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CATHOLIC UNIVERSITY COLLEGE OF GHANA, FIAPRE

COURSE OUTLINE
EBA 218: PRINCIPLES OF ACCOUNTING II

Lecturer: Stephen Frimpong Credits: 3


Mobile: 020-6915271 Course Meeting: Thursday, 8:00 - 10:30 (Reg)
Email: wofakfrimpong@gmail.com Saturday: 7:30 – 10:00 (Wk)

Course Description
The course is a continuation of Principles of Accounting I. The course is designed to assist
students acquire the language of business in order to understand terms and concepts used in
business decisions and to use accounting information to analyze business performance. It
considers correction of errors, bank reconciliation statement, Manufacturing Account,
Accounts for Non-Profit Making Organizations, Interpretation of Financial Statement
(Introduction), and Incomplete Records and Single entry, Non-current Assets and
Depreciation.

Course Objectives
The Course is designed to assist students:
1. Apply appropriate Accounting Systems and Theories to practical situations.
2. Appreciate the roles and functions of accounting.
3. Acquire the knowledge of basic accounting principles and their application to modern
business using manual, mechanical and computerized systems of financial reporting.
4. Acquire skills for using accounting as a tool for planning, organizing, controlling and
financial decision-making process.
5. Prepare and acquaint themselves for initial entry into accounting careers and also provide
them with sound foundation for further study of Accountancy at higher levels of
education.
6. Equip themselves with skills for analyzing and interpreting financial reports /statements
for the purpose of making useful management decisions.
7. Acquire moral and ethical values essential for accountability in financial matters of both
private and public sectors as well as inculcate an appreciation for neatness, orderliness,
thoroughness and accuracy in financial record keeping.
8. Acquire positive attitude towards good and patriotic citizenship, such as, regular payment
of tax, customs obligations due to individual organizations to the state and fear of
embezzling/misappropriation/misapplication of public funds.

EBA 218: Principles of Accounting II, 2016 1


Course Content
Module 1: Control Accounts
 Nature and Purpose of Control Accounts
 Functions of Control Accounts
 Sales Ledger Control Account
 Purchases Ledger Control Account
 Reconciliation of Ledger Balances and Control Accounts Balances

Module 2: Bookkeeping Errors


 Errors not affecting the Trial Balance
 Errors affecting the Trial Balance and Suspense Account
 Profit Increasing and Decreasing Errors
 Construction of Statement of Corrected Net Profit

Module 3: Bank Reconciliation Statement


 Reasons for the Preparation of Bank Recon. Statement
 Causes of Differences between Bank Balance and Bank Statement Balance
 Construction of Bank Reconciliation Statement

Module 4: Non-Current Assets and Depreciation


 Nature and Types of Non-Current Assets
 Meaning and Causes of Depreciation
 Methods of Depreciation
 Accounting for Depreciation

Module 5: Manufacturing Account


 Concepts and Elements of Cost
 Prime Cost and Factory Overheads
 Construction of Manufacturing Account
 Determination of Manufacturing Profits
 Provision for Unrealized Profit

 Module 6: Single Entry and Incomplete Records


 Nature of Single Entry and Incomplete Records
 Forms of Single Entry and Incomplete Records
 Limitations of Single Entry and Incomplete Records
 Reasons that Account for Incomplete Records Keeping
 Construction of Income Statement using Control Accounts Approach

Module 7: Final Accounts for Non-Profit Making Organizations


 Nature and Sources of Income of Non-Profit Making Organizations
 Determination of Accumulated Fund
 Preparation of Receipts and Payments Account
 Trading Activities of Non-Trading Organizations
 Preparation of Financial Statements of Non-Profit Making Organizations

Module 8: Interpretation of Financial Statement


 Overview of Financial Statement Analysis
 Liquidity Ratios
 Activity Ratios
 Profitability Ratios
 Investor Ratios

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EBA 218: Semester 2, January, 2015
Reading List
1. Appiah-Mensah, K. B. (2004), Principles of Accounting.
2. Brigham, E.F., Ehrhardt, M.C. (2008), Financial Management, Theory and Practice,
U.S.A., Von Hoffman Press Inc.
3. Weygandt, J. J., Kieso, E. D. and Kimmel, D. P. (2008) Accounting Principles (8th Edn)
USA, Von Hoffmann Press.
4. Wood, F., Sangster, A. (2008), Business Accounting 1, 11th Edition, Cataloguing, Great
Britain, Clays Press Ltd., pp623-658
5. Wood, F. and Sangster, A. (2011) Business Accounting I (11th edn) Prentice Hall.
6. Nickels G. W, McHugh J. M, and Susan M. H, (1993) Understanding Business (3rd Edn),
Course Requirements
1. Regular Attendance to Lectures by students
2. Students are to read the relevant sources of literature
3. All students are required to participate in class discussions, assignments and group
presentations.
Lecturer’s Approach of Teaching
1. Overview and Class Demonstration
2. Group Presentation
3. Group and Individual Assignments
4. Mid-Semester Examination
5. End of Semester Examination
Assessment of Student’s Performance and Achievements
Students will be assessed on an ongoing continuous basis. The effect of this is to place less
importance on final examinations and more on regular performance throughout the system.
Attendance at lectures is required, except in special circumstances such as illness certified in
writing by a medical doctor and accepted by the Dean of Students. Students who miss more than
20% of the session will be disqualified from writing end of semester examination. The final
examination will represent sixty (60%) of the course grade. Regular quizzes, mid-semester
examination, written reports and classroom participation will represent the other forty (40%) of
final course grade.
Grading
Grading components will be weighted as following determining student’s grade for this course:
Assignments & Quizzes 20%
Mid-Semester Exams 20%
End of Semester Exams 60%
Total 100%
Examinations
One Mid-semester and one comprehensive final exams, will be written during the semester. Each
exam will cover all materials discussed in class. The mid-semester exams will be given during
the normally scheduled mid-way the semester except the final exam, which is scheduled during
final weeks. Questions may be multiple choice, true/false, and/or short essay. Alternative exam
times will be considered only on a special basis in accordance with school policy. No make-up
exam will be given unless otherwise officially excusable with the lecturer’s prior permission. You
must notify the lecturer in advance if you cannot be present for any exam.

Quizzes & Assignments


Quizzes may be organized, with or without prior announcement. Students will also be required to
do outside class assignments that will incorporate problems from the text. Assignments are due on
the specified dates and no late assignments will be accepted unless prior arrangements have been
made. A reasonable effort to complete the problems is necessary for credit.

EBA 218: Principles of Accounting II, 2016 3


UNIT EIGHT
CONTROL ACCOUNTS
Introduction
The control account is a means of cross checking and comparing the correct postings,
additions, subtractions and the balances arrive at from the various accounts in the sales and
purchases ledger. Since the sales ledger and the purchases ledger contain accounts of debtors
and creditors, the control account is used to check those items that affect the debtors account
as well as creditors account.

Control accounts are also known as Self-Balancing Ledgers or Adjustment Accounts or Total
Accounts. A control account is thus an account to which is posted the totals of items posted to
the individual accounts over which the control account is maintained.

Control account issues relate only to goods bought or sold on credit. This means, cash sales
and cash purchases are not recorded in control accounts. For small organizations, control
account does not form part of the double entry system. In big organizations, the control
account forms part of the double entry system.

Major Classifications
1. Sales ledger control account/Total debtors account. This is a summary of debtors account.
That is the account of individuals, firms and organizations who owe the business some
amount of money.

Items that affect trade debtors


Items − Source Book
Credit Sales − Sale Journal
Sales Returns − Sales Returns Journal
Cash From Customers − Cash Book
Cash Refund to Customers − Cash Book
Cheque From Customers − Cash Book
Bad Debt Written Off − General Journal
Bills Received − Bills Receivable Book
Discount Allowed − Cash Book
Bills Receivable Dishonored − Bills Receivable Book
Interest Charged on Debtors Overdue Debts − General Journal
Cheques From Debtors Dishonoured − Cash Book
Set Off − General Journal
Allowance to Customers − General Journal

2. Purchases ledger control account/total creditors account. This is a summary of creditors


account. That is the account of individuals, firms and organizations who the business
owes some amount of money.
Items that affect trade creditors
Items − Source Book
Credit Purchases − Purchases Journal
Interest on Bills Payable − General Journal
Cash paid to Creditors − Cash Book
Cheques Issued Dishonoured − Cash Book
Cheques Issued to Creditors − Cash Book
Bills Payable Dishonoured − General Journal
Cash Discount Received − Cash Book
Returns Outwards − Purchases Returns Journal

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EBA 218: Semester 2, January, 2015
Cash Refunded by Creditors − Cash Book
Set Off − General Journal
Bills Payable − General Journal

Functions of Control Account/Reasons for preparing Control Account


1. Control account helps to check the arithmetical accuracy of each ledger. Control accounts
thus helps in locating mistakes/errors in the bookkeeping system in the sales and
purchases ledgers.

2. As errors are located, delay in balancing is minimized thereby saving time, money and
labour.

3. A complete trial balance may be compiled before the individual personal ledger, balances
are extracted thus facilitating the preparation if both interim account and draft final
account.

4. It provides an element of internal check or internal control against fraud most especially
where the control accounts are kept by a responsible officer. With control account in
place, control or internal check can be facilitated. If the ledgers are divided into sub-
units then different clerks can work on separate sections at a time. This reduces errors
and facilitates control and accuracy.

5. It provides a quick means of ascertaining the up to date amount owing to (debtors) and
by the business (creditors). This information can be very useful to the management.

6. It helps in ascertaining certain missing items where accounting records are not complete
in nature.

7. The knowledge of the account clerks that a check is being exercised on their performance
through the use of control account will tend to minimize fraud and promote efficiency.

8. Since individual ledgers are self-balancing, this will make the preparation of final account
easier.

All the above functions aid management control since the speed at which information is
obtained is one of the pre-requisite of efficient control.

Techniques in Preparing Control Accounts


Sales Ledger Control Account
Since control account deals with increases and decreases, group all increasing items and
decreasing items separately and
i. Debit all increasing items
ii. Credit all decreasing items

Increasing items
The following are increasing items in the Sales ledger
a. Debit balance in the debtors account brought forward from the previous year
b. Credit sales made within the year to customers
c. All dishonoured cheques/dishonoured bills
d. Cash refund to customers
e. interest charges
f. payments to debtors for claims

EBA 218: Principles of Accounting II, 2016 5


Decreasing items
Decreasing items in the sales ledger include the following
a. Any credit balance in the debtors account brought forward from the previous year.
b. All cash receipts from debtors. It also includes payments by cheques.
c. Return inwards/sales returns for the period.
d. Bad debts
e. Discount allowed
f. Bill receivable
g. Allowance to debtors
h. Set- offs
Sales Ledger Control Account
GH¢ GH¢
Balance b/f (Opening Dr Bal) xx Balance b/f (Opening Cr Balance) xx
Credit Sales xx Cash Received xx
Dishonoured Cheques / Bills xx Cheques Received xx
Interest on Overdue Debts xx Discount Allowed xx
Cash Refund to Customers xx Allowance to Customers xx
Bad debts recoverable xx Bad debts recovered xx
Bad debt Recovered xx Bills Receivable xx
Balance c/d (Closing Cr Bal) xx Bad debt (Not provision) xx
Returns Inwards xx
Set-offs / Contra xx
Balance c/d (Closing Dr Bal) xx
xx xx
Note:
1. The difference between the increasing items (Debit side) and decreasing items (credit
side) will give the total debtors for the period in that ledger.

2. Set-off (Contra Entry): Where a person is a supplier (creditor) to a firm, and the same
person is a customer (debtor) to the firm, it is possible to set-off part of the amount owed by
the firm against what the customer owe to the firm. The effect of such transactions is to
reduce debtors and creditors by the same amount. It is a system where a debt in the sales
ledger is written off against a debt in the purchases ledger. The set-off entries are made in the
general ledger of the firm; hence they are also referred to as contra entries.
3. Provisions are not recorded in control account. Examples are provision for bad debts and
provision for discount on debtors.

Purchases Ledger Control Account


Group all increasing items separately from decreasing items and
i. Credit all increasing items
ii. Debit all decreasing items

Increasing items: Increasing items in the purchases ledger include


a. Credit balance in the creditors account before from the previous year
b. Credit purchases from suppliers within the period.
c. Cash refund to the business by suppliers (creditors)

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EBA 218: Semester 2, January, 2015
Decreasing items: Decreasing items in the purchases ledger include
a. Debit balance in the creditors account before from the previous year (if any)
b. All payments to suppliers (creditors) be it cash or cheque.
c. Return outwards
d. Discount received
e. Bills payable
f. Allowances from suppliers
g. Set- offs
Purchases Ledger Control Account
GH¢ GH¢
Balance b/f (Opening DR Balance) xx Balance b/f (Opening CR Balance) xx
Cash paid to Creditors xx Credit Purchases xx
Cheques Issued to Creditors xx Cash Refund by Suppliers xx
Discount Received xx Balance c/d (Closing Dr Balance) xx
Bills Payable xx
Allowances from Suppliers xx
Returns Outwards xx
Set-off xx
Balance c/d (Closing Cr Balance) xx
xx xx
Note: The difference between the increasing (Credit side) items and decreasing (Debit side) items
represents the total creditors for the period.
* It should be noted that Cash sales, cash purchases, trade discount, carriage outwards and
provision for bad debts, provision for discount are not to be recorded in control accounts.

Illustration
Balances and transactions affecting Gargantuan Company’s control account for the month of
June, 2013 are listed below:
Balances at 01/06/13: GH¢’000
Sales ledger 9,123 (Dr.)
211 (Cr)
Purchases ledger 4,490 (Cr.)
88 (Dr.)
Transactions during June, 2013:
Purchases on credit 18,135
Allowances from suppliers 629
Receipts from customers by cheque 27,370
Sales on credit 36,755
Discount received 1,105
Cash sales 7,550
Payments to creditors by cheque 15,413
Contra settlements 3,046
Allowances to customers 1,720
Bills of exchange receivable 6,506
Provision for bad debts 580
Customers’ cheque dishonored 489
Cash receipts from credit customers 4,201
Refund to customers for our payment of 53
accounts
Discount allowed 732
Cash purchases 3,650
Balances at 30/06/13:
Sales ledger 136 (Cr)
Purchases ledger 67 (Dr)

EBA 218: Principles of Accounting II, 2016 7


Required:
Prepare the sales ledger and purchases ledger control accounts for the month of June 2013 and
derive the respective debit and credit closing balances on 30/6/13.

Solution:
Sales Ledger Control Account
June, 2013 GH¢’000 June, 2013 GH¢’000
Balances b/d 9,123 Balances b/d 211
Sales 36,755 Bank 27,370
Bank: Dishonored 489 Set off (contra) 3,046
Cash refund 53 Allowances 1,720
Balances c/d 136 Bills receivable 6,506
Cash 4,201
Discount allowed 732
Balances c/d 2,770
46,556 46,556
July 1:Balances b/d 277
Purchases Ledger control Accounts
June, 2013 GH¢’000 June, 2013 GH¢’000
Balances b/d 88 Balances b/d 4,490
Allowance 629 Purchases 18,135
Discount received 1,105 Balances c/d 67
Bank 15,413
Set off 3,046
Balances c/d (Diff) 2,411
22,692 22,692
July 1, Balances b/d 2,441
Reconciliation
The entries in the ledger control accounts and ledger account are expected to be the same
hence the same closing balances. Sometimes due to certain differences in entries or errors, the
two balances expected to be the same do not agree. The disagreement in the balances calls for
reconciliation. Reconciliation of control account is prepared to make sure that the entries in
the ledger accounts agree with the entries in the ledger control accounts.
Reconciliation is of two forms or kinds, namely,
1. Debtors Ledger Reconciliation
2. Creditors Ledger Reconciliation

Debtors Ledger Reconciliation


Causes of differences
a) Single entry (entry in only ledger a/c or control a/c but not in individual a/c or control a/c)
b) Omission of transaction from control a/c.
c) Wrong posting e.g. Credit sales posted in error.
d) Arithmetical error/casting error
e) Wrong balancing of individual

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EBA 218: Semester 2, January, 2015
Sales Ledger Control Account
Bal. b/d xx Errors adjusted Xx
Errors adjusted xx Bal. c/d Xx
xx Xx
Bal. b/d xx

Reconciliation of Debtors Balance with Control Account Balance


Balances as per data (Individual Debtors Bal) xx
Add Errors that reduced the debtors ledger balances xx
xx
Less Errors that increase debtors ledger bal. xx
Revised balance c/d on control A/c xx

Creditors Ledger Reconciliation


Causes of differences:
a) Errors in the creditors ledger (credit purchases posted in error)
b) Errors in creditors control a/c
c) Single entry in either control a/c or individual legers
d) Omission of transactions from control a/c
e) Casting error
Purchases Ledger Control Account
Errors adjusted xx Bals b/d as per data xx
Bals c/d xx Errors adjusted xx
xx xx
xx xx
Bals b/d
Reconciliation of creditors balance with Control A/c Balance
Balance as per data (Individual Creditors Bal) xx
Add: Errors that reduced creditors ledger balance xx
xx
Less: Errors that increase the creditors balance xx
Revised Control Account balance xx

Illustration
The sales ledger control account balance declared by Sakasaka Company in the month of
June, 2013 was GH¢1,032,720 and the individual accounts in the debtors ledger was
GH¢1,056,804. Further investigation revealed the following:
a) Discount allowed amounted to GH¢720 have not been recorded in the control account.
b) A contra settlement of GH¢9,000 has not been recorded in the debtors ledger control.
c) Cash received of GH¢4,800 from customers has been debited to the individual customer’s
account in the debtors ledger.
d) A customer paid an amount of GH¢1,932 to the business has wrongly been recorded in the
debtors ledger as GH¢1,398.
e) A credit sales of GH¢27,000 has not recorded in the control account.
f) A cheque of GH¢3,330 from a customer has been dishonoured but no entry has been made
in the individual ledger account.
You are required to correct the sales ledger control account and reconcile the individual
account total with sales ledger control account.

EBA 218: Principles of Accounting II, 2016 9


Solution
Sales Ledger Control Account
GH¢ GH¢
Bal. b/d 1,032,720 Set off 9,000
Sales 27,000 Discount allowed 720
Bal. c/d 1,050,000
1,059,720 1,059,720
Balance b/d 1,050,000

Reconciliation of individual ledger balances with Control A/c


GH¢ GH¢
Balance as per individual ledger a/c 1,056,804
Add: Dishonoured cheque 3,330
1,060,134
Less: wrong posting/entry 9,600
Casting error 534 10,134
Revised balance 1,050,000

Points To Note
1. Identify the items or transactions, which relate to the control account and individual ledger
accounts. That is, items, which should be, treated in the control account and the individual
ledger accounts.
2. All items, which relate to the control account, should be treated in the control account.
3. All items, which relate to individual ledger accounts, should be treated in the
reconciliation.
4. Identify those items or transactions that reduce or increase the individual ledger account.
5. Add all items that reduce the creditors or debtors ledger balance and less all items that
increase the creditors or debtors ledger balance.

Tutorials
1. Woyome Enterprise maintains memorandum Debtors and Creditors ledgers in which the
individual accounts of customers and suppliers’ accounts are kept. The following information
relates to August, 2013:
GH¢
Debit balances in the debtors’ ledger on 1 August, 2013
st
663,000
Credit balances in the creditors’ ledger on 1st August, 2013 506,000
Sundry debit balances in the debtors’ ledger on 1 August, 2013
st
7,240
Goods purchased on credit 2,579,190
Goods sold on credit 3,236,140
Cash received from debtors 2,991,490
Cash paid to creditors 2,105,220
Discount received 26,630
Discount allowed 29,300
Cash purchases 36,270
Cash sales 59,220
Bad debts written off 36,510
Interest charged on overdue debtor account 2,770
Returns Outwards 29,260
Returns Inwards 28,050
Accounts settled by contra between debtor and creditor ledger 11,060
Sundry credit balances in the debtors’ ledger on 31st August, 2013 8,150
Sundry debit balances in the creditors’ ledger on 31 August, 2013
st
6,980

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EBA 218: Semester 2, January, 2015
You are required to prepare the debtors and creditors ledger control accounts as they would
appear in the firm’s ledger at 31st August, 2013.

2. The following balances and transactions were extracted from the financial records of Awo
Konkonsah Company for the month of January, 2013.
Balance at 1st January, 2013: GH¢’000
Purchase ledger 22,450(Cr)
100(Dr)
Sales ledger 86,000(Dr)
220(Cr)
Transaction during January, 2013:
Cash purchases 450,000
Credit sales 800,000
Cash sales 920,000
Credit purchases 630,000
Allowances from suppliers 2,500
Cheques received from credit customers 600,000
Cash received from credit customers 80,000
Discount received 12,000
Cheque paid to creditors 470,000
Purchases ledger and sales ledger contra settlement 15,000
Allowance to customers 30,000
Bills of exchange payable 100,000
Bills of exchange receivable 20,000
Cheques from customers dishonoured 18,000
Provision for discount on debtors 5,000
Bad debts written off 8,000
Discount allowed 10,000
Refunds to customer for over payment 21,000
Interest charged on debtor overdue account 2,000
Sales returns 10,000
Returns outwards 6,000
Balance at 31st January, 2013:
Sales ledger 200 (credit)
Purchases ledger 90 (debit)
You are required to write up the Sales Ledger Control Account and Purchases Ledger
Control Account for the month of January, 2013.

3. Konkonsah Enterprise is a business, which sells fishing nets on credit basis to fisherman in
the Brong Ahafo Region. The following balances were extracted from its ledgers on 28th
February, 2013.
GH¢
Creditors balance as at 01/02/13 50,000
Debtors balance as at 01/02/13 85,000
Balances as at 28/02/13:
Sales of nets 724,000
Purchases of nets 345,000
Discounts allowed 8,000
Discounts received 7,000
Cash received from debtors 700,000
Cash paid to creditors 322,000
EBA 218: Principles of Accounting II, 2016 11
Returns inwards 37,000
Returns outwards 5,000
Carriage outwards 4,000
Carriage inwards 6,000
Overdraft interest 3,000
Provision for doubtful debts as at 28/02/11 5,000
Bad debts written off in January, 2011 but recovered in Feb. 2011 2,000
Additional information:
A cheque of GH¢1,200 from Bandede, a customer, has been returned by the bank marked
returned to drawer. Bad debts totaling GH¢6,900 were written off in February, 2013.

You are required to prepare for the month ended 28th February, 2013 Sales Ledger Control
Account and Purchases Ledger Control Account.

4. The following information was extracted from the books of Pink Sheet Limited for the
month of January, 2013.
GH¢
Cash received from debtors 22,540,000
Cash paid to supplier 76,140,000
Set-off between sales and purchases ledger balances 99,000,000
Purchases journal 84,400,000
Sales journal 30,200,000
Amounts owed to supplier (01/01/13) 7,200,000
Amounts owed by customers (01/01/13) 62,100,000
Discount allowed 1,880,000
Discount received 1,760,000
Interest on overdue debts 300,000
Returns outwards journal 1,180,000
Returns inwards journal 1,500,000
Bad debts written off 380,000
Dishonoured cheques 2,200,000
Credit balances in the sales ledger (31/01/13) 55,000
Debit balances in the purchases ledger (31/01/13) 150,000
You are required to prepare the purchases and sales ledger control accounts for the month of
January, 2013.

