Acc 201 Introduction To Financial Accounting I

UNIVERSITY OF MAIDUGURI
Maiduguri, Nigeria
CENTRE FOR DISTANCE LEARNING
MANAGEMENT SCIENCES
ACC 201: INTRODUCTION TO FINANCIAL ACCOUNTING I UNITS: 2
STUDY GUIDE
ACC 201 Introduction to Financial Accounting I Units: 2
GENERAL INFORMATION
Course Code and Title: ACC 201: Introduction to Financial Accounting I
Credit Unit: 2
Year: 2015
Total Hours - 28 hours @ two per Week of Study.
For any queries or Questions contact the Course Lecturer Using your email through the Centre for
Distance Learning Portal.
You are welcome to this study Unit. Each Unit is arranged to simplify your study. In each topic of
the Unit we have introduction, learning outcome, in-text information, in-text questions and
answers, summary and self assessment exercises. In-text questions and answers serve as
motivation for your reading and to encourage to pay attention to major points in the text. Tutors
will be available at designated contact Centre for Tutorial. Meet them to resolve your questions
and other guide. The Centre expects you to plan your work well. Should you wish to read further
you could supplement the study with more information from the list of references and suggested
reading available in each study Unit.
PRACTICE EXERCISES
SELF ASSESSMENT EXERCISES (SAES)
This is provided at the end of each topic or Study Session. The exercises can help you to assess
whether or not you have actually studied and understood the topic/study session. Solutions to the
exercises are provided at the end of the Study Unit for you to assess yourself.
HOW TO PREPARE FOR EXAMINATION
To prepare for the examination you should read and understand the Study Materials provided for
you on C.D.ROM, prints or downloads from the Portal.
Other things you need to prepare for examination include understanding all sample questions at the
end of every Study Session/topic Reading the suggested/recommended reading texts.
ASSESSMENTS
-The continuous assessment for all courses consist of 30%.
-The Examination shall make up 70% of the total Marks.
-Feedback and advice is a component of the continuous assessment
The Examination shall be conducted at the Centre for Distance learning (Centre). Students are to
come to the Centre on the Examination date with all the necessary requirements. The Examination
is Computer based or e-testing one.
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Study session 1: Final Account of a Sole Trader

Introduction
The main objective of this Statement is the determination or calculation of the gross profit and Net
Profit for the period. It is also in this account that the cost of obtaining the goods, usually referred
to as cost of goods sold or simply as cost of sales is calculated.
Learning outcomes:
At the end of this session, readers would be able to:-
1.1 Understand the steps involved in preparation of a Sole trader final accounts
1.2 Know some accounting terminologies
1.3 Prepare income Statement of a Sole Trader from trial balance
1.4 Prepared Statement of financial position
1.1 Steps involved in preparation of a Sole trader final account
The first step in the preparation of the final accounts is the compilation of a Trial Balance, with a
view to:
(a) Proving the arithmetical accuracy of the postings, and
(b) Providing in one statement a concise summary of the items, which are to be included in the
Income statement (i.e. Trading, Profit and Loss account) and the Statement of financial position
(i.e. Balance Sheet).
Debit balances recorded in the Trial Balance normally represent either assets, or losses and
expenses. The assets are entered in the Statement of financial position, while losses and expenses
are debited to the Income statement.
Credit balances represent liabilities, provisions, reserves, or revenues and gains. The liabilities are
entered in the statement of financial position as deductions from assets of the firm, while income
and gains are credited to the Income statement.
The main objective of this Statement is the determination or calculation of the gross profit for the
period. It is also in this account that the cost of obtaining the goods, usually referred to as cost of
goods sold or simply as cost of sales is calculated.
Another important function of this Statement of is that it enables the owner of a business to
compare the gross and net profit of a current period with the results attained in previous periods. It
is pertinent that, the component items in the Income Statement do not vary in any material effect
from previous and subsequent accounts, as this will make it impossible for any analyst to make
meaningful approximate comparison. This therefore means that the Income Statement should be
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standardized so that the same items should appear in similar form in the successive final accounts
so that an effective comparison may be made of one trading period with another.
The actual items in the Income Statements of different classes of enterprises or businesses will
necessarily vary depending on the nature of the nominal accounts in the respective business; for
example, a retailer selling rice or maize.
1.2 Accounting Terminologies

Business Organisations usually maintain four different accounts for the inventories/stocks function.
The accounts involved are:
i. Sales or Turnover account
ii. Returns inwards account
iii. Purchases account and
iv. Returns outwards account
The sales and the returns inwards accounts are accounts in which are recorded the respective goods
sold and goods returned by customers. The purchases account and the returns outwards account
contain transactions involving goods bought for resale and goods returned to suppliers respectively.
The usual practice is to maintain the sales account separately and not to deduct directly any goods
that have been returned by customers during the accounting period. The returns inwards account
serves as a contra to the sales account by recording all sales that have been returned by customers.
Being a contra account to the sales account means that it has a debit balance which when
transferred to the sales account at the end of the accounting period will show the net sales or
turnover of the organisation.
1.2.1 The accounting entries will be recorded as follows:
Dr. Bank/Cash or Debtors/Receivables Account
Cr. Sales or Turnover Account
With goods sold for cash or on credit
Dr. Returns inwards Account
Cr. Bank/Cash or Debtors/Receivables Account
With goods sold but returned by customers
Dr. Sales or Turnover Account
Cr. Returns inwards Account
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With the balance on the return inwards account
Similarly the purchases account is maintained separately by recording all goods bought for the sole
purpose of resale relating to the accounting period. The returns outwards account serves as a contra
to the purchases account. Into this account is recorded all purchases that were returned to suppliers.
Being a contra account to the purchases account means that it has a credit balance which when
transferred to the purchases account at the end of the accounting period will show the net purchases
of the business organisation.
1.2.2 The accounting entries will be recorded as follows:
Dr. Purchases Account
Cr. Bank/Cash or Creditors/Payables Account
With goods bought for cash or on credit
Dr. Bank or Creditors/Payables Account
Cr. Returns outwards Account
With goods bought but returned to suppliers
Dr. Returns outwards Account
Cr. Purchases Account
With the balance on the return outwards account
1.2.3 Carriage inwards and outwards
Carriage is an accounting terminology that refers to the cost of transport that a trading concern
incurs in moving goods meant for resale into or out of a firm. Where the carriage is charged for
delivering goods purchased, it is called carriage inwards. Carriage of goods upon sale out of a firm
is called carriage outwards.
Carriage inwards is a cost that is incurred in order to bring the goods into a condition that is
necessary for its sale and as such should be charged to the Income Statement. This is done by
adding the carriage inwards to the purchases figure in the Income Statement. This ensures that the
true cost of buying goods for resale is taken into account in calculating the gross profit of a
business.
Carriage outwards, however, is not considered as a relevant cost the purpose of which is to put the
asset into a saleable condition. It is therefore worthy to note that carriage outwards is an Income
statement item and for that reason is not included in the calculation of gross profit. This is because
carriage outwards is seen as expenses on sales and as a result is debited in the Income statement.
1.2.4 Drawings of goods or cash

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It is common in a one man business to find the proprietor making use of the products that he is
selling for his own benefit. The use of products or goods by a proprietor is usually termed
inventories/stocks drawings. The accounting effect of inventories drawings is that it reduces the
amount of cost of goods available for sale since the total goods bought for resale have been reduced
by the inventories/stocks drawings and as such the inventories/stocks drawings account must be
debited and the purchases account credited.
1.3 Preparation of income Statement of a Sole Trader from trial balance
Format for preparing final accounts of a sole trader
ADA SOLE TRADER

Income Statement for the Year Ended 31st December, 20XX
N N N
Sales/Turnover x
Returns inwards (x)
Net sales xx
Cost of goods sold:
Opening inventory/stock x
Purchases x
Add: Carriage inwards x
Wages x
Less: Return outwards (x)
Drawings (x)
Lost (x) x
Cost of goods available for sales xx
Less; closing inventory/stock (x) (xx)
Gross profits xx
Add other incomes:
Discount received x
Decrease in provision of bad and doubtful debts x
Received x
xx
Less Expense:
Carriage outwards x
Discount allowed x
Bad debts written off x
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Increase in provision of bad and doubtful debts x

Wages and salaries x
Rent and Rates x
Insurance x
Depreciation charges on non-current assets x (xx)
Net profits xx
1.3 Preparation of Statement of financial position

Statement of Financial Position as at 31st December, 20XX
N N N
Non-current Assets: Cost Dep. NBV
Land properties x (x) x
Fixtures x (x) x
Motor Vehicles x (x) x
xx (x x) xx
current Assets:
Inventory/stocks x
Accounts receivable/Debtors x
Less provision for bad debts (x)
Prepayments x
Cash at Bank x
Cash in Hand x xx
Total Assets xx
Equities and Liabilities:
Capital x
Add Net profit x
Less Drawings (x)
Proprietor Equities xx
Non-current liabilities;
Loans payable more one year x
Current Liabilities:
Accounts payable/Creditors x
Accruals or Outstanding’s expenses x
Bank Overdraft x xx
Total Equities and Liabilities xxx
Illustration 1.
The following trial balance was extracted from the books of AMA a Sole Trader as at 31st
December, 2013.
N N
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Capital 111,000
Inventory at 1st January, 2013 15,300
Purchases 142,400
Sales/Turnover 186,000
Account receivables 46,000
Account payables 22,000
Returns inward 5,000
Returns outward 2,000
Discounts allowed 2,500
Discounts received 2,000
Carriage inwards 2,000
Carriage outward 5,000
Drawings 2,800
Land and Building at cost 55,000
Motor vehicle at cost 20,000
Accumulated depreciation on Land properties 5,000
Accumulated depreciation on motor vehicle 1,000
Rent and Rates 6,000
Postage and Stationery 2,800
Electricity Bills 2,200
Salaries and Wages 10,000
Bad debts 2,400
Provision for bad and doubtful debt 1,000
Insurance 3,000
Cash at Bank 5,000
Cash in hand 2,600
________ ________
330,000 330,000
Additional information:
i. Inventory as at 31st December 2013 valued N15,500
ii. Goods worth N1,400 were consumed by the proprietor is yet to be recorded
iii. Prepayment: rent and rates N2,000, salaries and wages N4,000
iv. Accrued expenses: Electricity N1, 800, postage and Stationery N500.
v. Provision for bad and doubtful debts is to be reduced to N500
vi. Depreciate fixed assets on the following rate; Land properties 10% on cost, Motor vehicle 5%
on cost.
You are required to prepare:

(a) Income Statement for the year ended 31st December, 2013.
(b) Statement of Financial Position as at that date
Solution 1
AMA
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Income statement for the Year ended 31st December,2013

N N N
Sales 186,000
Lees return inwards (5,000)
Net sales 181,000
Less cost of goods sold:
Opening inventory 15,300
Purchases 142,400
Add carriage inwards 2,000
Less; Return inwards (2,000)
Drawings (1,400) 141,000
Cost of goods available for sales 156,300
Closing inventory (15,500) (140,800)
Gross profit 40,200
Add other incomes: discount received 2,000
Decrease on provision of bad debts 500
42,700
Less Expense
Discount allowed 2,500
Carriage outwards 5,000
Bad debts 2,400
Insurance 3,000
Rent and Rates (6,000 – 2,000) 4,000
Salaries and Wages (10,000 – 4,000) 6,000
Postages and stationery (2,800 + 500) 3,300
Electricity bills (2,200 + 1,800) 4,000
Depreciation: land properties (10% of 55,000) 5,500
Motor Vehicles (5% of 20,000) 1,000 (36,700)
Net profit 6,000
Statement of Financial Position as at 31st December, 2013

