Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

LECTURE NOTES

IBRAHIM AYOUBA
PCET, MSc, CPA,
PhD (Fellow) in Accounting
TEL: (+237) 671-527-879
Email: [email protected]

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER ONE

ACCOUNTING FOR ASSETS AND LIABILITIES

1.1. Conceptual Framework for Financial Reporting

1.1.1. The meaning of GAAP

The preparation and presentation of financial statements is based on a large number of concepts, principles and
detailed rules. Some of these are contained in law and others are in financial reporting standards. Many of the most
fundamental concepts are not contained in any law or regulation or standard but are simply accepted accounting
principles and conventions.

All the concepts, principles, conventions, laws, rules and regulations that are used to prepare and present financial
statements are known as Generally Accepted Accounting Principles or GAAP.

‘Generally accepted accounting principles’ vary from country to country, because each country has its own legal
and regulatory system. For example, there is US GAAP, EU GAAP, UK GAAPs, and SYSCOHADA and so on.
The SYSCOHADA has adopted International Financial Reporting Standards or IFRSs, sometimes called
International Accounting Standards (IASs). It is now fairly common to use the term IFRS (or IAS) to refer to the
totality of the rules set out in the International Accounting Standards Board’s (IASB’s) conceptual framework, all
international accounting standards (IFRSs and IASs), and all the associated interpretations and guidelines.

1.1.2. The meaning of a conceptual framework

A conceptual framework is a system of concepts and principles that underpin the preparation of financial statements.
These concepts and principles should be consistent with one another.

More recently, the term ‘conceptual framework’ has come to mean not only the principles themselves, but a
document or statement that sets out and explains the concepts and principles that support the preparation of financial
statements. A conceptual framework is developed for a particular regulatory system or a particular set of ‘generally
accepted accounting principles’ or GAAP.

The International Accounting Standards Committee (the predecessor of the IASB) issued a conceptual framework
document in 1989. This was called the Framework for the Preparation and Presentation of Financial Statements
and was adopted by the IASB. It is comprised of the following sections:

 The objective of financial statements (now replaced – see below)

 Underlying assumptions of financial statements
 Qualitative characteristics of financial statements (now replaced – see below)
 The elements of financial statements
 Recognition of the elements of financial statements
 Measurement of the elements of financial statements
 Concepts of capital and capital maintenance.

The IASB has been working closely with FASB (the US standard setter) on a wide range of projects with the aim
of converging IFRS and US GAAP. One of the projects has had the aim of producing a conceptual framework
common to each GAAP.

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1.2. Various Standards of Accounting

Even though IPSASB have been based on IFRSs some differences exist between the two sets of accounting
standards which need to be addressed:
 Recognition and measurement: the absence of the profit objective in public services where public policy
goals result in services being provided at no charge. E.g. non-exchange transactions are typical in the public
sector (e.g. transfer payments), which are not found in the for-profit sector. In the public sector, impairment
is more than just being future cash flow generated.
 Presentation and disclosure: the financial statement of the public sector requires much information that is
not found in the financial statement put in place by IFRS. This is due to the nature of activities of the
government entities which has a far broader concept of accountability
 The basis of accounting: public sectors still do prepare their financial statements on a cash basis of accounting
in line with their fiscal budgeting.
Accounting Standards
i. IAS 1 – Presentation of Financial Statements
ii. IAS 2 – Inventories
iii. IAS 7 – Statement of cash flows
iv. IAS 8 – Accounting policies, changes in accounting estimate and errors
v. IAS 10 – Events after the reporting date
vi. IAS 11 – Construction contracts
vii. IAS 12 – Income taxes
viii. IAS 16 – Non-current assets
ix. IAS 19 – Employee benefits
x. IAS 20 – Government grants
xi. IAS 21 – Foreign currency
xii. IAS 23 – Borrowing cost
xiii. IAS 24 – Related party disclosures
xiv. IAS 26 – Accounting and reporting by retirement benefits
xv. IAS 27 – Separate financial statements
xvi. IAS 28 – Investment in associates and joint ventures
xvii. IAS 29 – Financial reporting in Hyperinflationary economies
xviii. IAS 33 – Earnings per share
xix. IAS 34 – Interim financial reporting
xx. IAS 36 – Impairments
xxi. IAS 37 – Provisions, contingent assets and liabilities
xxii. IAS 38 – Intangible assets
xxiii. IAS 41 – Agriculture
xxiv. IFRS 5 – Non-current assets held for sale and discontinued operations
xxv. IFRS 9 – Financial instruments
xxvi. IFRS 13 – Fair Value
xxvii. IFRS 15 – Revenue from contracts with customers
xxviii. IFRS 16 – Leases

1.3. Accounting Concepts and Conventions

Accounting is meant for reporting financial information to the management and other internal and external users of
accounting information. To make all accounting information intelligible and commonly understood by all the users,
it needs to be based on universally recognised standards. These standards are also known as accounting principles.
They can be classified into two categories:
• Accounting concepts
• Accounting conventions

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Accounting Concepts
The term ‘concepts' include all the assumptions or conditions upon which the science of accounting is based
A convention, on the other hand, is defined as a practice based on a general agreement between parties. Accounting
conventions are the methods or procedures which have been recognised as conventional or common for accounting.
The distinction between these two terms is more of academic interest than practice. Concepts and conventions,
when combined, become accounting principles.
The following are the widely accepted accounting concepts, conventions and principles:
i) Business Entity Concept
According to this concept, a clear distinction is made between a business enterprise on the one hand and its owners
on the other. It means that the enterprise is liable to the owner for the capital investment made by the owner. Since
the owner invested capital, which is also called risk capital, he has a claim on the profit of the enterprise. Part of
the profit which is apportioned to the owner and is immediately payable becomes a current liability.
The concept of separate entity applies to all forms of business organisation. For example, in the case of a partnership
business or sole proprietorship business, the partners or sole proprietors are not considered as separate entities in
the eyes of the law. If the enterprise fails to pay its liability, the proprietors/partners have to pay it from their
personal funds, but for accounting purposes, they will be considered as separate entities. In the case of companies,
there is a legal distinction between the shareholders and the company. The liability of the shareholders of a limited
company is limited to the unpaid amount on their shares. This concept has proved extremely useful in keeping
business affairs strictly free from the effect of the private affairs of the owner.

ii) Revenue Realisation Concept

According to this concept, revenue is recognised when a sale is made. A sale is considered to be made at the point
when the property passes to the buyer, and he becomes legally liable to pay the amount.
However, accountants follow a more conservative path. They try to cover all probable losses but do not count any
probable gain. That is to say, if accountants anticipate a decrease in value they count it, but if there is an anticipated
increase in value they ignore it until it is realised - this is called Prudence.
Similarly, this concept does not allow profits on unsold goods to be recorded but allows the loss on the stock after
a fall in the market value to be recorded.

iii) Accrual Concept

Accrual means the recognition of revenue and costs as they are earned or incurred and not as money is received or
paid. The accrual concept relates to the measurement of income, the identification of assets and liabilities.
According to the accrual concept:
Revenue - Expenses = Profit
Alternatively as per cash basis:
Cash received in the ordinary course of business - Cash paid in the ordinary course of business = Profit.
iv) Dual Aspect Concept
This is the basic concept of accounting. According to this concept, every business transaction has a dual effect.
Article 17 (2) of the UAA says that the double-entry bookkeeping method shall be used, which means that entries
shall be posted in at least two accounts, one being debited and the other credited. When a transaction is recorded,
the total of the sums entered on the debit side must be equal to the total of the sums entered on the credit side. For
example, Akoh starts a business with a capital of FCFA 20,000. There are two aspects of the transaction. On the
one hand, the business has assets of FCFA 20,000 while on the other hand, the business has to pay to the proprietor
a sum of FCFA 20,000 which is the owner's capital. This expression can be shown in the form of an equation:
Cash (assets) = Capital (equities)

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i.e. FCFA 20,000 = FCFA 20,000

v) Accounting Period Concept (Periodicity)

According to this concept, the life of the business is divided into appropriate segments and evaluations made on
performance after each segment. This is because although the life of the business is considered to be indefinite
(according to the going concern concept), the measurement of income and studying the financial position of the
business after a very long period would not be helpful in taking proper corrective steps at the appropriate time.
For example, if a tea factory (like Tole Tea) lasts for 100 years, it is necessary to measure its performance as well
as financials periodically and not only at the end of its life. It is, therefore, necessary that after each segment or time
interval, the businessman must evaluate performance to see how things have gone. In accounting, such a segment
or time interval is called the ‘accounting period'. It could be one month, quarterly, half yearly, or yearly depending
on the nature of the business. However, the statutory accounting period is one year, and in Cameroon, it follows the
calendar year (i.e. from January to December).
Article 7 of the UAA says that By way of exception, an initial accounting period commencing during the first half
of the calendar year is shorter than twelve months, and an initial accounting period commencing during the second
half of the calendar year is more extended than twelve months.
If an entity ceases trading, regardless of the reason therefore, the duration of the liquidation proceedings is counted
as a single accounting period, subject to provisional annual statements being drawn up.
At the end of each accounting period, a Statement of Income and a Statement of Financial Position are prepared.
The Statement of Income shows the profit or loss made by the business during the accounting period while the
Statement of Financial Position describes the financial position of the business as of the last day of the accounting
period.

vi) Matching Concept

This concept is based on the accounting period concept. The primary objective of running a business is to earn a
profit. To find out the profit made by the business during a period, it is necessary that ‘revenues' of the period should
be matched with the 'expenses' (costs) of that period. The term ‘matching' means an appropriate association of
related revenues and expenditures. In other words, income made by the business during a period can be measured
only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue.
The question of when the payment was received or made is irrelevant, from an accrual accounting standpoint. With
this concept, adjustments are made for all outstanding expenses, accrued incomes, prepaid expenses and unearned
income, etc, while preparing the final accounts at the end of the accounting period.
So accrual, periodicity, and matching are the three procedural conventions that work simultaneously for income
measurement and recognition of assets and liabilities. Going concern, cost and realisation concepts give the
valuation criteria. Entity and money measurement are viewed as basic concepts on which other procedural concepts
cluster.
It is important to state that the question of matching arises because of the accrual and accounting period concepts.

