture + Bank Bal. should he obtain a Bank loan of N120. assuming a sole trader starts a business with an initial capital of N100. our A = C hold thus: Asset (cash) = Capital N100. = Capital + Loan N80. assuming we continue with our earlier example of the sole trader.0 3. the equation changes to: A=C+L Where: A = Assets C = Capital. the equation still has to balance i.BHM 107 GENERAL ACCOUNTING II 3.000 = N200.000 N100.000 cash.000 + N120. and L = Liabilities So. In this case.000 + N120.000 With the introduction of the liabilities.
income. while a loss must have the amount of assets also. A = C + L1 L2 Where: A = Assets C = Capital L1 = Liabilities L2 = Losses incurred The underlying assumption is that. vouchers. are made available so as to support all entries that the book-keepers pass. expenses etc. the adjustment to the equation will be as under: In cases of profit. A=C+L+P Where: A = Assets C = Capital P = Profits In case of loss. the amount of profit generated must have led to an addition to the firm's assets. bills etc. receipts. it is necessary that: (i) All necessary source documents supporting various transactions e. Assets.BHM 107 GENERAL ACCOUNTING II Introduction of Profits and Losses Where a business generates profits or incurs losses.g. (ii) 11 . The book-keeper is familiar with the accounting classification of various accounts i.e.2 Double Entry Book-Keeping Book-keeping in the accounting sense simple refers to the actual recording of transactions in various accounting records in a manner that shows the history of all the transactions of a firm and it's assets and liabilities. liabilities. What all Book-keepers should know In order to achieve proper book keeping. 3.
BHM 107 GENERAL ACCOUNTING II (iii) The book-keeper is also capable of interpreting each transaction correctly. invests N10. you debit the account. A.3 Double Entry Principle The basic underlying assumption of the double entry principle is that every transaction has that effects on the resources and liabilities of an entity. A liability (capital) was introduced. ii. Assets 2. The Golden Rules Once a transaction is interpreted correctly. (iv) Classification of Accounts For proper identification and appropriate documentation of transactions. 3. Nominal. These golden rules are summarized below: Type of Account 1. The accounts used in recording transactions that are temporary. Liabilities Entry Purpose Debit Increase in Assets Credit Decrease in Assets Debit Decrease in Liabilities Credit Increase in Liabilities 12 .000 as his take-off capital. the book-keeper applies the golden rules to pass the double entry. The numerical ability of the book-keeper must not be in doubt to be able to sum figures and extract balance. The transaction can be interpreted thus: i. Accounts used to record tangible assets that are held for a long duration e. i. two entries must be passed to account for the duality of each transaction. liabilities.g. accounts are often classified into Real. you credit the account. income expenses etc. and Personal accounts. to know precisely whether a transaction leads to increase or decrease in assets. fixed are referred to as Real Account.e. terminated at the end of particular accounting periods are referred to as nominal accounts. Example includes all revenue and expenditure accounts. that is. and therefore. An asset (cash) has increased. Assuming Mr.
3.000 from a credit agency Transferred N30. 13 .000. we considered the accounting equation in which accountant try equates the Assets of a firm to its capital or to capital plus liabilities.000. We also know the golden rules that entries are used to show increase in assets or decreases in liabilities and capital.000 cash to the Bank account Sold all the goods brought for a sum of N30. we have analysed the golden rule of double entry. 4. 6. 5. once a transaction is interpreted correctly the bookkeeper applies the golden rules to pass the double entry.0 CONCLUSION In this unit.000 in a bank account. and Bank overdraft of N15.0 TUTOR-MARKED ASSIGNMENT Al Yasa Ltd. 2. subsequently. Capital Debit Decrease in Income Credit Increase in Income Debit Increase in Expenses Credit Decrease in Expenses Debit Decrease in Capital Credit Increase in Capital SELF ASSESSMENT EXERCISE 1. Started business with a sum of N200. the following transactions took place: 1.0 SUMMARY In this unit. Bello started business with N50. Income 4. motor vehicle worth N30. 000 proceeds being received by cheque. (a) (b) What is accounting equation? Mal. Expenses 5. The capital of the business must have been N--------Use the above figures to prove the equation that: Assets = capital + liabilities + profit 4. Brought goods worth N20.000 cash.000 paying by cheques Obtained a cash loan of N50.BHM 107 GENERAL ACCOUNTING II 3. 2.
Principle of Financial Accounting.0 REFERENCES/FURTHER READINGS Damagun. Y.BHM 107 GENERAL ACCOUNTING II 7. Introduction to Financial Accounting. M. (1997). 14 . A. Malthouse Press Ltd. (1999). A. Jos: Destinno Press. Okwoli.
5.BHM 107 GENERAL ACCOUNTING II UNIT 3 CONTENTS 1.3 Errors of Principle 3.6 Errors of Complete Reversal of Entry Conclusion Summary Tutor-Marked Assignment References/Further Readings 1. 15 .4 Uses of the Trial Balance 3.3 Essential Notes 3.0 INTRODUCTION This unit addresses the problem of basic book-keeping from the interpretation of each transaction correctly. it touches on the preparation of Trial Balance and certain accounting errors which a Trial Balance cannot detect. 220.127.116.11 3.5.0 BOOK-KEEPING TO THE TRIAL BALANCE 4.5 Errors of Original Entry 3.5.2 The Process of Book-Keeping 3.0 6.0 OBJECTIVES At the end of this unit.0 2. you should be able to: •interpret all transactions in terms of their accounting treatments •open ledgers or T accounts correctly and post the details of respective transactions therein •close or balance off ledger account and extract Trial Balance •outline the purpose of the Trial Balance and the types of errors that cannot be detected through it. In addition.1 Errors of Omission 3.0 Introduction Objectives Main Content 3.5. to posting of entries in ledger or 'T' accounts.5 Errors not Detected by the Trial Balance 3.0 7.2 Errors of Commission 3.1 Book-Keeping 3.4 Errors of Compensation 3.0 5.
Obtaining appropriate supporting documents such as invoices receipts. and Preparing relevant financial statements:. Proper interpretation of transaction i. expenses etc. Entering the details from source documents into the books of prime entry.0 3.3 Essential Notes As a pre-requisite to understanding the processes of book keeping. As such. a beginner must be familiar with the following: i. liabilities.2 The Process of Book Keeping To achieve proper book keeping objective. a journal entry reads: Dr. whether a debt or credit entry is required. Balancing of the ledger accounts. Proper book keeping is achieved using the techniques of double entry. the following processes are essential: i. 16 . in support of each transaction. ii.BHM 107 GENERAL ACCOUNTING II 3.e. To provide basic input for the preparation of final account. vouch. from the Trial Balance 3. vii. income. Posting from the books of prime entry to the ledgers. The purposes of book keeping are: i. The need to have permanent records of all transactions. Whether it is resulting in decreases or increases in assets. etc. vi.e. Furniture and fittings a/c Cash a/c XX XX The bookkeeper automatically knows that the ledger accounts for furniture and fittings and cash are to be affected and also the type of posting i.profit and loss account. 3. This is because posting to ledger accounts is done with reference to the journal entries. v. Extracting a Trial Balance from a summary of the balance in the individual ledgers. iv. iii. iii. and To ensure proper accountability over all resources owned by an organization. Cr. or instance. etc.1 MAIN CONTENT Book-Keeping Book-keeping simply means the correct recording of details of transactions in appropriate accounting records. balance sheet. to determine correctly what a transactions entails. when. ii. The correct way of journalizing transactions.
They simply refer to the balance standing in an account when it was last closed either at the end of an accounting year or any determined period.000 paying cash 3/1/96 paid rental expenses N2.000 cash as additional capital 10/1/96 returned goods N6. N15.000 cash 4/1/96 bought goods N70. These are balances. we credit such accounts while debit entries represent decreases.BHM 107 GENERAL ACCOUNTING II ii.000 2.000 Bank Balance N80. so such accounts are debited when transactions involve increases to such items while in case of decreases. The reverse is the case for the liability. balance carried down at the end of one period automatically become balance brought down in the succeeding accounting period ceteris paribus. Illustration Assume the following details in respect of the business of Sambo Enterprises. We have already made mention of the fact that all assets and expenses normally carry debit balances. so to record increases. The two terms mean the same thing and are used interchangeably.500 2. iv. The type of balance normally carried by each type of account.000 to FCT on credit 7/1/96 cash sales N30. which mark the end of an accounting period and are carried to the next accounting period. These terms are also used interchangeably and usually at the time of the closure of an account. capital and revenue accounts. iii. credit entries are passed. Starting business with the following balances on l/1/96 Cash N100.000 All the payments were in cheques. They are credit accounts.000 in cash 12/1/96 paid for expenses as follows Stationary Telephone Wages Sundries N 3.000 to UTC 11/1/96 paid UTC N50.800 4. Balances brought forward (b/f) or brought down (b/d). 17 .000 for resale from UTC on credit 6/1/96 sold goods. Balances carried down (c/d) or carried forward (c/f). By these definitions.000 9/1/96 introduced N50.000 2/1/96 bought a typewriter N20.
000 Cr.000 70.000 3.000 2.000 30.000 15.000 50.000 30.000 70.000 2.000 20.000 2.000 50.000 15.000 50.000 50.500 2.000 20. 180.000 6.000 6.000 80. Solutions Sambo Enterprises: General Journal Date 1/1/96 Particulars Folio Cash a/c Bank a/c Capital a/c Being the initial capital Introduction Typewriter a/c Cash a/c Being typewriter bought by cash Rental expenses a/c Cash a/c Being rental expenses paid by cash Purchases a/c UTC a/c Being credit purchases from UTC FCT a/c Sales a/c Being credit sales to FCT Cash a/c Sales a/c Being cash sales made Cash a/c Capital a/c Being additional capital Introduced UTC a/c Returns outwards a/c Being good returned to UTC UTC a/c Cash a/c Being cash payment to UTC Stationery expenses a/c Telephone expenses a/c Wages expenses a/c Sundry expenses a/c Bank a/c Being expenses paid by cheques Dr. enter the individual transactions and extract a trial balance as at 12 January 1996.300 2/1/96 3/1/96 4/1/96 5/1/96 7/1/96 9/1/96 10/1/96 11/1/96 12/1/96 18 .000 12. 100.BHM 107 GENERAL ACCOUNTING II Required: Open the necessary books of account.800 4.
000 50.500 2.000 3/1/96 Cash a/c 3/1/96 Cash a/c N 2.000 80.000 180.000 19 . a/c “ Sundry exp.000 230.000 230.800 4.000 2/1/96 Typewriter a/c 3/1/96 Rental exp.000 N 20.000 2.000 30.000 2. That means you open a ledger (T) account as shown by the journal's narration and post the debit or credit entries as indicated therein.000 80. For example cash a/ c.000 50. you are not supposed to open more than one cash a/ c.000 50.000 Bank Account 1/1/96 Capital a/c N 80. rather just open cash a/c and post all entries involving cash into account.000 N 3.000 Typewriter Account N 20. Cash Account 1/1/96 Capital a/c 7/1/96 Sales a/c 9/1/96 Capital N 10.000 12/1/96 Balance c/d 1/1/96 Cash a/c 1/1/96 Bank a/c 9/1/96 Cash a/c N 100.BHM 107 GENERAL ACCOUNTING II You can now post to the individual ledger accounts going strictly by the narration in the journal. Below are the ledger accounts we require per the above journal entries.000 80.000 12/1/96 Balance c/d Rental Expenses Account N 2. In such situations.000 12/1/96 Stationary “ Telephone exp.000 108. a/c “ Balance c/d Capital Account N 12/1/96 Capital a/c 230.000 180. a/c 11/1/96 UTC a/c 12/1/96 Balance c/d N 20. a/c “ Wages exp. Note that you may see some accounts featuring many times in the journal depending on the nature of the transactions.
000 FCT Account 5/1/96 Sales a/c N 15.000 6.000 Cr.000 The agreement of the above balance is supposed to serve as an indication that the book-keeping exercise was correctly done unless we have committed some of those accounting errors which are not usually detected by the trial balance.500 2.000 70.000 Cash Bank Capital Typewriter Rental expenses Purchases UTC FCT Sales Returns Outwards Stationary expenses Telephone expenses Wages expenses Sundry expenses 295.000 SAMBO ENTERPRISES Trial Balance as at 12 January 1996 Dr.000 12/1/96 Balance c/d 14.000 295.000 N 15.000 12/1/96 Balance c/d N 70.000 20. 20 .000 14.000 70.000 45.000 3.000 2. We shall be addressing these errors in the later part of the unit.000 15. N 230.000 4/1/96 Purchase a/c 11/1/96 Cash a/c 50.000 70.800 4.000 67.000 2.000 12/1/96 Balance c/d N 70. N 108.BHM 107 GENERAL ACCOUNTING II 9/1/96 UTC a/c Purchases Account N 70.000 Purchases Account N 19/1/96 Returns inwards 6.
We can detect the following book-keeping problems with reference to it.000 1/1/96 Purchase a/c N 10.4. such accounts are not to be included the trial balance. The complete absence of the entry will not show in the trial balance. Errors in the computation of account balances. For example where we bought goods on credit from Mr. Errors in compiling the trial balance Errors in ascertaining the trial balance totals. Uses of the Trial Balance Although we have stated earlier that there are a number of book-keeping errors which a trial balance cannot detect. Customer A's Account 3/1/97 N 10.e. the trial balance is still useful in the following ways: 1.000 Such an account has no balance and will therefore not from part of a trial balance assuming it has to be drawn on 3/1/97 or a later date. Errors in entering debit and credit entries to some ledgers. it has been niled as accountants usually say). note that all the 14 (fourteen) ledger accounts were included in the trial balance because they contain some balances. 21 . balance sheet etc. Errors of Omission This occurs where a transaction is left out of the book-keeping system completely. 3. (a) (b) (c) (d) (e) 2. A.BHM 107 GENERAL ACCOUNTING II Meanwhile.5 Errors Not Detected by the Trial Balance Among the errors that a trial balance cannot detect are: 1. Failures to complete double entries in some accounts. The trail balance provides the relevant information for the preparation of final accounts viz: Trading and profit and loss account. N10.000 on 1/7/96 and paid for them fully on 3/1/97 by cash. 3. Where an account carries no balances at the end of a particular period (i. the account will appear as under.
Once that wrong entry is passed in conformity with double entry requirement. The two errors thus cancel out and the trial balance will still agree. An example is where an amount of N1. Assuming a debtor owing a certain sum of money is mistakenly considered to have paid N1. Assuming Mr. paid a sum of N500 in settlement but by mistake a sum of N5000 was credited to his account. 6. B.000 representing fuel expenses is posted in the motor vehicle account. Errors of Principle This occurs where a book keeper enters correct amounts but in the wrong class of accounts against conventional accounting principles. a trial balance cannot reveal such an error. Supposing by coincidence another Mr. so long as the book keeperpasses a N1. Errors of Commission This arises where fictitious transactions or figures are brought into the book keeping system and correct book keeping procedures are followed in recording such transactions or figures. A debtor paid a sum of N5. 5.500 understatement of the debtor's balance.000 over statement of the debtor's balance. Errors of Original Entry It occurs where wrong figures are entered in respect of a particular transaction right from the start. Since both the fuel expenses and the motor vehicle account are debit accounts. Errors of Compensation Such errors involve the coincidental cancellation of one error by another in the process of book keeping. So long as the figures posted are correct and the double entry requirement observed. For example where the account to be credited is debited and the account to be debited is credited.000 debit entry to the cash a/c and a N1. the trial balance will not reveal such an error.000 cash. 3. the trial balance drawn at the end of the postings will not reveal that initial error. it will mean N4. 4.BHM 107 GENERAL ACCOUNTING II 2. so long as the correct double entry principle is observed. Errors of Complete Reversal of Entry This arises where a transaction is given the correct double entry treatment but in the revealed order.000 credit entry to the debtor's a/c a trial balance extracted at the end will not reveal such an error. 22 .
Malthouse Press Ltd. all the essential items in the preparation of book keeping to trial balance was enumerated.0 REFERENCES/FURTHER READINGS Damagun. 6. Y. (1999). 23 .0 CONCLUSION In this unit. A.A.0 SUMMARY This unit considered the basic procedures involved in book keeping with particular reference to the posting. Note was also taken of the uses of the trial balance and various errors that are detectable by the trial balance. Okwoli. balancing of ledgers and the extraction of trial balance. Principles of Financial Accounting.0 TUTOR-MARKED ASSIGNMENT Mention three types of errors that cannot be detected by the trial balance 7. Introduction to Financial Accounting.M. (1997). Jos: Destinno Press.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE What are the uses of the trial balance? 4. the concept of book keeping to the trial balance was discussed extensively. 5.
The left side. two-column.0 3.0 4.1 explain the techniques of maintaining two-column and three-column cash books describe the difference between two-column cash book and three-column cash book. the discount columns. is called debit side while the right hand side which is the paying or giving 24 . also takes place in it and so refer to it as cash account but because individual items are necessarily posted from it into the ledger it is still reasonable to regard it as book of original entry. Where only the cash Bank columns are maintained. MAIN CONTENT The Cash Book The cash book is the book into which all cash receipts and payments of a business are entered.1 The Cash Book Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 INTRODUCTION Organizations always keep their cash and bank transactions in a common book referred to as the cash book.BHM 107 GENERAL ACCOUNTING II UNIT 4 CONTENTS 1.0 CASH BOOK Introduction Objectives Main Content 3.0 3. while it becomes a three columns by adding to it. which is the receiving side. The cash book is ruled in such a way that it has two sides coinciding with left and right hands. three-column and petty types. 2.0 5. you should be able to: • • 3. which is characteristic of ledger accounts. because balancing.0 7. Some authors do not regard this book as a book of original entry.0 2. it is referred to as a two-column cash book. societies and associations is the receipts and payments account. The term cash book covers the one-column. The equivalent of cash book in non-trading organizations such as clubs.0 OBJECTIVES By end of this unit.0 6.
Double or thick lines are recommended immediately before monetary column or immediately after ledger folio columns.500. Conventionally.000.00 25 .000. Any cash received by the entity enters the debit side while any cash leaving the business goes through the credit side.00 1.00 200.00 200.000.00 3. Agbo and balance the account (book) on 31st January 1988.00 20. Obande Paid insurance premium Purchases Sales 2. a double or thick line normally divides the account books into two equal sides for debit and credit entries.00 500.00 500.00 1.00 2.00 300. Bought goods for cash Bought furniture for cash Cash sales to date Paid rent Cash sales Lent C.00 2. 1988 and the following transactions took place during the month: Jan. is called the credit side.000.000.00 1.00 100.000.00 500. Onuh Bought stationary Paid wages Purchased goods for cash C.000 after his retirements from civil service on 1st January. 2 5 8 11 12 15 18 19 25 27 28 29 30 31 Required: Enter the transactions in the column cash book of A.000.00 1. The one-column cash book is so called because it contains only one monetary column in each of its two sides-one at the debit side and one at the credit side.000. Illustration I. A Agbo started business with cash of N8. Obande Cash sales to date Withdrew cash for private use Paid D.BHM 107 GENERAL ACCOUNTING II side. Onuh paid on account Received from D.00 1.
00 20.00 100. Obande 30 Insurance Premium 31 Purchases Balance 16.580. Balance c/d Balance carried down from the bigger side to balance off the smaller side since financial account totals must necessarily be equal.00 15 2.00 1.000.00 200.00 5 200. AGBO'S CASH BOOK (JANUARY 1988) DR. Balance b/d Balance brought down as cash in hand to begin the following month's business with.200. Cr.00 7.00 18 1.00 Jan.200. Onuh D.000.000. 26 .000.000.580. 1) 2) The two-column & three-column cash books should be treated with examples The difference(s) between the two should be pointed out in order to achieve the objectives of this unit.00 Explanation of Abbreviations Used Dr.000.000.00 c/d Calculation Method Debit side total Credit side total Balance carried down N 16.000.BHM 107 GENERAL ACCOUNTING II A.580.00 8.00 7.00 1. Date Jan.00 7.200.00 2. Onuh Stationary Wages Purchase 29 Drawings 30 D.000.1 8 12 27 28 29 30 Particular L/F Capital Sales Sales C.00 11 500.00 CR.00 19 1.620.00 16. The balance brought down should necessarily be the same as balance carried down.00 500.Obande Sales Sales Amount Date 8.00 300.00 1. L/F Amount 2.00 500.00 Particular Purchases Furniture Rent C.2 3.500. L/F Debtor or debit side Credit or credit side Ledger Folio column where the page number of the ledger into which the item may be posted or written.
