0452 Accounting

Revision Notes

CHAPTER 1

TERM DEFINITION

BOOKKEEPING Bookkeeping is the detailed recording of all the

financial transactions of a business.

ACCOUNTING Accounting is using book-keeping records to prepare

financial statements and to assist in decision making.

STATEMENT OF Statement of financial position shows the assets and

FINANCIAL POSITION liabilities of a business on a certain date.

CAPITAL Total resources provided by the owner and represents

what the business owes the owner.

ASSETS Things owned by a business.

LIABILITIES Things owed by a business

OWNER’S EQUITY Total resources provided by the owner and represents

what the business owes the owner.

INVENTORY Inventory is the goods a business has available for

resale.

TRADE RECEIVABLES The amount owed to the business by its credit

customers.

TRADE PAYABLES The amount the business owes to the credit suppliers of
goods

ACCOUNTING EQUATION
ASSETS = CAPITAL + LIABILITIES
CHAPTER 2

DRAWINGS Any value taken from the business by the owner of that
business.

CARRIAGE INWARDS The cost of bringing the goods to the business.

CARRIAGE OUTWARDS The cost of delivering the goods to the customers.

DRAWINGS Any value taken from the business by the owner of that
business.

DEAD CLIC
DEBIT CREDIT
EXPENSES LIABILITIES
(PURCHASES & SALES RETURN) INCOMES
ASSETS (SALES & PURCHASES RETURNS)
DRAWINGS CAPITAL

CHAPTER 3

TRIAL BALANCE A list of balances on the accounts in the ledger at a certain date.

PURPOSE OF TRIAL BALANCE

Trial balance will show if the total of the debit balances is equal to the total credit balances.
To check the arithmetical accuracy of the double entry
To prepare the financial statements

Errors that do not affect the trial balance

1.Error of Commission
This occurs when a transaction is entered using the correct amount and on the correct side,
but in the wrong account of the same class.
Example: Cash, $100 received from Malini credited to Mallika’s account
2.Error of Complete Reversal
This occurs when the correct amount is entered in the correct accounts, but the entry has
been made on the wrong side of each account.
Example: Cash drawings debited to the cash account and credited to the drawings account

3.Error of Ommission
This occurs when a transaction has been completely omitted from the accounting records.
Neither a debit entry nor a credit entry has been made.
Example: Payment of wages by cheque not entered in the books.

4.Error of Original Entry

This occurs when an incorrect figure is used when a transaction is first entered in the
accounting records. The double entry will therefore use the incorrect figure.
Example: Goods, $100, bought on credit but recorded as $1000.

5.Error of Principle
This occurs when a transaction is entered using the correct amount and on the correct side,
but in the wrong class of account.
Example: Motor expenses debited to the motor vehicles account.

6.Compensating Errors
These occur when two or more errors cancel each other out.
Example: Purchases account under-casted by $100 and sales returns account over-casted
by $100.

CHAPTER 4

CONTRA ENTRY A contra entry is one which appears on both sides of the cash
book.

BANK OVERDRAFT It occurs when more has been paid out of the bank than was
put into the bank account.

CASH DISCOUNT An allowance given to a customer when the account is settled

within a time limit set by the supplier.

DISHONOURED A cheque received which the debtor’s bank refuses to pay.

CHEQUE
 TRADE DISCOUNT A reduction in the price of goods to encourage customers to buy
in bulk.

DIVISION OF LEDGER ACCOUNTS

SALES LEDGER: Credit customers’ (trade receivables) accounts.

PURCHASES LEDGER: Credit suppliers’ (trade payables) accounts.
CASHBOOK: Bank and cash accounts
GENERAL/ NOMINAL LEDGER: All the other accounts (incomes/ expenses/ drawings,
capital etc.)

REASONS FOR DIVISION OF LEDGER ACCOUNTS

Same type of accounts can be kept together

Task of maintaining the ledger can be divided between several people
Checking procedures will be easier
Reduce the possibility of fraud

Debit Credit
Any money received Any money paid out

(if the money is placed in the cash till, it will be (if the money is paid in cash, it will be
entered in the cash column and if it is paid into entered in the cash column and if it is paid
the bank, it will be entered in the bank column) out of the bank, it will be entered in the
bank column.

CHAPTER 5

PETTY CASH BOOK A petty cash book is used to record low-value payments.

IMPREST SYSTEM Where the amount spent each period is restored so that the
petty cashier starts each period with the same amount.

When a member of staff wishes to obtain some petty cash, he/

PETTY CASH
she should present the petty cashier with a completed petty cash
VOUCHER
voucher.

Purpose of Petty Cash Book

 It lists the transactions for transferring to ledger accounts
o Expenses: postages. Stationery, Cleaning, Travelling expenses etc.

 It also acts as a ledger account for petty cash transactions

Advantages of Petty Cash Book

 Reduces the number of entries in cash book
 Able to train the junior members of staff
 Chief cashier will concentrate on more important task

CHAPTER 6
INVOICE
 Business sells and purchase goods on credit, 
 The invoice will be issued to the purchaser by the seller.
 Trade discount will be showed in the invoice as deduction.
 The customer receives the original invoice and uses it to record the purchase of
goods on credit.
 The supplier keeps a copy of the invoice and uses it to record the sale of goods on
credit.

ENTRIES IN THE LEDGER ACCOUNTS

 Using the copy of the invoice, the SELLER will record the following in his/her
Accounting Book:
o Debit: Trade Receivables
o Credit: Sales

 Using the original invoice, the BUYER will record the following in his/ her Accounting
Book:
o Debit: Purchases
o Credit: Trade Payables

DEBIT NOTE
 Debit Note is issued when there is any shortages, overcharges and faults.
 Debit note issued by purchaser to the seller to request a reduction in the invoice
received.
 A debit note is merely a request to the supplier to reduce the total of the original
invoice. No entries should be made in the ledger accounts using debit note.

CREDIT NOTE

 Credit Note is issued when goods are returned, reported faulty, or where there has been
an overcharge on an invoice.
 The document is issued by the supplier to the customer and the customer uses it to
record the purchases returns.
 The supplier keeps a copy of the credit note and uses it to record the sales returns.
ENTRIES IN THE LEDGER ACCOUNTS
 Using the copy of the credit note, the SELLER will record the following in his/her
Accounting Book:
o Debit: Sales Returns
o Credit: Trade Receivables

Using the original credit note, the BUYER will record the following in his/ her Accounting
Book:
o Debit: Trade Payables
o Credit: Purchases Returns

STATEMENT OF ACCOUNT

 It is a summary of the transactions for a month, which usually issued by the supplier at
the end of each month.
 A statement of account is a reminder to the customer of the amount outstanding.
 Neither the supplier nor the customer makes any entries in their accounting records in
respect of a statement of account.