Accounting Conventions
The concepts of accounting already discussed are now part of the business world over many years. These concepts,
however, are capable of being interpreted in many ways. Accounting conventions are accepted approaches to the
application of the earlier concepts. The main conventions are:
1. Materiality
2. Prudence
3. Consistency
4. Full disclosure

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5. Going concern

i) Materiality.
Information is material if its omission or misstatement could influence the decision of its users taken by financial
statements. According to this convention, the accountant should attach importance to material details and ignore
insignificant details. This is because accounting will otherwise be unnecessarily overcrowded with irrelevant
details. The question of what constitutes a material detail is left to the discretion of the accountant. Moreover, an
item may be material for one operation or company while immaterial for another.
Accounting does not serve a useful purpose if the effort of recording a transaction in a certain way is not worthwhile.
For example, if a box of paperclips were bought, it would be used up over a period, and this cost is used up every
time someone uses a paper-clip. It is possible to record this as an expense every time it happens, but apparently, the
price of a box of paper-clips is so little that it is not worth recording in this way. The box of paper clips is not a
material item and therefore would be charged as an expense in the period it was bought, irrespective of the fact that
it could last for more than one accounting period. In other words, do not waste your time in the elaborate recording
of immaterial items.
ii) Prudence/Conservatism.
The accountant must see that people get the proper facts about the business. He should make sure that assets are
not valued too highly. Similarly, liabilities should not be shown at values too low. Otherwise, people might lend
money to a firm, which they would not do if they had the proper facts.
The accountant should always be on the side of safety, and this is known as Prudence. The prudence concept means
that usually, he will take the figure, which will understate rather than overstate the profit. Thus, he should choose
the figure, which will cause the capital of the firm to be shown at a lower amount rather than at a higher one. He
will also usually make sure that all losses are recorded in the books, but profits should not be anticipated by
recording them before they should be. The term ‘conservatism' was once widely used until it was generally replaced
by ‘prudence'.
iii) Consistency
The consistency convention requires that accounting practices should remain unchanged from one period to another.
This cannot be done if one method is used in one year and another method in the next year and so on. Continually
changing the methods would lead to misleading profits being calculated from the accounting records. This
convention states that when a firm has once fixed a method for the accounting treatment of an item, it will enter all
similar items that follow in the same way.
iv) Full Disclosure
According to this convention accounting, reports should disclose fully and fairly the information they are supposed
to represent. They should be prepared honestly and should sufficiently disclose information which is of material
interest to proprietors, present and potential creditors and investors. The convention is gaining more important
because most of the big businesses are run by joint stock companies where ownership is divorced from management.
v) Going Concern
Businesses are normally created to operate for as long as possible from one accounting period to another. The
accountant must also prepare accounts of the business showing the real value of the assets at present considering
that the assets will still be used in subsequent periods. This convention is concerned with the valuation of assets
and liabilities. As such in preparing accounts at the end of one period, especially for assets, the book value of the
assets should be considered rather than their present market value is given that the business is not to be sold at the
end of that period but to go on for many other years.

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1.4. Informational needs of those who use financial statements

i) Investors
Investors in a business entity are the providers of risk capital. Unless they are managers as well as owners, they
invest in order to obtain a financial return on their investment. They need information that will help them to make
investment decisions. In the case of shareholders in a company, these decisions will often involve
whether to buy, hold or sell shares in the company. Their decision might be based on an analysis of the past financial
performance of the company and its financial position, and trying to predict from the past what might happen to the
company in the future. Financial statements also give some indication of the ability of a company to pay dividends
to its shareholders out of profits.
ii) Lenders
Lenders, such as banks, are interested in financial information about businesses that borrow from them. Financial
statements can help lenders to assess the continuing ability of the borrower to pay interest, and its ability to repay
the loan principal at maturity.
iii) Suppliers and other trade creditors
Financial information about an entity is also useful for suppliers who provide goods on credit to a business entity,
and ‘other trade creditors’ who are owed money by the entity as a result of debts incurred in its business operations
(such as money owed for rent or electricity or telephone charges). They can use the financial statements to assess
how much credit they might safely allow to the entity.
iv) Government
The government and government agencies are interested in the financial statements of business entities. They might
use this information for the purpose of business regulation or deciding taxation policies. The public in some cases,
members of the general public might have an interest in the financial statements of a company. The IASB
Framework comments: ‘For example, entities may make a substantial contribution to the local economy in many
ways including the number of people they employ and their patronage of local suppliers.’
v) Employees
Employees need information about the financial stability and profitability of their employer. An assessment of
profitability can help employees to reach a view on the ability of the employer to pay higher wages, or provide
more job opportunities in the future.
vi) Customers
Customers might be interested in the financial strength of an entity, especially if they rely on that entity for the
long-term supply of key goods or services.
vii) Managers
Managers are not included in this list of users by the IASB Framework, because management should have access
to all the financial information they need, and in much more detail than financial statements provide. However,
management is responsible for producing the financial statements and might be interested in the information they
contain.
1.5. Non-Current Assets
The assets of a business are classified as current assets or non-current assets.
IAS 1 (Presentation of financial statements) defines current assets and then states that all other assets should be
classified as non-current assets.

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Current assets include, cash, receivables, prepayments (see chapter 7) and inventory. They are all items that will be
used or recovered in the short term.
A non-current asset is an asset which is used by the business over a number of years.
Non-current assets may be:
 Tangible non-current assets. These are physical assets, such as property (land and buildings), plant and
equipment (including motor vehicles); or
 Intangible non-current assets. These are assets that do not have a physical existence such as patent rights.
IAS 16: Property, plant and equipment
Rules on accounting for property, plant and equipment are contained in IAS 16 Property, plant and equipment.
Definitions
Property, plant and equipment are tangible items that: are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes; and are expected to be used during more than one
period and future economic benefit is going to arise from the asset.
Initial measurement
Property, plant and equipment are initially recorded in the accounts of a business at their cost. The cost is the
amount of cash paid or the fair value of the other consideration given to acquire an asset at the time of its
acquisition or construction.
The cost of an item of property, plant and machinery consists of:
 Its purchase price after any trade discount has been deducted, plus any import taxes or non-refundable
sales tax; plus
 The directly attributable costs of ‘bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management’ (IAS 16 Property, plant and
machinery). These directly attributable costs may include:
 employee costs arising directly from the installation or construction of the asset;
 the cost of site preparation;
 delivery costs (‘carriage inwards’);
 installation and assembly costs;
 testing costs; and
 professional fees directly attributable to the purchase
Example 1:
A company has purchased a large item of plant. The following costs were incurred.
CFAF
List price of the machine 10,000,000
Trade discount given to company 500,000
Delivery cost 1,000,000
Installation cost 1,250,000
Cost of site preparation 2,000,000
Architect’s fees 150,000
Administration expense 1,500,000
Required: Calculate the cost of the Plant

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1.5.1. Depreciation and Carrying Amount

Definition of depreciation
Depreciation is a method of spreading the depreciable amount of a non-current asset over its expected useful
life (economic life), so that an appropriate portion of the cost is charged in each accounting period.
Definitions (from IAS 16)
Depreciation: The systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount: The cost of an asset (or its revalued amount, in cases where a non-current asset is
revalued during its life) less its residual value.
Residual or Scrap value: The expected disposal value of the asset (after deducting disposal costs) at the end
of its expected useful life.
Useful life: The period over which the asset is expected to be available for use by the business entity.

Note that the revaluation of non-current assets and the disposal (sale) of noncurrent assets are not in this treated
in this chapter. They are mentioned above for completeness. You will learn about these in later chapter.

1.5.2. Derecognition of Property, Plant and Equipment

Gain or loss on disposal of a non-current asset

Property, plant and equipment are eventually disposed of: by sale, or if they have no sale value, through disposal
as scrap. Disposal can occur at any time, and need not be at the end of the asset’s expected useful life.

The effect of a disposal on the statement of financial position (or accounting equation) is that:

 The asset (at cost or valuation) is no longer in the statement of financial position, and
 The accumulated depreciation on the asset is also no longer in the statement of financial position.
The carrying amount of the asset is therefore removed from the accounting equation.

1.5.3. Disclosure requirements of IAS 16

IAS 16 Property, plant and equipment requires the following disclosures in the notes to the financial statements,
for each major class of property, plant and equipment.

 The measurement bases used (cost or revaluation model (not in course)

 The depreciation methods used
 The useful lives or depreciation rates used
 Gross carrying amounts and the accumulated depreciation at the beginning and at the end of the period
 A reconciliation between the opening and closing values for gross carrying amounts and accumulated
depreciation, showing:
 Additions during the year
 Disposals during the year
 Depreciation charge for the year
 Assets classified as held for sale in accordance with IFRS 5
 Acquisitions of assets through business combinations
 Impairment losses (beyond the scope of this course)

The following is an example of how a simple table for tangible non-current assets may be presented in a note to the
financial statements.

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Schedule of Property, plant and equipment

Cost Property Plant & Equipment Total
At the start of the year XX XX XXX
Additions XX XX XXX
Disposal (XX) (XX) (XXX)
At the end of the year (A) XXX XXX XXX
Accumulated depreciation
At the start of the year XX XX XXX
Accumulated depreciation on disposals (XX) (XX) (XXX)
Depreciation expense XX XX XXX
At the end of the year (B) XXX XXX XXX
Carrying amount: A – B XXX XXX XXX

Example 2:
The property, plant and equipment balances of Matatizo Ltd. comprised the following as at 1 January 2022:
Cost Depreciation Net book value
‘000’CFAF ‘000’ CFAF ‘000’ CFAF
Freehold land 30,000 - 30,000
Buildings 38,520 - 38,520
Plant and machinery 70,200 37,812 32,388
Motor vehicles 37,800 23,040 14,760

The company uses the straight line method of depreciation on assets as follows:
 10% per annum for plant and machinery.
 20% per annum for motor vehicles.
Additional information:
1. It is the company's policy to make a depreciation charge proportionate to the period of usage of the asset.
2. An item of machinery bought on 1 July 2018 for 10,080,000 CFAF was sold on 1 April 2022 at 6,000,000
CFAF.
3. From the year ended 31 December 2022, the management of the company decided to charge depreciation
on buildings at a rate of 2.5% per annum. The buildings were all completed on 1 July 2022.
4. On 1 January 2022, a vehicle purchased on 1 May 2019 for 12,600,000 CFAF was traded in at a value of
7,320,000 CFAF in part exchange for a new vehicle costing 18,000,000 CFAF.
5. Included in machinery is an old machine which originally cost Sh.13, 500,000 and which was already fully
depreciated and not expected to yield any material amount on either use or resale.
6. On 30 June 2022, a machine costing 13, 500,000 CFAF was purchased from a vendor who had used it for
three years. The vendor had bought the machine at 18,000,000 CFAF. Another machine costing 10,500,000
CFAF was purchased on 1 August 2022.
Required:
A schedule showing the movement of property, plant and equipment for the year ended 31 December 2022.
1.6. Inventory
Measurement of Inventory
Inventory must be measured in the financial statements at the lower of cost; and net realisable value (NRV).

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Cost of inventory
IAS2 states that ‘the cost of inventories shall comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition. Purchase cost the purchase cost of
inventory will consist of the following:
 the purchase price
 plus import duties and other non-recoverable taxes (but excluding recoverable sales tax)
 plus transport, handling and other costs directly attributable to the purchase (carriage inwards), if these
costs are additional to the purchase price.
The purchase price excludes any settlement discounts, and is the cost after deduction of trade discount.
Net realisable value
Definition: Net realisable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
Net realisable value is the amount that can be obtained from selling the inventory in the normal course of business,
less any further costs that will be incurred in getting it ready for sale or disposal.
 Net realisable value is usually higher than cost. Inventory is therefore usually valued at cost.
 However, when inventory loses value, perhaps because it has been damaged or is now obsolete, net
realisable value will be lower than cost.
The cost and net realisable value should be compared for each separately identifiable item of inventory, or group
of similar inventories, rather than for inventory in total.
Example 3:
A business has four items of inventory. A count of the inventory has established that the amounts of inventory
currently held, at cost, are as follows:
CFAF CFAF CFAF
Cost Sales price Selling costs
Inventory item A1 8,000 7,800 500
Inventory item A2 14,000 18,000 200
Inventory item B1 16,000 17,000 200
Inventory item C1 6,000 7,500 150

Required: the value of closing inventory to reported in the financial statements:

1.7. Bank Statement

A bank statement is a detail analysis of the transactions in a depositor’s account issued (usually monthly) by a bank
describing the activities during the period. This statement shows the financial position of the customer as per bank.
The statement enables the customer to compare it with his cash book so as to ascertain the exact amount or balance
left in the bank.
1.7.1. Causes of Disagreement between the bank statement and the Cash Book bank column:
1. Cheques deposited but not yet credited by the bank: When cheques are received, they are entered in the Cash
Book immediately. There may be a delay of a day or two in sending the cheques to the bank. Moreover, the bank
usually does not credit the customer until the bank gets the cheques realized if they are on other banks. In the
meantime, therefore, the Cashbook will show more balance than what the bank shows in its own books.