5. The following total transactions and account balances relate to the Debtors’ and
Creditors’ ledgers of Abronomah Enterprise for the quarter ended 31st March, 2013:
GH¢
Balances on 1st January, 2013:
Sales ledger 600,000
Purchases ledger 360,000
Total transactions during the quarters:
Sales journal 2,600,000
Purchase journal 4,800,000
Returns inwards 120,000
Returns outwards 110,000
Cheques to suppliers 2,100,000
Cheques from customers 4,600,000
Cash paid to suppliers 111,000
Interest charged on overdue debts 70,000
Interest payable on overdue suppliers’ accounts 50,000
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EBA 218: Semester 2, January, 2015
Provision for bad debts 150,000
Bad debts 400,000
Customer’s cheque dishonoured 700,000
Carriage outwards refundable by customers 550,000
Cheque to a supplier dishonoured 600,000
Credit balances in bought ledger transferred to
Sales ledger 200,000
Balances on 31st March, 2013:
Sales ledger 200,000 (credit)
Purchases 220,000 (debit)
You are required to prepare the
a) Total Debtors Account b) Total Creditors Account

6. Mr Pink Sheet, a sole trader, keeps her books so that a Sales and Purchases Ledger Control
Accounts are shown in her ledger and balanced at the end of each month. From the following
details, show how these two control accounts will appear in the general ledger for the month
of May, 2013.
2013 GHc
May 1 Debit balances in the Sales Ledger 13,500,000
Debit balances in the Purchases Ledger 115,000
Credit balances in the Sales Ledger 300,000
Credit balances in the Purchases Ledger 12,000,000
May 31 Sales Journal 20,000,000
Purchases Journal 17,500,000
Sales Returns and Allowances to debtors 360,000
Purchases Returns and Allowances from creditors 200,000
Cash received from trade debtors 7,500,000
Bad debts recovered 16,000
Cheques received from trade debtors 15,000,000
Discount received from creditors 120,000
Allowances to cash customers 124,600
Payments made to trade creditors 16,400,000
Discount allowed to trade debtors 360,000
Bad debts written off 50,000
Provision for doubtful debts 200,000
Bills of exchange accepted by trade debtors 4,300,000
Bills of exchange accepted by Pink Sheet 6,600,000
Sales Ledger balances transferred to purchases ledger 80,000
Refunds to customers for over payment 128,000
Cash purchases 3,000,000
Dishonoured bills payable 130,000
Carriage outwards 186,200
Dishonoured bills receivable 150,000
Interest Charged on overdue debt 54,000
Credit balances in the Sales Ledger 195,000
Debit balances in the Purchases Ledger 180,000

7. The following information was extracted from the books of Amansan Limited with respect
to the business debtors.
(a) The total amount for the list of individual accounts in the sales ledger was GH¢2,201,700
(b) The balance that stood in the debtors ledger control account as GH¢2,151,500.
(c) Discounts Allowed of GH¢1,500 have not been recorded in the control account.

EBA 218: Principles of Accounting II, 2016 13


(d) An amount of GH¢10,000 received from customer has been debited to the customer’s
account in the debtors ledger.
(e) An amount of GH¢18,750 which happens to be a contra item (entry) has not been
recorded in the debtors ledger control account.
(f) A cheque worth GH¢6,950 received from a customer has been dishonoured but has not
been recorded in the individual’s account.
(g) Credit sales of GH¢56,250 to a customer has not been entered in the control account even
though it has been posted to the ledger account.
(h) A receipt of GH¢4,050 from a customer has been wrongly entered in the debtors ledger as
GH¢2,900
You are required to:
i. Correct the debtors ledger control account
ii. Prepare statement reconciling the original total of the individual balances with the
corrected balance on the control account.

8. The disclosed balances for individual ledger accounts and that of creditors control account
are not the same. The individual ledger accounts balance totaled GH¢39,532 and the control
account balance stood as GH¢43,664. Thorough investigation revealed the following:
a) Discount received amounting to GH¢3,430 has not been entered into the control account
but has been entered in the individual ledger account.
b) An amount of GH¢410 has been wrongly treated as a debt in the individual ledger a/c
instead of credit balance.
c) Petty cash payment of GH¢126 to suppliers has been entered in the control account but in
the individual ledger account.
d) Purchase journal has been understated by GH¢4,000.
e) A contra settlement of GH¢4,000 with the debtors ledger has been rightly entered in the
individual ledger account but no record has been made in the control account.

Assignment
1. The Purchases ledger control account balance failed to agree with the balances of the
individual ledger accounts. The balances are GH¢158,128 and GH¢174,656 respectively.
Further scrutiny exposed the following errors
(a) Discount received of GH¢13,720 has only been entered in the individual ledger accounts.
(b) An amount of GH¢1,640 which happens to be an individual credit balance has been
treated as a debit.
(c) An amount of GH¢504 paid to a supplier has not been entered in the supplier’s individual
ledger account.
(d) Purchases journal has recorded an undercast of GH¢16,000.
(e) Contra settlements with debtors ledger of GH¢16,032 have not been recorded in the
control account but correctly entered in the individual ledger.
You are required to:
i. Adjust the purchase ledger control account
ii. Prepare a statement reconciling individual balances with the control account balance.

2. The following transactions were taken from the books of Mr. Bandede, a sole trader in the
month of August, 2013.
August. 1. Bought 200 bags of sugar on credit from Konkonsah at GH¢700
per bag, invoice subject to a 5% trade discount;
6. Bought goods on credit from Tutugyagu for GH¢5,000;
10. Sold 160 bags of sugar on credit to Araba Stamp at GH¢850 per bag,
subject to trade discount of 5%.

14
EBA 218: Semester 2, January, 2015
12. Issued a cheque to Johnson for the goods bought on January 1, less a cash
discount of 10%.
15. Sold goods on credit to Odeneho for GH¢3,900;
19. Bought goods on credit Konkonsah for GH¢6,100;
20. Received a cheque from Araba Stamp for the amount due less a
10% cash discount
27. Paid cash of GH¢3,200 to Tutugyagu
29. Received cash of GH¢3,000 from Odeneho.

You are required to prepare the


(a) Sales Journal
(b) Purchases Journal
(c) Accounts in the sales ledger
(d) Accounts in the purchase ledger
(c) Sales ledger and purchase ledger control accounts

EBA 218: Principles of Accounting II, 2016 15


MODULE TWO
CORRECTION OF ERRORS AND SUSPENSE ACCOUNT
When errors are made in book-keeping, they must not be corrected by striking out the wrong
figures or entries. However, another entry must be made to correct the error and show the
true position. Such entries must be recorded in the general journal with a full narration
describing the necessity for the entry.
Book-keeping errors may be grouped into two broad categories:
1. Errors that do not affect the agreement of the trial balance totals
2. Errors that affect the totals of the trial balance and thus put the debit and credit totals
into disagreement.
Errors that do not affect the agreement the Trial Balance Totals
The mere agreement of the trial balance total is not a proof of the absolute accuracy of the
recordings in the books. There may exist serious errors that the trial balance cannot disclose
because such errors do not have any effect on either of the two totals of the statement. The ff.
classes of errors will not be disclosed even though the trial balance has been agreed:
Error of Omission: This situation occurs where a transaction is entirely omitted and neither
debit nor credit entry is made in the books. Example: Sale of goods to Awo Konkonsah
GH¢240 has been omitted from the books. Correction is made by recording the transaction in
the appropriate accounts at the correct sides.
Error of Commission: This error occurs where the correct amount is posted to a wrong
account within the same category, usually due to similarities in names. For instance, debiting
or crediting Amina’s account instead of Mina’s account. Correction is effected by making the
correct entry in the right account, with the corresponding entry going to the wrong account.
Error of Principle: This occurs where a transaction is entered in a wrong class of account.
For example, Cost of machinery which should be recorded in the machinery account which is
a real account, is debited to machinery repairs account which is a nominal account. Such
errors are corrected by reversing the entry in the wrong account with the corresponding entry
going to the right account.
Error of Original Entry: This is where the initial recording in the book of prime entry is
incorrectly made and the wrong figure is later posted to the ledger in accordance with double
entry principles. This type of error may be corrected by raising necessary entries for the
difference so as to reduce or increase the wrongly entered figure to the correct amount. For
instance, a credit sale of goods for GH¢2,179 wrongly entered in the sales day book as
GH¢1,297 and the latter figure credited as such to sales account and debited to the customer’s
account. Correction of this particular error is made by debiting the customer’s account and
crediting sales account with the difference/undercast, GH¢882 (i.e. 2,179 - 1,297).
Compensating Error: These are the types of errors that cancel each other and thus do not
affect the agreement of the trial balance. That is, where the effect of an error is fully
compensated for by the effect of another error. For example, in a credit purchase transaction,
Odeneho Stores is wrongly credited with GH¢50 while purchase account is correctly debited
with GH¢500, and in another transaction, Furniture account is wrongly debited with GH¢54
while Agyewodin Furniture Company is credited with GH¢504. The error arisen from the
understated credit of GH¢450 in Odeneho Stores’ account is compensated by the understated
debit of the same amount in the furniture account. This type of error is corrected by making
good the shortage or overflows whichever is applicable at the appropriate sides of the
accounts involve.
Complete Reversal Entry: This is where the guiding principles of debiting and crediting are
applied in the reverse direction. Correct accounts and amounts are used but each item is

16
EBA 218: Semester 2, January, 2015
shown on the wrong side of the accounts. For instance, Received cash of GH¢5,000 from
VM Trading Company and VM Trading Company is debited and Cash account is credited.
Such errors are corrected by doubling the actual figure originally recorded. The first reversal
entry cancels the error whilst the second entry of the same account records the transaction
correctly.
Error of Duplication: This is where an entry is made twice in the books giving rise to the
debit and credit totals being overstated by equal amount. Credit purchases from MELCOM
GH¢9,000 was recorded twice in the books. When detected, such errors may be corrected by
reversing one of the two entries.
Illustration
Show the journal entries needed to correct the following errors:
a) Purchases GH¢6,990 on credit from K. Ward had been entered in H. Wood’s account.
b) A cheque of GH¢1,890 paid for advertisements had been entered in the cash column of
the cash book instead of the bank column.
c) Sales of goods GH¢4,430 on credit to B. Gordon had been entered in error in B. Gorton’s
account.
d) Purchase of goods on credit from K. Isaacs GH¢890 entered in the books as GH¢990.
e) Cash paid to H. Moore GH¢890 entered on the debit side of the cash book and the credit
side of H. Moore’s account.
f) A sale of fittings GH¢5,000 had been entered in the sales account
g) Cash withdrawn from bank GH¢1,000, had been entered in the cash column on the credit
side of the cash book, and in the bank column on the debit side.
h) Purchase of goods GH¢4280 has been entered in error in the Fittings account.
Solution:
JOURNAL ENTRIES
Dr. Cr.
GH¢ GH¢
H. Wood 6,990
K. Ward 6,990
Being an item recorded in the wrong personal account, now corrected
Cash 1,890
Bank 1,890
Being amount recorded in wrong account, now corrected
B. Gordon 4,430
B. Gorton 4,430
Being an item recorded in the wrong personal account, now corrected
K. Isaac 100
Purchases 100
Being amount overcastted in two account
H. Moore 1,780
Cash 1,780
Being amount recorded at the wrong sides of the two accounts
Sales 5,000
Fittings Disposal 5,000
Being amount posted to the wrong class of account, now corrected
Cash 2,000
Bank 2,000
Being drawings from bank completely reversed in the books
Purchase 4,280
Fittings 4,280
Being amount entered in the wrong account, now corrected

EBA 218: Principles of Accounting II, 2016 17


TRY
The following errors were detected in the books of Single Spine Enterprise.
i. Extra capital of GH¢100,000 paid into the bank had been credited to sales account.
ii. Goods taken for own use GH¢7,000 had been debited to General Expenses.
iii. Private insurance GH¢890 had been debited to insurance account.
iv. A purchase of goods from Uncle Dee, GH¢8,570 had been entered in the books as
GH¢5,870.
v. Cash banked GH¢3,900 had been credited to the bank column and debited to the cash
column in the cash book.
vi. Cash drawings of GH¢4,000 had been credited to the bank column of the cash book.
vii. Returns inwards GH¢1,680 from Peter had been entered in error in Paul’s account.
viii. A sale of a motor van GH¢10,000 had been credited to Motor Expenses.
You are require to:
a. State the type of error committed in each case
b. Pass journal entries to correct these errors

Errors that Affect the Agreement of the Trial Balance Totals


Some of the common errors that affect the Trial Balance Totals and thus put the debit and
credit total into disagreement include the following

Incomplete Double Entry: This occurs where only one side of a transaction is recorded.
Correction is effected by making up the entry entries omitted at the appropriate side in the
appropriate account. Example: Sale of goods to Agyewodin has been recorded in the sales
account, but no corresponding entry is made in the personal account.

Errors in Posting: Where the posting to the ledger is placed on the wrong side of one of the
two accounts involved in the double entry, thus resulting in two debits or credits. Correction
requires twice entry of the amount of the error at the correct side of the account involve.

Where amounts posted to opposite sides of the ledger accounts disagree. This is where the
figures posted to the accounts involve in a transaction are not the same resulting in an
undercast/overcast in the account involve. Example: A cheque of GH¢940 paid to Kaas
Enterprise has been correctly entered in the Cash Book but posted to the personal account as
GH¢904. Here the correction is made by debiting Kaas’ Account with GH¢36, being an
undercast in the earlier entry made in the account.

Incorrect addition/Error of casting: This is a situation where the addition of the entries
made in an account is wrongly done resulting in an overcast/undercast. Example: the debit
side of the Cash Book has been undercast by GH¢216. Here correction is made by debiting
the cash book with the undercast of GH¢216.

Failure to extract one or more balances from the books: This is where some ledger
accounts balances are not included in constructing the Trial Balance. Correction is made by
recording the omitted amount on the correct side (depending on the nature of the account
balance) of the account involves. Example: An amount of GH¢480 in the Sales Ledger has
been omitted from the list of balances at the end of the period. Here correction is made by
debiting Customers Account with GH¢480.

Omission of opening balance: This is where the opening balance(s) of some account(s)
is/are omitted from the entries made in the current period. Correction is made by recording the
omitted balance at the right side of the account involves. Example: An opening balance of

18
EBA 218: Semester 2, January, 2015
GH¢918 was not recorded in Nananom’s Account in the purchases ledger. Correction is made
by crediting the account of Nananom with GH¢918.

Correct balance extracted but placed on wrong side of the trial balance: This is where
correct balance in an account is picked but recorded at the wrong side of the Trial Balance.
Correction is made by recording twice the amount involves at the correct side. This will
cancel the wrong entry made by half of the current entry made. Example: A debit balance of
GH¢760 extracted from the account of Uncle Dee in the Sales ledger das been placed at the
credit side of the Trial Balance. Correction is made by debiting Uncle Dee’s account with
GH¢1,520.

*It should be noted that corresponding entries of errors that affect the agreement of the Trial
Balance are made in the Suspense Account.

SUSPENSE ACCOUNT
The suspense account comes into play only when the errors that affect the agreement of the
Trial Balance totals are not detected during the accounting period. The balance on the
suspense account (the difference in the trial balance totals) is shown under current liabilities
(if a credit balance) and under current assets (if a debit balance). Corrections of such errors
during the ensuing period, then, have to be made through the Suspense Account so as to
eliminate the original brought down on the accounts.

Correction of Errors through the Suspense Account


In deciding which side of the suspense account a given item of error should be placed so as to
effect correction, the following guiding principles should be adopted:
a) Where the effect of the error makes total debit more, Debit Suspense Account
b) Where the effect of the error makes total credit short, Debit Suspense Account
c) Where the effect of the error makes total credit more, Credit Suspense Account
d) Where the effect of the error decreases total credit, Credit Suspense Account

Illustration
The following Trial Balance was extracted from the books of Single Spine Enterprise, a small
wholesale business at 31/03/13
Trial Balance as at 31st March, 2013
Dr Cr
GH¢ GH¢
Capital 43,000
Accounts Payable 18,470
Accounts Receivable 26,310
Equipment at cost 39,440
Prov. for dep. on Equip. 8,620
Stock of goods 01/04/12 9,080
Sales 97,910
Cash at bank 560
Cost of goods sold 60,080
Discount allowed 1,220
Discount received 790
Rates and insurance 2,600
Warehouse wages and expense 13,700
Office salaries and expenses 12,010
Depreciation of Equipment 2,430
167,430 168,790

EBA 218: Principles of Accounting II, 2016 19


The causes of the difference in the books are found to be attributable to the following errors:
a) The total in discount allowed column of the cash book of GH¢520 was entered correctly
in the debtors control account but debited as GH¢250 in the discount allowed account
b) An item for GH¢800 for a new adding machine was incorrectly posted to warehouse
wages and expenses.
c) A cheque for GH¢430 for rates was entered in the books as GH¢630.
d) A physical stock taking revealed that the correct value to be placed on the stock of goods
was GH¢8,750.
e) A cheque for GH¢1,210 received from a debtor have been dishonored but no record has
been made of the in the books.
f) Warehouse wages and expense of GH¢270 and Office salaries and expenses of GH¢240
paid by cheque have not been recorded in the books.
g) A sales invoice of GH¢830 was correctly entered and posted to the sales account but
omitted from the debtors account.
h) A sales invoice of GH¢130 was correctly credited to the sales account, but also credited to
the creditors account in the creditors ledger.

You are required to:


i. Prepare journal entries correcting these matters with full narrations
ii. Show the suspense account as it would appear after the errors have been corrected
iii. Prepare a revised trial balance after the correction of these errors.
Solution:
SINGLE SPINE ENTERPRISE
JOURNAL ENTRIES
Dr. Cr.
GH¢ GH¢
Discount allowed 270
Suspense 270
Being a discount allowed undercast, now corrected
Equipment (Adding Machine) 800
Warehouse wages and expense 800
Being an amount posted to a wrong account, now corrected
Bank 200
Rates 200
Being an overcast of rates paid by cheque, now corrected
Cost of goods sold 330
Inventories 330
Being an overcast of closing stock, now corrected
Accounts Receivable 1,210
Bank 1,210
Being a transaction omitted from the books, now entered
Warehouse wages and expense 270
Office salaries and expense 240
Bank 510
Being items omitted from the books, now entered
Accounts Receivable 830
Suspense 830
Being an incomplete record of entries, now corrected
Accounts Receivable 130
Accounts Payable 130
Suspense 260
Being a double recorded transaction, now corrected

20
EBA 218: Semester 2, January, 2015
SUSPENSE A/C
GH¢ GH¢
Difference in the Trial Bal. 1,360 Discount allowed 270
[168,790-167,430] Debtors control 830
Creditors control 130
Debtors control 130
1,360 1,360
SINGLE SPINE ENTERPRISE
REVISED TRIAL BALANCE AS AT 31/03/13
DR. CR.
GH¢ GH¢
Capital 43,000
Accounts Payable [18,470-130] 18,340
Accounts Receivable [26,310 + 830 + 1,210 + 130] 28,480
Equipment at cost [39,440 + 800] 40,240
Provision for Depreciation on Equipment 8,620
Stock of goods (9,080-330) 8,750
Sales 97,910
Bank Balance [(1,460 + 200) – (1,210 +510)] 960
Cost of goods sold (60,080 + 330) 60,410
Discount allowed [1,220 + 270] 1,490
Discount received 790
Rates and insurance [2,600 – 200] 2,400
Warehouse and wages and Exp. [13,700 – 800 + 270] 13,170
Office salaries and exp. [12,010 + 240] 12,250
Depreciation of Equipment 2,430
169,700 169,700

EFFECTS OF ERRORS ON REPORTED PROFIT


Bookkeeping errors that affect profit calculation are those whose corrections necessitate the
adjustments in the balances of nominal accounts (Expenses and Revenues).
Profit Increasing Errors: These are errors that cause a shortage in the balances of revenue
expenses accounts or those that result in the overstatement in the balance of accounts of
incomes. They have the tendency to increase the correct profit figure. Since profit increasing
errors result in an overstatement of the correct net profit, the value of such errors are deducted
back from the draft profit figure in order to obtain the correct profit figure.
Profit Decreasing Errors: They are errors that cause the balances of revenue expense
accounts to be more, or those that cause an understatement in the balances of income
accounts. They have the tendency of causing profits to be understated. Because profit
decreasing errors lead to the understatement of the correct net profit, their values are added
back to the given draft profit figures in order to ascertain the correct net profit.

EBA 218: Principles of Accounting II, 2016 21


Determination of Corrected Net Profit
Statement of Corrected Net Profit for the Year Ended………..
GH¢ GH¢
Net Profit as per Accounts xx
Add Profit Decreasing Errors:
Expenses Overstated xx
Revenues Undercast xx xx
xx
Less Profit Increasing Errors:
Expenses Undercast xx
Revenues Overcast xx xx
Correct Net Profit xx

Illustration
Agyewodin Enterprise extracted a Trial Balance on 31/12/12 which showed a difference of
GH¢21,500 at the credit. Upon an investigation the following revelations were made:
a) A total in the purchases day book was carried forward as GH¢59,750 instead of
GH¢57,950. The ultimate total being posted to purchases account.

b) The stock sheet were undercast by GH¢10,000

c) A bank deposit account of GH¢12,500 was omitted

d) The Cash Book is overcast by GH¢4,950 at the debit side.

e) A page in the sales journal totaling GH¢2,750 was omitted from the amount posted to
sales account.

f) An amount of GH¢1,250 paid in respect of has not been recorded in the books.

g) An invoice of GH¢3,500 has been included in purchases and stock but not posted to the
personal ledger.

h) An item in the sales day book of GH¢250 was posted in the sales ledger as GH¢1,250

i) The income statement reported a net profit of

You are required to show the:


i. Journal entries to correct the above errors
ii. Suspense account
iii. Corrected net profit GH¢385,000

22
EBA 218: Semester 2, January, 2015
Solution
Journal Entries
Dr Cr
GH¢ GH¢
Suspense 1,800
Purchases 1,800
Being purchases overcast
Stock 10,000
Cost of sales 10,000
Being stock undercast
Bank 12,500
Suspense 12,500
Being omission in the bank
Suspense 4,950
Cash Book 4,950
Being overcast in the cash book
Rent 1,250
Cash Book 1,250
Being payment of rent omitted
Suspense 22,750
Sales 22,750
Being sales undercast
Suspense 3,500
Accounts Payable 3,500
Being undercast in creditors a/c.
Suspense 1,000
Accounts Receivable 1,000
Being overcast in debtors a/c

Suspense Account
GH¢ GH¢
Purchases 1,800 Diff. in Trial Bal. 21,500
Cash in hand 4,950 Bank Deposit 12,500
Sales 22,750
Creditors 3,500
Debtors 1,000
34,000 34,000

Agyewodin Enterprise
Revised Net Profit for the Year Ended 31st December 2012
GH¢
Net profit as per account 385,000
Add: Purchases overcast 1,800
Stock undercast 10,000
Sales undercast 22,750 34,550
419,550
Less Omission of Rent 1,250
Corrected Net Profit 418,300

EBA 218: Principles of Accounting II, 2016 23


TUTORIALS
1. The Trial Balance of Nabb Ltd failed to agree and the difference was posted to the credit
side of the Suspense Account. An investigation into the books revealed the following:
a) A payment of GH¢7,875 for telephone was posted to the credit side of the account.
b) Purchase Day Book was overcast by GH¢110,000
c) A sum of GH¢35,000 paid for salaries was recorded only in the Cash Book.
d) A balance of GH¢390,000 on Sales Day Book was carried forward as GH¢930,000
e) A payment of GH¢210,000 made by Issah was credited to Isaac’s account.
f) An amount of GH¢200,000 posted to Building Account included GH¢15,000 for repairs.
g) A balance of GH¢295,000 due from a debtor was brought down as GH¢925,000.

You are required to prepare:


i. Journal entries to correct the errors
ii. Suspense Account

2. The Trial Balance of Amabokoboko Enterprise failed to agree. The difference was placed in
a suspense account. Upon thorough investigations, the following errors were detected:
a) A small piece of machinery purchased for GH¢3,600 had been written off to repairs and
maintenance;

b) The receipts side of the cash book had been undercast by GH¢1,800;

c) A sum of GH¢5,000 representing credit sales to King James was posted to the credit side
of his account;

d) A credit note for GH¢2,400 received from Bongo Bar, a supplier had been posted to the
wrong side of her account;

e) Discount allowed was overcast by GH¢400;

f) Rent of GH¢3,700 received from a sub-tenant was rather debited to rent and rates account;

g) A cheque for GH¢4,500 paid into the bank and subsequently dishonoured was correctly
reversed in the cash book but debited in the customer’s account as GH¢450;

h) The purchase day book was overcast by GH¢1,920;

i) The income statement for the year ended 31st March, 2013, disclosed a net profit of
GH¢1,255.

You are required to show a:


i. Journal entries to rectify the errors
ii. Suspense account to disclose the difference in trial balance
iii. Statement showing the adjusted net profit or loss

24
EBA 218: Semester 2, January, 2015
3. The book-keeper of a firm, having been unable to agree the trial balance, raised suspense
account in which he entered the difference. The trial balance drawn is as shown below:

Trial Balance as at 31st December, 2012


DR. CR.
GH¢ GH¢
Business premises 314,000
Equipment 200,000

Sales 900,000
Purchases 625,000
Inventories (01/01/12) 80,000
Creditors 30,000
Debtors 90,000
Bank 180,000
Rates 15,000
General expenses 25,000
Capital 600,000
Suspense account 1,000 _
1,530,000 1,530,000

Upon examination of the books, the following errors were detected:


a) The purchases journal had been undercast GH¢75,000

b) Goods bought from a supplier amounting to GH¢185,000 had been posted to the credit of
his account as GH¢158,000

c) A cheque of GH¢160,000 received from a debtor and paid to the bank has been
dishonoured. Nothing concerning the dishonour has been entered in the books.

d) An item of GH¢8,000 entered in the sales returns book had been posted to the debit of the
customer who returned the goods.

e) An old equipment sold at GH¢50,000 had been entered in the sales day book, the total of
which had been posted to the sales account.

f) An amount of GH¢45,000 owing to a supplier had been omitted from the list of sundry
creditors.

g) Discount amounting to GH¢4,000 allowed to a customer had been duly entered in his
account, but not entered in the nominal ledger.

h) An amount of GH¢10,000 being rates treated as prepaid in the previous year, had not been
brought forward as a balance on the rates account.