2004 Feb.00 Withdrew cash from bank for office use 4.00 Cash sales 3.00 Cash sale paid into bank" 2. The books of original entry other wise known as subsidiary books of accounts include the cash book.000.800.00 Paid cash into bank 2. Contra entries are never posted into the ledger because they are deemed to have satisfied the double entry principle.00 cash sales paid into cash 300.00 Bough goods by cheques 2.000. money may be withdrawn from bank for office use or money may be taken from office to bank.00 Cash sales to date 2.00 Bank 12. That means that it would enter both debit and credit sides of the same book although different columns. Any of these transactions represent contra entries. While it is not possible for the credit side of the cash column to be greater than the debit side because one cannot give because on a special arrangement with the bank the business may be allowed to overdraw its account to an agreed limit. It also means that the business transacts some of its businesses though the bank.00 Paid rent by chehge 1. cash transaction is entered in the cash column while cheques transactions entered in the bank columns. For instance. for the month of February.300.BHM 107 GENERAL ACCOUNTING II The two-column cash books on the other hand) is so called because it contains two monetary columns in each of the debit and credit sides-the cash and bank.000.000.800.000. In a cash book containing both cash and bank columns.00 Withdrew cash for private use 300.000.750.100. internal transactions may also take place.00 500. a trader.00 4. Edache 1.00 Received cheques from A. Here.00 Bought stationary by cheque 600. 1 2 5 8 10 13 14 16 19 23 24 25 26 28 29 Capital cash 5.00 Bought furniture by cheques 4.00 Bought goods for cash 3. 27 .0 CONCLUSION The practice of accountancy will be virtually impossible if there is no day-to-day recording of financial transaction as they occur. Cash is maintained both in office and at bank. Oga. SELF ASSESSMENT EXERCISE Enter the following transactions in the two-column cash book of J.000.00 Paid wages in cash 600.
GENERAL ACCOUNTING II
The cash book is the book into which all cash receipts and payments of a business are entered.
This unit treated two-column and three-column cash books. The columns are the discount cash and banks.
Mr. Oji trading as Oji & sons, started business on 1 st April, 2006, with a capital of N20,000 divided to N8,000 cash in hand and N12,000 as cash in the bank. The following transactions took place during the month. April 2 3 5 8 9 11 13 17 20 23 27 30 30 Required: Enter the transactions into three-column cash book and balance the account on 30th April 2004. Purchased goods for cash Bought stationery for cash Bought furniture & fitting by cheques Cash sales paid into bank Withdrew cash from bank for office use Received a cheque of N1,900 from J. Ujo in full settlement of his debt of N2000 Paid ala N500 cash in full settlement of debt N550 owned to him Cash sales T. Ojo who owned in full settlement of debt of N550 owned to pay N355 cash in full settlement of the debt Paid cash into bank Paid cash into bank Bought goods by cheques Cash sales paid into bank N 5,000 500 2,100 4,200 5,000
2,500 500 3,600 2,400
Damagun, Y. M. (1999). Introduction to Financial Accounting. Jos: Destinno Press. Okwoli, A. A. (1997). Principles of Financial Accounting. Malthouse Press Ltd.
GENERAL ACCOUNTING II
CONTENTS 1.0 2.0 3.0
4.0 5.0 6.0 7.0
Introduction Objectives Main Content 3.1 Bank Reconciliation (Unpresented Cheques) 3.1.1 Uncredited Cheques 3.1.2 Bank Charges 3.1.3 Direct Payments Conclusion Summary Tutor-Marked Assignment References/Further Readings
It is normal for a business to be interested in knowing his balance of cash in hand and at bank at the end of every month. While the customer prepares a cash book to show the required balances, the bank prepares a bank statement. The usual practice is that bank debits all cheques that are credited to the cash book because they reduce the amount of money in the customer's credit and credit all cheques that are debited to the cash book because they work to increase the customer's credit in it (bank). One should be right then to think that the balance in the bank column of the cash book should always agree with the bank statement since all cheques received are assumed to be paid straight into the bank while cheque payment’s are made through the bank; but that is not always true because of supervening events that may have countervailing positive or negative effects on either of the balance. One or more of usually create(s) a difference between a business man's actual cash balance in the bank column of his cash book and the balance as shown by the bank statement.
At the end of this unit, you should be able to:
explain the causes of discrepancy between cash and bank balance describe the causes of the discrepancy and reconcile.
GENERAL ACCOUNTING II
MAIN CONTENT Bank Reconciliation (Unpresented Cheques)
At the time the bank is preparing its statement to send to the customer, some of the customer's cheques issued to outsiders, which are duly credited to the cash book, may not have been presented to the bank for payment, so the bank would not have debited the customer's account with such amounts. The effect of unpresented cheques is that the balance in the bank statement is higher than the cash book balance in the bank column. The difference created by the unpresented cheques is reconciled by either adding the amount of such unpresented cheque bank to the cash book balance or subtracting it from the bank statement balance.
3.1.1 Uncrdited Cheques
When a businessman receives cheques, he debits the bank column of his cash book immediately thereby creating a possibility for showing high cash balance in the bank but the bank may take sometime before crediting his account since the cheques may need to be cleared before crediting it. The cheques may be dishonored unknown to the customer at the time he prepares his cash book balance. The bank does not credit a customer's account with dishonoured cheques. The techniques for reconciling difference created by the uncredited cheque is either to deduct the amount of such uncredited cheque from the cash book balance (bank column) or add it to the balance as shown by the bank statement if it is not a dishonoured cheque. When a cheque is dishonoured, there is just the need to reverse entries in the cash book. That is, to credit the cash book (bank column) to neutralized the original debit entry.
3.1.2 Bank Charges
The bank charges commission on certain services on current accounts, and interest on overdrafts and cheque books supplied to the customer. When any of these are made the customer's account is debited in the bank but the Information may not immediately be communicated to the customer to effect entries in his cash book. To reconcile the discrepancy created by bank charges, the amount of such charges should be deducted from the cash book balance. That is, to credit the cash during its (cash book) adjustment
GENERAL ACCOUNTING II
3.1.3 Direct Payments
In everyday business, there is the possibility that the bank may pay certain amount of money on behalf of its customer on the authority of prior notice. Sometime, an authority may be given to the bank by a customer to pay regular subscriptions to certain organizations and when such a payment is made, the customer's balance in bank will be reduced without the customer knowing immediately. This will create a discrepancy between the cash book balance and the bank balance. Such discrepancy may be reconciled by deducting such payments from the cash book balance by crediting the cash book during the amendment. The bank may also receive certain amount on behalf of the customer. When money such as interest, loan or dividend is paid directly into the customer's account, the bank statement balance will exceed the cash book balance by such payments and the difference can be corrected by adding the payments to the cash book during the cash book (bank column) amendment. And finally, the bank reconciliation is a process of adjusting the different figures as may be shown by the cash book and the bank statement to a common point. Bank reconciliation statemen1 therefore, is the statement showing that process of adjustment and the consequent result. It IS suggested that the actual reconciliation should be made with the unpresented and uncredited cheques. All other items should be used in the amendment of the book to bring its balance to the authentic figure before the reconciliation. SELF ASSESSMENT EXERCISE 1 Illustration On 30th April, 2000 the cash book of U. Mohammed showed a balance in bank of N 12,409 .44 and on the same day bank statement showed a favorable balance of N11,482.44. On cross-checking the details in the bank statement with the cash book, it was discovered that the discrepancy was due to the following: (a) (b) The credit side of the cash book was under-cast to the tune of N120.00 Cheques dishonoured Ngozi (c) 156.00
Cheques drawn and recorded in the cash book (Book column) but not shown in the bank statement. T. Abel 132.00
GENERAL ACCOUNTING II
Amufu Limited Items debited by the bank: Bank charges Costs of cheques book
246.84 30.00 18.96
Items duly debited in the cash book but not yet cleared by the bank: cheques received from D. Okeke 243.96 cheques received from P. Ojimekwe 174.00 cheques received from R. Owate 562.00
Required: Show the amended cash book and the bank reconciliation statement for U. Muhammed on 30th April, 2000. U. MOHAMMED AMENDED CASH BOOK (BANK COLUMNS ONLY) DR.
April 30 Bal. b/f N 12,409.44 N April 30 Under-cast written Back 120.00 P. Ngozi Dishonoured cheques 156.00 Bank charges 30.00 Cost of cheques book 18.96 Balance c/d 12,084.48 12,409.44 12
12 409.44 12,084.48
Note: (i) What we have done here is to amend the cash book by bringing up to the cash book all those items that would ordinary be treated in the cash book. When the cash book has been amended we will be left with unpresented and uncredited cheques items to use in reconciliation process. If there is an under-cast, the amount is written back to the side that has the shortfall but if there is an overcast the techniques is to write the amount at the opposite side of the side that has been overcast to neutralize the effect of the overcastting.
GENERAL ACCOUNTING II
BANK RECONCILIATION STATEMENT N Balance as per cash book Add unpresented cheques T. Abe Amufu Limited Less Uncredited Cheques: D. Okeke P. Orjimekwe R. Owate Balance as per bank statement l 132.00 246.84 243.96 174.00 562.92 N 12,084.48 378. 84 12,463.32
We many also start the process of reconciliation from the balance as per bank statement. BANK RECONCILIATION STATEMENT N Balance as per Bank Statement Add uncredited cheques D. Okeke P. Ojimekwe R. Owate Less unpresented cheques T. Abel Amufe Limited Balance as per Cash Book SELF ASSESSMENT EXERCISE 2 1.
Dr. Date Mar.1 5 8 11 17 26 29 31 April
243.96 174.00 562.92 132.00 246.84
980.88 12,463.32 378.84 12,463.43
Below are the cash book (bank column only) and the Bank Statement of R. Nuhu for month of March, 1998.
part Bal. b/f J. Sambo Cash G.Nwanikwe Cash M. Dogo J. Aruwa P. Egbe Bal. L/F Amount 4,201.50 400.90 1,200.08 900.00 4,200.00 1,600.00 2,004.00 100.00 14,606.54 8,755.14 Date Mar 1 11 12 16 26 28 31 31 part J. Onalo E.Uzo V.Okwuosa R. Onuh K. Idoko S. Agwai F. Agada A. Atama c/d L/F Cr. Amount 1,500.00 406.50 707.70 133.00 2,100.00 500.00 204.20 300.00 8,755.14 14,606.54
04 4. 1998 Date March 1 6 6 8 13 14 17 24 27 28 29 30 30 Particular Balance b/f J.34 9. Sambo Cash E.00 2. Okuosa M.00 6. Onuh J.) Charges Divided from Ota Ltd Dr.288. Dogo (cheque Dis.96 1.00 1.50 900.500.BHM 107 GENERAL ACCOUNTING II UNITY BANK BANK STATEMENT SENT TO 31ST MARCH.70 1.34 6.658.34 500.00 2.04 8.102. Balance 4.08 406.04 8. Idoko M.600.302.200.158.34 7.996.701.201.100. Nwanikwe Cash V.896.200. 1.46 4.888.54 3. Uzo G. Given below are the cash book (bank columns only) and the bank statement of Dansani for the month of 31st May. 2006 34 .188. 2006.50 2.00 707.34 6.788.00 400.600.796.00 4. UNITY BANK PLC BANK STATEMENT SENT DANSANI ON 31ST MAY. Dogo K.00 30.00 Cr.50 3.
00 Cheques drawn by Bako and paid by the bank for the year 14. 5. N Balance brought forward on 31st January 600. 4. 1999.BHM 107 GENERAL ACCOUNTING II Required: Amend and balance Dansani cash book (bank column only) and reconcile this with his bank statement. On the same day. 6. 1999 agreed with balance as shown by his cash as at that date. The above cheques were not included in the totals shown above.500.00 Bank charges 45. pays all business takings into the bank and makes all payments by cheques.255. The following statement shows the summary of figures appearing on the bank statement for the year. Bako paid in a cheques of N80.000.00 On the 31st December of the same year. D.0 CONCLUSION This unit treated the issue of reconciling the bank column of the cash book with the bank statement issued by the bankers. Bako 1.0 SUMMARY The normal practice in reconciliation of bank statement and the cash book is to identify those items in the cash book that are not in the bank statement and those in the bank statement that are not in the cash book. D.00 Dividends received by the bank on behalf of D. which he received from Abubakar. The major causes of the discrepancy are the unpresented cheques and uncredited lodgment.0 TUTOR-MARKED ASSIGNMENT D.00 Amount paid in by Bako and credited by the bank for the year 15. Bako had drawn two cheques to Musa and Abdullahi for N60 and N675 respectively. A summary of the bank statement for the year and A bank reconciliation statement at 31st December. Bako. having been paid and credited respectively by the bank in January of the following year. The balance of his cash book on 31st January. Required: a) b) c) A summary of the cash book (bank column only) in the books of D. 35 . trading as Bako Brothers. Bako for the year.
BHM 107 GENERAL ACCOUNTING II 7. (2004). Financial Accounting 2nd Edition. 36 . (1997). UK: Ash Lord Colour Press.0 REFERENCES/FURTHER READINGS Jennings. A. R. Malthouse Press Ltd. Hampshine. Principles of Financial Accounting. A. Okwoli. A.
0 3.0 6. The correct profit or loss can only be obtained if the accounts carry every kobo of loss incurred and every kobo of revenue earned. Provisions for cash discounts.0 DEPRECIATION OF FIXED ASSETS I Introduction Objectives Main Content 3. 37 .0 7. Such adjustments include: 1) 2) 3) 4) 5) 6) Depreciation and appreciation of fixed assets. Bad debts and provision for doubtful debts.0 INTRODUCTION The preparation of final accounts has two main aims-that every trading and profit and loss account show the 'correct' profits or losses for the period and every balance sheet gives the 'true and fair' view of the affairs of the business at a given period.0 4.0 2. must take into consideration matters which require adjustments.BHM 107 GENERAL ACCOUNTING II MODULE 2 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Depreciation of Fixed Assets I Depreciation of Fixed Assets II The Trading Account Profit and Loss Account The Balance Sheet UNIT 1 CONTENTS 1.0 5.1 Depreciation of Items and Fixed Assets 3. Payments in advance to and by a firm. The accountant. For a balance sheet to show a ‘true and fair’ view of a business affair it must show the assets and liabilities at their ‘correct’ values. Amortization of intangible and factious assets. in attempting to achieve the two aims of final accounting.2 Methods of Depreciation Conclusion Summary Tutor-Marked Assignment References/Further Readings 1. and Payments accrued due to and from the firm.
physical factors such as evaporation of liquids. you should be able to: explain 3. In other words. A fundamental fact of accountancy is that depreciation represents the expired part of the total cost of the fixed asset and so it is a charge against the profit of the period. renewals or diminution in value of fixed assets must be disclosed in the published accounts'. quality or value of fixed asset. Any change in such a policy is both legally and professionally required to be disclosed in the note accompanying the main statements. the depreciation method used. and effluxion. 3. It also provides that where asset is 38 . In effect. the main causes of deprecation include. It concerns itself with the provision that financial statement should disclose for each major class of assets. The importance of depreciation to company management and government of Nigeria can be seen from the requirements of schedule 32 of the Nigerian Companies and Allied Matters Decree of 1990 which states that ‘the amount charged to revenue by way of provision for depreciation. management is at liberty to make choice of the method they consider most suitable for their type of business subject to the requirement that once a basis is selected it has to be applied for period in keeping with the consistency concept. wear and tear. the expected useful lives of the assets or the depreciation rates used. erosion and dampness. effluxion of time or obsolescence though technology and market changes. the total depreciation associated for the period. depreciation may be described loosely as the permanent and continuing diminution in the quantity.1 MAIN CONTENT Depreciation of Items of Fixed Assets SSAP 12 defines depreciation as the measure of the wearing out.0 OBJECTIVES At the end of this unit.BHM 107 GENERAL ACCOUNTING II 2.0 3. fall in market prices which include unfavourable foreign exchange rate. consumption or other loss of value at" fixed assets arising whether from use. obsolescence due to invention or change in fashion. loss of potency of acids.2 Methods of Depreciation any methods exist for the deprecation of an asset and as directed by SSAP 2. and the gross amount of depreciable assets and the related accumulated depreciation. SSAP 12 which deals with depreciation of fixed assets does not attempt to recommend particular methods to be used by companies.
less the salvage or scrap value. a) Straight Line Method The straight line method of depreciation otherwise known as the fixed insta1lment method.000 − 100 10 = = = N390 3.000 which the estimate would have a useful life of ten years. Prominent among them are the straight line. A number of depreciation methods are in use today. revaluation. The salvage or scrap value at the end of the period is estimated at N100.BHM 107 GENERAL ACCOUNTING II revalued. machine hour. It spreads the provision of depreciation equally over the period of its anticipated use and it is easily applicable. Required: Using the straight line method of depreciation. show in the books of the company for the first three years. the provision for depreciation should be based on the revalued amount and the current estimate of the remaining useful life of the asset. sum of the year’s digit and the double decline methods. 2000 a trader buys a plant for N4. by the number of years of estimated useful life of whose useful life can be determined with some degree of accuracy. unit product. depletion unit. determines the amount of annual depreciation charge by dividing the cost of the asset.900 10 Depreciation provision is an adjustment that normally passes through the journal proper as follows: 39 . This method is criticized on the ground of equal provision from year to year because it cannot be true that cost of an asset can expire by the same extent each year throughout its useful life. annuity. sinking fund. Illustration On 1st January. Yearly depreciation will be obtained as follows: Formular = Cost – Salvage value Life span of the asset 4. endowment insurance policy. reducing balance.
under this method.00 390.220.00 This method. the scrap value is always the negligible amount that is left after year of depreciation. It is an accelerated method of depreciation.830.00 390.BHM 107 GENERAL ACCOUNTING II 3RD YEAR 2002 Depreciation Plant 390 BALANCE SHEET AS AT 31ST DECEMBER.00 3. the amount charged to the profit and loss account in the name of depreciation reduces revenue because it is believed that asset will produce more revenue when it is new than when it starts falling in value and as the asset ages on and contributes less to the revenue generating efforts of the firm smaller amounts are then charged the profit and loss account as it depreciation.220. if any. provides for depreciation by computing a fixed percentage rate of the book value of the assets as reduced by previous provisions for depreciation.610.00 3. Under this method. 1998 a trader buys a machinery for N4. 2000 TO 2002 EXTRACTS ONLY N N Fixed assets: 1st Year 2000 Plant Less depreciation 2nd Year 2001 Plant Less depreciation 3rd Year 2002 Plant Less depreciation b) The Reducing Balance Method 4. Required: 40 .610.00 390.000 which by his experience depreciates at the rate of 10% per annum.00 3.00 2.000.00 3. otherwise known as the declining or diminishing balance method. In effect. Illustration On 1st January.
00 360.10 x 4.10 x 3. the yearly depreciation will not be equal from year to year but will depend on the value of the asset at the beginning of the period.BHM 107 GENERAL ACCOUNTING II Using the reducing balance of depreciation. = 10 3. Depreciation account (Being depreciation for the first year transferred to profit and loss account) 2nd Year 1999 Depreciation account Dr.10 x (3.10 x (4.600 – 360) 0. show the entries for the first three years.000 = N400.10 x 3. 1999 = = 10 4. Solution Here. Depreciation Account (Being depreciation for the second year transferred to profit L/F DR N 400.000 − 400 x 100 1 10 3.240 = N324.00 or 0.00 10 4.600 − 360 x 100 1 10 3. 1998 2nd Year.000 – 400) 0.000 x 100 1 or 0.00 360.600 = N360.00 CR N 360. Machinery account (Being depreciation written off the machinery for the second year) Profit and Loss Account Dr. The annual values of depreciation will be calculated as follows: 1st Year.00 41 .00 or 0.600 x 100 1 or 3rd Year.00 400. Machinery account (Being depreciation written off the machinery for the first year) Profit and Loss account Dr.240 x 100 1 or JOURNAL PROPER DATE PARTICULARS 1st Year 1998 Depreciation account Dr.00 400.00 400.00 360.
00 Jan.00 31 Balance c/d 3.240. 2001 Balance b/f 2.00 4.00 3. 31 Depreciation 400.00 Dec.00 N Depreciation 324.00 DEPRECIATION ACCOUNT 1ST YEAR 1998 N Dec.600.00 324. 31 31 3RD YEAR 1999 N Jan. 31 31 2ND YEAR 1999 Dec.600.000. 31 Balance b/f 400.00 2ND YEAR 1999 N Depreciation 360.240. PARTICULARS 3rd Year 2000 Depreciation Machinery account (Being depreciation written off the plant for the first year) Profit and Loss Account Dr.000.240.00 CR N Jan.00 3.00 Dec.00 3.400.00 Balance c/d 2. Depreciation account (Being depreciation for the third year transfer to profit and loss account) L/F DR N 324.BHM 107 GENERAL ACCOUNTING II and loss account) DATE Dec.916.00 Dec.600. 1 Balance b/f 3.000. 1 Cash MACHINERY ACCOUNT 1ST YEAR 1998 N N 4.00 42 . 31 Profit & Loss account N 400.600.00 Balance c/d 2.00 Dec.916.00 3.00 4.00 Dec. 31 Profit & Loss account N 360. 1 Balance b/f 3.00 N Jan. 31 Machinery N 360.