CHEQUE
 A cheque is a written order to a bank to pay a stated sum of money to the person or
business named on the order.
 The supplier receives the cheque; a paying-in slip is completed when the cheque is paid
into the bank.
 The counterfoil of this paying-in slip is used to make the entry in the cash book to show
the money paid into the bank.
 The customer keeps the cheque counterfoil and uses it to make the entry in the cash
book to show the money paid out of the bank.

ENTRIES MADE IN THE LEDGER

 Using the cheque, the SELLER will record the following in his/her Accounting Book:
o Debit: Cashbook (Bank Column)
o Credit: Trade receivables

 Using the counterfoil, the BUYER will record the following in his/ her Accounting Book:
o Debit: Trade payables
o Credit: Cashbook (Bank Column)

RECEIPTS
 Receipt is a written acknowledgement of money received and acts as proof of payment.
 If goods are sold for cash, the customer is usually provided with a receipt.
ENTRIES MADE IN THE LEDGER
  Using the copy of receipt, the SELLER will record the following in his/her Accounting
Book:
o Debit: Cashbook (Cash Column)
o Credit: Sales

 Using the original receipt, the BUYER will record the following in his/ her Accounting
Book:
o Debit: Purchases
o Credit: Cashbook (Cash Column)

CHAPTER 7

BOOKS OF PRIME One in which transactions are recorded before being entered
ENTRY in the ledger.

ADVANTAGES OF BOOKS OF PRIME ENTRY

 Grouping similar types of transactions, which is useful when posting to the ledger.
 Bookkeeping can be divided between several people.
 Assist in the collating and summarizing of accounting information
 Useful to prepare control accounts (credit transactions)

BOOKS OF PRIME ENTRY PURPOSE

 To record day-to-day transactions and contains the
CASH BOOK
cash and bank (account)
PETTY CASH BOOK To record the low-value payments
SALES JOURNAL To record sales on credit
PURCHASES JOURNAL To record purchases on credit
SALES RETURNS JOURNAL To record sales returns
PURCHASES RETURNS JOURNAL To record purchases returns
To record all the other type of transactions; usually,
GENERAL JOURNAL it is used to record irregular transactions like
purchases of assets

CHAPTER 8

INCOME A statement prepared for a trading period to show the gross

STATEMENT profit and (net) profit for the year.

GROSS PROFIT The difference between the selling price and the cost of those
goods.

PROFIT FOR THE The final profit after any other income has been added to the
YEAR gross profit and the running expenses have been deducted.

Trading Section of Income Statement is prepared to calculate the profit earned from
the sale of goods.

Gross Profit = Net Sales – Cost of Sales

Net Sales = Sales – Sales Returns
Cost of Sales = Opening Inventory + Purchases – Purchases Returns + Carriage Inwards –
Goods Taken For Own Use – Closing Inventory

Profit and Loss Section of Income Statement is prepared to calculate the profit/ loss
gained for the year.

Profit for the year = Gross Profit + Other Incomes – Other Expenses

CHAPTER 9
Statement of financial position: Statement of financial position shows the assets and
liabilities of a business on a certain date.

NON-CURRENT ASSETS
These are long-term assets which are obtained for use rather than for resale.
Example: Land and Building, Machinery, Fixtures, Motors etc.

CURRENT ASSETS
These are short-term assets because they arise from the normal trading activities of the
business and their values are constantly changing.
These are assets which are either in the form of cash or which can be turned into cash
relatively easily.
Example: Cash, Bank, Inventory, Trade Receivables

FINANCED BY,
This represents the owner’s investment in the business and is the amount owed by the
business to the owner.
Opening Capital + Profit for the year – Drawings = Closing Capital

NON-CURRENT LIABILITIES
These are amounts owed by the business which are not due for repayment within the next
12 months.
Example: Long-term loan, mortgage etc.

CURRENT LIABILITIES
These are short-term liabilities.
Current liabilities arise from the normal trading activities of the business and their values are
constantly changing.
They are amounts owed by the business which are due for repayment within the next 12
months.
Example: Trade payables, bank overdraft etc.

Working Capital is the amount of money spent on day to day expenses or money used
to pay back the short term liabilities
Formula: Working Capital = Current Assets - Current Liabilities
NEGATIVE WORKING CAPITAL shows that a business has insufficient amount to pay for
day-to-day expenses and/or pay back short term liabilities.

CHAPTER 10

GOODWILL The amount by which the value of a business as a whole

exceeds the value of the separate assets and liabilities.

CAPITAL Money spent on purchasing, improving or extending non-

EXPENDITURE current assets.

CAPITAL RECEIPTS Money received by a business from a source other than the
normal trading activities.

REVENUE Money spent on running a business on a day-to-day

EXPENDITURE business.

REVENUE Money received by a business from normal trading activities.

RECEIPTS

ACCOUNTING PRINCIPLES
BUSINESS ENTITY: This means that the business is treated as being completely separate
from the owner of the business.
EXAMPLE: When the owner makes drawings from the business a debit entry will be
made in the drawings account. It shows that the money taken for personal use of the
owner and it will not be included in any financial statements to realise the profit/loss
and to determine the financial position of a business.

CONSISTENCY: Once a method has been selected, the method must be used consistently
from one accounting period to the next. If this is not done, a comparison of the financial
results from year to year is impossible.
EXAMPLE: Provision for depreciation
A business should apply a method consistently
If a method has been changed, it is important that the effects are noted in the
financial statements

DUALITY: It is also referred as the dual aspect principle.  Every transaction has two aspects
– a giving and a receiving.
 EXAMPLE: When an owner introduce capital in a business, the transaction will be
recorded as; debit – bank and credit – capital.

GOING CONCERN: This means that it is assumed that the business will continue to operate
for an indefinite period of time and that there is no intention to close down the business or
reduce the size of the business by any significant amount. This continuity means that non-
current assets shown in a balance sheet at book value and inventory at the lower of cost.
EXAMPLE: If the business continues to operate, the non-current assets will be
shown at their book value (Cost Price – Depreciation). Whereas if the business
intends to close down, the non-current assets will be shown at their expected sale
values.