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2. Cheques issued but not yet presented to the bank: As soon as cheques are issued, they are entered in the cash
book, but the bank makes no entry until the cheques are actually presented for payments and are paid. This means
that the bank shows a higher balance in favour of the customer than what the cash book of the customer shows.
3. Bank debit and credit Memos: Debit memos reflect deductions for such items as service charges, notes paid by
the bank for the depositor, etc. The bank often makes charges for services it renders. If there is an overdraft the
bank will also charge interest. These bank charges and interest are entered in the Pass Book and the entry is generally
made in the Cash Book only when the bank statement is received. Credit memos reflect additions for such items as
notes collected for the company by the bank and wire transfers of funds from another bank to the depositor’s
account.
4. Collection Items: The bank is always entrusted with the task of collecting interest on securities or dividends on
shares or even collection of amount due on bills of exchange or promissory notes. The bank will credit its customers
as soon as the amounts are received. But the entry by the customer in the cash book is only done when information
has been received from the bank.
5. Errors: There may be errors in the cash book and/or bank statement.
6. Bounced cheques (Dishonoured cheques): At time, a cheque deposited by a customer is ultimately returned
unpaid for whatever reason. Such a cheque is called a bounced cheque, or rubber cheque. This cheque was already
recorded in the cash book of the customer not knowing that it will eventually be returned. The bank may also charge
the depositor for processing an uncollectible cheque.
7. Standing orders: A firm can instruct its banks to pay regular amounts of money at stated dates to persons or
firms. The firm will only know whether the bank has paid or not when the bank statement is received.
8. Direct Debit: This is an arrangement made by a creditor with a bank to debit its debtors’ accounts. This is only
done with the prior permission of the debtor or account holder. When the bank has affected the transaction, the
creditor will only know through a bank statement.
1.7.2. Bank Reconciliation Statement

As a result of the disagreement between the balance in the cash book and the Bank Statement balance, on any given
date, a reconciliation statement is required at periodical intervals to indicate the items which cause the disagreement.
Bank reconciliation often called bank reconciliation statement or schedule, is a schedule prepared by a company
(depositor) to reconcile or explain the difference between the cash balance on the bank statement and the cash
balance on the company’s books. The company prepares a bank reconciliation to determine its actual cash balance
and prepares the entry (ies) to correct the cash balance in the ledger. As an internal control measure there should be
segregation of duties between the persons involved in cash disbursement and that involved in bank reconciliation.
This prevents collusion among employees. Also, the bank could mail the statement directly to the person who
reconciles the bank account each month to limit the number of employees who would have an opportunity to tamper
with the statement.
Example 4:
EDDY enterprise presents its bank statement and the cash book bank column to you to prepare an updated cash
book and the bank reconciliation statement so as to determine the exact cash available, for the enterprise as at
1/8/2023

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Bank Statement from Bank Atlantique

Dr Cr Balance
000F 000F 000F
1/7/2023 Balance Difference 5000 O/D
9/7/2023 T Ndeh 120 - 5120 O/D
18/7/2023 cheque - 230 4890 O/D
23/7/2023 Agbor 300 - 5190 O/D
28/7/2023 cheque - 450 4740 O/D
30/7/2023 credit transfer- Ngwa - 40 4700 O/D
31/7/2023 standing orders- Pamol 150 - 4850 O/D
31/7/2023 bank charges 30 - 4880 O/D
Note: O/D means overdraft

Cash Book Bank Column July 2023

000F 000F
17/7 Bella 230 1/7 Balance Difference 5000
28/7 Che 450 7/7 T Ndeh 120
31/7 Bella 100 9/7 Agbor 300
31/7 Joe 90 30/7 Ndah 250
30/7 Betang 110
Example 5:
The following is a summary of the cash book of Azimio Ltd. for the year ended 31 May 2023
Cash book
000 CFAF 000 CFAF
Balance brought forward 805 Payments 146,203
Receipts 145,720 Balance carried forward 322
146,525 146,525

Subsequent investigations reveal that:

1. A page of the receipt side of the cash book has been under cast by 200,000 CFAF.
2. The following transactions appearing on the bank statement have not yet been entered in the cash book:
 Dividend received on a trade investment 1,147,000 CFAF.
 Hire purchase repayments for 12 months at 55,000 CFAF per month.
 Interest for the half year to 30 November 2023 on a loan of 20,000,000 CFAF at 11 percent per
annum.
3. Bank charges of 143,000 CFAF shown on the bank statement have not yet been entered in the cash book.
4. A cheque received from a customer for 180,000 CFAF was returned by the bank unpaid and no entry has
been made in the cash book for this transaction.
5. The company owes 430,000 CFAF for electricity consumed in the month of May 2023.
6. A cheque for 82,000 CFAF has been debited to the company's account in error by the bank.
7. A cheque drawn for 98,000 CFAF has been entered in the cash book as 89,000 CFAF and another one
drawn for 230,000 CFAF has been entered as a receipt.
8. A transposition error occurred in the opening balance of the cash book. The opening balance should have
been brought down as 850,000 CFAF instead of 805,000 CFAF.
9. Cheques paid to suppliers totalling 630,000 CFAF have not yet been presented at the bank, while deposits
totaling 580,000 CFAF made on 31 May 2023 have not yet been credited to the company's account.
10. The balance as per the bank statement is an overdraft of 870,000 CFAF.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Required:
i) Adjusted cash book balance.
ii) Bank reconciliation statement as at 31 May 2023.
1.8. Control Accounts
A Control Account is an account opened at the end of a financial period by a firm, which is engaged in credit
transactions. Its objective is to ascertain the total of either creditors or debtors of the firm within a financial period,
or the totals of purchases or sales within a financial period. A control account is therefore a summary of a particular
ledger account and once the balance of a ledger account differs from that of a control account, there is need for
proper checking or reconciliation.
1.8.1. Principle of Control Account
If the opening balance of an account is known, together with information of the additions and deductions entered
in the account, the closing balance can be calculated. This is the principle on which control accounts operate.

1.8.2. Sales Ledger Control Accounts

It is also called total debtors account or account receivable control account. This is used to prove the accuracy of
the accounts receivable ledger entries. The total of the account receivable ledger balances is the key to the operation.
Account Receivable Control Account
Balance b/d XX Cash received from customers XX
Sales on credit XX Cheques received from customers XX
Cash refund to customers XX Return inwards XX
Dishonoured cheque XX Bad debts written off XX
Discount allowed XX
Bills receivable (Bills of Exchange) XX
Contra XX
___ Balance c/d XX
XXX XXX
Balance b/d XX
Note that the items appear on the same side of the control account as the individual items appear in the accounts
receivable ledger account. The balance carried down (c/d) will agree with the total of the accounts receivable ledger
balances.

1.8.3. Purchase Ledger Control account

It is also called a Total Creditors Account or Account Payable Control Account or Creditors Control Account. It is
a summary of the suppliers' accounts in the purchase ledger. Information that is recorded in the suppliers' accounts
comprise of:
Creditors Control Account
Cash payment to suppliers XX Balance b/d XX
Cheques issued to suppliers XX Purchases on credit XX
Discount received from suppliers XX Dishonoured cheques returned to us XX
Bills payable XX Cash refund from suppliers XX
Returns outwards XX
Contra account or set offs XX
Balance c/d XX ___
XXX XXX

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Bal b/d XX

Note that both the debtors and creditors control accounts can have at the same time opening debit and credit balances
as well as closing debit and credit balances. This happens in the debtors control account when the enterprise owes
some of the customer’s refunds or has issued credit advice to some customers. In the suppliers control account such
balances will exist when the some suppliers owe the firm.

Example 6:
The following balances were extracted from the books of Juhudi Traders for the month of July 2023:
“000”CFAF
Debit balances: (1 July 2023) Sales ledger 1,428,000
(1 July 2023) Purchases ledger 10,500
Credit balances: (1 July 2023) Sales ledger 40,500
(1 July 2023) Purchases ledger 553,800
Discounts received 142,500
Discounts allowed 209,700
Purchases (including cash purchases of 152,000 1,334,000
CFAF)
Cash sales 618,000
Credit sales 2,068,200
Credit notes issued to customers 75,000
Contra settlements 36,900
Payments to trade payables 1,159,200
Interest charged by trade payables on overdue 69,000
accounts 1,578,000
Receipts from trade receivables 37,200
Bad debts written off
Customer’s dishonoured cheques 26,100
Interest charged on customers’ overdue accounts 96,100
Debt collection expenses charged to trade 10,800
receivables 26,700
Credit notes received from trade payables
Balances as at 31 July 2023:
Purchases ledger (Debit) 14,400
Sales ledger (Credit) 50,700

Required:
i) Sales ledger control account for the month ended 31 July 2023.
ii) Purchases ledger control account for the month ended 31 July 2023.
iii) Explain any FOUR reasons why control accounts are used in an organisation

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

1.9. Common Accounting Errors

Since no one is infallible, accountants also commit errors in the course of recording transactions. The following
errors have been committed by accountants:

a) Error of Principle

This error is committed when an amount is recorded in the wrong class of accounts. e.g cash purchase of equipment
800,000FCFA has been debited in the purchases account with the credit of cash.

An expenses account has been debited instead of fixed asset account but the cash has been recorded correctly. To
correct this error, the following entries should be made in the journal.

b) Error of Commission

This error is committed when an amount is recorded in the wrong person’s account. e.g credit sales of goods to
Amadou 1,500,000FCFA has been debited in Adamou’s account with the credit of sales.

Both Amadou and Adamou are customers and are of the same class of accounts. to correct this error, the correct
person will be debited and the wrong person will be credited to nullify the effects as follows.

c) Error of Transposition

This error is committed when the wrong sequence of an account is recorded. e.g cash payment to SAJOUKA
123,000FCFA has been recorded as 132,000FCFA in the correct accounts.

The accountant has overstated the amount by 9,000FCFA in the course of recording by debiting SAJOUKA with
132,000FCFA and credit cash with the same amount. To correct this error, the entries will be reversed with the
overstated amount in order to reduce the erroneous amount recorded.

Suppose the 123,000FCFA paid to SAJOUKA was instead recorded as 120,000FCFA. Then we would have
concluded that the accountant had understated the amount by 2,000FCFA since SAJOUKA had instead been
credited with 120,000FCFA and cash had been credited with the same amount. To correct this error, the same
entries will be passed with the understated amount in order to increase the erroneous amount recorded.

d) Error of Complete Reversal Entry

This error is committed when an amount is recorded in the wrong side of an account e.g sale has been debited and
cash credited for a cash sales of goods 100,000FCFA. To correct this error, the erroneous entries will be reversed
and the amount will be double so as to nullify the effect of the error and to enter the correct entries simultaneously.

e) Error of Omission

The error is committed when a transaction has been omitted from the book completely e.g the acquisition of a loan
550,000FCFA cash has not been recorded. To correct this error, we simply record the omitted transactions in
accordance with the principle of double entry.

f) Error of Duplication

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

This error is committed when the transaction is recorded twice. It also known as error of double entry e.g the
acquisition of building by cash 5,800,000FCFA has been recorded correctly in the books twice. To correct this
error, the erroneous entry will be reversed with the same amount to nullify the effect of the duplication.

g) Error of Compensation

This error occurs when two or more errors are committed and the effect of one cancels out the other(s). such errors
will not be revealed by the trial balance and is extremely difficult to trace them e.g cash sales of goods 130,000FCFA
has been overstated by 20,000FCFA and cash purchase of goods has also be overstated by 20,000FCFA. The cash
balance will not be affected and profit will not also be affected. However, if such error can be traced, they should
be corrected accordingly.

h) Error of Original Entry

This is an error that has been committed originally in an accounting document, yet the accountant has recorded the
document with the error in the journal and posting has been made to the ledger.