1998 TO 2000 1ST YEAR 1998 Depreciation Machinery 2ND YEAR 1998 Depreciation Machinery 3RD YEAR 1998 Depreciation Machinery 400.00 3.600. necessitates valuing such assets at starts as well as at close of accounting year.600.00 3. The amount of depreciation to be charged against the profits is determined by subtraction the values assigned to such assets at the end of the accounting period from the values at start.00 3.00 2. bottles and create in a brewery.240.00 360.240.00 360.00 324. small drills in an engineering concern or barrels.00 Dec.000.00 PROFIT AND LOSS ACCOUNT FOR THE YEARS ENDED 31ST DECEMBER.00 400. screw drivers. 43 .00 BALANCE SHEET AS AT 31ST DECEMBER.00 This method of depreciation is most popular with companies that make use of loose tools such as spanners. 31 Profit & Loss account N 324. This technique.00 3. 31 Machinery N 324. therefore. 1998 TO 2000 (EXTRACTS ONLY) N N Fixed assets: 1st Year 1998 Plant Less depreciation 2ND Year 1999 Plant Less depreciation 3RD Year 2000 Plant Less depreciation c) Revaluation Method 4.BHM 107 GENERAL ACCOUNTING II 3RD YEAR 2000 Dec.00 324.196.
800. Loose tools account (Being depreciation written off the loose tools for the first year) Profit and Loss Account Dr. 1993) Depreciation 2nd Year 1993 Depreciation: July1.00 800. 1992 Less value at close (June.00 600. 1992 is put a N1.200.00 400. Loose tools account (Being depreciation written off the loose tools for the first year) Profit and Loss Account Dr.00 400.000. On 1st January of the following year.00 400.00 1.00 L/F Dr.000 on 1st July 1991.00 Cr.00 Bal. the value of the tools is put at N800.00 600. If the value of the tools at the end of June. Depreciation account (Being Depreciation for the first year transferred to profit and loss account) 2nd Year 1993 Depreciation Account Dr.00 1.00 400. 1993) Depreciation Date June 30 Particulars 1st Year 1992 Depreciation Account Dr.00 44 .200. what is the amount written off as depreciation? If by June 1993. further tools worth N800 were bought for the business.00 600.BHM 107 GENERAL ACCOUNTING II Illustration An engineering firm bought loose tools for N1.00 800. b/f 1. N July 1 (1991) July 1 (1992) Less value at close (June.00 600.200. what would be the depreciation charge for that year? Computation formular 1st Year 1992 Depreciation: = Value at start – value at close Cash Cash 1. Depreciation account JOURNAL PROPER 1991 TO 1993 June 30 June 30 400. N 600.
we discussed three methods of depreciation i.200. Calculate the annual depreciation on a motor vehicle acquired on 1st January.200.00 1.200. reducing balance method and revaluation method. What do you understand by the term “Depreciation”? 2.e. using straight line method.00 1.00 June 30 Loose tools 400. The asset is expected to last for a period of 5 years after which its estimated value will be N48.00 Balance b/f Balance c/d June 30.00 1.00 800.0 CONCLUSION In this unit. 1992 June 1. 2000.200. 45 .00 June 30 Depreciation 600.00 1.000. 2000 at N50. You are required to compute the amount of deprecation to be charged in each year of the assets life. 5. 1992 2ND YEAR July 1. 1992 Balance c/d N 600.00 June 30 Balance c/d 400.00 400. 1993 Balance c/d DEPRECIATION ACCOUNT 1ST YEAR June 30 Loose tools 2ND YEAR 600.800.00. 1992 Depreciation June 30.0 TUTOR-MARKED ASSIGNMENT ABG Ltd bought an asset for a sum of N298.0 SUMMARY This unit focused on the various methods of accounting for depreciation and the way to disclose assets and depreciation information in financial statement.000.000 and its expected life span is 4 years with a scrap value of N3. 1993 Depreciation June 30. 1993 Cash Cash N 1.00 800. 1991 Jan.000 on 1 st January. straight line method.00 1.BHM 107 GENERAL ACCOUNTING II (Being depreciation for the second year transferred to profit and loss account) LOOSE TOOLS ACCOUNT 1ST YEAR July 1.00 June 30.000. 4.800.00 SELF ASSESSMENT EXERCISE 1. 6.00 1.00 800. 1.
M (2003). Financial Accounting.0 REFERENCES/FURTHER READINGS Damagum. Malthouse Press. Principles of Accountings. Y. A. Okwuli. (1997).BHM 107 GENERAL ACCOUNTING II 7. Jos: Clestinno Press. 46 .A.
47 .0 3. Wear and tear: Continuous usage leads to deterioration in the physical features of an asset.0 INTRODUCTION This unit focuses on the various methods of accounting for depreciation and the ways to disclose assets and depreciation information in financial statements.BHM 107 GENERAL ACCOUNTING II UNIT 2 CONTENTS 1.0 7.2 The Machine Hour Method 3. 2.3 The Units Produced Method 3. 2. 3.0 Introduction Objectives Main Content 3.0 2.0 DEPRECIATION OF FIXED ASSETS II 4. • explain the ways to disclose assets and depreciation figures in financial statements.0 3.1 Factors Responsible for Depreciation 3. you should be able to: • discuss the need to provide for depreciation on fixed assets engaged in business.4 The Sum of Years’ Digit Method Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 5.1 MAIN CONTENT Factors Responsible for Depreciation Among the factors responsible for depreciation in the utility of an asset are: l. Obsolescence: An existing asset can be rendered valueless as time passes and new models are developed.0 6.0 OBJECTIVES At the end of this unit.
new methods of operations may evolve with time.000 x 2.00 2. Technological changes: With changes in technology. 3. rainfall and other weather related conditions can eventually reduce the value of an asset.000 1 48 .000.00 First year 1998 = Second year 1999 = 20. 1998. Required: Show the depreciation entries in the books of the company for the two years.BHM 107 GENERAL ACCOUNTING II 3. 4.000 80.000 1 x Hours spent 1 N800.200. 5. The plant spent 80.000 hours in service in its first year and put in 120. the value of an asset becomes affected either by experiencing a depreciation or appreciation depending on whether prices are going upwards or downwards. Environmental conditions: Factors like excessive heat.000 was bought on 1st January. Instability in prices: As prices fluctuate.000 hours in the second year. The plant has a life span of 2.000.2 The Machine Hour Method For this method to be realistically used in any company the total hours the assets can serve the company in its lifetime must be known with some degrees of certainty.000.000 x = N1. Solution Formular = Cost Estimate number of hours = 20. Illustration A plant costing N20. which renders certain assets useless. The per hour depreciation will be determined by dividing the total cost by the total number of hours allocated to its life expectancy.000 hours of active service. This is not a very good method of depreciation especially during slack times as idle plants are also open to some of the causes of depreciation.000 120.
00 800.00 1. 31 1. Depreciation account (Being depreciation for the first year transferred to profit and loss account) 2nd Year 1999 Depreciation account Dr.00 1.00 PLANT ACCOUNT DEPRECIATION ACCOUNT 49 .200.00 Dec. 31 Particulars 1st Year 1998 Depreciation account Dr.BHM 107 GENERAL ACCOUNTING II JOURNAL PROPER Date Dec.200.200.200. N Dec. Depreciation account (Being depreciation for the second year transferred to profit and loss account) L/F Dr. 31 1. Plant account (Being depreciation written off the plant for the second year) Profit and loss account Dr.00 800. 31 800. Plant account (Being depreciation written off the plant for the first year) Profit and loss account Dr.00 Dec. N 800.00 Cr.
200. This method is not to be recommended because depreciation.000 units of the product in the first year and 100.00 1.200. 50. The yearly depreciation to be charged against the profits will be the per unit depreciation multiplied by the number of unit produced during the year.000 units of a particular product during its life time. 50 . being a fixed cost goes on whether there is production or not. 1998 TO 1999 (EXTRACTS ONLY) N 1ST YEAR 1998 Depreciation: 2ND YEAR 1999 Depreciation: Plant Plant 800.00 1.000 were produced in the second year.200. 1990.000.200.00 19.3 The Units Produced Method Under this method.BHM 107 GENERAL ACCOUNTING II PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER.00 3.200 was bought on 1st July.00 N 19.00 800. 1998 TO 1999 (EXTRACTS ONLY) N FIXED ASSETS 1ST YEAR 1998 Plant Less Depreciation 2ND YEAR 1999 Plant Less Depreciation 20.00 BALANCE SHEET AS AT 31ST DECEMBER.00 18. Illustration A machinery costing N12. the total number of units of a particular product to be produced during the life time of the machine is estimated and then a per unit depreciation is determined by dividing the cost of the machine by the estimate number of units. It was estimated that the machinery would produce 600.000.
Solution Formula = cost Number of units to produce 12. Depreciation account (Being depreciation for the second year transferred to profit and loss account) L/F Dr.000 100.000 x 600. Depreciation account (Being depreciation for the first year transferred to profit and loss account) 2nd Year 1999 Depreciation account Dr.000.00 51 .00 June 30 2.000.000.00 600.000 = N1.00 Cr.00 2.000. N June 30 1.00 1.000.000.000.000 1 50.00 2.000.BHM 107 GENERAL ACCOUNTING II Required: Show the depreciation entries in the books of the company for the first two years.000 x = N2.00 1 JOURNAL PROPER Date June 30 Particulars 1st Year 1991 Depreciation Machinery account (Being depreciation written off the machinery for the first year) Profit and loss account Dr. Machinery account (Being depreciation written off the plant for the second year) Profit and loss account Dr.000.000.00 1.00 June 30 2.000 x Units produced 1 1st Year (1991) Depreciation charge = 2nd Year 1992 Depreciation charge = 12. N 1.
00 1. 1991 TO 1992 (EXTRACTS ONLY) N N Fixed Assets: 1st Year (1991) Machinery Loss depreciation 12. 1991 TO 1992 (EXTRACTS ONLY) N 1 Year 1991 Depreciation Machinery 2nd Year 1992 Depreciation Machinery st 1.00 BALANCE SHEETAS AT 30TH JUNE.00 11.000.00 2.000.000.00 52 .000.BHM 107 GENERAL ACCOUNTING II MACHINERY ACCOUNT DEPRECIATION ACCOUNT PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH JUNE.000.
1990 a trader bought a machinery for N10.000. The underlying assumption here is that more benefits are recei1led from the computation of the sum of the years' digits.. + 10 1 First year 1990 Depreciation charge Second Year 1991 53 = 10 x 55 10. and functions as produced by the above steps should be multiplied each year by the asset's depreciation value to arrive at the yearly depreciation charges. the numerator for each years' depreciation should be the number of years remaining in the asset's estimated useful life at the beginning of the particular year for which the depreciation is being computed over the sum of the year's digitals.BHM 107 GENERAL ACCOUNTING II 2nd Year 1992 Machinery Less Depreciation 2. Illustration On 1st January.818. Solution Since the asset will last for ten years the formular will be obtained by 1+2+3+4+5+6+7+8+9+10.000.. so that the first year depreciation will be obtained by: 10 Cost x 1 + 2.000 = N1.000 which he estimated would last for ten years. Required: Show the entries for the first two years in the books of the business providing for depreciation by the sum of the years' digit method.18 1 .00 9.00 3. Depreciation charge is that the discrete digits in the assets estimated useful life should be added.4 The Sum of Years’ Digit Method The sum of the year’s digit method of depreciation is an accelerated method which aims at writing off higher costs from the asset at the initial stage and then reducing the depreciation charge recessively as the years pass by.
36 1.000.000. N 1.36 1.82 8.636.82 6.46 8.545. 1 Balance b/d 8.181. 1 Balance c/d 6.636.18 1.818. 31 Particulars 1st Year 1990 Depreciation Account Machinery account (Being depreciation written off the machinery for the first year) Profit and loss account Dr.82 10.181.636.36 1. 1 Depreciation 1. 1 Cash st N 10. 31 1.818.BHM 107 GENERAL ACCOUNTING II Depreciation = 9 10.181.545. Depreciation account (Being depreciation for the second year transferred to profit and loss account) L/F Dr.18 1. 1 Depreciation 1.000 x = N1.36 Jan.636.18 Cr.46 54 . Machinery account (Being depreciation for the second year) Profit and loss account Dr. 31 1.00 10.000.636. 1 Balance c/d 8. 1 Balance b/f Jan.18 Jan.00 Jan.818.82 2nd Year 1991 Jan.36 55 1 JOURNAL PROPER Date Dec.181.18 Dec.636.36 MACHINERY ACCOUNT N 1 Year 1990 Jan.00 Jan. Depreciation account (Being depreciation for the first year transferred to profit and loss account) 2nd Year 1991 Depreciation account Dr.181. N Dec.181.
181.46 4. 2.545.000. 1990 TO 1991 (EXTRACT ONLY) N st 1 Year 1990 Depreciation Machinery 1. organizations apply different methods to depreciate their assets as a matter of convince.636.36 June 30 Profit and loss 1.818.181. 1990 TO 1991 (EXTRACT ONLY) N N Fixed Assets: 1st Year 1990 Machinery Loss depreciation 2nd Year 1991 Machinery Less Depreciation SELF ASSESSMENT EXERCISE 1. we have thoroughly discussed the issue of depreciation of fixed assets using the various methods.0 CONCLUSION In practice.18 st N 1.82 6.636. nature of assets and other considerations. 5. What do you understand by the term 'sum of year digit' in depreciation accounting? 10.18 June 30 Profit and loss 2nd Year 1991 June 30 Machinery 1.636.0 SUMMARY In this unit.818.36 8.82 1.36 BALANCE SHEET AS AT 31ST DECEMBER. List the causes of depreciation of fixed asset. It is normal for a company to 55 .181.636.36 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER.181.00 1.BHM 107 GENERAL ACCOUNTING II DEPRECIATION ACCOUNT N 1 Year 1990 June 30 Machinery 1.18 2nd Year 1991 Depreciation Machinery 1.18 8.
Okwoli.A. (1997). Compute the amount of the depreciation to charge in respect of each of the years using sum of the year's digit method. 6. Malthouse Press 56 . A.M. 7. bought an equipment for N613.BHM 107 GENERAL ACCOUNTING II decide to charge full depreciation on an asset irrespective of the time of the year in which it was bought. 000 which is to last for 6 years with a residual value of N13.0 TUTOR-MARKED ASSIGNMENT Ibro Plc. Principles of Accounts. Jos: Clesinno Press. Y. (2003). Financial Accounting.0 REFERENCES/FURTHER READINGS Damagum.000.
returns outwards. The gross profit or loss ultimately is the difference between the cost of goods sold plus the trading expenses (if any) and the net sales.0 INTRODUCTION Trading account is designed to determine the gross profit or gross loss of a trading organization.0 5. When sales revenue exceeds costs there is gross profit and vice versa. 2. sales.BHM 107 GENERAL ACCOUNTING II UNIT 3 CONTENTS 1. you should be able to: 3.1 Trading Account Formular Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.1 a) b) MAIN CONTENT Trading Account Formular Average stock = Opening stock + Closing stock 2 Stock available for sale = Opening stock + Net purchases. and other trading expenses such as wages and warehouse expenses.0 6. During the accounting year. total purchases or cost of production/market value of goods manufactured for manufacturing concerns.0 3.0 2.0 4. returns inwards carriage inwards.0 7. 57 .0 3.0 THE TRADING ACCOUNT Introduction Objectives Main Content 3.0 OBJECTIVES At the end of this unit. items to be found here include the opening and closing stocks of finished goods.
00 Purchases 12. Aondo. AONDO: TRADING ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER.00 C.BHM 107 GENERAL ACCOUNTING II c) Cost of goods sold: i) Stock available for sale -closing stock ii) Average stock x rate of turnover Opening stock = cost of goods sold + closing stock-net purchases Closing stock = stock available for sale-cost of goods sold Purchases = cost of goods sold + closing stock-opening stock Sales: i) ii) 1. sales = 100 + % of profit x Cost 100 1 10 100% of profit x Cost 1 d) e) f) g) If on sale or turnover.00 Returns inwards 600. a sole trader.200.00 Returns outwards 250.00 Carriage inwards 300. If on cost. sales = = h) i) Rate of turnover Cost of goods sold Average stock Percentage of gross profit on turnover = Gross profit x 100 Sales 1 Illustration Prepare the trading account of C.00 Closing stock 2. 1999 from the following particulars: N Opening stock 3.500.00 Sales 15.600. 1999 58 . for the year ended 31st December. 2.450. Cost of goods sold + trading expenses = gross profit When percentage of profit is given.
200. the differences is the Gross profit.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE 1 On 1st January. 1990 Mal.800. v) CONCLUSION SUMMARY Enter on the debit side the opening stock as given in the time balance Adjust the purchase where necessary by entering the purchase figure. iv. Compare the net sales figure in (iv) with the cost of sales in (iii) if the net sales is higher than the cost of sales. iii. Where the cost of sales is higher than the net sales you have a Gross loss. the steps for preparing trading account are stated as follows . Deduct closing stock from the goods available and you get the cost of sales. Required: Show the trading account for the year with necessary calculations. 59 In this unit. SELF ASSESSMENT EXERCISE 2 What is the purpose of a trading account? 4. he turned over his stock five times during the year and made on the whole a gross profit of 25% on the turnover. adding to it carriage inwards if any and deducting the figure for returns outwards. ii. his stock on 31st December of the same year was valued at N6. Abu’s opening stock was valued at N5. Enter on the credit side the sales figure from the trial balance and deduct from any returns inwards. The result is the net sales.0 5.0 i.
Financial Accounting. (1997).380 836 1.800 29.0 TUTOR-MARKED ASSIGNMENT Prepare the trading account of S.BHM 107 GENERAL ACCOUNTING II 6. A. Y. Jos: Clesinno Press.128 7. Malthouse Press.824 604 38. Okwoli. 60 .200 208 6.A. Principles of Accounting.M. 2000 from the following particulars: Opening stock Purchase Purchases returns Sales Sales returns Wages Carriage inwards Closing stock N 4.0 REFERENCES/FURTHER READINGS Damagum.G Company for the year ended 31st December. (2003).
0 INTRODUCTION The profit and loss account is the financial statement in which the revenue earned by a business is matched against the expenses incurred in earning the resulting difference being the net profit or net loss.0 6.0 4. owners. The statement needs to be prepared in accordance with the generally accepted accounting principles and standards to ensure that profit or otherwise of the company is calculated in a manner that is comparable with the income of sister companies in times of analysis.0 5.1 Illustration Conclusion Summary Tutor-Marked Assignment References/Further Readings 1. Earning a reasonable and fair profit requires generation of income and incurring expenses. In order to create the impression that revenue earned from gain on sale of items not in the normal course of business is 61 .0 2.0 7.0 PROFIT AND LOSS ACCOUNT Introduction Objectives Main Content 3. The profitabi1ity or otherwise which this statement indicates is one of the most important barometers of judging management’s effectiveness and so it is carefully studied by managers. Revenue is the inflow of assets which should be recognized at the time but not before it is earned.0 3.BHM 107 GENERAL ACCOUNTING II UNIT 4 CONTENTS 1. creditors and government agencies among others for business decisions.
00 Salaries 1.0 OBJECTIVE At the end of this unit.00 Purchase return 300. 2. the profit and loss account takes over from where trading account ends.00 Rent and rates 200. 2004: N Stock at start 6.00 Wages 1. 3.00 Purchases 14. This is different from unusual items which arise in the normal course of business but the incidence and size of which may make separate desire.00 Discount allowed 50.000. you should be able: • to prepare a Profit and Loss Account.00 Insurance premium 500. there are only two principal types of operating expenses incurred in carrying out a business selling such goods (including the cost of office administration) which is normally charged against revenue in the profit and loss account.0 3. 2004. 62 . Orji’s trading and profit and loss accounts for the year ended 30th June.00 Commission received 500.00 Sales 20.BHM 107 GENERAL ACCOUNTING II related to the profits of current operation it should be reported as extraordinary non-operation gain.K) defines extraordinary items as any item of revenue or expenditure that does not use in the normal course of business and whose occurrence is infrequent. SSAP 6 (U.600.00 Carriage inwards 700.00 Discount received 160.00 Sales returns 200. Orji at 30th June.1 1. In the final account process. prepare M.000.00 Stock at close 7. Strictly.000. MAIN CONTENT Illustration The following list of balances are extracted from the books of M.200.600.00 Required: From the above information.
00 50. ORJI. Stock: 1 October.00 160.00 1. ORJI: TRADING ACCOUNT FOR THE YEAR ENDED 30TH JUNE.800.00 750. Obenta on 30th September.00 2.00 2.BHM 107 GENERAL ACCOUNTING II MR.200.00 5.00 2.800.00 3.000.00 200.250.000.00 The following is the list of the balances extracted from books of K.310.00 5.00 500.00 Discount allowed 50.00 400.00 1.00 Net profit 3.00 Insurance premium 500. 2005.660. 2005 Purchases Returns outwards Sales Returns inwards Salaries Rent and rates Discount allowed Height and heating Carriage outward Insurance premium Commission paid st N 2.000.660.200. PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 2004 N Salaries 1.00 250.760.00 30. 2004 MR. 2004 Stock: 30th September.00 Rent and rates 200.600.00 40. Gross profit b/d Discount received Commission received N 5.00 Required: 63 .
400 33.200 64 . Answer the following questions: i) ii) iii) iv) v) What was the average stock held during the year? What was the cost of goods sold during the year? What was the rate of turnover of stock? Express the gross profit as a percentage of turnover Express the net profit as a percentage of turnover.000.200 = 3.00 2 2.BHM 107 GENERAL ACCOUNTING II a) b) Prepare trading and profit and loss accounts from the above records for the year ended 30th September. 2005 N bi) Average stock: Opening stock: = Closing stock: = = ii) Cost of goods sold: Opening stock = Purchases: = = 2.200 2. K.800 3. OBENTA: TRADING ACCOUNT FOR THE YEAR ENDED 30TH SEPTEMBER. 2005.800 30.800 + 3. 2005 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH SEPTEMBER.
