Accounting Principles

PRINCIPLES
COURSE INTRO
OF ACCOUNTING 1 Unit 1 Introduction:
PRINCIPLES Structure
OF ACCOUNTING 1
Dear student, you are warmly welcome to the study of this book on
Principles of Accounting I. It is the first in the series of accounting courses
in the programme of study you have enrolled in.
Accounting has been called the financial language of business. This is

because it is the system which measures business activities and processes
such activities into reports and communicates the results to management and
other users. Accounting is therefore described as the process of recording
business transactions and reporting financial information. It is very much
related to any field of endeavour so long as financial and monetary issues
are involved.
The purpose of this course module is to introduce you to the basic financial
accounting principles. It is structured into six units. Each unit is divided into
sections. Each unit has an introduction and unit objectives. In the same vein,
each section begins with an introduction and section objective(s). We expect
you to go through the introductions and the objectives since they will help
you to focus on the core issues presented in this module.
Unit one covers the nature, function and regulatory framework of

accounting. The meaning and purpose of accounting, the differences
between bookkeeping and accounting, users of accounting information and
their information needs, qualities of accounting information, accounting
concepts and conventions are all discussed in this unit. Unit two discusses
the theory of double entry principle of accounting. It treats the double entry
principle for recording assets, liability, capital, revenues and expenses. The
use of the ledger in recording cash transactions is also dealt with.
Unit three presents the principles for accounting for non-current assets.
Non-current assets, which is normally referred to as property, plant and
equipment, represents a significant component of the total assets employed
in business. The ledger entries relating to the acquisition, depreciation and
disposal of non-current assets are treated in unit three. Unit four covers the
preparation and presentation of financial statements of sole proprietorship
business. In accordance with the provisions of the International Financial
Reporting Standards (IFRS), the following financial statements will be dealt
with: Statement of Profit or Loss and Other Comprehensive Income;
Statement of Financial Position; and Statement of Cash Flows. This will be
followed by adjustments to these financial statements which will be treated
in Unit five. Adjustments such as prepayments and accruals, provisions and
valuation of inventory will be dealt with in Unit five. The course module
concludes with Unit six on correction of errors, preparation of bank
reconciliation statements and the use of control accounts.
We have prepared this module using a step-by-step approach that allows

you to deal with specific aspect of each major topic irrespective of how brief
or lengthy this might be. We have also made available, throughout the
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PRINCIPLES
Course Intro OF ACCOUNTING 1
module, worked-out illustrative examples. There are end of section

exercises aimed at enabling you to check your understanding of the concepts
and principles explained in this module. It is our hope that you will spend
ample time in reading the sections and working all the illustrative examples
and exercises. Remember, accounting is a living and practicable subject
discipline. We wish you well in your study.
At the end of the course you will be able to:

 describe the nature, function and regulatory framework of accounting;
 apply the theory of double entry principle of accounting in recording
business transactions;
 account for the acquisition, depreciation and disposal of non-current
assets;
 prepare the financial statements of sole proprietorship business;
 make end-of-period adjustments to the financial statements of sole
proprietorship business;
 correct errors that occur in the recording of business transactions;
 prepare bank reconciliation statements; and
 use control accounts to check the accuracy of ledger entries.
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MODERN ENGLISH NATURE, FUNCTION
UNIT
STRUCTURE AND USAGE 1
Unit 1 Introduction:
AND REGULATORYStructure
FRAMEWORK OF ACCOUNTING
Hello dear learner! You are welcome to the first unit of this course module.
The primary focus of this unit is to lay a firm foundation for this
introductory course in accounting. The unit is divided into six sections and
in each section we are going to treat specific issues that introduce you to
financial accounting. In this unit, we will explain to you the meaning and
definition of accounting. We will provide an overview of the evolution of
accounting. The concepts, assumptions and accounting standards
underlining the preparation and presentation of relevant and reliable
financial information will also be discussed.
At the end of this unit you will be able to:

 explain the nature and evolution of accounting
 describe the major stages in the accounting process
 identify the users of accounting information and their information
needs
 explain the qualities that make accounting information useful for
decision making
 apply the relevant accounting concepts and standards to the
preparation and presentation of reliable financial reporting
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CURRICULUM STUDIES
PRINCIPLES
IN EARLY CHILDHOOD
Unit 1 Introduction: This
Structure
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EDUCATION
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PRINCIPLES THE ROLE
UNIT 1 SECTION
OF ACCOUNTING 1 1
Unit 1, OF
Section 1: The role of book-keeping and accounting in business
BOOK-KEEPING AND ACCOUNTING IN BUSINESS
The keeping of records is very essential to any field of endeavour. In

accounting, book-keeping forms the basis for the provision of relevant
information for decision making. In this first section of unit one, we will
define the term ‘accounting’ and explain how it can be distinguished from
bookkeeping. We will also describe the various stages through which
accounting information is generated. The function of accounting
information in decision making in business will also be part of the subject
matter of this section.
By the end of this section you will be able to:

 define the term accounting
 explain the term accounting
 differentiate between accounting and bookkeeping
 describe the evolution of accounting
 state the main purpose of accounting
 mention some other purposes, functions or uses of accounting
 list the major steps in the accounting process
 explain the stages in the accounting process
Definition and Meaning of Accounting

Accounting is the process of recording, analysing, summarising and
reporting business transactions to meet user’s needs. It is simply the
provision of relevant and reliable financial information relating to an entity
for decision making and control purposes by interested persons. The process
involves identifying accounting related transactions, recording those
transactions in the appropriate books of accounts and preparing financial
reports in relation to these transaction.
Over the years, various definitions have been given for accounting. Let us
review a few of these definitions. Accounting has been defined as the art of
collecting, analysing, recording, summarising, presenting and interpreting
financial and operating data expressed in terms of money for use by
management of economic entities and other interested parties in making
decisions or for control purposes. In other words, it is the art of identifying,
measuring and communicating economic information of organisations to
management and other users for decision making.
The American Accounting Association defines accounting as “the process

of identifying, measuring, and communicating economic information to
permit informed judgements and decisions by users of the information”. The
American Institute of Certified Public Accountants, (AICPA) also defines
accounting as “the art of recording, classifying and summarising in a
significant manner and in terms of money, transactions and events which are
in part at least, of a financial character, and interpreting the results thereof”.
Accounting may also be viewed as a system for recording business
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Unit 1, Section 1: The role of book-keeping and accounting in business OF ACCOUNTING 1
transactions and reporting financial information, to interested parties, as a

basis for performance assessment, decision-making and control.
The definitions above are similar in that they contain the essential elements
involved in the accounting process. These are:
 Recording of transactions and events which also involves collecting and
analysing data;
 Summarising and presenting information to end users; and
 Interpreting the results or information.
Evolution of Accounting
For some time now, accounting has been called the financial language of
business. This is because it is the system which measures business activities
and processes such activities into reports and communicates the results to
management and other users.
As early as 8,500 B.C., accounting already existed. During that time, it was
found out that clay tokens which correspond to such commodities like
sheep, clothing or bread were used in the Middle West in keeping records.
After some time, the tokens were replaced by wet clay tablets. During such
time, experts concluded this to be the start of the art of writing. Similarly,
payments of salaries were recorded in clay tablets. In addition, the rulers of
some civilized societies used accounting to keep track of labour and
material costs used in building structures. A good example is the case of the
Egyptian pharaohs in building their magnificent pyramids.
During the thirteenth to the fifteenth centuries, there was advancement in

account-keeping methods in trade-flourished places such as Florence,
Venice and Genoa; thanks to the merchants and the bankers of such time.
However, the system of accounting was primitive as the concept of equality
for entries was absent. Double entry records first came out during 1340 A.D.
in Genoa. In 1494, the first systematic record keeping was formulated by
Fra Luca Pacioli, a Franciscan monk and one of the most celebrated
mathematicians to this day. Fra Luca Pacioli is considered as the father of
accounting. Three books of account are to be kept. According to Fra Luca
Pacioli, three books of accounts are to be kept. They are the memorandum –
used for daily recording; the journal – used for daily recording with
narration; and the ledger – used for classification of similar transaction to
give summary effect by observing double entry bookkeeping.
Due to the industrial revolution which was characterized by great changes in