MATCHING: The revenue of the accounting period is matched against the costs of the same
period.
EXAMPLE: Credit Sales and Credit Purchases will be included when a business
calculates profit/loss at the end of the financial year.

PRUDENCE: Accountants should ensure that profits and assets are not overstated and that
liabilities are not understated.
EXAMPLE: Profit is earned when goods actually change hands; but if the customer
fails to pay after a reasonable time, the principle of prudence may be applied and the
debt is written off.

HISTORIC COST: It requires that all assets and expenses are recorded in the ledger
accounts at their actual cost.

MATERIALITY: This principle applies to items of very low value. It refers to the items which
are not worth recording as separate items in an accounting record. The worth of the
immaterial is depending on the size of the business itself. When an item is regard as
immaterial, it will be recorded as an office expense in the year of purchase.

MONEY MEASUREMENT: It means that only information which can be expressed in terms
of money can be recorded in the accounting records. Money is recognised unit of measure
and is a traditional way of valuing transactions. There are aspects of a business which
cannot be measured in terms of money and therefore, do not appear in the accounting
records.
REALISATION: This means that profit is only regarded as being earned when the legal title
to goods or services passes from the seller to the buyer.

OBJECTIVES IN SELECTING ACCOUNTING POLICIES

RELEVANCE
 Financial statements provide information about a business’ financial performance and
position.
 It is important that the information is relevant to users of the financial statements.
 This means that it can be used to confirm, or correct, prior expectations about past
events and also to help forming, revising or confirming expectations about the future.

RELIABILITY
 The information provided in financial statements can be reliable if it is:
o Capable of being depended upon by users as being a true representation of the
underlying transactions and events which it is representing.
o Capable of being independently verified
o Free from bias
o Free from significant
o Prepared with suitable caution being applied to any judgements and estimates
which are necessary

COMPARABILITY
 The information contained in financial statements can be useful if it can be compared
with similar information about the same business for another accounting period or at
another point of time.
 To make comparisons, it is necessary to be aware of any different policies used in the
preparation of the financial statements, any changes in these policies and the effects of
such changes.

UNDERSTANDABILITY
 It is important that financial statements can be understood by the users of those
statements.
 It depends partly on the clarity of the information provided.
 Any related information should not be omitted from financial statements because it is
decided that it is too difficult for users to understand.
CHAPTER 11
Only items relating to that particular time period (accounting period) should be included in
the statement. The timing of the actual receipts and payments is not relevant. This is a
practical application of the accruals principle.

ACCRUED EXPENSES
 An accrual is an amount due in an accounting period which remains unpaid at the
end of that accounting period.
 Where an expense is accrued it means that some benefit or service has been received
during the accounting period but this benefit or service has not been paid for by the end
of the period.
 Any amount due but unpaid at the end of the financial year must be added to the
amount paid and the total expense relating to the accounting period transferred to the
income statement.
 Unpaid payment will be included as a current liability in the statement of financial
position.
 Opening accrued should be excluded (-) and closing accrued should be included
(+) in the income statement.

ACCRUED INCOMES
 Any amount due but not received at the end of the financial year must be added to
the amount received.
  As the balance represents an amount owing to the business, due to be received in the
near future, it will be included as a current asset in the statement of financial position.
 Opening accrued should be excluded (-) and closing accrued should be included
(+) in the income statement.

PREPAID EXPENSE
 A prepayment is an amount that is paid in advance.
 Where an expense is prepaid it means that a payment has been made during the
financial year for some benefit or service to be received in a future accounting period.
 Any amount paid during the financial year relating to a future accounting period must
be deducted from the amount paid so that only the expense relating to the accounting
period is transferred to the income statement.
 As the balance represents a short-term benefit, which the business has paid for but
which is not used up, it will be included as a current asset in the statement of financial
position.
 Opening prepaid should be included (+) and closing prepaid should be excluded (-)
in the income statement.
PREPAID INCOMES
 Any amount received during the financial year relating to a future accounting period
must be deducted from the amount received so that only the income relating to the
accounting period is transferred to the income statement.
 The balance on the income account, this will be included as a current liability in the
balance sheet as the business has a liability to provide some service or benefit for
which the business has already been paid.
 Opening prepaid should be included (+) and closing prepaid should be excluded (-)
in the income statement.

CHAPTER 12
  Depreciation is an estimate of the loss in value of a non-current assets over its
expected working life.
 The cost of the non-current asset is spread over the years which benefit from the
use of that asset. This is the application of accruals/ matching principle.
 Depreciation is a non-monetary expense as it does not involve an outflow of money,
nor does it provide a cash fund to use for the replacement of a non-current asset.
 As the estimated depreciation is included in the financial statements, the business
applies prudence principle. By including depreciation in the other expenses, the
business is not overstating profit.
 By including the provision for depreciation, the business is recording the non-current
assets at more realistic value.
 Businesses apply the accounting principle of consistency by using the same
method of depreciation.
 If a business changes the method of depreciation, the financial information might not be
accurate makes it difficult to compare between different years.

CAUSES OF DEPRECIATION

1. PHYSICAL DETERIORATION: This is the result of wear and tear due to the normal
usage of the non-current asset. It can also be because the asset falls into a poor
physical state due to rust, rot, decay etc.
2. ECONOMIC REASON: The non-current asset may become inadequate as it can no
longer meet the needs of the business. It can also be because the non-current asset
has become obsolete as newer and more efficient assets are now available.
3. PASSAGE OF TIME: This arises where a non-current asset, has a fixed life of a set
number of years. After the expiry of the period, they are rendered useless. So, their
cost is written of over their legal life.
4. DEPLETION: This arises in connection with non-current assets such as wells and
mines. The worth of the asset reduces as value is taken from the asset.

METHODS OF DEPRECIATION

STRAIGHT LINE METHOD

i. This method applies the same amount of depreciation each year.

ii. This method is used where each year is expected to benefit equally from the use of
the asset.
iii. Formula: Cost of asset/ Number of expected years of use
iv. Residual value: Where it is estimated that the asset will have some value at the end
of its working life, this must be included in the calculation.
v. Formula: Cost of asset – Residual value/ Number of expected years of use

ADVANTAGES
• It is easy to calculate
• It is useful when a non
current asset provides equal
benefit for each year of its
useful life
REDUCING BALANCE METHOD
DISADVANTAGES
• It is necessary to estimate
the useful life and the
residual value of the non-
current asset
• It ignores the actual rate at
which the non-current asset
will lose value

i. It is also known as Diminishing Balance Method.

ii. The same percentage rate is applied, but it is calculated on a different value each
year.
iii. This method is used when the greater benefits from the use of the asset will be
gained in the early years of its life.
iv. Formula: Cost of asset – Provision of depreciation x % or Netbook value x %

ADVANTAGES
• It matches costs with
revenue
• It is useful for those non-
current assets where greater
benefits are gained in the
early years of usage.
DISADVANTAGES
• The depreciation has to be
recalculated each year.
• The depreciation charge
against profit is greater in the
early years of the non-
current asset’s life.

