Accounting Basics 1 2016 2017

1
ACCOUNTING BASICS
What is accounting?
To account means to render stewardship of what have been entrusted to you
In whatever venture you undertake be it social services, personal activities, business
venture etc. you need to render accounts. Directors, business managers, supervisors etc
should render account of what has been entrusted to them. Professional accounting has
been developed such that the stewardship process goes through acceptable systematic
stages.
Accounting is
a process that involves systematic and acceptable stages by which the process of
stewardship can be accomplished.
The stages could be broken down as;
1. Capturing of transactions
2. Recording transactions
3. Checking of the accuracy of recorded transactions
4. Presentation of relevant summarised statement
CAPTURING STAGE
All transactions ought to be captured. Invoices, receipts, bills etc. are some of the
documents used in capturing transactions between parties. Duplicates of documents are
kept to ensure that after issuing the original document that was used to capture the
transaction, both parties have the same records for keeping its books
Transactions ought to be captured in a form of documentary evidence as a source of

recording in the second stage.
Documents used to capture the transaction should highlight at least the following
1. The date of the transaction

2. The parties involved. The supplier and the beneficiary
3. The nature of transaction, eg. Sales, purchases, payment etc
4. The financial implications i.e amount involved.
5. Evidence of Authorisation of the transaction normally in the form of signatory
Example of Document and their purpose

Document Purposes
Sales Invoices Used for credit sales transaction
Credit Notes Used for goods returned, allowances
Purchases Invoices Used for credit purchases transaction
Receipt book Used for cash received
Pay- Slips Used to capture payment made into banks
Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

ACCOUNTING BASICS 2
RECORDING OF TRANSACTION
After capturing the transactions on the basic documents such as invoice, receipts, the
transactions are recorded in a much summarised form.
In professional accounting, a system of double entry is used to record every transaction

i.e. For every transaction there should be a debit and a credit or for every debit there
should be a corresponding credit entry of the same amount or in total.
The basis of the above, as designed, is that every transaction affects two sides of different
account a "receiving account and a giving account" or a beneficiary account and a provider
account.
This two sides ought to be accounted for or monitored.
Example: Let consider a company which purchased a motor vehicle for cash costing 45
million on 1 January 1995.
The company can be said to have:
Received 'A motor vehicle at 45 million.

Given out 'Cash worth 45 million
The recording system is to
Debit the receiving account - Motor Vehicle Account
Credit the giving account - Cash Account
An account is designed in a form of a T and normally called a T account based on the

design as below. The T account is also called a ledger account
DEBIT NAME OF ACCOUNT CREDIT

Date Details Amount Date Details Amount
Name of Accounts
Account names are given to reflect the transaction being undertaken e.g.
1. The account which will monitor all purchases for resale transactions will be given the
name Purchase account.
2. If a company is dealing with customer by name Kweku Quartey, the name of the
account that will monitor the transaction with the customer will certainly be named
Kweku Quartey.

ACCOUNTING BASICS 3
There are few technical names e.g.
Capital Account: This monitors the personal contribution of the proprietor

Drawing Account: This monitors the withdrawals by the proprietor
The T design creates two sides of account. The left side is called the Debit and the right
side is called the Credit side.
Each side would highlight the Date of the transaction, the Details of the transaction and
the amount of the transaction
Practice work
Enter the following transaction for K.M. Sarpong, a sole trader trading as Sarpong Enterprise
2000
1/1 K Sarpong registered a company and opened a business bank account with Ghana
Commercial Bank
1/1 K. Sarpong introduced 30 million cash into the business bank account as his
capital
3/1 Purchased Motor vehicle costing 6 million paying by cheque.
6/1 Purchased goods for resale costing 8 million on credit from Breman Suppliers
10/1 Sold goods for cash 5 million
15/1 Sold goods on credit to A&B Company with 5 million
2/4 Paid Breman Supplies by cheque, 4 million
5/5 Purchased goods for resale costing 12 million on credit from Breman Suppliers
3/6 Received from A&B Company by cheque 2 million
7/8 Sold goods on Credit to Samsam Ltd for 3 million
10/9 Sold goods on credit to A&B Company with 4 million
12/9 Paid Breman Supplies by cheque, 5 million
CHECKING ON THE ACCURACY OF THE RECORDING
It is obvious that various types of errors could be made in the recording system. Some
reasons for the errors could be, lack of knowledge, omission, clerical errors etc.
Entries would have to be checked against errors. Systems designed for checking errors
are
Bank Reconciliation System Cash Book
Trial Balance and Suspense - Accuracy of the Double Entry
Control Accounts System - Debtors and Creditors Ledger

ACCOUNTING BASICS 4
The Bank Reconciliation System
This is a system that checks on the accuracy of the bank column of the cash book or the
bank transaction as being monitored. The system compares the bank transaction and
account with the statement from the bank. The cash book is reconciled to the cash book
balance with the bank statement.
The Trial Balance
The trial balance is a system that check on the accuracy of the double entry system. It
list all the balances either as debit as debit or credit balances as extracted on the ledgers.
The totals of the two sides, debit and credit balances ,are added and checked to ensure
that they agree.
The Control Account System
This system is operated for Debtors and Creditors Ledgers.
The Debtors Control Account System
This system checks on the accuracy of the total of the Debtors ledger balances on the
individual account.
Transaction which concern debtors, and entered in their account through a double entry
system are again recorded separately in Days Books.
Credit sales are recorded in a Sales Day Book

Return Inward are recorded in a Return Inwards Day Book etc.
The total of the day books are set out in a memorandum form.
All things being equal it is expected that the balance on the control account should agree
with total list of individual debtors Ledger Control Account.
This will be discussed in details later
PRESENTATION OF INFORMAITON
Two most important information required by management in every institution is the

1. Profitability Statement
2. Assets and Liabilities position of the company

ACCOUNTING BASICS 5
THE DOUBLE ENTRY Transaction Based

The double entry system is a system designed by accountants to record transactions.
Business transactions can be recorded any how by non-accountant. Professional
Accountants have designed a system called The Double Entry. The set up on which this
system is designed is the T account. Every transaction effects two accounts. Every
account has two sides the receiving side (debit) and the giving side (credit). Every
transaction effects two sides of two accounts (sometime more). The receiving side of an
account is affected whiles the giving side of another account is affected with same
amount or in total. In recording transactions, identify the receiving account and debit the
account, and identify the giving account and credit the account.
In effect Debit the receiver, Credit the giver, with the same amount or in total.
Lets us now consider what accounts are and how their names are derived.
Accounts are statements that monitors or has monitored transactions of a specific nature
Eg. The Profit and Loss Accounts monitors the profitability of a business. Banks keeps
accounts of their customers when you receive your accounts/statement from your bankers
you will realise that it has monitored or stated your transactions with the bank.
ACCOUNT NAMES
Account names are given to the transaction that the account is supposed to monitor. If a
business wants to monitor its transaction concerning the business assets such as Motor
Vehicle it will be prudent to name the accounts Motor Vehicle account rather the
Furniture Account. It is obvious that the following accounts names should be given
based on the nature of the transaction.
Names Transactions
Cash / Bank Account - Cash/Bank
Investment Account - Investments
Motor Vehicle Account - Acquisition and disposal of motor Vehicles
TECHNICAL NAMES
Although we have discussed the way accounting names are derived we will consider
some technical names, which are used for some transaction.
CAPITAL ACCOUNT
This account monitors a proprietor contribution towards his business. The contribution
could be in the form of cash, assets or services. This contribution could either be at the
beginning or during the course of running the business.