N N N
Cost Dep. NBV
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Non-Current Assets
Land properties 55,000 (10,500) 45,500
Motor Vehicles 20,000 (2,000) 18,000
75,000 (12,500) 62,500
Current Assets
Inventory 15,500
Less provision (500) 45,500
Prepayment: Rent and Rates 2,000
Cash at Bank 5,000
Cash in Hand 2,600 74,600
Total Assets 137,100
Equities and Liabilities
Capital 111,000
Add Net profit 6,000
Less Drawings (2,800 + 1,400) = (4,200)
Equity 112,800
Current Liabilities
Accrued; Electricity bills 1,800
Postages and stationary 500 24,300
Total Equities and liabilities 137,100
ITQ: The use of cash, products or goods by a proprietor in a business is usually called_____
ITA: Drawings
Summary
In study session 1 you have learned:
Steps involved in preparation of a Sole trader final account

Some accounting terminologies
How to Prepare income Statement of a Sole Trader from trial balance
How to Prepare Statement of financial position
Self-Assessment Questions (SAQs) for study session 1
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Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Write your answers in your study diary
and discuss them with your Tutor at the next study support meeting.
SAQ1
The following trial balance was extracted from the books of PELLA ENTERPRISES as at 31 st
December, 2014.
N N
Capital 125,000
Inventory at 1st January, 2014 14,500
Purchases 142,400
Sales/Turnover 232,200
Returns inward 4,200
Returns outward 2,000
Discounts allowed 2,500
Discounts received 5,800
Carriage inwards 1,500
Carriage outward 2,000
Drawings 5,800
Land and Building at cost 90,000
Fixtures and Fittings 18,000
Accumulated depreciation on motor vehicles 6,000
5% Loan from corporative society 20,000
Rent paid 9,800
Transportation 2,000
Sundry expenses 2,200
Bad debts 2,400
Provision for bad and doubtful debt 1,500
Interest received 3,000
Insurance 3,000
Electricity bills 1,800
Fixed Deposit account 15,000
Cash in hand 3,100
Bank Overdraft 6,000
________ ________
430,200 430,200
a) Inventory as at 31st December 2014 valued N13,000
b) Goods worth N200 taken Monthly by proprietor is yet to be recorded in the books
c) Rent paying N150 monthly in advance
d) Outstanding Electricity bills N600, for three months
e) Provision for bad and doubtful debts 5% is to be adjusted on Debtors’ balances.
f) Loan interest for the year was due but yet to be paid.
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g) Depreciate fixed assets on the following rate; Land and Building 25% on cost, Motor vehicle
15% on cost, fixtures and fittings 5%
You are required to:

i. Prepare Income Statement for the year ended 31st December, 2014.
ii. Prepare Statement of Financial Position as at that date
SAQ 2 Short answer Questions

1. An accounting terminology that refers to the cost of transport that a trading concern
incurs in moving goods meant for resale into or out of a firm is called___________
2. The use of products or goods by a proprietor is usually termed______________
3. In a trial balance of sole trader list Five (5) Items that would be found on Debit and Credit
sides.
4. A gross profit of Ama's business is N40, 700 and the followings were incurred; provision
for bad and doubtful debts is reduced by N300 Equipment’s cost N23,000 depreciation
charged at 10% to income statement for the year Operating expenses N25,500. Calculate the
net profit of the business.
5. Ama a sole Trader provides you with the following balances in regards to the business
transactions
Inventory at 1st January, 2013 N15, 300
Purchases N142, 400
Sales N186, 000
Return outwards N2, 000
Return inwards N4, 000
Carriage inwards N600
Closing inventory at 31st December N13, 000
Calculate the gross profit of the business.
References
ATSWA study Pack (2009) Basic Accounting Processes and System, ABWA Publishers,
Nigeria.
Frank Wood’s and Alan Sangster (2008) Business Accounting 1 Eleventh edition, prentice Hall
Pearson Education Limited, London
Igben, R.O.(2010). Financial Accounting made simple 2. Second edition, ROI Publishers,
Lagos Nigeria
Jennings A.R, (2005) Financial Accounting, Second Edition, Thomson Learning, Ashford
Colour Press, Gosport, Hampshire, UK.
Further Reading
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Lagos Nigeria
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Study Session 2: DEPRECIATION
Introduction
Capital expenditure like building, plant, fixtures and fittings do normally last for more than one
year. It is obviously possible that these assets may deteriorate with the passage of time due to its
usage. There is therefore the need to recognise the loss in the value of a non-current in the books of
accounts of businesses. If this is not done the value of non-current assets in the statement of
financial position will be overstated.
Learning outcomes:
2.1 Define Depreciation
2.2 Know the causes of depreciation
2.3 Learn the methods of calculating depreciation
2.4 Calculate depreciation charges for a particular period
1.1 Definition of Depreciation
The process of recognising the loss in the value of non-current assets as a result of using such assets
is called depreciation. The Nigerian SAS No. 9 states that depreciation “represents an estimate of
the portion of the historical cost or revalue amount of a non-current asset chargeable to operations
during an accounting period”. The standard also recognises the fact that depreciation for the
accounting period is charged to income either directly or indirectly. This definition implies that
depreciation is effectively an accrual technique, which matches the cost of a non-current asset with
the benefits, which are derivable from the asset.
Non-current Assets produce revenue through use rather than through resale. They can be viewed as
quantities of economic service potential to be consumed over time in the earning of revenues.
Depreciation recognition transfers a portion of acquisition cost and capitalised post acquisition cost
of non-current to an expense account called depreciation expense. The corresponding credit is the
provision for depreciation, a contra non-current assets account that reduces gross assets to net book
value. This expense is recorded as an adjusting entry at the end of each accounting period.
Depreciation expense could be classified as a selling or administrative expense, depending on the
assets function. Manufacturing firms include depreciation of plant and machinery or factory
building in the cost of goods produced. When the goods are sold, depreciation becomes part of cost
of goods sold. Certain types of non-current assets have unlimited useful economic lives, and so do
not require depreciation. This is usually true of land unless the land is an agricultural land or land
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acquired for extractive purposes. By contrast, buildings will normally have limited useful economic
life, and therefore, will normally be subject to depreciation.
You must note that the Provision for Depreciation account does not represent cash set aside for
replacement of non-current; nor does depreciation recognition imply the creation of reserves for
asset replacement.
1.2 Causes of Depreciation
There are several factors that contribute to depreciation of non-current assets. These factors or
causes can be classified as follows:
1.2.1 Physical deterioration: This is where the fall in value of a non-current asset is due to wear
and tear as a result of its constant use. Natural occurrences such as erosion, rust and decay will
certainly reduce the value of any non-current asset.
1.2.2 Economic factors: This is where an asset is put out of use even though it is in good working
condition. This occurs where an asset becomes out of date as a result of new inventions or
technological advancement. For example bakers use clay-moulded oven in baking bread. The
invention of gas-moulded oven will certainly render the former out of date. This factor of
depreciation is known as obsolescence.
Another situation closely linked with economic factors is where a non-current asset is rendered
useless as a result of the growth and changes in the size of business. A fisherman who uses canoe
may have to acquire a large fishing boat when the demand for fish increases beyond the capacity
that the canoe can cope with. In this situation you can clearly deduce that it would be more efficient
and economical to operate a large fishing boat than the canoe, and as a result the canoe will be put
out of use, though it is in good working condition. This factor of depreciation is known as
inadequacy.
1.2.3 Depletion: Natural resources such as mines, quarries, oil, coal and gas deposits become
worthless when the deposits or resources are depleted. These assets are called wasting assets. The
process of providing for the consumption of such assets is called depletion.
1.2.4 Time factor: There are certain assets that have specific period of legitimate life span. Assets
such as patent, copyrights, finance leases have a legal life fixed in terms of years. As and when the
years elapse, the value of these assets reduces. The cost of these assets must be spread over their
legal lives. The term used in recognising the fall in value of these assets is amortisation.
1.3 Methods of calculating depreciation
Depreciation is an attempt to allocate the cost of a non-current asset to each accounting period that
the asset is used to generate income or earnings. Depreciation may be calculated simply by
deducting the amount receivable when the asset is either sold or put out of use by the business from
the cost of the non-current asset. The amount that will be received when the asset is sold or put out
of use is technically termed the salvage value or the residual value of an asset. The cost less the
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salvage value is called depreciable value or amount. It is this depreciable value that the accountant
seeks to spread over the useful life of a non-current asset.
There are several methods of calculating depreciation. These include:

a. Straight Line Method
b. Reducing Balance Method
c. Sum-of- the-Years‟-Digits Method
d. Units-of-Output Method
e. Revaluation Method
f. Machine Hour Method
g. Depletion of Unit Method
The purpose of this manual is to explain in details only two of the methods mentioned above. The
straight Line or fixed instalment method and the reducing balance or diminishing balance method
will be discussed; the remaining methods will be treated in the next stage of the course.
In order to calculate the depreciation charge for a period, we need to know four factors:
i. The cost of (or revalue amount) of the non-current asset.
ii. The estimated residual value of the non-current asset.
iii. The estimated useful economic life of the non-current asset.
iv. The method of depreciation that is appropriate for the business.
1.3.1 Straight Line Method
The straight line method is the most widely used method of computing depreciation charge for
financial statement purposes. Under this method, an equal amount of depreciation is recorded for
each accounting period over the useful life of the non-current asset. The depreciation amount is
computed by dividing the original cost of the non- current asset less estimated salvage value by the
useful life of the asset. A mathematical formula can be deduced as follows:
Annual Depreciation = Original cost of Asset – Salvage Value

Useful Life of Asset
Illustration 1
On January 1, 2010 NOMA Limited purchased a motor vehicle for N5, 000,000. The motor vehicle
has an estimated useful life of five years with a salvage value of N500, 000.
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You are required to calculate the depreciation charge and accumulated depreciation for each of the
years and show the net book value as at the end of 2014 accounting period using the straight-line
method.
Solution
Annual Depreciation = N5,000,000 – N500,000
5
= N900,000
Year cost of Assets Depreciation Accumulated Dep. Net Book Value

N N N N
2010 5,000,000 900,000 900,000 4,100,000
2011 4,100,000 900,000 1,800,000 3,200,000
2012 3,200,000 900,000 2,700,000 2,300,000
2013 2,300,000 900,000 3,600,000 1,400,000
2014 1,400,000 900,000 4,500,000 500,000
1.3.2 Reducing Balance Method

Under this method of depreciation, the book value of a non-current asset at the beginning of the
year is multiplied by a fixed percentage to determine the depreciation for the accounting year. This
procedure is repeated in subsequent accounting periods so as to reduce the depreciable value of the
non-current asset to zero (i.e. reduce its cost to its residual value).
Illustration 1
On January 1, 2010 HAPS Limited purchased plant and machinery for N5, 000,000. It is the policy
of the company to charge depreciation on non-current assets at 15%.
You are required to calculate the net book value as at the end of 2014 accounting period using the
reducing balance method.
Solution to Illustration 1
Year cost of Assets Dep. rate Depreciation Accumulated Dep. Net Book Value
N N N N
2010 5,000,000 15% 750,000 750,000 4,250,000
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2011 4,250,000 15% 637,000 1,387,000 3,612,500

2012 3,612,500 15% 541,875 1,928,875 3,070,625
2013 3,070,625 15% 460,593.75 2,389,468.75 2,610,031.25
2014 2,610,031.25 15% 391,504.70 2,780,973.45 2,219,026.55
When a non-current asset is purchased during the year, depreciation is calculated to the nearest
month. In some organisations a full year’s depreciation charge is provided on non-current assets
acquired during the year irrespective of the period in which they were purchased. Where this is the
case any asset sold in the year will also not attract depreciation in the year of sale irrespective of the
time of sale within the accounting period.
1.3.4 Double entry records for depreciation