working and business transactions the double entry system of accounting
paved way to the specialized field of accounting called cost accounting in
order to meet the need for the analysis of various costs. In addition, since
there was a development of the corporate form of organization, there was a
need for a separate and independent report to provide reasonable assurance
as to the reliability of management's financial representations.
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OF ACCOUNTING 1 Unit 1, Section 1: The role of book-keeping and accounting in business
Today, accounting has moved towards the information age. At present, there
have been tremendous advancements in accounting to meet the needs
brought about by information technology. Those duties that required
manual, tedious and time-consuming methods can now be done using
computers which make work faster, more reliable, accurate and precise.
True enough, business transactions have changed and evolved. Businesses
can now be transacted virtually making it faster and hassle-free. Business
people transacting their businesses without even facing one another have
become possible all because of information technology. With the
advancement of businesses, accounting has also advanced to meet the needs
of businesses at this day. There has been a great quantity of applications and
elements of accounting that meet up the various needs of businesses. As
they often point out, as a smart businessman, one must breathe in
information technology to keep up with the trend and stay competitive.
An emerging trend in accounting is the gradual shift from mechanical

accounting to financial reporting. This has been attributed to the use of
computers in accounting. As noted above those duties that required manual,
tedious and time-consuming methods can now be done using computers. At
the moment, accounting has moved from manual accounting through to the
use of lotus to spreadsheets and now to accounting packages or software.
Distinction between Bookkeeping and Accounting

The accounting process starts with bookkeeping often referred to as record
keeping. It is important for us to examine the distinction between
bookkeeping and accounting in order to see the scope of accountancy.
The aspect of accounting which is concerned with the recording of business

transactions is what is usually termed as bookkeeping. Bookkeeping is the
aspect of accounting that deals with the mere aspect of accounting as they
occur whether in the accounting system or in a computerised accounting
system. When accounting first evolved, transactions and events were being
recorded in books; thus, the term bookkeeping. Accounting goes beyond
bookkeeping in that it classifies the transactions that have been recorded to
aid management decisions. Accounting also deals with interpretation of
final data. Bookkeeping is a very important component of accounting since
it is concerned with the work of entering data into accounting records and
afterwards maintaining such records properly. However, the following are
some distinctions between bookkeeping and accounting:
 Bookkeeping is a subset of accounting. It ends at the recording stage of
accounting. Accounting goes on further to include summarising,
presenting and interpreting results.
 The one who does the work of bookkeeping is called a bookkeeper. In
today’s business language, he or she may be called an accounts clerk.
However, the one who does the work of accounting is called an
accountant or an accounts officer.
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 Bookkeeping does not require any special skill or training even though
guidance may be needed. However, accounting requires some form of
special skill and proper training.
 Bookkeeping has no strict rules regarding it. With accounting, many
principles, rules and regulations have to be followed.
Purpose of Accounting
The main purpose of accounting is to provide quantitative information
expressed in terms of money to users to make economic decisions. This
implies that accounting should lead to the provision of information that is
useful for decision making. The accounting information should help the
housewife take a decision as to how much foodstuffs should be bought. It
should also help the employee to take a decision as to whether to remain in
the employment of an organisation or to look elsewhere. It should also help
the manager to assess the performance of an organisation, and in so doing,
decide on courses of action that will help maintain or improve current
performance of the business.
The information that accounting provides is usually quantitative and

monetary in nature. The information is expressed in figures and currency
terms. The implication is that those valuable information about an entity
which are not quantitative in nature, must be ignored. Accounting
information therefore does not give us a complete picture of an organisation.
Functions (Uses) of Accounting Information

The end result of the accounting process is the provision of relevant
accounting information for useful decision making. As stated above, this is
what is usually referred to as the main purpose of accounting. Apart from
the main purpose of accounting, the following are some of the functions or
uses of accounting information:
1. Accounting information provides analysed and summarised information
on business activities.
2. It also facilitates the efficient allocation of scarce resources.
3. It enables us to meet the requirements of the law.
4. It shows the accountability of the affairs of an entity through the
preparation and presentation of financial statements to owners of the
entity.
5. It assists in the control of business transactions.
6. It provides information on persons or objects of an entity.
7. It helps in ensuring accuracy in recording of business transactions.
8. Accounting information also is used to plan for future operations.
Limitations of Accounting Information