ACCOUNTING BASICS 6
PURCHASES ACCOUNT
The name purchases is used to monitor transaction which involves acquisition or
purchase of items intended for re-sale in the normal course of the business. The name is
not used when an asset such as motor vehicle, which is to be used in the business and not
intended for resale is purchased.
SALES ACCOUNT
The Sales Account is used to monitor transactions, which involves sale of items, which a
business sells as normal part of its trading activities. It is not used to a monitor disposal
of asset.
DRAWINGS
The owner of the business uses this account to monitor transactions which involves
withdraw of cash and or other business assets from the business for personal benefit of
the owner. It also includes expenses enjoyed by the proprietor but paid for by the
business.
RETURN INWARDS
It represent transactions that involves return of goods for resale by customers to the
business after purchasing such goods. Reason could be due to defect and
inappropriateness.
RETURN OUTWARDS,
It represents transaction that involves return of goods for resale by the business to the one
from whom the goods were purchased. Reason could be due to defects and
inappropriateness.
CARRIAGE INWARD,
It represents direct transport cost which relates to goods purchased for resale.
CARRIAGE OUTWARD
It represents transportation cost that is incurred to transport customers goods from the
company premises to the customer premises. It is served as an inducement. factor which
entices the customer to buy the companies goods. The cost is borne by the company.
We will come across other account names not discussed, but always remember accounts
names must reflect the transaction.

ACCOUNTING BASICS 7
BALANCING THE LEDGERS

After effecting the double entry the ledgers are balanced systematically as follows:
Step 1
Draw total lines on the debit and credit side of the account. This should be on the same
line.
Step 2
Add first the column (either the debit or credit ) with the highest total, and state the
figures on both the Debit and Credit total lines
Step 3
Add the side (either the debit or credit ) with minimum totals and deduct it from the ones
with the maximum total as stated on the total lines
The difference is stated at the minimum side of the ledger. You will then realise that
when the two sides are added, they agree in total.
Balancing of equation follows the rule of basic addition and subtraction. One side of the
accounts, the Debit or Credit serve as the positive and the other side serves as the
negative. When the balance on the debit side is deducted from the balance on the credit
side or vise-versa depending on which balance is the bigger, it results in a mathematical
balance.
Lets assume some entries have been made in the under-mentioned ledgers and we want to
balance the ledgers
Step 1 Step 2
BANK BANK

Capital 50,000 Purchases 6,000 Capital 50,000 Purchases 6,000
Cash 10,000 Rent 2,000 Cash 10,000 Rent 2,000
Furniture 7,000 Furniture 7,000
Water 5,000 Water 5,000
60,000 60,000
The debit side has a total of 60,000 whiles the credit side has a total of 20,000
Step 3
BANK

Capital 50,000 Purchases 6,000
Cash 10,000 Rent 2,000
Furniture 7,000
Water 5,000
Bal. c/d 40,000
60,000 60,000
Bal. b/f 40,000

ACCOUNTING BASICS 8
The balance 40,000 is inserted on the credit side to balance the equation
The balance is mathematically derived as
Debit
Capital 50,000
Sales 10,000
60,000
Less
Credit
Purchases 6,000
Rent 2,000
Furniture 7,000
Water 5,000 20,000
40,000
Balance Carried Down Abbreviated as Bal. C/d

When ledgers are balance or closed, it is assumed that it is being closed for a relevant
period, this could be at the end of a month or a year.
The balance as determined at the end of the period e.g a year are carried down i.e. c/d to
the next period.
Balance Brought Forward abbreviated as Bal. B/f

This abbreviation is attached to the balance which at the beginning of the period (month
or year) had been brought forward from the previous period.
Exercise
Balance the following Accounts
BANK MANU LTD

Capital 60,000 Purchases 20,000 Capital 80,000 Purchases 10,000
Cash 90,000 Rent 2,000 Cash 10,000 Purchases 20,000
Furniture 6,000 Purchases 7,000
Water 4,000
Elect. 3,000

ACCOUNTING BASICS 9
CAPITAL BANK

Cash 90,000 Capital 50,000 Purchases 60,000
Cash 40,000 Cash 10,000 Rent 90,000
Furniture 72,000 Debtors 60,000 Furniture 70,000
M.Veh 30,000 Plant 90,000
CAPTURING EXPENSE TRANSACTIONS

Transactions concerning expenses could be in two main forms
1. The company incurring the expense has no continuous relation with the provider
of the service and for that matter the beneficiary of the service does not keep a ledger
account of the provider or vice versa
Example
The Accountant of CCB Ltd paid 50,000 transport cost from Madina to Accra.
In the above situation the Accountant of CCB Ltd will not maintain a ledger account of
the Taxi driver.
2. The company incurring the expense has a continuous relation with the provider
of the service and for that matter the beneficiary of the service keeps a ledger account of
the provider or vice versa
Example
Electricity Company of Ghana (ECG) bills CCB Ltd an electricity expense for the month
of January 2004, 180,000 The Accountant of CCB ltd pays on account as part of the
expense an amount of 120,000

ACCOUNTING BASICS 10
Practice Exercise
Question 1 (a)
Kofi Baako started a business trading in provisions under the business name
BAAKO_KOFI ENTERPRISE on 1/1/2001 The following were his transaction for the
period.
2001
1/1 Introduce capital of 909-

6million in the form of Cash into the business bank account Ghana Commercial
2/1 Bank
3/1 Introduce personal motor vehicle costing 60 million into the business
3/1 Introduced personal computer costing 6million into the business
3/1 Purchased by cheque goods costing 8 million.
4/1 Purchased by chequeOffice Furniture costing 6 million.
6/1 Introduce personal computer costing 10 million into the business
7/1 Purchased goods on credit from Ewuebi Ltd Ltd costing 10 million.
7/1 Purchased goods on credit from Ananse Ltd costing 60 million.
Introduce capital of 30million in the form of Cash into the business bank
8/1 account
10/1 Made cash sales of 14 million.
10/1 Paid carriage outwards by cash 500,000
10/1 Banked Cash of 12 million
11/1 Returned goods costing 600,000 to Ewuebi Ltd Ltd
11/1 Made credit sales of 15 million to Oteng Ltd.
12/1 Purchased goods on credit from Great Ltd costing 75 million
12/1 Paid carriage on goods bought from Great Ltd 3million by cheque.
13/1 Made credit sales of 23 million to Osono Ltd
13/1 Made sales of 6 million by cheque
14/1 Paid for transport and travelling 300,000 by cheque
15/1 Paid for cleaning and sanitation 100,000 by cheque
17/1 Paid Great Ltd by cheque 12 million .
25/1 Paid for stationery by cheque, 1 million.
28/1 Received from Oteng Ltd 10 million by cheque
28/1 Paid Ewuebi Ltd by cheque 7 million .
29/1 Paid Ananse Ltd by cheque 6 million .
Received from Osono Ltd 25 million by cheque
Post the above in a double entry form and extract a trial balance

Question 1(b)
Kofi Baako started a business trading in provisions under the business name
KOFIBEE ENTERPRISE on 1/1/2002 The following were his transaction for the
period.
2002
1/1 Introduce capital of 60million in the form of Cash into the business bank
account
3/1 Purchased by cheque goods costing 35 million.
3/1 Purchased by cheque computers costing 4 million.
3/1 Purchased by cheque office furniture costing 5 million
4/1 Purchased goods on credit from Oyoko Ltd costing 10 million.
6/1 Purchased goods on credit from Oboubi Ltd costing 5 million.
account
8/1 Returned goods costing 900,000 to Oyoko Ltd
10/1 Made credit sales of 12 million to Oteng Ltd.
10/1 Purchased goods on credit from Oboubi Ltd costing 135 million
10/1 Paid carriage on goods bought from Oboubi Ltd 1million by cheque.
11/1 Made credit sales of 12 million to Mantey Ltd
11/1 Made credit sales of 5 million to Jamson Ltd
12/1 Paid for transport and travelling 300,000 by cheque
12/1 Goods are returned by Mantey Ltd valued at 1million
13/1 Paid Oboubi Ltd by cheque 4 million .
13/1 Paid Asabea by cheque 6 million
15/1 Made cash sales of 4 million
17/1 Made credit sales of 5 million to Mantey Ltd
18/1 Received from Jamson Ltd 3million by cheque
18/1 Made credit sales of 6 million to Rexford Ltd.
22/1 Paid 10 million into Bank account.
22/1 Purchased goods on credit from Oboubi Ltd costing 25 million.
23/1 Purchased goods on credit from Boatemaa Ltd costing 9 million.
25/1 Made credit sales of 31 million to Wayo Ltd
26/1 Made credit sales of 9 million to Browaa Ltd
27/1 Returned goods costing 3million to Oboubi Ltd
27/1 Paid 4 million into Bank account
27/1 Purchased goods on credit from Fortitude Ltd costing 16 million
28/1 Paid Takyiwaa by cheque 8 million
28/1 Receives a Ghana Telecom telephone bill of 350,000 for the month of January
29/1 Pays on account to Ghana Telecom by cheque 100,000