After calculating the depreciation charge for the accounting year you must record the amount in the
books of account. It is important for you to remember that the process of providing for depreciation
is recording for the use of non-current assets during the accounting period. This therefore means
that depreciation is revenue expenditure and as such must be recorded in the same manner that
accountants record normal business expenses.
The modern practice of recording depreciation treats depreciation as a contra to the non-current
asset account. The non-current asset account is maintained at its original cost. A ledger account
called “Accumulated Provision for Depreciation account” is opened and all depreciation
calculations are credited to that account, the corresponding entry being passed into the Depreciation
charge Account as a debit. The double entry is as follows:
Dr. Depreciation charge Account

Cr. Accumulated Provision for Depreciation Account
ITQ: The process of recognising the loss in the value of non-current assets as a result of using such
assets is called_____
ITA: Depreciation
Summary
Definition of Depreciation,
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Causes of depreciation,
Methods of calculating depreciation
Calculation depreciation charges for a particular period
SAQ1
On 1st June, 2011 KAKA PLC Bought plant and Machinery at the cost of N4, 000,000. The Non-
current asset in the company has an estimate of four years with a salvage value of N800, 000.
You are required to calculate the depreciation charge and accumulated depreciation for each of the
years and show the Net Book Value as at the end of the accounting period using the straight-line
method.
SAQ2
On January 1, 2011 HAPS Limited purchased plant and machinery for N4, 000,000. It is the policy
of the company to charge depreciation on non-current assets at 10%.
You are required to calculate the net book value as at the end of 2015 accounting period using the
reducing balance method.
SAQ3. Enumerate four (4) factors that contribute to depreciation of non-current assets.
Reference
Nigeria.
Lagos Nigeria
Colour Press, Gosport, Hampshire, UK
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Study Session 3: PARTNERSHIP ACCOUNT

Introduction:
Partnership is widely accepted as the relationship which exists between persons carrying on a
business in common with the objective of making a profit and sharing in agreed terms. Here we are
basically concerned with the statements of account keeping by the partnership business.
Learning outcomes:
3.1 Define a partnership
3.2 Know types of partnership
3.3 Know Partnership agreement/deed.
3.4 Know types of accounts kept by the partnership business
3.5 Prepare Income Statement of a partnership from trial balance
3.6 Prepare statement of financial position of a partners as at the year ended
1.1 Defining a partnership

Partnership is the relation which subsists between two or more persons carrying on a business in
common with a view of profit making. Therefore it has been widely accepted as the relationship
which exists between persons carrying on a business in common with the objective of making a
profit. However, personal liability of each partner for the firm’s debts is unlimited, and so an
individual’s personal assets may be used to meet any partnership liabilities in the event of
partnership bankruptcy.
1.2 Types of partnership

1.2.1 Limited partnership
This is the type of partnership where liability of the partnership is limited to the amount of
debts owed the business that is the amount of capital invested in the business which remain
unpaid. Therefore in this type of a partnership, when the business becomes insolvent, the
partner who has limited liability will only lose their invested capital and will not be required
to contribute anything in repaying the debts of the partnership.
1.2.2 Unlimited partnership
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This is a type of partnership where partners are liable to all the debts of the business up to
the extent of their personal assets when the partnership becomes insolvent. The partners
must pay the debts even if it means selling their personal properties in order to raise money
for that bankruptcy.
1.3 Partnership agreement

There is no rigid principle as regards the content of agreement in the Partnership business, but for
accounting purposes partners usually agree on;
i. Capital to be contributed by each partner
ii. Profit sharing ratio
iii. Rate of interest on capital
iv. Rate of interest on drawings
v. Salary payable to active partners
vi. Admission of a new partner
vii. Procedure on death, retirement and dissolution of the Partnership.
Where there is no Partnership agreement existing, the partnership Act 1890 provides the following;
i. Profits/losses are to be shared equally
ii. There is no interest allowed on capital
iii. Interest is not to be charged on drawings
iv. Salaries are not allowed
v. Any amount in excess of agreed capital contributed should be entitled to 5% interest per
annum.
1.3 Capital Account

The capital account of the Partnership business can be represented in two ways:
I. Fixed capital account: – under this way of keeping capital accounts of partners, the amount of
capital contributed by each partner remains fixed always in the capital account on the credit
balance.
II. Fluctuating capital account:- under this method of keeping capital accounts of partners, the
items affecting partners’ equity are adjusted on the capital account - that is items like drawings,
interest on capital, salary, shares of profits or losses.
21
1.4 Preparation of Income Statement of a partnership from trial balance
Illustration 1
Ma, Me and Mu, are in partnership sharing profits and losses in ratio of 3:2:1 respectively.
The following balances were extracted from the books of the business as at 31st December, 2013;
N N
Capital Account: Ma 20,000
Me 14,000
Mu 9,000
Current Account: Ma 1,400

Me 800
Mu 1,300
Bank Account 3,000
st
Stock as at 1 January, 2013 20,000
Purchases and Sales 85,000 150,000
Trade Debtors and Trade Creditors 23,000 35,000
Provision for bad and doubtful debts 1,000
Discounts 1,700 2,500
Land property at cost 60,000
Furniture and Fittings at cost 20,000
Provision for depreciation: Land property 9,000
Furniture and Fittings 2,000
Rent and Rates 4,000
Salary and wages 11,000
Electricity bills 4,000
Bad debts 1,300
Drawings: Ma 5,000
Me 3,000
Mu 2,000 ____
246,000 246,000
The following additional Information’s were given:
(i) Stock as at 31st December, N25,000
(ii) Prepaid rent and rate N1,000
(iii) Electricity bills outstanding N1,000
(iv) Provision for bad and doubtful debts is to be reduced at N 500
(v) Depreciate fixed assets on the following rates; Land property 15% on cost. Furniture
and Fittings 10% on cost.
(vi) Partnership agreement as follows:
22
Mu to be paid salary of N500 monthly

Interest on capital to be 10% per annum
Interest on drawings to be charged at 5% per annum
Required:
(a) Prepare Income Statement for the year ended 31st December, 2013.
(b) Partners current accounts in columnar form
(c) Statement of financial position as at that date
Ma, Me and Mu
Income Statement for the year ended 31st December,2013
N N N
Sales 150,000
Cost of goods sold:
Opening stock 20,000
Add purchases 85,000
Cost goods available for sales 105,000
Less closing stock (25,000) 80,000
Gross profit 70,000
Add other Incomes:
Discount received 2,500
Decrease on provision for bad debts 500
73,000
Less expenses:
Discount allowed 1700
Salary and wages 11,000
Rent and Rates (4,000-1000) 3,000
Electricity bills (4,000+1000) 5,000
Bad debts 1,300
Depreciation: land property (15% x 60,000) 9,000
Furniture’s and fittings (10% x 20,000) 2,000 (36,000)
Net profit 37,000
Appropriation:
Add Interest on Drawings: Ma (5% x 5,000) 250
Me (5% x3,000) 150
Mu (5% x 2000) 100 500
37,500
Less Interest on capital: Ma ( 10% x 20,000) 2,000

Me (!0% x 14,000) 1,400
Mu (10% x 9,000) 900 (4,300)
23
Salary paid to Mu (500 x 12) (6,000)

27,200
Profit sharing: Ma (3/6 x 27,200) 13,600
Me (2/6 x 27,200) 9,067
Mu (1/6 x 27,200) 4,533 (27,200)
0 0000
Partners’ Current account

Details Ma Me Mu Details Ma Me Mu
N N N N N N
Drawings 5,000 3,000 2,000 Balance b/f 1,400 800 1,300
Int.on drawings 250 150 100 Ints on capital 2,000 1,400 900
Salary - - 6,000
Balance c/d 11,750 8,117 10,633 Profit shared 13,600 9,067 4,533
17,000 12,267 12,733 17,000 12,267 12,733
Balance b/d 11,750 8,117 10,633
Statement of financial position as at 31st December, 2013
Non-current Assets: N N N
Cost Dep. NBV
Land property 60,000 (18,000) 42,000
Furniture and Fittings 20,000 (4,000) 16,000
80,000 (22,000) 58,000
Current assets
Stocks 25,000
Debtors 23,000
Less provision for doubtful debts (500) 22,500
Prepayment 1,000
Cash at bank 3,000 51,500
Total Assets 109,500
Equities
Capital account: Ma 20,000
Me 14,000
Mu 9,000 43.000
Current account: Ma 11,750
Me 8,117
Mu 10,633 30,500
Current liabilities:
Trade creditors 35,000
Accrued 1,000 36,000
Total Equity and Liabilities 109,500
24
Illustration 2. Abu, Isa and Zaka are partners in business sharing profits and losses in the ratio of
2:3:1. The following is the trial balance extracted from the partnership’s books of account as at
31st December 2012.
N N
Inventory as at Jan 1st 2012 40000
debtors/creditors 66200 31600
capital as at 1st 2012:
Abu 50000
Isa 80000
Zaka 40000
drawings: Isa 9000
Zaka 5100
purchase/sales 131600 230500
Wages 10500
current accounts:
Abu 8000
Isa 16000
Zaka 10300
loan: Isa 20000
Salary 20000
Land & building 59000
Cash 18580
rent and rates 4100
Insurance 10500
Furniture and fittings 51000
general expenses 9000
motor van 50000
sales/purchases returns 5742 5322
Discount 3600 2200
493922 493922
The following information was given as at year end;
1. Abu shall be entitled to an annual salary of N5000
2. Closing Inventory as at 31st December 2012 stood at N35000
3. Insurances is paid up to March 2013
4. Rent and rates outstanding is N1000
5. Provision for bad debts is 5% of annual debtors
6. Depreciate furniture and fittings at 5% and motor van at 10%
7. Interest on capital shall be 8% per annum
8. Interest on drawing 10%
9. Drawing limits of partners shall be N15000
10. Interest on loan is 15% per annum
You are required to prepare :
25
Income Statement for the year ended 31st December 2012, Appropriation account, partner’s
current account, partners’ capital accounts.
Statement of Financial Position as at that date.
Abu, Isa and Zaka
Income Statement for the year ended 31st Dec 2012.
N N N
sales 230,500
less sales return (5,742)
224,758
less cost of sales:

opening inventory 40,000
add purchases 131,600
less purchases returns (5,322) 126,278
cost of goods available for sales 166,278
less inventory (35,000)
131,278
Wages 10,500
cost of sales (141,778)
gross profit 82,980
discount received 2,200
85,180
less expenses:
Salary 20,000
rent and rates 5,100
Insurance 8,400
discount allowed 3,600
provision for bad debt 3,310
general expenses 9,000
depreciation on furniture and fittings 2,550
depreciation on motor van 5,000 (56,960)
net profit 28,220
Appropriation
N N N N
salaries: net profit 28,220
Abu 5,000
interest on drawings:
interest on capital: Isa (9,000 of 10%) 900
Abu (50,000 of 8%) 4,000 Zaka (5,100 of 10%) 510 1,410
26
Isa (80,000 of 8%) 6,400

Zaka (40,000 of 8%) 3,200 13,600 interest on loan:
Isa (20,000 of 15%) 3,000
share of profit:
Abu (2/6 of 14,030) 4,677
Isa (3/6 of 14,030) 7,015
Zaka ( 1/6 of 14,,030) 2,338 14,030
32,630 32,630
Partners’ current account

Abu Isa Zika Abu Isa Zika
N N N N N N
interest on drawings 900 510 balance b/d 8,000 16,000 10,300
interest on loan 3,000 Salaries 5,000
interest on
Drawings 9,000 5,100 capital: 4,000 6,400 3,200
balance c/d 21,677 16,515 10,228 share of profit: 4,677 7,015 2,338
21,677 29,415 9,728 21,677 29,415 9,728
balance c/d 21,677 16,515 10,228
Partners’ capital accounts