The eight (8) errors sighted above do not affect the trial balance and can only be traced with the help of the control
accounts. Errors that affect the trial balance are enumerated as follows:

- One sided omission

- One sided transposition of an amount
- Incorrect additions in any account

1.10. Suspense Account

When the trial balance does not agree, it is necessary to calculate the difference between the debit and credit totals
in order to trace the error(s) committed and to correct them. However, if the trial balance still does not agree, a
suspense account should be credited.

A suspense account is a temporal account created with the difference of the trial balance pending the correction of
error(s). If the debit total of the trial balance is greater than the credit total, the suspense account will have a credit
balance and vice versa so as to balance the statement.

It is not worthwhile to prepare financial statements when suspense account is still appearing on the trial balance.
However, if the error is still not found up to the end of the financial year, financial statements can be prepared. As
such, suspense will appear in the balance sheet as a liability if it has a credit balance or as an asset if it has a debit
balance. For examination purpose, it is not recommended for candidates to balance their trial balance with a
suspense account.

If the errors committed are traced, the suspense account (created to balance the trial balance) should be closed by
simply correcting the errors in the suspense account and erroneous accounts.

Example 7:

The trial balance of JAKI Plc. as at 31/12/19 showed a shortage of 77,000 frs on the debit. A suspense account
was opened. On 28/2/20 all errors from the previous year were discovered.

 A cheque of 150,000 frs paid to L. Kenet had been correctly entered in the cash book, but had not been
entered in L. Kenet’s account.
 The purchases account had been under cast by 20,000 frs.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

 A cheque of 93,000 frs received from K. Sand had been correctly entered in the cashbook but omitted from
Sand’s account.

Required: Make necessary corrections to trace the new suspense account balance.

Example 8:
To enable work to proceed on a firm’s draft year end account a difference found in the trial balance was entered
into the suspense account opened for the purpose. The draft profit and loss account subsequently showed a profit
for the year of 102,108,000 CFAF and the suspense account was shown in the draft balance sheet.
During audit, the following errors were found which when corrected eliminated the suspense entry:
(i) One of the pages of the sales day book totaling 5,138,000 CFAF had not been posted to the sales
account.
(ii) The year - end stock sheets had been over casted by 1,100,000 CFAF
(iii) The last page of the purchase day book totaling 7,179,000 CFAF had been posted to the purchase
account as 1,779,000 CFAF
(iv) No account had been taken for electricity consumed since the last meter reading, the estimated amount
is 246,000 CFAF
(v) An invoice of 64,000 CFAF entered correctly in the sales day book had been posted to the customer’s
account as 164,000 CFAF
(vi) The entry in the purchase day book of 82,000 CFAF had been posted to the supplier’s account.
(vii) An error had been made in balancing the petty cash book, the correct amount being 250,000 CFAF not
25,000 CFAF.
(viii) Loan interest paid amount to 500,000 CFAF had been posted to the loan account.

Required:
(a) Frame the necessary journal entries to clear the suspense account (narratives not required).
(b) Prepare the suspense account showing the amount of the original difference
(c) Prepare a statement showing the corrected profit and loss account for the year.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER TWO
FINANCIAL STATEMENTS OF A SOLE TRADER
2.1. Introduction

Sole trading is a form of business carried out by one person called a sole trader or a sole proprietor who contributes
the capital and enjoy the profit alone, sole trader’s required two types of financial statement: a trading, profit or loss
account and a balance sheet. These financial statements are also called final accounts since they are usually prepared
at the end of the accounting period.

2.2. Trading, Profit and Loss Account or the Income Statement

This is a statement that shows the amount of profit realized by the enterprise for the year. It is also known as an
income statement and has two sections. The first section of the income statement is the trading account and shows
gross profit realized in trading for the year. Trading items include sales, purchases, returned inwards, returned
outwards, carriage inwards and stock in trade. The second section of the income statement is the profit and loss
account and its reveals the net profit or loss realized by the enterprise. The net profit or loss is equal to the gross
profit realized on trading plus any other revenues less all expenses, such as one year. Income can be computed as
follows:
Net income = Revenue – Expenses
Revenue refers to inflows from the delivery or manufacture of a product or from the rendering of a service.
Expenses are outflows incurred to produce the revenue.
To separate income from operations from other forms of income, the above equation can be expressed as:
Net income = Revenue – Expenses + Gains – Losses
Gains refer to items such as capital gains and losses refers to capital losses, losses from natural disasters, etc.
Name of Enterprise
Trading, Profit or Loss Account for the Year Ended 31/12/20XX
FCFA FCFA
SALES xxx
Less: return inwards (xx)
NET SALES xxx
COST OF GOODS SOLD: xx
Opening stock xxx
Purchases xx
Carriage inwards xx
Return outwards (xx)
Closing stock (xx) (xxx)
Gross profit xxx
Add: other incomes (discount, rent, interest xx
received, etc
TOTAL INCOME xxx
LESS EXPENSES:
Discount allowed xx
Carriage outwards xx
Salesman commission xx
Salesman salary xx

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Office salary xx
Bank charges xx
Loan interest xx
Sundry expenses xx
Light and heat xx
Rent xx
Insurance xx
Printing and postage xx
Advertising xx
Irrecoverable debts xx
Motor expenses xx
Depreciations xx
ETC,
(xxx)
NET PROFIT xx

2.3. The Balance Sheet or Statement of Financial Position

This is a statement that shows the state of affairs of the enterprise as at a particular date. It reveals the financial
position of the firm. A balance sheet exposes the assets, liabilities and capital of the enterprise as at a given date. It
is intended to show the financial picture of a business on a particular date. The statement of financial position is a
representation of the accounting equation for the whole business on a given date.
Assets = Owners’ Equity + Liabilities
The vertical presentation of the balance sheet is given as follows:
Name of the Enterprise
Statement of Financial Position as at 31 December 20XX
FCFA FCFA FCFA
NONCURRENT ASSETS: (Cost) (Accumulated Dep.) (Net book Value)
Land and Buildings xxx (xx) xxx
Machinery and equipment xxx (xx) xxx
Fixtures and Fittings xxx (xx) xxx
Motor Van, etc xxx (xx) xxx
xxx (xx) xxx

CURRENT ASSETS:
Inventory or Stocks xxx
Receivable or Debtors xxx
Cash at bank xxx
Cash at hand xxx
Prepayment, etc. xxx xxx

TOTAL ASSET xxxx

FINANCES BY:
Capital xxx
Ad net profit xxx
Less drawings (xx) xxx
LONG-TERM LIABILITIES:

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Long term loans xxx

CURRENT LIABILITIES:
Bank overdraft xxx
Payables or Creditors xxx
Accruals, etc. xxx xxx
TOTAL CAPITAL AND xxxx
LIABILITIES

2.4. Adjustment for Financial Statements.

There are several adjustments to be made at the end of the financial year before financial statements are prepared.
These adjustments include:

a) Accruals: These are expenses owing by the end of the financial year. They are also called
outstanding expenses or expenses creditors. In the profit and loss account, accruals are added to
the expenses while in the balance sheet they are treated as current liabilities.
b) Prepayments: These are expenses made in advance by the end of the financial year. They are also
called expenses debtors. In the profit and loss account, prepayments are subtracted from the
expenses while in the balance sheet they are treated as current assets.
c) Depreciation: These are reductions made on the value of fixed assets at the end of the financial
year. In the profit and loss account, depreciations are treated as expenses while in the balance sheet
they are subtracted from the fixed assets.
d) Provision: This is a probable loss in the value of an asset. In the profit and loss account, provisions
are treated as expenses while in the balance sheet they are subtracted from the asset.
e) Bad debts: These are debts that cannot be recovered either because the debtor is bankrupt, death
or has disappeared without trace. In the profit and loss account, treat bad debts as expenses and
subtract bad debts from debtors in the balance sheet.
f) Provision for doubtful debts: It can also be called provision for bad debts. It is created only when
debtor has become doubtful. This is therefore, a debt that may not be recovered. It has the same
treatment with bad debts in the profit and loss account and the balance sheet.
g) Capital Expenditures: This refers to the expenditure on capital items like motor vans, building,
equipment, plant and machinery. Such items have a long life span and can last in the enterprise for
more than a year. Hence, any expenditure on fixed assets is known as capital expenditure.
h) Revenue Expenditure: This refers to the expenditure on the day-to-day activity of the enterprise.
Such expenditure is made on items with usually a short span that can only last in the enterprise for
less than a year e.g. expenses incurred on salaries, rents, stocks, etc.

Example 1:

Mr. Tomson carries on a merchandising business. The following balances have been extracted from the books as
of 30/09/2020.
000 FCFA 000 FCFA
Capital – Tomson 01/09/2019 24,239
Cash drawings – Tomson 4,888
Inventory 1/1/2019 14,972
Purchases and Sales 167,760 203,845
Office furniture 1,440
Debtors and creditors 19,100 8,162
Stationery and printing 737
Salaries 6,352

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Rents 1,350
Light and heat 475
Insurance 304
Discounts 517 955
Bad debts written off 331
Provision for bad debts 143
Cash in hand 29
Cash at bank 6,603
Telephone 517
General expenses 2,044
Travellers’ commission 9,925
Total 237,344 237,344
The following further information is to be taken into account:
(a) Stock on hand at 30/09/2020 was 12,972,000 FCFA
(b) Provision is to be made for the following liabilities and accrued expenses as on 30 September: Rent
450,000 FCFA, light and heat 136,000 FCFA, travellers’ commission 806,000 FCFA, accountancy
charges 252,000 FCFA.
(c) Provision for bad debts is to be raised to 3% of debtors.
(d) Office furniture is to be depreciated by 10% on book value.
(e) Tomson removed stock 112,000 FCFA for his own use.
You are required to prepare an income statement and a statement of financial position as at 30/09/2020.