What is the purpose of a profit and loss account? What differentiates a profit and loss account and a trading account.000 3. 6. commission.BHM 107 GENERAL ACCOUNTING II Less closing stock iii) = 3. The revenue items include discount received.000 Turnover = N40.000 = 2.0 CONCLUSION The profit and loss account starts from the gross profit/loss brought down.000 100 x = 25% 40.000 = 33. rent and other receivable items.000 100 x = 5% 40.0 TUTOR-MARKED ASSIGNMENT Prepare the pro-forma of trading and profit and loss accounts of a typical company for the year ended 30th September. 5.000 Average cost = 3.0 SUMMARY Profit and loss account involves the deduction of expenses and addition of income or revenue.000.000 Turnover = 40.00 Rate of turnover: Cost of goods sold: = 30. 2005.000 1 SELF ASSESSMENT EXERCISE 1.0 REFERENCES/FURTHER READINGS 65 .000 Gross profit as percentage of turnover: Gross profit = 10. then deduct all expenses and add all revenue you will have net profit/loss. 7. 4.200 = 30.000 = 10 times iv) = v) 10. 2.000 1 Net profit as percentage of turnover: Net profit = N2.
UNIT 5 CONTENTS 1. its financial condition cannot remain static. Principles of Accounting. (2003). because of the constant stream of activities of a business entity. However.2 The Liabilities and Owners’ Equity 3. Any process by which an 66 . Financial Accounting. The balance sheet of a business just like a coin consists of two sides-the assets side and the liabilities and owners' equity side.0 THE BALANCE SHEET 4.0 3. it is the dividing line between successive accounting periods. Jos: Clesinno Press. liabilities and owners equity of an enterprise on a specific date.M.1 Assets 3.0 6. Zaria: Malthouse. The balance sheet date is the point in time in which the financial condition of the business entity is determined. Y.0 2. The balance sheet therefore is just a picture of the entity's financial condition at a point in time-just a still picture of dynamic process.A. At the cut-off date.0 5.0 INTRODUCTION A balance sheet is the financial statement showing the assets.BHM 107 GENERAL ACCOUNTING II Damagum. Okwoli.0 Introduction Objective Main Content 3. (1997). All assets have sources represented by liabilities and equities. A.0 7.3 Balance Sheet Formula Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.
Examples of these assets include formation expenses. There are four main sources of acquiring assets that are reported in the balance sheet-assets can be bought on credit which creates liability.1 MAIN CONTENT Assets The assets side of the balance sheet reports economic resources owned by the business entity. you should be able to: • state the objectives. 2. equipment. Some asset from such economic resources will last over several accounting periods.0 3. Good example of current assets includes quoted investments. This class of assets is used from year to year and is therefore subject to yearly depreciation. Assets may 67 . And some assets are fictitious because they represent the expired costs incurred in the business which management has decided to write-off over several accounting periods because they feel these expenses will also benefit those future periods. prepayments. Examples of fixed assets include land and buildings. These assets are cash or assets that may be reasonably be expected to be realized in cash or consumed within one year or one operating cycle of the business.0 OBJECTIVE At the end of this unit. Assets are properties and rights to properties or services owned and the potential monetary value and ownership. Depreciation in this case is an attempt to measure that position of the economic resources the asset had been used in the course of business during the accounting period under consideration. tools. the two sides must balance hence the term balance sheet and the balance sheet equation: Assets = Liabilities + Owners' Equity. and discounts on shares and debentures. Other assets are termed 'current' because the benefits to be derived from them will be exhausted within one accounting period. Because all assets are financed by liabilities and owners' equity. stocks. 3. machinery and plant. vehicles and office furniture. and cash. money can be borrowed which also creates owner's equity and business can increase by ploughing back profit which also creates equity. debtors.BHM 107 GENERAL ACCOUNTING II asset is acquired entails increase in either the liabilities or equities.
Intangible assets are not visible but imaginary creations such as patent rights trade marks and goodwill. It is equal to the total assets.BHM 107 GENERAL ACCOUNTING II also be classified into tangible and intangible assets. Tangible assets are those assets that can be seen and touched.2 The Liabilities and Owners’ Equity The other side of the balance sheet reports the liabilities and owners' equity-the sources of finance for the business. 3. In the order of permanence. and profits that have been earned and retained in the business in terms of reserves. This class of liabilities is made up of tax payable. the balance sheet is prepared by listing all the items that are most liquid in the business first before bringing in items that are more permanent. 3.3 i. proposed dividends and bank overdrafts. The capital at the beginning of the year plus profit less drawings Sum of capital owned and the total liabilities. there are two main approaches to preparing a balance sheet-the liquidity approach. provision and undistributed earnings. Current liabilities on the other hand are debts that are expected to be liquidated within one year or one operating cycle. In the order of liquidity. This approach prepared the balance sheet in a vertical format by showing the long-term sources of finance on top of the assets they finance. ii. Capital employed 68 . accrued expenses. This method is most applicable to published accounts of companies but could be used in any organization. Owners' equity is made up of the amounts that have been invested in the business in terms of share capital. and the permanence approach. and the payment of which requires the use of presently classified current assets. Owners' equity is the interest of the owners in the business. creditors. Recently. Rationally. a third approach to preparing a balance sheet was introduced. iii. Liabilities may be long-term or current. items of permanent nature are first treated in the balance sheet and then current items are taken into consideration. Balance Sheet Formula Capital invested Capital owned = = = The actual amount of money's worth brought into the business by the owner(s) from outside. Long-term liabilities are made up of debentures and other long-terms loans.
1999 2.800.00 2.022.737.00 1. Order of Liquidity Approach A.00 3.00 1.00 1. Illustration Prepare A. Order of Permanence Approach 69 .00 1.560.BHM 107 GENERAL ACCOUNTING II iv.00 5.00 759.000.235.00 And answer the following questions from the above data: i) ii) iii) iv) What is the capital invested in the above balance sheet? What is the capital owned? What is the capital employed? What is the working capital? 1. ldoko's balance sheet from the figures given below in his list of balances Dr Capital Land and buildings Mortgage on premises Drawings Profit and loss account balance Furniture and fittings Motor vehicles Closing stock Debtors Creditors Cash book balance b) 9.500.500.00 5.00 23.00 23.022.677.731. IDOKA: BALANCE SHEET AS AT 31ST DECEMBER.545. Working capital = Current assets less current liabilities.00 Cr 12.
00 17.00 LESS CURRENT LIABILITIES 3.00 4.00 N Capital Add net profit Less drawings Long-term Liabilities Mortgage on premises 12.000.731.00 1.737.000.00 13.00 1.00 5.545.00 N 12.526. IDOKA: BALANCE SHEET AS AT 31ST DECEMBER.500.300.00 7.996.00 Original capital Capital at beginning Add net profit N 12.845.00 Creditors Working capital i) ii) Capital = Capital owned = 70 .800.560.677.00 FINANCED BY: Fixed Assets Land and buildings Furniture and fittings Motor vehicle Current Assets Stock Debtors Cash 9. 1999 3.BHM 107 GENERAL ACCOUNTING II A.800.00 1. The Vertical Approach N 12.845.00 17.00 2.500.000.319.800.235.00 1.00 1.00 759.00 5.00 13.
800.00 Carriage outwards 1.00 Drawings 6.000.00 Less current liabilities 3.00 2.319.00 Cash in hand 552. Galadima’s books.500.584.980.00 Carriage inwards 720.680.00 Land and buildings 43.00 4.00 Discount received 10.00 Motor vehicles 5.400.222.00 Working capital = Capital Assets 7.00 Current liabilities 3.00 Purchases 108.00 Salaries 23.00 Insurance premium 592.300.00 13.00 Mortgage loan 20.064.384.00 12.220. 2001 18.520.300.00 Sales 178.00 Discount allowed 4.984.522.677.900.889.00 Returns outwards 5.996.677. 2002 and also a balance sheet as at that date.00 1. Dr Cr N N Capital 38.300.000.000.900.800 256.00 Cash at bank 10.600. prepare Trading and Profit and Loss Accounts for the year ended 30th September.416.00 12.00 256.00 Closing stock amounted o N21.00 st Stock at 1 October.00 Furniture and fittings 5.00 9.00 Rent and rates 5. What is a balance sheet? 4.00 Light and heat 6.00 iv) SELF ASSESSMENT EXERCISE From the following Trial Balance of D.00 Creditors 4.BHM 107 GENERAL ACCOUNTING II Less drawing iii) Capital employed = Capital owned Add total liabilities Long-term liabilities 5.0 CONCLUSION 71 .500.000.00 Returns inward 2.00 Debtors 11.545.00 21.040.920.
000 2. 72 .000 1. 2006.0 TUTOR-MARKED ASSIGNMENT Prepare Dan Musa’s balance sheet from the figures given below in his list of balances as of 31st March.000 30. we have known that a balance sheet is a picture of the dynamic process of a business. consists of two sides.000 10.000 1. just like a coin.R. 5.0 REFERENCES/FURTHER READINGS Jenning. (1997).0 SUMMARY The balance sheet of a business.A. Okwoli. DR N Capital Furniture and fitting Drawings Profit and loss account Motor vehicles Premises Debtors Closing stock Creditors Cash 5. UK: Ashfor Press.BHM 107 GENERAL ACCOUNTING II In this unit. is made up of the assets side and the liabilities and owner's equity side. Financial Accounting 2nd Edition. (2004).000 7.000 9. A.000 2. which consists all the net worth of the organization.000 5.000 CR N 20. Zaria: Malthouse Press. A.000 5.000 30. Principles of Accounting. 6.
1 The Receipt and Payment Account 3.0 ACCOUNTS OF NON-PROFIT ORGAIZATIONS Introduction Objectives Main Content 3.0 4. associations.2 The Income and Expenditure Account Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 6.0 3.0 2. a lot of these organizations exist to promote activities or to provide 73 .0 INTRODUCTION Clubs.0 5. In Nigeria today. or to provide useful services to mankind.0 7. which interest members. societies and other non-profit making organizations exist in most countries of the world to promote activities.BHM 107 GENERAL ACCOUNTING II MODULE 3 Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Accounts of Non-Trading Organizations Departmental Accounts Consignment Accounts Container Accounts Introduction to Partnership Accounts UNIT 1 CONTENTS 1.
The name does not however restrict launching as commonly organized by these entities to raise funds from interested members of the public.0 OBJECTIVES At the end of this unit. These non-profit making organizations generate their income in the main from registration of members. The debit side takes records of all the entity’s cash receipts. Good examples of non-profit making or non-trading organizations in Nigeria include the Eccodu of Nigeria. donations and sometimes from the proceeds of social activities organized by them. The equivalent of capital. In effect. you should be able to: • describe the methodology involved in preparing accounts for nonprofit organizations • explain and prepare the various accounts. annual subscriptions by members. 3. Their expenditures result from sponsoring the activities that interest their members. receipts and payments account. 2. maintenance of their secretariats and occasional donations to charitable organizations. Certain income and expenditures are however incidental to the existence of some of the non-trading organizations. profit and loss account and net profit or loss in the trading organizations are known as the consolidated or accumulated fund. while the credit side (payments side) records all the cash payments.0 3. all the entity's cash transactions are recorded in this book irrespective of the period for which the cash is received or paid or 74 . It is drawn in such a way that it has both debit and credit sides.1 MAIN CONTENT The Receipts and Payments Account The receipts and payments account operates in the same manner with the cash book of the trading organizations. and the net surplus or deficit respectively in the non-trading organizations. income and expenditure account. Football Clubs. Old Students' Associations and so many others. cash book. the Red Cross Society. the People's Club.BHM 107 GENERAL ACCOUNTING II services to needy people. The term ‘non-trading organizations’ and ‘non-profit making organizations’ are used to describe the same form of organizations as profit machinery is clearly associated with trading. which is the receipt side.
GWAGWALADA OLD BOYS RECEIPT AND PAYMENTS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER. The association acquired premises at the rate of N5. The association has a full time secretary on a N1. Illustrations 1. The Old Students decided to issue magazine at N4 per copy to themselves.2 The Income and Expenditure Account The income and expenditure account takes records of all revenue items of the organization for a given period irrespective of whether cash has been received or paid in respect of them. 3.000. all the Old Students except 300 paid their subscriptions. Traveling expenses amounted to N2. It operates almost the same way as the profit and loss account of the trading organizations except that the end results is either net surplus when revenue exceeds expenditure or net deficit when expenditure exceeds revenue instead of the profit or loss in the profit and loss account. All items of revenue nature for the period are credit entries while all items of expenditure for period are debit entries in this account. 1995 to which every member was required to subscribe N5. All paid without exception. This account does not take record of capital items like fixed assets. Required: a) Prepare the Receipts and Payments Account for the association.200 had been paid. 1995 RECEIPTS PAYMENTS 75 . and prepare the income and expenditure account for the association for the year ended 31st December.50 each. At the end of the year. 3.BHM 107 GENERAL ACCOUNTING II irrespective of the transaction for which the cash is received or expended.00 annually.890 salary per annum out of which Nl. Two local firms inserted advertisements for which they each paid N75. 1995.500 out of which N500 had not been paid. 3. 100 of them paid their subscriptions in advance against 1996. stationery and postage amounted to N850 for the year. The school had 100 members on the staff and each member paid N10 to the association.600 old students of a Gwagwalada school decided to form Old Students Association (OSA) on 1st January.600 copies of the magazine were printed at the rate of N2.
1995 Illustration II The Benue Club has the following assets and liabilities in the books on 1st October.000.00 2.BHM 107 GENERAL ACCOUNTING II Subscription (3.00 14.000. N 5.000.000.00 2.500.00 850.000.00 1.00 150.00 500.000.00 5.00 Balance b/d GWAGWALADA OLD BOYS INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER.00 2.600x5) Staff donations Sales of magazine Advertisement receipts N 17. receipts and payments were as follows.00 1.550.00 32.00 32.200.00 1.00 14.550.500.00 76 .000. 1994 Club premises Fixtures and fitting Subscriptions in arrears Cash at bank Expenses accrued During the year.500.000.400.00 14.00 Printing expenses magazine Secretary’s salary Traveling expenses Premises Stationery and postage Balance c/d N 9.
iv.200.00 d) Printing expenses accrued 200.00 c) Bar creditors 350.500.800. 1994 is to be depreciated at 10%. f) N400.00 800.00 1.00 e) Including in the general expenses paid was the N500. and N550 was in advance against the following year.00 1st October 1994 – 30th September 1995 N N b) Stock of bar 600. Required: As the Financial Secretary of the club. 1995 Income and Expenditure Account for the year ended 30th September. 1995 and Balance Sheet as at 30th Solution i.00 600.500. ii.00 800.00 2. Consolidated or Accumulated Fund = Assets – Liabilities (all at start) 77 .00 900. you are required to prepared the: i. Club Trading Account for the year ended 30th September.00 is owing for subscriptions for the current year. v. iii. g) The balance of subscriptions for previous year still outstanding is to be written off as bad debt h) the balance of fixtures and fitting at 1st October.500.BHM 107 GENERAL ACCOUNTING II Subscriptions received Printing expenses Fixtures Bar takings Bar supplies Receipt from advertisement in the club journal Stationery and postage Proceeds of dances Costs of dances General expenses The following items must be taken into account: a) Of the subscriptions paid: i) ii) N750 was for the previous year.00 owing from the previous year. Receipt and payments account for the club.000.00 1.00 2.00 450.500. 4. Consolidation funds at start for the club.00 1.00 1.
00 Bar supplies 1.250.000.00 2.400.00 stationery & postage 600.500.00 N 11.00 500.00 Advertisement receipt 900. In order to prepare the bar trading account there is need to know the authentic figure for purchase (bar suppliers). If different figures were quoted for opening and closing debtors in the question in the authentic figure for sales (bar taking) different from the one reported in the receipts and payments account would also need to be calculated to prepare to prepare the bar trading account.400.00 Cost of dances General expenses Balance c/d 1.100.00 12.00 Subscriptions 4.00 Balance b/d iii.000.00 THE BENUE CLUB RECEIPTS AND PAYMENTS ACCOUNT (1995) RECEIPTS PAYMENT N N Balance b/f 2.500.800.500.00 1.00 600. the figure for bar suppliers in the receipt and payments account does not represent the true figure for the bar suppliers in the receipt and payments account does not represent the true figure for the bar supplies any more.00 5.200.500.00 Printing expenses 1.00 Bar takings 2.BHM 107 GENERAL ACCOUNTING II N Assets as start: Club Premises Fixtures and fitting Subscriptions in arrears Bar stock Cash at bank Less liabilities at start: Accrued expenses Bar creditors Consolidated or accumulated fund 5.00 Fixtures 800.500.00 Proceeds of dances 2.000.000.500.00 12. Bar supplies: 78 .00 350.00 850.00 1.00 5.000. Because there are different figures for opening and closing creditors.00 10.00 2.000.
00 iv) THE BENUE CLUB INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 30TH SEPTEMBER.400.600.00 2.00 1.00 Bar takings 2.500. 1995 79 .BHM 107 GENERAL ACCOUNTING II Creditors at close Add cash paid to bar suppliers Less creditors at start Bar supplies N 450.00 Cost of bar sold 1.00 THE BENUE CLUB BAR TRADING ACCOUNT FOR THE YEAR ENDED 30TH SEPTEMBER.500.950.00 Less closing stock 800.00 Gross bar profit 1.100. 1995 v) THE BENUE CLUB BALANCE SHEET AS AT 30TH SEPTEMBER. 1995 N N Opening stock 600.00 1.00 Add bar supplies 1.00 Cost of stock available for sale 2.200.500.500.00 350.00 2.600.00 1.
0 SUMMARY The non-profit making organization generate their income in the main from registrations and sometimes from the proceeds of social activities organized by them. 5.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE 1. 2.0 TUTOR-MARKED ASSIGNMENT Zumuta social club had the following balances as at 31 December. we shall discuss Departmental Accounts. The similarity is that the receipt and payment is like the cash book while the income and expenditure have the same setting with the profit and loss account of the profit making organization. Such accounts are the Receipts and Payments account. And since they do not engage in business.0 CONCLUSION The non-profit making organizations maintain records in an account similar to the profit-making organizations. In the next study unit. and the Income and Expenditure account. 2005 80 . they maintain different accounting records compared to those of the business enterprise. What are the main differences between trading organizations and non-trading organization? What are the main sources of income to non-trading organization? 4. 6.
000.000 for subscription ending stock were.200 227. 81 .800 Rent 28. and a balance sheet as at that date.600 6. Subscriptions paid in advance amounted to N22.000 while Rates and insurance paid in advance amounted to N19.000 Stock: Catering 2. Taking.500 Furniture and fittings 84. Electricity N7. VAT Bal. Bar purchase N16.000 As at 31st December 2005 the club was owing for.400 37.400.900 8.BHM 107 GENERAL ACCOUNTING II Fixed Assets: N Plant and equipment 7. rates Insurance Electricity Printing & Stat.400 5.200.300 34.400 226.500 466.300 788.000 Debtor (catering) 1. Bar N44.000 VAT 5.400 Wages: House 82.600 5.200 and catering N3.500 Liabilities Creditors: Catering 4.300 Rent./Postage Club General exp.000 Cathering 97.600 For the year 2006 the club had the following cash book summary N Bank Bal.600 Club 14.300 N Purchases: Bar 262. Tel.500 Bar 41. Fees 368. bar Catering Subscription Parking rec.200 20.300 Subscription in advance 20.300 Prepaid rates and insurance 18.400 37.000 6.000.700 Electricity 8.800. at bank N 369.200 788. 10 percent is to be written off the book value of the furniture and fittings. Reg. Required: Prepared the Zumuata social club's income and expenditure for the period ended 31st December.400 and VAT N6.100 23.100 85.500.100 Cash at bank 50.200 Arrears of subscription 4.800 9. Catering purchases N3. Rent N28.500 Bar 14.600 for catering and N4.200 N 50. Club members owned N1.000 98.