Question 2
Kofi Nti started a business trading in spare parts under the business name
NTIFIE ENTERPRISE on 1/1/2004 The following were his transaction for the period.
2004
account
3/1 Purchased by cheque computer costing 6 million.
3/1 Purchased by cheque office furniture costing 2 million.
4/1 Purchased goods on credit from Takyiwaa Ltd costing 12 million.
6/1 Purchased goods on credit from Asabea Ltd costing 3 million.
6/1 Paid carriage inwards of 1million on goods purchased from Asabea Ltd by
cheque
10/1 Made credit sales of 3 million to Obrafo Ltd
10/1 Made cash sales of 4 million to Manu Ltd.
11/1 Returned goods costing 2million to Takyiwaa Ltd
12/1 Purchased goods on credit from Asabea Ltd costing 15 million.
12/1 Paid Takyiwaa by cheque 4 million .
15/1 Made credit sales of 9 million to Sempe Ltd
17/1 Made credit sales of 8 million to Manu Ltd.
18/1 Banked 10million cash.
20/1 Purchased goods on credit from Abrobe Ltd costing 8 million.
22/1 Paid carriage inwards of 1million on goods purchased from Abrobe Ltd by
cheque
23/1 Returns by Manu Ltd. goods costing 2million
27/1 Paid 13 million into Bank account
28/1 Purchased goods on credit from Doudu Ent. Ltd costing 16 million
28/1 Paid Takyiwaa by cheque 8 million
29/1 Paid Boatemaa by cheque 8 million


30/1 Received from Browaa Ltd 12 million cheque.
31/1 Received from Browaa Ltd 12 million cheque.
Question 3
Kofi Boakye started a business trading in sandals under the business name
BJAD Enterprise on 1/1/2000 The following were his transaction for the period
2000
account
3/1 Introduce personal computers costing 4 million into the business
3/1 Purchased by cheque Plant costing 6 million.
4/1 Purchased by cheque office furniture costing 3 million.
6/1 Purchased goods on credit from Yayera Ltd costing 15 million.
7/1 Rented accommodation from Rental Agency at 500,000 a month
7/1 Purchased goods on credit from Kumkom Ltd costing 3 million.
9/1 Banked 5 million
10/1 Paid rent of 500,000 to Rental Agency by cheque
11/1 Made credit sales of 13 million to Obrafo Ltd
13/1 Purchased goods on credit from Kumkom Ltd costing 22 million.
13/1 Purchased goods on credit from Yayera Ltd costing 12 million
14/1 Paid Yayera by cheque 4 million .
14/1 Paid for secretarial services by cash , 200,000 .
15/1 Paid for repairs and maintenance of computers by cash , 200,000
15/1 Paid Kumkom by cheque 6 million
17/1 Made credit sales of 5 million to Sempe Ltd
18/1 Made credit sales of 6 million to Manu Ltd.
22/1 Purchased goods on credit from Abrobe Ltd costing 10 million.
26/1 Paid for sanitation by cash, 300,000.

THE ACCOUNTING EQUATION
The accounting equation is a self checking recording system that ensures the accuracy of
accounting records: It is designed such that the two sides of accounting equation can be
viewed from two angles:
(1) Transaction Based Double entry (this has already been discussed)
(2) Resource Based
RESOURCE BASED
All business assets are resourced from a source. Thus all business assets must match
to its source of financing. This concept is expressed on a statement called the Balance
Sheet.
Owners supply resources in the form of finance and assets to start a business. When the
owners have provided this finance the business, as an independent person from the owner, uses
the finance to acquire assets such as Buildings, Motor Vehicle etc. A basic equation can be
expressed as
Capital = Company Assets
The assets of a company could also be financed by other people other than the owner.
Such contribution in the form of Loans are termed business liabilities. The equation can
therefore be expanded as
Capital + Liabilities = Company Assets.
It is very important that we explain some of these terms in a basic way
Assets consist of physical assets and resource-owned by a company such as building,

machinery , motor vehicle , stocks and cash. It also includes yet to be realised assets in
the form of Debts owning - Debtors to the company
Capital is amount due the owner of a business from the company based on his resource
contribution towards the company and also profit earned and due him.
Capital is often called owners equity or net worth.

Liabilities are contribution or resource advanced to the company toward its assets by
persons or institutions other than the owner and yet to be paid. This could be monies
such as long term loans short term loans bank overdraft, goods supplied on credit, unpaid
expenses.
In expressing the above the form of an accounting Equation we can stated that
Capital + Liabilities = Assets

Capital + Net Profit + Long term liabilities + short term Liabilities, Trade Credits, +
Unpaid expenses = Plant & Machinery + Motor vehicle + Plant & Machinery + Stocks
+ Debtors + Cash.

Capital + Net Profit + Liabilities = Assets

Capital + Net Profit = Assets - Liabilities
Capital + Net Profit = Net Assets
Capital + Net Profit = Owners Equity
Owners Equity = Net Assets

Net Assets = Assets - Liabilities
The accounting Equation might be appreciated if it is expressed in horizontal format

BALANCE SHEET
as at 31/12/95
LIABILITIES Assets
Capital 600,000 Plant & Machinery 200,000
Net Profit 200,000 Motor Vehicle 300,000
Long Term Loan 400,000 Furniture 100,000
Trade Creditors 160,000 Stocks 400,000
Expenses owing 40,000 Debtors 120,000
Cash 280,000
1,400,000 1,400,000
We will now consider various transactions and see its effect on the accounting equation.
The two sided effect of every transaction should balance the accounting equations. Such
transaction will not be related to the previous transaction.
1. On 1/1/96 the proprietor contributed additional 1,000,000 cash unto the business.
Effect
The capital will increase to 1,600,000 resulting in a total balance of 2,400.000. The
cash will increase to 1,280,000 resulting in a total asset balance of 2,400,000 to
balance the equation
(2) The business paid creditors 100,000

Effect:
Cash will reduce by 100,000 to 180,000 reducing the total asset to 1,300,000
creditor will reduce by 100,000 to 60,000 reducing the total, liability to 1,300,000
thus balancing the equation
(3) Goods worth 300,000 were sold to debtors on credit for 500,000
Effects:
Stocks will reduce by 300,000 to 100,000 Debtors will increase by 500,000 to
620,000. The effect of this is total assets will increase by 200,000 to 1,600,000 which
is the profit from sale. The profit of the proprietor will increase by 200,000 to
400,000. The total liabilities will therefore increase to 1,600,000 to balance the
equation.

(4) Bought goods worth 800,000 on credit.

Effects:
Stocks (assets) will increase by 800,000 to 1,200,000 increasing total assets to
2,200,000 creditors (liabilities) will increase by 800,000 to 960,000 increasing total
liabilities to 2,200,000 to balance the equation.
(5) The business secured long term loan of 3,000,000 cash

Effects:
Long term loan will increase (liabilities) will increase by 3,000,000 to 3,000,000 to
3,280 increasing total assets to 4,400,000 to balance the equation.