Example 2:

The following statement of financial position as at 30 June 2023 was prepared by an inexperienced bookkeeper:
Utamaduni Ltd.
Statement of financial position as at 30 June 2023
Cost Accumulated Net book
Depreciation value
“000”CFA “000”CFAF “000”CFAF
F
Assets:
Non-current assets 363,400 103,500 259,900
Current assets:
Inventory 316,250
Accounts receivable
(Less allowance for doubtful debts) 278,070
Bank balance 25,875 620,195
Total assets 880,095
Capital and liabilities:
Authorised issued and fully paid
Share capital 3,220,000 shares of 100CFAF 322,000
each Share premium 23,000
Profit for the year 132,250
477,250
Current liabilities:
Accounts payable 402,845
Total capital and liabilities 880,095

Additional information:

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

1. A new machine purchased for 2,300,000 CFAF had been recorded in the repairs account.
2. An inventory sheet had been misplaced causing the closing inventory to be undercast by 2,300,000 CFAF.
3. An invoice from a supplier of 1,460,500 CFAF had been omitted from the books.
4. Bank reconciliation had not been done and the following items on the bank statement had not been entered
in the books:
 Bank charges 1,150,000 CFAF
 Standing order for rent payment 805,000 CFAF
5. An additional allowance of 575,000 CFAF is required in respect of doubtful debts.
6. No provision has been made for electricity expense of 402,500 CFAF and audit fees of 1,035,000 CFAF.
7. The company has signed an agreement to buy a new plant costing 8,050,000 CFAF to be delivered and
installed in six months’ time.
8. Depreciation on non-current assets is provided at 10% per annum on straight line basis. A full year’s
depreciation is charged in the year of purchase.
Required:
i. Journal entries to correct the above errors. (Narrations not required).
ii. Corrected statement of profit or loss for the year ended 30 June 2023.
iii. Adjusted statement of financial position as at 30 June 2023

2.5. Single Entries and Incomplete Records

Some small and medium-size enterprises keep accounting records but fail to respect the double-entry principles.
This could be due to lack of adequate knowledge of double entry or as a result of the fact that they are more
concerned with particular accounts. The act of recording transactions in just one account is called single entry.
Many small enterprises are more interested with the amount of cash received from cash sales or amount of cash
paid when goods are purchased. They are also interested in listing the names of debtors and creditors and the
amount owed.
More often, small enterprises do not record all transactions which occur within an accounting period, thereby
resulting in incomplete records. Single entry and incomplete records create serious problems in determining net
profit or loss for the period, as well as in preparing the statement of financial position. One of the methods adopted
in solving this problem is by comparing capital at start (or initial capital) and capital at the end of an accounting
period.
Incomplete records refer to a situation where a business does not keep proper accounting records.
Single entries and incomplete records are problems encountered in sole proprietorship businesses. This is because
the sole proprietors are not compelled by law to keep proper accounting records
2.5.1. Determination of Profit or loss from change in Capital

Here we assume that a change in ending capital is caused by profit or loss made within the accounting period.
Net profit or loss = Ending Capital – initial capital

Example 3:
The statement of financial position of Tan's Enterprise as at 1 January 2020 consists of the following items:
Cash 40,000
Stock 50,000
Marketable securities 20,000
Equipment 100,000
Creditors 60,000
Accrued wages 10,000
Debentures 80,000

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

As at 31/12/2020, the statement of financial position consisted of:

Cash 17,000
Stocks 150,000
Prepayment 15,000
Equipment 100,000
Accumulated depreciation – equipment 20,000
Machinery 190,000
Overdraft 70,000
Long-term loan 100,000
Required
Determine the net profit or loss for the period to 31/12/2020.

2.5.2. Profit determination in the case of additional capital and drawings

Drawings refer to money or goods taken from the business by the owners for personal use. Such amounts affect
capital or net profit negatively. To determine the actual value of capital at the end of the accounting period, the
amount of cash or goods withdrawn by the proprietor must be added to ending capital. That is,

Initial capital + net profit +additional capital – drawings = ending capital

(IC + NP + AC – D = EC)

Example 4:
MAIKIN presented the items of her the Statement of Financial Position as at 1/1/2021 and 31/12/2021 as follows:
1/1/2021 31/12/2021
Cash 170,000 --
Debtors 55,000 50,000
Stocks 35,000 110,000
Prepayments 75,000 50,000
Furniture 45,000 40,000
Machinery 180,000 200,000
Accrued interest 19,000 19,000
Short-term loan 130,000 130,000
Overdraft -- 20,000
Wages payable 15,000 --

Drawings made in the course of the year amounted to 24,000 FCFA and donations received in cash amounted to
20,000 FCFA.
Required
Determine the net profit or loss for the period to 31/12/2021.

2.5.3. Determination of Net Profit from a more detailed record

The main objective here is to be able to prepare financial statements (income statement and statement of financial
position) from single entries and incomplete records. Knowing that sole trades will always have balances at the
beginning and at the end of periods, and that cash and bank account (book) will always be given (record of money
received and used during the period), an understanding of the double entry principle can assist one to prepare
financial statements from incomplete records by following the following steps:
- Determination of opening capital
- Determination of cash and bank balance
- Determination of the values of sales and purchases
- Adjustments for other expenses and incomes

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

- Preparation of the financial statements

1. Determination of the opening capital: The capital at the beginning of the period is calculated using the
balances (assets and liabilities) at the beginning of the period by preparing an opening statement of
financial position called statement of affairs. Knowing that Assets equals capital and liability, capital
will be the difference between assets and liabilities.
2. Determination of cash and bank balance: This is done by balancing the cash book, thus if the cash
book is balanced i.e. the closing balances for cash and bank are given, move to the next step.
3. Determination of the values of sales and purchases: The values of sales and purchases can be
determined using mark-up rates and margin rates or using control accounts.

- Using margin rate and mark-up rate: margin rate is the gross profit expressed as a percentage of
net sales or turn over meanwhile mark-up rate is the gross profit expressed as a percentage of cost of
sales.
• Margin rate =
• Mark-up rate =
- Using control accounts: the sales ledger control account (total debtors account) is used to calculate
credit sales meanwhile the purchases ledger control account (total creditors account) is used to
calculate credit purchases. This is done as follows
5. Preparation of the income statements: the income statement and the statement of financial position can now
be prepared.
Example 5:
HAMA is a retailer who does not keep proper accounting records for his business. On 31 December 2020, you
were invited to build up accounting records from available information. After investigation, the following
information was made available:
- All sales were made on cash basis at a uniform mark-up of 40% for the year 2020
- A summary of receipts and payments based on the cash at bank account for the year ended 31
December 2020 showed the following:
Cash book (bank account)

000 FCFA 000 FCFA

Cash deposited 26,545 Administrative exp 2,250
Payment to suppliers 12,800
Drawings 1,210
Selling expenses 580
Bank charges 210
Land 5,000

- During 2020, selling expenses of 440,000 FCFA were paid in cash

- The insurance company had agreed to compensate the business for 50% of some cash stolen.
- The balances of the business as at 31 December were as follows :
31/12/2019 31/12/2020
000 FCFA 000 FCFA
Office equipment (at cost 1,875,000 FCFA) 1,500 ?
Inventory 9,250 2,475
Cash at bank 3,900 ?
Trade payables 1,500 2,100

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Accrued administrative exp - 1,200

Prepaid selling expense 200 -
Capital 13,650 -
(1) Cash balance before it was stolen 300 ?(1)
(1) Cash balance before it was stolen
- Depreciation is to be provided on office equipment at a rate of 20% per annum straight line method
Required
i. Income statement for the year ended 31 December 2020, showing the cash loss separately
ii. Statement of financial position as at 31 December 2020
Example 6:
Muthusi is a businessman operating a retail business in a small town. Due to the size of his business, he is not able
to employ a qualified accountant on a permanent basis.
The following information was extracted from the books of the business as at 31 October 2021:
CFAF
Freehold property (cost) 600,000
Motor vehicles (NBV) 750,000
Furniture and fixtures (NBV) 240,000
Stock 390,000
Trade debtors 500,000
Bank overdraft 60,000
Trade creditor 380,000
Accruals 15,000
10% loan 600,000
Provision for doubtful debts 25,000

The following transactions took place during the financial year ended 31 October 2022:

1. Sales and purchases on credit amounted to 2,080,000 CFAF and 1,900,000 CFAF respectively.
2. The following transactions were carried out through the bank account:

CFAF
Sales – Cash 720,000
Purchases – Cash 240,000
Payments to trade creditors 1,940,000
Purchase of furniture 200,000
Salaries and wages 160,000
Lighting 65,000
General expenses 35,000
Interest on loan 30,000
Drawings 60,000
Repayment of loan on 30 April 2003 100,000
Collections from trade debtors 1,890,000
Proceeds from sale of motor vehicle 120,000

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

3. The business depreciates motor vehicles at 20% per annum on a reducing balance basis. A full year’s
depreciation is provided on a motor vehicle acquired in the course of the year and no depreciation is
provided on a motor vehicle disposed of in the course of the year. The motor vehicle sold in the year had
been purchased at 250,000 CFAF and an accumulated depreciation of 122,000 CFAF had been provided
on it at the time of disposal.
4. Furniture is depreciated at 10% per annum on cost and in proportion to the period used in the year. The
additional furniture was purchased on 1 May 2022 while the cost of furniture held on 31 October 2021 was
400,000 CFAF
5. Loan interest paid was for one-half year up to 30 April 2022
6. The business received discounts of 40,000 CFAF and allowed discounts of 70,000 CFAF during the year.
7. Bad debts of 20,000 CFAF were written off. Provision for doubtful debts is to be maintained at 5% of the
debtor’s balance at the end of the year.
8. Accruals are in respect of lighting and on 31 October 2022, the amount accrued was 19,000 CFAF
9. Muthusi’s business obtains a normal gross profit rate of 25% on selling price.
Required:
a) Trading and profit or loss account for the year ended 31 October 2022
b) Statement of financial position as at 31 October 2022.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER THREE
FINANCIAL STATEMENTS OF A PARTNERSHIP
3.1. Introduction
A partners is a type of business were two or more persons or business persons enters into an agreement to open a
business to create profit according to an agreed profit sharing ratio. The agreement is in the form of a document
called partnership deed which details:
 The capital to be contributed by each partners
 How profit will be shared
 How salaries will be allocated
 The desired percentage on interest on capital and drawing
 Procedures for admission and retirement of partners
 Procedures to be followed for dissolution

3.2. Type of Partnership Accounts

I. Capital account (fixed account) this account shows capital contributed by members. It shows
other movement likes revaluation gain/loss on fixed assets and movement of goodwill which will
be discussed later but the main purpose of the account is to keep the fixed capital contributed by
the members as shown below.
Date Details(particulars) Dr(000) Cr(000)
XX/XX/XX Cash(other assets) X
Capital account X
Being capital introduced by partners

II. Current account (fluctuation account) it is an account use to manage the net profit generated or
earned from the business. It shows movement of:
- salaries to be shared to partners (non-operating salaries)
- interest on capital
- interest on drawings
- drawings
- net share of profit after taken care of salaries, interest on capital and drawings as shown
below

Element A B Element A B
Drawings X X Balance b/d X X
Interest on drawing X X Partners salary X X
share of loss X X interest on Capital X X
Balance c/d X X share of profit X X
Total XX XX XX XX

3.3. Adjustments to be made with the Net Profit

The net profit of a partnership will be calculated the same way we did for a sole trader. When this net profit is
gotten or calculated it is used to make the following distributions as shown below:
1. Net profit calculated from the income statement the net profit will be transferred into an account called
the appropriation. The appropriation accounts shows how salaries, interest on capital and drawings are
managed.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

2. Salaries’ salaries partners can also agree to pay salaries calculating the net profit for the year. These
salaries are paid for participation of the business day to day operations but are not considered as expenses.
Remember, the salaries are deducted after the net profit for the year in the appropriation account. This
amount will be deducted from the profit kept in the appropriation account and transfer to the current
account. The salaries might be based on the skill and knowledge that each partner is investing in the
business.
3. Interest on capital this is a sum of money given to partners for keeping their capital into the business rather
than investing it somewhere(opportunity cost) it is assumed that if the partners did contribute to the
partnership business, their money would have been invested somewhere to earn a return or income which
can be express in term of percentage. This amount will be deducted from the profit kept in the appropriation
account and transfer to the current account. Interest on capital = N% X capital contributed. Were N% is the
return rate.
4. Drawings these are assets taken by partners for their personal consumption or assets taken by members not
for business purposes. The asset taken will be deducted from the assets account and also used to reduce the
capital account.
5. Interest on drawings these are little interest on the amount withdrawn by partners. The interest on
drawings is treated as a non-operating income and is added to the appropriation account or to net profit in
the appropriation account (Cr side) and also used to reduce the partner’s current account (Dr Side)
Interest on drawings = N% X amount withdrawn.
6. Final profit to be shared the final profit to be shared is the profit after deducting, salaries, interest on
capital, and adding interest on drawings.