Departmental accounts may be prepared just to ascertain net profits.0 2. Jos: Clestinno Press. Introduction of Financial Accounting.BHM 107 GENERAL ACCOUNTING II 7.0 REFERENCES/FURTHER READINGS Damagum. Zaria: Malthouse.A. Principles of Financial Accounting.0 7. When goods are distributed from the central store of a company to its departments. UNIT 2 CONTENTS 1.0 4. Departmental accounts of a company are customarily shown in columnar form right from the subsidiary books to the final accounts. Y. This is 82 .2 Departmental Accounts in Practice Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.1 Departmental Accounting 3. Departmental accounts in a company are used to decide on which department to encourage or phase out on the basis of each department's contribution. (2004).0 3. it is likely that each department is regarded as a profit center. In this case.0 DEPARTMENTAL ACCOUNTS Introduction Objectives Main Content 3.0 INTRODUCTION Departmental accounts are kept by companies that have more than one department and wish to know the contributions of each department to their total profits. it is necessary to charge the goods at selling prices.0 5. (1999). Okwoli A.0 6.M.
you should be able to: 83 .0 OBJECTIVES At the end of this unit. If all charges goods are not sold. It is suggested that the stock account and the mark up account be prepared in memorandum forms. average value of stock held by each department. the mark up account is debited with the value of percentage added to such stock so that any balance could represent the actual gross profit realized. 2.BHM 107 GENERAL ACCOUNTING II not only to keep adequate control over the department stock but will also ensure that each department stock is accounted for what may be regarded as the selling price is simply the addition of the product of a fixed percentage to the cost price. In a situation where the company is forced to reduce selling prices. the accountants comes face to face with two types of expenditure – the expenditure that is specific to each department and the expenditure that is common to all the department. In an attempt to ascertain departmental net profits. The proceeds of sales are credited to the stock account. Goods may be transferred from one department to another. Examination question may however give specific instruction as to the method of apportionment. When goods are charged to each department at selling prices the stock should be debited accounted with the value of the percentage that had been added. The specific expenditure can only be distributed among the departments by the process of appointment. It necessitates the preparation of two major accounts in respect of each department-stock account and mark-up account. It is suggested that selling and distribution expenses should be apportioned in proportion either to space occupied by each department. the reduction in the mark up should be used in the valuation of the closing stock also. When such happens the goods should not simply be merged with the purchase or central transfer of sales of the departments involved but should be recorded in special columns of inter-departmental transfers at both sides of the accounts concerned. The balance carried forward on the stock account minus balance carried forward on the mark-up account is usually the cost price of the unsold stock. departmental turnovers or number of articles sold by each department and interest charges should be apportioned to the departments in proportion to the capital employed in each department.
BHM 107 GENERAL ACCOUNTING II • explain the difference between departmental accounting and a single accounting system • describe the various methods of apportioning expenses • explain the basic concept of segregating departmental functions.0 3. They were sold during the year at the new price. 1990 50. which cost N13. Again. 1991 276. 500. 3.00 Mark-up 20% on cost The opening stock included goods. The selling price of these goods was marked-down by 10%.000 had their selling price reduced to N95.300. Four fifths of these goods were sold during the year.000.400.300. MEMORANDUM STOCK ACCOUNT AT MARK UP PRICES 84 . goods which had cost N81. The following figures relate to the clothing department of the stores.1 MAIN CONTENT Departmental Accounting Illustration 1. Okopi stores has a number of departments. N st Stock at cost 1 July. Explanatory analyses are also required as appendices to the accounts. Required: Show the memorandum stock account and the memorandum mark-up account for clothing department of this store for the year ended 30th June. 1991 375.00 th Sales to 30 June.00 th Purchase to 30 June. A memorandum stock account and a memorandum mark-up account are kept for each of the departments. 1991.
Stock: Stock at 1st July.800.00 1.892.592.440.400.808.8 x 81.00 Current year mark down prices. 1990 Add purchase Less cost of sales Stock at close (June 30) at cost Sales: Selling price N a) Opening stock at mark down price Cost 13.200 Less marked down 1.500.00 236.808 at normal Rate of 20% Cost price N Gross profit N N 326.350 14.00 Cost price (0.300.00 Selling Marked upon N11.00 64.362 Gross profit 85 .500 Add 20% mark up 2.00 11.00 60.318.892.700.00 b) c) 3) Cost price 2.BHM 107 GENERAL ACCOUNTING II MEMORANDUM MARK UP ACCOUNT Analyses N 1.700 16.00 47.300) 76.00 314.910. Selling price (0.8 x 95. 13.000.240.108.00 2.00 314.000) Balance at full marked up price 283.350.00 11.00 276.00 375.00 50.850.
00 17. 2005.300) 380.000.00 4.00 600.00 40.BHM 107 GENERAL ACCOUNTING II Less markdown on unsold stock 0.000 1. showing the percentage which the gross and net profit bear to the turnover of each department and the total. The following balances are extracted from the books of the company as at 31st December.100.200.2 x 81.00 10. GENERAL Opening stocks Machinery (Cost N8.00 240.00 70.00 500.000.00 800.00 600.000.600.00 7.00 10.900. MONGUNO LIMITED TRADING ACCOUNTING FOR THE ENDED.000.400.00 960.00 ELECTRONICS N 12.00 12.00 56.400.600.400.000.000 3.300.00 600.00 12.00 1. of Machinery Salaries General expenses Carriage outwards Interest on investment General reserve Investments Cash in hand Cash at bank Closing Required: GARMENT N 10. 2005.000 Prepare from the above information the trading and profit and loss accounts for the year ended 31st December.000.00 2.2 x (1.982.00 8. 31 DECEMBER.2 Departmental Accounts in Practice The Monguno Limited has two departments: the Garment Department and the Electronics Department.00) Capital Debtors Creditors Sales Purchases Wages Rent and rates Dept.00 20.000-95.000.000.00 39. 2005 86 .00 12.00 3.200.00 700.000.
00 15.00 325. 1995 MONGUNO BALANCE SHEET AS AT 31ST DECEMBER.000.00 600.000.000.00 625.000.000. The following particulars relate to the departments: Opening stock Purchases Sales A 50.00 375.00 B 20.000.00 287. 2005 SELF ASSESSMENT EXERCISE 1 Garba Brothers carry on their business through four departments.000.750.00 C D 10.500.00 125.00 262. The departments are numbered A to D.000.00 118.BHM 107 GENERAL ACCOUNTING II PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED.00 87 . 31ST DECEMBER.500.000.
000.000.0 SUMMARY Departmental accounting is a system whereby the operational activities of an organization are accounted for along departmental or segmental times rather than from a single unit of collective perspective. Required: Departmental trading and profit and loss account for the year ended 30th September.000.0 REFERENCES/FURTHER READINGS Damagum.0 CONCLUSION Departmental accounts may be prepared just to ascertain departmental gross profits or to ascertain both the departmental gross profits and net profits or loss.00 Expenses incurred are as follows: N Commission paid 9. Y. SELF ASSESSMENT EXERCISE 2 What are the uses of departmental accounting? 4. 88 . (2003).000.00 Discount allowed 2.BHM 107 GENERAL ACCOUNTING II Closing stocks 150.00 General expenses 20.M.00 25.000.000.00 Rent and rates 18.000.000.00 175.0 TUTOR-MARKED ASSIGNMENT What are the methods of apportionment of indirect expenses in departmental accounting? 7. 5.000.00 75. 1999.00 The expenses are to be charged to each department in proportion to the purchase of that department. Introduction to Financial Accounting.000. Jos: Clestinno Press. 6.00 Salaries 60.00 Insurance 1.
A. (1999).2 Consignment Account Illustration Conclusion 89 .0 2.0 4. A.0 CONSIGNMENT ACCOUNT Introduction Objectives Main Content 3.0 3.1 Preparation of Consignment Account 3. Zaria: Malthouse Press.BHM 107 GENERAL ACCOUNTING II Okwoli. Principles of Financial Accounting. UNIT 3 CONTENTS 1.
The practice of fair accountability requires the consignee to render to the consignor an account called ‘account of sale’ showing particulars of the consignment.0 6. In the consignee's books only one account . In the consignor's balance sheet unsold goods on consignment form part of his current assets under the name of goods on consignment. He enters the cash proceeds of sale in hid private cash 90 . or after necessary reconciliations. his entitlements and the balance to be remitted to the consignor. the basis of the consignee’s expenses and commission and finally showing the net amount due to the accounts that may be prepared by the consignor after taking all associated income and expenditure into consideration. namely the consignment outward account which shows the cost of goods sent on consignment. he is allowed to collect the proceeds. the consignment to consignee account which shows the proceeds of sales of the consigned goods and the consequent net profit or loss on the consignment. and the consignee account which records the gross proceeds of the sale. A paper called ‘proforma invoice’ which gives brief descriptions of the goods on consignment and the minimum price in which could be sold normally accompanies all goods on consignment as instructions from the consignor to the consignee until they are sold by the consignee.0 7. A further concession called ‘del credere’ commission may be granted at an agreed percentage of the proceeds of sales to the consignee if he guarantees payment in case of occurrence to bad debts in the transactions. which after the deduction of his expenses in respect of the goods and his agreed commission should be remitted to the consignor.BHM 107 GENERAL ACCOUNTING II 5. When the consignee sells the goods consigned to him. all expenses incurred by him in respect of the consignee.0 Summary Tutor-Marked Assignment References/Further Readings 1. There is therefore a consignment when goods are sent to an agent known as the consignee for sale by the sending party called the consignor. Two people’s account books are affected when goods are sent on consignment-the consignor’s books and the consignee’s books.the consignor's account – is of particular interest. At no time does ownership of the goods pass to be consignee in his capacity as a consignee and therefore all expenses in connection with such goods are borne by the consignor.0 INTRODUCTION A consignment is an arrangement whereby goods are sent to an agent who tries to sell then on behalf of the sender on commission basis. The consignor's account shows the gross proceeds on sale of the consignment. In the consignor’s books three main accounts may be opened.
1 MAIN CONTENT Preparation of Consignment Account The following took place in respect of a consignment of goods from MaiLafia of Lafia and Achebe of Abagana.00 Fire insurance 20. The same day. 3.00 On 29th January 1998 Achebe sent the account of sale to MaiLafia showing the following results and associated costs.00 Custom duties 200.00 Transport cost 300.00 Import duties 50. iii) iv) v) vi) Required 91 . i) ii) On 1st January. 1998. MaiLafia paid the following expenses. the consignor takes all costs into account to determine his profit or loss on consignment. Achebe remitted the net balance by bank draft to MaiLafia on 31st January.0 3. The cloths had cost MaiLafia N0.000.0 OBJECTIVES At the end of this unit. N Proceeds of sales 5.15 per metre at Lafia on 1st January. He does not concern himself with any cost not borne by him. N Packing charges 103. Unlike the consignee.5% of the gross sales as del credere commission for guaranteeing against bad debts.00 Warehouse expenses 75.BHM 107 GENERAL ACCOUNTING II book of sale of the consignment when the consignment is paid the cash book should be credited.5% of the gross sales and a further 0. 1998.00 Achebe is entitled to a flat commission at. you should able to: • explain the nature of consignment account • describe the various concepts of consignment transactions.000 metres of hand woven clothes valued by proforma invoice at 50 per metre to Achebe.00 Insurance charges 157. 2. 1998 MaiLafia sent 8.
Packing charges account Insurance charges account Custom duties account Transport expenses account (Being sundry expenses paid by MaiLafia – the consignor in respect of his consignment Achebe Dr. 1 Jan.00 Jan.BHM 107 GENERAL ACCOUNTING II Show the relevant accounts in the books of the consignor and the consignee for the month of January. Solution DATE PARTICULARS LF 1998 Jan.00 Jan.00 145.00 250.00 1.580.00 N Jan. 1998 Journal entries are required.00 25. 1 275. 30 Transfer of trading 1.000. 30 Consignment Outwards Jan.000.00 account Jan. 1 CONSIGNMENT OUTWARDS ACCOUNT N Jan.00 75.200. 1 Consignment to Achebe N N 1. Achebe: Fire Insurance Import duties Warehouse expenses (Being sundry expenses paid by Achebe) Consignment to Achebe account Dr.00 200.000.000.00 Jan.200.00 60.00 4.00 20.00 157.00 103.580.200 Jan.000 – N1.200. nd commissions) DR CR N N 12. Achebe: 5% commission 0.00 5. Consignment Outwards Account (Being the cost of goods sent on consignment) to Achebe N15 x 8.00 300. 1 Consignor 1. 1 Consignment to Achebe Dr. 29 Consignee (proceeds of sale) 92 . Achebe (Being remittance of net proceeds by Achebe to the consignor – that is the difference between the gross proceeds and Achebe’s exp.00 5. 1 Jan.00 Jan. 1 5. 1 Consignment to Achebe Account Dr.200.00 4.00 760.5% del credere commission (Being commission due to Achebe on the consignment Bank account Dr. Consignment to Achebe (Being proceeds of sale of the goods on consignment by Achebe) Consignment to Achebe account Dr.
00 Del credere Commission 25. 29 275. 29 Fire insurance 20.00 GENERAL ACCOUNTING II 5. Commission receivable (Being commission receivable by Achebe and deducted from the consignors account) Cash Account Dr.00 5.00 50.00 275.00 ACHEBE. 1 Consignee: Fire insurance Import duties Warehouse Commissions Jan.00 75.000.00 5.00 MAILAFIA. 29 Consignment to Achebe (proceeds of sales) 5.000.000. 29 Jan.000.00 2. 29 Jan. ABAGANA Jan. 29 Bank 4.BHM 107 Expenses: Packing 103.000.000.00 IN THE CONSIGNMENTS BOOKS JOURNAL PROPER (ACHEBE.00 Transport 300.00 Insurance 157.00 275.00 Jan. 29 PARTICULARS Mai Lafia Dr. 29 93 .580. 29 20. 29 5.00 75.00 4.00 4.00 CR N 20. Mai Lafia (Being proceeds of sale of consignment) Mai Lafia Bank account (Being payment of net proceeds of sale to the consignor LF DR N 145. 29 Jan.00 Jan.00 Commission 250. 29 Jan.00 75. LAFIA N Jan.00 5.00 50.00 Jan. ABAGANA) DATE 1997 Jan.580.00 Jan.500.00 275.00 Jan. 29 Jan. Cash: Fire insurance Import duties Warehouse expenses (Being sundry expenses paid in cash by Achebe-the consignee) MaiLafia Dr.580.00 Import duties 50.00 Cash (Sales) N 5. 29 Prof on consignment 20.620.00 Warehouse expenses 75. 29 Cash: Fire insurance Import duties Ware expenses Commission Bank Jan.00 4.00 Custom duties 200.000.00 Jan.00 50.
Bankole agreed to write them off his books.500 Obi paid Carriage expenses 1.000. Solution This question brings out a situation where both the consignor and consignee made expenditure on goods that have not been sold in full. 10 of the crates were discovered to have been damaged I transit and had to be discared.000. Required: Show these transaction in the: i) ii) Consignor's book including the balance sheet on 30th April.000 Handling charges 500 Sundry expenses 1.00 CR N 7. Bankole paid Transport expenses Nl. 1998. It is suggested that all the expenditure be written-off against the present revenue instead of spreading the cost in proportion to crates on consignment as other authors may suggest.00 3.500. and Consignee's books.2 Consignment Account Illustration Bankole of Jos consigned goods to Obi in Enugu on 1st April. The following data relate to the transactions for the month of April.000 Deliver expenses 1. Consignment outwards account (being the cost of goods sent on LF DR N 7. IN THE CONSIGNOR’S BOOKS JOURNAL PROPER (BANKOLE JOS) DATE 1998 April 1 PARTICULARS Consignment to Obi Account Dr. April April April 15 April 25 April 26 April 30 Bankole consigned 500 crates of goods costing N15 per crate. 1998.BHM 107 GENERAL ACCOUNTING II 5.00 94 .00 5.500. 1998.000 Fire insurance 550 Obi sold 450 of the crates of goods at N30 each Obi submitted an account of sale to Bankole and remitted the net Balance in bank draft to him (Bankole) after deducing his agree Commission at 5% of the sales.
00 600. Transport charges account Handling charges account Sundry expenses account (Being sundry expenses paid by the consigner in respect of his consignment) Consignment to Obi Account Dr.00 2.000.550.00 10.00 550.00 500.00 1.500.00 150.000. Consignment of Obi account (Being proceeds of sale of part of goods on consignment by Obi Consignment to Obi account Dr. Consignment to Obi account (Being goods on consignment which were damaged and had to written off) 3.00 1.750.500. Obi (5% commission) (Being commission due to Obi on the consignment) Bank account Dr.00 13.275.00 675.00 150. (Being remittance of net proceeds by to the consignor) Consignment outwards account Dr.00 1.00 CONSIGNMENT OUTWARDS ACCOUNT April 30 April 30 April 30 Consignment to Obi Stock of unsold goods Transfer of trading account 150.275. Obi: Carriage expenses account Delivery expenses account Fire insurance account (Being sundry expenses paid by the consignee) Obi Dr.500.500.BHM 107 GENERAL ACCOUNTING II April 1 April 1 April 26 April 26 April 26 April 30 consignment to Bankole N15 x 500) Consignment to Obi Account Dr.00 13.00 1.000.00 675.00 7.00 6.00 10.00 7.500.00 May 1 Stock balance b/c CONSIGNMENT TO OBI ACCOUNT 95 .000.00 April Consignment to Obi 7.500.
ENUGU) N600.BHM 107 GENERAL ACCOUNTING II OBI.00 BANKOLE. JOB 96 . ENUGU BANKOLE BALANACE SHEET AS AT 30TH JUNE. 1998 Current Asset Goods on consignment IN THE CONSIGNMENT JOURNAL PROPER (OBI.
as they concern the consignment of goods by the seller and deliver to the buyer.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE 1. 6. Y.0 CONCLUSION The . 5.A (1999). Okwoli. (2004).0 TUTOR-MARKED ASSIGNMENT What do you understand by del credere commission in consignment transaction? 7.M. A. 2.0 REFERENCES/FURTHER READINGS Damagun. Jos: Clestino Press. Principle of Financial Accounting. Introduction to Financial Accounting.consignment account is mainly concerned with the account records of transactions involving the consignor and cosignee. What is consignment? What are the parties involved in a consignment transaction and how do they settle their account? 4. Zaria: Malthouse Press. In the next study unit.0 SUMMARY The consignment transactions involve maintaining two set of books: one for the consignor's account which shows the gross proceeds on sale of the consignment and all the expenses incurred by him in respect of the consigned goods. we shall discuss container accounts. UNIT 4 CONTAINER ACCOUNTS 97 .
a crate for soft drinks. salt and so on.0 3. In marketing? the container is called the package. waterproof bags containing shirts. the secondary package and the labeling is nay-printed information. price column for the price at 98 .1 Preparation of Container Account 3. In accounting literature. In modern times. Ideally. each of these accounts should contain three columns at each of its sides-the quantity columns for the total figure involved in the transaction. a container is looked at from two main stand-points-either it is non-returnable or returnable. It has its own distinct cost.BHM 107 GENERAL ACCOUNTING II CONTENTS 1. Two main accounts are recommended to use in recording the transactions concerning containers-the containers stock account and the containers suspense account. the cost of packaging would have been taken into consideration for the non-returnable. secondary and the labeling level. which may be dividend into three main levels of materials-the primary.0 6. The primary package is the producer's immediate container.0 4. examples of container abound every where-a carton of beer. Just like opening and closing balance of stock of goods for sale there can also be opening ant closing balances of stocks of containers.0 INTRODUCTION A container is any item that contains goods for the purpose of either preservation or conveying to agreed destination. which appear on the package to describe the product in it. Customers are not chargeable for non-returnable package. granulated sugar. Returnable containers norn1ally attract deposits from customers at the time of sale.2 Container Account Illustration Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 Introduction Objectives Main Content 3.0 7. The cost of the returnable container is not taken into consideration in costing the goods that are sold.0 5. The difference between the amount of deposit (the charge-out price) and the amount refunded (the credit back price) on return of the containers represents profits to the business. In costing the goods. The amount to refund on return of the containers is less than the amount of the deposit. A container of that nature is treated as a manufacturing expenses and record is taken of it after sales. which is returnable. bed sheets.0 2.
The second illustration will assume that the prices vary. the cost price.* On 1st January. charge-out price which will and credit back price which represents the amount which customers are credited with on return of the containers. 500 crates were damaged beyond repairs and therefore discarded. you should be able to: • explain the various prices involved in certain transactions • describe how certain records can be maintained.000 crates in the warehouse.1 MAIN CONTENT Preparation of Container Accounts We will take two hypothetical cases for our illustrations. The crates are purchased by the company from another. i) 24.800 crates in the hands of customers. 3.000 crates in the warehouse ii) 6. In the first case it will.000 crates were returned by customers and credited in full.200 crates in transit. and iii) 1. During the year. The containers stock account shows the profit or loss arising on containers while the containers suspense account deals with movements of containers to and from customers Four main prices may be associated with container accounts-the book value which represents the price at which stock of containers is valued for balance sheet purposes.000 crates were purchased during the year.000 were made to the crates.0 3.0 OBJECTIVES At the end of this unit. 1. the charge-out price and the credit back price are the same for the containers. at the same rate of N10 per crate. cost price which is paid for purchase of new containers. 30. 200 crates were retained by customers. 17. and the closing stock take shows. 2.BHM 107 GENERAL ACCOUNTING II which each transaction takes place and the amount column for the net totals of the transaction.000 crates were invoiced to customers. Repairs to the tune of N1. Be assumed that the book value. 20. Plastics limited. Ojiji Company delivers goods to customers in plastic crates which are involved to them at N10 each and credited in full if returned within three months of delivery. 1993 there were 5. Required 99 . the following transactions took place: 10.000 with customers and 500 in transit.