You are required to:


i. Write journal entries to correct the errors.
ii. Write up the suspense account
iii. Draw up the corrected trial balance.

EBA 218: Principles of Accounting II, 2016 25


4. The Statement of Financial Position of Gyaesu Enterprise indicated that the enterprise
made a net profit of GH¢10,994 for the year ended 31st March, 2013. However, the liabilities
side of the Statement of Financial Position showed a suspense account balance of GH¢9,110.
Subsequent checking of the records revealed the following.
a) A cheque for GH¢5,200 for the purchase of a new display stand on 31st March, 2013 had
been incorrectly entered in the shop fittings account as GH¢4,000

b) A credit note from Yentie Obiaa Ltd. for GH¢1,230 had been entered correctly in the
returns outwards book but had been posted to the account of Enkoyie Ltd. as GH¢1,320.

c) Bank charge of GH¢420 appeared in the cash book but had not been posted to the bank
charges account.

d) An invoice of GH¢3,680 for goods sold on credit to Ayeden Trading Company had been
posted to the personal account as GH¢3,860.

e) A debit balance of GH¢44,600 on customer’s account on 31st March, 2013 had been
carried down as GH¢55,060 and included in the trial balance at that figure.
You are required to
i. Make journal entries to correct the errors detected.
ii. Write up a suspense account to clear the difference in the books.
iii. Prepare a statement showing the revised profit for the year ended 31st March, 2013.

5. The trial balance of Sakasaka Enterprise failed to agree. The difference of GH¢21,900,000
was placed at the debit side of the suspense account. The following errors were detected.
a) An amount of GH¢15,000,000 for credit sales to a customer was posted to the credit side
of his account.

b) A cheque for GH¢3,750,000 paid into the bank was later dishonoured but the customer’s
account was debited with only GH¢375,000

c) The purchases day book was overcast by GH¢2,250,000

d) The debit side of a supplier’s account was overcast by GH¢7,500,000

e) Returns inwards figure of GH¢1,125,000 was omitted from a customer’s account.

f) Discount allowed was overcast by GH¢600,000.

g) A credit sale of two machines at GH¢3,000,000 each was entered in the sales day book.

h) The income statement for the year ended 31st July, 2013 disclosed a net profit of
GH¢26,250,000.

You are required to


i. Make journal entries to correct these errors.
ii. Prepare the suspense account
iii. Prepare a statement to show the adjusted net profit.

26
EBA 218: Semester 2, January, 2015
6. The trial balance of Boat Enterprise was extracted on difference of ¢GH¢1,650,000 credit
was disclosed. A scrutiny of the records showed the following:
a) A sales invoice of GH¢85,000,000 correctly recorded in the sales ledger had been entered
in the sales day book as GH¢79,250,000.

b) A purchase invoice for GH¢15,000,000 posted to the purchased ledger, had been recorded
in the sales day book.

c) The purchases day book has been overcast by GH¢17,200,000.

d) The discounts columns in the cash book had been interchanged when posting to the
nominal ledger, these are discount allowed GH¢25,200,000 and discount received
GH¢31,700,000.

e) Returns of goods worth GH¢2,150,000 to a supplier had been posted to the credit sides of
his account even though it was correctly entered in the returns outwards book.

f) A folio in the cash payment has been carried forward as GH¢63,750,000 correct amount
should have been GH¢67,350,000.

g) A cheque for GH¢5,300,000 received from a debtor had been entered in the cash book as
a payment.

h) A trade discount of GH¢7,000,000 on goods purchased has been recorded as part of the
purchases price. The correct amount has been paid to the supplier.

You are required to pass journal entries to correct the errors and show the suspense account.

7. The trial balance of Evidence Trading Enterprise failed to agree and the difference was put
into a suspense account. Later, the following errors were discovered. After correction, the trial
balance agreed and the suspense account was eliminated.

a) The return outward account is overcast by GH¢60,000.

b) A sale of old furniture for GH¢109,000 to Mavis Agbodza on credit is mistakenly entered
in the sales day book at the figure but posted as GH¢190,000 to Mavis Agbodza’s account
in the ledger.

c) A total discount received of GH¢125,000 in the cash book is posted to the debit of
discount allowed in the ledger.

d) An invoice for goods purchased on credit has been omitted from the books. The details of
the invoice revealed a gross amount of GH¢180,000 and a trade discount of 10%.

e) A GH¢450,000 cheque paid for equipment has been debited to the purchases account.

f) A sale figure for the year has been totalled and transferred as GH3,160,000 instead of
GH¢3,610,000.

g) A sale of goods on credit for GH¢310,000 has been posted to Ben Addy’s a/c instead of
Moses Addy’s a/c.

EBA 218: Principles of Accounting II, 2016 27


h) The valued of the stock at the year end is understated by GH¢689,000.

i) Purchase of GH¢760,000 are entered in error in the sales day book.

j) The ledger account of carriage on purchases has been debited with GH¢143,000 instead of
GH¢134,000 as correctly entered in the cash book.

k) No entry has been made in the books in respect of an invoice for credit purchase
amounting to GH¢580,000 from Sea Enterprise.

l) Carriage on sales has been entered in the ledger account as GH¢153,000 instead of
GH¢135,000.

m) The net profit before the discovery of those errors amounted to GH¢7,200,000

You are required to:


i. Correct those errors through the journal.
ii. Write up the suspense a/c showing the balance which has been put into at start
iii. Calculate the correct profit taking into account the above errors.

28
EBA 218: Semester 2, January, 2015
MODULE THREE
BANK RECONCILIATION STATEMENT
Banks and Customers:
A bank is financial institution that people or businesses can keep their money in or borrow
money from. A customer may open deposit or current account with a bank. Money in current
account may be withdrawn on demand or may be transferred to another person in whole or in
part by means of a cheque. Current account holders are charged commission by the bank and
receive Bank Statement monthly. A person or business who has deposited money with a bank
is a customer to the bank.

When money is deposited at the bank, the bank becomes a debtor and the business becomes a
creditor. Therefore, anytime money is deposited with the bank, the customer’s account is
credited and when money is withdrawn the customer’s account is debited.

Bank Statement:
It is a periodic document or statement of account prepared by a banker and sent to a customer
who operates current account showing details of transactions that have occurred within a
given period. It thus shows the bank’s transactions with its customers for a given period of
time.

Because the bank and the business maintain independent records of the depositor’s checking
account, you might assume that the respective balances will always agree. In fact, the two
balances are seldom the same at any given time, and it is necessary to make the balance per
cash book (bank column) agree with the balance per the bank statement through a process
called reconciling the bank account. The lack of agreement between the two balances is due
to:
a) Time lags that prevent one of the parties from recording the transaction in the same
period.
b) Errors by either party in recording transactions.

Bank Reconciliation Statement:


It is a statement usually prepared by the customer who keeps current account to bring into
agreement the bank column balance of the cash book and the bank statement balance of the
customer whenever there is discrepancy between the two. The main purpose of the Bank
Reconciliation Statement is to find out the differences in the cash book and bank statement
and adjust them.

Factors that Warrant the Preparation of a Bank Reconciliation Statement


They are the factors that bring about difference between the Cash Book balance and the Bank
Statement balance. They include the following:

Items found in the Bank Statement but not in the Cash Book
Standing Orders: Sometimes a business instructs bankers to make periodic payments on
their behalf and when such payments are made the banker immediately debit the business
account without the business entering it in the cash book until the information is received
from the bank. Examples of such payment may include; water bills, electricity bills,
insurance premium, trade subscription etc.

Credit Transfer: They are the monies received by the bank on behalf of a customer direct
through the banking system. These monies are credited by the bank but unknown to the
business or customer. Examples are dividends, interest on investments, payment by debtors,
etc.

EBA 218: Principles of Accounting II, 2016 29


Bank Interest: If the bank pays any interest to the business, the bank will credit the business
with the interest and this will not be shown in the cash book immediately.

Bank Charges: The bank issues cheque books, bank statements, savings books, etc and
render some additional services for clients. The bank charges some amount for such services
and this is debited to the client’s account. This is not recorded in the cash book until a bank
statement is received.

Errors Made by the Bank: (i) Cheque Debited in Error; this is where a cheque drawn by
another customer of the bank has been debited to the firm’s account or error made in debiting
the firm’s account, instead of crediting it. (ii) Cheques Credited in Error; this is where a
cheque drawn by another customer of the bank has been credited to the firm’s account or error
made by the bank in crediting the firm’s account instead of debiting it.

Treatment of such Errors:


a) Errors made by the bank must be corrected by the bank when detected. The firm must not
correct such errors in the Cash Book as Adjusted but must be treated in the Bank
Reconciliation Statement.
b) Errors made in the Cash Book are corrected in the Adjusted/Corrected Cash Book.

Items found in the Cash Book but not in the Bank Statement
Cheques not yet presented for payment (Unpresented Cheques): These are cheques paid by
the business and credited in the cash book but which have not been presented to the bank for
payment by suppliers.

Cheques not yet Credited by the Bank (Uncredited Cheques): Sometimes the business
receives cheques from customers or trade debtors. Such cheques are immediately debited in
the cash book and if they are not sent to the bank before the bank sends its statement, the
balance stated in the Bank Statement would be different from the cash book balance.

Dishonoured Cheques: (i) Cheques paid which have been dishonoured. These cheques were
credited in the cash book when they were paid. Now that they have been dishonoured by the
bank they have to be debited in the adjusted cash book. (ii) Cheques received and later
dishonoured. These cheques were debited upon receipt and must be credited in the adjusted
cash book when they are dishonoured.

Accounting Procedure
1. Prepare the Adjusted Cash Book by using the items that are found in the Bank Statement
but not in the original Cash Book.
2. Prepare Bank Reconciliation Statement using the items found in the Cash Book but not in
the Bank Statement and adjust for errors made in the original Bank Statement.

30
EBA 218: Semester 2, January, 2015
FORMATS
Using the Cash Book Balance
Name of Business
Bank Reconciliation Statement as at/on…………………………
GH¢ GH¢
Balance as per Cash Book xx
Add: Unpresented Cheques xx
All transactions at the bank that increase the Cash Book
Balance, eg. Dividend, Credit Transfer, etc xx
Bank’s Increasing Errors xx xx
xx
Less: Uncredited Cheques xx
All transactions at the bank that goes to decrease the Cash
Book Balance, eg. Standing Order, Bank Charges etc xx
Bank’s Decreasing Errors xx xx
Balance as per Bank Statement xx

Using the Adjusted Cash Book Balance


Adjusted Cash Book
GH¢ GH¢
Balance b/f xx Bank Charges xx
Credit Transfer xx Standing Order xx
Bank Interest xx Dishonoured Cheques xx
Errors Adjusted xx Errors Adjusted xx
Investment Income xx Expenses Understated xx
Dishonoured Cheques xx Balance c/d pp
xx xx
Balance b/d pp

Bank Reconciliation Statement as at/on …………….


GH¢ GH¢
Balance as per Cash Book Adjusted pp
Add: Unpresented Cheques xx
Bank errors that result in an increase of the Balance xx Xx
Xx
Less: Uncredited Cheques xx
Bank errors that result in a decrease xx Xx
Balance as per Bank Statement Xx

Using the Bank Statement Balance


Name of Business
Bank Reconciliation Statement as at/on ……………………..
GH¢ GH¢
Balance as per Bank Statement xx
Add: Uncredited Cheques xx
All transactions at the bank that decreases the Cash
Book Balance, eg. Standing Order, Bank Charges, etc xx
Bank’s Decreasing Errors xx xx
xx
Less: Unpresented Cheques xx
All transactions at the bank that increases the Cash
Book Balance eg. Credit Transfer, Dividend, Bank

EBA 218: Principles of Accounting II, 2016 31


Interest, etc xx
Bank’s Decreasing Errors xx xx
Balance as per Adjusted Cash Book xx

Questions for Discussion


1. The following is an extract from the bank columns of the cash book of Mind Your Own
Business, a retail business in Sunyani in the Brong-Ahafo Region.
Cash Book
2013 GH¢ 2013 GH¢
June 1: Balance b/f 495,000 June 5: D. Oppong 47,000
June 8: M. Adu 76,000 June 26: S. Okai 106,000
June 15: J. Peters 54,000 June 28: E. Armah 42,000
June 26: Cash 88,000 June 30: Balance c/d 634,000
June 30: F. Oti 116,000
829,000 829,000
July 1: Balance b/d 634,000
The business received the following Bank Statement from its bankers for the month:
Bank Statement
2013 DR CR Balance
GH¢ GH¢ GH¢
June 1: Balance b/f 495,000
June 8: Cheque 76,000 571,000
June 9: D. Oppong 47,000 524,000
June 15: Cheque 54,000 578,000
June 26: Cash 88,000 666,000
June 29: Credit transfer - Mr Sankwan 52,000 718,000
June 30: Bank charges 40,000 678,000
You are required to draw up a;
i. Adjusted Cash Book
ii. Bank Reconciliation Statement as at 30th June, 2013.

2. The bank column in the cash book for August 2013 and the bank statement for that month
for Sympathy Enterprise are as follows:
Cash Book
2013 GH¢ 2013 GH¢
Aug. 1 Balance b/f 2,379,000 Aug. 5 D. Blake 150,000
Aug. 7 B. Green 158,000 Aug. 12 J. Gray 433,000
Aug. 16 A. Silver 93,000 Aug. 16 B. Stephens 88,000
Aug. 28 M. Brown 307,000 Aug. 29 Orange Club 57,000
Aug. 30 K. Black 624,000 Aug. 30 Balance c/d 2,833,000
3, 561,000 3,561,000

Bank Statement
DR CR Balance
2013 GH¢ GH¢ GH¢
Aug. 1 Balance b/f 2,379,000
Aug. 7 Cheque 158,000 2,537,000
Aug. 8 D. Blake 150,000 2,387,000
Aug. 16 Cheque 93,000 2,480,000
Aug. 17 J. Gray 433,000 2,047,000
Aug. 18 B. Stephens 88,000 1,959,000
Aug. 28 Cheque 307,000 2,266,000

32
EBA 218: Semester 2, January, 2015
Aug. 29 Standing Order (Insurance) 44,000 2,222,000
Aug. 30 Johnson: Credit Transfer 90,000 2,312,000
Aug. 30 Bank Charges 70,000 2,242,000
You are required to:
a) Write the cash book up to date to take the above into account, and then
b) Draw up a bank reconciliation statement as on 31st August, 2013

3. The summary of the bank column in the Cash Book of Osagyefo Trading Enterprise for
the year ended 30/9/13 is as follows:
Cash Book
GH¢ GH¢
Opening Bal. 450,000 Total payment 6,750,000
Total receipt 6,500,000 Closing balance 200,000
6,950,000 6,950,000
When Osagyefo received his bank statement on 30/9/13 it showed a balance, which differed
from that of the cash book. Your investigation of the accounting records for this period
reveals the following:
a. Standing order payments in respect of insurance and trade subscription amounting to
GH¢30,000 and GH¢65,000 respectively have been made by the bank and entered in the
bank statement and omitted from the cash book

b. The bank had wrongly debited a cheque for GH¢200,000 which should have been placed
against another customer’s accounts.

c. Cheques drawn up to 30/09/13 but not submitted for payment by the payees totaled
GH¢206,000
d. Credit transfers which had been received by the bank on behalf of Osagyefo trading
Enterprise but which had not be entered in the cash book totaled GH¢120,000

e. Cheques from customers amounting to GH¢390,000 which were entered in the cash book
on 30/09/13 were not credited by the bank until 06/10/13

f. Bank charges of GH¢45,000 shown in the bank statement had not been entered in the cash
book.

g. A cheque drawn for GH¢105,000 had been entered in the cash book as GH¢150,000 and
the cash book page on the receipt side has been under added by GH¢200,000

h. A cheque of GH¢70,000 drawn by Osagyefo Trading Enterprise was correctly entered in


the cash book but was debited in the bank statement as GH¢7,000

Required
(a) Make an appropriate adjustment with the cash book to show the balance which should
appear on 30/09/13
(b) Calculate the balance shown on the bank statement by means of a reconciliation
statement

Solution
Adjusted Cash Book
GH¢ GH¢
Bal. b/f 200,000 Standing order:
Credit transfer 120,000 Insurance 30,000

EBA 218: Principles of Accounting II, 2016 33


Transposition Error (150,000- 45,000 Trade subscription 65,000
105,000)
Under added receipt 200000 Bank charges 45,000
Bal. c/d 425,000
565,000 565,000
Bal. b/d 425,000

Osagyefo Trading Enterprise


Bank Reconciliation Statement as on 30/09/13
GH¢ GH¢
Balance as per adjusted cash book 425,000
Add Unpresented cheques 206,000
Under debited amount (70000-7000) 63,000 269,000
694,000
Less cheques not yet credited 390,000
Amount wrongly debited 250,000 640,000
Balance as per bank statement 54,000

4. The cash book of At Long Last Limited Showed a credit balance of ¢5,040 at 30/6/13
while the bank statement showed overdraft of GH¢11,620. On investigation, the
following discoveries were made:
a) Lodgments totaling GH¢7,620 had not been credited by the bank.

b) Cheques paid to suppliers totaling GH¢2,670 had not been presented to the bank.

c) A cheque for GH¢250 drawn on At Long Last Ltd had been wrongly debited by the bank

d) Interest on government treasury bills totaling GH¢620 was credited by the bank on
30/06/13. No entries were made in the cash book.

e) An issue of cheque for GH¢220 had been entered on the wrong side of the cash book.

f) A cheque for GH¢800 deposited on 20/06/13, has been returned by the bank with the
remarks “no funds receivable,” but no adjustment has been made in the cash book

g) A cheque for GH¢66 drawn in respect of electricity had been incorrectly entered in the
cash book as GH¢666

h) The bank statement showed banker’s charges totaling GH¢1,360. These had not been
entered in the cash book
You are required to:
i. Show the adjustments required in the cash book
ii. Prepare a Bank Reconciliation Statement as on 30/06/13

34
EBA 218: Semester 2, January, 2015
Solution:
Adjusted Cash Book
GH¢ GH¢
Int. on treasury bills 620 Bal. b/f 5,040
Cheques overcast (666-66) 600 Error of posting (220 x 2) 440
Bal. c/d 6,420 Dish. Cheque 800
Bank charges 1,360
7,640 7,640
Bal b/d 6,420

At Long Last Limited


Bank Reconciliation Statement as on 30/06/13
GH¢ GH¢
Overdraft as per cash book 6,420
Add Lodgments not yet credited 7,620
Cheques wrongly debited 250 7,870
14,290
Less Unpresented cheques 2,670
Overdraft as per bank statement 11,620

When the Bank Balance is an Overdraft

Using the Overdraft Balance in the Adjusted Cash Book


Bank Reconciliation Statement as at/on…………………………….
GH¢ GH¢
Overdraft as per Adjusted Cash Book xx
Add: Uncredited Cheques xx
Bank’s Decreasing Errors xx xx
xx
Less: Unpresented Cheques xx
Bank’s Increasing Errors xx xx
Overdraft as per Bank Statement xx

Using the Bank Statement Balance


Bank Reconciliation Statement as at/on……………………………
GH¢ GH¢
Overdraft as per Bank Statement xx
Add: Unpresented Cheques xx
Bank’s Increasing Errors xx xx
xx
Less: Uncredited Cheques xx
Bank’s Decreasing Errors xx xx
Overdraft as per Adjusted Cash Book xx

EBA 218: Principles of Accounting II, 2016 35


5. The cash book and bank statement of Die Hard Enterprise are given below.
Cash Book
Apr’13 GH¢ Apr’13 GH¢
10. A. Shash 440,000 1. Balance c/d 2,598,500
16. M. Nash 122,000 6. T. Lullock 61,000
21. A. Klexander 166,500 9. S. Baba 499,000
22. B. Sheriff 1,008,000 14. K. Kata 949,000
30. S. Unclair 80,000 30. B. Annet 104,000
30. Balance c/d 2,640,000 30. S. Jaw 245,000
4,450,500 4,456,500

Bank Statement
DR CR Balance
April, 2013 GH¢ GH¢ GH¢
1. Balance b/f 2,598,500 (O/D)
8. T. Lullock 61,000 2,659,500 (O/D)
16. Cheque 122,000 2,537,500 (O/D)
20. B. Annet 104,00 2,641,500 (O/D)
21. Cheque 166,500 2,475,000 (O/D)
31. Credit transfer - T. Murnbull 28,500 2,446,500 (O/D)
30. Standing Order 24,500 2,471,000 (O/D)
30. Bank charges 14,000 2,485,000 (O/D)
30. Investment Dividend 2,005,000 480,000 (O/D)

You are required to:


a. Write up an adjusted Cash book;
b. Prepare a bank reconciliation statement as at 30th April, 2013.

TRIAL QUESTIONS
1. Briefly distinguish between a Bank Statement and a Bank Reconciliation Statement.
2. What is the main purpose of a Bank Reconciliation Statement?
3. Enumerate reasons why a Bank Statement may disagree with the customer’s own record
of his deposits and withdrawals.
4. Recount the procedure for the preparation of a bank reconciliation statement.
5. Explain the following, giving example:
a) Deposits in transit
b) Standing Orders
c) Dishonoured Cheques
d) Credit Transfer
e) Bank charges or Commissions

6. On the 31st of May 2007, the bank balance in the cash book of Adeepena, a trader, showed
a favourable balance of GH¢300,000. This balance differed from the balance, which
appeared on the bank statement for the same month. On checking the bank statement
against the cash book, the following differences were found:

a) Cheques amounting to GH¢90,000 paid into the bank on 30th May were not credited by
the bank.
b) A standing order for the payment of GH¢70,000 to another trader, paid by the bank had
not been entered in the cash book.

36
EBA 218: Semester 2, January, 2015
c) Unpresented cheques amounted to GH¢80,000.
d) A cheque for GH¢120,000 paid into the bank had been dishonoured.
e) An amount of GH¢100,000 paid into the bank account by a debtor had not been entered
in the cash book.
f) The bank had debited Adeepena wrongly with GH¢60,000.
g) On 19th May, a cheque for GH¢45,000 was received from a customer and a discount of
GH¢2,000 was allowed. However, GH¢47,000.00 had been entered in the bank column
of the cash book and credited to the customer.
h) A cheque for GH¢35,000 received from a customer and paid into the bank account had
been entered in the cash book as GH¢53,000
i) Bank charges GH¢10,000 appeared on the bank statement.

You are required to:


i. Write up the cash book;
ii. Prepare a bank reconciliation statement.

7. Baby Nayoka, a sole proprietor has just received her bank statement and is confused as to
why her cash book shows balance of GH¢36,930,000. Upon further enquiries, the following
information became available.
a) Three cheques received (GH¢10,740,000; GH¢3,180,000; and GH¢1,350,000) were still
in the office safe even though credit has been taken for them.
b) A standing order for the payment of electricity charges of GH¢7,760,000 was paid by the
bank.
c) The bank charged GH¢510,000 for a cheque book supplied to Baby Nayoka.
d) The bank had debited Nayoka’s account in error with GH¢1,160,000.
e) A credit transfer of GH¢46,500,000 has been made in favour of Nayoka. This is recorded
on the bank statement only.
f) As at the date of receiving the bank statement, the following cheques, which were
recorded as paid, had not been presented to the bank for payment.
GH¢
Agyekum 4,700,000
Duah 4,500,000
Adu 3,680,000
Sarpong 3,630,000
g) The bank received a telegraphic transfer GH¢830,000. This was credited in error to Baby
Nayoka.
You are required to:
i. Adjust Nayoka’s cash book;
ii. Prepare a statement to reconcile the Cash Book balance with that shown on the bank
statement.