Exercises
Accounting Equation
Complete the following column to show the effects of the following transaction in
terms of increase or decrease
Question 1 Effects upon
Transactions ASSETS LIABILITIES CAPITAL
1. Introduced personal vehicle costing
12,000,000 into the business
2. Bought good worth 5,000,000 on credit .
3. Introduced 7,000,000 cash into business
account.
4. Introduced plant costing 18,000,000 into
business
5. Sold goods worth 3,000,000 for
4000,000 cash.
6. A debtor paid 1,000,000 cash.
7. Withdrew 1,000,000 for personal use.
8. Purchase goods costing 6,000,000 on
credit.
9. Pays creditor 2,000,000 cash.
10. Receives 2,000,000 cash from a debtor
11. Sold good costing 3,000,000 for
5,000,000 cash.
Question 2
Transactions Assets Liabilities Capital Net Profit
1. Purchased goods costing 18,000,000 on credit
2. Introduced cash of 15,000,000 into business
3. Sold goods costing 2,000,000 for 4,000,000
cash
4. Purchased goods costing 9,000,000 on credit
5. Returned to creditor goods costing 1,000,000
6. Sold goods costing 600,000 for 800,000
7. Withdrew cash of 400,000 for personal use
8. Introduces personal motor vehicle costing
6,000,000 into business
9. Bought motor vehicle costing 6,000,000 on
credit
10 Receives a long term loan of 15,000,000
11. Paid for Stationery costing 600,000 by Cheque
12. Receives telephone bill from Ghana Telecom of
800,000
13 Pays Ghana Telecom 500,000 by cheque

Question 3
Assets Liabilities
Fixed Cur- Long Short Capital Net Profit
rent Term term
1. Introduced plant and machines
costing 10 million into the
business
2. Introduced personal cash 15
million into the business
3. Purchased stock of 6 million on
credit.
4. Sold stock of 1, million for 2
million cash.
5. Sold stock of 3 million for 6
million cash
6. Withdrew 1. Million cash for
personal use.
7. Sourced a long term loan of 12
million cash
8. Receives Electricity bill of
500,000 from ECG
9. Receives Water bill of 300,000
from Ghana water Company
10. Pay for transport of 200,000 by

cash
11. Purchased motor vehicle costing
4 million for cash
12. Purchased furniture costing 2.
for cash
13. Pays ECG by cheque 200,000
14. Paid long term loan of 3million.
15. Received from Debtor
2.5million cash
16. Paid creditors 3million cash

USERS OF FINANCIAL STATEMENT
The meticulous way by which financial statement are developed (capturing records,
recording, checking accuracy and presentation), is based on the fact that it is relied upon
by sensitive institutions for varied purposes. Users of financial information and
statements can be categorised into three based on their needs.
Basic Information Needs are:
1 operational efficiency and improved profitability

2 borrowing and credit purposes
3 investment decisions
Management
Management are much interested in analysis of revenue and investment which provides
information for controlling and decision making. Actual ratio are compared to standard
information variations are investigated and corrective action taken. The profitability
statement and ratios are yardsticks for measuring management performance.
Employees and Trade Union Representatives
The above group is concerned about the profitability, growth and stability of the
company. Employees are concerned about the above, because it ensures stability of
employment as against layoff and redundancy, It also ensures promotional opportunities
and claims for higher wages and better conditions of service in the near future.
EXTERNAL
Shareholders and Potential Shareholders

Shareholders are interested in knowing the return on their capital, the companies assets
against liability. The profitability of the company and the possibility of the company
paying dividends. Gearing ratios which affects the stability of the company are also of
much concerned financial analyst who service investors such as insurance companies,
unit trust, investment trust, are another group of users, who are concerned about
accounting information.
Lenders
These are made up of current and potential long term and short term lending institutions
and individuals ie. Debenture holders and creditors. Lenders are interested in the
security of the their loan, repayment of principal and interest. Profitability, gearing,
working capital and liquidity ratios are of much concerned to the above.

Government Agency
The main government agency interested in companys financial statement are the
statistical information services which uses such information to the build trends within the
economy as a whole and the Internal Revenue which determines the companys tax
liability based on the companies profits and fixed assets for capital allowances.

CONVENTIONS AND REGULATIONS
DISCLOSURE OF ACCOUNTING POLICIES
1. This Statement deals with the disclosure of all significant accounting policies which
have been adopted in the preparation and presentation of financial statements.
2. Usually, financial statement are made available once each year and are the subject of
a report by an auditor.
FUNDAMENTAL ACCOUNTING ASSUMPTIONS
3. Certain fundamental accounting assumptions underlie the preparation of financial statements.

(The term financial statements covers balance sheet, income statements or profit and loss account,
statement of cash flows, notes, and other statements and explanatory material which are identified
as being part of the financial statements). They are usually not specifically stated because their
acceptance and use are assumed. Disclosure is necessary if they are not followed, together with
the reasons.
4. The management of such an enterprise may prepare financial statements for its own
use in a number of different ways best suited for internal management purposes. When
financial statement are issued to other persons, such as shareholders, creditors,
employees, and the public at large, they should conform to IAS and IFRS .
a. Going Concern
The enterprise is normally viewed as a going concern, that is as continuing in operation

for the foreseeable future. It is assumed that the enterprise has neither the intention nor
the necessity of liquidation of materially the scale of its operations. This is demonstrated
by the fact that accounts are prepared on historical cost basis. Assets are valued
historical cost basis and not at their saleable value. To value assets at their saleable value
connotes that the business is about to wind up.
B. Consistency
It is assumed that accounting policies are consistent from one period to another.
In the preparation of financial statements, accounting policies should consistently be
applied from year to year in order to give basis for consistent comparison of one year
results with the past or future years.

Where there is a basis for the justification for changing of a policy the effect on the
financial statement should be highlighted. E.g of some accounting policies are
Depreciation Straight-line, Reducing Balance
C. Accruals
Revenues and costs are accrued, that is, recognised as they are earned or incurred (and
not as money is received or paid ) and recorded in the financial statements of the periods
to which they relate.
ACCOUNTING POLICIES
7. Accounting policies encompass the principles, bases, conventions, rules, and procedures
adopted by management in preparing and presenting financial statements. There are many
different accounting policies in use even in relation to the same subject; judgement is required in
selecting and applying those which, in the circumstances of the enterprise, are best suited to
present properly its financial position and the results of its operations.
8. Three considerations should govern the selection and application by management of

the appropriate accounting polices and the preparation of financial statements: They are
Prudence, Substance over Form and Materiality
a. Prudence
Uncertainties inevitably surround many transactions. This should be recognised by

exercising prudence in preparing financial statement. Prudence does not, however,
justify the creation of secret or hidden reserves.
Where a business anticipates losses in the near future during the preparation of the
financial statement., it will be prudent for such losses to be provided for in the current
year rather that allow such losses to occur in the future before writing it off.
If it is provided for in the current year it will reduce distributable profit and possible
taxes.
The application of the prudence considerations demonstrated by providing for bad debts.
Prudently anticipated gain should not bee accounted for until realised.
This is demonstrated by adjusting for provision for unrealised profit
B. Substance Over Form
Transaction and other events should be accounted for and presented in accordance with their
substance and financial reality and not merely with their legal form.
This is demonstrated by the fact that leased properties are shown as part of the assets of
the lessee although title has not passed