00 at N10 = N320.000.800 1.000 Cost of crate newly issued to customers: 20.00 c/d Warehouse Customers Transit 24.000. Solution Stock at start: Warehouse Customers In transit 5.000.000 Value of crates retained customers: 200 Value of damaged crated: 500 = 0 Stock at close Warehouse 24.00 Qty.000 500 22.00 N2.000 Value of crates returned by customers: 30. Opening balance 500 with 17.200 10 323.000.00 10 20. Opening stock b/ f Warehouse Customer Transit Cash Purchases Cash Repairs Containers Recovered 500 17.000.000 Price N Amount N Containers Scrapped Containers Suspense Retained Profit and Loss Closing stock 200 32.000 17.000.00 N300.00 200.00 Qty.200 32.BHM 107 GENERAL ACCOUNTING II Prepare appropriate accounting records for all crate transactions for the year ended 31st December. 1993 in the books of the company.800 1.000 6.00 6.00 N200.000 at N10 at N10 at N10 at N10 at N10 = = = = = N225.000.000.000.000 6.000.00 100.000.000 500 10. Crate returned 30.200 32.500 Cost of new purchase: 10.00 N100.500 In transit 1.000 Price N 10 Amount N 300.700 Stock b/d Warehouse Customers Transit 24.000.000 20.000 Customers 6.000. Price N Amount N 10 10 225.00 PLASTIC CONTAINERS STOCK ACCOUNT Qty.700 500 200 10 2.000 10 10 170.000.000.00 10 320.000.00 customers Crate sent to customers Price N Amount N by customer Container 100 .00 PLASTIC CONTAINERS SUSPENSE ACCOUNT Qty.00 328.000.
00 200 10 2. the crates depreciate at the rate of 12. On 1st July.5% irrespective of when the purchases are made. 330 crates were returned late by customers.500 with customers and 360 in transit.600 crates invoiced to customers.000. In other words. 150 of these crates were still credited in full but reminder were credited at N5 each Repairs were made to the crates at N780 120 crates were retained by customers 90 crates damaged and discarded but sold at half of their original cost as scrap. 33.500 crates in the warehouse 25. Container Account Illustration Ijika (Nigeria) Limited delivers goods to customers in wooden crate. On 30th June 1995.650 Transit 300 In this company.000 370. During the year to 30th June.000.900.BHM 107 Stock: Retained by Customers Closing Balance with Customers 6. There is an arrangement that for each crate returned by customers within three months of delivery in good condition they (the customers) will be credited with N9. closing stock of crates were valued at N7 each for wear and tear. The crates are bought from Wooden Products Limited at the rate of N8 each but are invoiced to the customers at N10 each. 2005.00 Containers GENERAL ACCOUNTING II 37.000. the following transactions took place: 27. the stock of crate had a break down as follows: Warehouse 12.000 10 68.800 37. Required: Show: i) the wooden containers stock account 101 .2 2. customers 19.00 3.000 crates were returned in good time and credited at full-agreed price.000. 2004 there were 7.00 370.
BHM 107 GENERAL ACCOUNTING II ii) iii) the wooden containers suspense account. and the extracts to the transaction in the balance sheet. WOODEN CONTAINERS STOCK ACCOUNT WOODEN CONTAINERS STOCK ACCOUNT 102 .
What are the main prices that may be associated with containers? 4. 6. The containers are bought at N16 per container but are invoiced at N20 to customers. In the next study unit. 2.800 containers were purchased. In accounting. containers are categorized into two distinct groups – returnable and non-returnable.000 containers invoiced to customers 103 .0 CONCLUSION Container accounting treats those containers that are returnable as a basis of trading of the organization. 5.0 SUMMARY Those containers that are treated as a manufacturing expenses pose no problem to the container accounting after sales. Discuss. The company commenced business on 151 January. 4. 1991 and the following data represented their transaction for the year.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE 1. i) ii) 6. The account maintains all records involved in those containers issued to customers.0 TUTOR-MARKED ASSIGNMENT The management of Plateau Breweries Limited delivers its products to customers in plastic containers. we shall discuss Introduction to Partnership Accounts.
280 containers were retained by customers.A (1999). (200). Jos: Clestino Press.480 containers were returned in good condition and credit at the agreed credit-back price ofN18 per container.0 REFERENCES/FURTHER READINGS Damagum Y. Zaria: Malthouse Press. Required to prepare: 1) 2) the containers stock account.BHM 107 GENERAL ACCOUNTING II iii) iv) v) 2. Okwoli. 40 containers were badly damaged and had to be discard. A. Principles of Financial Accounting. UNIT 5 CONTENTS 104 INTRODUCTION ACCOUNTS TO PARTNERSHIP . 7. and 1.M. 1991 were located as follows: At the warehouse With customers In transit 3. The stocks of containers at 31st December. Introduction to Financial Accounting.800 240. the containers suspense account. and 720 The company decided to adopt the policy of valuing the stock of containers at N14 per container to allow for depreciation.
b) c) THE PARTNERSHIP DEED It is usually but not necessarily compulsory for the partners in a partnership business to draw up a document called a partnership agreement (deed) setting out the arrangements.2 Maintenance Capital Accounts of Partners Conclusion Summary Tutor-Marked Assignment References/Further Readings 1. The owners of a partnership business are known simply as partners. 1890 provides that the following rules shall apply: 105 .0 Introduction Objectives Main Content 3. which subsists between persons carrying on a business in common with a view of profit”.0 6. A partnership business may originate from one of three ways: a) Where two or more independent persons decide to start a wholly new business or buy an independent going concern.BHM 107 GENERAL ACCOUNTING II 1. in the absence of any expressed implied agreement between the partners. Where two or more persons each carrying on separate business as sole traders decide to amalgamate their independent concern to form a partnership.0 5.0 INTRODUCTION Section 1 of the partnership Act of 1890 defines a partnership as “relationship.0 7. Whatever arrangements that have been made between them will guide their rights and limitations in the business and will also set out the mode for the preparation of the accounts. However.0 4. In this case. Where one person who is already in business decides that he needs somebody to help him in running the business and so admits a person.0 2. the assumption is that none of them (the would-be partners) possesses an existing business and if there is an existing business will not be used in the partnership. section 24 of the partnership Act.0 3.1 The Appropriation Accounts 3. which have been decided between them.
3. sustained by them. Illustration 106 . a partnership business requires the preparation of the appropriation accounts The appropriation section of the accounts records non-operating costs such as interests on capital and partnership salaries. and That without the general consent of all no one can be introduced to the business as a partner. That the firm must indemnify every partner in respect of payment made and personal liabilities incurred by him. That partners are not entitled to partnership salaries. he is entitled to interest at the rate of 5% per annum of the amount.0 3. non-operating income such as interest on drawing.BHM 107 GENERAL ACCOUNTING II (a) (b) (c) (d) (e) (f) (g) That all the partners are entitled to shared equally in the capital and profit of the business and must contribute equally towards the losses. The accounts that are usually found in this section of the partnerships’ financial records are the profit and loss appropriation account. That no partner is entitled to interest on capital subscribed by him. That the partnership books shall be kept at the ordinary place of business of the firm and any of the partners may have access to them. 2. If the partnership capital is not fixed. individual partners' current accounts and the individual partners' drawing account. whether of capital nature or otherwise.0 OBJECTIVES By the end of this unit.1 MAIN CONTENT The Appropriation Accounts In addition to the usual records and accounts from the subsidiary books of accounts to the profit and loss account. there may be no need for the current account as all the items of the current account could be used in adjusting the capital account to their net current value. and the distribution of the net profit among the partners. In the ordinary and proper conduct of the business of the firm. you should be able to: • discuss the legal requirement governing the conduct of partnership • explain the preparation of appropriation account • explain partnership capital/current account. That if a partner lends money to the firm in excess of the capital he agreed to subscribe.
Solution Calculation of interest on capital Abu = 5/100 x 8.00 3. 1991 ii.000 0.000 respectively as t heir capitals on 1st April.000 = = N400 N300 N 4.00 3000/2 = 1. 1990.500 each ABU AND BELLO PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31ST MARCH.05 x 8.200.000.200. Abu and Bello contributed N8. The partnership deed allows interest on capital at the rate of 5% per annum. Bello is entitled to a partnership salary of N500 per annum.000/1 or Profits to share Net operating profit Less Partnership salary .00 1.00 0.05 x 6.200 on 31st March. 1991. 1991.000 and N6.BHM 107 GENERAL ACCOUNTING II Abu and Bello are in partnership sharing profits and losses equally. Required: Show the profit and loss appropriation account of the firm at 31 st March. Fluctuation Capital Account Fixed Capital Account: 107 .00 300.001/1 or Bello = 5/100 x 6.00 400.(Bello) Interest on capitals – Abu Interest on capital – Bello Share of profit = N 500. The net trading profit for the year amounted to N4.
an account know as partner's current account is opened. 1994 Debtor and creditors DR N 12. commission payable to partners etc.00 18.00 108 .000. The closing balance of a partner’s current account is shown on liabilities side in case of credit balance and it is shown on assets side in case of debit balance. Moreover the word fixed is not prefixed to capital account of a partner because maintenance of partner's current account implies that capitals are fixed. It may be noted that in case of fixed capital the balance of capital account remains unchanged except when either the fresh capital is introduced or the excess capital is permanently withdrawn. To record drawing made by a partner and his share in allocation of profits including interest on capital. the balance of capital account will fluctuate from year to year and non-preparation of current accounts implies capital accounts are fluctuating. balance of capital in the beginning of the year. are recorded in capital account. Stock 1st July. The following trial balance was extracted from their books on 30th June. Fluctuating Capital Account: If current accounts of partners are not maintained.00 DR N 14. interest on drawings. salary payable to partners. interest on drawings. In that case. SELF ASSESSMENT EXERCISE Obi and Oba are partners sharing profits and losses in the ratio of 3:2. fresh capital introduced during the current year are recorded on credit side and permanent withdrawal of excess capital and closing balance of capital are recorded on debit side of the capital account. 1995. There is always a credit balance in the capital account of a partner.000.000.BHM 107 GENERAL ACCOUNTING II In the case of fixed capital accounts. which is shown on liabilities side of the balance sheet. salary of a partner etc. the transactions relating to drawing by partners and their share in allocation of profits including interest on capital.
00 20.000 A provision for bad and doubtful debts of N1.000.000.200. 1995 amounted to N500 Salaries still outstanding at 30th June. The trading accounts.000.00 30.00 Stock at 30th June.000 is to be created. v.000.00 6. Interest is charges on the fixed capitals at 5% Interest on gross drawing if to be charged at 5% per annum irrespective of the time the drawings were made.00 8.000. The profit and loss account. ii.00 304. iii.000.00 11.000.000.000.00 15. The partners' current accounts and The balance sheet as at 30th June 1995 4.000) Freehold premises Drawing for the year: Obi Oba Cash at bank Cash in hand Additional Information: a) b) c) d) e) f) g) 18. 1995 amounted to N2.000. Required Prepare: i. Rates prepaid on 30th June. 1995 was N24.BHM 107 GENERAL ACCOUNTING II Capital account at 1st July 1994 Oba Purchase and sales Salaries Rates Discounts allowed and received General expenses Plant and machinery at cost Furniture and Fittings (cost N8.00 2.00 16.000.00 240.00 3.00 4.000 Depreciation is provided as follows: Plant and Machinery – 10% on cost furniture and fittings – 10% on cost.800.00 3.000.0 CONCLUSION This unit focused on partnership business and relevant accounting procedures required to report the financial operating results of 109 . The profit and loss appropriation account.00 2.000.000.00 18. iv.
Jos: Clestinno Press. 6.BHM 107 GENERAL ACCOUNTING II partnership business. MODULE 4 Unit 1 Unit 2 110 Admission of New Partners Partnership Admission II . India: Tan Prints. Fundamentals of Financial Accounting.0 7.0 TUTOR-MARKED ASSIGNMENT REFERENCES/FURTHER READINGS Damagum Y. partnership profit and loss account and balance sheet are adequately covered. we shall discuss Admission of New Partners. Introduction to Financial Accounting.M (2003). the treatment of interest on partner’s capital interest on drawings and partnership salaries have been adequately treated. Key issues like the treatment of interest on capital. What constitutes a partnership deed.0 SUMMARY This unit introduced the concepts of partnership ventures and their bookkeeping peculiarities. 5. Ashok S. (2003). In the next study.
BHM 107 GENERAL ACCOUNTING II Unit 3 Unit 4 Unit 5 Unit 6 The Partnership Accounts (Retirement) Dissolution of Partnership Ratio Analysis Ratio Analysis (Potential and Actual Growth) UNIT 1 CONTENTS 1. revaluation of the assets and liabilities of the existing business before the payment of the capital amount.0 7.1 Admission of Partners with Premium 3.0 3.2 Sharing the Premium in Profit Sharing Ratio 3.0 Introduction Objectives Main Content 3. The new partner may be required to provide management expertise and/or additional resources to the business.0 2. one out of six decisions requiring accounting entries must be taken.0 ADMISSION OF NEW PARTNERS 4. a partnership admission takes place and a new partnership business different from the old business emerges. The new partnership deed may provide for one of the following: a) b) c) d) e) payment of agreed capital amount alone by the incoming partner. payment of agreed capital amount with premium which may be received privately by the partnership in their old sharing ratio. or 111 .0 6. When a new person is admitted into a business. When a new person joins a partnership business or the business of a sole proprietorship.3 Premium shared but Retained in the Business Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 INTRODUCTION A business that is started by one or a few people may grow until it becomes necessary to involve additional hands as partners. payment of capital amount with premium which may be received by the old partners in their sharing ratio through the books of account. payment of capital amount with premium which is retained in the business by crediting the capital accounts of the old partners with the premium paid.0 5.
00 9.000.00 3.00 1.500.0 OBJECTIVES By the end of the unit.00 13.000. 1995 Capital Account Abba Yaro Current Liabilities Trade creditors Expenses creditors N 5.000.000. 1996.000.00 N 10.BHM 107 GENERAL ACCOUNTING II f) creations of goodwill in the business in favour of the old partners before the payment of the capital sum.1 MAIN CONTENT Admission of New Partners with Premium Admission of new partners with premium indicates that the new partner(s) has to pay a premium to the existing partners in addition to the capital contribution.000.00 Fixed Assets: Land and building Furniture and fitting Current Assets: Stock Cash N 6.000 as premium which is paid privately to the existing partners.000.00 4. 112 . ABBA AND YARO BALANCE SHEET AS AT 31ST DECEMBER.00 5. 2.000.00 2. Required: Show the exercise in the books of the firm with the assumption that the decision was implemented to the letter.000.000 in cash as his capital and N2.0 3. Illustration Messrs Abba and Yaro who shared profits and losses equally had the following balance sheet before admitting Bako on 1st January.00 3. 3.00 N It was agreed to admit Bako on the conditions that he introduced N5.00 13.000.00 3. you should be able to: • discuss the reasons of admitting a new partner • explain the accounting entries involved in the admission of a partner with a premium • describe the mechanism of the double entry concept of admitting a partner.000.00 500.000.
00 5. 1 Balance b/f Jan.000.00 5. 1 Balance b/f YARO’S CAPITAL ACCOUNT Jan.00 6. 1995 3.00 ABBA.00 CR N 5.000. 1 Balance c/d 6. 1 Bako’s Capital Jan.00 5.000.000. YARO AND BAKO BALANCE SHEET AS AT 1ST JANUARY.000.2 Sharing the Premium in Profit Sharing Ratio We will now assume that the premium was paid through the books of account to the existing partners in the old profit sharing ratio. 1 Cash 5.000.00 ABBA’S CAPITAL ACCOUNT Jan.000.000.00 DR N 5. The position will then be as follows: 113 .000.00 6. 1 Balance b/f BAKO’S CAPITAL ACCOUNT Jan. Bako’s Capital Account (Being cash introduced by Bako as his capital in the firms) CASH ACCOUNT Jan.000. 1 Balance b/d 1.00 Jan.000.00 6.BHM 107 GENERAL ACCOUNTING II JOURNAL PROPER LF 1996 Cash account Dr.
Cash Account (Being Yaro’s share of Bako’s Premium withdrawn from the cash book) LF DR N 5.000. 1 Jan.000.000.00 1.000.00 Jan.00 8. Cash Account (Being Aba’s share of Bako’s Premium withdrawn from the Cash books) Yaro Current Account Dr.00 1.000.00 1. Bako’s Capital Account (Being cash introduced by Bako as his capital on Admission in the partnership Cash Account Dr.00 Jan. 1 Jan.000.00 8.000.000. Abba’s current account Yaro’s current account (Being Bako’s premium shared by Abba and Yaro in their old) Profit sharing ratio Abba’s Current Account Dr.00 2. 1 Balance c/d 1.000.000. 1 CASH ACCOUNT Jan.00 2.000. 1 Jan.00 2.00 1.00 1. (Being cash) Bako’s premium account (Being cash introduced by Bako as premium) Bako’s Premium Account Dr.00 Jan. 1 Balance b/f Bako’s capital Bako’s premium Balance b/d 1.00 ABBA’S CAPITAL ACCOUNT N Jan.000.00 114 . 1 2. 1 Drawings – Yaro Jan. 1 Balance b/f N 5.BHM 107 GENERAL ACCOUNTING II JOURNAL PROPER DATE 1996 Jan.000.00 5.00 6.00 CR N 5. 1 PARTICULAR Cash Account Dr. 1 Jan. 1 Jan.00 1.000. 1 Drawings – Abba Jan.000.000.000.000.00 6.000.000.
00 Jan.00 Jan.00 ABBA. 1 Balance b/f BAKO’S CAPITAL ACCOUNT N Jan.000.00 N 5.000.000. 1 Drawings N 1.000.000.BHM 107 GENERAL ACCOUNTING II YARO’S CAPITAL ACCOUNT N Jan. YARO AND BAKO BALANCE SHEET AS AT 1ST JANUARY.00 N 5.00 ABBA’S CURRENT ACCOUNT Jan. 1 Cash N 2. 1 Yaro’s premium N 1. 1 Abba’s current account 1.000.00 YARO’S CURRENT ACCOUNT Jan.3 Premium Shared but Retained in the Business It is now assumed that the premium is shared among the old partners in their old profit sharing ratio but retained in the business.00 Jan. 1 Cash BAKO’S CAPITAL ACCOUNT N Jan. 1 Yaro’s current account 1. 1 Drawings N 1.000.00 Jan.000.000. The accounting entries would be as follows: JOURNAL PROPER DATE 1996 PARTICULAR LF DR N CR N 115 . 1 Bako’s premium N 1. 1995 3.000.000.00 2.00 2.
1 Jan.000.00 6.000.00 1. (Being cash) Bako’s premium account (Being cash introduced by Bako as premium) Bako’s Premium Account Dr.00 1.00 1.000.00 5.000.000. Cash Account (Being Yaro’s share of Bako’s Premium withdrawn from the cash book) 5. 1 Jan.00 5.000. 1 Balance c/d N 8. 1 Jan.00 N .000.000.00 2.00 6. 1 Balance c/d 6.00 1.00 8.00 CASH ACCOUNT Jan.00 8. 1 Balance b/f Jan.000. Cash Account (Being Aba’s share of Bako’s Premium withdrawn from the Cash books) Yaro Current Account Dr.BHM 107 GENERAL ACCOUNTING II Jan.00 ABBA’S CAPITAL ACCOUNT N Jan.00 2.000.00 Jan.00 Jan. Abba’s current account Yaro’s current account (Being Bako’s premium shared by Abba and Yaro in their old) Profit sharing ratio Abba’s Current Account Dr.000.000.000.000.000.000.00 8.000.00 2.000. 1 Bako’s capital Jan.000. 1 Bako’s premium 6. 1 Jan. 1 Cash Account Dr. 1 Balance b/d YARO’S CAPITAL ACCOUNT N 116 N 5. 1 Balance b/d Jan.00 2. 1 Premium Jan.00 1.00 Jan.00 1.000. 1 Balance b/d N 1.000.000.000. Bako’s Capital Account (Being cash introduced by Bako as his capital on Admission in the partnership Cash Account Dr.
1995 SELF ASSESSMENT EXERCISE 1.00 1.000. YARO AND BAKO BALANCE SHEET AS AT 1ST JAUNARY. 1 Balance c/d 6.000.000. 1 Cash 2. 1 Cash BAKO’S PREMIUM ACCOUNT N Jan.000.00 2. What are the reasons for admitting a partner? What are accounting entries required in the admission of a new partner? 4.000. existing partners sacrifice a portion of their share of profit in favour of the incoming partner. 1 Abba’s Capital Account Jan. 1 Balance b/d Jan.00 ABBA. 1 Balance b/d 5. 2.00 6.00 1. 5. The ratio in which 117 .00 N 5. 1 Yaro’s Capital Account 1.00 N 2.00 Jan.00 Jan.0 SUMMARY On admission of a partner.000.000.00 6.000.00 6.000.0 CONCLUSION The incoming partners become liable for the acts the business after his admission and is not liable for any act of the firm done prior to his admission as a partner.000.000. 1 Bako’s premium Jan.000.00 BAKO’S CAPITAL ACCOUNT N Jan.BHM 107 GENERAL ACCOUNTING II Jan.