1. Accounting information ignores non-monetary information. This means
it only records monetary transaction. For instance, the death of a
manager and the negative behaviour of employees towards work will
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not be recorded or stated even though they can affect the business in
one way or the other.
2. Accounting information may not contain all the qualitative
characteristics that make it useful for decision making. In reality there is
usually a trade-off among the qualities. A quality such as relevance
may have to be sacrificed for another quality such as reliability. That is,
in an attempt to provide timely accounting information which will be
relevant for decision making, the information may contain errors
thereby making them unreliable.
3. Accounting information is expressed in terms of money but money as a
unit of measurement is unstable. Therefore, changes in prices due to
inflation may distort the information presented in financial statements.
4. There are sometimes contradictions among some of the concepts
underlying the preparation and presentation of accounting information.
For example, revenue recognition and prudence.
5. Accounting information may be subject to human error and/or
manipulation.
Financial accounting information reports past or historical data which may

not be relevant for future decision making. The historical information may
not also show the real purchasing power of accounting information.
The Accounting Process

The Accounting Process involves two main aspects: recording business
transactions and reporting financial information. Recording business
transactions involves identifying and recording transactions and events
which also involve collecting (documentation) and analysing data.
Reporting financial information involves summarising and presenting
information to end users; thus, preparation of a trial balance and
presentation of financial statements to users for decision-making.
Stages/Steps in the Accounting Process

The accounting process or cycle can also be viewed as an accounting
system. A system designed to record accounting transactions and events of
an entity, and account for them in a way that complies with its policies and
procedures. The basic elements of the accounting system are identifying,
measuring, collecting, recording, and reporting transactions.
The stages in the accounting process can explained as follows:

1. Recognition and measurement of business transactions: When
transactions, events or activities occur in business, they are identified as
business transactions and distinguished clearly from non-business
transactions. Values in monetary terms are then assigned to the
accounting information relating to these business transactions.
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2. Collection and analysing of source documents: With the aid of source

documents such as invoices, receipts and vouchers, information on these
transactions are collected and analysed.
3. Journalising: The information collected are recorded in the appropriate

books of prime entry (i.e. the journals).
4. Posting the transactions recorded in the journal to the ledgers: The

transactions recorded in the journals are then transferred into their
respective ledger accounts using the double entry system of accounting.
5. Balancing off accounts in the ledgers and extracting a trial balance:

The accounts in the ledgers are balanced off. That is, comparing the total
of the debit side of the accounts with the total of the credit side of the
accounts, and reconciling them with the difference, which is the balance
carried down (c/d). The balance brought down (b/d) of the various
accounts are then extracted in the form of a trial balance.
6. Preparation of financial statements: After considering end-of-period

adjustments which may affect the entries in the accounts, the trial
balance is used to prepare the financial statements in the form of the
income statement and the statement of financial position, among others.
7. Interpretation of accounts: Where the need arises, the financial

statements are interpreted using ratio analysis.
Diagrammatically, the accounting process can be depicted as in Fig 1.
Fig. 1 – The accounting process

Business Transactions
Sales Purchases Receipts/Paying-in Credit/Debit

Invoice Invoice slips/Cheques note
Sales day Purchases day Return inwards and Return

Cash book
book book outwards day books
Sales ledger Purchases ledger Cash book (Cash General ledger