Abu Isa Zika Abu Isa Zika
balance c/d 50,000 80,000 40,000 balance b/d 50,000 80,000 40,000
50,000 80,000 40,000 50,000 80,000 40,000
balance b/d 50,000 80,000 40,000
Statement of Financial position as at 31st Dec

2012
Asset: N N N
land & Building 59,000 59,000
motor van 50,000 5000 45,000
furniture & fittings 51,000 2,550 48,450
160,000 7,550 48,450
current asset:
Stock 35,000
Debtor 66,200
less provision for bad debt (3,310) 62,890
Cash 18,580
prepayment insurance 2,100
118,570
less current liabilities:
Creditors 31,600
27
accruals rent & rent 1,000 (32,600)

85,970
238,420
financed by:
capital: Abu 50,000
Isa 80,000
Zaka 40,000 170,000
current account:
Abu 21,677
Isa 16,515
Zaka 10,228 48,420
loan: Isa 20,000
238,420
ITQ: A type of partnership where partners are liable to all the debts of the business up to the extent
of their personal assets when the partnership becomes insolvent is known as___
ITA: Unlimited partnership
Summary

a. Definition of a partnership
b. Types of partnership business
c. Partnership agreement/deed.
d. Various types of accounts kept by the partnership business
e. How to Prepare Income Statement of a partnership from trial balance
f. How to Statement of financial position of a partners as at the year ended
SAQ1. Where there is no Partnership agreement existing, the partnership Act 1890 prevailed. State
five provisions by the Act guiding the partnership business that you know
SAQ2
Ali, Boni and Konto are in Partnership sharing profits and losses in the ratio 4:3:2. The following is
the Trial Balance of the Partnership as at 31st December, 2014
28
N N
Capital account: 18,000

Ali 12,000
Boni 6,000
Konto
Current account: 500 700
Ali
Boni 300
Konto 2,500 1,000
Provisions for bad debts 23,000
Bank 60,000 35,000
Debtors and creditors 20,000
Land and building at cost 4,000
Office expenses 4,000
Purchases
Rates 150,000
Sales 14,000
Selling expenses 20,000
Stock at beginning
Accumulated depreciation: 12,000
Land and building 8,000
Motor vehicles
Drawings: 4,000
Ali 3,000
Boni 3,000
Konto 243,000 243,000
Additional information
i. Stocks as at 31/12/2014 was N 20,000
ii. Depreciate fixed assets as follows; land & building 10% per annum on cost
iii. Motor vehicle 20% per annum on cost
iv. N 1, 775 was owing for selling expenses
v. Rates were prepaid N 2,000
vi. Bad debts written off N 600
vii. The bad debts provision is to be made equal to 5% of outstanding debtors balance.
viii. The partnership agreement covers the following information:
Konto is to be allowed a salary of N 100 weekly
Interest on capital to be 10%
Interest to be charged on drawing 5%
Required:
a. Income Statement for the year ended 30th September 2014.
b. Partners current accounts
29
c. Statement of Financial Position as at that date
SAQ3
Ali and Boni are in partnership sharing profits and losses equally. The following is their trial
balance as at 31st May, 2015.
N N
Capital accounts: Ali 90,000
Boni 90,000
Land property at cost 160,000
Furniture’s and fixtures at cost 40,000
Discount received 4,500
Trade Debtors 69,600
Trade Creditors 26,590
Cash in hand 14,130
Inventory at 1/7/ 2014 62,740
Sales/Revenue 363,110
Purchases 210,800
Discount allowed 1,820
Loan interest 3,900
Salaries and wages 16,810
Bad debts 1,630
Insurance 10,000
Provision for doubtful debts 1,400
Bank loan 65,000
Drawings: Ali 21,000
Boni 20,000
640,600 640,600
Additional Information:
i. Inventory at 31st May, 2015 N54,200
ii. Prepaid Insurance N2,000
iii. Outstanding Salary and wages N2,000
iv. Depreciate; Land property 20% on cost, Furniture and Fixtures 10% on cost.
v. Reduce provision for doubtful debts to N1,000
vi. Interest on drawings to be charge at 10% per annum.
vii. Interest on capital 5% per annum
Required:
a. Prepare income statement for the year ended 31st May, 2015
b. Partners’ capital account
c. Statement of Financial position as at 31st May, 2015
30
Reference
Nigeria.
Lagos Nigeria
Further Reading
Lagos Nigeria
31
Study Session 4: GOODWILL ACCOUNT

Introduction
Goodwill is an asset, but it cannot be seen or touched, hence it is referred to as intangible asset. It is
not a tangible asset and cannot be realized until the business is to be sold. This is the benefit a firm
will enjoy as a result of the name, location, reputation and good management. It is the attractive
force which brings in customers.
Learning outcomes:
4.1 Define goodwill
4.2 Reasons for Goodwill
4.3 Methods of valuing goodwill
4.4 Characteristics of goodwill
4.5 Conditions that would introduce goodwill in the partnership business
4.6 Treatment of Goodwill on admission of new partner
4.7 Treatment of Goodwill when there are Changes in the Profit Sharing Ratio
4.1 Definition of Goodwill

There are various definitions of goodwill given by different authors. In 1890, Lord Elton defined
goodwill ‘as the probability that the customers will continue to patronize old business even when
there is change in ownership’.
Goodwill can also be defined as the excess of the purchases consideration over the total value of
assets less liabilities. It arises as a result of connection, reputation and efficiency of a business
concern. It is not a tangible asset and cannot be realized until the business is to be sold. This is the
benefit a firm will enjoy as a result of the name, location, reputation and good management. It is
the attractive force which brings in customers.
4.2 Reasons for Goodwill

These are the reasons why a purchaser will be willing to pay an amount over the realizable value of
assets.
i. The name, reputation and connection of the business. A firm that has been in existence for
a long time would have the necessary connections e.g Coca cola, Cadbury etc.
ii. Quality of goods: The quality, durability of the products of a company can bestow good
name on it.
iii. Possession of partial monopoly: When a company is not faced with much competition in
the market, then it can become a monopolist.
iv. Managerial skill: The effectiveness and efficiency of the management of a company can
give them the necessary reputation.
v. Goodwill can also come into force when a purchaser feels that there may be high degree of
growth rate in the future.
32
vi. Another reason for goodwill is for patent and copy right protection.
vii. The location of a business premises may also induce the purchaser to pay for goodwill.
viii. The effectiveness of publicity: Some companies with aggressive marketing strategies
would have made impression on the consumers.
4.3 Goodwill Valuations

There is no actual method of valuing goodwill, but the following methods can be used.
a. Number of year.
b. Super profit
c. Number of times of the gross annual fee income
d. Excess of value of a business over the realizable value.
4.4 Characteristics of goodwill

a. It may fluctuate from day to day
b. The value is subjective
c. It cannot be sold separately apart from other assets of the business.
4.5 Conditions that would introduce goodwill in partnership business

i. Change in the profit or loss sharing ratio
ii. A new partner is admitted
iii. A partner retires or dies
iv. Partnership is dissolved
v. Amalgamation of partnership.
4.6 Treatment of Goodwill on Admission of New Partner

A new partner can be introduced into the business based on agreement of the partners, on the
introduction of a partner; the old partners will give up part of their profit. In order to compensate
them, he will bring in goodwill and this will be dealt with as follows:
1. When Goodwill is brought and retained into the books: A goodwill account will be opened and
the amount debited to it. It will be credited to the capital account in their old profit sharing ratio.
Ledger entries:
Debit: Goodwill account
Credit: Partner’s capital in old profit sharing ratio
2. When Goodwill is written off: The goodwill brought into the books may be written off. This will
be done in their new profit sharing ratio in the partner’s capital account.
Ledger entries:
Debit: Capital account in new profit sharing ratio
Credit: Goodwill account
Illustration I
33
Ali and Boni are in partnership. They shared profit equally. It was decided to admit Kabir and he
brought in cash N7, 000 as capital. It was agreed that goodwill was worth N15, 000. The new profit
sharing ratio is to be 3: 2: 2 respectively
The Statement of Financial position before Kabir was introduced was as follows:
N
Net assets 40,000
Capital Ali 20,000

Boni 20,000
40,000
Required:
Show the Statement of Financial on 1st January 2015 after goodwill has been taken into account if:
1. Goodwill account was opened
2. Goodwill account was not opened
Solution
1. Goodwill account was opened: The’ goodwill account will be debited and the capital account
will be credited in their old profit sharing ratio.
Dr Goodwill Account Cr
N N
Ali½x15,000 7,500
Boni½x15,000 7,500 Balance c/d 15,000
15,000 15,000
Dr Partners Capital account Cr

Ali Boni Kabir Ali Boni Kabir
N N N N N N
Bal. c/d 27,500 27,500 7,000 Bal. b/f 20, 000 20,000 -
cash - - 7,000
goodwill 7,500 7,500 -
27,500 27,500 7,000 27,500 27,500 7,000
Balance b/d 27,500 27,500 7,000
Goodwill sharing in their old profit sharing ratio
Goodwill N15, 000
Ali’s share = ½ x 15.000 = N7, 500
Boni’s share = ½ 15,000 = N7, 500
Statement of Financial position as at 1st May, 2015
N
34
Net assets 40,000

Goodwill 15,000
Cash 7,000
Total assets 62,000
Capital: Ali 27,500
Boni 27,500
Kabir 7,000
Equity 62,000
2 Goodwill to be written off: the partners’ capital account will be debited with the value of
goodwill in their new profit sharing ratio.
Dr Goodwill Account Cr
N N
Ali 3/7 x 15,000 6,428
Ali½x15,000 7,500 Boni 2/7 x 15,000 4,286
Boni½x15,000 7,500 Kabir 2/7 x 15,000 4,286
15,000 15,000
Dr Capital account Cr
Ali Boni Kabir Ali Boni Kabir
N N N N N N
Goodwill 6,428 4,286 4,286 Bal. b/f 20,000 20,000 -
Bal. c/d 21,072 23,214 2,714 cash - 7,000
Goodwill 7.500 7,500 -
27,500 27,500 7,000 27,500 27,500 7,000
Balance b/d 21,072 23,214, 2,714
Goodwill written of
Ali = 15,000 x 3/7 = N6, 428
Boni = 15,000 x 2/7 = N4, 286
Kabir = 15,000 x 2/7 = N4, 286
Statement of Financial position as at 1st May, 2015