In the next study unit.1 Admission with Revaluation 3.0 2.0 REFERENCES/FURTHER READINGS Okwoli.BHM 107 GENERAL ACCOUNTING II existing partners contribute to the share of the profit payable to the incoming partners is called ‘Scarifying Ratio’ and the ratio in which all partners (including the incoming partner) decide to share future profits is called ‘New Profit sharing ratio’. 6. Principles of Financial Accounting.0 4.2 Admission with Goodwill Conclusion . UNIT 2 CONTENTS 1. Deepak. A. we shall discuss further on admission of partners. India: Taxman Services.0 118 PARTNERSHIP ADMISSION Introduction Objectives Main Content 3.A (1997). S.0 TUTOR-MARKED ASSIGNMENT A and B who shared profit in the ratio of 3:2 admitted C and decided to give him 1/6 share of profits. (2003). New Delhi. Fundamentals of Financial Accounting. What are sacrificing ratio and new profit-share ratio of the firm? 7. Zaria: Malthouse Press.0 3.
the assets of the firn1 were revalued. 2. the partners may decide to retain the revalued figures in the books while in other cases. It was agreed that Musa should be admitted to the partnership as from 1st January.000 as his capital but before the admission could take place.0 Summary Tutor-Marked Assignment References/Further Readings 1. The assets and liabilities of the business may just be revalued before his admission.0 3.0 OBJECTIVES By the end of this unit. you will be able to: • explain the other method admission of a partners • understand the double entry concepts on admitting a new partner. 1997. Musa was to introduce N5.0 6.0 7.0 INTRODUCTION The unit is an extension of unit 1 which explained the purpose and objective of admitting a new partner into the partnership firm. The balance sheet of the firm before his admission and the revaluations were as follows: 119 . In some instances. A revaluation surplus increases the capital balance of the old partners while a deficit reduces them. 3. Illustration Olu and Okoro were partners sharing profits and losses in the ratio of 3:2.1 MAIN CONTENT Admission with Revaluation When a person is being admitted into a business he may not be required to pay premium. they may decide to write then back again.BHM 107 GENERAL ACCOUNTING II 5. The revaluation may have surplus balance or deficit balance and both affect the capital balance of the existing partners according to their old profit sharing ratio.
00 4.00) (500.500.000.BHM 107 GENERAL ACCOUNTING II OLU AND OKORO BALANCE SHEET AS AT 31ST DECEMBER.00 3.00 5.00 N 6.000. Solution Revaluation Effects: New value of premises Less old values New value of furniture and fittings Less old value New value of stock Less old value New value of debtors Less old value Revaluation surplus Olu’s share Okoro’s share = = N 8.00 1.6 x 4.500.00 (400.4 x 4000 = N1.00 4.00 5 1 0.00 1.00 3.000. 1996 Revaluations: Freehold premises Furniture and fitting Stock Debtors Required: Show the revaluation process and its effects on the accounts of the firm.000.000.000.600.000 = N2.00 2.900.000.000.00 3.00 3 4000 x or 0.00 N 5. Show the effects to the admission of Musa in the books of the new firm.00 4.400.00 JOURNAL PROPER (OLU AND OKORO) DATE PARTICULAR LF DR CR 120 .600.00) (100.900.600.00) 4.
31 Dec.000.00 Dec.00 8.000. 31 Dec.00 Jan.400. c/d 8.600.00 400.600.00 5.00 5. b/d 1. 31 Revaluation 5.00 Jan. 31 Jan.00 Dec. 31 Balance b/f N 2.00 100.000.00 2.00 2.000. 31 Balance c/d N 8. 1 (1997) Bal. Stock Account (Being revaluation deficit on stock) Revaluation Account Debtors Account (Being revaluation deficit on debtors) Revaluation Account Dr.000. 31 Balance b/f 3.000.000. 31 Revaluation Balance c/d N 400.00 1.600.00 8.00 FURNITURE AND FITTING ACCOUNT Dec.00 2.000.000.00 1.000. Revaluation Account (Being premises revaluation surplus) Revaluation Account Dr.00 4. 1. Furniture and Fittings (Being revaluation deficit on furniture and fittings) Revaluation Account Dr.00 STOCK ACCOUNT 121 .000. Olu’s Capital Account Okoro’s Capital Account (Being revaluation surplus shared between Olu and Okoro in the profit sharing Ratio) Cash Account Dr.00 Dec.00 500.000. Musa’s Capital Account (Being cash introduced by Musa as his capital) N 5. 1 (1997) Bal. 31 Dec. 1997 Freehold Premises Account Dr. 31 FREEHOLD PREMISES ACCOUNT N Dec.00 500.00 N 5.BHM 107 GENERAL ACCOUNTING II 1996 Dec.00 Dec.00 100.000.000.
00 5.00 Dec.000.00 Cash 3. 31 Dec.000.900.000.00 Okoro’s capital 1. 31 Revaluation Balance c/d 4.00 N N 9.00 Credit Assets 3.00 Jan.00 Furniture & fitting 1.000.00 21.000. 1 Musa’s capital 5.600. 1 (1997) Olu’s capital 2.00 4.000.00 8.00 Stock 100.600.000. 1 Balance b/f OKORO’S CAPITAL ACCOUNT Jan. 31 Balance b/f N 4.00 Debtors 4.00 3.00 OLU’S CAPITAL ACCOUNT Jan. b/d 3.00 21.000.000.00 When the admission takes place.000.00 N 100.00 Current liabilities Creditors N Fixed Assets Freehold premises 8.00 4.00 Stock 3. 31 Freehold premises N 5.000.00 Jan. 1 Balance b/f 3.00 REVALUATION ACCOUNT N Furniture & fitting 400.600.900. 1 Balance b/f MUSA’S CAPITAL ACCOUNT N 7.00 Jan. 31 Dec. 1997 N Capital Account Olu 10.400. 1 Balance c/d N 8.400.000.00 122 .00 4.00 8. the following entries will be made: CASH ACCOUNT N Jan.00 Balance c/d 4. 1 Balance b/d 8. 1 (1997) Balance b/f 5.000.00 Jan.00 Jan.000.000.000.BHM 107 GENERAL ACCOUNTING II Dec.600.400.000. 1 (1997) Bal.00 OLU AND OKORO BALANCE SHEET AS AT 1ST JANUARY.400.600.00 Jan.000.000.000.00 Debtors 500.00 4.900.00 18.00 Dec.500.000. 31 Dec.00 Okoro 7.00 N 10.00 11. 31 Dec. 31 Dec.000.
possession of monopoly or near monopoly rights such as patents and trade marks and the quality of management.00 3. N170.000.000.00 N 9.000.00 4.BHM 107 GENERAL ACCOUNTING II Jan.000. N190. N135.400.00 16.00 Furniture & fitting 1. 1 Cash N 5.000. The calculation will be as follows: Year 1 2 3 4 5 150.2 Admission with Goodwill Goodwill is an intangible.000.900.000. asset because it does not possess physical characteristics.00 OLU. It represents the reputation of the business in the eyes and minds of the people.000.000.000. three years' purchases of average of the last five years profit figures. Some of the factors that may give rise to goodwill in a business include the personal characteristic of the owners.00 23. location of the business premises.000. Let's assume the net profit for past five years had been N150.600.000.000.00 Credit Assets 3. 1997 N Capital Account Olu 10.00 26. OKORO AND MUSA BALANCE SHEET AS AT 1ST JANUARY.00 3.000.00 Musa 5. an agreement may be reached that a goodwill be raised in the books of the business and credited to the old partners’ capital accounts in their old profit sharing ratio.00 8. It’s only fair that a new partner compensates them for past efforts.00 Okoro 7. For instance.00 Stock Debtors Cash 26.00 170. quality of goods or services being sold or rendered. respectively and the goodwill is to be valued at three years' purchase of the average of the five years’ profit figures.000.00 Current liabilities Creditors N N Fixed Assets Freehold premises 8.000.00 190.000. The compensation may be in the form of payment of a premium but where the incoming partner cannot introduce more cash in addition to his capital for the premium.600.00 123 . One of the methods of calculating the goodwill is the multiplication of the average profit of a number of year's profits by an agreed number of years.00 205.400. and N205.000.500.00 135. A business that has been operating successfully for years should have made its mark.600.
00 900. 1997 124 .000 ÷ 5 x 3 = 180. The net worth of the business is the difference between its net assets and its net liabilities. Let's assume that the average profit of the last five years’ profit is 17.000.000 20.00 100 17. so we shall return to it in the section dealing with acquisition. This method is most common when the business is being acquired.000.000 x 3 = 540.000. the goodwill will be calculated as follows: The super profit 10% = 100% ? NI7.00 Another method of calculating goodwill is the use of super profit method. retirement of a partner. Goodwill may be calculated for adjustments in partnership books under so many instances.00 10 1 Goodwill super profit = = = Super profit – tangible assets 170.000 x = 170. changes in profit sharing ratios and changes in the accounting policies.000 and that the normal rate of return on capital is 1 0%.000 One method of calculating goodwill is to subtract the net value of the business from its purchase price where the purchase consideration is higher than the networth of the business. dissolution of the partnership.000 – 150. Given this information. Such instances include admission of a partner. death of a partner. Illustration The following is the balance sheet of Enayi and Omoka who share profit and losses in the ratio of 2:1 respectively: ENAYI AND OMOKA BALANCE SHEET AS AT 31ST DECEMBER. In using this method the average profit of a number of years' profit figures is capitalized at the normal of rate of return in capital.000. that the value of the business' tangible assets is 150.000.BHM 107 GENERAL ACCOUNTING II N900.
BHM 107 GENERAL ACCOUNTING II The partners agree to admit Atuma into the partnership on 1st January. Solution Goodwill: Year 1 2 3 N 2. OMOKA AND ATUMA) DATE 1998 Jan.00 125 .400. The goodwill is to be valued at two years' purchase of the average net profit for the past three years.600 and N3. and Future profit sharing ratio would be 3:2:2.000 respectively.500.00 3.000. 1998 on the following conditions: i) ii) iii) Atuma is to bring in a capital of N8.000 x 2 = 3.00 9.000 x 2 = N6.00 CR N 4.000 in cash An account is to be created for the value of goodwill.00 2. Net profits for the past three years had been N2.000. 1 PARTICULAR Goodwill Account Dr. Required: Prepare journal entries and ledger accounts to record the above transaction and show the balance sheet after admission of Atuma. N3.000.000.000 3 JOURNAL PROPER (ENAYI.00 3.400. Enayi’s Capital Account Omoka’s Capital Account (Being goodwill raised and LF DR N 6.
0 SUMMARY The new partner brings in his share of capital and compensates the existing partners for sacrificing their share of profit in his favour. 1 Jan.000.000. 1998 SELF ASSESSMENT EXERCISE 1. compute the profit the profitsharing ratio after admitting Caro.BHM 107 GENERAL ACCOUNTING II Jan. are applied before admitting a new partner in order to allow the existing partners to benefit from the long time of successful operation of the business. are distributed among the existing partners.000. 1 credited to the capital accounts of Enayi and Omoka in their old profit sharing ratio on admission of Atuma) Cash Account Atuma’s Capital (Being cash contributed by Atuma to the business as his capital on admission) Balance b/d 8.0 CONCLUSION Both the revaluation and goodwill methods. 126 . State the various reasons that may require changes in the partnership agreement. This requires adjustment of goodwill at the time of admission of a partner. Reserves accumulated losses/profit etc. OMOKA AND ATUMA BALANCE SHEET AS AT 1ST JANUARY. 2.00 8. 4. 5.00 8. Ado and Bellow are in partnership sharing profit and losses as 3:2 Caro is admitted for ¼ share.00 ENAYI.
and Schgal.0 TUTOR-MARKED ASSIGNMENT Discuss the problems to solved at the time of admitting a new partner? 7. D. UNIT 3 CONTENTS 1.0 THE PARTNERSHIP ACCOUNT (RETIREMENT) Introduction Objectives 127 . Fundamentals of Financial Accounting. India: Taxamanns. 6. Schgal. A. (2003).BHM 107 GENERAL ACCOUNTING II In the next study unit.0 REFERENCES/FURTHER READINGS Okwoli. Zaria: Malthouse Press. we shall discuss Partnership Account (Retirement). (1997). Introduction to Financial Accounting. A.0 2. New Delhi. A.
BHM 107 GENERAL ACCOUNTING II 3.1 MAIN CONTENT Retirement of a Partner When a partner is retiring from a business. He is entitled to a refund of his capital sum which may be arrived at after some adjustments in the accounts of business. interest may have accrued on his capital. The retiring partner is also entitled to the refund of his current account balance. 3. drawing may has been made. If the business cannot pay the adjustment capital sum of the retiring partner once. based on the old profit sharing ratio. his share.0 OBJECTIVES By the end of this unit. The assets may be revalued and if there is a revaluation surplus. 2. On the other hand. a goodwill could be raised in the books of the business based on an agreed formula and the retiring partner’s capital account be credited with his own share on the basis of their old profit sharing ratio. should be credited to the balance of his capital and vice versa to determine his current capital entailment.0 INTRODUCTION In every aspect of human endeavour.0 6. The current account may also require adjustment if the partner is retiring sometime after the end of the accounting year of the business as some profits may have been made during the period. a time comes a person is forced to give up active participation in his occupation. if credit. interests 128 . A partnership business is no exception so a partner may be forced to retire from a partnership on ground of old age. you should be able to: • explain the various reasons for a partner’s retirement • describe the various accounting entries.0 Main Content 3. he is entitled to certain benefits.0 7. ill-health or even death. The payments could be instalmental depending on the agreement prior to retirement.1 Retirement of a Partner Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 5.0 4. it could be left in the business as a long-term loan which will be yielding interest to him until the principal sum is paid back in full.0 3.
Illustration Abiodun. Trade mark is to be written off. Both capital and current 129 .BHM 107 GENERAL ACCOUNTING II may have accrued on such drawing and part of his partnership salary (if any) may have earned during the period. and Current account balance is to be paid in cash. BOLADE AND CHIKE BALANCE SHEET AS AT 31ST MARCH. Abiodun to take over the motor vehicle at book value. N960 and N1. The adjusted current account balance is normally paid at once to the retiring partner to enable him start well in his private life. ABIODUN. 1998 Abiodun retired from the partnership on the date of the balance sheet on the following terms: (a) Goodwill in the partnership is to be revalued at 2 years purchase of the average profit over the last three years before the retirement of Abiodun. A provision of N150 for doubtful debt to be created. The following is their balance sheet as at 31st March.300. The profits of the last three years were N70. Any debt due to him other than that of his current account remains on loan to the partnership. 1998. Bolade and Chike have been in partnership for a number of years sharing profits and looses equally. (b) (c) (d) (e) Required: Write up the transaction in the books of the partnership and show the opening balance sheet of the new partnership.
Chika’s Current Account Dr. Trade Marks Account (Being trademarks written off on the retirement of Abiodun) Abiodun’s Capital Account Dr.00 CR N 1.00 3. Bolade’s Current Account Dr. BOLADE AND CHIKA) DATE 1998 March 31 PARTICULAR Goodwill Account Dr.500. Revaluation Account (Being revaluation of goodwill on the retirement of Abiodun) Revaluation Account Dr.000.00 2.000.00 5. Bank Account (Being the current accounts withdrawn by the partners on retirement of Abiodun) LF DR N 1.00 JOURNAL PROPER (ABIODUN.950.700. Solution: Goodwill Year 1 2 3 740 960 1300 3 = 3. Provision for Bad Debts Account (Being provision for bad debts created in the books on retirement of Abiodun) Abiodun Current Account Dr.00 March 31 1.400.950.000 x 2 3 = N2.00 2.600.00 1. Motor Vehicle Account (Being the motor vehicle taken over by Abiodun on his retirement from the partnership business) Revaluation Account Dr.00 REVALUATION ACCOUNT 130 . 1981).00 150.BHM 107 GENERAL ACCOUNTING II accounts are to be in columnar form.100.00 March 31 March 31 March 31 150.000.100. (Adopted and simplified from NIB examination.00 3.00 2.
00 Balance b/f 8. 31 Reval.00 PROVISION FOR BAD DEBTS ACCOUNT N Mar.000.00 100.00 6. 31 Motor Vehicle 3.000.00 Mar.000.950.00 2.00 4.00 3.BHM 107 GENERAL ACCOUNTING II GOODWILL ACCOUNT Mar.00 PARTNER’S CAPITAL ACCOUNT Abiodun N Bolade N Chike N Abiodun N Bolade Chike N N Mar. 31 Mar. 31 Balance c/d 5.00 Mar.100.000. 31 Balance b/f N 3. 31 Balance b/f N 2.000. 31 Balance c/d N 2. 31 Mar. Deficits 100.000.000.900.100. 31 Balance c/d N 2.00 Mar.00 Mar.00 Mar.00 LONG-TERM ACCOUNT N Mar.000.00 1.00 100.00 131 .00 2.00 MOTOR VEHICLE ACCOUNT Mar. 31 Loan 4.900.000.900.00 TRADEMARKS ACCOUNT Mar. 31 Balance c/d N 3. 31 N Abiodun’s capital 900.00 2.00 Mar.000. 31 Balance c/d Revaluation N 50. 31 Revaluation N 150.
31 Mar.900.00 Balance b/f 1.800.00 Freehold land 10.100.900.800.00 BOLADE AND CHIKE BALANCE SHEET AS AT 31ST MARCH.800.900. 31 Mar.000.00 6.500.100.00 BANK ACCOUNT N Mar.00 6.00 18.900.500.00 3.400. 31 Balance b/f GENERAL ACCOUNTING II 8.00 1.00 12.00 Cash 18.00 N N JOURNAL PROPER (ABIODUN.000.00 1.900.000.900.00 6.400.00 5.200.00 Goodwill 2.00 PARTNERS’ CURRENT ACCOUNTS Abiodun N Mar.00 less: provision for bad debt 150.00 Debtors 2.000.00 1.00 3.00 2.900.500. Cash account LF DR N 1.00 CR N 1.700. 1998 AFTER ABIODUN’S RETIREMENT N Capital Account Bolade Chike Long terms Liabilities Loan (Abiodun) Current Liabilities Trade creditors Expenses creditor N N N Fixed Assets 5.000. BOLADE AND CHIKA) DATE 1995 PARTICULAR Cash Account Dr.000. 31 Cash Bolade N Chike N Abiodun N Bolade N Chike N Mar.000. 31 Mar.00 500.00 2.700.000.00 1.700.00 500.100.00 1. 30 132 .00 3.BHM 107 8.00 and building Current Asset 4.00 4.00 500.00 Balance b/d 6. 31 Balance c/d 6.500.00 2.700.900.00 2.00 Mar.00 Mar.900.00 6. 31 Abiodun’s current Account Bolade’s Current Account Chike’s Current Account Balance c/d N 1.700.00 1.400.00 4.00 9.00 Stock 3.00 Sept.850.000.000. 31 1. Debtors Account (Being cash realized from debtors) Creditor Account Dr.
BHM 107 GENERAL ACCOUNTING II Sept.00 100. (Being dissolution expenses paid in cash) 100. 30 Sept. Cash account (Being bank overdraft repaid) Dissolution expenses account Dr. Discount received account (Being discount received from creditors) Bank Account Dr.000.00 1.00 200. 30 Sept.000.00 CASH ACCOUNT AGBO’S CAPITAL ACCOUNT FREEHOLD PREMISESACCOUNT FURNITURE AND FITTING ACCOUNT 133 .00 1.00 200. 30 (Being cash paid to creditor in full settlement of their debts Creditor Account Dr.
BHM 107 GENERAL ACCOUNTING II MOTOR VAN ACCOUNT STOCK ACCOUNT DEBTOR’S ACCOUNT CREDITOR’S ACCOUNT DISCOUNT RECEIVED ACCOUNT BANK ACCOUNT 134 .
BHM 107 GENERAL ACCOUNTING II DISSOLUTION EXPENSES ACCOUNT STAGE 2: JOURNAL PROPER (AGBO AKOR) FREEHOLD PREMISES ACCOUNT REALIZATION ACCOUNT 135 .
BHM 107 GENERAL ACCOUNTING II FURNITURE AND FITTING ACCOUNT MOTOR ACCOUNT DEBTOR’S ACCOUNT DISCOUNT RECEIVED ACCOUNT DISSOLUTION EXPENSES ACCOUNT AGBO’S CAPITAL ACCOUNT AKOR’S CAPITAL ACCOUNT 136 .
BHM 107 GENERAL ACCOUNTING II STAGE 3: JOURNAL PROPER (AGBO AKOR) CASH ACCOUNT AGBO’S CAPITAL ACCOUNT AKOR’S CAPITAL ACCOUNT THE TOTAL APPROVAL 137 .
BHM 107 GENERAL ACCOUNTING II STAGE 1: TRANSFER OF ASSETS JOURNAL PROPER (AGBO AND AKOR) FREEHOLD PREMISES ACCOUNT FURNITURE AND FITTING ACCOUNT MOTOR ACCOUNT STOCK ACCOUNT 138 .
000.00 1. 30 Balance b/f N 2.00 Sept.000.900.00 REALIZATION ACCOUNT STAGE 2: ASSET REALIZATION AND DEBT SETTLEMENT JOURNAL PROPER (AGBO AND AKOR) DATE 1995 Sept. 30 3.000.800.000. Discount received account (Being cash discount LF DR N 30.00 100.00 Sept.00 CR N 41.00 10.00 Sept. 30 Realization N 2.BHM 107 GENERAL ACCOUNTING II Sept.00 5. Freehold premises account Furniture and fitting Realization account (Being cash from sales of assets) Agbo’s Account Dr. 30 Balance b/f N 3.000. 30 1.00 Sept.800.00 DEBTOR’S ACCOUNT Sept. 30 100. Realization account (Being stock van taken over by Agbo on the dissolution of partnership) Akor’s Account Dr. 30 Sept.00 5.900.000.000.00 Sept.00 1.000. Realization account (Being stock van taken over by Agbo on the dissolution of partnership) Creditors Account Dr.000. Cash account (Being discount received from creditors at the time of setting their debts in cash) Discount Account Dr.000.00 3. 30 Realization N 3. 30 PARTICULAR Cash Account Dr.00 139 .