The substance of the transaction is that, the lessee has a significant asset that is
contributing to wealth
Reality of the transaction should prevail over the legality of the transaction.
C. Materiality
Financial statements should disclose all items which are material enough to effect
evaluations or decisions.
Explanation
9. Financial statements must be clear and understandable. They are based on accounting
policies which vary from enterprise to enterprise, both within a single country and among
countries. Disclosure of the significant accounting policies on which the financial
statements are based is therefore necessary so that they may be properly understood. The
disclosure of these policies should be an integral part of the financial statements; it is
helpful to users if they are all disclosed in one place. Sometimes a wrong or
inappropriate treatment in adopted for items in balance sheets, income statements or
profit and loss accounts, or other statement. Disclosure of the treatment adopted is
necessary in any case, but disclosure cannot rectify a wrong or inappropriate treatment.
Users of Financial Statements
10. Financial statements give information which is used by a variety of users, especially
shareholders and creditors (present and potential) and employees. Other important
categories of users include suppliers, customers, trade unions, financial analysts,
statisticians, economists, and taxing and regulatory authorities.
11. The users of financial statement's require them as part of the information needed,
among other purposes, for making evaluations and financial decisions. They cannot
make reliable judgments on these matters unless the financial statements clearly disclose
the significant accounting policies which have been adopted in preparing them.
Variations in Accounting Policies and in Their Disclosure
12. The task of interpreting financial statements is complicated by the adoption of

diverse policies in many areas of accounting. There is no single list of accepted policies
to which users may refer and the diverse accounting policies that are presently available
for adoption can produce significantly different sets of financial statements based on the
same events and conditions. The following are examples of areas in which differing
accounting policies exist and which therefore require disclosure of the treatment selected:
13. Accounting policies are not at present regularly and fully disclosed in all financial
statements. Considerable variation in format, clarity, and completeness of disclosure
exists among and with in those countries such as Ghana in which accounting policies are
disclosed. In a single set of financial statements some significant accounting policies
may be disclosed while other significant policies are not. Even in Ghana and other

countries where disclosure of all significant accounting policies is required, guidelines to

secure uniformity in the method of disclosure are not always available. The growth of
international enterprises and finance has increased the necessity for greater uniformity of
financial statements across national boundaries.
14. Financial statements should show corresponding figures for the preceding period. If
a change in an accounting policy is made which has a material effect it is necessary to
disclose that a change has been made and to quantity the effect. A change in an
accounting policy which may not have a material effect in the current year should
nevertheless be disclosed if it may have a material effect in subsequent years.

ACCOUNTING STANDARDS
With regard to accounts of companies prepared under the companies Code, there is an
overriding requirement that those accounts show a true and fair view. However, there is
no universal definition of true and fair view
Accounting standards
The Companies Code is mainly designed to deal with the problem of companies
producing inadequate information. Accounting standards set out to tackle a different
problem:
that of the diversity of treatment of certain items in published accounts.
Accounting standards are used to apply a consistent set of accounting principles to the
preparation of financial statements.
Because types of businesses often vary so much, what is suitable as an accounting policy
for one business may be unsuitable for another. It is, however, important for a given
business to follow its accounting policies from one year to the next, so that valid
comparisons of performance may be made.
The following are examples of the areas where variations in accounting practices exist:
Depreciation of fixed assets
Research and development expenditure
Hire purchase or installment transactions
Stock and work-in-progress.
The Institute of Chartered Accountants (Ghana) Act 1963 Act 170 section 9 (e) enjoins
the Institute :
To secure the maintenance of professional standards among persons who are members
of the Institute and to take steps as may be necessary to acquaint such persons with the
method and practices necessary to maintain such standards
Reference to notes on IAS 1
FINAL ACCOUNTS
At the end of each year every business organisation will be interested in two main types
of statement.
(1) The Profitability Statement which assesses whether the business made a profit or
loss.
(2) The Net Worth Statement which highlights what the business is worth by
highlighting the Assets and Liabilities.
For a trading organisation the profitability statement is highlighted in a statement called

the Trading Profit and Loss Accounts, whiles the net worth statement is highlighted in
the Balance Sheet Statement.

The definition of Financial Statements as presently set out in the preface to GNASB
Statement of Accounting Standards covers Balance Sheet, Income Statements or Profit
and loss account, Statement of Cashflows, notes and other statements and explanatory
material which are identified as being part of the financial statement.
The management of an enterprise may prepare financial statements for its own use in a
number of different ways best suited for internal management purpose
When financial Statements are issued to other persons such as shareholders, creditors,
employees and the public at large, they should conform to GNASB Standards
FORMAT OF TRADING PROFIT AND LOSS ACCOUNTS
1 KWESI ATA ENTERPRISE

2 TRADING, PROFIT AND LOSS ACCOUNT
3 FOR THE YEAR ENDED 31/12/95
4 000 000 000
5 Sales 60,000
Less Return Inwards 1,000
6 Net Sales 59,000
7 Less Cost of Sales

Opening Stock 4,000
add Purchases 40,000
add Carriage Inwards 2,000
42,000
46,000
Less Return Outwards 3,000
Goods for Own Use 1,500
Stolen/Damaged 500 5,000
7a Goods available for Sale 41,000
Less Closing Stock 6,000 35,000
8 Gross Profit 24,000

9 Add Other income
Profit from sale of Assets 5,000
Discount Received 1,000 6,000
30,000
Less Expenses
Rent and Rates 500
Electricity 1,200
Depreciation 1,300
Bad debts 400
Carriage Outward. 600
Salaries and wages 2,000 6,000
NET PROFIT. 24,000

The figures used are just for illustrative purposes
The above statement can also be presented in a horizontal form, as shown below which
will not be discussed here. The vertical statement has a lot of advantages by way of what
it highlights. Many businesses have adopted the vertical presentation and students are
advised to use the vertical presentation in examination.
(1) THE NAMES OF THE BUSINESS. It is always important that the name of the
business should be stated
(2) THE NAME OF THE STATEMENT should also be stated the Trading Account is
distinct from the profit and loss account although they are normally combined. When you
are asked to prepare only the profit and loss account, you must start with the profit and
loss statement.
(3) THE PERIOD THAT THE STATEMENT COVERS

Profitability statement covers one-year period although, it could cover a period more than
one year but not more than 15 months ending in the company's year-end. For this purpose
it is captioned FOR THE YEAR ENDED OR THE YEAR TO 31ST DECEMBER
The year-end of business could vary e.g. 31st July, 31st August 30th September 31st
December.
(4) VALUE COLUMNS: Three value commas are set out to allow for a better
appreciation of the figure and sub-totals.
(5) Sales refers to the Gross Sales- including Cash and Credit Sales Gross-Sales is not
affected by any discount. You will later realise that Trade discounts have no place in the
books.
(6) Return inward is an account on its own and it highlighted separately and deducted
from the sales figure to arrive at the net sales.
(7) COST OF SALES
The word cost of sales represents the cost price of the sales that has been made since it is
not one item that is being sold, various computation will have to be made to arrive at this
figure.
Opening stock is shown on the second column. Carriage Inward is a direct cost related to
purchase. It is added to the purchases cost before being added to the opening stocks.
Return outward, goods for own use, stolen goods, damaged goods are deductions, which
are highlighted, separated because they are accounts on their own. They are deducted

from the total of opening stock and purchases because such goods can come from both
the opening stock and purchases.
(7a) GOODS AVAILABLE FOR SALE. This highlights the goods which is available
to be sold.
(8) GROSS PROFIT

This is the excess of sales over the cost of goods sold during the period.
(9) OTHER INCOME

These are incomes derived from other activities other than the main business activities of
the business
EXPENSES
These are normal business expenses incurred in running the business. When this is
deducted from the total of gross profit and other income, one arrives at the NET
PROFIT/LOSS.