N
Net assets 40,000
Cash 7,000
Total assets 47,000
Capital: Ali 21,072
Boni 23,214
35
Kabir 2,714
Equity 47,000
4.7 Treatment of Goodwill when there are Changes in the Profit Sharing Ratio
In partnership business, the partners may decide to alter or change the profit or loss sharing ratio.
This may occur when the contribution of the partners changes. In such a situation, goodwill may be
brought into the business.
1. When goodwill is brought into the business: Goodwill account will be opened and the
value debited to it. The capital account will be credited with the share of goodwill in old
sharing ratio.
Ledger entries:
Debit: Goodwill account
Credit: Capital account in old profit sharing ratio.
2. When goodwill is written off:
Ledger entries:
Debit: Capital account in new profit sharing ratio.
Credit: Goodwill account.
If the amount due to him is paid:
Credit; cash account
Debit; capital account
But when payment has not been made it can be treated as loan
Credit: Loan account
Debit: capital account
Illustration2
Peter and Paul are in business sharing profit in the ratio 3:2. Upon the admission of James, their
profit sharing ratio changed to 3:2:1 with Peter and Paul maintaining their share. The capital of
Peter and Paul before the admission of James was N75, 000 and N50, 000 respectively. James will
be required to contribute a capital of N60, 000 in cash which was paid into the books account.
Assuming the goodwill arrived at is N50, 000. Goodwill is to be maintained in the books.
Required to show:
Goodwill account,
Partners’ capital accounts,
Bank account
36
Solution:
Goodwill accounts
Share of Goodwill N N N
3
Peter ( /5 of 50,000) 30,000 Balance c/ 50,000
d
Paul (2/5 of 50,000) 20,000 50,000
50,000 50,000
Balance b/ 50,000
d
Partner’s capital
Peter Paul James Peter Paul James
N N N N N N
Balance b/d 75,000 50,000 -
Bank - - 60,000
Balance c/d 105,000 70,000 60,000 Goodwill 30,000 20,000 -
105,000 70,000 60,000 105,000 70,000 60,000
Bank account
N N
Captal: James 60,000
It is shown that James has now paid for the goodwill in the old business which is shared between
Peter and Paul in their old sharing ratio which will now change to 3:2:1 respectively.
ITQ: The benefit a firm will enjoy as a result of the name, location, reputation and good
management is called________
ITA: Goodwill
Summary
a. Definition of Goodwill
b. Reasons for Goodwill
c. Methods of valuing goodwill
d. Characteristics of goodwill
e. Conditions that would introduce goodwill in the partnership business
f. Treatment of Goodwill on admission of new partner
g. Treatment of Goodwill when there are Changes in the Profit Sharing Ratio
37
SAQ1. Enumerate some Conditions that would introduce goodwill in partnership business that you
know.
SAQ2.
Adam and Dan are in partnership sharing profit and loss equally. The balance sheet as at 31st
March, 2015 was as follows.
N N
Net assets 100,000
Capital:
Adam 50,000
Dan 50,000
Equity 100,000
On 1st April 2015, Habu was admitted to the partnership and brought in 50,000 cash. Profit sharing
was to be on equal basis. It was agreed that goodwill was worth N24, 000 and that no goodwill
account should be maintained in the books.
Prepare the necessary accounts.
SAQ3
X, Y and Z had been partners in business for the past twenty years. X gave notice of retirement
effective from 1st January 2013.
Y and Z agree to take over X’s shares of the business on X terms which were:
a. Cash payments for half of his entitlements
b. Conversion of the remaining entitlement to a loan at the rate of 10% per annum.
The partners revalued the assets of the company resulting in the creation of Goodwill of N24,000.
The Statement of Financial Position for X, Y and Z as at 31st December is as follows:
X, Y and Z
N N
Non-current assets:
Buildings 60,360
Plant and Machinery 84,280
Equipment 16,520
Motor vehicles 31,560
192,720
Current assets:
Stock 10,460
38
Debtors 9,000
Cash 46,740 66,200
Total assets 258,920
Capital accounts; X 60,000
Y 60,000
Z 60,000
Current accounts;
X 5,340
Y 10,380
Z 9,060 24,780
Creditors 54,140
258,920
Partners share profit and losses equally before and after the retirement of X
You are required to show,
i. Necessary Journal entries for the transactions
ii. X’s Capital account before retirement
iii. Statement of Financial Position for the new partnership as at 31/1/2013
SAQ4.
Statement of Financial Position of Audu, Bala, & Gana as at 31st December 2012 was as follows:
N N,000
Net assets 85,000
Capital
Audu 40,000
Bala 25,000
Gana 20,000
85,000
The partners shared profit in the ratio 3:2:1. They decided to alter the profit sharing ratio 5: 3: 2
respectively. Goodwill of N20, 000 was introduced into the business.
You are required to:
Show the Statement of Financial Position on 1st January 2014 after goodwill has been taken into
account
If:
1. Goodwill account was opened
2. Goodwill to be written off
SAQ5
39
BaBa, Yaro and Kaka have been in partnership for many years sharing profits and losses in the rate
2:1:1 respectively. The following was their Statement of Financial position as at 31st December
2011.
N’000 N’000
Non-current assets:
Plant and machinery 3,600
Goodwill 4,000
Current assets:
Stock 3,920
Debtors 4,260
Cash at bank 180 8,360
Total assets 15,960
Capital:
BaBa 6,000
Yaro 4,000
KaKa 4,000
Creditors 1,960
15,960
On 1st January 2011, they admitted Aji as a partner on the condition that he contributed 4,000 as
his capital, but that the plant and machinery and stock should be revalued at N4,000 and N3,800
respectively, the other assets excepting goodwill, remaining at their present book values. Goodwill
must be valueless.
You are required to prepare:
a. Goodwill account
b. Revaluation
c. Capital account
d. Statement of Financial Position as at 1st January, 2011
e. What is goodwill?
References/ Further Reading
40
Lagos Nigeria
Study Session 5: COMPANY ACCOUNT

Introduction
Company is an entity created by law that is separate from its owners. It has most of the rights and
privileges granted to individuals. It is the duties of the directors to prepare the financial statement
which must be audited by an external auditor who is appointed by the shareholders that the account
is prepared in accordance to the International Financial Reporting Standard (IFRS) and accounting
policies of the company. The components of financial statement are the Income statement and
Statement of financial position.
Learning outcomes:
At the end of this session, readers should know the
following:-
5.1 Define a company
5.2 Categories and types of a companies
5.3 Documents found in a company register
5.4 Characteristics of a company
5.5 Know books of account keep by a company
5.6 Right of the Shareholders
5.7 Share capital of a company
5.8 Methods of issuing Shares/Stock
5.9 Accounting for the issuance of shares
5.10 Method of payment
5.11 Prepare Final Account of a Company
5.1 Definition of a Company

A corporation/Company is an entity created by law that is separate from its owners. It has most of
the rights and privileges granted to individuals. Owners of corporations are called stockholders or
shareholders.
41
5.2 CATEGORY OF COMPANIES

There are three kinds of companies which may be constituted or incorporated under the companies
Act:
1. Unlimited Companies: In an unlimited company, the liability of the members for the debts of
the company is unlimited.
2. Company Limited by Shares: This is a company whose liabilities is limited to the amount
invested in the business
3. Company Limited by Guarantee: These are companies whose liabilities are limited to the
amount guaranteed by the members in the event of liquidation e.g Clubs. Motherless homes
5.2.1 TYPES OF LIMITED LIABILITY COMPANIES
Limited liability companies that have profit as their motive of operation are of two types, namely;
private and public companies:
1. Private company is defined by Section 28 of the Company Act of 1948 as a company which by
its articles: -
a. Restricts the right to transfer its shares
b. Limit the number of its members to fifty
c. Prohibits any invitation to the public to subscribe to its shares ci. The private companies end their
names with the word “Limited” Examples in Nigeria are News watch Communications Ltd, Vigeo
Ltd etc.
2. Public companies: These are companies which invite the public to subscribe to its shares. The
minimum number of shareholders required to form a public limited company is seven. There is no
restriction on the maximum number of shareholders. The shares are transferable to other persons
without informing other shareholders. The name of the company must end with “PLC or Public
liability Company”. Examples are Lever Brothers PLC, Nestle PLC, Total PLC. etc
5.3 Documents found in a company register

5.3.1. Memorandum of association : this contains the external rules of the company. They refer to
the object and power of the company and how it intends to deal and interact with the outside world
i.e. public. The memorandum contains the following:
a. The name of the company with the word limited at the end.
b. The registered office
c. The object of the company.
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d. A declaration that the liability is limited

e. The amount of authorized capital
5.3.2. Articles of association: This is a document which states the internal regulations of a limited
company. It contains the regulations which govern the internal management of the company’s
affairs. The following particulars are found in the document:
a. The rights and responsibilities of shareholders
b. The duties and power of directors
c. How directors may be appointed
d. The right and duties of the members as between each other and the company. The procedure for
accounting and auditing of the company’s book etc
5.3.3. Prospectus: This is a document issued by limited companies inviting the public to subscribe
to its shares. The prospectus contains detailed information about the company. It is prepared by
only public companies.
5.3.4. Certificate of Incorporation: This is a document which gives legal authority to the
company to operate as a legal personality. It is issued by the Registrar of Companies after due
consultation with the various documents submitted.
.
5.4 Characteristics of a Company
Company/Corporations represent an important type of organization. Their unique characteristics
offer advantages and disadvantages:
5.4.1 Separate legal entity: A corporation conducts its affairs with the same rights, duties, and
responsibilities of a person. It takes actions through its agents, who are its officers and managers.
5.4.2 Limited liability of stockholders: Shareholders are liable for neither corporate acts nor
corporate debt.
5.4.3 Transferable ownership rights: The transfer of shares from one stockholder to another
usually has no effect on the corporation or its operations except when this causes a change in the
directors who control or manage the corporation.
5.4.4 Continuous life: A corporation’s life continues indefinitely because it is not tied to the
physical lives of its owners.
5.4.5 Lack of mutual agency for stockholders: A corporation acts through its agents, who are its
officers and managers. Stockholders, who are not its officers and managers, do not have the power
to bind the corporation to contracts
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5.4.6 Ease of capital accumulation: Buying stock is attractive to investors because (1)
stockholders are not liable for the corporation’s acts and debts, (2) stocks usually are transferred
easily, (3) the life of the corporation is unlimited, and (4) stockholders are not corporate agents.
These advantages enable corporations to accumulate large amounts of capital from the combined
investments of many stockholders.
5.4.7 Government regulation: A corporation must meet requirements of a state’s incorporation
laws, which subject the corporation to state regulation and control. Proprietorships and partnerships
avoid many of these regulations and governmental reports.
5.4.8 Corporate taxation: Corporations are subject to the same property and payroll taxes as
proprietorships and partnerships plus additional taxes. The most burdensome of these are federal
and state income taxes that together can take 30% or more of corporate pre-tax income. Moreover,
corporate income is usually taxed a second time as part of shareholders’ personal income when
they receive cash distributed as dividends in the forms of withholding tax at 10%. This is usually
double taxation on the profit of the company
5.4.9 Management of a Corporation: The ultimate control of a corporation rests with
Shareholders who control a corporation by electing its board of directors, or simply, directors.
Each shareholder usually has one vote for each share of stock owned. A corporation usually holds a
Shareholders Annual General Meeting (AGM) at least once a year to elect directors and transact
business as its bylaws require. A group of shareholders owning or controlling votes of more than a
50% share of a corporation’s shares can elect the board and control the corporation. Shareholders
who do not attend AGM must have an opportunity to delegate their voting rights to an agent by
signing a proxy, a document that gives a designated agent the right to vote at AGM. Day-to-day
direction of corporate business is delegated to executive officers appointed by the board. A
corporation’s chief executive officer (CEO) is often its president. Several vice presidents, who
report to the president, are commonly assigned specific areas of management responsibility such as
finance, production, and marketing. One person often has the dual role of chairperson of the board
of directors and CEO. In this case, the president is usually designated the chief operating officer
(COO).
5.5 Books of accounts: it is the duty of the directors to prepare the financial statement which must
be audited by an external auditor appointed by the shareholders that the account is prepared in
accordance to the International Financial Reporting Standard (IFRS) and accounting policies of the
company. The components of financial statement are the Income statement and Statement of
44
financial position, while for listed companies Chairman’s Report, Directors Report, Auditors
Report, Changes in equity statement, Group Financial Statements, Statement of Accounting
Policies, Notes on the Accounts, Value added statement, Fund flow Statement and a Five year
Financial Summary.
5.6 Rights of Shareholders: When investors buy stock/shares; they acquire all specific rights the
corporation’s charter grants to shareholders. They also acquire general rights granted shareholders
by the laws of the country in which the company is incorporated. When a corporation has only one
class of share, it is identified as common stock/share. Country’s laws vary, but common
shareholders usually have the general right to:-
5.6.1. Vote at AGM
5.6.2. Sell or otherwise dispose of their stock.
5.6.3. Purchase their proportional share of any common stock later issued by the corporation. This
pre-emptive right protects shareholders’ proportionate interest in the corporation. For example, a
shareholder who owns 25% of a corporation’s common stock has the first opportunity to buy 25%
of any new common stock issued.
5.6.4. Receive the same dividend, if any, on each common share of the corporation.
5.6.5. Share in any assets/profit remaining after creditors and preferred shareholders are paid when,
and if, the corporation is liquidated. Each common share receives the same amount. Stockholders
also have the right to receive timely financial reports.
5.7 Share Capital of a Company