8. The cash book and bank statement of Aseda Enterprise are given below.
CASH BOOK
Sept, 2013 GH¢ Sept, 2013 GH¢
1. Balance c/d 5,197,000 6. Ankonam 61,000
10. Ankonam 440,000 9. Boniaye 499,000
16. Gyaesaa 122,000 14. Diasempa 949,000
21. Nkonim 166,500 30. Yekomm 104,000
22. Abrabopa 1,008,000 30. Obroni 245,000
30. Ahenkan 80,000 30. Balance c/d 5,155,500
7,013,500 7,013,500

EBA 218: Principles of Accounting II, 2016 37


BANK STATEMENT
Debit Credit Balance
Sept, 2013 GH¢ GH¢ GH¢
1. Balance b/f 5,197,000
8. Ankonam 61,000 5,136,000
16. Cheque 122,000 5,258,000
20. Yekomm 104,000 5,154,000
21. Cheque 166,500 5,320,500
31. John Bull; Credit transfer 28,500 5,349,000
30. Standing Order 24,500 5,324,500
30. Bank charges 14,000 5,310,500
30.Investment Income 2,005,000 7,315,500

You are required to:


a. Write up an adjusted Cash book;
b. Prepare a Bank Reconciliation Statement as at 30th November, 2013.

38
EBA 218: Semester 2, January, 2015
MODULE FOUR
NON-CURRENT ASSETS AND DEPRECIATION
General Objectives:
By the end of this chapter the student will:
 Beware of the distinction between revenue and capital expenditure
 Appreciate the need to provide for depreciation of non-current assets.
Learning Outcomes:
By the end of this m the student should be able to:
 Distinguish between capital expenditure and revenue expenditure
 Explain depreciation and the various causes of depreciation.
 State and describe the various methods of depreciation.
 Calculate annual depreciation charge using the various methods.
 Make ledger entries for acquisition of non-current assets and its related depreciation.
 Apply the procedure for recording the disposal of non-current assets.

The Nature and Types of Non-Current Assets


Non-Current assets are items not specifically bought for resale but to be used in the
production or distribution of those goods normally sold by the business. They are durable
goods that usually last for several years, and are normally kept by a business for more than
one accounting year. An expenditure on such items is only regarded as a non-current asset if it
is of a material amount, as defined by the materiality concept. A non-current asset is usually
defined as an asset that:
a. Is held by an enterprise for use in the production or supply of goods and services, for
rental to others, or for administrative purpose and may include items held for the
maintenance or repair of such assets:
b. Has been acquired or constructed with the intention of being used on a continuing
basis; and
c. Is not intended for sale in the ordinary course of a business’

A slight different way of expressing the criterion for what constitutes a non-current asset is
that the expenditure must be expected to generate revenue over a number of future years. This
is arguably the most important criterion in determining whether expenditure is to be classified
as a non-current asst.

Expenditure incurred to acquire non-current assets is referred to as capital expenditure. All


other costs and expenses as referred to as revenue expenditure. The latter are entered in the
income statement of the year in which the cost are incurred.

Non-current assets can be classified as either tangible or intangible. Tangible non-current


assets are non-current assets which can be felt, touched and seen physically. They have
physical substance. Example of tangible non-current assets include land and buildings, plant
and machinery; motor vehicles; furniture, fixtures and fittings; office equipment (such as
computer); and loose tools. Tool that are only expected to last for less than one year as
referred to as consumable tools, and treated as revenue expenditure.

Intangible assets are non-current assets that do not have physical substance but are
identifiable and are controlled by the entity through custody or legal rights. Examples include
goodwill, patents, trademarks and development expenditure.

EBA 218: Principles of Accounting II, 2016 39


Capital and Revenue Expenditure
Expenditure
It is an outflow of fund (cash). It is the amount spent which involves monetary sacrifice.

Classification of Expenditure
There are two main types of expenditure in accounting. These are;
(i) Capital Expenditure and (ii) Revenue Expenditure

Capital Expenditure
Capital expenditure comprises all expenditure incurred in order to acquire permanent assets or
improve existing fixed assets for the purpose of earning income or increasing the revenue
earning capacity of a business. The benefit of such expenditure is spread over several
1accounting periods and not consumed fully in the period in which it is incurred.

Capital expenditure consists of not only the cost of purchasing the fixed assets but also
include other costs necessary to get the fixed assets operational. Some possible additional
capital expenditure are installation cost, legal cost in purchasing property and land, architects
fee for building plan, demolition cost, and inspection and testing cost. Capital expenditure is
treated in the balance sheet as they add to the value of fixed assets.

Determination of Capital Expenditure


a) If the expenditure is incurred for acquiring a fixed asset. Example, purchase of a motor
vehicle, etc.
b) It the expenditure incurred was used in constructing or manufacturing of a fixed asset.
Example, wages paid to workers working on a building or manufacture furniture for use
by a firm.
c) If such expenditure is necessary in order to make the acquisition of an asset possible.
Example, legal fees
d) If such expenditure is necessary to enable business to be started. Example, the cost of
number plates of a car.
e) If the expenditure is necessary to be incurred to make possible the construction of an
asset. Example, demolition cost
f) If the expenditure incurred brings about the perfection or increase in the revenue earning
capacity of the business. Example, extension to building
g) If the benefit accruing from the expenditure extends beyond the accounting period in
which it is incurred.

Revenue Expenditure
This is the expenditure incurred for the purpose of maintaining the assets and earning capacity
of a business in satisfactory conditions. Such expenditure does not add to the value of the
fixed assets but rather represent the cost of running the business on day-to-day basis. The full
benefit of revenue expenditure is fully consumed in the period in which it is incurred.
Example purchases, rent, rate, carriage on purchased materials meant for sales, insurance,
depreciation, etc. Revenue expenditure items are chargeable to the profit and loss account of
the business.

40
EBA 218: Semester 2, January, 2015
Reasons for the Distinction between Capital and Revenue Expenditure
It is important to distinguish between Capital and Revenue Expenditure for the following
reasons:
1. To prevent the profit or loss of the firm from being overstated or understated
2. To avoid overstating or understating the cost or value of fixed assets in the balance sheet.
3. To show a true and fair profit or loss of the business in a particular year.
4. To comply with the generally accepted accounting practice.
5. To render accounting information that is more reliable for managerial control of business
operations and decision-making.

Self-Test
1. During a certain year, a Fiapre based Food Contractor incurred the following expenditure’
a) Purchases of cold store at Fiapre
b) Legal charges in connection with (a) above
c) Immediate alteration to the newly acquired cold store
d) Painting of the Fiapre cold store necessitated by the alterations made
e) Legal charges in connection with collection of debts owed by a debtor
f) Installation of telephone and electric light fittings at Fiapre
g) Uniforms for stores attendants at Fiapre
h) Repainting of Fiapre store at the end of year
i) Purchases of delivery van for the Fiapre store
j) Purchase of petrol for the delivery van
k) Purchase of new tyres to replace worn-out ones on delivery van
l) Purchase of second-hand weighing scale
m) Cost of installing second-hand weighing scale
n) Maintenance of second-hand weighing scale

You are to classify the above expenditure as Capital or Revenue and give reasons for your
answer.

2. For each item, indicate whether the expenditure should be treated as capital or revenue and
give reason for your answer.
a) Cost of spraying a motor vehicle already in use.
b) Cost of changing the worn-out tyres on a motor vehicle
c) Cost of replacing the engine of a van with a brand new engine.
d) Cost of building a concrete reinforcement to prevent a building from constant erosion by
rainwater.
e) Cost of making an extra door to an existing building
f) A wooden bridge collapsed and in repairing it metal bars were used to strengthen the
bridge. The cost of repair is……
g) Cost of repairs to an office adding machine
h) Cost of repairs to plant in the factory
i) Cost of redecoration of the managing director’s office
j) Cost of reinforcement of the factory floor to enable heavy machinery to be installed
k) Purchase of a photocopying machine for use in the office.

EBA 218: Principles of Accounting II, 2016 41


Meaning of Depreciation
Depreciation is concerned with the reduction in value of an asset. It refers to “the measure of
wearing out, consumption, other reduction in useful economic life of a non-current asset,
whether through use, effluxion of time or obsolescence through technological change”.

The purchase of a non-current asset occurs in one year but the benefits generated from its use
normally arise over a number of years in the future. This is referred to as its useful economic
life. If the cost of non-current assets were treated as an expense in the Income statement in the
year of purchase this would probably result in an excessive loss in that year, and excessive
profits in the year in which the benefits will arise. This gives a misleading view of the profit
and losses of each year and distorts comparisons over time. Therefore, the cost of a non-
current asset is not treated as an expense in the year of purchase but rather carried forward and
written off to the Income Statement over the useful economic life of the asset in the form of
depreciation. This is an application of the matching principle. According to the matching
principle, that part of the cost of an asset which is ‘used up’ or ‘consumed’ in each year of the
asset’s useful economic life must be set against the benefit or revenue that it generates. That
part of the cost of a non-current asset which is ‘used up’ or ‘consumed’ during an accounting
period is referred to as depreciation. Thus depreciation may be defined as the allocation of the
cost of a non-current asset over its estimated useful economic life.

Depreciation also refers to the measure of the wearing out, consumption or other reduction in
the useful economic life of a non-current asset arising from use, effluxion of time or
obsolescence through technological or market changes. Obsolescence through technological
changes refers to where a new model of the asset which is significantly more efficient or
performs additional functions comes onto the market. Obsolescence through market changes
occurs when there is a substantial reduction is demand for the firm’s product because of, for
example, technological advances in competitor’s products. These causes of obsolescence
usually result in a sudden relatively large decrease in value of the asset, particularly where it
cannot be used for any other purpose.

In another sense, depreciation can be defined as the permanent decrease in value of a non-
current asset during a given accounting period. Depreciation can also be viewed as a
provision for the replacement of non-current assets. The annual charge for depreciation in the
Income Statement represent a setting aside of some of the income so that over the useful life
of the asset sufficient ‘fund’ are retained in the business to replace the asset. However, it must
be emphasised that no money is usually specifically set aside. Thus, when the time comes to
replace the asset, the money needed to do so will not automatically be available. Furthermore,
where depreciation is based on the historical cost of the asset the amount of funds set aside
will be insufficient to provide for any increase in the replacement cost of the asset.
Depreciation can therefore be said to be also an application of the prudence concept in that it
is a provision for the loss in value of a non-current asset.

Distinction Between Depreciation and Maintenance


Depreciation is the process of allocating the cost of tangible non-=assets over its estimated
useful life. Depreciation is charged against the profit and loss account. Depreciation is mainly
meant
- To match cost against revenue
- To spread the cost of the asset over it useful life.
- To determine the true profit of the business

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EBA 218: Semester 2, January, 2015
Maintenance on the other hand is an expense incurred in order to keep the non-current assets
in good working condition. The amount spent on maintenance is treated as part of revenue
expenditure hence it not deducted or added to the cost of non-current asset.

Cause of Deprecation
Some of the common causes of depreciation can be summed up as follows:

Wear and tear – this signifies los of value arising from use. For example, a motor vehicle
may suffer from physical deterioration with passage of time. A brand new car is usually in
good condition than the same model of the car which has been used for five years.

Obsolescence – this arises when as asset loses its usefulness, not because it is worm out, but
because it has been superseded by invention and better models. Example, computers are
usually replaced for this reason.

Inadequacy – this is when the asset becomes useless because the firm has grown or changed
its requirements.

Depletion – if an asset is of a wasting nature such as a quarry, mining activities reduces the
amount of inventory of the stone quarry.
Time factor – if an asset is acquired for a limited period only, it ceases to be of use to the
business at the end of that time. Example, a lease on premises for ten years will expire at the
end of ten years unless another agreement is entered into..

Methods of Depreciation
A number of different methods have been developed for measuring depreciation, each of
which will five a different annual charge to the Income Statement. There is no one method of
depreciation that is superior to all other in all circumstance. The most appropriate method will
depend on the type of asset and the extent to which it is used in each period. There is a range
of acceptable depreciation methods. Management should select the method regarded as most
appropriate to the type of asset and its use in the business so as to allocate depreciation as
fairly as possible to the periods expected to benefits from the asset’s use.

The method of depreciation that is chosen is referred to as one of the business entity’s
accounting policies, and should be applied consistently each year. Whichever method is used
to calculate depreciation, at least three pieces of data relating to the asset in question are
needed:
1. The historical cost;
2. The estimated useful economic life of the asset to the business entity; and
3. The estimated residual value of the asset at the end of its useful economic life.

The historical cost is the original cost at which the asset was acquired. The useful life of the
asset refers to the period which the business regards as being the most economical length of
time to keep the particular asset. This will depend on a number of factors, such as the pattern
of repair costs, etc. The useful life of an asset may well be considerably shorter than its total
life. Residual value refers to the estimated proceeds of sale that can be realised at the end of
the asset’s useful life. It should be noted that both the useful life and the residual value have
to be estimated when the asset is purchased.

There are a number of methods which are used in determining the annual depreciation
charge. Some of the methods are;
a. Straight line

EBA 218: Principles of Accounting II, 2016 43


b. Reducing balance
c. Sum of the year’s digits
d. Production units
e. Service hour
f. Revaluation
g. Sinking fund
h. Annuity

The two most common methods of depreciation are the straight line and reducing balance
methods.

Straight line / Fixed Instalment Method


The straight line method, also known s fixed instalment method charges an equal amount of
depreciation in each year of the asset’s life. It assumes that the non-current asset is equally
beneficial during each year of its useful life, therefore the same amount of depreciation is
charged as an expense for each year. Under this method the annual depreciation which will be
charged to the Income Statement is computed as follows:

Annual depreciation charge = Cost – Estimated residual value


Estimated useful life in years

However, in practice, the rate of depreciation is usually expressed as a percentage. The annual
amount of depreciation is then calculated by applying the percentage to the cost of the asset.
The method gives the same charge for depreciation in each year of the asset’s useful life. It is
therefore most appropriate for assets which are depleted as a result of the passage of time (e.g.
buildings, leases, pipelines, storage tanks, patents and trademarks). The method may also be
suitable where the utilisation of an asset is the same in each year.

The main advantages of the straight line method are that it is easy to understand and the
computations are simple. The main disadvantage is that it may not give an accurate measure
of the measure of the loss in value or reduction in the useful of an asset.

Illustration
The original cost of a motor van bought on 1 Jan, 2011 is GH¢22,000. The estimated salvage
value is GH¢6,000 and the estimated useful life is four years.

Calculation:
Annual Depreciation = GH¢22,000 – 6,000 = 4,000
4
The year by year position of this motor van is shown as follows:
Year Original cost Depreciation Accumulated Net Book Value
GH¢ GH¢ Depreciation GH¢
GH¢
2011 22,000 4,000 4,000 18,000
2012 22,000 4,000 8,000 14,000
2013 22,000 4,000 12,000 10,000
2014 22,000 4,000 16,000 6,000

The net book value or written down value (WDV), is the difference between the original cost
and the accumulated depreciation at any point in time.

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EBA 218: Semester 2, January, 2015
Diminishing/Reducing Balance Method
This method of depreciation assumes that the efficiency of the non-current asset decreases
year by year so the annual depreciation charged is decreased accordingly. The depreciation
written off in each year is a fixed percentage not of the cost but of the book value (written
down value) at the beginning of the year. The percentage rate of depreciation to be charged is
calculated by using the formula:

Rate of Depreciation = (1-n√s/c) x100

Where:
n = the estimated useful life
s = the estimated salvage / residual value
c = the original cost of the asset

If we apply the formula to the motor van that cost GH¢22,000 and that has estimated
economic life of four years with salvage value GH¢6,000, the annual rate of deprecation
would be 28%.

That is: (1-4√(6,000/22,000) x100 = 28%

Note that under this method, the annual depreciation charged to the Income Statement is
computed as follows:

Annual depreciation charge = Rate of depreciation * Written down value of asset

The written down value (WDV) of the asset refers to its cost less the accumulated
depreciation of the asset since the date of acquisition. This method thus gives a decreasing
annual charge for depreciation over the useful life of the asset. It is therefore most appropriate
for non-current assets that deteriorate primarily as a result of usage where this is greater in the
earlier years of their life (e.g. plant and machinery, motor vehicles, furniture and fittings,
office equipment). However, this method may also be suitable even if the utilisation is the
same in same in each year.

The logic behind this apparently contradictory assertion involves taking into consideration the
pattern of repair costs. These will be low in the earlier years of the asset’s life and high in
later years. Thus the decreasing annual amount of depreciation combined with the increasing
repair cost will give a relatively constant combined annual charge in each year of the asset’s
useful life which is said to reflect the constant annual usage.

The reducing balance method is also said to be a more realistic measure of the reduction in
the market value of non-current assets, since this is likely to be greater in the earlier years of
the assets life than later years. However, it is highly questionable whether the written down
value of a non-current asset is intended to be a reflection of its market value. The main
criticisms of this method relate to its complexity, and there is an arbitrary assumption about
the rate of decline built into the formula.

EBA 218: Principles of Accounting II, 2016 45


Illustration:
Using the question on the motor van and applying the rate of 28%, the year by year position
will be as follows:
Year Original Cost Depreciation Accumulated Book Value
GH¢ GH¢ Depreciation GH¢
GH¢
1 22,000 28%*22,000=6,160 6,160 15,840
2 22,000 28%*15,840=4,435 10,595 11,405
3 22,000 28%*11,405=3,193 13,788 8,212
4 22,000 28%*8,212 =2,299 16,087 5,913

Sum of the Year’s Digits Method


In this method, the annual depreciation charge is calculated based on the proportion of its
useful life remaining at the commencement of each year and the cost of the asset less the
salvage value.

Using the earlier example of the motor van, the expected life is four years; therefore sum of
the year’s digit year is 10 which is computed as follows.
Year Digit Proportion
1
1 1 /10
2
2 2 /10
3
3 3 /10
4
4 4 /10
Sum of the digits 10

Revaluation Method
Here the asset is actually revalued at the end of each financial year and the difference between
the opening and closing valuations is written off to the Income Statement, through the
depreciation account. This method is suitable for loose tools, patents and copyrights; but it is
not suitable for plant and machinery.

Annuity Method
Under this method, the amount expended on the asset is regarded as earning interest at a
definite rate per cent. This interest is debited annually to the asset account and credited to the
Income Statement.

Sinking Fund Method


Under this method, an amount equal to the annual depreciation expense is invested outside the
entity, and this with compound interest provides sufficient cash at the end of the asset’s life to
allow for its replacement. The amount of depreciation to be written off as an expense in each
period is determined using one of the methods describe earlier.

Accounting for Depreciation of Tangible Non-Current Assets


Accounting for depreciation involves the systematic allocation of the depreciable amount of
an asset over its estimated useful life. The matching concept requires the depreciation expense
to be charged to the accounting periods which benefit from the use of the asset. That is, if a
motor van is expected to last for three years then the depreciation should be spread over the
three years, as each year will benefit from its use and should therefore share in the cost until
the end of year 3 when the van is scrapped or sold.

In accounting for depreciation of non-current assets, an account is opened for each type of
non-current asset. For example, motor vehicles account or equipment account. The asset

46
EBA 218: Semester 2, January, 2015
account is debited with the cost of the relevant non-current asset. In addition, corresponding
accounts are required to record depreciation, for example, a provision for depreciation of
motor vehicle account. The annual charge for depreciation is credited to provision for
depreciation account and debited to the Income Statement.

In the preparation of the final accounts, the accounting entries in respect of the annual
depreciation provision charge are made as follows:
Debit Depreciation expense account
Credit Provision for depreciation account

The depreciation expense account is transferred to the Income Statement, thus:


Debit Income Statement
Credit Depreciation expense account
The effect is to accumulate the provision while making a charge in the Income Statement each
year.

Illustration
Wofa Enterprise uses the straight line method of depreciation. It acquired a machine for
GH¢22,000 on January 1, 2011. The salvage value is estimated at GH¢2,000 and the useful
life is four years. Show the relevant ledger entries relating to the purchase and the provision
for depreciation in each year as well as the relevant Statement of financial position extract.

Solution:
First of all, calculate the annual depreciation charge as
22,000 – 2,000 = GH¢5,000 per annum
4

The ledger entries will be as follows:

Machinery Account
2011 GH¢ GH¢
Jan 1 Bank 22,000

Provision for Depreciation of Machinery Account


2011 GH¢ 2011 GH¢
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss 5,000
2012 2012
Dec 31 Balance c/d 10,000 Jan 1 Balance b/d 5,000
Dec 31 Profit and loss 5,000
10,000 10,000
2013 2013
Dec 31 Balance c/d 15,000 Jan 1 Balance b/d 10,000
Dec 31 Profit and Loss 5,000
15,000 15,000
2014 2014
DEC 31 Balance c/d 20,000 Jan 1 Balance b/d 15,000
Dec 31 Profit and loss 5,000
20,000 20,000
20115
Jan 1 Balance b/d 20,000
The statement of financial position (extract) in respect of the machinery and provision for
depreciation are as follows

EBA 218: Principles of Accounting II, 2016 47


Statement of financial position (Extract) as at
Cost Accumulated Book Value
Depreciation
GH¢ GH¢ GH¢
31 Dec 2011
Non-current assets: Machinery 22,000 5,000 17,000

31 Dec 2012
Non-current assets: Machinery 22,000 10,000 12,000

31 Dec 2013
Non-current assets: Machinery 22,000 15,000 7,000

31 Dec 2014
Non-current assets: Machinery 22,000 20,000 2,000

Disposal of Non-Current Assets


It is common in business for non-current assets such as motor vehicle to be disposed off (sold)
after its estimated useful life or even before the end of its estimated useful life. Normally,
when an asset is sold at the end of (or during) it’s useful life the proceeds of sale differ from
the estimated residual value (or written down value if sold during its useful life). Where the
proceeds are less than the written down value, this is referred to as a loss on disposal. Where
the proceeds are greater than the written down value this is referred to as a profit on disposal.

The disposal of non-current assets and the resulting profit or loss on sale must be recorded in
the ledger. The procedure is as follows:
1. Transfer the cost of the non-current asset disposed from the non-current asset account
to the non-current asset disposal account. Debit non-current asset disposal account and
Credit non-current asset account. The balance remaining on the non-current asset
account represents the cost price of the assets retained.

2. Credit the proceeds of sale to the non-current asset disposal account, Debit the cash
account.

3. Transfer the accumulated depreciation up the date of disposal from the provision for
depreciation account to the non-current asset disposal account. Debit provision for
depreciation account and credit non-current asset disposal account. The balance on the
provision for Depreciation Account represents the accumulated depreciation on these
retained assets.

4. From the ledger entries in respect above, the disposal account would have been
debited with the cost of the asset and credited with the accumulated depreciation. The
amount received from the disposal of the asset is credited to the disposal account. The
balance remaining on the disposal account represents either an under-provision for
depreciation (that is, a loss on Disposal) or an over-provision for depreciation (that is,
a profit on disposal). This is transferred to the Income Statement. A loss on sale
should be credited to the non-current asset disposal account and debited to the Income
statement. A profit on sale should be debited to the non-current asset disposal account
and credited to the Income Statement.

48
EBA 218: Semester 2, January, 2015
Illustration
On January 1, 2011 a business bought two motor vehicles for GH¢30,000 and GH¢40,000. It
was decided that depreciation on both cars should be 25% per annum on cost price using the
straight-line method. On January 1, 2012 the vehicle purchase for GH¢30,000 was sold for
GH¢20,000.
The relevant accounts will appear as follows:

Motor Vehicles Account


2012 GH¢ 2012 GH¢
Jan 1 Balance b/f 70,000 Jan 1 Disposal 30,000
Dec 31 Bal. c/d 40,000
70,000 70,000
2013
Jan 1 Balance b/d 40,000

Provision for Depreciation of Motor Vehicle Account


2011 GH¢ 2011 GH¢
Dec 31 Bal. c/d 17,500 Dec 31 profit and loss 17,500
2012 2012
Jan 1 Disposals 7,500 Jan 1 Bal. b/d 17,500
Dec 31 Bal. c/d 20,000 Dec 31 profit and loss 10,000
45,000 45,000
2013
Jan 1 Bal. b/d 20,000

Disposal of Motor Vehicle Account


2012 GH¢ 2012 GH¢
Jan 1 Motor Vehicle 30,000 Jan 1 Prov. For Dep. 7,500
Jan 1 Bank 20,000
Dec 31 P&L Account (Loss) 2,500
30,000 30,000

Depreciation in Years of Purchase and Disposal (Partial Year Depreciation)


It is not likely that all purchase and disposal of no-current assets will take place on the first
day of each accounting period. New assets are acquired and existing assets are sold at various
intervals during the year, so it is difficult to know what depreciation to charge in the year of
purchase and sale. The problem is usually solved in one of the following ways:
a. Depreciation is calculated on the basis on one month’s ownership, that is,
proportionate basis.
b. The dates of purchase and disposal are ignored. In the case of a purchase, a full year’s
depreciation is provided regardless of the mouth of purchase. In the case of a sale no
depreciation is charged in the year of disposal.