REVALUATION METHOD

i. The assets are valued at the end of each financial year.

ii. The amount by which the value of the assets has fallen is the depreciation for the
year.
iii. This method is used where it is not practical, or it is difficult, to keep detailed records
of non-current assets.
iv. Formula: Opening value + Purchases during the year – Closing value

ADVANTAGES DISADVANTAGES
 • It is not necessary to
estimate the useful life and
the residual value of the non-
current asset.
• No complex calculations are
required.
• The non-current asset has to
be revalued at the end of
each year.
• The valuation many be
based on personal opinion.

DISPOSAL OF ASSET ACCOUNT

i. When a non-current asset is sold, it is a capital receipt and is recorded in a special

account known as a disposal of non-current asset account.

ii. The cost of the asset and the depreciation on the asset are removed from the asset
account and the provision for depreciation account and transferred to a disposal
account.

iii. The proceeds of sale are also entered in the account.

iv. EXAMPLE OF asset, provision for depreciation, disposal accounts:

Sameera
Motor Vehicle Account

2015 $ 2018 $

Jan 3 Bank 4 000 Feb 1 Disposal 4 000

Sameera
Provision for depreciation of motor vehicle account

2015 $ 2015 $

Dec 31 Balance c/d 800 Dec 31 Income 800

statement

800 800

2016 2016
 Dec 31 Balance c/d 1 600 Jan 1 Balance b/d 800

Dec 31 Income 800

statement

1 600 1 600

2017 2017

Dec 31 Balance c/d 2 400 Jan 1 Balance b/d 1 600

Dec 31 Income 800

statement

2 400 2 400

2018 2018

Feb 1 Disposal 2 400 Jan 1 Balance b/d 2 400

2 400 2 400

Sameera
Disposal Account

2018 $ 2018 $

Feb 1 Motor vehicle 4 000 Feb 1 Provision for 2 400

depreciation of 800
motor vehicle 800
Bank
Income statement

4 000 4 000

1. On that date:
 Credit the asset account
Debit the disposal of non-current asset account with the original cost price.
 Debit the provision for depreciation account
 Credit the disposal of non-current asset account with the total depreciation charged
 Credit the disposal of non-current asset account
Debit (either) cash book or debtor’s account

2. At the year-end: Transfer any difference on the disposal of non-current asset

account to the income statement

LOSS:
Debit side of the income statement (expense)
Credit side of disposal account

PROFIT:
Credit side of the income statement (income)

Debit side of disposal account

CHAPTER 13

• A irrecoverable debt is an amount owing to a business which will not be paid by

the credit customer.

• The reasons might be:

• The credit customer has disappeared

• The credit customer has gone out-of-business

• The credit customer is unable to pay

• The credit customer’s death

• If all reasonable steps to obtain payment have failed the debt is written off as a
irrecoverable debt.

• The account of the credit customer is closed by transferring the amount written off to
the irrecoverable debts account.

• The amount of the irrecoverable debt is regarded as a loss for the year so must be
included in the income statement otherwise the profit for the year will be overstated.

• Writing off irrecoverable debts is an example of the application of the principle of

prudence.
ENTRIES IN THE LEDGER ACCOUNTS

DEBIT: Irrecoverable Debts Account

CREDIT: Credit Customer’s Account

• The establishing of a credit limit and later monitoring of the debtor’s account is
known as CREDIT CONTROL.

• Invoices and month-end statements should be issued promptly

• Sales ledger accounts should be monitored

• Any overdue amount should be investigated

• Debtor should be contacted by letter/ telephone calls etc.

• No further goods should be supplied until the amount due is paid.

• Legal actions against the debtor.

• A debts recovered arises when a debtor pays some, or all, of the amount owed,
after the amount was written off as an irrecoverable debts.

ENTRIES IN THE LEDGER ACCOUNTS

DEBIT: Bank Account

CREDIT: Debts Recovered Account

• An alternative method is to re-instate the debt by crediting the bad debts recovered
account and debiting the debtor with the amount previously written off.

• The amount received would then be entered by debiting the cash book and crediting
the debtor.

• The advantage of this method is that all the transactions relating to the debtor appear
in the debtor’s account.

PROVISION FOR DOUBTFUL DEBTS

• A provision for doubtful debts is an estimate of the amount which a business will
lose in a financial year because of irrecoverable debts.
 • At the end of the year, businesses try to anticipate the amount will be lost because of
bad debts.

• This ensures the profit for the year is not overstated and the amount of trade
receivables is shown at realistic level. (prudence principle)

• By maintaining a provision for doubtful debts, a business apply the principle of

accruals.

• The provision for doubtful debts allows businesses estimate the actual value of their
account receivables more accurately.

CREATING A PROVISION FOR DOUBTFUL DEBTS

• Formula: Total trade receivables x %

• Credit Provision for doubtful debts accounts, debit income statement and record the
total provision in the current assets (trade receivables – provision for doubtful debts)

INCREASE IN THE PROVISION FOR DOUBTFUL DEBTS

• Formula: Total trade receivables x %

• Credit Provision for doubtful debts accounts (provision from previous year – current
years provision), debit income statement and record the total provision in the current
assets (trade receivables – provision for doubtful debts)

DECREASE IN THE PROVISION FOR DOUBTFUL DEBTS

• Formula: Total trade receivables x %

• Debit Provision for doubtful debts accounts (provision from previous year – current
years provision), debit income statement and record the total provision in the current
assets (trade receivables – provision for doubtful debts)

CHAPTER 14

• A bank statement is a copy of a customer’s account in the books of the bank which is
sent to the customer at regular intervals.
 • Bank reconciliation statement is prepared to reconcile the balances on cashbook and
bank statement.
• The bank statement is a copy of the customer’s account in the books of the bank and
so is a record of transactions as they affect the bank. When money is paid into the
bank the customer’s account will be credited as this is the amount owed by the bank
to the customer.