Share Capital is a general term that refers to any shares issued to obtain capital (owner financing).
Selling (Issuing) Shares: a corporation can sell shares directly or indirectly.
To sell directly, it advertises its stock/shares, issuance to potential buyers. This type of issuance is
most common with privately held corporations.
To sell indirectly, a corporation pays a brokerage house (investment banker) to issue its
stock/shares to potential buyers usually members of the public. Some brokerage houses underwrite
an indirect issuance of stock; that is, they buy the stock from the corporation and take all gains or
losses from its resale.
There are various terms used in connection with the share capital:
45
Authorized or registered capital or nominal capital: This is the total amount stated in the
memorandum of association and approved by the registrar of companies which a company can
issue out.
Issued capital: This is the total amount that the directors decide to issue to the public for
subscription
Called up capital: This is the total amount asked for on all shares
Paid-up capital: The total amount paid up, or credited as paid tip, on the issued share capital.
Uncalled-up capital: The total amount which has not been called up on the issued share capital.
Calls In arrears: This relates to amounts called for but not yet received.
Calls In advance: This relates to money received prior to payment being requested.
5.7.1 Market Value of Share- Market value per share is the price at which a stock is bought and
sold. Therefore, expected future earnings, dividends, growth, and other company economic factors
influence market value of a share.
5.7.2 Classes of Stock/Shares- When all authorized shares have the same rights and
characteristics, the stock is called common stock. A corporation is sometimes authorized to issue
more than one class of stock, including ordinary shares, preferred shares, deferred shares and
different classes of common stock.
5.7.3 Par Value Stock- Par value is the amount assigned per share by the corporation in its charter
that is in its memorandum of association and article of association. It is the value at which the
shares were first sold at registration of the company
5.7.4 Shareholders’ Equity/Capital- A corporation’s equity is known as stockholders’ equity, also
called shareholders’ equity or corporate capital.
Stockholders’ equity consists of;
(a) Paid-in capital (or contributed capital) is the total amount of cash and other assets the
corporation receives from its shareholders in exchange for its stock.
(b) Retained earnings is the cumulative net income (and loss) not distributed as dividends to its
stockholders but kept as profit not distributed or reserved.
5.7.5 Authorized Share or Nominal share capital or Registered share capital is the number of
shares that a company’s charter allows it to sell. The number of authorized shares usually exceeds
the number of shares issued (and outstanding), often by a large amount. (Outstanding stock refers
to issued stock held by stockholders.). A corporation must apply to the Corporate Affairs
46
Commission (CAC) for a change in its charter if it wishes to issue more shares than previously
authorized. A corporation discloses the number of shares authorized in the equity section of its
balance sheet or notes.
5.7.6 Issued share capital- this is the part of the authorised capital of a company that has been
offered for sales or actually sold. Sometimes the issues may be oversubscribed or undersubscribed.
Part not issued out is called unissued share
5.7.7 Called up-capital- this is part of the issued share capital that the shareholders were called
upon to pay for. While uncalled up shares are part not called up for.
5.7.8 Paid up-share capital- this is part of the called-up share capital which the shareholders have
paid when called up to do so.
5.8 Methods of issuing shares/stocks

Shares/Stocks can be issued through the following ways:
5.8.1 By private subscription- this is issue of shares through special arrangement where
shares are only sold to already existing shareholders in the public company while for
private company the shares are issued to its members only.
5.8.2 By bonus or script issue- this is the act of transferring reserves or undistributed profit to
existing shareholders in form of bonus shares which is then capitalized to their
shareholding.
5.8.3 By prospectus- this is a legal document usually issued by a PLC inviting the public to
subscribe to or buy its share. And this issue must obey existing shareholders pre-
emptive right.
5.8.4 By placing - here the shares are sold in blocks allocated to investment houses, insurance
and banks and other corporate buyers.
5.9 Accounting for the issuance of shares- The issuance of common stock affects only paid-in
(contributed) capital accounts; no retained earnings accounts are affected. Shares can be issued at
the following values
1. At par,
2. At a premium (above par), or
3. At a discount (below par).
47
5.10 Methods of payment- there are basically two methods of payment for shares. These are by
cash through commercial banks or payment through other means than cash such as payment with
an asset, services etc.
5.10.1 Application for Share- a prospective shareholder in a public company obtains an
application form and a copy of its prospectus from the designated commercial bank when the
company issues its prospectus to sell shares
5.10.2 Allotment for shares- when the company receives an application it will make an allotment
to the applicant within 42 days after the allotment to notify the applicant of the allotment of shares
to him. This now makes him/her a shareholder of the company. An applicant has the right before
allotment to withdraw his/her application. Sometimes shares can be paid for in instalments, such as
- on application, on allotment, on calls which can be 1st calls , 2nd calls 3rd calls etc.
5.10.3 Calls for shares- from time to time the directors of the company may be asked on a special
resolution by the shareholders to make calls upon the shareholders in respect of monies unpaid to
the shares issued to them according to the condition of the shares as stated in the article of
association.
5.11 Preparations of Final Account of a Company

In a limited liability company, the following accounts will be prepared at the end of the year.
1. Income statements. i.e Trading, profit and Loss Account
2. Appropriation account
3. Balance sheet or Statement of financial position
This module will analyze the content of each separately and we shall limit ourselves to the
preparation of simple company accounts for internal use.
Income Statement of Limited Liability Company has similarity, with those of partnership. Credit
side: Revenue side
Turnover/Sales of goods
Income from investments
Rent receivable from land and property
Debit side: Expenditure/Expenses
Interest payable on debentures and loans
Reserves and provisions
Depreciation of all assets
48
Directors’ fees, emoluments and compensations

Hiring of plant and machinery
Corporate tax
Dividend paid and proposed
Audit fees and expenses
Charges and credits relating to previous years that are not included under the headings.
Statement of Financial Position

Assets
i. .Non-Current or Fixed assets: The assets must be shown at Cost, the Accumulated
depreciation, and Net Book value. Examples motor van, premises, land and building.
ii. Investments: Quoted and unquoted investments.
iii. Current assets: stocks, debtors, prepayment, Bank cash
iv. Intangible assets: Goodwill, patent and trade mark
v. Preliminary and Issue expenses formation expenses
Share capital:
a. Authorized share capital
b. Issued share capital
c. Capital reserves e.g share premium account, capital redemption reserves.
d. Revenue reserve: e.g credit balance of profit and loss account, general reserves
Non-Current Liabilities:
Long term liabilities: % Debenture
Loans
Current liabilities:
Trade creditors,
Bank overdraft,
Proposed dividend
Corporation tax
Accruals
Illustration 1
49
The following Trial Balance was extracted from the Books of ZUMA Limited as at 31st December,
2013
Dr Cr
N N
Issued and fully paid 20,000 Ordinary shares of N1 each 20,000
Share premium 10,000
General reserve 8,000
Retained earnings b/f 3,000
Discounts 200 400
Carriage inwards 160
Purchases and sales 45,000 91,740
Stock as at 1st January 8,000
Carriage outwards 560
Bank Loans 24,000
Interest on loan 1,000
Provision for bad and doubtful debts 2,400
Preliminary expenses 12,000
Motor vehicle expenses 2,800
Directors salaries 6,000
Repairs to premises 250
Rates 1,600
Premises at cost 20,000
Plant and machinery at cost 25,000
Provision for depreciation:
Debtors & Creditors 12,290 8,000
Cash in hand 300
Cash at bank 4,000
Returns 240 360
170,000 170,000
Additional Information
a. Stock at 31st December, N412, 500
b. Outstanding Expenses: Motor expenses N200
Insurance N450
Sundry expenses N400
c. Prepaid expenses:
Rates N320
Sundry expenses N250
d. Provision for bad debts to be increased to N2, 800.
e. Part of the premises is sublet at N2, 400 per annum.
f. Monthly salaries and wages bill N400
g. Bad debts at 31st December N600
h. Loan interest is 5% per annum
i. Provide for depreciation on a straight line method:
Premises 20% on cost
50
Plant and machinery 25% on cost

Motor vehicles 10% on cost
j. Write off preliminary expenses
k. Transfer to general reserves N5, 000 and N5,000 to revenue reserve.
Required Prepared:
a. Income Statement for the year ended 31st December, 2013.
b. Statement of Financial Position as at that date
Solution to illustration 1
ZUMA Limited
Income Statement for the year ended 31st December,2013.
N N N
Sales/Turnover/Revenue 19,740
Less Returns Inwards (240)
91,500
Net sales
Less cost of goods sold:
Opening stock 8,000
Add purchases 45,000
Add carriage Inwards 160
45,160
Less returns outwards (360) 44,800
Cost of goods available for sales 52,800
Less closing stock (12,500) ( 40,300)
Gross profit 51,200
Discount received 400
Rental income 2,400
54,000
Less Expense:
Salaries and wages (wk 1) 4,800
Discounts allowed 200
Carriage outwards 560
Interest on loan (wk 2) 1,200
Motor vehicle expenses (wk 4) 2,000
Directors salaries 6,000
Repairs to premises 250
Rates (wk5) 1,280
Provision for depreciation
Premises (wk 6) 400
Plant and machinery (wk6) 6,250
Motor vehicle (wk6) 2,300
Sundry expenses (wk 7) 3,650
Insurance 450
Bad debts 600
Provision for bad debts (wk3) 800 (30,740)
Net profit 23,260
Add retained profit from last year 3,000
51
26,260
Appropriations:
General reserve 5,000
Revenue reserve 5,000
Preliminary expenses written off 12,000 22,000
Retained profit carried forward to next year 4,260

N N N
Cost Dep NBV
Non current assets:
Premises 20,000 (400) 19,600
Motor vehicle 23,000 (2,300) 20,700
Plant and machinery 25,000 (8,750) 16,250
68,000 (11,450) 56,550
Current assets:
Stock/Inventory 12,500
Debtors (wk8) 8,990
Rent received in arrears 2,400
Prepayment: Rate 320
Sundry expenses 250
Wages and salaries 200
Bank 4,000
Cash in hand 300 28,960
Total Assets 85,510

Share capital:
Authorized Issued
N N N
Ordinary shares of N1each 20,000 20,000 20,000
Reserves:
General reserve (wk 9) 13,000
Revenue reserve 5,000
Retained profit 4,260 32,260
Non current liabilities:
Bank Loans 24,000
Current liabilities
Creditors 8000
Loan interest owing 200
52
Motor expenses owing 200

Insurance accrued 450
Sundry expenses owing 400 9,250
Total Equities and Liabilities 85,510
Workings
1. Salary and wages:
N
Amount paid 5,000
Less due (400x12) 4800
Payment 200
2. Interest on loan:
Amount due for payment ( 5% x 24,000) 1,200
Amount paid 1,000
Owing 200
3. Provision for bad debts:

New provision 2,800
Less Old provision 2,000
Increase in provision to P&L A/C 800
4. Motor vehicle expenses:

Amount paid 1,800
Owing 200
2,000
5. Rates:
Amount paid 1,600
Less amount prepaid 320
To P & L A/C 1,280
6. Depreciation:
Premises 2% x 20,000 = N400
Motor vehicles 10% x 23,000 = 2.300
Plant and machinery 25% 25,000
New provision to profit and loss N6.250
Old provision 2,500
8,750
7. Sundry expenses:
Amount paid 3,500
Owing 400
3,900
Less prepaid 250
P & L A/C 3,650
8. Debtors: 12,390
Less Bad debts 600
53
11,790
Less provision 2,800
8,990
9. General reserve
Old 8,000
Add New 5,000
13,000
ITQ: A document contains the regulations which govern the internal management of the
company’s affairs is known as___________
ITA: Articles of association
Summary
a. Definition of a company
b. Categories and types of companies
c. Documents found in a company register
d. Characteristics of a company
e. Books of account kept by a company
f. Right of the Shareholders
g. Share capital of a company
h. Methods of issuing Shares/Stock
i. Accounting for the issuance of shares and Method of payment
j. How to Prepare Final Account of a Company
Self-Assessment Questions (SAQs) for study session
SAQ1 Theory
a. Briefly Differentiate between Public liability Company and Private limited Company
b. Enumerate seven (7) Characteristics of a company that you Know
c. Write short notes on the following:
i. Memorandum of Association
ii. Prospectus
iii. Certificate of incorporation
54
iv. Authorized share capital
v. Issued Share Capital
SAQ2 Practices
A. The following Trial Balances was extracted from the books of HANKURI Nig. Ltd as at
31st December, 2014
N’000 N,000
Authorized, issued and fully paid capital:
160,000,000 ordinary shares of N1 each 160,000
40,000,000 7% preference shares N1 each 40,000
General reserves 6,800
Freehold premises at cost 150,000
Furniture and fitting at cost 60,000
Plant and Equipment’s 100,000
Account Receivables 57,000
Inventory as at l/1/2014 24,000
Bad debts written off 800
Rent 1,000
Rates 200
Insurance 1,500
5% Debentures 32,000
Electricity 600
Postages and telephone 800
Director’s remunerations 5,000
Purchases and Sales 155,000 258,500
Interest received 4,500
Administration expenses 500
Distribution expenses 1,500
Bank 20,000
Audit fees 1,200
Cash 300
Retained Earnings B/f at 1/1/2014 800
583,400 583,400
i. Inventory as at 31st December, 2014 was valued N30,000,000
ii. Debenture interest for the year was due but yet to be paid.
iii. Provisions for depreciation are to be charge on the straight line method as follows: Freehold
premises. 25% per annum, Furniture and fittings 5% per annum, plant and Equipment 15%
respectively.
iv. Corporation Tax of N300,000 is to be paid on profit.
55
v. The Director proposed a final dividend of 8% on the ordinary share capital and payment of
dividend on the preference share.
vi. Transfer 1,000,000 to General reserve.
Required;
a. Prepare Income Statement for the year ended 31st December, 2014
b. Statement of Financial Position as that date for internal use
B. The following trial balance has been extracted from the records of HUBA Ltd as at 31st
May, 2014
N’000 N’000
Retained earnings b/f 1/4/2013 2,000
Sales 400,000
Cost of goods sold 280,000
Wages and salaries 25,000
Trade expenses 23,000
Debenture interest net 700
10% Debenture 10,000
Ordinary shares of N1 each 100,000
7% preference shares of N1 each 40,000
Building at cost 100,000
Plant and machinery cost 120,000
Provision for depreciation:
Motor vehicles 11,000
st
Stock at 1 April, 2013 40,000
Debtors and creditors 78,000 62,000
Directors remuneration 11,000
Bank 15,300
753,000 753,000
Additional Information
a. Provisions for depreciation are to be made on straight line method
Motor vehicles 20%
Plant and machinery 15%
b. Corporation tax is N11,000

c. Accrued audit fees of N3,000
d. The directors propose that final preference dividend and 12% dividend on the ordinary
shares be paid.
Required Prepared:
I. Income Statement for the year ended 31st March 2014.
II. Statement of Financial Position as at that date.
56
Reference
Robert,O.I. (2009), Financial Accounting made simple Vol. 2. Third edition, ROI Publishers,
Lagos Nigeria
Further Reading
Robert,O.I. (2009). Financial Accounting made simpleVol.2. Third edition, ROI Publishers,
Lagos Nigeria
Study Session 6: INTRDUCTION TO CASH FLOW STATEMENT

Introduction
The primary purpose of a statement of cash flows is to provide relevant information about the cash
receipt and cash payment of an enterprise during a period
Learning outcomes:
6.1. Know Statement of Cash Flows
6.2. Reasons for preparing Statement of Cash Flows
6.3. Prepare Statement of Cash Flows
6.1 CASH FLOW STATEMENT SAS 18 /IAS 7

The statement of cash flows report the cash coming in (positive amount) and the cash going out
(negative amount) during a period. Business activities result in a net cash inflow or a net cash
inflow or a cash outflow. The statement of cash flows reports the net increase in cash during the
period and the ending cash balance.
57
6.2 REASONS FOR PREPARATION OF STATEMENT OF CASH FLOWS
The primary purpose of a statement of cash flows is to provide relevant information about the cash
receipt and cash payment of an enterprise during a period. The statement of cash flows provides
answers to the following simple but important questions:
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. What was the change in the cash balance during the period?
CONTENT AND FORMAT OF THE STATEMENT OF CASH FLOWS
Companies classify cash receipts and cash payments during a period into three different activities in
the statement of cash flows- operating, investing, and financing activities, defined as follows:
Operating activities involve the cash effects of transaction that help in the determination of net
income.
Investing activities include making and collecting loans and acquiring and disposing of investment
(both debt and equity) and property, plant, and equipment.
Financing activities involve liability and owners items - they include:
(a) Obtaining resources from owners and providing them with a return on their investment,
(b) Financing money from creditors and repaying the amounts borrowed.
Format Statement of Cash Flows for the Year 20xx
Cash flows from operating activities: N N

Receipts xxx
Payments (xxx)
Net cash flows from operating activities xxx
Cash flows from investing:
Sales of assets xxx
Purchase of assets (xx)
Net cash flows from investing activities xxx
Cash flow from financing activities
Purchase of shares xxx
58
Sales of share (xx)

Net cash flows from financing xxx
Net increase (decrease) in cash or cash equivalent xx(xx)
Cash at beginning of the year xxx
Cash at end of the year xxx
Illustration 1
The Balance sheet of professional ltd for 2013 and 2014 are given below
2014 2013
N 000 N 000 N 000 N 000
Fixed Assets:
Land and building 3,585 3,470
Plant, equip and vehicle 2,702 3,107
6,287 6,577
Goodwill and patient 852 785
7,139 7,362
Current Assets:
Stock and WIP 5,717 5,735
Debtors and prepayment 4,935 4,697
Cash and bank balance 465 115
(a) 11,117 1,054
Creditors and accruals 2,795 2,672
Current taxations 895 985
Bank overdraft 272 705
Proposed dividend 637 505
(b) 4,599 4,867
Net current assets (a-b) 6,518 5,680
Deferred taxation (1,555) (1,545)
12,102 11,497
Represented by:
Capital and Reserves:
Ordinary share capital 4,400 4,400
Share premium capital 517 517
59
Other capital reserves 1,100 1,100

Revenue Reserve 6,085 5,480
12,102 11,497
a. The profit after tax in 2014 and 2013 are included the Revenue and Reserves.
b. Dividend amounting to N927, 000 and income and education tax of N1130, 000 in
cash was paid in 2014.
c. Depreciation in 2014 for plant equipment and vehicle is N600,000 Goodwill and
patients N23,000 and land & Building N87,000
You are required to prepare the statement of Cash Flow for the year ended 31st December,
2014
Solution to illustration 1
Cash Flow statement for the year ended 31st December, 2014
Operating activities N, 000 N, 000
Net profit 2714
Add Depreciation. (600+23+87) 710
3424
Changes in working capital:
Stocks 18
Debtors (238)
Creditors 123 (97)
Tax paid. (1130)
Net cash flow from operating activities 2197
Cash flows from investment
Purchase of fixed Assets: land & Building 202
Plant equip & vehicle 195
Goodwill 90
Net cash flows from investment (487)
1710
Cash flow from Financing
60
Dividend paid (927)

Net increase/ decrease in cash & cash equip 783
Cash and cash equivalent at 1st Jan, 2014 (115-705) (590)
Cash and cash equivalent at Dec 31, 2014 (465-272) 193
Workings
(1) Net profit adjusted :
Revenue & reserves 605,000
Deferred tax 10,000
Current tax 1,040,000
Dividend 1059,000
2,714,000
(2) Current taxation

Eductant tax 1130,000 Bal b/d 985000
Bal a/d 895,000 P&L 1040,000
(3) Cash Dividend

Paid 927,000 Bal b/d 505000
Bal a/d 637000 P&L 1059,000
(4) Land & Building

Bal b/d 3470 Dep 87
Purchase 202 Bal ad 3585
(5) Plant equip & vehicle

Bal a/d 3107 Dep 600
61
(6) Goodwill & Patients

Bal b/d 785 Dep 23
ITQ: Cash effects of transaction that help in the determination of net income is known as____
ITA: Operating Activity
Summary

Meaning of Statement of Cash Flows
Reasons for preparing Statement of Cash Flow
How to Prepare Statement of Cash Flow
SAQ1. State the reasons of preparing Cash Flow Statement of a business organization.
SAQ2 The Statement of Financial Position of GNUT Ltd for 2012 and 2013 are given below
2013 2012
N 000 N 000 N 000 N 000
Fixed Assets:
Land and building 4,000 3,700
Plant, equip and vehicle 2,400 2,200
6,400 5,900
Goodwill and patient 900 700
7,300 6,600
62
Current Assets:
Stock and WIP 5,700 5,800
Debtors and prepayment 4,900 4,600
Cash and bank balance 400 200
(a) 11,000 10,600
Creditors and accruals 2,700 2,600
Current taxations 800 900
Bank overdraft 200 700
Proposed dividend 600 500
(b) 4,300 4,700
Net current assets (a-b) 6,700 5,900
Deferred taxation (2,000) (1,900)
13,000 11,600
Represented by:
Capital and Reserves:
Ordinary share capital 4,500 4,500
Share premium capital 1,000 1,000
Other capital reserves 1,500 1,500
Revenue Reserve 6,000 4,600
13,000 11,600
a. The profit after tax in 2013 and 2012 are included in the Revenue and Reserves.
b. Dividend amounting to N92, 000 and income and education tax of N30, 000 in cash
was paid in 2013.
c. Depreciation in 2013 for plant equipment and vehicle is N600,000 Goodwill and
patients N20,000 and Land & Building N90,000
You are required to prepare the statement of Cash Flow for the year ended 31 st December,
2013
References
63
Lagos Nigeria
Further Reading
Robert,O.I. (2009). Financial Accounting made simpleVol.2. Third edition, ROI Publishers,
Lagos Nigeria
Study Session 7: Stock valuation