EBA 218: Principles of Accounting II, 2016 49


MODULE FIVE
MANUFACTURING ACCOUNTS
Introduction
Manufacturing Account is an account prepared to show the various components of cost of
manufacturing a product. Manufacturing Account s prepared by firms that convert raw
materials into finished products. Manufacturing accounts is prepared for the purpose of
determining cost of production to be transferred to the sales department. It is also prepared
for the purpose of controlling production cost and for estimation of production cost.

Concept of Cost
Cost refers to the amount of expenditure, whether actual or notional, incurred or attributable
to, a product, process or operation. Cost is made up of two components, quantity used and
price. That is Cost = Quantity Used x Price. Cost is different from expenses. When cost
expires, it becomes an expense. An expense is therefore expired cost. For instance
depreciation as an expense is the expired cost of non-current asset.

Classification of Cost
Cost classification is the process of arranging cost items into groups according to their
common characteristics to enhance their informational value. It is an attempt to sort out cost
data and group them in a way that would assist the attainment of purpose. In manufacturing
accounting, cost are classified as Direct Cost and Indirect Cost

Elements of Cost
Elements of cost are items of expenditure that make up the total cost of an item. The Table
below shows the analysis of cost:

Table Analysing Elements of Cost


Material cost = Direct material cost + Indirect material cost
+ + +
Wages = Direct wages + Indirect wages
+ + +
Expenses = Direct Expenses + Indirect Expenses
Total cost = Prime cost + Overheads

MATERIAL: It is a physical substance used by a manufacturing concern to process or


manufacture its products or goods for sale. Materials are inputs, which are processed into
some desirable consumer or producer goods.

Direct Material Cost: This is the cost of material, which can be identified with and allocated
to cost centres or cost units object. Examples of Direct Materials are the following
 Diesel or petrol for transport industry
 Tyres for a vehicle
 Sugar cane for sugar industry
 Corn for Kenkey
 Iron ore and coal for steel industry
 Wood for furniture
 Cement for block making

Characteristics of Direct Material Cost:


1. It can be easily identified with and allocated to a cost centre or a product.
2. It varies directly with the volume of output
3. It is large in amount

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EBA 218: Semester 2, January, 2015
Indirect Material Cost: This is the cost of material, which cannot be easily identified with
and allocated to a cost centre or a cost unit. Examples: oil, consumable stores, cleaning
materials for machines.

LABOUR: It is a human effort, which is applied to produce or manufacture goods as well as


rendering services.

Direct Labour Cost: This is the labour cost, which can be directly identified with a product
or a cost centre. In other words, it refers to the wages and salaries of employees whose effort
directly applied to a product or saleable service.
Direct labour cost is also known as direct wages. Examples of direct labour are:
1. A carpenter working to manufacture a table
2. A machine man working on a printing machine in a printing press.
3. A mason erecting a building wall.
4. Labour extracting coal, petroleum, iron ore, and other minerals

Characteristics of Direct Labour Cost:


1. It can be easily identified with and allocated to a cost centre or a product.
2. It varies directly with the volume of output
3. It is large in amount

Indirect Labour Cost: This refers to an amount of wages paid to workers who do not
change the form of the product. In other words, indirect labour cost is the cost, which is not
incurred directly in the production of specific goods or services. Examples are: Wages of
foreman in production department, Wages of clerical assistant in the production department,
etc.

EXPENSES: They are cost other than material and labour incurred in production of goods or
rendering of services. Expenses are the cost of services provided to an organisation by the
utility companies. An expense may be either actually paid in cash or not.

Direct Expenses: They are cost of services rendered to an organisation, which can be
conveniently allocated to a cost unit/unit. Examples of Direct Expenses are:
1. Cost of patent and royalties payments
2. Cost of hire of special machinery and plant.
3. Fees of Architects and Consultants.
4. Travelling expenses
5. Cost of special pattern and designs
6. Auditors’ fee

Characteristics of Direct Expenses:


1. They can be easily identified with and allocated to relevant costing unit/centre.
2. Some of the direct expenses may be variable while others are fixed
3. The ratio of direct expenses to total cost varies from industry to industry.
Indirect Expenses: These are the cost of services, which are to be apportioned over jobs.
Examples are payments of rent, rates and taxes, insurance, depreciation, Interest on loans, etc.

EBA 218: Principles of Accounting II, 2016 51


Direct Cost: This is a cost that can clearly be traced to a product. It is made up of direct
material cost, direct labour cost, and direct expenses
Gh¢
Direct Material Cost xx
Direct Labour Cost xx
Direct Expenses xx
Prime Cost xx
Indirect Cost: This is a cost that cannot be traced directly to a product or a cost unit. It is
made up of indirect material cost, indirect labour cost and indirect expenses.
GH¢
Indirect Material Cost xx
Indirect Labour Cost xx
Indirect Expenses xx
Factory or Manufacturing Overhead xx
Examples of factory overheads are;
a) Wages of cleaners
b) Supervisor’s wages
c) Wages of crane drivers
d) Wages of factory foremen and supervisors
e) Rent and rate of the factory
f) Depreciation of plant and machinery
g) Factory insurance
h) Factory Lighting, etc.

Apportionment of Expenses
Quite often expenses will have to be split between Factory Overhead Expenses,
Administration Expenses, and Selling and Administration Expenses using appropriate bases
of apportionment

Classification of Stock
a) Stock of Raw Materials
b) Stock of Work-In-Progress: This refers to the partly finished goods or goods still in
manufacturing process or progress
c) Stock of Finished Goods and consumable stores

COST BUILD UP/COST STRUCTURE


The cost of a product can be built up by adding the direct material cost, direct labour cost and
direct expenses to get the prime cost. Indirect factory costs called factory or production
overhead is added to the prime cost to get the production cost.

Computation of cost
GH¢
Direct material cost xx
Direct labour cost xx
Direct expenses xx
Prime cost xx
Add Production Overheads xx
Factory Cost of production xx
Administration Overheads xx
Total cost of production xx

52
EBA 218: Semester 2, January, 2015
Manufacturing Profit:
This is the difference between the total production or manufacturing cost and the market
value. Its purpose is to establish the profit from the production activity. Manufacturing profit
is transferred to the profit and loss account

FORMAT
Name of Business
Manufacturing, Trading, Profit and Loss Account for the year .........................
GH¢ GH¢
Opening Stock of Raw Materials xx
Purchases of Raw Materials xx
Add Carriage Inwards xx
xx
Less Returns Outwards xx xx
Cost of Raw Materials Available for Sale xx
Less: Closing Stock of Raw Materials xx
Cost of Raw Materials Used or Consumed xx
Direct Wages xx
Direct Expenses (Royalties) xx
Prime Cost xx
Factory Overheads
Factory Rent & Rate (%) xx
Fuel and Lubricants xx
Factory Salaries xx
Factory Insurance (%) xx
Supervisor’s wages xx
Depreciation on Plant & Machinery xx xx
xx
Add Work-in-Progress at Start xx
Less Work-in-Progress at Close xx xx
Loose Tools at Start xx
Less Loose Tools at Close xx xx
Factory Cost of Production xx
Manufacturing Profit (% of Factory Cost) xx
Market Value / Cost of Finished Goods Produced xx
Sales xx
Less Returns Inwards xx
Net Sales xx
Less Cost of Sales:
Opening Stock of Finished Goods xx
Add Market Value/Production Cost xx
xx
Less Closing Stock of Finished Goods xx xx
Gross Profit/Loss xx
Manufacturing Profit xx
Other Incomes xx
xx
Less Operating Expenses xx
Net Profit/Loss xx

EBA 218: Principles of Accounting II, 2016 53


Provisions for unrealised profit
Where there exist unsold inventory of finished goods at market value in the business at the
end of the year, the profit margin related to them referred to as ’unrealised profit' should be
ascertained and charged to the income statement. This treatment is intended to set off the
amount of unrealised profit on the unsold inventories against the credit for profit loaded on all
completed goods manufactured in the financial year.

Treatment
The amount of provision for unrealised profit on unsold inventory in the first year of creation
must be fully charged to the income statement and credited to the provision for unraised profit
account. In the second and subsequent years, appropriate adjustments required for increases or
decreases over the previous year must be adjusted accordingly to the provision account in the
same manner as with provision for bad debts accounts

Illustration 1
The closing inventory of finished goods at market value as at 31/12/15 was GH¢8,000.
Compute the unrealised profit if goods are transferred to the trading department at cost plus
331/3%.

Solution
Mark-up = 331/3% = 1
/4
1
Margin = /4+1 = 25%
Unrealised profit = 25% x GH¢8,000 = GH¢2,000

Illustration 2
The following relate to the business of Wofa K Manufacturing Company as at 31/12/2015:
GH¢
Inventories at Market Value (01/01/15) 55,000
Inventories at Market Value (31/12/15) 90,000

Goods are transferred to the trading department at cost plus 331/3%.

Required: Prepare the Provisions for unrealised Profit Account and determine the amount to
be charged to the Income Statement.

Solution
Mark-up = 331/3% = 1
/4
1
Margin = /4+1 = 25%

Unrealised profit (Opening) = 25% x GH¢55,000 = GH¢13,750


Unrealised profit (Closing) = 25% x GH¢90,000 = GH¢22,500

Provisions for Unrealised Profit


GH¢ GH¢
Balance c/d 22,500 Balance b/d 13,750
Profit/Loss Account 8,750
22,500 22,500
Balance b/d 22,500

54
EBA 218: Semester 2, January, 2015
Illustration 3
The following relate to the business of Wofa K Manufacturing Company as at 31/12/2015:
GH¢
Market Value of Finished Goods 1,440,000
Sales 1,939,500
Inventories at Market Value (01/01/15) 340,000
Inventories at Market Value (01/01/15) 270,000
Selling and Distribution Expenses 216,000
Administration Expenses 180,000
Financial Charges 48,000

Goods are transferred to the trading department at cost plus 331/3%.

Required: prepare the Income Statement of the company for the year ended 31/12/15

Solution
Wofa K Manufacturing Company
Income Statement for the Year Ended 31/12/15
GH¢ GH¢
Sales 1,939,500
Less Cost of Sales:
Opening Inventory 340,000
Add Market Value of Finished Goods 1,440,000
1,780,000
Less Closing Inventory of Finished Goods 270,000 1,510,000
Gross Profit 429,500
Add Manufactured Profit [25% x 1,440,000] 360,000
Decrease in Unrealized Profit 17,500
807,000
Less: Selling and Distribution Expenses 216,000
Administration Expenses 180,000
Financial Charges 48,000 444,000
Net Profit 363,000

W1
Unrealised profit (Opening) = 25% x GH¢340,000 = GH¢85,000
Unrealised profit (Closing) = 25% x GH¢270,000 = GH¢67,500

W2
Provisions for Unrealised Profit
GH¢ GH¢
Profit/Loss Account 17,500 Balance b/d 85,000
Balance c/d 67,500
85,000 85,000
Balance b/d 67,500

TUTORIALS
1. The following are the details of production cost of Maame Nyarko Limited for the year
ended 31st December, 2012:
GHc
Stock of Raw materials (31st December, 2011) 5,000

EBA 218: Principles of Accounting II, 2016 55


Stock of Raw material (31st December, 2012) 7,000
Raw material purchased 80,000
Manufacturing wages 210,000
Royalties 1,500
Indirect wages 90,000
Factory rent 3,200
Rates of factory 1,200
Depreciation of plant and machinery 4,000
General factory indirect expenses 3,100

You are required to determine the production cost

2. Abronomah started business on 1st January, 2012 as a manufacturer of poultry feed. The
following figures were extracted from his records on 31st December, 2012.

GH¢
Sales 10,500,000
Plant and machinery 900,000
Administrative salaries 180,000
Loose tools bought 64,000
Electricity 400,000
Building repairs 200,000
Raw materials bought 3,800,000
Salesmen salaries 230,000
Factory supervisors’ salaries 540,000
General administrative expenses 350,000
Direct manufacturing wages 2,100,000
Repairs to machinery 110,000
Rates and insurance 100,000
The following additional information is also relevant:

(i) Closing stocks at 31st December, 2012 were valued as follows:


GH¢
Raw materials 200,000
Work-in-progress 640,000
Finished Goods 820,000
Loose tools 24,000
(ii) Depreciate plant and machinery (bought on 1st July, 2012) by 10% per annum on cost.

(iii) Apportion expenses as follows:


Factory Administration
Electricity 90% 10%
Building repairs 60% 40%
Rates and insurance 80% 20%

(iv) A manufacturing profit of 25% on production cost was added for the purpose of
transferring finished goods to the Trading section.

You are required to prepare Manufacturing, Trading and Profit and Loss Account for the year
ended 31st December, 2012.

56
EBA 218: Semester 2, January, 2015
3. The following balances were extracted from the books of Abronomah Manufacturing
Company on July 31st, 2013:
GH¢
st
Stocks at August 1 , 2012: Raw materials 460,000
Work-in-progress 290,000
Finished goods 790,000
Purchases raw materials 1,490,000
Carriage on raw materials 110,000
Rent and rates 220,000
Manufacturing wages 330,000
Factory power 170,000
Factory supervisor’s salary 110,000
Carriage outwards 60,000
Selling expenses 120,000
Insurance 140,000,
General expenses 182000
Plant and machinery 800,000
Motor vehicles 1,000,000
Accounts Receivable 400,000
Bad debts 80,000
Provision for doubtful debts 01/08/12 160,000
Accumulated dep. Plant and machinery 160,000
Sales 3,000,000
Wages and salaries 200,000

Additional information:
(a) Stocks at July 31st 2013 were valued as follows:
GH¢
Raw material 140,000
Work-in-progress 200,000
Finished goods 600,000

(b) Rent and rates and insurance are to be apportioned as follows:


Factory Office
Rent and rates 60% 40%
Insurance 80% 20%

(c) Depreciation is to be provided for as follows:


Plant and Machinery 10% per annum on reducing balance basis and
Motor Vehicles, 20% using straight-line method

(d) The doubtful debts provision is to be made equal to 5% accounts receivable

You are required to prepare the Manufacturing, Trading and profit and loss account for the
year ended July, 31st 2013.
4. Obolo Ventures is a manufacturing firm. The following balances were extracted from their
books on 31st December, 2012.
GH¢
Stocks (01/01/12):
Raw materials 730,000
Work-in-progress 280,000
Finished goods 800,000

EBA 218: Principles of Accounting II, 2016 57


Purchases of raw materials 1,980,000
Sales 10,000,000
Factory wages 1,400,000
Direct expenses 300,000
Royalties 200,000
Indirect expenses 100,000
Depreciation of machinery 140,000
Depreciation of fixtures and fittings 70,000
Factory light and power 250,000
Factory Insurance 80,000
Vehicle maintenance 60,000
Advertising 120,000
Wages and salaries 400,000
Carriage on raw materials 110,000
Rent and rates 240,000
Bad debt written off 26,000
Stationery 120,000
Stock (31/12/12):
Raw materials 600,000
Work-in-progress 180,000
Finished goods 360,000

Additional information:
a) 25% of wages and salaries to be charged to factory
b) ¼ of vehicle maintenance to be treated as factory cost
c) ¹/3 of stationery to be treated as factory cost
d) Rent and rates to be apportioned as 2/5 factory, 3/5 office)
e) Finished goods to be transferred to trading account at cost plus 25%

You are required to prepare:


i. Manufacturing Account for the year ended 31st December 2012;
ii. Trading, Profit and Loss Account for the year ended 31st December, 2012

5. The following balances were extracted from the books of Baba & Sons Manufacturing
Company on 31/07/13:
GH¢
Stock of raw materials at August 1, 2012 920,000
Stock of finished goods August 1, 2012 1,580,000
Work-in-progress August 1, 2012 580,000
Purchases of raw materials 4,470,000
Carriage inwards on raw materials 330,000
Rent and rates 550,000
Direct wages 825,000
Lighting 425,000
Carriage outwards 180,000
Salesmen’s salaries 120,000
Insurance 280,000
General expenses 364,000
Factory supervisor’s salary 500,000
Plant and machinery 1,600,000
Motor vehicles 5,000,000
Trade debtors 600,000

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EBA 218: Semester 2, January, 2015
Bad debts 40,000
Accumulated depreciation on plant and machinery, August 1, 2012 400,000
Sales 9,000,000
Wages and salaries 900,000
Capital, August 1, 2012 10,000,000
Additional information:
Stocks at July, 31st 2013 were valued as follows:
GH¢
Raw materials 520,000
Work-in-progress 400,000
Finished goods 900,000
Lighting, insurance and rent and rates to be apportioned as follows:
Factory 75%
Office 25%
Depreciate fixed assets as follows:
10% per annum on the reducing balance method for plant and machinery
25% on the straight-line method for motor vehicles
Accrued salesmen’s salaries amounted to GH¢480,000.
You are required to prepare the Manufacturing, Trading and Profit and Loss accounts for the
year ended July, 2013.

6. The following balances were extracted from the ledger of Abronomah Ventures for the year
ended 31st December, 2012:
GH¢
Stock of raw materials at 01/01/12 800
Stock of raw materials at 31/12/12 1,050
Work-in-progress at 01/01/12 350
Work-in-progress at 31/12/12 420
Year to 31st December, 2012:
Direct wages 3,960
Indirect wages 2,550
Purchases of raw materials 8,700
Direct expenses 990
Lubricants 140
Carriage inwards on raw materials 300
Factory rent 200
Depreciation of factory plant 420
Transport expenses 180
Insurance 160
General expenses 330
Sales 25,000
Stock of finished goods at 01/01/12 3,500
Stock of finished goods at 31/01/12 4,400

Additional information:
a. Expenses are to be apportioned as follows:
Factory Sales
1 2
Transport /3 /3
Insurance ¾ ¼
General expenses ½ ½
b. Goods are to be transferred from factory to the trading account at a mark-up- of 10% on
factory cost on 31st December, 2012.

EBA 218: Principles of Accounting II, 2016 59


You are required to prepare a manufacturing, trading, profit and loss account for the year
ended 31st December, 2012.

7. Below is the Trial Balance of Manson Kotobre Company on 31st May, 2013.
DR. CR.
GH¢’000 GH¢’000
Stocks: 01/06/12
Finished goods 275
Raw materials 130
Purchases of raw materials 4,600
Carriage outwards 90
Carriage on raw materials 80
Repairs to machinery 210
Bank overdraft 200
Cash in hand 800
Plant and machinery 2,000
Provision for depreciation -Plant and machinery 500
Debtors and creditors 1,500 900
Discount allowed and received 120 1,175
Salesmen’s wages 730
Printing, postage, etc 70
Manufacturing wages 1,630
Administration salaries and wages 1,370
Factory, power, lighting and cooling 500
Indirect labour cost 170
Bank interest 25
Royalty 100
Capital 2,225
Sales _____ 9,400
14,400 14,400
Additional information
a) Stock balances at the end of the year were
GH¢
Finished goods at cost 372,000
Raw materials 210,000
b) Provision for depreciation on plant and machinery should be 20% per annum on cost

c) Profit margin on manufactured goods is at the rate of 10% on cost of production.

You are required to prepare a Manufacturing, Trading and profit loss account for the year
ended 31st May 2013, and a Statement of Financial Position as at that date.

8. Ogyam Manufacturing Enterprise started business on 1 January 2012 as a manufacturer of


poultry feed. The following were extracted from his records on 31st December 2012
GH¢
Sales (8,500 packets @ GH¢300) 2,550,000
Plant and machinery 180,000
Administrative salaries 36,000
Loose tools bought 12,800
Electricity 80,000
Repairs to building 40,000
Raw material purchased 760,000

60
EBA 218: Semester 2, January, 2015
Salesmen salaries 46,000
General administrative expenses 70,000
Direct manufacturing wages 420,000
Repairs to machinery 22,000
Rates and insurance 20,000
Factory supervisor’s salaries 108,000
Royalties 11,100
Additional information
a) Included in rates and insurance is an amount of GH¢6,000 which is related to the
following year
b) Annual electricity bill of the business is GH¢85,000
c) Repairs to building includes GH¢3,000 paid to works for renovating the proprietor’s
private residence
d) Allocate expense as follows:
Factory Administration
Electricity 90% 10%
Repairs to building 60% 40%
Rates and insurance 80% 20%
e) Depreciate plant and machinery (bought on 30th June, 2012) by 10 % per annum
f) During the year, 10,000 packets were produced. Finished goods from the factory are
transferred to the trading section at a mark up of 25%.
g) The production manager anticipates bottleneck in production at the start of the next
period, as a result 1,000 packets of poultry feed at GH¢160 were purchased from a
supplier to meet expected demand.
h) Other stocks at 31st December, 2012 were valued as follows:
GH¢
Raw material 40,000
Loose tools 4,800
Work in progress 128,000
i) Provision should be made for any unrealised profit on manufactured goods.
You are prepare the manufacturing, trading and profit and loss account for the year ended 31st
December, 2012, using the vertical format

EBA 218: Principles of Accounting II, 2016 61


MODULE SIX
INCOMPLETE RECORDS/SINGLE ENTRY
Introduction
If you visit small businesses in your locality you will find that there are several businesses in
which no records are kept at all. The owner’s memory is the only record of his financial
dealings. His memory can fail at anytime. Some small businesses keep records partially; their
main concern in record-keeping will be to record their own and their customers’ debts. We
shall call all those accounting systems, which do not follow double-entry systems incomplete
accounting systems. A business, which goes further by recording one aspect of its
transactions, only is said to be using single-entry book-keeping. For example, a business may
keep records of its cash sales in an exercise book but may not have cash book with which to
crosscheck the sales records.

Single entry may thus be defined as a method or variety of methods employed for recording
of business transactions in which the principles of double entry bookkeeping are net adhered
to and which thus ignores completely the two fold aspect of each transaction. Single entry
records are often called incomplete records in as much as the methods of keeping such records
do not conform to the requirements of complete double entry bookkeeping.

Characteristics of non-double entry methods (Incomplete Records)


There are certain common characteristics of financial records, which are not kept on the
double-entry system.
1. As there is no system of debits and credits, no Trial Balance and Statement of Financial
Position may be prepared.
2. Distinction between capital and revenue expenditure may not be made.
3. The method of calculating profit and loss may vary from year to year; in some cases profit
is measured only by the amount of cash available.
4. No adjustments are made for closing stock and no provision made for depreciation and
bad debts.
5. There may be a register of debtors and creditors.
6. Personal financial affairs may be mixed with business affairs.
7. The main records kept are likely to be sales invoices received.

Reasons for the widespread use of single entry


Double-entry booking has been in use for a long time and one would have expected that
businesses would keep their accounts on double-entry principles. In large companies
government regulations make it compulsory for accounts to be kept in the proper manner, but
for small business the need for proper record keeping is a personal choice for the proprietor.

Below are reasons why small businesses do not use the double-entry system.
1. The proprietor may not recognize the usefulness of proper accounting; he may consider it
a waste of money to employ qualified accounting personnel.
2. Some business owners do not have trust in anybody apart from themselves; they like to be
in charge of all financial matters no matter how badly they handle money.=
3. Lack of funds prevents some n=businesses from employing qualified accountants; they
may recognize the need but they are not able to afford accountants’ salaries.
4. The need for secrecy can be the reason why some businesses fail to employ accounting
staff; they may want their financial matters to be secret.
5. Avoidance of taxation may be another reason. A business may fail to keep proper
accounts so that the proprietor can declare a small amount of profit in order to pay less
tax.

62
EBA 218: Semester 2, January, 2015
6. Some businessmen have the wrong idea about what is ‘profit’; to them profit means the
amount of cash in hand and at the bank. As long as there is enough money they are
satisfied they are making profits.

Limitations/Disadvantages of single entry or incomplete records


Some of the limitations of keeping records under the system include:
1. There is no trial balance or Statement of Financial Position to test equality of debits and
credits. It is thus not possible to prove the arithmetical accuracy of the books by the
extraction of a trial balance because complete recording of transactions are not made.
2. The financial position and progress of the business cannot be known when financial
records are incomplete
3. There is a complete lack of definite system or carefully planned method of keeping the
books and no complete information is available readily.

4. Since no nominal accounts are kept there is no available material for the preparation of a
trading and profit and loss account

5. The absence of any real accounts renders the preparation of a statement of a financial
position of a business a difficult task.

6. Because there is no effective expense control, fraud and misappropriation may be difficult
to detect. That is, without proper accounting it will be difficult to detect fraud, theft and
all forms of financial malpractices.

7. Outside parties such as bankers and tax authorities may be reluctant on accepting accounts
prepared from incomplete record.

8. The business cannot plan ahead; it cannot plan properly for buying goods for sale; it may
find itself threatened by creditors’ it may face serious cash shortages to the extent that it is
not able to pay employees’ salaries.