Reasons why the bank account and the bank statement may differ

Timing Differences
• Cheques not yet presented: These are cheques that have been paid by the
business and entered on the credit of the cash book, but which do not appear on the
bank statement. Maybe payee has not paid the cheque into his bank or the cheque is
still in the banking system and has not yet been deducted from the business’ account.
• Amounts not yet credited: These are cash and cheques that have been paid into
the bank and entered on the debit side of the cash book, but which do not appear on
the bank statement. It takes a few days before the money paid into the bank is
recorded in the customer’s account.

Items Not Recorded In The Cashbook

• Bank Charges and Bank Interest: The bank may deduct an amount from the
customer’s account to cover the cost of running the account and for any interest
charged on overdrafts and loans.
• Dishonoured Cheques: A cheque paid into the bank may be returned because the
drawer did not have sufficient funds in the account.

Items In Cash Book But Not In Items In Bank Statement But

Bank Statement Not In Cash Book
Cheques not yet presented Bank charges and bank interest
Amounts not yet credited Dishonoured cheques

Errors in cash book Standing orders

Credit transfers

Direct debits
Errors on bank statement
CHAPTER 15

• Any transactions which cannot be recorded in another book of prime entry are
recorded in the journal; mostly non-regular transactions are recorded in the journal.
• Any transactions which cannot be recorded in another book of prime entry are
recorded in the journal.
• These often consist of transactions which are not occurring regularly and year-end
transfers to the income statement.
• The transaction is posted to the appropriate ledger accounts after the journal entry is
completed.
Provision for depreciation
Provision for doubtful debts
Debts recovered and Irrecoverable debts
Purchases and sales of non-current assets
Accruals and prepayments
 • The narrative consists of a brief explanation of what is being recorded and why the
entry is being made.
• Errors made in the recording of the day-to-day transactions can be divided into two
categories:
Those which are not revealed by the trial balance
Those which result in the trial balance not balancing

Effect on profit of correcting errors

• If errors are discovered after the income statement has been prepared, it may be
necessary to amend the profit figure.
• Any corrections made to items appearing in the:

Effect on statement of financial position of correcting errors

• If errors are discovered after the preparation of financial statements, the statement of
financial position may have to be amended.
• If the profit for the year has been corrected this will affect the capital section of the
statement
• Closing Capital = Opening Capital + Profit/ Loss for the year - Drawings

CHAPTER 16

• Control Account acts as a type of Trial Balance for sales and purchases ledgers
 Purchases
Sales Ledger
Ledger Control
Control Account
Account

Total Trade Total Trade

Receivables Payables

Debit Credit
balance balance

Advantages of control account

 They can assist in locating errors when the trial balance fails to balance.
 They are proof of the arithmetical accuracy of the ledgers they control.
 The balances on these accounts are regarded as being equal to the total of the trade
receivables & payables.
 Draft financial statements can be prepared quickly because of the balances provided
by control accounts.
 They help to reduce frauds as the control accounts are prepared by someone who
has not been involved in making the entries in the ledger.
 They provide a summary of the transactions affecting the credit customers and credit
suppliers for each financial period.

Sales Ledger Control Account

 Sales ledger control account acts as a check on the individual credit customers’
accounts.
 The information to prepare a sales ledger control account is obtained from the books
of prime entry.
 The information obtained from the following books of prime entry:

Item Source of information

Sales Sales Journal

Sales returns Sales Returns Journal

Cash & cheques received from credit Cash Book

 customers

Discounts allowed to credit customers Cash Book

Dishonoured cheques Cash Book

Refunds to credit customers Cash Book

Bad debts written off General Journal

Interest charged on overdue accounts General Journal

Purchases Ledger Control Account

 This account acts as a check on the individual credit supplier’s accounts.
 An error in the purchases ledger would not be revealed if the control account is
prepared from the accounts in that ledger.
 The information to prepare a purchases ledger control account is obtained from the
books of prime entry.
 The information obtained from the following books of prime entry:

Item Source of information

Purchases Purchases Journal

Purchases returns Purchases Returns Journal

Cash & cheques received from credit suppliers Cash Book

 Discounts received from credit suppliers Cash Book

Refunds to credit suppliers Cash Book

Interest charged on overdue accounts General Journal

CHAPTER 17

Statement of affairs is a statement of capital, liabilities and assets.

 Statement of affairs is prepared under the single-entry system in order to find out
the amount of opening or closing capital of the business.
 It is also known as the balance sheet of single-entry system.
 For the purpose of determining the amount of opening capital, the statement of
affairs is prepared on the opening date.
 For the purpose of determining the amount of opening capital, the statement of
affairs is prepared on the opening date.
 The statement of affairs is prepared on the closing date for the purpose of
determining the amount of closing capital.
 The difference between the total assets and total liabilities is considered as the
amount of capital.

Key Differences Between Statement of Affairs and Statement of Financial Position

 Statement of affairs
• The basis of preparation of the
Statement of Affairs is a single
entry system, whereas the
basis of preparation of Balance
Sheet is a double entry system.
• A Balance Sheet is a very
important part of the financial
statements, but the Statement
of Affairs is not a part of the
financial statement.
• The Balance Sheet is accurate
as it is prepared after a
complete procedure is
followed, but the accuracy of
the Statement of Affairs is very
less, as it is ready from
incomplete records.
Statement of financial position
• In Balance sheet, there are no
estimated figures, however,
due to insufficient records,
hypothetical figures are taken.
• Statement of Affairs is
prepared on either opening or
closing date, whereas Balance
Sheet is prepared for a specific
date.
• There is no specific format for
the Statement of Affairs,
whereas Balance Sheet has a
particular format (Revised
Schedule VI), on the basis of
which it is prepared.

CALCULATION OF PROFIT/ LOSS

Profit = Closing Capital – Opening Capital + Drawings – Capital Introduced

CALCULATING PROFIT WITH INCOMPLETE RECORDS

MARGIN The margin is the gross profit
measured as a percentage of
selling price.
MARK-UP The mark-up is the gross
profit measured as a
percentage of the cost price.
INVENTORY TURNOVER The rate of inventory
turnover is the number of
times a business replaces its
inventory in a given period of
time.
Gross profit/ Sales x 100
Gross profit/ Cost of Sales x
100
Cost of Sales/ Average
Inventory
Average Inventory= Opening
+ Closing Inventory / 2
CHAPTER 18

Non-Trading Activities: An organization formed to provide facilities and services for

members. They are not formed with the aim of making a profit.