Introduction
Stocks are valued using the prices of the last batches of materials received. When materials are
needed from stores, the prospective user prepares a materials requisition to request for the
materials. When the materials are issued out they should be priced. The problem usually is the
price to use. This is because materials in stock may have been purchased at varying prices from
time to time.
Learning outcomes:
At the end of this session, reader would be able to know:-
7.1 Objectives of material pricing
7.2 Methods of pricing Issues and valuing Stocks
7.3 Advantages and Disadvantages of some Stocks Valuation Methods
7.4 How to prepare materials requisition using FIFO and LIFO methods
7.1 Objective of material pricing
There are several methods that could be used to price issues.
The objectives of material pricing are:
a. To charge to production on a consistent and realistic basis the cost of materials used.
b. To provide a satisfactory basis of valuing stock at the end of the period
64
7.2 Methods of Pricing Issues and Valuing Stocks
There are several methods. Examples are
1. First In First Out (FIFO)
2. Last In First Out (LIFO)
3. Simple Average method
4. Weight Average method
5. Standard Price
6. Replacement price
7. Specific Identification
8. Retail method
7.2.1 FIFO
This method uses the price of the first batch of materials received for all issues until all units in the
first batch have been issued, after which the price of the next batch received becomes the issue
price.
Stocks are thus valued using the prices of the last batches of materials received.
Advantages
i. It reflects the normal movement of materials in store – issuing materials in order of

receipt
ii. Stock is valued using recent prices
iii. The method is simple and easily understood
iv. It uses actual prices.
Disadvantages
i. The comparison of the cost of one job with another is difficult because
different issue prices are often used. The cost of a job depends on when materials
are requisitioned from stores
ii. The issue price may not reflect current economic values.
iii. Stocks with low turnover will tend to be priced at old prices when they are
eventually issued. These prices could well be unrealistic.
65
iv. In times of inflation, product cost may be low whilst replacement cost is high.
v. Thus profit may be overstated.
7.2.2 LIFO
This method uses the price of the last batch of materials received for all issues until all units from
this batch have been issued and then the price of the previous batch is used. Note that if a new
delivery is received before the first batch is fully issued, the new issue price at once becomes the
last in price and is used to price issues until either the batch is exhausted or a new delivery
received.
Stocks are valued using the prices of materials delivered first.
Advantages
i. The issue price is near to current economic value
ii. It is fairly simple to operate when materials are slow moving.
iii. It uses actual prices.
iv. During a period of rising prices, stock values are conservative
Disadvantages
i. It is not realistic as it is contrary to normal issue procedures
ii. The frequency of calculations causes much clerical work.
iii. Stock values may significantly be understated.
iv. It can become complicated with fast moving stock since not all of one receipt may
be exhausted before a differently priced replacement order arrives.
7.2.3 The Simple Average Method
Under this method the issue price is the co-efficient of the different prices of all the materials in
store and the number of material items in that total.
The assumption is that materials issued out of stock at any time are drawn from a mixed group in
the store without any deliberate attempt to identify materials or stocks as being from the earliest or
the latest.
Advantages
i. It is simple to operate
66
ii. It evens out effects of any price fluctuations
Disadvantages
i. It does not use actual prices
ii. Where prices fluctuate, stock values may be misleading
iii. It gives very false issue and valuation figures.
7.2.4. Weighted Average Price Method
This method averages prices after weighting by their quantities. With each receipt of materials, the
weighted average price is re-calculated and subsequent issues are priced at the calculated weighted
average price until a further receipt of goods necessitates the average price to be re-calculated.
Advantages
i. It smoothens out fluctuations in issue prices
ii. The comparison of different jobs is easier because it assumes that values of identical
items are all equal.
Disadvantages
i. Calculations have to be made to approximately four decimal places to achieve a fair degree
of accuracy.
ii. The issue price may not reflect current earning
7.4 Preparing materials requisition using FIFO and LIFO methods
Illustration
KuKawa manufacturing company Ltd is reorganization its costing system. A materials consultant
has recommended that the company adopts one pricing method to cost the issues of materials to
production or specific jobs. He recommended that the choice should be either the FIFO or LIFO
method. Based on the consultant’s recommendation, the Company has requested that you assist
its newly employed cost accountant to prepare cost statements for its job 2020. The following
data for material used for the job in May 2015 have been provided.
Date Particulars Kilos Cost
2nd May Balance 40,000 12,000,000
67
5th May Receipts 10,000 400 per kilo
16th May Issues 48,000
26th May Issues 40,000
Required:
Using FIFO and LIFO methods of pricing, cost the materials issued to job 2020
as well as the materials on hand on 26th May, 2015
Solutions
Stores ledger card (FIFO)
Date Receipts Issued Balance
Quantity Unit Value Quantity Unit Value Quantity Unit value
Price pric price
e
May 2 40000 300 12,000,000
May 5 10000 400 4,000,000 50000 16,000,000
May 12 24000 500 12,000,000 74,000 28,000,000
May 16 40000 300 12,000.000
8000 400 3,200,000
48000 15,200,000 26000 12,800,000
May 19 34000 450 15,300,000 60000 28,100,000
May 26 2000 400 800,000
24000 500 12,000,000
14000 450 6,300,000
40000 19,100,000 20000 450 9,000,000
Cost of issues for production

Date quantity issued cost
May 5 48,000 15,200,000
May 26 40,000 19,100,000
68
88,000 34,300,000
Valuation of closing stock
Date quantity price per value
Outstanding unit
May 19 20,000 450 9,000,000
(ii) Stores ledger card (LIFO)
Date Receipts Issued Balance

Quantity Unit Value Quantity Unit Value Quantity Unit value
price price price
May 2 40,000 300 12,000,000

May 5 10,000 400 4,000,000 50,000 16,000,000
May 12 24,000 500 12,000,000 74,000 28,000,000
May 16 24,000 500 12,000,000

10,000 400 4,000,000
14,000 300 4,200,000
48,000 20,000,000 26,000 300 7,800,000
May 19 34,000 450 15,300,000 60,000 23,100,000

May 26 34,000 450 15,300,000
6,000 300 1,800,000
40,000 17,100,000 20,000 300 6,000,000
Cost of issues for production

69
Date of issue unit issued cost of issues
May 16 48,000 20,200,000

May 26 40,000 17,100,000
88,000 37,300,000
Valuation of closing stock
May 2 20,000 @ N300 = N6, 000,000
ITQ: Method uses the price of the last batch of materials received for all issues until all units from
this batch have been issued and then the price of the previous batch is used is known
as________
ITA: LIFO
Summary
a. Objective of material pricing
b. Methods of pricing Issues and valuing Stocks
c. Advantages and Disadvantages of some Stocks Valuation Methods
d. How to prepare materials requisition using FIFO and LIFO methods
SAQ1
a. List seven (7) Methods of Stock pricing and valuation that you know
b. Give three (3) advantages and disadvantages of FIFO and LIFO methods.
SAQ2.
KULIKULI manufacturing company Ltd is reorganization its costing system. A materials
consultant has recommended that the company adopts one pricing method to cost the issues of
materials to production or specific jobs. He recommended that the choice should be either the
FIFO or LIFO method. Based on the consultant’s recommendation, the Company has requested
that you assist its newly employed cost accountant to prepare cost statements for its job K K .
The following data for material used for the job in August 2015 have been provided.
70
Date Particulars Kilos Cost

1st August Balance 2,000 240,000
5th August Receipts 1000 50 per kilo
12th August Receipts 4,000 100 per kilo
15th August Issues 6,000
20th August Receipts 3,000 150 per kilo
28th August Issues 2,000
Required:
Using FIFO and LIFO methods of pricing, cost the materials issued to job 2020
as well as the materials on hand on 28th August, 2015
71
Study Session 8: INTRODUCTION TO ACCOUNTING STANDARDS

Introduction
The accounting policies that an entity uses in its opening IFRS statement of financial position may
differ from those that it used for the same date using its previous GAAP. The resulting adjustments
arise from events and transactions before the date of transition to IFRSs. Therefore, an entity shall
recognise those adjustments directly in retained earnings (or, if appropriate, another category of
equity) at the date of transition to IFRSs.
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) is used to interpret financial statements. GAAP
are the base for the formulations of accounting Principles, Standards, Concepts, and
Assumption. GAAP aims to make information in financial statement relevant, reliable, and
comparable.
1. Relevant information affects the decisions of its users.
2. Reliable information is trusted by users.
3. Comparable information is helpful in contrasting organizations.
For instance, a lot of Generally Accepted Accounting Principles (GAAPs) have been developed
to be followed in the preparation of financial statements. The GAAPs are developed from time to
time to keep pace with changes in the economic and political environments. The GAAPs are also
codified into what is known as Accounting Standards. Therefore, accounting is not a fixed set of
rules but a constantly evolving body of knowledge. Most countries have their own Local
Accounting Standards Board but the body responsible for developing and issuing International
Accounting Standards is the International Accounting Standards Board (IASB) based in the
United Kingdom. In Nigeria, the Nigerian Accounting Standards Board (NASB) now Financial
Reporting Council (FRC) is charged with the responsibility of developing and issuing local
accounting standards known as Statement of Accounting Standard (SAS) for use by all preparers
and users of financial statements in Nigeria.
International Accounting Standards Board (IASB) was formed in 1973 to develop worldwide
accounting standards; the IASB develops proposals, circulates these among interested
organizations, receives feedback, and then issues a final pronouncement. The 14 Board members of
72
the IASB come from many countries and represent a variety of professional backgrounds. The
accounting standards produced by the IASB are referred to as International Financial Reporting
Standards (IFRSs) and International Accounting Standards (IASs). The difference between these
two sets of standards is merely one of timing; the IASB standards issued before 2001 are called
IAS and those issued since 2001 are called IFRS. In practice, the entire body of IASB standards is
referred to simply as IFRS. January 1, 2012 is the adoption date in Nigeria in place of SAS
An entity’s estimates in accordance with IFRSs at the date of transition to IFRSs shall be consistent
with estimates made for the same date in accordance with previous GAAP (after adjustments to
reflect any difference in accounting policies), unless there is objective evidence that those estimates
were in error.
To comply with IAS 1, an entity’s first IFRS financial statements shall include at least three
statements of financial position, two statements of profit or loss and other comprehensive income,
two separate statements of profit or loss (if presented), two statements of cash flows and two
statements of changes in equity and related notes, including comparative information.
Reference/ Further Reading
Lagos Nigeria
73

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Acc 201 Introduction To Financial Accounting I

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UNIVERSITY OF MAIDUGURI

ACC 201: INTRODUCTION TO FINANCIAL ACCOUNTING I UNITS: 2

is Computer based or e-testing one.

Study session 1: Final Account of a Sole Trader

1.1 Steps involved in preparation of a Sole trader final account

(a) Proving the arithmetical accuracy of the postings, and

1.2 Accounting Terminologies

i. Sales or Turnover account

ii. Returns inwards account

iii. Purchases account and

iv. Returns outwards account

1.2.1 The accounting entries will be recorded as follows:

Dr. Bank/Cash or Debtors/Receivables Account

Cr. Sales or Turnover Account

With goods sold for cash or on credit

Dr. Returns inwards Account

Cr. Bank/Cash or Debtors/Receivables Account

With goods sold but returned by customers

Dr. Sales or Turnover Account

Cr. Returns inwards Account

With the balance on the return inwards account

1.2.2 The accounting entries will be recorded as follows:

Dr. Purchases Account

Cr. Bank/Cash or Creditors/Payables Account

With goods bought for cash or on credit

Dr. Bank or Creditors/Payables Account

Cr. Returns outwards Account

With goods bought but returned to suppliers

Dr. Returns outwards Account

Cr. Purchases Account

With the balance on the return outwards account

1.2.3 Carriage inwards and outwards

1.2.4 Drawings of goods or cash

1.3 Preparation of income Statement of a Sole Trader from trial balance

Format for preparing final accounts of a sole trader

ADA SOLE TRADER

Increase in provision of bad and doubtful debts x

1.3 Preparation of Statement of financial position

You are required to prepare:

Income statement for the Year ended 31st December,2013

Statement of Financial Position as at 31st December, 2013

In study session 1 you have learned:

Steps involved in preparation of a Sole trader final account

Self-Assessment Questions (SAQs) for study session 1

You are required to:

SAQ 2 Short answer Questions

Study Session 2: DEPRECIATION

2.2 Know the causes of depreciation

2.3 Learn the methods of calculating depreciation

2.4 Calculate depreciation charges for a particular period

1.1 Definition of Depreciation

1.2 Causes of Depreciation

1.3 Methods of calculating depreciation

There are several methods of calculating depreciation. These include:

i. The cost of (or revalue amount) of the non-current asset.

ii. The estimated residual value of the non-current asset.

iii. The estimated useful economic life of the non-current asset.

iv. The method of depreciation that is appropriate for the business.

1.3.1 Straight Line Method

Annual Depreciation = Original cost of Asset – Salvage Value

Year cost of Assets Depreciation Accumulated Dep. Net Book Value

1.3.2 Reducing Balance Method

2011 4,250,000 15% 637,000 1,387,000 3,612,500