Determination of Profit or Loss Where No Written Records Are Available


In a situation where records are not available, computation of profit or loss for the year can be
made from estimates and from careful investigation.
This estimate is obtained as follows:
1. Compile a statement of affairs at the beginning and end of the period in question detailing
all assets and liabilities.
2. Compare the net asset at the beginning and end of the period. The result is an apparent
profit where the closing net asset exceeds the opening net asset in value and vice visa.
3. Adjust for any inflow and outflow of capital during the period. The final result is either
profit earned during the year or loss incurred during the period in question

Illustration
The following information relate to the business of Gyae Su on 31st August, 2012
GH¢
Cash 115,000
Bank balance 2,209,000
Fixtures 4,000,000
Inventories 16,740,000
Accounts Receivable 11,890,000
Accounts Payable 9,052,000
Motor van (at valuation) 3,000,000

EBA 218: Principles of Accounting II, 2016 63


During the year at 31/08/13, his drawings amounted to GH¢7,560,000. Winnings from
National lottery amounting to GH¢2,800,000 were put into the business. Extra fixtures were
bought for GH¢2,000,000. At 31st August 2013, the assets and liabilities were:
GH¢
Cash 84,000
Bank overdraft 165,000
Inventories 21,491,000
Accounts Payable 6,002,000
Creditors for expenses 236,000
Motor van to be valued at 2,500,000
Accounts Receivable 15,821,000
Prepayments 72,000
Fixtures to be depreciated at 600,000

Draw up a statement showing the profit or loss made by Gyae Su for the year ended 31st
August, 2013

Solution:
Gyae Su
Statement of Affairs as At 31st August:
01/09/12 31/08/13
GH¢ GH¢ GH¢ GH¢
Assets:
Cash 115 84
Bank 2,209
Fixtures 4,000 5,400
Inventories 16,740 21,491
Accounts Receivable 11,890 15,821
Motor van 3,000 2,500
Prepayment - 72
37,954 45,368
Less liabilities:
Accounts Payable 9,052 6,002
Bank overdraft 165
Creditors for exp. (accrual) - 9,052 236 6,403
Net assets/Capital 28,902 38,965

Gyae Su
Statement of Profit and Loss for the Year Ended 31st August, 2013
GH¢
Net Assets (31/08/13) 38,965
Net Assets (01/09/13) 28,902
10,063
Add drawings (out flow) 7,560
17,623
Less Lottery wins 2,800
Estimated profit for the year 14,823

*All inflows (additional capital) should be subtracted from the apparent profit while outflows
(deductions) should be added.

64
EBA 218: Semester 2, January, 2015
Where Partial Written Records are Available
In a system where some records are kept, it may be possible to construct a trading and profit
and loss account and the Statement of Financial Position by building up totals accounts
thereby filling in missing figures.

The procedure under the system would be to prepare the following statements and accounts.
1. The statement of affairs at the beginning to ascertain opening capital or any missing figure
(s).

2. A cash and bank summary to ascertain drawings, cash sales or whichever figure is
missing.

3. Total debtors account to determine credit sales or cash receipt from debtors.

4. Total creditors account to determine credit purchases or cash payment to creditors

5. Other relevant expenses or revenue accounts to ascertain what pertains to the period under
question and what amounts are outstanding or paid in advance.

6. With the information from the workings in 2 to 5 above, prepare a trading and profit and
loss account to determine profit or loss

7. Prepare a closing Statement of Financial Position

Illustration
The accountant obtained the following details of transactions for Joy’s Retail Store for the
year ended 31/12/12.
a. The sales are mostly on credit basis. No record of sales have been made but
GH¢25,000,000 has been received, GH¢23,750,000 by cheque and GH¢1,250,000 by
cash from persons to whom goods have been sold.
b. Cheque paid to suppliers during the year amounted to GH¢18,000,000
c. Expenses paid during the year by cheque; rent GH¢500,000.
d. General expenses paid by cheque, was GH¢450,000
e. Paid by cash a rent of GH¢125,000
f. Joy took GH¢25,000 cash per week (52 weeks) as drawings.
Additional Information:
31/12/11 31/12/12
Accounts Receivable 2,750,000 3,300,,000
Accounts Payable 1,000,000 1,625,000
Rent owing - 125,000
Bank 2,825,000 7,625,000
Cash 200,000 25,000
Stock 3,975,000 4,250,000

The fixed assets were plant and machinery valued at GH¢2,000,000 which were depreciated
at 10% per annum, straight-line method.

You are required to prepare


a) Cash book summary
b) Statement of affairs showing the opening capital
c) Trading, profit or loss account and Statement of Financial Position for Joy.

EBA 218: Principles of Accounting II, 2016 65


Solution:
a) Cash book summary
Details Cash Bank Details Cash Bank
GH¢’000 GH¢’000 GH¢’000 GH¢’000
Balance 200 2,825 Suppliers - 18,000
c/d
Debtors 1,250 2,3750 Rent 125 500
General - 450
expenses
Drawings 1,300 -
Balance c/d 25 7,625
1,450 26,575 1,450 26,575

b) Statement of affairs as at 31/12/11


Fixed assets GH¢’000 GH¢’000
Plant and machinery 2,000
Current Assets
Inventories 3,975
Accounts Receivable 2,750
Bank 2,825
Cash 200 9,750
11,750
Less Liabilities
Accounts Payable 1,,000
Capital 10,750

Workings
Total Creditors
GH¢’000 GH¢’000
Cash 18,000 Balance b/d 1,000
Balance c/d 1,625 Purchases 18,625
19,625 19,625
Total Debtors
GH¢’000 GH¢’000
Balance b/d 2,750 Receipt: Cash 1,250
Sales 25,550 Bank 23,750
Balance c/d 3,300
28300 28300
Rent
GH¢’000 GH¢’000
Bank 500 Profit and loss 750
Cash 125
Accruals c/d 125
750 750

66
EBA 218: Semester 2, January, 2015
c) Joy
Trading, Profit/Loss Account for the Year Ended 31/12/12
GH¢’000 GH¢’000
Sales 25,550
Less: cost of sales
Opening stock 3,975
Add purchases 18,625
22,600
Less closing stock 4,250 18,350
Gross profit 7,200
Less expenses
Rent 750
General expenses 450
Depreciation; Plant and Machinery 200 1,400
Net Profit 5,800
Statement of Financial Position as at 31/12/12
GH¢’000 GH¢’000
Fixed Assets
Plant and Machinery 2,000
Less depreciation 200 1,800
Current Assets
Stock 4,250
Debtors 3,300
Bank 7,625
Cash 25
17,200
Less Current Liabilities
Creditors 1,625
Rent owing 125 1,750 13,450
15,250
Financed By:
Capital 10,750
Add Net Profit 5,800 16,550
Less Drawing 1,300
15,250
MARK-UP AND MARGIN
It is necessary for us to learn how to apply mark-up and margin to determine the profit on a
product, hence the inclusion of this business mathematics topic. Sometimes missing figures in
the trading account may be obtained by resorting to the use of basic accounting ratios like
mark-up or margin. When profit is expressed as a percentage or fraction on cost price, it’s
termed as mark up. When profit is expressed as a percentage or fraction on selling price, it is
termed margin.

Mark-Up is a percentage or fraction of profit on the cost price of an item.


Margin is a percentage or fraction of profit on the selling price of an item.

Fraction Percentage
Profit Profit
Mark up = or =  100
Cost price Cost price
Profit Profit
Margin = or =  100
Selling price Selling price

EBA 218: Principles of Accounting II, 2016 67


Change the following mark-ups to margin: i) ½ ii) 0.20 iii) 25%

Solution:
1 1 1 20 1 1 1 25 1 1 1
i)  1  ii) 0.20     iii)   
2 2 3 100 5 5  1 6 100 4 4  1 5

1
Change the following margin to mark-up. i) ii) 0.20 iii) 25%
4
Solution:
1 1 1 20 20 1 25 1 1 1
i)   ii) 0.20    iii) 25%    
4 4 1 3 100 100  20 4 100 4 4  1 3

APPLICATION
Example 1:
The cost of an item is GH¢ 25,000. If profit is 25% on cost, find the selling price.

Solution: Mark-up = 25%, Profit = 25/100 × 25,000 = GH¢6,250


Therefore, Selling price = 25,000 + 6,250 = GH¢ 31,250
Example 2:
The selling price of an item is GH¢31,250, find the cost price, if profit is 25% of the cost of
the item.
Solution: Mark-up = 25%, therefore margin = 25/125 = 1/5
Profit = 1/5 × 31,250 = GH¢6250
Hence, cost price = 31,250 – 6250 = GH¢25,000

Question
GH¢
Opening stock 50,000
Purchases 320,000
Sales 360,000
Assuming a Mark up 20%, Calculate the closing stock
Solution
A PRO FORMA TRADING ACCOUNT
GH¢ GH¢
Sales 360,000
Less cost of sales:
Opening stock 50,000
Purchases 320,000
370,000
Closing stock 70,000 300,000
Gross profit 60,000

Workings
Mark-up = 20%
20 1
Margin = 
100  20 6
1
Hence gross profit =  ¢360,000  ¢60,000
6

68
EBA 218: Semester 2, January, 2015
TRIAL QUESTIONS
1. Sankwan Ventures does not keep a set of accounting records for its business operations.
For the year ended 31st May, 2013 the following information was made available:

Opening stock GH¢3,500


Cost of goods available for sale GH¢113,500
Cost of sales GH¢90,000
Gross profit percentage on sales 10%
Net profit GH¢4,000
Net fixed assets GH¢81,500
Working capital GH¢4,500
Short-term loan GH¢800
Creditors for goods GH¢700
Long-term loan GH¢40,000
Current ratio 4:1
Capital ?

You are required to calculate


a) Sales and purchases
b) Closing stock;
c) Total revenue expenses;
d) Total value of current assets;
e) Capital of Sankwan Enterprise on 31st May, 2013.

2. Adofo Enterprise makes provision for debtors annually. For the Financial year ended
2012, the following rates were applied;
Provision for bad debts 10%
Provision for discount on debtors 3%

On 1st January, 2012, the balance on debtors account was GH¢4,500,000. During the year the
following transactions took place;
GH¢
Credit sales 88,000,000
Cash from debtors 42,000,000
Discount allowed 560,000
Returns inwards 100,000

On 31st December, 2012, debts ascertained to be bad amounted to be GH¢90,000 while debts
amounted to GH¢980,000 which were written off in 2011 had been recovered in 2012.
You are required to write up the following accounts to 31st December, 2012;
(a) Debtors account;
(b) Bad debts account;
(c) Bad debts recovered account;
(d) Provision for bad debts account;
(e) A Statement of Financial Position (extract) as at 31st December, 2012.

3. Mr. Tutugyagu, who operates a cold store, has not kept proper books of account. His
assets and liabilities on 31st December, 2011 were as follows:
GH¢
Fixtures and fittings 604,000
Inventories 2,646,000
Accounts Receivable 1,556,000

EBA 218: Principles of Accounting II, 2016 69


Accounts Payable 2,866,000
Bank 1,230,000
Cash 90,000
st
During the year ended 31 December, 2012 his drawings amounted to GH¢1,800,000. He
also introduced additional capital amounting to GH¢1,200,000.

At the end of the year his assets and liabilities were:


GH¢
Fixtures and fittings 604,000
Motor van 1,200,000
Accounts Receivable 1,726,000
Accounts Payable 2,556,000
Inventories 2,940,000
Bank 1,536,000
Cash 64,000
Additional information:
a) A provision of GH¢86,000 is to be made for doubtful debts.
b) Motor van is to be depreciated by 25%.

You are required to prepare:


a. Statements of affairs for Mr. Tutugyagu as at 31st December, 2011 and 2012;
b. Statement of profit and loss for the year ended 31st December, 2012.
c. Statement of Financial Position as at 31st December, 2012.

4. The following is the Bank Account summary of Nana & Co. for the year ended 01/03/13
Bank Account
GH¢ GH ¢
Balance b/d 40,200 Suppliers 32,600
Cash from customers 62,000 Salaries 12,000
Additional capital 10,000 Cash purchases 20,000
Cash Sales 48,000 Rates 5,000
Drawings 16,000
Expense Creditors 3,500
Balance c/d 71,100
160,200 160,200
Balance b/d 71,100
Additional information:
01/04/12 31/03/13
GH¢ GH¢
Stock-in-trade 41,000 39,000
Debtors 26,000 24,000
Creditors for goods 17,000 15,500
Expenses creditors 9,000 10,200
Rates owing 1,200 1,400

You are required to prepare a:


a) Statement of Affairs as at 1st April, 2012;
b) Total Debtors’ Account
c) Total Creditors’ Account;
d) Trading, Profit and Loss Account for the year ended 31st March, 2013

70
EBA 218: Semester 2, January, 2015
5. The following balances were extracted from the ledgers of Aboadidi Ltd.
1st Oct, 2012 30th Oct, 2013
GH¢ GH¢
Rent receivable prepayment 8,000 9,500
Rates and insurance prepayment 50,000 20,000
Accruals 11,000 12,000
Trade debtors 180,000 240,000
Stationery: Stock in hand 10,000 13,000
Owing to suppliers 9,000 6,000
During the year ended 30th September, 2006, the following transactions took place.
GH¢
Rent received by cheque 160,000
Rates paid by cheque 400,000
Insurances paid by cheque 280,000
Cheques received from trade debtors 4,200,000
Discounts allowed to trade debtors 130,000
Bad debts written off 30,000
Payment to suppliers of stationery 54,000

You are required to post and balance the following ledger accounts for the year ended 31st
October, 2013, showing clearly the accounts to be transferred to profit and loss account,
where applicable.
a) Rent receivable
b) Rates and insurances
c) Trade debtors
d) Stationery.

Solution to Question 3
. Mr. Tutugyagu
Statement of Affairs as at 31/12/11
Assets: GH¢ GH¢
Fixtures and Fittings 604,000
Inventories 2,646,000
Accounts Receivable 1,556,000
Bank 1,230,000
Cash 90,000 6,126,000
Less Liabilities:
Accounts Payable 2,866,000
Capital/Net Asset 3,260,000

Mr. Tutugyagu
Statement of Affairs as at 31/12/12
Assets: GH¢ GH¢
Fixtures and Fittings 604,000
Motor Van [75% × 1,200,000] 900,000
Inventories 2,940,000
Accounts Receivable [1,726,000-86,000] 1,640,000
Bank 1,536,000
Cash 64,000 7,684,000
Less Liabilities:
Accounts Payable 2,556,000
Capital/Net Asset 5,128,000

EBA 218: Principles of Accounting II, 2016 71


Mr. Tutugyagu
Statement of Profit or Loss as at 31/12/12
GH¢
Capital as at 31/12/12 5,128,000
Less capital as at 31/12/11 3,260,000
1,868,000
Add drawings 1,800,000
3,668,000
Less Additional Capital 1,200,000
Net Profit 2,468,000

Mr. Tutugyagu
Statement of Financial Position as at 31/12/12
Non-Current Assets: COST DEP NBV
GH¢ GH¢ GH¢

Fixtures and Fittings 604,000 - 604,000


Motor Van 1,200,000 300,000 900,000
1,804,000 300,000 1,504,000
Current Assets:
Inventories 2,940,000
Accounts Receivable 1,640,000
Bank 1,536,000
Cash 64,000 6,180,000
Less Current Liabilities:
Accounts Payable 2,556,000 3,624,000
5,128,000
Financed By:
Opening Capital 3,260,000
Add Net Profit 2,468,000 5,728,000
Additional Capital 1,200,000
6,928,000
Less Drawings 1,800,000
5,128,000

72
EBA 218: Semester 2, January, 2015
MODULE SEVEN
FINAL ACCOUNTS OF NON-PROFIT-MAKING ORGANISATIONS

The purpose of trading concerns (Sole trader, Partnership and Limited Liability Companies) is
primarily to make a profit for their respective owners. Non-trading organization provides
services rather than carry on trading with a view to profit making. They are established solely
for fostering and promoting activities for the benefit of members. Under the category of non-
trading organization are:

 Clubs, e.g. Social clubs, Football clubs, Fun clubs, etc


 Associations, e.g. Churches, GNAT, NAGRAT, etc
 Charitable Organisations, e.g. UNO, AU, ECOWAS, etc

Some Sources of Income to Non-Profit Making Organisations


i. Membership Subscription
ii. Entrance Fees
iii. Registration Fees
iv. Donations
v. Interest on Investment
vi. Assets disposal
vii. Penalties and fines
viii. Fund raising activities
ix. Profit on Special Activities, eg Bar Trading, Dinner Dance, etc

The kind of final accounts prepared by these organisations are either Receipts and Payments
or Income and Expenditure accounts.

Receipts and Payments Account


This is the summary of the cash transactions for a given period. It shows the actual cash
received and paid out. It contains items of both capital and revenue nature and takes no
account of depreciation of fixed assets.

Illustration
From the following, prepare receipts and payments accounts for Azonto Keep Fit Club for the
month of March 2014.
GH¢
Cash balance as at 1st March 19,500
Subscription Received 90,000
Entertainment 9,000
Repairs & Maintenance 4,500
Entrance Fee 12,000
Extension to building 14,000
Sales of land 48,000
Bank interest 2,000
Salaries 60,000
General expenses 3,000
Sundry income 1,500
Electricity 3,600
Donations received 7,500

EBA 218: Principles of Accounting II, 2016 73


Azonto Keep Fit Club
Receipts and Payment
GH¢ GH¢
Balance b/d 19,500 Entertainment 9,000
Subscription Received 90,000 Repairs & Maintenance 4,500
Entrance Fee 12,000 Extension to building 14,000
Sales of land 48,000 Salaries 60,000
Bank interest 2,000 General expenses 3,000
Sundry income 1,500 Electricity 3,600
Donations received 7,500 Balance c/d 86,400
180,500 180,500
Balance b/d 86,400

Income and Expenditure


An income and expenditure account is similar in form to the profit and loss account of a
trading concern. An income and expenditure account is thus the profit and loss a/c of the non-
trading concern. The income and expenditure account contains on the debit side revenue
expenditure relating to the period whether paid or not. On the credit side of the income and
expenditure account are all income pertaining to that period, whether received or not. The
final balance on the income and expenditure account represents a Surplus if income exceeds
expenditure, on the other hand, where expenditure exceeds income, the difference represents a
Deficit.
That is:
Expenditure > Income = Deficit
Income > Expenditure = Surplus

Differences between Receipts and Payments Account and Income and Expenditure
Account
Receipts & Payments Account Income & Expenditure Account
1. It is a real account (asset) 1. It is a nominal account
2. It contains items of both capital and revenue 2. It contains only items of revenue nature
nature.
3. Income are on the debit side and expenditure 3. Incomes on the credit side and
on the credit side. expenditure on the debit side
4. It records receipts and payments relating to 4. It does not cover expenditure or income
previous year or subsequent years. relating to previous or subsequent years or
periods.
5. It does not record accrued income and 5. It takes into account of accrued income
expenditure. It however takes account of and expenditure
prepayments and income received in advance
6. It does not take accounts of depreciation 6. It takes account of depreciation
7. The closing balance, representing cash on 7. The final balance representing surplus or
hand or cash at bank, or bank overdraft shows deficit for the year is transferred to the
cash position as at the end of the period accumulated fund.

Accumulated Fund
This the term used for the capital account of a non-profit making organisation. Therefore,
Accumulated Fund = Assets – Liabilities

74
EBA 218: Semester 2, January, 2015
Terminologies:
Profit Making Organisations Non-Profit Making Organisations
1. Cash or Bank Account 1. Receipts and Payments Account
2. Profit and Loss Account 2. Income and Expenditure Account
3. Net Profit 3. Surplus or Excess of Income over
4. Net Loss Expenditure
5. Capital 4. Deficit or Excess of Expenditure over
Income
5. Accumulated Fund

Determination of Accumulated Fund


Statement of Affairs as at ....................................
GH¢ GH¢
Assets
Motor Vehicle xxx
Fixtures and Fittings xxx
Land and Building xxx
Inventories xxx
Accounts Receivable xxx
Subscription Owings xxx
Cash balance xxx
xxx
Less Liabilities
Creditors xxx
Owings xxx
Subscription Prepaid xxx xxx
Accumulated Fund xxx

Preparation of Subscription Account


(i) Members owed subscription of GH¢3,600 for the year 2009 as at 1st January 2010.
(ii) In December 2009, members paid GH¢800 for the year 2010
(iii) During the year 2010, cash received for subscription amounted to GH¢74,200
(iv) Subscription for the year 2011 was GH¢1,400
(v) At 31st December 2010, members had not paid GH¢2,200 of 2010 subscription.
Required: Prepare the subscription account for the year 2010.

Illustration I:
The following is a summary of the receipts and payments of the Aduana Rotary Club during
the year ended 31st July 2014
Aduana Rotary Club
Receipts and payments account for the year ended 31st July, 2014 __
GH¢ GH¢
Cash and bank bal. b/f 210 Secretarial expenses 163
Sales of competition tickets 437 Rent 1402
Members subscriptions 1,987 Visiting speaker’s exp. 1275
Donations 177 Donations to charities 35
Refund of rent 500 Prizes for competitions 270
Balance 13 Stationery & printing 179
3,324 3,324

EBA 218: Principles of Accounting II, 2016 75


The following valuations are also available:
as at 31st July 2013 2014
GH¢ GH¢
Equipment (original cost GH¢1,420) 975 780
Subscriptions in arrears 65 85
Subscription in advance 10 37
Owing to suppliers of competition 58 68
prizes
Stocks of competition prizes 38 46

Required:
a) Calculate the value of the accumulated fund of the club as at 1st August 2013.
b) Reconstruct the following accounts for the year ended 31st July 2014
i) Subscriptions account
ii) Competition prizes account
c) Prepare an income and expenditure account for the club for the year ended 31st July 2014
and Statement of Financial Position as at that date.

Illustration II:
The following information relates to Die Hard Youngsters’ Club for the year ended 31st
December, 2013.

Balance at January 1st, 2013 December 31st. 2013


GH¢ GH¢
Furniture & Equipment 900,000 1,430,000
Dance expenses owing - 49,000
Subscription in advance 53,000 36,000
Subscription due but unpaid 79,000 -
Creditors for rent and rates 14,000 21,000
Receipts and Payment Account
GH¢ GH¢
Balance b/d: Cash 108,000 Furniture & equipment 600,000
Bank 350,000 General dance expenses 414,000
Subscriptions: 2012 79,000 Secretary’s wages 152,000
2013 512,000 Sundry expenses 43,000
2014 36,000 Printing of dance ticket 99,000
Sale of magazines 17,000 Rent and rates 108,000
Interest on bank a/c 19,000 Balance c/d,
Proceeds from dance 872,000 Cash 57,000
Bank 400,000
1,993,000 1,993,000
You are required to:
a) Ascertain the accumulated fund on 1st January, 2013.
b) Write up the Dance Account
c) Write up the subscriptions account
d) Prepare the income and expenditure account for the year ended 31st December, 2013.

76
EBA 218: Semester 2, January, 2015
Profit from Special Activities
Sometimes non-profit making organisations under take some trading activities to make profit.
Such profits are not to be kept but used for the main purpose of the organisation. For instance,
a church could open a Snack Bar or a School, or a bookshop, out of which a profit would be
made to pay church expenses. When this happens, a normal trading account is prepared
separately for such activity to find the profit accruing from it during the season. The profit or
loss ascertained is then transferred to the income and expenditure account in ascertaining the
surplus or deficit for the period. Most often the records maintained by these trading sections
of the organisation are incomplete. These records must therefore be reconstructed to find out
essential information such as sales, purchases, closing stock, etc in order to prepare the
trading account.

Illustration III:
The Receipt and Payments Account below relate to the Kumasi Club for the year ended
December 31st, 2010.
Receipts and Payment Account
GH¢’000 GH¢’000
Balance b/d 7,200 Payments for bar suppliers 60,000
Subscription: 2012 13,700 Stationery 2,400
2011 2,000 Rent 10,500
2013 1,500 Electricity 9,600
Bar sales 85,000 Motor van 12,400
Commission received 3,000 Staff wages 4,500
Donations 1,000 Barmen wages 3,800
Balance c/d 10,200
113,400 113,400

The following additional information is available:


1/01/12 31/12/12
GH¢ GH¢
Bar stocks 4,000,000 4,800,000
Bar creditors 3,600,000 2,700,000
Wages owing (Staff) 950,000 650,000
Rent owing 2,000,000 2,500,000
Electricity prepaid 600,000 800,000
Subscription owing 2,500,000 1,300,000
Motor van 7,500,000 10,500,000
Equipment 6,800,000 5,200,000

Required:
Prepare the Income and Expenditure Account for Kumasi Club for the year ended December
31st, 2012 and a Statement of Financial Position as at that date.