Characteristics of non-trading business

• These organisations are set up to provide service without profit motive
• Main sources of income is subscription.
• Managed by a group of persons called managing committee
• Treasurer is responsible for collecting any money due to the society and for paying
money owed by the society.

RECEIPTS AND PAYMENTS ACCOUNT

• All money received is debited and all money paid is credited.
• The account is balanced and carried down to become the opening balance for the
following financial year.
• A debit balance is an asset and represents money owned by the society.
• A credit balance is a liability and represents a bank overdraft.
• No adjustments are made for accruals and prepayments
• No distinction is made between capital receipts and revenue receipts
• No distinction is made between capital expenditure and revenue expenditure
• Non-monetary items such as depreciation are not included.

INCOME STATEMENT
• Many club or society do carry out trading activity though it is not their main purpose.
Example: Café, Sports Equipment Shops, Souvenir Shop
• At the end of financial year, an income statement (trading section only) should be
prepared for each separate trading activity to show the profit earned.
 • The trading section of an income statement of a club or society is prepared in exactly
the same way as that for a business.
• Revenue – Cost of Sales – Any running expenses (wages of shop staffs/
depreciation of shop assets etc.)
• The profit (later) will be transferred to the income and expenditure account.
• CREDIT PURCHASES = Amount paid to credit suppliers + Closing Trade Payables –
Opening Trade Payables

INCOME & EXPENDITURE ACCOUNT

• If the gains are more than the expenses the difference is referred to as a surplus or
excess of income over expenditure.
• If the gains are less than the expenses the difference is referred to as a deficit or
excess of expenditure over income.
• An income and expenditure are prepared using the same principles as those applied
in the preparation of an income statement of a trading business.
• Adjustments must be made for accruals and prepayments
• Capital receipts and expenditures are not included.
• Revenue receipts and expenditures are included.
• Non-monetary items such as depreciation are included.

STATEMENT OF FINANCIAL POSITION

• The principles applied when preparing a statement of financial position of a club or
society are similar to those applied in the preparation of a statement of financial
position of a business.
• The statement is prepared in exactly the same way of a trading business.
• There is no capital in the statement of financial position of a club or society.
• Business usually financed by an investment of capital from owners/ shareholders.
• Members of a club or society do not invest money, so they are not entitled to make
any drawings.
• The surpluses will accumulate within the organization to form a capital fund known as
the accumulated fund.

SUBSCRIPTION
 Subscriptions are amounts members of an organization pay, usually annually, to use
the facilities provided by the club or society.
  Receipts and Payments Account shows the amount of subscription received.
 Income and expenditure account shows the amount of subscriptions relating to the
financial year (adjusted for any subscriptions owed or prepaid by members)
 The calculation of the amount relating to the financial year may be shown in the form
of a ledger account known as a SUBSCRIPTION ACCOUNT.
 SUBSCRIPTION RELATED TO CURRENT YEAR = Subscription Received During
The Year + Opening Prepaid + Closing Accrued – Opening Accrued – Closing
Prepaid

ACCUMULATED FUND

The accumulated fund consists of the surpluses (less any deficits) which have accumulated
over the life of the organisation. It replaces capital in the statement of financial position of a
club or society.

ACCUMULATED FUND

DEFICIT will decrease the SURPLUS will increase the

accumulated fund accumulated fund

CHAPTER 19

 A PARTNERSHIP is a business in which two or more people work together as owners

with a view to making profits.
 A partnership business will maintain double entry records in the same way as a sole
trader.
 At the end of the financial year, an income statement and a statement of financial
position are prepared.
 An additional statement will also prepared, and it is known as profit and loss
appropriation account.
 A partnership agreement is a document setting out the rules under which the partners
will operate the business, including profit-sharing agreements
Advantages Disadvantages
 • Additional finance is
available
• Additional knowledge,
experience and skills are
available
• The responsibilities are
shared
• The risks are shared
• Discussions can take place
before decisions are taken
• Profits have to be shared among the
partners
• Decisions have to be recognized by all
partners
• Decisions may take longer to put into effect
• One partner’s actions on behalf of the
business are binding on all the partners
• Disagreements can occur
• All partners are responsible for the debts of
the business

PROFIT & LOSS APPROPRIATION ACCOUNT

 It is part of the year-end financial statements.
 It is prepared after the income statement.
 It shows the division of the profit or loss between the partners.
 The RESIDUAL PROFIT is the profit remaining after adjusting the profit for the year
for interest on drawings, interest on capital and partner’s salaries.
 It is divided between the partners in the agreed profit-sharing ratio.
 INTEREST ON DRAWINGS is to discourage partners from making high levels of
drawings.
 INTEREST ON CAPITAL is to encourage partners to increase capital.

CAPITAL ACCOUNT

 Each member of the partnership business has their own capital account in the
nominal ledger to record permanent increases or decreases in the capital invested
by the individual partners.
 Capital accounts prepared in this way are referred to as fixed capital accounts.
 A capital account has a credit balance as the business owes this to the partner.

CURRENT ACCOUNT

 Each member of a partnership business also has a current account.

 Anything which the partner becomes entitled to will be credited to this account.
 Anything which the partner is charged with will be debited to this account.
  If current accounts are not maintained, interest on capital, partner’s salaries, profit
share, drawings and interest on drawings are recorded in the capital account.

Debit entry Credit entry

Debit balance – amount owed credit balance – amount

by the partner to the
business
(If a partner’s drawings are
more than his/her total share
of profit, the current account
will have a debit balance)
owed by the business to the
partner
(If a partner’s drawings are
less than his/her total share
of profit, the current account
will have a credit balance)

DRAWINGS ACCOUNT

 A drawings account is maintained for each partner.

 The total of this account is transferred to the partner’s current account at the end of
the financial year.

STATEMENT OF FINANCIAL POSITION

A Statement of Financial Position of a partnership is same as that of a sole trader with the
exception of the capital section and this must show that the capital and current balances for
each partner separately.

CHAPTER 20

Manufacturing account shows the production cost or transfer price of goods completed
during the accounting period.
 Production Costs
Direct Materials + Direct
Prime Cost Labours + Direct
Expenses

Indirect Materials +
Factory Overhead Indirect Labours +
Indirect Expenses

TYPES OF INVENTORY
Raw Materials: Natural resources that will be used to produce finished goods.
Work in Progress: Goods that have been partially completed in the production process.
Finished Goods: Goods that have been produced and sold to the customers.