EXERCISES
PREPARE A TRADING ACCOUNT FOR KWESI ATA ENTERPRISE FROM

THE FROM THE FOLLOWING DATA
Question
1 2 3
Year Ended 31/12/95 31/10/98 31/6/97
000 000 000
Sales 38,000 40,000 50,000
Return Outward 3,000 - -
Return Inwards 2,000 2,000 -
Opening Stock 6,000 3,000 2,000
Purchases 13,000 18,000 28,000
Closing Stock 9,000 7,000 5,000
Carriage Inwards 2,000 1,000 2,000
PREPARE A TRADING ACCOUNT FOR THE UNDERMENTIONED

ENTERPRISE FROM THE FROM THE FOLLOWING DATA
Question
4 5 6
Kwabena Boadu Nanaa
Ent. Enterprise Enterprise
Year Ended 31/12/98 31/12/96 30/6/94
000 000 000
Sales 70,000 72,000 60,000
Opening Stock 4,000 6,000 -
Closing Stock 12,000 - 8,000
Capital 60,000 31,000 20,000
Return Outward 2,000 2,000 -
Debtors 4,000 6,000 16,000
Purchases 40,000 35,000 40,000
Goods for Own use 2,000 3,000 4,000
Carriage Inwards 6,000 4,000 -
Carriage Outwards - 3,000 4,000
Return Inwards 5,000 - 2,000

PREPARE A TRADING , PROFIT AND LOSS ACCOUNT FOR THE

UNDERMENTIONED ENTERPRISE FROM THE FROM THE FOLLOWING
DATA
Question
4 5 6
Obiba Jactex Ntow
Ent. Enterprise Enterprise
Year Ended 31/12/98 31/12/96 31/12/02
000 000 000
Sales 700,000 880,000 700,000
Sanitation 2,000 1,000
Closing Stock 120,000 90,000 160,000
Capital 300,000 800,000 900,000
Furniture 120,000 150,000 140,000
Debtors 65,000 6,000 240,000
Purchases 420,000 300,000 500,000
Goods for Own use 8,000 6,000
Transport 2,500 2,500 3,000
Carriage Outwards 5,000 1,500
Return Inwards 8,000 1,100 6,000
Rent and Rates 1,800 2,200 3,000
Electricity Expense 1,200 2.000 8,000
Stationery 600 1,600 6,000
Vehicle Repairs 1,400 1,200 7,000
Motor Vehicle 70,000 60,000 180,000
Carriage Inwards 10,000 6,000 8,000
Machinery 61,000 80,000 260,000
Return Outward 10,000 18,000 15,000
Opening Stock 100,000 90,000 15,000
Discount Received 40,000 120,000 60,000
Discount Allowed 70,000 12,000 12,000
Dividend received 8,000 15,000

GROSS PROFIT MARGIN

Names for Gross profit to sales relationship are Gross profit Margin,
Gross profit to Sales Ratio, Gross Profit to Sales %.
Formula
Gross Profit x 100%

Sales
The % relationship between Sales, Cost of Sales and Gross Profit is the same as the
monetary structure. Sales % - Cost of Sales % = Gross Profit %.
Illustration

Sales 500,000 100%
Less Cost of Sales 400,000 80%
= Gross Profit 100,000 20%
Gross Profit to Sales% = Gross Profit x 100

Sales
100,000 x 100
500,000
= 20%
Cost Of Sales to Sales% = Cost of Sales x 100

Sales
400,000 x 100
500,000
= 80%
Thus in determining a missing figure under a gross profit sales relationship, a simple
approach is to
1. Set out the cost structure
2. State the figures giving
3. Attach the % relationship to the figures by representing Sales by 100%
4. Calculate the missing figures
5. You do not need to convert margins to mark-up or mark-up into margin before
working.

Illustration
A Company makes a 20% gross profit margin on its sales. Cost of sale during the year
was 576,000.
Calculate
1. the gross profit made during the period
2. the Sales made during the period
Approach
Set Out the Structure
Sales
Less Cost of Sales
=Gross profit
State the figures giving

Sales = ?
Cost of Sales = 576,000
Gross Profit = ?
Attach the relationship

Sales = ? = 100%
Cost of Sales = 576,000 = 80%
Gross Profit = ? = 20%
Note the Sales% -Cost of Sales% = Gross Profit % because the Sales Cost of Sales
=Gross Profit
Calculate the missing figure

Cost of Sales = 80% = 576,000
Gross Profit = 20% = 20 x 576,000
80
=144,000
To determine the sales
Having determined the gross profit, we can add gross Profit to cost of sales to get the
sales
Cost of Sales + Gross Profit = Sales
576,000 + 144,000 = 720,000
Or
Cost of Sales = 80% = 576,000

Sales = 100% = 100 X 576,000
80
= 720,000

Where a accompany has return inwards, the net sales should be used instead of the total
sales because a company cannot make a gross profit on goods returned.
Illustration
A company makes a gross profit margin of 30% on its Sales .Relevant
information concerning the period was as follows
Opening stock 9,000,000, Closing stock 1,920,000, Purchases 38,000,000.
Return Inwards 800,000.
Required
Determine the total Sales made during the year
Prepare a trading Account
Solution
Determine the Cost of Sales

Opening Stock 9,000,000
+Purchases 38,000,000
-Closing Stock 1,920,000
45,080,000
Net Sales ? = 100 %

Less Cost of Sales 45,080,000 = 70 %
Gross Profit ? = 30 %
Net Sales :
Cost of Sales = 70 % = 45,080,000
Net Sales = 100/70 x 45,080,000
= 64,400,000
Trading Account :
Sales 65,200,000
Less Returns inwards 800,000
Net Sales 64,400,000
Less Cost of Sales :
Opening Stock 9,000,000
Purchases 38, 000,000
47,000,000
Less Closing Stock 1,920,00
45,080,000
Gross Profit 19,320,000

Mark UP :
This is the expression of gross as a % of Cost of Sales
ie. Gross Profit X 100
Cost of Sales
Other names for this are Cost plus , Gross Profit to Cost of Sales %.
For a gross profit relation and cost structure , Cost of Sales is represented by
100 %.
Sales is represented by cost of sales % + Gross Profit %.
Eg, A Company's mark up on cost 15 % . Build its cost structure .
Solution :
Sales 115 %
Cost of sales 100 %
Gross Profit 15 %
Activity :
A Company marks up on cost 36% on its products. Determine the Gross Profit made if its
Net
Sales for the period is 12,104 ,000
Solution:
Sales 136 % -= 12,104,000
Cost of Sales 100 % = ?
Gross Profit 36 % = ?
Sales = 136 % = 12,104,000

Gross Profit = 36% = 36/136 x 12,104,000 = 3,204,000
FILL IN THE MISSING INFORMATION
(1) (2) (3) (4)

000 000 000 000
SALES 120,000 120,000 ? ?
GROSS PROFIT 40,000 ? 60,000 40,000
COST OF SALES ? 70,000 100,000 62,000
NET PROFIT ? 10,000 ? 39,000
TOTAL EXPENSES 5,000 ? 6,000 20,000
OTHER INCOME 2,000 4,000 4,000 ?

(1b) (2b) (3b) (4b)

000 000 000 000
SALES 1,700,000 1,200,000
GROSS PROFIT 90,000 150,000 ? 120,000
COST OF SALES ? 800,000 600,000 ?
NET PROFIT 25,000 25,000 ? ?
TOTAL EXPENSES ? ? 150,000 35,000
OTHER INCOME 15,000 15,000 30,000 40,000
OPENING STOCK 20,000 120,000 200,000 ?
PURCHASES 80,000 900,000 ? 900,000
CLOSING STOCK 40,000 ? 900,000 200,000
FILL IN THE MISSING INFORMATION

(5) (6) (7) (8)
000 000 000 000
SALES 400,000 900,000 840,000 640,000
GROSS 30% ? 25% ?

PROFIT/SALES %
GROSS PROFIT ? 300,000 ? ?
COST OF SALES ? ? ? 200,000
(9) (10) (11) (12)

000 000 000 000
SALES 720,000 ? ? ?
GROSS PROFIT/COST 20% 30% ? 20%

OF SALES %
GROSS PROFIT ? ? 360,000 105,000
COST OF SALES ? 42,000 640,000 ?

(13) (14) (15) (16)
SALES 1,000,000 4,200,000 ? ?
COST OF SALES 400,000 ? 320,000 ?
GROSS PROFIT ? 800,000 ? 240,000
GROSS ? ? ? 24%
PROFIT/SALES %
GROSS PROFIT/COST ? ? 40% ?