EBA 218: Principles of Accounting II, 2016 77


TUTORIALS
1) The secretary of the Bravemen Social Club gives you the following summary of the club’s
cash book for the year ended 31st May, 2014.
GH ¢ GH¢
Balance at bank 63,000 Rent 234,000
Balance in hand 10,000 Printing & stationery 18,000
Subscriptions 170,000 Affiliation fees 12,000
Excursion fees 170,000 Secretary’s expenses 37,000
Annual Social dance 134,000 Refreshments 61,000
Annual social dance 102,000
Equipment purchased 26,000
Balance at bank 49,000
Balance in hand 8,000
547,000 547,000
The secretary also gives you the following information
31st May, 2013 31st May, 2014
GH¢ GH¢
Subscription owing 14,000 12,000
Excursion fees owing 78,000 53,000
Annual social dance fees owing by members 6,000 -
Rent owing 72,000 54,000
Printing owing - 3,000
Secretary’s expenses owing 4,000 8,000
Refreshments suppliers owing 13,000 12,000
Subscriptions prepaid - 20,000

On 31st May, 2013 the club’s equipment in the books was valued at GH¢150,000. Equipment
is to be depreciated at 12½% of the book value.

You are required to


a) Show your computation of the Club’s Accumulated Fund at 31st May, 2013.
b) Prepare the Income and Expenditure Account for the year ended 31st May, 2014.
c) Draw up the Club’s Statement of Financial Position as at that date.

2) The following trial balance of Susubribi Soccer Club was extracted as at 31st December,
2010.
DR CR
GH¢’000 GH¢’000
Club house 84,000
Equipment 27,000
Profits from raffles 19,920
Subscriptions received 75,040
Wages: Bar staff 11,236
Grounds men 30,792
Coach’s salary 24,000
General expenses 2,320
Bar stock 31/12/2001 7,056
Bar purchases and sales 46,632 71,892
Cash at bank 6,280
Accumulated fund 72,700
31/12/2001
239,552 239,552

78
EBA 218: Semester 2, January, 2015
Additional information
i. Bar purchases and sales were transacted on cash basis.
ii. Bar stocks on 31st December, 2010 were valued at GH¢3,956,000
iii. Subscriptions paid in advance on 31st December, 2010 amounted to GH¢720,000
iv. Fixed assets were to be depreciated as follows:
Club house GH¢4,000,000
Equipment GH¢3,040,000

You are required to prepare:


(a) Bar trading account for the year ended 31st December, 2010.
(b) Income and expenditure account for the year ended 31st December, 2002.
c) A Statement of Financial Position as at 31st December, 2010.

2. The Apuske Ladies Club was formed to promote social life of ladies in Kawanotum
Village. The following is the receipts and payments account for the club for the year ended
31st December, 2008.
Receipts and Payments
GH¢ GH¢
Cash in hand b/f 3,200 Refreshment 27,200
Cash at bank b/f 12,000 Repairs and Renewal 51,200
Subscriptions 256,800 Office expenses 28,400
Life membership fees 16,000 Rates & Insurance 18,000
Donation 10,000 General expenses 14,400
Equipment 14,400
Wages 11,600
Furniture & Fittings 92,400
Cash in hand c/d 8,400
Cash at bank c/d 32,000
298,000 298,000
i. Assets and liabilities at the beginning and end of the year are as follows:
1/1/08 31/1/08
GH¢ GH¢
Equipment 40,000 54,400
Furniture & Fittings 60,600 153,000
Subscription in advance 4,000 8,000
Wages owing 2,000 10,000
Rates & Insurance prepaid 6,000 3,000
Subscription owing 25,000 15,000
ii. The club had eight (8) life members in 2008 year and life membership fee was GH¢2,000
per member. It is the policy of the club to create life membership reserve account and
credit fees from life members into it and make 10% to income and expenditure at the end
of every year
iii. The closing balances of fixed assets of the club include the acquisition of the current year
and depreciation is provided, Equipment, and Furniture and Fittings at the rate of 10% and
25% on cost respectively.
You are required to prepare for the club,
a) Accumulated fund as at 1st January 2008.
b) Subscription Account for the 2008
c) Income and Expenditure for the year ended 31st December, 2008.
d) The Statement of Financial Position as at that date.

EBA 218: Principles of Accounting II, 2016 79


MODULE EIGHT
ANALYSIS OF FINANCIAL STATEMENT
Key source of Data:
(a) The statement of profit or loss for the period (Income Statement). It is basically
revenues matched against expenses for the period.
(b) A statement of financial position of a company at a particular date (The Statement of
Financial Position). It expresses the Accounting Equation in the form
Assets = Owners’ Equity + Liabilities

Ratio Analysis
Ratio analysis describes the significant relationship which exists between the figures shown in
the financial statements of an enterprise. It expresses a proportionate relationship between
two figures shown in a financial statement.

Financial statement analysis is important to:


- Creditors/Suppliers
- Management
- Shareholders
- Customers/Debtors

Classification of Key Ratios


1. Liquidity Ratios
2. Efficiency/Activity Ratios
3. Gearing Ratios
4. Profitability Ratios
5. Investment Ratios

EXHIBIT 1:
Kakabo Company Limited
Profit And Loss Account for the Year Ended 31st December
All figures in Cedis
2005 2004
Turnover 2,867,543 2,765,430
Less Cost of Sales 2,456,890 2,346,100
Gross Profit 410,653 419,330
Direct Operating Expenses 355,112 284,177
Admin. & General expenses 86,323 77,965
Total expenses 441,435 362,142
Net Profit before interest and Tax (30,782) 57,188
Interest (10,778) (8,314)
Net Profit before tax (41,560) 48,874
Taxation (375) (17,625)
Dividend - -
Retained earnings (41,935) 31,249

80
EBA 218: Semester 2, January, 2015
Statement of Financial Position as at 31st December
2005 2004
Fixed Assets 26,543 29,560
Long-term investments 5,871 4,805
32,414 34,365

Current Assets

Stocks 162,421 206,500


Debtors 112,520 80,813
Short-term Investments 2,142 13,250
Bank and Cash Balances 10,754 287,837 22,259 322,82
2

Less Current Liabilities


Bank Overdraft 110,559 115,856
Creditors 35,343 40,812
Provision for Taxation 1,146 147,048 140,789 19,024 166,69 158,130
2
Net Assets/Capital 173,203 190,495
Employed

Financed by
Capital 173,203 190,495

Note:
Cost of sales include purchases of GH¢1,946,300 in 2005 and GH¢1,686,990 in 2013.

LIQUIDITY RATIOS
These rations measure the company’s ability to meet its short-term financial obligation. That
is, they measure the short-term financial stability of the company and reveal its ability to meet
current liabilities as and when they fall due.

Types
(a) Current/Working Capital Ratio: It shows the number of times the company’s current
assets can cover its current liabilities. It measures in general terms, the ability of a company
to meet its short-term liabilities as they fall due out of its current assets.

It is calculated as: Current Assets


= n times or n : 1
Current Liabilities

Generally, current ratio around 2:1 is preferred but what is an ideal current ratio differs from
industry to industry. The higher the ratio, the more solvent (in the short run) the business is.
However, if the ratio is too high it indicates under-trading or holding of excessive liquid
funds.

Using Exhibit 1
287,837
 Current Ratio (2005) = 1.96 : 1 or 1.96 times
147,048

 Current Radio (2004) 322,822 = 1.94 : 1 1.94 times

EBA 218: Principles of Accounting II, 2016 81


166,692
The above implies that for every GH¢1 of current liabilities on the short-term basis, the
company has GH¢1.96 of current assets to cover it in 2005. Also, for every GH¢1 of current
liabilities in the short-term basis, the company has GH¢1.94 of current assets to cover it in
2004.

(b) Quick/Acid-test Ratio: The ratio indicates the relative amount of assets in cash or
which can be quickly converted into cash (i.e. current assets minus stock and prepayment),
available to meet current liabilities. The ratio thus measures the company’s ability to meet its
short-term debt out of its current assets without stock and prepayment, if any.

It is calculated as:
Current Assets – (Stock + Prepayment)
= n: 1 or n times
Current Liabilities

A Quick Ratio of about 1:1 is generally satisfactory but what is ideal depends on the industry.

Using Exhibit 1
287,837- 162,421
 Quick Radio (2005) = 0.85:1 or 0.85 times
147,048

322,822- 206,500
 Quick Radio (2004) = 0.70:1 or 0.7 times
166,692

ACTIVITY/EFFICIENCY RATIOS
These ratios measure the degree of efficiency in the use of the company’s resources to
generate revenue and profit. That is, how competent the management has been in managing
its working capital.

Types
(a) Debtors Collection period/Debtors Turnover Ratio
This ratio measures how many times it takes the firm to receive money from debtors or how
long it takes for the debtors to pay their debts within an accounting year. It thus shows the
average credit period granted to credit customers.

It is calculated as:
Net Credit Sales
 How many times = = n:1 or n times
Debtors

Debtors x N
 How long = = n days/weeks/months
Net Credit Sales

N = number of days, weeks or months in the year

Note:
If the value of credit sales is not given, take the Net Sales given. Net Sales is total Sales less
returns Inwards.

The debtor period should be compared with the company’s credit policies. At any point in
time, the debtor period should be better than the credit policy of the company. This is

82
EBA 218: Semester 2, January, 2015
because every company’s credit policy should be such that the debt of the company could be
recovered.
The interpretation of the debtor period calculated should be made based on the company’s
credit policy. One cannot just look at the figure and conclude that it is too short or long. The
interpretation can also be done by comparing the debtor period with the creditor period. It is
not preferable when the creditors’ period is shorter than the debtor period.
Using Exhibit 1
112,520
 Debtors period (2005) = × 365 = 15 days
2,867,543

80,813
 Debtors period (2004) = x 365 days = 11 days
2,765,430

* Assume the credit policy of the company is for debtors to pay in 20 days.

 Comments:
Management has been efficient in recovering its debts. However, management has
relaxed a little bit since the collection period has gone up by 3 days from 2004 to
2005.

* Management should be interested in the debtors’ period to ascertain that debtors are
paying their debts in time. Management should not relax for customers to pay as and
when they like.

* The debtor period/credit policy gives an indication of how efficient management has
been in recovering its debts.

(b) Creditors payment period/creditors turnover ratio


The ratio measures how many times the firm pays money to its creditors or how long it
takes the firm to pay its creditors within an accounting period. The ratio thus, shows
the average credit period granted by credit suppliers.

It is calculated as:
Credit Purchases
(i) How many times - = n times
Creditors

Creditors x N
(ii) How long - = n days/weeks/months
Credit Purchases
NB: If the value of purchases is not given, take the cost of sales.

Using Exhibit 1
35,343 x 365
 Creditors period (2005) = = About 7 days
1,946,300

 Creditors period (2004) = 40,812 x 365 = About 9 days


1,686,990

NB: Any creditor period calculated should be compared with the supplier’s credit period.

EBA 218: Principles of Accounting II, 2016 83


Reasons Why Management Should Show Interest in Creditors Period
1. It gives an idea on how management can set their credit policy.
2. If management is unable to pay its creditors, they may lose supplies.
3. To protect the company’s image as far as settlement of debt is concerned.
4. Suppliers might increase their profit margin in dealing with a firm which has a long
credit period (i.e. interest may be charged on overdue debt).
5. Such that the company will not go into bankruptcy.

(c) Stock Turnover Ratio/Rate of Stock Turn:


The ratio measures the rate the firm changes its stock into cash or sales. It is
calculated as:
(i) How many times = cost of sales
= n times
Average stock

Average Stock x N
(ii) How long = = n days/weeks./months
Cost of Sales
Note:
 Average stock = (opening stock + closing stock) ÷ 2
 If opening stock is not given, then the closing stock figure is the average stock
 A very high ratio can indicate stock shortage.
 A low ratio (when the period is long) indicates
- A slowdown in turnover
- Over-stocking (excessive investment in stock) or obsolescence
Using Exhibit 1
= 162,421
x 365 = About 24 days
 Stock turnover ratio (2005) 2,456,890

Or
2,456,890 = 15.12 times
162,421

 =
Sto 206,500 x About
ck turnover 365 32
ratio 2,346,100 days
(2004) =

Or
2,346,100
= 11 times
206,500
GEARING RATIOS
These ratios measure the company’s ability to meet its long-term debts.
Types
Capital Gearing Ratio: This ratio measures a company’s debt position in relation to its
capital employed. A company is considered highly geared if its capital gearing ratio is greater
than 50%.
It is calculated Long-term Debt x 100
as: Capital Employed

The ratio thus shows how much of the capital employed is being sourced (financed) by long-
term debt.
Using Exhibit 1
84
EBA 218: Semester 2, January, 2015
 Capital Gearing 107,776 x 100
= = 62.2%
(2005) 173,203

 Capital Gearing 82,133 x 100


= = 43.6%
(2004) 190,495

 Preference shares should be part of long-term debt if any.


Comment:
 62.2% of the capital employed in 2005 is being sourced from long-term debt and 43.6% of
capital employed is being sourced from long-term debt in 2004.
 There was an increase in long-term debt from 2004 to 2005 and a decrease in capital
employed hence the increase in capital gearing ratio from 2004 to 2005.

(b) Debt-Equity Ratio: The ratio measures the company’s level of debt in relation to its
equity.

It is calculated Long-term Debt x 100


as: Shareholders’ Fund

 Shareholders Fund = Share Capital + Surplus

A debt equity ratio of 100% means that the company’s debt is equal to its equity. If the ratio
is greater than 100%, then the company is considered as highly geared (the company has more
debts than its equity).

Using Exhibit 1
 Debt Equity Ratio 107,776 x 100
= = 165 %
(2005) 65,427

 Debt Equity Ratio 83,133 x 100


= = 77%
(2004) 107,362

Interpretation:
2005: If we take a debt of GH¢1.65, we have equity of GH¢1
2004: If we take a debt of 70Gp, we have GH¢1 as equity.

Interest Cover: The Interest cover shows how many times a company can cover its current
interest payment out of its current profits, and indicate whether servicing debt may be a
problem. An interest cover of more than seven times is usually regarded as safe, and an
interest cover of more than three times as acceptable. A ratio below three times is not safe.

Profit/Earnings before interest and


It is calculated as tax
Interest charges

Using Exhibit 1
(48,874+8,314)
 Interest cover (2004) = = 6.9%
8,314

EBA 218: Principles of Accounting II, 2016 85


Factors to Consider Before Taking More Debts
1. Current gearing position.
2. Business confidence and expectation of future profit.
3. Restrictions from previous borrowing (e.g. the company might have signed a bond in
its previous borrowing not to borrow again).

Question:
How different is the capital Gearing Ratio from the debt Equity Ratio?
Suggested Solution:
In capital gearing ratio, we look at long-term debt in relation to capital employed whereas in
debt equity ratio, we look at the long-term debt in relation to shareholders’ fund.
PROFITABILITY RATIOS
These ratios measure the degree of profit earning capacity in terms of certain values that
contribute towards profit earning.

Types
(a) Returns on Capital Employed (ROCE)
= Earnings Before Interest and Tax (EBIT)
Capital Employed

Earnings/Profit before interest and tax is often called operating profit. Capital employed is
simply total assets less current liabilities or shareholders’ funds plus long-term debt or fixed
assets plus net working capital.

Using Exhibit 1
(30,7820 ×
 ROCE (2005) = 100) = (17,8%)
173,203

57,188 × 100
 ROCE (2004) = = 30%
190,495

Interpretation
2004: 30% means that for every GH¢1 put in the business, a return of 30Gp is made or
management are able to use GH¢1 to generate GH¢1.30.

2005: (17.8%) means that for every GH¢1 put in the business, a loss of about 18Gp is made
or management are using GH¢1 to generate 82Gp.

(b) Gross Profit Margin:


= Gross Profit x 100
Net Sales

Using Exhibit 1
 Gross profit margin 410,653 x 100
= = (14,3%)
(2005) 2,867,543

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EBA 218: Semester 2, January, 2015
419,330 x
 Gross profit margin
= 100 = (15,2%)
(2004)
2,765,430

Interpretation
 For a company to achieve an increase in Gross Profit margin, its turnover must increase
more than its cost of sales.

Percentage change in Profit = P1 – Po


x 100
Po
Where P1 is the current year’s profit and P0 is the previous year’s profit

Using Exhibit 1

(2,456,890 – 2,346,100) x
Percentage change in cost of sales (2004 – 2005) = 100 = 4.7%
2,346,100

(2,867,543 – 2,765,430) x
Percentage change in turnover (2004 – 2005) = = 3.7%
100
2,765,430

 From the above computations, the percentage change (increase) in cost of sales is greater
than the percentage change (increase) in turnover, hence the reduction in Gross profit margin
between 2004 and 2005.

 A high gross profit margin is better in terms of profit earning potential but it does not
necessarily result in a large absolute figure for gross profit unless it is accompanied by a large
volume of sales.

Promoting Sales While Reducing Cost of Sales


A manager can turn the performance of the company around by looking at its cost of sales or
turnover.

Factors:
- Offer discount for bulk purchases (quantity discount).
- Buy in bulk from a supplier to get trade/quantity discount.
- Bargain for good/better terms of trade like discount, free transportation etc.
- Come out with good/quality/reliable products to enhance sales.
- Examine demand whether it is elastic or inelastic. If elastic, then reduce the price a
little. If demand is inelastic, increase price; then embark on sales promotion.

(c) Net Profit Margin:


= Net Profit before Int. and Tax x 100
Net Sales

The ratio, when related to Gross Profit Ratio, indicates the degree of efficiency in controlling
administration general, selling and distribution overheads.

EBA 218: Principles of Accounting II, 2016 87


Using Exhibit 1

 Net profit margin (2005) = (30,782) x 100


= (1.07%)
2,867,543

 Net profit margin (2004) = 57,188 x 100 = 2.06%


2,765,430

 Percentage change in total (441,435 - 362,142) x


expenses = 100 = 21.9%
362,142

 Percentage change in turnover = 3.7% (calculated previously)


From the above calculations, it is seen that the percentage increase in expenses, is greater than
the percentage increase in turnover, hence the decrease in the net profit margin from 2004 to
2005.

Reducing Expenses
(i) Ensure proper supervision.
(ii) Reduce maintenance cost. E.g. employees can be made to use their own cars where they
will be paid some amount as fuel and maintenance allowance instead of using company’s
cars.
(iii) Adopt the practice of engaging service organizations e.g. security agencies, Cashiers etc.
so that management can concentrate on the core activities of the firm.
(iv) Encourage the use of Information Technology for the company’s operations to help
reduce labour cost.

(d) Net Asset Turnover: It measures productivity and efficiency. That is, how best
management has been able to use funds to generate sales (with respect to productivity and
efficiency).
Sales = n
It is calculated as: =
Capital Employed times
Using Exhibit 1
 Net Asset Turnover 2,867,543
= = 14.5 times
(2005) 173,203

 Net Asset Turnover 2,765,430


= = 16.6 times
(2004) 190,495
INVESTOR RATIOS:
Investor ratios are used in assessing the effects of proposed financing. These are ratios
normally used by investors or analysts to help them decide either to buy, hold, or sell shares
in a particular entity.

Types
(a) Returns on Equity (ROE): Whereas ROCE looks at overall return to all providers of
finance, ROE compares the earnings attributable to ordinary/equity shareholders with the
book value of their investment in the business.

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EBA 218: Semester 2, January, 2015
Earnings After Tax and Pref. Dividend (EATPd)
It is calculated as:
Shareholders Fund

ROE must be compared with the risk free rate of the economy. If the ROE is lower than the
risk free rate, it means that management has not done well. This is because, shareholders by
investing their monies in shares means they are taking risk for themselves and should
therefore earn more from their investment.

Using Exhibit 1
(41,935) x 100
 ROE (2005) = 173,203 = (24.21%)

= 31,249 x 100
 ROE (2004) = 190,495 = 16.40%

(b) Earnings Per Share (EPS): This ratio is used as a measure of a company’s performance and
very important for comparing results for a period of time. A company must be able to
sustain its earnings in order to pay dividend and re-invest in the business for further growth.
Investors are always interested in the growth in earnings per share. EPS shows that amount
that will be paid to Equity Shareholders per share if all earnings after tax and Pref. Dividends
were paid as dividend. Earnings per share is regarded as a key ratio by stock market
investors.
EATPd
It is calculated as:
No. of Equity Shares

(c) Dividend Per Share (DPS): This measures the relative amount attributable to every
Equity/Ordinary share . Dividend per share is part of earnings per share that is given out to
equity shareholders as dividend. While the total dividend paid change from year to year,
individual shareholders will expect that dividend per share will not decrease

Proposed Equity/Ordinary Dividend


It is calculated as:
No. of Equity Shares

Self-Test
1 The following statements were prepared by the accountant of Subanpa Company Ltd:
Subanpa Company. Ltd
Trading, profit and loos Account for the year ended 31/12/09
GH¢ GH¢
Sales 680,000
Less: Cost of sales
Opening stock 165,750
Add purchases 484,500
Goods available for sale 650,000
Less closing stock 242,250 (408,000)
Gross profit 272,000
Administration expenses 130,000
Selling and distribution 100,000
expenses
Financial expenses 8,000 (238,000
)
Net profit 34,000

EBA 218: Principles of Accounting II, 2016 89


Statement of Financial Position as at 31/12/09
GH¢ GH¢ GH¢
Fixed Asset at cost 255,000
Less: Depreciation 85,000 170,000

Current Assets
Stock 242,250
Trade debtors 93,680
Cash and Bank 46,570 382,500

Less Current Liabilities


Creditors 127,500
Working capital 255,000
Capital employed 425,000

Financed by:
Capital 361,250
Long term debt: 7% loan 63,750
425,000
You are required to compute the following:
(a) Current ratio; (e) Rate of stock turnover;
(b) Acid Test ratio; (f) Returns on capital employed;
(c) Debtors collection period (in month); (g) Net profit margin;
(d) Creditors payment period (in month); (h) Gross profit margin;

2. Below are the financial statements prepared by the accountant of Antwiwaa Company
Limited.

Trading, profit and loss and income surplus account for the year ended 31 st December,
2008
GH¢ GH¢
Stock 140,000 Sales 447,500
Add purchase 295,000
435,000
Less stock 162,500
272,500
Gross profit c/d 175,000 _
447,500 447,500
Total expenses 140,000 Gross profit b/d 175,000
Net profit c/d 60,000 Discount received 25,000
200,000 200,000
Dividends 35,000 Net profit b/d 60,000
Balance c/f 40,000 Balance b/d 15,000
75,000 75,000

90
EBA 218: Semester 2, January, 2015
Statement of Financial Position as at December 31st, 2008
GH¢ GH¢
Stated capital 532,500 Total fixed assets at cost 945,000
Income surplus 40,000 Less: Depreciation 120,000
572,500 825,000
8% Debenture 300,000
Current Liabilities Current Assets
Trade creditors 22,500 Stock 72,500
Bills payable 44,000 Debtors 31,000
Bank overdraft 18,500 Bills receivable 45,000
Proposed dividends 35,000 Cash 19,000
992,500 992,500

You are required to calculate the following


(a) Gross profit percentage (e) Capital employed
(b) Rate of stock turnover (f) Current ratio
(c) Acid rest ratio (g) Net profit percentage
(d) Working capital

3. The summarised accounts of Amanfo limited for the years 2008 and 2009 are given below.
Trading, profit and loss accounts for the year ended 31st December.
2008 2009
GH¢ GH¢
Sales 200,000 280,000
Less: cost of sales 150,000 210,000
Gross profit 50,000 70,000
Less:
Administration expenses 38,000 46,000
Interest on debenture _ 4,000 50,000
Net profit 12,000 20,000

Statement of Financial Position as at 31st December


2008 2009
GH¢ GH¢
Fixed assets at cost 110,000 140,000
Current assets:
Stock 20,000 30,000
Debtors 25,000 28,000
Bank 5,000
45,000 63,000
Less Current Liabilities:
Creditors 15,000 12,000
Bank 10,000 25,000 20,000 - 51,000
130,000 191,000

Financed by:
Ordinary share capital 100,000 100,000
Profit and loss 30,000 41,000
account
8% Loan _ 50,000
130,000 191,000

EBA 218: Principles of Accounting II, 2016 91


Stock at 1st January, 2008 was GH¢50,000

You are required to calculate the following ratios for 2008 and 2009
(a) Stock turnover (d) Current ratio
(b) Net profit; sales (e) Net profit; capital employed
(c) Quick (acid test) ratio

4. The summarised accounts of Nana Limited and Kaas Limited for the year ended 31st
December, 2009 are given below:
Income Statement for the year ended 31st December, 2009
Nana Ltd Kaas Ltd
GH¢ GH¢
Turnover 200,000 280,000
Less: cost of sales 150,000 210,000
Gross profit 50,000 70,000
Less: Administration expenses 38,000 46,000
Interest on loan 4,000 50,000
Net profit 12,000 20,000

Statement of Financial Position as at 31st December, 2009


Nana Ltd Kaas Ltd
GH¢ GH¢
Non-Current Assets 110,000 140,000
Current assets:
Inventories 20,000 30,000
Accounts Receivable 25,000 28,000
Bank 5,000
45,000 63,000
Less Current Liabilities:
Accounts Payable 15,000 12,000
Bank 10,000
20,000 25,000 20,000 - 51,000
130,000 191,000
Financed by:
Capital 130,000 141,000
8% Loan _ 50,000
130,000 191,000
The purchases for the year for Nana Ltd and Kaas Ltd were GH¢124,500 and GH¢144,600
respectively.
a. You are required to calculate the following ratios for the two companies
i. Debtors’ collection period iv Creditors’ payment Period
ii. Current ratio v Net profit margin
iii. Returns on stock turn vi Quick (acid test) ratio
[Assume a 365 days in a year]
b. Drawing upon your knowledge of accounting, comment on the differences and similarities
of the ratios for the two companies. Which company seems more efficient?