CALCULATION OF UNIT COST

Total cost of production/ Total quantity produced

MANUFACTURING BUSINESS MAY PURCHASE SOME FINISHED GOODS FOR THE

FOLLOWING REASONS:
• When production does not meet demand
• When it is cheaper to buy the goods rather than making them
• When those particular items cannot be made by the business

CHAPTER 21
A limited company is a legal entity which has a separate identity from its shareholders,
whose liability for the company’s debts is limited.

NATURE OF LIMITED LIABILITY COMPANY

• No maximum number of members
 • Capital is divided into units known as shares
• Shareholders of the company are only liable for the debts of the company up to the
amount they agree to pay for their shares
• Large amount of capital can be raised
• Profits are distributed among the members in the form of dividends, often stated in
terms of a percentage (%) of the face value of the shares
PRIVATE LIMITED PUBLIC LIMITED
• Sell its’ shares to only the
people known; to family and
friends
• Sell its shares to the public
• Functions as a smaller
• Have to be registered with the
company and is not allowed to
Registrar of Companies as a
offer its shares to the public
“public limited company”
• Have to be registered with the
• Have the abbreviation “plc”
Registrar of Companies as a
attached to its official name.
“private limited company”
• Have to trade its shares on the
• Have the abbreviation “ltd”
public exchange (Stock Market
attached to its official name.
or Securities Exchange)
• Does NOT have to trade its
• Have to publish its financial
shares on the public exchange
statements annually
(Stock Market or Securities
Exchange)
• Does NOT have to publish its
financial statements

BENEFITS OF BEING A MEMBER OF LIMITED LIABILITY COMPANY

• The liability for the debts of the company is limited to the amount the member agreed
to contribute
• The company has a separate legal entity to its shareholders
• Shareholders do not take an active part in the running of the business
• Board of directors will be appointed to run the business during AGM
• It is possible to access greater capital than for sole trader and partnership
• It is easy to buy and sell shares
• Loans can be obtained easily
• The company has continuity of existence
 • There are many legal requirements in relation to forming and running a limited
company
• Annual financial statements must be prepared and provided to the shareholders

ISSUED SHARE CAPITAL

• When a limited company is formed the amount of share capital required will be
issued to the shareholders
• This is known as the issued share capital
• If more capital is required at a later date, further shares can be issued

CALLED UP CAPITAL
• A company may not immediately require all the money due on the shares it issues
• Shareholders may be allowed to pay in installments at times and amounts fixed by
the company
• The total amount a company has requested from the shareholders is known as the
called up capital
• This may be less than the issued capital as a company may only ‘call up’ the amount
it actually requires at that date

PAID UP CAPITAL
• Paid up capital refers to that part of the called up capital for which as company has
actually received cash from its shareholders

PREFERENCE SHARES
• Receive a fixed rate of dividend which is payable before any dividend is payable to
ordinary shareholders
• Dividend received is the same every year – provided that the profit of the company is
adequate to cover this amount
• If a company closed down, any money left after paying outside liabilities is used to
pay back the preference shareholders first
• Preference shareholders are not entitled to vote at shareholders’ meetings

REDEEMABLE PREFERENCE SHARES

 • Redeemable preference shares are those preference shares which must be bought
back by the company at an agreed date and for an agreed price
• If the preference shares are redeemable, the dividend is included as a finance cost in
the profit and loss section of the income statement
• Accrued redeemable preference shares will appear in the current liabilities in the
statement of financial position
• The shares are shown as a non-current liability in the statement of financial position

NON-REDEEMABLE PREFERENCE SHARES

• The non-redeemable preference shares’ dividend paid should be included in the
statement of changes in equity
• The shares are included in the equity and liabilities section (also known as equity and
reserve) of the statement of financial position

ORDINARY SHARES
• These are known as equity shares
• The dividend on ordinary shares is only payable after that on the preference shares
has been accounted for
• Dividend is not a fixed amount, but can vary according to the profits of the company
• If the trading results are poor, the ordinary shareholders may not receive any
dividend at all but the results are good, they may be awarded high dividends
• If a company closed down, the outside liabilities and the preference shareholders are
repaid before any money returned to the ordinary shareholders
• This may result in very little being returned to the shareholders if the company was
short of funds.
• The shareholders may receive a return higher than their original capital investment if
the company has adequate funds.
• Ordinary shareholders are entitled to vote at shareholders’ meetings on the basis of
one vote per share.

DEBENTURES
 A debenture is a long-term loan which has a fixed rate of interest, payable
irrespective of the profit of the company.
 It carries a fixed rate of interest, which is payable whether or not the company makes
a profit.
 The loan interest appears as a finance cost in the profit and loss section of the
income statement.
  If the company close down, the debenture holders will be repaid before any capital is
repaid to shareholders.
 Debenture holders are not members of the company, so they are not entitled to vote
at shareholders’ meetings.

INCOME STATEMENT
 An annual income statement is prepared for a limited company in exactly the same
way as it is for a sole trader or a partnership business
 The only difference is that interest on debenture and dividend on redeemable
preference shares will be shown as finance costs in the profit and loss section

STATEMENT OF CHANGES IN EQUITY

 Equity is the total funds provided by the shareholders of the company
 It summarises the changes during the year to the ordinary share capital, non-
redeemable preference share capital, retained earnings and general reserve.
 Any ordinary share dividend and dividend on non-redeemable preference
shares which has been paid during the financial year is recorded in this statement.
 Interim dividend means the shareholders will be paid half way dividend during the
year and this is recorded in this statement as well
 Proposed dividend: ordinary share dividend and dividends on non-redeemable
preference shares – should NOT be recorded in the current year’s statement, instead
in the year the business pay out to the shareholders.
 Retained profit or retained earnings is the profit kept in the business rather than
paid out to shareholders as a dividend
 It will appear in the equity and reserves section of the statement of financial position
 Profit for the year should be added to the retained earnings
 Dividend paid to the shareholders and transfer to general reserve will be deducted
from the total retained earnings
 Any amount that is kept separate by a business, out of its profit for future is known as
‘General Reserve’
 Usually, business will reserve some amount from the profit made, for the following
reasons:
Expansion
Purchases of non-current assets
Developing new products
Entering new markets
STATEMENT OF FINANCIAL POSITION
 The following sections are presented in exactly the same way as for the sole trader
and partnership:
Non-current assets and current assets
Current liabilities
 The non-current liabilities section may include redeemable preference shares,
debentures
 The capital section has to be modified as it shows the details of shares and reserves
of the company
 Ordinary share capital and non-redeemable preference shares capital are recorded
in the ‘Equity and Reserves’ section
 The general reserves and retained earnings are added to the share capital as they
represent profits which have been retained in the company

CHAPTER 22
• Capital Owned is the amount owed by a business to the owner of the business on a
certain date
• Capital Employed is the total funds which are being used by a business
• Working Capital is the difference between the current assets and the current
liabilities
• Working capital is:
The amount available for the day-to-day running of the business
The short-term assets available to pay back short-term liabilitieS.