Example 1:
Martin and George are in Partnership sharing profit/loss in the ratio 55:45. Below is the additional information
for the business
Trial balance of M & G for the year ended 31th December, 2020
DETAILS DR(FCFA CR(FCFA)
Sales 6,620,000
Purchases 4,050,000
Returns inwards 120,000
Returns outwards 80,000
Lighting and heating 190,000
Rents and rates 240,000
Wages and salaries 520,000
General expenses 70,000
Carriage inward 90,000
Carriage outwards 110,000
Building 2,000,000
Fixtures and fitting 750,000
Receivables(debtors) 1,200,000
Creditors(payables) 900,000
Bank 120,000
Cash 940,000
Loan(repayable in 2years) 1,000,000
Capital account for George 550,000
Capital account for Martin 550,000
Current account for George 500,000
Current account for Martin 500,000
Stock at 1st January 2020 300,000

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Totals 10,700,000 10,700,000

Additional information:
 Inventory as at 31th December 2020 was 550,000frs
 Both partners are entitled to a salary of 60,000frs each
 Interest on capital is 10% to be given to all partners
 Martin and George withdrawn 1,000,000frs and 1,200,000frs cash at an interest of 8%

Required:
Prepare the following for the year ended 31/12/2020
a. Statement of profit or loss account
b. The appropriation account
c. Current account
d. Balance sheet

3.4. Admission of New Partners

A new partner can be admitted mostly when the business need additional capital that can’t be provided by the
existing partners or they might an expertise which can only come through admission of a new partner to utilize the
partner expertise (knowledge and skills).
The new partner will be required to:
a) Contribute his/her share of capital required by the existing member without paying any extra called
premium or for goodwill
b) Contribute his/her share of capital required by the existing members and pays a premium for goodwill
created by existing members.

Goodwill represent the reputation of the business form the day the company started right up to present date. That
is what positive things people or the public say about the company.

When a new partner is admitted, the assets and liabilities need to be revalued and shared to the existing
members in the existing or old profit sharing ratio. The valuation of the business helps to know the current
values of assets and liabilities before a new partners join the team

3.5. Creation of Goodwill

Goodwill represents the value of all the intangible assets of the company than can’t be seen with the physical eyes.
It represent the benefit created by the company from the day the company started right up to present day that can’t
be seen with the physical eyes. The goodwill will constitute the reputation of the business, the quality of product
produced. There are two types of goodwill:
a. Purchased goodwill
b. Internally generated goodwill
Purchased goodwill arises from the purchased of company above the balance sheet value as shown below:
Purchased goodwill = Purchased price of a business – balance sheet value(A – L = C)
Purchased goodwill = Purchased price of a business > balance sheet value(A – L = C)

The goodwill of a business when it has not been purchased is called internally generated goodwill. For example,
Mercedes has an internally generated goodwill of producing quality cars, Guinness has an internally generated
goodwill of producing quality drinks than brasseries. Messi has created more internally generated goodwill in
Barcelona football club. Other aspects of goodwill include:
 Good business relationships with customers and suppliers
 Quality of products produced by the company
 Great improvement in corporate social responsibilities

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

3.6. Retirement of a Partner

The following procedures are necessary for resignation.
A. Revalued the assets and liabilities and share the gain or loss to the partners’ capital accounts
B. Transfer all current account balance to capital account for the partner leaving by:
Dr Current account X
Cr capital account X
C. Balance the capital account to get the net figure. This will be the amount to be paid to the retired partner
Dr Capital account of the retired partner X
Cr cash/loan from partner X

Example 2:
Below is a partnership Business of Norbert and Kerensky for the year ended 31st December 2020
Balance sheet of N & K as at 31/12/2020
Non-current assets 000CFAF Capital account: 000CFAF
Property 15,000 Norbert 4,000
Plant & equipment 10,000 Kerensky 4,000
Current account:
Norbert 4,000
Kerensky 4,000
Current assets Liabilities
Inventory 4,000 Loan 10,000
Receivable 1,900 Creditors 6,100
Cash 1,200
Total assets 32,100 Total 32,100

The profit sharing ratio is 5:5 and by end of the year Kerensky retired and told Norbert that he will bring his
friend for admission. The new partner Thomas bring 7,500,000 CFAF as contribution being 4,000, 000 CFAF as
capital and the balance to his current account. No adjustment have been made to record the admission. The profit
sharing ration changes to 4:3:3 for Kerensky, Norbert and Thomas respectively.
The assets and liability were revalued on the date of the admission as shown below:
 Property 18,000,000frs
 Plant and equipment 9,500,000frs
 Loan 8,500,000
 Creditors 7,000,000
 Inventory and receivable were at their market value
Required:
The statement of financial position after the admission.
3.7. Partnership Dissolution
The partnership Act 1890 gives possibilities of dissolution of a partnership business:
 Death of a partner
 Bankruptcy or court order
 When the objective of the partnership has been achieved. Etc

Example 3:
Balance sheet of N & K as at 31/12/2020
Non-current assets 000frs Capital account: 000frs
Building 5,000 Norbert 6,000
Machinery 3,000 Kerensky 6,000

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Current account:
Norbert 0
Kerensky 300
Current assets Liabilities
Inventory 1,800
Receivable 2,800 Creditors 1,700
Bank 1,400
Total assets 14,000 Total 14,000

Kerensky and Norbert decided to dissolve the partners at reporting date.

The following additional information was available:
1) The had been sharing profit or loss in the ration 3:2 (Kerensky: Norbert)
2) The goodwill was sold for 2,000,000frs and machinery for 1,800,000frs
3) Building was taken over by Kerensky at an agreed value of 5,500,000frs
4) the amount collected from debtors amounted to 2,700,000frs after deducting discount
5) the creditors were paid for 1,600,000frs the difference being discount received
6) dissolution cost of 1,000,000frs was paid
Requirement:
Prepare the following accounts:
1) Realisation
2) Capital
3) Bank

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER FOUR
FINANCIAL STATEMENTS OF A COMPANY

4.1. Summary of IAS 1

Objective of IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to
ensure comparability both with the entity's financial statements of previous periods and with the financial statements
of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content. Standards for recognising, measuring, and disclosing
specific transactions are addressed in other Standards and Interpretations.
Scope
Applies to all general purpose financial statements based on International Financial Reporting Standards General
purpose financial statements are those intended to serve users who are not in a position to require financial reports
tailored to their particular information needs.

Objective of financial statements

The objective of general purpose financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in making economic
decisions. To meet that objective, financial statements provide information about an entity's:
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners
 cash flows
That information, along with other information in the notes, assists users of financial statements in predicting the
entity's future cash flows and, in particular, their timing and certainty.

Components of financial statements

A complete set of financial statements should include:
 a statement of financial position (balance sheet) at the end of the period
 a statement of comprehensive income for the period (or an income statement and a statement of
comprehensive income)
 a statement of changes in equity for the period
 a statement of cash flows for the period
 notes, comprising a summary of accounting policies and other explanatory notes
When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements, it must also present a statement of
financial position (balance sheet) as at the beginning of the earliest comparative period.
Financial statements should provide a fair presentation of the results, which is achieved by compliance with IFRSs.
Additionally, the entity should also disclose the following to make the financial statements more understandable:
 The name of the reporting entity
 Whether the financial statements are the individual or group financial statements
 The reporting date and the period covered by the financial statements

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 The presentation currency

 The level of rounding used in presenting the amounts within the financial statements
Reports that are presented outside of the financial statements – including financial reviews by management,
environmental reports, and value added statements – are outside the scope of IFRSs.
Fair presentation and compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an
entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and
conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set
out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result
in financial statements that achieve a fair presentation.
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved
statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs
unless they comply with all the requirements of IFRSs (including Interpretations).
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes
or explanatory material.
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an
IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out
in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure
of the nature, reasons, and impact of the departure.
Going concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant
concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management
concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern
basis, in which case IAS 1 requires a series of disclosures.
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual
basis of accounting.
Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next
unless a change is justified either by a change in circumstances or a requirement of a new IFRS.
Materiality and aggregation
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may
be aggregated only if they are individually immaterial.
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.
Comparative information
IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts
reported in the financial statements, both face of financial statements and notes, unless another Standard requires
otherwise. If comparative amounts are changed or reclassified, various disclosures are required.

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4.2. Structure and content of financial statements in general

Clearly identify:
 the financial statements
 the reporting enterprise
 whether the statements are for the enterprise or for a group
 the date or period covered
 the presentation currency
 The level of precision (thousands, millions, etc.
Financial statement may be prepared either internal use or for external use.

For internal use:

There are financial statements prepared for managers and people within the organisations. They are prepared
following some internal rules and usually prepare by entities such as sole proprietorship, partnership and Private
Limited Companies (LTD). Thus our normal (usual) income statement and statement of financial position are for
internal use.

For external use (or for publication):

These are financial statements prepared for external users (e.g. Shareholders, present and potential investors,
government, creditors etc.) and also called published financial statements. Published financial statements are
prepared by Public Limited Companies (PLC) because the law obliges them to do so, thus published financial
statements are prepared using some inter rules, the GAAP and other external standards such as the International
Accounting Standards (IAS), International Financial reporting Standards (IFRS) and OHADA.

The income statement and the statement of financial position

A) Income statement for publication:
It shows the financial performance of the company during the financial period. It discloses the income and the
expenses and thus the net profit. IAS requires income and expenses to be classified in the Published income
statement in two ways: by function or by nature

i) Classifying income and expenses by function: Under this format expenses of the company are
classified into five (5) major categories
• Cost of sales = [Opening stock + (Purchases - return outward + carriage inwards] - closing stock
• Distribution cost: Transport cost, carriage outwards, bad debts, commission, provision for bad and
doubtful debts etc.
• Administrative Expenses: salaries and wages, postage, telephone, rent and rates etc.
• Finance cost: Interest on loans and bank overdraft, dividend to redeemable preference shares.
• Other expenses: This refers to all other groups of expenses which do not fall under the above.