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EBA 218: Semester 2, January, 2015
5. At the just ended financial year, the management of Abronomah Limited observed little
deadline in the company’s performance as revealed by the following financial statements.

31/1209 31/12/08
GH¢ GH¢
Turnover 413,000 357,740
Cost of sales 295,720 260,800
Gross Profit 117,280 96,940

Current Assets
Stocks 23,800 21,800
Debtors (Note 1) 80,180 69,480
Short-term investment 840 3,760
Cash at Bank and in hand 9,640 9,600
114,460 104,640
Current Liabilities
Creditors (Note 2) 74,140 64,800
Loans and Overdraft 12,400 9,340
Corporate taxes 3,840 2,860
Dividend 9,820 7,060
100,200 84,060
Net current assets 14,260 20,580

Notes
31/12/09 31/12/08
GH¢ GH¢
1. Accounts Receivable 65,960 47,080
2. Accounts Payable 47,240 42,160

Required
Using relevant ratios analyse the company’s profitability, liquidity, and efficiency
performance situations and comment on your results.

Self-Test
Question One
Mr. Asembebadabi, a sole trader, started business on 1st January, 2013 with a capital of
GH¢6,000 which he paid into the business bank account. He paid rent for the year amounting
to Gh¢2,400 and bought fixtures and fittings worth GH¢1,800, all by cheque. Other
transactions during the year ended 31st December, 2013 were as follows:
a) Goods purchased within the year (all on credit) amounted to GH¢23,305.
b) Goods which cost GH¢19,940 were sold for Gh¢26,065, all on credit.
c) Miscellaneous business expenses (other than rent) paid amounted to Gh¢1,832.
d) Cash received from debtors amounted to GH¢22,497.
e) Cash paid to creditors amounted to GH¢19,186.
f) Cash withdrawn by proprietor for private use amounted to GH¢2,500.

The following information is also available:


i. Miscellaneous expenses paid in advance amounted to GH¢35, while those due but not paid
amounted to GH¢140.
ii. Fixtures and Fittings to be depreciated by 10 per cent.
iii. All cash receipts and payments were made by cheque.
EBA 218: Principles of Accounting II, 2016 93
You are required to prepare:
a) Appropriate ledger accounts to determine the following balances:
i. Accounts Receivable
ii. Accounts Payable
iii. Bank
iv. Inventories
b) An income statement for the year ended 31st December, 2013 and a Statement of Financial
Position as at that date.

Question Two
In April, 2014, Mrs. Hweyie received her monthly bank statement for the first quarter of
2014, which showed that there was a debit balance of GH¢21,290. This balance was not in
agreement with the balance shown in the bank column of her cash book. The chief cashier
carried out a reconciliation, which revealed the following:
a) a) Bank charges for the quarter ended 31st March, 2014, amounting to GH¢480 had
been omitted from the cash book;

b) A page in the cash book of debit entries had been undercast by GH¢6,000 and the
incorrect total carried forward to the next page;

c) A dividend cheque received for GH¢3,400 had been entered twice in the cash book;

d) An agent at Berekum had paid into a local bank a sum of GH¢15,500, but this was not
shown in the bank statement;

e) A standing order of GH¢1,100 to a trade association was duly paid by the bank but
there was no entry in the cash book;

f) Cheques totaling GH¢49,200 had been delivered to suppliers on 30th March, 2014 but
none of these had yet been presented to the bank;

g) A cheque for GH¢1,540 had been received from a customer on 25th March, 2014 but
had been entered in the cash book as GH¢1,450;

h) Mrs. Sankofa had entered into a hire purchase agreement for equipment. This required
GH¢1,200 to be paid every month for two years. The first payment was due on 20th
January, 2014. This amount was correctly entered by Mrs. Sankofa but the bank had
inadvertently debited another person;

i) The bank statement revealed a credit transfer received, for GH¢2,910 but after
inquires it was discovered that this related to another customer of the bank;

j) The bank statement recorded that a cheque for GH¢1,850 paid into the bank had been
subsequently dishonoured. Mrs. Sankofa was unaware of this.

You are required to prepare a:


i. Corrected Cash Book
ii. Bank Reconciliation Statement as at 31st March, 2014.

94
EBA 218: Semester 2, January, 2015
Question Three
Mr. Sankofa operates a restaurant on cash basis. All cash received are banked after deducting
the following expenses.
GH¢’000
Staff Wages 2,000
Cash purchases 500
Sundry expenses 100
Drawings (per week) 30
The following is the Bank Account of Mr. Sankofa:
Cash Book
GH¢’000 GH¢’000
Balance b/d (01/01/13) 2,000 Rent 500
Restaurant takings 26,000 Rates 400
Investment income 2,000 Electricity 220
Telephone 50
Advertising 200
New Equipment 400
Insurance 50
Repairs 300
Cash paid to Creditors 20,000
Deposit on private house 750
Income Tax 200
Balance c/d 6,930
30,000 30,000
The following additional information is available:
a) The balance extracted from the books are as follows:
31/12/12 31/12/13
GH¢’000 GH¢’000
Accrued electricity 30 40
Accounts Payable 1,500 2,000
Rate prepaid 100 150
Inventories 400 300

b) Equipment at cost of 01/01/13 was GH¢600,000. Depreciation is to be provided at 10% per


annum on cost.
c) Mr. Sankofa occupies an apartment in the restaurant, which attracts a rent of GH¢ 120,000.

You are required to prepare:


i. A Statement of Affairs as at 1st January, 2013;
ii. Appropriate ledger accounts to determine the amount to be transferred to the income
statement;
An income statement for the year ended 31st December, 2013 and a statement of financial

Question Four
a) Explain why an accountant provides for depreciation when measuring profit.
b) A company uses the straight-line method of depreciation. Applying this method, a
machine bought 5 years ago at GH¢10,000.00 have been fully depreciated at the end of
the fifth year with no residual value. The company does not however intend to scrap the
machine and proposes to work on it into the future. State how the machine would be
accounted for in subsequent year.

EBA 218: Principles of Accounting II, 2016 95


Question Five
Maame Antwiwaa Limited, manufacturers of sonata saloon cars, present to you the following
trial balance from their books at 31st December, 2013
GH¢ GH¢
Stated capital 200,000
Plan and Machinery less depreciation 180,000
Debtor/Creditors 120,000 110,000
Raw materials 31/12/13 21,700
Productive wages 490,000
Materials used in factory 210,000
Factory Expenses including depreciation of plant and machinery 140,000
Finished cars 01/01/13 in factory 3,300 cars 39,600
In warehouse (4,750 cars) 71,250
Sales (74,300 cars) 1,337,400
Unrealized profit on stock 01/01/2013 14,250
Administration and selling expenses 343,800
Bank balance 80,300
Income surplus 01/01/2013 35,000
1,696,650 1,696,650
Additional Information
a) During the year 70,000 saloon cars were produced completely. 72,000 cars were
transferred from the factory to the warehouse; these transfers are recorded in the factory
account and in the trading account at factory cost plus 25% mark up.
b) Closing stocks of manufactured cars in the factory are entered in manufacturing account at
factory cost. Closing stock of finished cars in the warehouse are entered in the trading
account at factory cost plus 25% mark up but are shown in the Statement of Financial
Position at factory cost.
c) There are no stocks of partly finished cars at either the commencement or end of 2013.

Prepare the following:


i. Manufacturing account
ii. Trading and profit/Loss account
iii. Statement of Financial Position as at 31/12/13 (ignore company taxation

Question Six
The following is the receipt and payments statement of Nkunim Sports Club for the year
ended 30th June, 2014.
GH¢ GH¢
Cash in hand b/d 1,600 Refreshments 13,600
Cash at bank b/d 6,000 Repairs and renewals 25,600
Subscriptions 128,400 Office Expenses 14,200
Life Membership fees 8,000 Rates and Insurance 9,000
Donations 50,000 General Expenses 7,200
New Sports 7,200
Equipment
Wages 55,800
Cash in bank 4,200
Cash in hand 1,000
Sports Supplies 46,200
Balance c/d 10,000
194,000 194,000

96
EBA 218: Semester 2, January, 2015
Assets and liabilities at the beginning and end of the year are as follows:
01/01/13 30/06/14
GH¢ GH¢
Club chalet 150,000 150,000
Sports Equipment 16,800
Furniture and Fittings 12,000
Reserve Account life Membership 90,000
Subscriptions received in advance 3,200 2,600
Subscriptions owing 6,400 8,200
Sports supplies unutilized 16,800 13,400
Wages owing 2,400 3,200

Additional Information
a) Each new member pays a life membership fee of GH¢2,000 which is credited to the life
membership reserve accounts. When a member dies, the fee is transferred to the income
and expenditure accounts in the year of death. During 2013/14, six members died and four
new members were enrolled.
b) Depreciation is to be provided on sports equipment at the rate of 30% on cost and 10% on
furniture and fittings.
c) A set of golf clubs valued at GH¢3,000 has been donated to the club.
d) Subscriptions have been received as follows:
2012/2013: GH¢5,000, 2013/2014: GH¢120,800, 2014/2015: GH¢2,600. It is the policy of
the club to write off as bad all subscriptions, which remain unpaid at the end of the second
year.
e) Rates and Insurance paid in advance were GH¢1,000.
Prepare:
(i) Income and Expenditure Account for the year ended 30th June, 2014
(ii) Statement of Financial Position as at 30th June, 2014

Question Seven
You met Mr. Sansankroma in the bar of his golf club when the conversation turned to
accounting matters. He said it is not my policy to charge for depreciation on fixed assets. The
plant in my business is always maintained in first class condition. Discuss the differences
between maintenance and depreciation.

Question Eight
The following are the details of production cost for the year ended 31st December, 2012
GH¢
1st Jan. 2012: Stock of raw materials 500,000
Raw materials purchased 8,000,000
31st December, 2012: Stock of raw materials 700,000
Manufacturing (direct) wages 21,000,000
Royalties 150,000
Indirect Wages 9,000,000
Rent of Factory excluding administration and selling and distributing 320,000
blocks
Depreciation of Plant & Machinery in the factory 120,000
General indirect expenses 310,000
Prepare the manufacturing account of Maame Confectioneries.

EBA 218: Principles of Accounting II, 2016 97


Question Nine
Amansan records his transaction in a haphazard manner and has provided you with the
following information.
1st July 2013 30th June 2014
GH¢’000 GH¢’000
Fixed Assets (at cost) 8,000 7,000
Stock 6,000 7,500
Sales debtors 400 450
Purchases creditors 395 405
Cash in hand 100 -
Bank overdraft - 125
Salaries due 30 50
Amansan keeps a rough book in which he has recorded the following:
GH¢’000
Credit sales for the year 20,500
Credit purchases for the year 14,305
Cheques paid for salaries 2,300
Cheques aid for general expenses 1,800
He also inform you that the proceeds of fixed assets sold amounted to GH¢85,000 and that he
keeps no record of cheques drawn for himself after some discussions it is agreed to provide
for depreciation on fixed assets at 15% p.a. cost at year end. He has made some cash drawings
for private use but he is not sure of the total amount and has agreed that the difference of the
bank accounts should be treated as such.
a. Prepare
i. Statement of Affairs as at 1st July 2013
ii. Trading profit and loss account for the year to 30th June, 2014
iii. The Statement of Financial Position as at 30th June, 2014
b. Compute the:
Quick/acid test
Net profit margin
c. State Four advantages of control accounts

Question Ten
Kojo Mensa is a sole trader specializing in small works in the building trade. He has asked
you to prepare his accounts for the year ended 31st March, 2014 and agrees fee of
GH¢150,000 for the work. The business is too small to warrant the employment of a
bookkeeper and the accounting records consist of the following:
GH¢ GH¢
Capital 6,880,000
Loan (Mrs. Mensa – 10% interest) 1,260,000
Current Liabilities
Trade Creditors 451,000
Accrued Expense – Telephone 14,000
- Electricity 28,000 42,000
8,633,000
Fixed Assets (at written down value)
Equipment and loose tools 1,540,000
Garage 152,000
Calculator 20,000
Motor Van 428,000
2,140,000

98
EBA 218: Semester 2, January, 2015
Current Assets
Stock and work-in –progress 3,480,000
Debtors 2,753,000
Prepayments Road Tax 50,000
Van Insurance 60,000
Bank 140,000
Cash in hand 10,000 6,493,000
8,633,000

Summary of bank transaction for the year ended


GH¢ GH¢
Opening Balance 140,000 Materials purchased 2,891,000
Cash Banked 9,656,000 Telephone 123,000
Printing and stationery 39,000
Holiday at Labadi 360,000
Van Repairs 564,000
Rent (year to 30/06/14) 240,000
Rates (18 months to 30/09/14) 120,000
Road Tax (year to 31/3/16) 60,000
Van Insurance (year to 31/12/15) 96,000
Electricity 150,000
Plant Hire 1,801,000
Sundries 370,000
Bank charges 37,000
Cash drawn for private use 1,208,000
Balance 1,737,000
9,796,000 9,796,000

Question Eleven
Kojo Mensa keeps a list of payments made out of cash received from debtors. This cash is
kept in a till until it is banked.
GH¢
Paid to Creditors for material 473,000
Repairs to Equipment 25,000
Postages 31,000
Petrol for Van 683,000
Plant hire 36,000
Cash withdrawn 560,000
1,808,000
Inquires provided the following information
a. Balance as at 31/03/14 in Cash in till - GH¢20,000
b. Kojo Mensa expects all his fixed assets to have a four-year life from now.
c. Kojo Mensa received GH¢25,000 a week for six weeks during the year from a natural
sickness benefit scheme. This cash was put in the till with money received from
Debtors
You are required to prepare a Trading and Profit and Loss Account for the year ended
31/03/14 and a Statement of Financial Position as at that date, in a good columnar form.

EBA 218: Principles of Accounting II, 2016 99


Question Twelve
Adwoa Smart, a trader who does not keep proper books of accounts started trading. An
analysis of the bank statement of the business for year has the following details:
Receipts Payments
GH¢’000 GH¢’000
Capital 75,000
Loan from Paa Dokono 15,000
Cash banked 138,000
Premium on lease 31,500
Purchase of Motor van 10,500
Other fixed assets 30,450
Stock supplies 128,115
Rent 9,000
Rates 3,300
Utilities 1,425
Insurance 675
Telephone 300
Repayment of loan to Paa Dokono 7,500
Repairs to Motor van 510
Bank charges and interests 900
The following cash payment have been made out of takings.
GH¢
Drawing 11,700,000
Wages 8,400,000
Petrol 1,110,000
Sundry costs 915,000

At 31st July, 2014:


Stock was valued at GH¢18,000,000
Debtors amounted to GH¢6,150,000
There was cash of GH¢600,000 in the till.

The annual rent under the lease is GH¢12,000,000 and the premium on the lease is to be
written off in equal installments over its 21-year life span. Depreciation on Motor Van is 20%
per annum and 10% per annum on other fixed assets based on the book value at the year end.
Provision for doubtful debts is 20% of the year on debtor figure.

Prepare Adwoa Smart’s:


a) Trading, Profit and Loss Account for the year ended 31st July, 2014
b) Statement of Financial Position as at 31st July, 2014

100
EBA 218: Semester 2, January, 2015
Question Thirteen
Kizito is a business, which acts as a distributor of air conditions entirely on credit terms to a
wide range of customers. The following balances were extracted from its ledgers at 30th June
2011:
GH¢ GH¢
Sales – credit balance at 30 June 2000
th
723,869.00
Debit balance at 30th June 2000 84,611,.00
Purchase 342,916.00
Discounts 8,214.00 6,978.00
Cash receipt from debtors 699,267.00
Cash payment from suppliers 321,853.00
Returns inward 36,925.00
Carriage outwards 5,264.00
Overdraft Interest 12,748.00
Provision for doubtful debt at 30th June 2010 4,813.00

Subsequent enquires revealed the following:


a. A cheque for GH¢1,246,000.00 form Wofa, a customer, has been returned by the bank
marked “referred to drawer”. Bad debt totaling GH¢6,854,000.00 are to be written off
and the provision for doubtful debts is to be raised to 8% of the debtor balance at 30th
June 2011.
b. On the last day the cheque is received for GH1million from the liquidator of Susubribi
Ltd. This customer had owed Kizito GH¢7,500,000.00 when it ceased to trade in
March 2008 and the debt had been written off as a bad debt in the year ended 30th June
2008. No entry in respect of this cheque has yet been in the books

Prepare for the year ended 30th June 2001


i. The debtors ledger control account
ii. The bad and doubtful debts account
iii. The Statement of Financial Position extract for debtors

EBA 218: Principles of Accounting II, 2016 101


Objective Test
1. A sale of GH¢32,000 to G. Davies was entered in the books as GH¢23,000. The
accounting entries to correct this error are.
A. Debit G. Davies account GH¢9,000, credit sales account GH¢9,000.
B. Debit G. Davies account GH¢32,000, credit sales account GH¢32,000.
C. Credit sales account GH¢9,000, debit G. Davies account GH¢32,000.
D. Credit sales account GH¢32,000, debit cash account GH¢32,000.

2. A suspense account is opened when


A. There are errors in the Statement of Financial Position.
B. The profit of the year is negative. C. Purchases are more than sales.
D. The two sides of the trial balance do not agree

Use the items listed below to answer Questions 3and 4


I. Standing order
II. Unpresented cheques
III. Uncredited cheques
IV. Customers cheques dishonoured
V. Direct payment by customers to the bank

3. Which of the items could result in a higher bank statement balance when compared to
the cash book?
A. II and III only B. II and V only
C. I, II and III only D. II, III and IV only

4. Which of the items will be entered in the Adjusted Cash Book?


A. II and III only B. I, II and III only
C. I, IV and V only D. III, IV and V only

5. By the end of 2009, Josephine had paid by cheque, water bill amounting to GH¢2,000.
She owed GH¢200 at the beginning of the year but by 31st December, she had paid
water bill in advance of GH¢400. Her annual water bill was
A. GH¢2,600 B. GH¢2,400 C. GH¢1,800 D. GH¢1,400

6. A cheque of ¢600,000 received from Jonas was credited to the account of Jonah. This
is an error of
A. Original entry B. Commission C. Principle D. Omission

7. The debit side of a bought ledger control account contains the following items except
A. Bills payable B. Cash to suppliers C. Purchase from suppliers D. Returns outwards

8. Which of the following errors will not affect the agreement of the Trial Balance?
I. Error of omission II Understatement of sales in the sales ledger
III. Overstatement of debenture interest IVOvercast of closing stock
A. II, III and IV only B. I, II and III only C III and IV only D. I and IV only

9. On 1st July 2009, a sole proprietor owed GH¢500,000 for insurance premium. He paid
GH¢3,000,000 in the year ended 30th June 2010. On that date he still owed
GH¢750,000. What is the amount for insurance premium to be charged to the Profit
and Loss account on 30th June 2010?
A. GH¢3,750,000 B. GH¢3,250,000 C. GH¢2,750,000 D. GH¢750,000

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EBA 218: Semester 2, January, 2015
10. The balancing figure carried down on the credit side of the sales ledger control account
represents the total of
A. The sales daybook B. Cash sales C. Sales returns D. Debtors

11. Given opening credits of GH¢11,500,000, cash purchases of GH¢40,000,000, credit


purchases of GH¢48,000,000 and payments to creditors of GH¢45,000,000, the closing
creditors figure will be
A. GH¢8,500,000 B. GH¢14,500,000 C. GH¢18,500,000 D. GH¢83,000,000

12. If a trial balance does not agree, the difference that arises is entered in
A. The profit and loss account B. The capital account
C. A real account D. A suspense account

13. Which of the following errors will cause the trial balance to disagree?
A. Selling expenses debited to sales account
B. A cheque from Bawa for GH¢5,900 entered in the cash book and Bawa’s account
as GH¢9,500
C. Credit sale of goods for GH¢300,000 entered as GH¢30,000 in the debtors account
D. Purchase of office stationery for GH¢25,000 omitted from the books

14. What error is committed if a plant is purchased for GH¢8,800,000 but its value is
recorded in the books as GH¢8,080,000?
A. Principle B. Commission C. Reversal of entry D. Transposition of figures

15. Accounting errors are corrected through the general journal because
A. It provides a means for explaining double entries B. It saves the bookkeeper’s time
B. It is much easier to do D. It saves space in the ledger

Use the following information to answer Questions 16 to 21


Trial balance (Extract) as at 30/4/01
DR CR
GH¢ GH¢
Insurance 12,000 -
Rent 15,000 -
Additional information:
a) Insurance represents payment of premium by cheque covering 12 monthly installments
ending 31/03/01.
b) Rent covers a payment for 15 months beginning from 01/03/00. It was also settled by
cheque

16. The insurance owing in respect of the year ended 30th April, 2001 was
A. GH¢1,000 B. GH¢2,000 C. GH¢3,000 D. GH¢4,000

17. The insurance prepaid as at 1st may, 2000 was


A. GH¢1,000 B. GH¢4,000 C. GH¢8,000 D. GH¢11,000

18. What was the amount charged to the profit and loss account in respect of insurance for
the year ended 30th April 2001?
A. GH¢4,000 B. GH¢11,000 C. GH¢12,000 D. GH¢13,000

19. Rent prepaid on 30th April, 2001 was


A. GH¢1,000 B. GH¢2,000 C. GH¢4,000 D. GH¢5,000

EBA 218: Principles of Accounting II, 2016 103


20. What was rent prepaid on 1st May 2000?
A. GH¢11,000 B. GH¢12,000 C. GH¢13,000 D. GH¢14,000
21. The amount charged to the profit and loss accounts in respect of rent for the year ended
30th April, 2001 was
A. GH¢11,000 B. GH¢12,000 C. GH¢13,000 D. GH¢14,000

22. A provision for bad debt is created


A. When creditors become bankrupt B. When debtors exhibit credit worthiness
C. To provide for possible bad debts D. To write off bad debts

23. If a bookkeeper debits furniture account with a furniture repair expense of GH¢40,000,
he is said to have committed the error of
A. Original entry B. Commission C. Principle D. Reversal of entry

24. Which of the following items can cause a Cash Book (Bank Column) balance to be
lower than Bank Statement balance?
A. Dishonoured cheque B. Unpresented cheque
C. Standing order payment D. Wrong debit entry to the bank statement

25. Annual rent payable is GH¢500,000. Rent prepaid at 1st January 2010 was GH¢80,000
and rent accrued at 31st December 2010 was GH¢60,000. How much was paid in
respect of rent in 2010?
A. GH¢520,000 B. GH¢500,000 C. GH¢480,000 D. GH¢360,000

26. Which of the following is not posted to the debit side of the Purchases Ledger Control
account?
A. Returns outwards B. Discount received
C. Bills payable D. Carriage Outwards

27. A debit balance on a bank statement indicates that the/a


A. Bank is a debtor to the customer. B. Customer is a debtor to the bank.
C. Cheque issued by the customer has not been presented. D. Customer’s account is closed.

Use the following information to answer Questions 28 and 29.


Debtors Control Account
GH¢ GH¢
Balance b/d 2,600 Discount allowed 700
Bills receivable 2,014
Returns inwards 1,070
Balance c/d 10,740
33,164 33,164
28. What is value of sales during the period?
A. GH¢12,600 B. GH¢18,640 C. GH¢30,564 D. GH¢33,164

29. What is the amount of cash received from debtors?


A. GH¢10,740 B. GH¢12,600
C. GH¢12,754 D. GH¢18,640

30. When a bank account is overdrawn the cash book will show
A. An increase in asset B. A decrease in liability C. A Credit balance D. A debit balance

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EBA 218: Semester 2, January, 2015