Ratio Purpose Formula

PROFITABILITY RATIO
It measures the performance of the business by comparing the profit to other figures in
the same set of financial statements.
Return On Capital The ratio shows the profit earned for Profit for the year/
Employed (ROCE) every $100 used in the business in Capital Employed x
order to earn that profit. 100
The higher the return, the more
efficiently the capital is being employed/
used within the business.
Gross Margin The ratio shows the gross profit earned Gross profit/ Sales
(this is also called for every $100 of sales. x 100
gross profit as a % of The higher the return, the more
turnover) profitable is the business.
The business may achieve a higher
monetary gross profit by reducing the
selling prices.
A fall in the gross margin may be caused
by:
Increasing the rate of trade discount
Selling goods at cheaper prices
Profit Margin The ratio shows the profit earned for Profit/ Sales x 100
(The ratio acts as an every $100 of sales.
indicator of how well a If the profit margin of a business
business is able to increases, it indicates that the operating
control its expenses.) expenses are being controlled.
A fall in the profit margin may be
caused by:
A decrease in the gross profit
An increase in other expenses
A decrease in other incomes
A change in the type of expenses

The profit margin can be improved by:

Increasing the gross margin
Controlling expenses
Increasing other incomes
LIQUIDITY RATIO
It measure the ability of the business to turn assets into cash to pay its short
term debts
Current Ratio It compares the assets which are in the Current assets/
form of cash or which can be turned Current liabilities
into cash relatively easily within the
next 12 months with the liabilities which
are due within that period of time.
The working capital must be adequate
to finance the day-to-day trading
 activities.

Quick Ratio It compares the assets which are in the Current assets –
form of money, or which will convert Inventory/ Current
into money quickly, with the liabilities liabilities
which are due for repayment in the near
future.
OTHERS
Rate of inventory This ratio calculates the number of Cost of Sales/
turnover times a business sells and replaces its Average Inventory
(It is also referred as inventory in a given period of time. OR
inventory turn) Businesses selling luxury goods will Cost of Sales/
have a low rate of inventory turnover. Average Inventory x
Businesses selling low value products 365 (by days)
(essential/ daily items), will have a high
rate of inventory turnover.

A lower rate of inventory turnover can be caused by factors such as:

• Lower sales (resulting in higher inventory levels)
• Inventory over-purchased
• Too high selling prices
• Falling demand
• Business activity slowing down
• Business inefficiency
Trade receivables It measures the average time the Trade Receivables/
turnover debtors take to pay their accounts. Credit Sales x 365
The answer to this calculation shows
 (also known as trade the length of time debtors actually take
receivables/ sales to pay their accounts.
ratio) The quicker the debtors pay their
accounts, the better it is: the money can
then be used for other purposes within
the business.
The collection period for trade receivables can be improved by measures such as:
• Improving credit control policy (sending regular statements of
account, “chasing” overdue accounts and so on)
• Offering cash discount for early settlement
• Charging interest on overdue accounts
• Refusing further supplies until any outstanding debt is paid
• Invoice discounting and debt factoring
Trade payables It measures the average time taken to Trade Payables/
turnover pay the creditors accounts. Credit Purchases x
(also known as trade The answers to this calculation should 365
payables/ purchases be compared with the term of credit
ratio) allowed by creditors.
If the period increases it may indicate
that the business is short of immediate
funds and is struggling to meet debts
when they fall due.
Taking longer to pay the creditors means that the business can use the funds for other
purposes, but there can be adverse effect such as:
• The supplier refusing credit in the future
• The supplier refusing further supplies
• The loss of any cash discount for early settlement
• Damage to the relationship with the supplier

PROBLEMS OF INTER-FIRM COMPARISON

• A business can compare their accounting ratios with other businesses but it will only
be meaningful if the businesses of:
• the same type
• the same size
• in the same trade
 • The businesses may apply different accounting policies, for example they may use
different methods of depreciation
• The businesses may apply different operating policies such as renting premises or
purchasing premises, obtaining long-term finance from capital only or using capital
and long-term loans.
• Such policies will affect both the profit for the year and the statement of financial
position
• Non-monetary items such as the skill of the work-force, the goodwill of the business
and so on do not appear in the accounting records, but are very important in the
success of the business
• It is not always possible to obtain all the information about another business which is
needed to make a true comparison
• Example: The inventory shown in the financial statements may not represent
the average amount held during the year; the financial statements do not
show the age of the non-current assets and when they need replacing

USERS OF ACCOUNTING STATEMENTS

INTERNAL
 Owners/ Shareholders
• To assess the business’ performance and progress
• Managers
• To assess past performance, plan for the future and take remedial/ recovery
action
• Employees
• To know if the business is able to continue operating – job security, increase
in wages etc

EXTERNAL
• Potential buyers of business
• Bank Manager
• To know the ability of repayment of loan/ bank overdraft (working capital)
 • Other Lenders
• To know the ability of repayment of loan
• Creditors/ Credit Suppliers
• Suppliers will need to know the liquidity position and the payment period for
trade payables
• Customers
• Ensure the continuity of supplies
• Trade Union
• to know if the business is able to continue operating
• Government departments
• Purpose of compiling business statistics and checking that the correct amount
of tax is being paid

LIMITATIONS OF ACCOUNTING STATEMENTS

• Time Factor: The accounting statements are a record of what has happened in the
past, not a guide to the future
• Historic Cost: Comparing transactions taking place at different times can be difficult
because of the effect of inflation
• Accounting Policies: Different accounting policies may be applied, so the
comparison with the results of different years and accounting policies is difficult
• Different Definitions: The figure of profit for the year may be adjusted for loan
interest, and sometimes preference share dividends in a limited company
• Money Measurement: Accounts only record information which can be expressed in
monetary terms