Note: There are certain types of income and expenses that do not fall within the ordinary activities of the firm e.g.
profit or loss on disposal of property and other non-current assets etc. The standard requires that if the above income
and expenses are material they can either be classified as part of other expenses or shown separately on the face of
the income statement. The company should give addition of information about such items in the notes to the
account.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

ABC PLC
Published Income statement for the year ended 31/12/20XX
000 FCFA 000 FCFA
Revenue or Turn over Net sales x
Less cost of sales x
Gross profit / gross loss x
Add other incomes x
Total gross income x
less Expenses:
Distribution cost X
Administrative cost X
Other expenses X (x)
Profit before inter est and tax x
Less Finance cost (x)
Net profit/(loss) before tax x/(x)
Less corporation tax (x)
Net profit after tax x
Add retained profit B/F x
x
Less:
- transfer to general reserves x
- transfer to fixed assets replaement reserves x
- preference share dividend x
- ordinsry share dividend x x
Retained earnings C/F x

B) Published Statement of Financial Position:

The statement of financial position for publication is presented using a vertical format. It shows the financial
position of the company as at a particular period. The standard requires that assets and liabilities to be classified
in their non-current and current portion i.e. long-term and short-term.
The first part of the published statement of financial position shows the total assets (non-current assets + current
assets) and the second part shows equity and liabilities. Equity is the shareholders’ funds (share capital, retained
earnings and reserves) while liability is the total of the non-current liability and current liability.
ABC PLC
Published Statement of Financial position as at 31/12/20XX
000 FCFA 000 FCFA
Non-current Assets x
Current Assets x
TOTAL ASSET y
Financed by:
Ordinary share capital x
Preference share capital x
Retained earnings C/F x
General reserves x
Fixed assets replacement reserves x

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

EQUITY AND RESERVES x

Non-Current Liabilities x
Current Liabilities x x
EQUITY AND LIABILITIES y

4) Notes to Accounts: The notes to the accounts provides additional information on the policies that the
company has adopted to highlight some of the items appearing on the face of the financial statement
and additional information on it.
The standard requires the approach to be used when presenting the note on the account.
- The company should state the basis of financial statements. (most cases, historical basis of
accounting)
- The company should present the significances policy adopted
- The make-up of some items appearing in the financial statement e.g. raw materials, Work in
progress, finished goods etc.
- Explanation of the item not found in the final account e.g., Dividend

Example 1:
The following trial balance has been extracted from the records of MEAL WALL Limited at 31st December, 2023
000 FCFA 000 FCFA
Revenue 30 780
Purchases 17 180
Inventory at 1st January, 2023 2 890
Distribution cost 3 040
Administrative expenses 2 240
Land at valuation 1st January 2023 21 840
Building at re-valued amount 16 000
Accumulated depreciation on building 1st January 2023 4 430
Factory plant and equipment at cost 26 640
Accumulated depreciation on factory plant and equipment 1st January 2023 5 140
Warehouse plant and equipment at cost 2 400
Accumulated depreciation on warehouse plant and equipment 1st January 2023 1 040
Trade receivables and payables 8 520 4 660
Cash at bank 800
Ordinary shares at 1 FCFA each 28 000
Debenture interest 120
Dividends 300
Share premium account 6 000
Retained earnings 9 320
Revaluation reserves 6 700
Bank interest 60
Long term bank loan 2 000
3% Debentures 4 000
Corporation tax 40
102 070 102 070

The following items are to be adjusted in the preparation of financial statements for the year ended 31 st
December 2023:

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i. Depreciation is to be provided as follows:

-Building 2% per year on re-valued amount
-Plant and equipment 20% reducing balance
Depreciation on Buildings is to be charged fully to Factory costs (cost of sales)
ii. Closing inventory at 31st December 2023, is valued at cost of 3 250 000 FCFA. Included in the
inventory at 31st December 2023 are goods which had cost 500 000 FCFA. Due to a down turn in
demand, these goods were sold at auction sale on 15th January 2024 for 300 000 FCFA. Auctioneer’s
fees were 3% of sales proceeds.
iii. The taxation charge of 40 000 FCFA included in the above trial balance is in respect of an under
provision in the previous year. The estimated tax charge for the current year is 940 000 FCFA.
iv. Included in trade receivables is a balance of 120 000 FCFA which is considered a bad debt and is to be
written off. The directors have decided to make an allowance for doubtful debts of 3% of outstanding
trade receivables.

Required:
Prepare in a form suitable for publication, the company’s statement of comprehensive income for the year ended
31st December 2023.
Example 2:
The trail balance of FALTA PLC as at 30th April 2023 is given below
000 FCFA 000 FCFA
Share capital: authorised and issued 200 000
Stock at 30th April 2022 102 994
Debtors and creditors 227 219 54 818
8% Debentures 40 000
Fixed assets replacement reserves 30 000
General reserve 15 000
Retained earnings 30th April 2022 12 411
Debenture interest 1 600
Equipment at cost 225 000
Motor vehicles at cost 57 200
Bank 4 973
Cash 62
Purchases and sales 419 211 880 426
Returns inwards 18 400
Carriage inwards 1 452
Wages and salaries 123 289
Rents, business rates and insurance 16 240
Discount allowed 3 415
Directors’ remuneration 82 400
Provision for depreciation:
- Equipment 32 600
- Motor vehicles 18 200
1 283 455 1 283 455

The following information applies on the 30th April 2023:

(i) Stock 30 April 20023 was valued at 111 317 000 FCFA

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

(ii) The share capital consisted of 300 000 Ordinary shares of 500 FCFA each and 50 000, 12%
Preference shares of 1 000 FCFA each. The dividend f preference shares were proposed to be paid
as well as a dividend of 18% on the Ordinary shares.
(iii) Accrued: rents 802 000 FCFA, Directors remuneration 6 000 000 FCFA
(iv) Debenture interest ½ year’s interest owing
(v) Depreciation on cost: Equipment 20% and Motor Vehicles 25%.
(vi) Transfer to reserves: general reserves 5 000 000 FCFA and Fixed assets replacement reserves 10 000
000 FCFA.
(vii) Corporation tax for the year is calculated at 30%.

Required:
In so far as the information permit, prepare FALTA PLC
a) Statement of comprehensive income for the year ended 30th April 2023
b) Statement of financial position as at that date for publication.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER FIVE
FINANCIAL STATEMENTS OF A MANUFACTURING ENTITY
5.1. Introduction
A manufacturing account is an account which is normally prepared by manufacturing firms at the end of an
accounting period to determine the total and unit cost of goods manufactured within the period. Manufacturing
firms refer to firms involved in transforming raw materials or partly finished goods (work in progress) to finished
goods. A manufacturing account is part of a trading account for manufacturing business. It is arranged in such a
way as to show the cost of production classified by the various elements that make up each cost category.
5.2. Element of Manufacturing Expenses

i. Direct Material Cost

ii. Direct Labour Cost
iii. Direct Expenses
iv. Manufacturing Overhead Costs or Factory Overhead Expenses
v. Non-manufacturing overhead cost
vi. Prime Cost
vii. Work-in-Progress
viii. Administrative Expenses
ix. Selling and Distribution Expenses

5.3. Categories of Stock Dealt With in Manufacturing Accounts

1. Stocks of raw materials

2. Stocks of work-in-progress or partly-finished goods.
3. Stocks of finished goods.
5.4. Formats of a Manufacturing Account
Name of Company
Manufacturing Account for the Year Ended 31 December 20XX

CFAF CFAF
Opening stock of raw materials XX
Add purchases XX
Add carriage inwards XX
Less closing stock of raw materials (XX)

Cost of raw materials consumed XX

Direct wages XX
Direct expenses XX
Prime cost XX
Factory overheads XX
XX
Add opening work in progress XX
Less closing work in progress (XX) XX
Production cost of goods completed C/D XXX

Example 1:
The following information is given for Campus Ltd

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1 Jan 2021 Stock of raw materials 80,000

31 Dec 2021 Stock of raw materials 105,000
1 Jan 2021 Work-in-progress 35,000
31 Dec 2021 Work-in-progress 42,000
Year to 31 Dec. 2021
Wages:
Direct 396,000
Indirect 255,000
Purchase of raw materials 870,000
Fuel and power 99,000
Direct expenses 14,000
Lubricants 30,000
Carriage inwards on raw materials 20,000
Rent of facility 72,000
Depreciation of factory plant and machinery 42,000
Internal transport expenses 18,000
Insurance of factory buildings and plant 25,000
General factory expenses 33,000
Required
Draw up a manufacturing account for Campus Ltd. as at 31/12/2021.

SUMMARY NOTES
1. In a manufacturing account, direct materials used are determined as follows:
Opening stock of raw materials + raw materials bought + cost of carriage inwards on raw materials - raw materials
returned - raw materials at close.
2. Prime cost = direct materials + direct wages + direct expenses
3. Factory overheads = indirect materials + indirect labour + indirect expenses
4. Total production cost = prime cost + factory overheads + opening work-in-progress - closing work-in-
progress
5. Cost of production per unit = (total production cost of goods completed) / (number of units produced)
5.5. Transfer of Finished Goods to the Trading Account
After manufacturing, the goods are transferred to the warehouse from where they are sold or supplied. The total
factory cost is then transferred to the trading account. The trading account records the actual profit made on selling
the finished goods. The transfer is made at:
a) The actual factory cost, or
b) A "loaded price".
When it is made at a factory cost, the purchases figure in the trading account is replaced by the cost of goods
manufactured. When the goods are transferred at a loaded price, (i.e., at a markup), the cost of goods in the
warehouse is in excess of production cost by the amount of profit added. The loaded price at which the completed
goods are transferred would normally be a price at which the finished goods could be obtained if purchased
elsewhere at wholesale prices. The loaded amount is credited to the manufacturing account and the difference is
known as gross profit on manufacturing.

Example 1:

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

The following trial balance was extracted from the books of MUNJAM manufacturing company BAMENDA as on
the 31st December 2022.
PARTICULARS CFAF (000) CFAF (000)
Capital 635
Creditor 145
Machinery 362
Premises 60
Fixtures and fittings 45
Motor van 52
Cash at bank 201
Cash in hand 72
Stock of raw materials at 01/01/2022 48
Purchases of raw materials 175
Stock of finished goods at 01/01/2022 24
Work-in-progress at 01/01/2022 15
Sales 396
Debtors 60
Manufacturing wages 17
Factory expenses 22
Selling expenses 10
Commission received 14
Administrative expenses 12
Rents and rates 15
1,190 1,190
Additional Information:
- Stock on 31st December 2022:
Raw materials 13,000 CFAF
Finished goods 39,000 CFAF
Work-in-progress 25,000 CFAF
- Accrued selling expenses 6,000 F CFA
- Prepaid Administrative expenses 4,000 CFAF
- Rents and rates should be charged 2/3 to manufacturing account and 1/3 to profit and loss account.
- Depreciation:
Machinery at 5%
Motor van at 10%
Fixture and fitting at 4%
Required:
Using the information given above, prepare a manufacturing, trading and profit and loss account for the year ended
31 December 2022.