OF SALES %
17 18 19 20
000 000 000 000
SALES 560,000 ? 720,000 720,000
RETRUN INWARDS 60,000 20,000 ? 20,000
COST OF SALES 650,000 ? 525,000
MARK UP ? 30% 20% ?
GROSS PROFIT ? ? 240,000 ?
MARGIN 20% ? ? ?
21 22 23 24
000 000 000 000
SALES 472,500 600,000 800,000 ?
MARK UP 35% ? ? 24%
MARGIN ? 28% ? ?
GROSS PROFIT ? ? 200,000 540,000

25 26 27 28
000 000 000 000
COST OF SALES 26,520 ? 2,400,000 840,000
MARGIN 48% ? ? ?
MARK UP ? 40% ? 30%
GROSS PROFIT ? 900,000 800,000 ?

THE BALANCE SHEETS

The balance sheets highlight the business assets and liabilities as at a particular date
normally the end of an accounting period.
1. KWESI ATA ENTERPRISE

2. BALANCE SHEET
3. AS AT 31 DECEMBER 1995
Cost Accumulated Net Book
Depreciation Value
5 FIXED ASSETS 000 000 000
Buildings 60,000 30,000 30,000
Plant & Machinery 40,000 10,000 30,000
Motor Vehicle 18,000 12,000 6,000
118,000 52,000 66,000
INVESTMENTS 2,000
6 Add
7 CURRENT ASSETS
Stocks 5,000
Debtors 3,000
Cash & Bank 7,000
15,000
8 Less CURRENT LIABILITES
Trade Creditors 6,000
Accruals 2,000
8,000
9 Working Capital 7,000
10. Total Assets Less Current 75,000

Liabilities
11 Less
Long Term Liabilities 15,000
12 NET ASSETS 60,000
000
13 REPRESENTED BY
Capital 50,000
Add Net Profit 15,000
65,000
14 Less Drawings 5,000
60,000
The figures used for the balance sheet are just for illustrative purposes. It has no relation with
that used for the profit and account, for now.

The balance sheet is equally being presented in a vertical format.
(1) The name of the business should always be stated

(2) The name of the statement "BALANCE SHEET" should also be stated
(3) The balance sheet is prepared AS AT a period and not for a year as in the case of
the profit and loss account.
(4) Its advisable to set three monetary columns.
(5) Assets are shown under two headings FIXED ASSETS AND CURRENT
ASSETS.
FIXED ASSETS
These are assets, which are acquired not for the purpose of resale but intended to be used
in the business over a longer period for the purpose of assisting to generate wealth.
Examples are buildings, machines and motor vehicles.
Fixed Assets are listed in order of that which are more of a lasting nature example,
building must be stated before plant and machinery.
Best format term based on arrangements are
1. Land and Building
2. Plant and Machinery
3. Motor vehicles
Where the Fixed Assets are more than three it advisable to set them under the three
vertical columns. In examination heading such as Cost, Accumulated Depreciation and
Net Book Value must be stated in full. Cost and Accumulated Depreciation Account are
ledger accounts on their own and must be shown in the balance sheet under separate
captions.
(6) ADD the capital adds is very important and must be highlighted. It add the fixed
Assets to the working capital (current Assets - Current liabilities)
(7) CURRENT ASSETS: These are assets whose nature is supposed to change within
one year or that have a short life span E.g. is Stocks, Debtors Balances, Cash and Bank.
They are listed in order of the assets which are not easily turned into cash. Between stock
and debtors, stocks will be listed first. Stock will be sold to Debtors before the debtors
pay cash.
Best Format
Current Assets
1. Stocks
2. Debtors
3. Cash at Bank
4. Cash on Hand
(8) CURRENT LIABILITIES

These are liabilities (amount owing) which are due to the immediate year or to the year
future. They are listed in order of items, which are further due. Trade creditors could be
paid at a later date than expenses owing.
BEST FORMAT
Current Liabilities
Trade Creditor
Expenses Owing
(9) WORKING CAPITAL

It mathematically defined as current Assets less current liabilities. It is the excess of
current assets over current liabilities where the current liability liabilities are in excess of
current assets working capital is said to be negative.
(10) Total Assets less current liabilities this is the same as Assets plus working capital.
It is the same as the net asset where the company has no long-term liabilities.
(11) Long term liabilities. These are amount due to be paid by the company not within
the immediate year.
(12) NET ASSETS

Its total assets less total liabilities or total asset less current liabilities minus long term
liabilities Net Assets is the same as the net worth of the business
(13) The heading REPRESENTED BY must be stated.
(14) Drawing is withdrawals by the proprietor, which occurs throughout the year. It
effects both capital and profits. It is therefore deducted after the capital and profit has
been added together.

EXERCISES
PREPARE AND BALANCE SHEET FROM THE FOLLOWING INFORMATION

(1) (2) (3) (4)
NAME OF BUSINESS NEETINA OBRMPEH OTU CARLE
ENT. ENT. ENT. ENT.
YEAR ENDED 31/12/98 31/12/99 31/12/2001 31/7/99
000 000 000 000
PLANT &MACH. 270,000 - 120,000 270,000
MOTOR VEHICLE 90,000 30,000 10,000 -
TRADE CREDITORS 26,000 46,000 20,000 30,000
ACCRUED EXP. 6,000 8,000 - 20,000
DEBTORS 42,000 140,000 30,000 90,000
CASH 18,000 88,000 20,000 10,000
CAPITAL ? ? ? ?
(5) (6) (7) (8)

NAME OF BUSINESS NBEA SEMPE BRAGO FIRAKO
ENT. ENT. ENT. ENT.
YEAR ENDED 31/12/99 31/7/99 31/12/97 31/12/96
000 000 000 000
LAND AND BUILDING 60,000 30,000 20,000 50,000
DEBTORS 20,000 12,000 10,000 20,000
TRADE CREDITOR 10,000 15,000 4,000 30,000
BANK OVERDRAFT 4,000 - 6,000 -
MOTOR VEHICLE 15,000 60,000 40,000 20,000
PLANT & MACHNERY 25,000 - 10,000 -
ACCRUED EXPENSES 6,000 10,000 - 8,000
INVESTMENT 10,000 40,000 - 30,000

LONG TERM LOAN 4,000 20,000 20,000 50,000
NET PROFIT 8,000 4,000 ? ?
FURN. & FITTING 18,000 40,000 26,000 -
CAPITAL ? ? 20,000 25,000
CASH/BANK - 8,000 3,000 6,000
FILL IN THE MISSING FIGURES (BALANCE SHEET)
(1) (2) (3) (4)

000 000 000 000
FIXED ASSETS 40,000 60,000 150,000 60,000
CURRENT ASSETS 70,000 ? 90,000 ?
CURRENT LIABILITIES 20,000 50,000 ? 10,000
WORKING CAPITAL ? 80,000 20,000 ?
CAPITAL 42,000 ? ? ?
NET ASSETS ? ? ? 70,000
NET PROFIT ? 15,000 30,000 20,000
(1b) (2b) (3b) (4b)

000 000 000 000
FIXED ASSETS 900,000 800,000 700,000 540,000
CURRENT ASSETS 650,000 ? 600,000 ?
CURRENT LIABILITIES 200,000 420,000 ? 100,000
WORKING CAPITAL ? 400,000 240,000 ?
CAPITAL 680,000 ? ? ?
NET ASSETS ? ? ? 680,000
NET PROFIT ? 140,000 300,000 120,000

(5) (6) (7) (8)

000 000 000 000
FIXED ASSETS 80,000 70,000 100,000 90,000
CURRENT ASSETS 40,000 50,000 ? 40,000
CURRENT LIABILITES ? 20,000 30,000 10,000
CAPITAL 50,000 ? ? 20,000
DRAWING 15,000 15,000 20,000 ?
WORKING CAPITAL 10,000 ? 20,000 ?
NET PROFIT ? 10,000 (6,000) 6,000
LONG TERM LOAN 15,000 ? - 30,000
TOTAL ASSETS
LESS CURRENT ? ? ? ?
LIABILITIES
NET ASSETS ? ? ? ?