000.00 200. 30 received transferred to realization account) Realization Account Dr.00 DISSOLUTION EXPENSES ACCOUNT Sept. 30 Balance b/f N 1.00 CASH ACCOUNT CREDITOR’S ACCOUNT DISCOUNT RECEIVED ACCOUNT DISSOLUTION EXPENSES ACCOUNT Sept.00 Sept. 30 Cash N 200.000.00 1.000. 30 Realization N 100. Cash account (Being bank overdraft repaid in cash) 200. 30 Sept.00 1.000.00 DISSOLUTION EXPENSES ACCOUNT 140 . Dissolution expenses account (Being dissolution expenses transfer to realization account) Bank Account Dr. 30 Cash N 1.BHM 107 GENERAL ACCOUNTING II Sept.00 Sept.
Akor’s Capital Account Furniture and fittings Realization account (Being cash paid back to the dissolution partners in respect of their final entitlement) LF DR N 23. 30 PARTICULAR Agbo’s Capital Account Dr.700.00 CR N 38.020.BHM 107 GENERAL ACCOUNTING II AGBO’S CAPITAL ACCOUNT AKOR’S CAPITAL ACCOUNT STAGE 3: CAPITAL DISBURSEMENT JOURNAL PROPER (AGBO AND AKOR) DATE 1995 Sept.680.00 CASH ACCOUNT AGBO’S CAPITAL ACCOUNT 141 .00 15.
30 Balance b/f (stage 2) N 23. What are the entitlements of the retiring partner in the partnership firm? The net profits of Bala and Garba partnership for the last five years have been Year 1996 1997 1998 1999 2000 Amount 6. His share of accumulated profits (or loss) and reserve on the date of retirement.400 16.800 10. etc. 5. notice in writing by the retiring partner to the remaining partners is sufficient to make his retirement effective. However.0 SUMMARY The retiring partner is entitled to receive from the firm the final balance calculated after taking into account the following.100 7. 142 .000 Calculate Goodwill as representing two years' purchase of the average annual profit for the five years. 4.BHM 107 GENERAL ACCOUNTING II Sept.0 CONCLUSION Retirement of a partner takes place when the retiring member ceases to be a partner and the remaining partners continue to carry on the business of the firm.200 12. 30 Cash N 23. i) ii) iii) iv) v) Net balance of his capital account on the date of retirement after adjustments for drawing current account balance. 2.00 Sept.000. in case of partnership at will. His share of goodwill of the firm subject to adjustment of goodwill already appearing in the balance sheet. A partner may retire from the firm with the consent of all the partners. His share of profit (or loss) on revaluation of assets and liabilities on the date of retirement.020.00 SELF ASSESSMENT EXERCISE 1. and His share in the surrender value of the joint life policy/individual life insurance policies subject to adjustment for the value already appearing in the balance sheet.
and Deepale. we shall discuss dissolution of partnership. (2003). S. India: Tax Mann’s Press. UNIT 4 CONTENTS DISSOLUTION OF PARTNERSHIP 143 . Fundamentals of Financial Accounting. S.BHM 107 GENERAL ACCOUNTING II In the next study unit. 6. New Delhi.0 REFERENCES/FURTHER READINGS Ashole.0 TUTOR-MARKED ASSIGNMENT Discuss the focus of the retirement of a partner at the time of retirement? 7.
conversion and absorption. you should be able to: • explain the accounting entries in dissolution of partnership • explain reasons for dissolution of partnership.1 MAIN CONTENT Procedure for Dissolution of Partnership There are procedures to be followed in partnership dissolution. partners’ loans In paying to each partner the amount due to him in respect of his capital and current account balances. The proceeds are applied in discharging the liabilities of the partnership and in paying the partnership according to certain legal or agreed priorities as follows: (a) Outside creditor: If not sufficient.0 7. the business is also brought to an end.2 Reason for Dissolution Conclusion Summary Tutor-Marked Assignment References/Further Readings 1. 3.0 3. The assets may be disposed of individually or the business may change hands as a complete unit.0 3.0 2. including the sums (if only) contributed by the partners to make up losses or deficiencies of capital must be applied in the: (i) (ii) (iii) In paying the debts and liabilities of the firm to persons who are not partners in the firm In repaying notably. 144 . then the rules of bankruptcy apply. 2.1 Procedure for Dissolution of Partnership 3.BHM 107 GENERAL ACCOUNTING II 1. Upon the dissolution of partnership.0 OBJECTIVES At the end of this unit.0 INTRODUCTION Dissolution of partnership means bringing to an end the existence of partnership business.0 4. Not only is the existing partnership terminated as in amalgamation.0 5.0 6.0 Introduction Objectives Main Content 3. section 44 office partnership Act 1890 provides that the asset of the firm. (b) Amount of any loan made by a partner to the business.
The balance sheet on the day was as follows.800 On settling the creditors discount ofN100 was received. if a specific objective was agreed upon. AGBO AND AKOR BALANCE SHEET AS AT 30TH SEPTEMBER.000 in the open market Furniture and fitting were sold for N10. including capital profits. 1995. Debtors realized N1.BHM 107 GENERAL ACCOUNTING II (c) (d) Partner's capital Any profits on the realization. if a fixed term was agreed upon. Required: Show the dissolution process in the books of the dissolution partnership.2 (i) (ii) (iii) (iv) (v) Reason for Dissolution Expiration of the period for which the firm was set up. 1995 Additional information: (a) (b) (c) (d) (e) (f) (g) Freehold premises realized N30. Attainment of the objective for which the firm was set up. 3. Agbo took over the motor van at N5. and Dissolution expenses amounted to N200.000 Akor took over the stock at balance sheet valuation. Death of a partner Retirement of a partner Bankruptcy of a partner 145 . Illustration Agbo and Akor who have been in partnership sharing profits and losses in the ratio of 3:2 decided to dissolve their partnership on 30th September.000. in the partners profit-sharing ratios.
GENERAL ACCOUNTING II
The occurrence of an event which causes the partnership to become illegal. When one partner allows his share of the partnership to be charged for his separate debts.
SELF ASSESSMENT EXERCISE A,B and C were in partnership sharing profits and losses in the ratio of 4:3:1. They decided to dissolve the partnership with effect from 31st December 1999. In the course of the dissolution, C was adjudicated bankrupt and could pay 60k in the naira. The balance sheet of the firm as at that date was as shown below: A, BAND C BALANCE SHEET AS AT 31ST DECEMBER, 1999
N Capital A B Creditors 18,000 4,500 N 22,500 7,500 30,000 Land and Building Plant & machinery Stock Debtors Cash C's capital overdrawn N 12,000 7,500 2,400 5,200 900 2,000 30,000
The assets were realized as follows:
Land and building Plant and machinery Stock Sundry debtors 9,000 6,000 2,700 4,050
5% discount was allowed by creditors and 9 ledger charge of N495 was to be paid in addition to other expenses of realization ofN330. You are to assume that the loss of profit on realization of each asset was separately transferred from the asset account to the realization account. You are required to show: (a) (b) (c) Realization account Cash account Partners capital accounts
GENERAL ACCOUNTING II
We have generally discussed reasons for dissolution of partnership as well as the accounting entries necessary to dissolution partnership.
In this unit, you were taught the accounting entries to dissolve partnership and also the entries needed where a partner is deficient and is unable to make good his deficiency. In the next study unit, we shall discuss Ratio Analysis.
What is dissolution of partnership? Discuss the reasons for dissolution.
Robbert, N.I (2003). Accounting Made Simple. Lagos: Rel Publish. Damagun, Y.M. (2001). Principles of Accounting. Jos: Clestino Press.
GENERAL ACCOUNTING II
CONTENTS 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Introduction Objectives Main Content 3.1 Analytical Method of Ratio Analysis 3.2 Long-Term Solvency and Stability Ratios Conclusion Summary Tutor-Marked Assignment References/Further Readings
Financial statements are produced for the uses they are put and not merely for the sake of producing them. Different users are interested in different aspects of the financial statements. The information disclosed by financial statements is of historical nature and in a summarized form, and the information is highly selective (Net Book Value and not market values). Despite the nature of the information disclosed by the financial statements many users still find help in them as guide into the future and as a basis for action. The users, (shareholders, investors, suppliers, customers, bankers, employees, trade unions, etc.) need the financial statement for different purposes. To aid the different users the accounts must be interpreted and this brings us to ratios analysis.
At the end of the unit, you should be able to:
• analyze the financial statement by way of ratios, relevant to solvency • interpret these ratios and advise on any future action. 3.0 3. 1 MAIN CONTENT Analytical Method of Ratio Analysis
The analytical technique employed is known as ratio analysis. A ratio is one number expressed in terms of another number to show the relationship between the two numbers. Let us look at the relationship between 5 and 15. It could be 15/5= 3 meaning 15 is three times five. If the order is reversed from 15 to 5, it means 5/15 = 1/3 or 0.33:1. It could equally be express as a percentage, e.g. 5/15 x 1 00 = 0.33:1%.
Fixed Dividend Cover = Net Profit After Tax (NPAT) Fixed Dividend This ratio indicates the number of times fixed dividends are covered by taxed profit. debenture interest is fixed (% debenture) i. 3. (i) Fixed Interest Cover Ratio There are fixed interest charges in business. Therefore. 5% preference shares) i. it has to be charged in the P & L A/C before arriving at the Net Profit.g. There are other fixed interest charges like loan interest.BHM 107 GENERAL ACCOUNTING II There are certain important relationships between items within the financial statement which become clearer when ratios are calculated. equity plus reserves. interest on overdraft. Fixed interest cover = Net Operation Profit/Fixed Interest (ii) Fixed dividend cover Dividends are apportioned i. tests financial stability. Fixed dividends do not fluctuate with level of profit.e. etc. For instance. Such dividends are fixed.e. Profit in this context is net profit.e. 149 . they are deducted from the taxed profit.e. (iii) Total Debts to Shareholders’ Funds Shareholders’ funds include the share i. Therefore: Total External Liabilities = Total debts to shareholders funds This ratio indicates whether the business is solvent and the extent it can cover external liabilities. the fixed interest cover ratio indicate the number of times fixed Interest is covered by profit. But preference shareholders are paid dividend before ordinary shareholders and their dividend is not a function of the level of profit but a fixed sum (e. We know that until every other thing is catered for ordinary shareholders cannot get any dividend. preference shareholders will get 5% of whatever amount of preference shares bought. it does not depend on whether or not profit is made before it is paid. This.2 Long-Term Solvency and Stability Ratios These ratios look at the concern or business on a long-term basis bearing stability in mind. Infact. therefore.
000 Ordinary Dividend 10% 10% Note that debenture interest for A (5.g. Gearing = Long-term loan : Total equity funds Theoretically.000 70. Share 60. Consider two companies A and B. A NAPT 45.000 80. This ratio tests the extent of cover for these and show how stable the business is in relation to external obligations.900 You will notice that the NPAT of Coy B is N2.000 100. a gearing of greater than 1: 1 is high and less than 1: 1 is low but in practice.200 B 43. Because of the difference in the capital structure of the two companies their ordinary shareholders earn dividends of different amounts.000 10% Debenture 50. 150 .000 less than that of A because of the difference in the amount of debentures.000 3.000 39. It is a ratio arrived at from the capital structure of the company. Every other thing about them is similar except: A(N) B(N) Ordinary shares 100. greater than 0. 10% debentures.000 NPAT & PD 10% Ord.000 5% Pref.2:1 is low. But before ordinary shareholders get their dividend the preference shareholders will get first. Therefore. Also different is the preference shares (higher in B). Dividend 3.000 Dividend 4. Long-term debtors to shareholders funds = Fixed External Liabilities Shareholders' funds (v) Gearing This ratio indicates the degree of vulnerability of earning available for ordinary shareholders.000) had already been changed to P & L A/C before at the net profit after tax given. This explains the issue of vulnerability of earning available for ordinary shareholders. 5% loan stock.000 4.6:1 regarded as high and less than 0.000 5% Pref. 42.000) and B (N7.BHM 107 GENERAL ACCOUNTING II (iv) Long-Term Debts to Shareholders’ Fund A long-term debt in this context is the fixed external liabilities e.
This ratio indicates the ability of a business to meet its short-term liabilities. Remember that current assets less current liabilities gives you working capital. debtors and marketable securities. as they fail due. = Cost of Sales Average stock Current Ratio (or Working Capital Ratio) This is the relationship between current assets and current liabilities. i. Ordinarily. the average stock being turned opening stock plus closing stock divide’s by two but if there were fluctuations during the period of sale then weighted average should be used. Debt Collection Period 151 . Stock Turnover Ratio The ratio shows the frequency in number of times per period at which the average figure of trading stock is being turned over. Current ratio iii. out of its short-term assets. Liquid assets consists of cash and bank balance. This ratio considers the liquid assets that can easily be converted to cash to meet current liabilities. Quick Assets Ratio = Current Assets – Stock Current Liabilities iv. = Current Assets Current Liabilities Liquidity Ratio or Acid Test or Quick Asset Ratio The three names simply mean the same thing.2 Short-Term Ratio These ratios show the ability of the company to meet short-term obligations.BHM 107 GENERAL ACCOUNTING II SELF ASSESSMENT EXERCISE Who are various users of financial statement and what are their information needs? 3. Stock Turnover ii.
Credit Payment Period This looks at the average periods the creditors are unpaid. financial ratios are computed from financia1 statements and so ratios developed for analysis of a firm's performance and financial position are subject to the same limitations which are present in the accounting statement themselves.BHM 107 GENERAL ACCOUNTING II This looks at the average period a debt stays uncollected. Creditor payment period = Trade Creditor x 12/1 or 52/1 or 365/1 Credit purchases 4. LTD 152 . 1969. you were taught solvency ratios. It will be meaningless if ratios are analyzed but cannot be interpreted. 6. weeks. In the last study unit of the course. we shall discuss further on ratio and analysis in terms of potential and actual growth.0 TUTOR-MARKED ASSIGNMENT The following are the trading and profit and loss account and the balance sheet of Amudat Nig. weeks or months. for the year ended 31 st December. The figure should be VAT inclusive too. Ltd. So the analysis of ratios and how they are used for the information need of various users were taught.0 SUMMARY In this unit. It is equally expressed in terms of days. Solvency ratios were broken down into long-tern solvency and stability ratios and short-term solvency and liquidity ratio. 5. days and the figure used in the calculation should include VAT (Value Added Tax). It could be expressed in months. AMUDAT NIG. Debtors Collection period = Trade Debtors x 12/1 or 52/1 or 365/1 Credit sales v.0 CONCLUSION Generally. The interpretations of these various ratios were demonstrated/highlighted.
900 3.847 Less closing stock 2. Share ofN1 each Reserves 8% Loan Capital Employed Required: Calculate all the solvency ratios and interpret them.0 REFERENCES/FURTHER READINGS 153 .220 5.360 170 3. Employed) Finance by Ord. LTD BALANCE SHEET AS AT 31/1/1969 N N 21.689 Opening stock 2.083 Net profit AMUDAT NIG. 7.020 12.167 65.530 69. 3.680 Add purchases 63.053 General Exp. 1969 N N Sales 71.000 4. Shares of N1 each 5% Pref.020 24.220 63.BHM 107 GENERAL ACCOUNTING II TRADING.763 Loan Interest 320 4.000 7.430 3.120 1.627 Gross profit 8.020 Fixed Asset Current: Stock: Raw materials Work in progress Finished Goods Debtor Cash in hand Current Liabilities Creditor Accruals Working capital Net Assets employed (Cap.580 2. PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DEC.100 2.000 28.880 650 10.000 5.000 28.
BHM 107 GENERAL ACCOUNTING II Damagum. Principles of Accounting. Jos: Clestinno Press.M (2001).O (1997). Jos: Malthouse Press. Y. Ambrose. Principles of Financial Accounting. A. 154 .
BHM 107 GENERAL ACCOUNTING II UNIT 6 CONTENTS 1. Investors and their advisers normally appraise the financial statements of quoted companies. stability and liquidity. 2.0 2. In this unit we shall look at the ratios relating to potential and actual growth of the business. selling out some or all of the shares or holding on to the shares. Thus Net book value of ordinary share No of ordinary share 155 . The net book value in this respect is shareholders’ funds less preferential share capital.0 OBJECTIVE At the end of the unit.1 Network Value per Ordinary Share 3.1 MAIN CONTENT Net Book Value per Ordinary Share This ratio indicates the historical cost base to which the price per ordinary share relates.0 RATIO ANALYSIS ACTUAL GROWTH) (POTENTIAL AND 4.4 Price/Earnings Ratio 3.5 Earning Yield Conclusion Summary Tutor-Marked Assignment References/Further Readings 1.0 5.3 Dividend per Share 3. This assists them in making good investment decisions like buying more shares. The appraisal is done by calculation of certain ratios relating to the potential and actual growth of the company whose shares are being appraised. you should be able to: • calculate ratios relevant to the potential and actual growth of the business.0 7. 3.0 Introduction Objective Main Content 3.0 6.0 3.2 Earnings per Share 3.0 INTRODUCTION In the last unit we treated ratio analysis in the area of solvency.0 3.
before the decision as to the amount of dividend to be declared is made. It indicates the amount of the net profit after tax exclusive of extraordinary items attributable to each ordinary share. Thus: Total Dividend = Dividend per share No of Ordinary share A total dividend is usually the figure of net proposed (or actually paid) plus the associated tax credits..4 Price/Earning Ratio This ratio is regarded as the indicator of future performance of the business. It is normally calculated in kobo. using the dividend per share (DPS) m conjunction with the EPS will give us the retention policy of the company. There may be transfer to reserves.BHM 107 GENERAL ACCOUNTING II 3. A high P/E ratio means strong shareholders’ confidence in the company and its future. This is a ratio of a company's current share price to the earning per share. So. The P/E ratio of a company can be compared 156 . writing-off preliminary expenses etc. The dividend paid per share and Retention policy of the company It may not necessarily be that the whole earning per share (EPS) is distributed as dividend.2 Earnings per Share This ratio is a component of price earning ratio. Thus. 3. Dividend x Minority interest x x Earning attributable of ordinary shares x x xx 3. Earning Per Share (EPS) = Total earrning (in kobo) No of ordinary shares Note: Net profit after tax exclusive of extraordinary items Less Pref. ii.3 Dividend per Share This ratio indicates: i.
SELF ASSESSMENT EXERCISE 1. Div.5 Earning Yield This indicates the potential return on investment. price earning ratio.000 N50. has a per value of N20 each and the company has 12. Net profit after tax Total dividends Market price N150.000 N55. This attempts to improve the comparison between investment in different companies. It simply highlights the amount earned on each share relative to their market price. 157 . Why are investment ratios calculated? The ordinary shares of Ozainah Plc. dividend cover and dividend per share. dividend yield.000 ordinary shares.) The dividend per share is taken as the dividend for the previous year. 2.00 Calculate earning per share. thus: Earning per share Market price per ordinary share x 100 1 = Earning Yield This is a performance indicator and therefore indicates what the dividend yield could be if (i) the coy paid out all its profits as dividend and retained nothing and (ii) there were no extraordinary items in the P & L A/C. Thus: Market price per share Earning per share = PER 3. thus: Dividend on the share for the ear (grossed up) x 100% Current mar et value of the share (Ex. This is an inverse of the PE ratio.000.BHM 107 GENERAL ACCOUNTING II with those of other companies generally or with those of the same industry. Dividend Yield This ratio indicates the current return on investment.
BHM 107 GENERAL ACCOUNTING II 4.775 1.15 A 45 15 30 1. S.75 Compare the dividend yield. Financial Accounting.3 2.A. Ord.5 Pref.825 B 4.25 0.0 CONCLUSION Despite the nature of the information disclosed by the financial statement may users still use ratio as guide into the future and as a basis of action. item before tax Tax Minority interest 1.0 TUTOR-MARKED ASSIGNMENT You are given the following information about two coys.20 4.05 15. F. 158 . Dividend No.828 4.75 1. dividend cover and earning yield of the two companies. of Ordinary Shares Market price of shares 0.475 0.R.375 15.0 REFERENCES/FURTHER READINGS Jennings. London: DP Publication Ltd. 5.325 0.075 0. of Ordinary Activity PAT on ordinary activity Profit to minority interest Extr.05 15.8 3. you were exposed to the calculation and the interpretation of the ratios. (1991). London: Longman Group Ltd.00 37.0 150 213. (1980). A and B PBT (on ordinary activity) Tax on Pref. 6.425 4.50 1. you were taught ratios relating to potential and actual growth of the company or business.5 2.5 28. Wood.50 2.075 30.875 1. Business Accounting. 7. Then.45 15.275 2.0 SUMMARY In this unit.5 115.
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