Example 3:

Babycare Ltd is in the business of manufacturing and selling children's toy. The company operates a small in MIFI
town.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

The trial balance extracted from books of Babycare Ltd on 31 March 2023 was as follows:
CFAF CFAF
75,000 ordinary shares of 20 cfaf each 1,500,000
General reserves 1,200,000
Retained earnings (1 April 2022) 107,440
Interim dividend paid 75,000
Bank balance 201,420
Trade payables and receivables 792,300 349,440
Land 300,000
Buildings at cost 450,000
Plant at cost 780,000
Motor vehicles at cost 318,000
Fixtures and fittings at cost 238,230
Accumulated depreciation:
Buildings 18,000
Plant 372,000
Motor vehicles 183,000
Fixtures and fittings 70,730
Inventory (1 April 2022):
Raw materials 204,330
Work-in-progress 345,960
Finished goods 650,070
Allowance for doubtful debts 41,430
Bad debts 29,370
Rates and insurance 55,290
Direct wages 650,220
Factory power 135,360
Electricity 97,680
Maintenance expenses 65,820
Salaries 540,000
Return inwards and outwards 8,070 19,020
Advertising 51,480
Transport expense 138,270
Bank charges 17,550
Sundry expenses 174,900
Purchases and sales 5,504,280 7,362,540
15% debenture 600,000
11,823,600 11,823,600

Additional information:

1) Depreciation for the year is to be provided using the reducing balance method at the following annual rates:
 25% on motor vehicles
 10% on fixtures and fittings
 15% on plant
2) Buildings are to be depreciated using the straight line method at the rate of 4% per annum. This is classified
as factory expense.
3) Allowance for doubtful debts is to be adjusted to 10% of trade receivables as at 31 March 2023.
4) Electricity, insurance, rates, maintenance and sundry expenses are to be apportioned in the ratio 2:1 between
factory and administration overheads respectively.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

5) An amount of Sh. 180,000 posted to the direct wages account was incurred as salary for the factory
manager.
6) Debenture interest for the year had not yet been paid.
7) Inventory as at 31 March 2023 were as follows:
CFAF
Raw materials 835,530
Work-in-progress 494,700
Finished goods 618,810
8) The directors propose to pay a final dividend which will bring the dividend for the year to Sh. 2.50 per
share.

Required:
a) Manufacturing, trading and income statement for the year ended 31 March 2023.

b) Statement of financial position as at 31 March 2023.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

CHAPTER SIX

FINANCIAL STATEMENTS OF A NOT FOR PROFIT ORGANISATION (NGO)

6.1. Introduction

Non-Profit-Making Organisations or Non-Governmental organisations (NGOs) are organisations dedicated to

promoting a particular social cause or advocating for a shared point of view. In economic terms, it is an
organization using its surplus of revenues to further achieve or promote its ultimate objectives, rather than
distributing its income to its shareholders, leader’s members.
Since such organisations are not out to make profits, they are tax exempt or charitable, meaning they do not pay
income tax in the money receive for their organization. They can operate in religious, scientific, research, sports
or educational settings.
The key aspects of NGOs are accountability, trustworthiness, honesty, and openness to every person who have
invested time, money, and faith I to the organization. NGOs are accountable to the donor, founders, volunteers,
program recipients, and the public community.

6.2. Common terms used in NGOs related to Accounting

- Capital: The capital of an NGO is called Accumulated funds, and this might be made up of shares (the
case with big NGOs) or variable like in the case of sole proprietors (most common with small NGOs)

- Cash book: The cash book of an NGO is call Receipts and payments account. The debit side is the
receipts section shows all the cash received during the period (E.g. subscription received, donations,
receipts from debtors, other incomes etc.) meanwhile the credit side is the payments section shows all
cash payments made by the organization during the period (payments to creditors, donations made,
rents, wages and salaries, other payments etc.)

- Income statement: the income statement of an NGO is called Income and expenditure accounts and
the net profit or loss is called surplus or deficit.

- In profit making shareholders or members make contributions called capital only one and might increase
it later, in NGOs though capital may be made of shares, members make periodic contributions called
subscription

Our main objective is to be able to prepare financial statements (income and expenditure accounts and statement
of financial position) from the books of NGOs. This can be done using the following steps: - Determination of the
accumulated funds at the start of the period
- Bar trading account
- Receipts and payments account
- The subscription account
- Adjustment for other expenses and incomes
- Income and expenditure account
- Statement of financial position

i) Accumulated funds at the start of the period: This is the capital at the beginning of the period, it is
calculated using the balances (assets and liabilities) at the beginning of the period and preparing an opening
statement of financial position called statement of affairs. Knowing that Assets equals capital and liability,
capital will be the difference between assets and liabilities.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

ii) Bar trading accounting: bar, here, refers to any profit making activity (such as bar, restaurant, provision
stores, super market etc.) undertaken by an NGO to generate income so as to support the main objective of
the NGO. This trading account is a normal trading account prepared to determine the net profit from the
bar, which will be transferred to the income and expenditure account as an income.
To prepare the bar trading account,
• the bar sales (also called bar takings) is in the receipts section of the receipts and payments accounts (if sale
is in cash), but if sales in on credit (i.e. when the question has debtors at the beginning and end of the
period), you will have to use the sales ledger control accounts to calculate credit sales (rare in practice)
• The stock or inventory at the beginning and end of period are given
• the bar purchases is in the payments section of the receipts and payments accounts (if purchases is in cash)
but if purchases in on credit (i.e. when the question has creditors at the beginning and end of the
period), you will have to use the purchases ledger control accounts to calculate credit purchase (rare
in practice)
• all other expenses related to the bar (if any) are in the payment section of the receipt and payment account,
are subtracted from the gross profit to have the net profit

iii) Receipts and payments account: the receipts and payments account is always given, the preparation
will required only when it has not been balanced.
 Receipts include subscription received during the period, bar sales (takings), donations received,
loan received and other incomes received during the period;
 Payments include bar, purchases, rents and other expenses paid, loan repayments, purchases of
non-current assets etc.
Thus, if it has been balanced you can skip this step and go to the next.
iv) Subscription account: Subscriptions are periodic contributions made by members of the NGO in order
to renew their membership. Thus subscriptions are incomes to the organization, and can be received in
advance or in arrears.
 When members pay their subscription in advance, it means that the organization owes them,
thus they are creditors (i.e. subscription in advance or prepayments for subscription, is also called
creditors for subscription). Subscription in advance are current liabilities
 When members pay their subscription in arrears, it means that they owe the organization, thus
they are debtors (i.e. subscription in arrears or Owings for subscription is also called debtors for
subscription). Subscriptions in arrears are current assets.
 The total subscription received during the period may include arrears for the previous periods,
prepayments for the next periods and some for this period. Thus a subscription account is prepared
to calculate the subscriptions due for the period which will be taken to the income and expenditure
account as an income.
Subscription Account
FCFA FCFA
Subscription in arrears B/F x Subscription in advance B/F x
Income and expenditure A/C ? Cash and Bank x
Subscription in advance C/D x Subscription in arrears C/D x
y y

6.3. Life Membership and Entrance Fees

This is a situation whereby some members decide to pay a substantial amount at once for their subscription, so that
they no longer pay annual subscription, but would have to enjoy the facilities of the club for the rest of their lives.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Such a receipt is not treated as income in the income and expenditure account solely in the year payment is done.
The recording of the receipt is done as follows;
Dr Cash A/c
Cr Life Membership A/c amount paid
At the end of each year an appropriate amount is transferred from the Life Membership account to the Income and
Expenditure account as income that year. The journal entry is
Dr Life Membership A/c
Cr Income and Expenditure A/c amount agreed upon each year
The balance left in the life membership account after the transfer is recorded in the statement of financial position
at end of that year as a liability. This is because the club still has the obligation to render services to those members
in the years ahead without any further payments by the members.
Entrance fees refer to the extra payment made by new members in addition to their annual subscriptions. Entrance
fees are considered as income in the year that they are received. However when entrance fees is substantial, some
clubs may decide to spread the income over a number of years.
v) Adjustments for other expenses and incomes: These are adjustments are done to calculate the expenses
and income due for the period to be taken to the income and expenditure account.
vi) Income and expenditure account: The upper section summarises the incomes meanwhile the lower
section summarises the expenditures
 Incomes include: subscription due in the period, net profit from bar, donations, proceeds from sales
of tickets etc.
 Expenditures include: salaries and wages, rents, lighting and heating, depreciation of non-
current assets etc.
NB: When the total income is greater than the total expenditure, there is a surplus and this surplus is added to the
accumulated funds in the statement of financial position, meanwhile. When the total income is less than the total
expenditure, there is a deficit and this deficit is subtracted from the accumulated funds in the statement of
financial position.
Income and Expenditure account for the year ended 31st December 20xx
INCOMES: FCFA FCFA
Subscriptios due x
Net profit from bar x
Donations and other incomes x x
EXPENDITURES:
Wages and salaries x
Rents and rates x
Lighting and heating x
Depreciation x x
Surplus/(Deficit) x/(x)

vii) Statement of financial position: This is the usual statement of financial position that we prepare
for a profit making organization. The only difference being the surplus or deficit which is added to
the capital in the place of net profit or net loss.

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Example 1:
On April 1, 2020, the Statement of Financial Position of Highlands Club was as follows:
000 FCFA
Liabilities
Capital Fund 21,000
Creditors for general expenses 800
000 FCFA
Assets
Furniture 5,200
Bar equipment 8,800
Bar stock 4,400
Subscription due 1,200
Bank 2,200
During the year to 31st March 2021, the Receipts and Payments were as follows were as follows:
Receipts 000 FCFA Payments 000 FCFA
Bank balance 01/4/2020 2,200 Creditors for expenses 800
Subscription 2020 800 General expense 38,350
Subscription 2021 40,800 Bar expenses 16,250
Subscription 2022 600 Purchases of bar stock 29,200
Bar sales 51,200 Dance expenses 6,400
Receipts from dances 4,000 Furniture 3,200
Balance 5,400
96,600 96,600
The following items must be taken into account on 31st March 2021.
a) Subscription owing for 2011 was 1,320,000 FCFA.
b) The balance of subscription owing for 2010 are bad debts.
c) Stock for refreshment 4,200,000 FCFA.
d) Value of bar equipment 8,000,000 FCFA.
e) Furniture to be depreciated at the rate of 25% p.a. of book value.
Required:
Prepare for the year to 31st March 2021,
i) A bar Statement of Income
ii) Income and Expenditure Account for the year
iii) Statement of Financial Position as at 31st March 2021.

Example 2:
The receipts and payments accounts of a football club for the year ended 31/12/2022 is made up of the following
items
Receipts 000 FCFA Payments 000 FCFA
1 Jan. 2022 – Bank balance 524,000 Payments for bar supplies 3,962,000
Subscription received for 2021 ( arrears) 55,000 Wages for:
Grounds man 939,000
Bar man 624,000
Subscription for 2022 1,236,000
Subscription for 2023 (advance) 40,000 Bar expenses 234,000
Repairs to stands 119,000
Bar sales 5,628,000 Secretary’s expenses 138,000

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Ibrahim Ayouba Advanced Financial Accounting I Lectures Notes

Donations received 120,000 Grounds upkeep 229,000

Transport expenses 305,000
Bank balance 31/12/2022 1,053,000
Additional information:
a) Stock in the bar at cost 31 December 2021 and 31 December 2022 are 496,000 and 558,000 respectively.
b) Owings for bar supplies stands at 294,000 as at 31 December 2021 and 340,000 as at 31 December 2022
c) Bar expenses owing stand at 25,000 as at 31 December 2021 and 36,000 as at 31 December 2022.
d) Transport expenses owing amounted to 65,000 as at 31 December 2022.
e) The land and stands were valued at 31 December 2021 as follows:
 Land 4,000,000 Stands 2,000,000
 The stands are to be depreciated at the rate of 10% per annum.
f) The equipment at 31 December 2021 was valued at 550,000 and it is depreciated at the rate of 20% per
annum.
g) Subscriptions owing by members amounted to 55,000 as at 31 December 2021 and 66,000 as at 31
December 2022.
Required:
(i) Draw up a bar trading account for the period to 31/12/2022.
(ii) Prepare the income and expenditure account for the year ended 31/12/2022.
(iii) Draw a balance sheet as at 31 December 2022.

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