EXCERCISE
TRADING PROFIT AND LOSS ACCOUNT AND BALANCE SHEET extracts
1 2 3
31/12/94 31/12/90 31/12/00

Capital 1/1 ? ? ?
Sales 400,000 1,200,000 1,800,000
Drawings 6,000 20,000 -
Return inwards 20,000 60,000 -
Return Outwards 15,000 - 60,000
Purchases 220,000 900,000 1,500,000
Carriage Outwards 4,000 50,000 -
Discount Allowed 25,000 60,000
Goods Stolen 6,000 4,000 -
Water 6,000 50,000
Opening Stock 10,000 30,000 -
Rent 3,000 6,000 8,000
Goods for own use 15,000 -
Stationary 5,000 10,000 7,000
Discount Received 40,000 60,000
Electricity 6,000 9,000 120,000
Bank 187,000 465,000 135,000
Trade Debtors 200,000 250,000 220,000
Trade Creditors 90,000 140,000 120,000
Motor Vehicle 140,000 200,000 400,000
Plant & Machinery 120,000 160,000 200,000
Investment 90,000 - -
Closing Stock 50,000 90,000 140,000
Accrued Expenses 12,000 15,000 20,000
4 5 6
31/12/95 31/12/98 31/12/93

Capital 1/1 ? ? ?
Discount Allowed 24,000 4,000
Goods stolen 9,000 6,000 10,000
Drawings 12,000 15,000 25,000
Return Inwards 8,000 6,000 7,000
Accrued Expenses 7,000 9,000 18,000
Return Outwards 6,000 8,000 10,000
Purchases 280,000 300,000 500,000
Carriage Outwards 6,000 4,000 6,000
Sales 430,000 480,000 720,000
Bank 258,000 142,000 23,000

Water 10,000 7,000 10,000
Opening stock 6,000 - 15,000
Rent 4,000 6,000 12,000
Goods for own use 3,000 - 18,000
Creditors 70,000 50,000 90,000
Discount Received 20,000 4,000 20,000
Electricity 4,000 6,000 15,000
Stationary 6,000 4,000 25,000
Debtors 70,000 90,000 120,000
Prepayment 13,000 5,000 8,000
Motor Vehicle 80,000 120,00 120,000
Plant & Machinery 40,000 140,000 60,000
Closing stock 25,000 60,000 70,000

BOOK OF ORIGINAL ENTRY AND LEDGERS
One important aspect in the accounting statement is that analysing classifying and control
of data.
When transactions are captured from source document they are recorded (not in the
double entry form) first in separate books. These books are called books of original
entry.
The importance of keeping these books alongside the ledger which records the double
entry is that
1. It used to check on the accuracy of the entries the are effected in the ledgers.
2. Summaries can be gathered and posted into the ledger to avoid the ledger being
filled with detailed transactions.
3. When similar types of transactions are put together before or as are being posted to
the ledgers it makes it easier for such similar transactions to be monitored.
. The nature of the transaction affects which books it is recorded into.
The following details are stated during the entry:

(1) Date: The transaction should be recorded in order of date.
(2) Details: Details of the transaction should be stated under this column.
(3) Folio: This column is for cross-reference purpose
(4) Monetary value
TYPES OF BOOK OF ORIGINAL ENTRY

BOOKS PURPOSES
Sales Journal/Sale Day Book Record credit Sale
Purchases Journal/Purchases Day Book Records credit purchase
Return Inward Journal/ Return Inward Day Record Return inward
Return Outward Journal / Return Outward Day Book Return Outward
Cash Book Record Receipt and Payment
General Journal For other items
After recording the transaction is the journal, the accountant applies his/her double entry
principle is record the transaction in the appropriate ledger using the principle
(1) For every debit there must be a corresponding credit entry.
(2) Debit the receiving, account credit the giving account.
There are three main different types of ledgers
Sales Ledger: In this ledger is kept individually all credit customer's personal accounts.
Purchase Ledger: In this ledger is kept individually all credit suppliers personal
accounts.
General Ledger: In this is kept all other accounts such as expenses, fixed assess, capital,
drawings etc.

All business transaction
Classify -put same types of transactions

together
Credit Credit Return Return Cash receipts Other

sales purchase inwards Outward and payments types
s s
Enter in Enter in Enter in Enter in Enter in Enter in

sales purchase return return cash general
journal s journal inwards outward book journal
journal s journal
Enter in double entry accounts in the various

ledgers
Sales ledgers
Purchases ledgers
General ledgers
TYPES OF ACCOUNTS
Accounts can be classified into four main categories:

PERSONAL ACCOUNTS
IMPERSONAL ACCOUNTS
REAL ACCOUNTS
NOMINAL ACCOUNTS
PERSONAL ACCOUNTS
These are accounts, which can be related to personalities or individuals. Debtors and
Creditors account are classified as Personal Accounts.
IMPERSONAL ACCOUNTS
These are accounts, which can not be related to personalities. Impersonal accounts can
be divided into Real Accounts and Nominal Accounts.
REAL ACCOUNTS
Real accounts are accounts which monitors tangible properties such as Building, Plant
and Machinery, Motor vehicle and Fixtures and Fitting.
NOMINAL ACCOUNTS
Records expenses income and capital.

NOMINAL AND PRIVATE LEDGERS
The ledger in which the impersonal accounts are kept is known as the nominal
(or general )ledger.
The capital and drawings account are normally kept outside the nominal ledger. This is
done normally to ensure that the office staff do not have access to the information
relating to the proprietors contribution and drawings proprietors
TYPES OF ACCOUNTS
ACCOUNTS
Personal Impersonal
Accounts Accounts
Debtors Creditors Real Accounts Nominal

Accounts Accounts Accounts
for property
of all kinds
,for expenses
income and



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1

The stages could be broken down as;

Transactions ought to be captured in a form of documentary evidence as a source of

1. The date of the transaction

Example of Document and their purpose

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

In professional accounting, a system of double entry is used to record every transaction

The company can be said to have:

Received 'A motor vehicle at 45 million.

An account is designed in a form of a T and normally called a T account based on the

DEBIT NAME OF ACCOUNT CREDIT

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

There are few technical names e.g.

Capital Account: This monitors the personal contribution of the proprietor

CHECKING ON THE ACCURACY OF THE RECORDING

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

The Bank Reconciliation System

The Trial Balance

The Control Account System

This system is operated for Debtors and Creditors Ledgers.

The Debtors Control Account System

Credit sales are recorded in a Sales Day Book

Two most important information required by management in every institution is the

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

THE DOUBLE ENTRY Transaction Based

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

BALANCING THE LEDGERS

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Balance Carried Down Abbreviated as Bal. C/d

Balance Brought Forward abbreviated as Bal. B/f

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

CAPTURING EXPENSE TRANSACTIONS

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

1/1 Introduce capital of 909-

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

30/1 Paid Asabea by cheque 7 million

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

THE ACCOUNTING EQUATION

Capital = Company Assets

It is very important that we explain some of these terms in a basic way

Assets consist of physical assets and resource-owned by a company such as building,

Capital is often called owners equity or net worth.

Capital + Liabilities = Assets

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Capital + Net Profit + Liabilities = Assets

Capital + Net Profit = Owners Equity

Owners Equity = Net Assets

The accounting Equation might be appreciated if it is expressed in horizontal format

(2) The business paid creditors 100,000

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

(4) Bought goods worth 800,000 on credit.

(5) The business secured long term loan of 3,000,000 cash

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

10. Pay for transport of 200,000 by

Developed By George Quartey (C.A. Ghana MSc Finance) Phone: 0244044324

USERS OF FINANCIAL STATEMENT

Basic Information Needs are:

1 operational efficiency and improved profitability

Employees and Trade Union Representatives

Shareholders and Potential Shareholders