(Trade receivables (Trade payables and bank accounts (Real and Nominal
accounts) accounts) & Petty Cash book) Accounts)
TRIAL BALANCE
Statement of Profit Statement of

or Loss Account financial position
Interpretation of
accounts Source: Authors’ Construct
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Review questions
1 What do you understand by the term Accounting?
2 State the main purpose of accounting.
3 Enumerate five uses of accounting information.
4 Distinguish between bookkeeping and accounting.
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Unit 1,
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The role
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PRINCIPLES REGULATORY
UNIT 1 SECTION
OF ACCOUNTING 1 2
Unit 1, AND
Section 2: Regulatory and conceptual framework of Accounting
CONCEPTUAL FRAMEWORK OF ACCOUNTING
Accounting is a regulated profession. There are several rules and regulations

that the accountant must comply with. In this section, we will discuss the
constituents of the regulatory and conceptual framework of accounting. For
the conceptual framework, we will discuss the International Accounting
Standard Board (IASB) conceptual framework for financial reporting. The
regulatory framework comprises the national legislation, accounting
standards, accounting concepts and conventions, generally accepted
accounting principles and international influences. In the last section of this
unit, we will discuss accounting concepts and conventions in detail.
By the end of this section, you will be able to:

 identify the constituents of the regulatory framework of accounting
 explain the need for broad rules to guide the recording and reporting
of financial transactions
 explain the components of the IASB conceptual framework for
financial reporting
 identify the need for accounting standards
 describe the standard setting process
Regulatory Framework of Accounting

The regulatory framework of accounting is a general term used to describe
the laws, principles, rules and regulations that govern the recording of
business transactions and the reporting of financial information. It includes:
1. Generally Accepted Accounting Principles e.g. International Financial
Reporting Standards (IFRS), IFRS for SMEs.
2. Acts of Parliament e.g. The Companies Act of 1963, Act 179.
3. Relevant legal requirements e.g. stock exchange regulations.
4. Other international influences
Generally Accepted Accounting Principles (GAAP) refer to the rules,

accounting standards, accounting concepts, conventions, principles, bases
and policies usually followed by accountants in measuring, recording and
reporting transactions.
International Financial Reporting Standards (IFRS)

Currently, the main and single set of accounting standards applicable in
Ghana as well as globally is the International Financial Reporting Standards
(IFRS). The IFRS which was previously known as the International
Accounting Standards (IAS) are a comprehensive set of accounting rules
and guidelines applied in the preparation and presentation of financial
statements. As of January 2013, the following IFRS were in issue:
 IFRS 1 First-time Adoption of IFRS
 IFRS 2 Share-based Payment
 IFRS 3 Business Combinations
 IFRS 4 Insurance Contracts
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Unit 1, Section 2: Regulatory and conceptual framework of Accounting OF ACCOUNTING 1
 IFRS 5 Non-current Assets Held for Sale and Discontinued

Operations
 IFRS 6 Exploration for and Evaluation of Mineral Resources
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IFRS 9 Financial Instruments (Replacement of IAS 39)
 IFRS 10 Consolidated Financial Statements
 IFRS 11 Joint Arrangements
 IFRS 12 Disclosure of Interest in Other Entities
 IFRS 13 Fair Value Measurement
 IFRS 14 Regulatory Deferral Accounts
 IFRS 15 Revenue from Contracts with Customers
 IAS 1 Presentation of Financial Statements
 IAS 2 Inventories
 IAS 7 Cash Flow Statements
 IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
 IAS 10 Events after the Reporting Date
 IAS 11 Construction Contracts
 IAS 12 Income Taxes
 IAS 16 Property, Plant and Equipment
 IAS 17 Leases
 IAS 18 Revenue
 IAS 19 Employee Benefits
 IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance
 IAS 21 The Effects of Changes in Foreign Exchange Rates
 IAS 23 Borrowing Costs
 IAS 24 Related Party Disclosures
 IAS 26 Accounting and Reporting by Retirement Benefit
Plans
 IAS 27 Separate Financial Statements
 IAS 28 Investments in Associates
 IAS 29 Financial Reporting in Hyperinflationary Economies
 IAS 32 Financial Instruments: Presentation
 IAS 33 Earnings per Share
 IAS 34 Interim Financial Reporting
 IAS 36 Impairment of Assets
 IAS 37 Provisions, Contingent Liabilities and Contingent
Assets
 IAS 38 Intangible Assets
 IAS 39 Financial Instruments: Recognition and Measurement
 IAS 40 Investment Property
 IAS 41 Agriculture
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OF ACCOUNTING 1 Unit 1, Section 2: Regulatory and conceptual framework of Accounting
These IFRSs will be dealt with at a later stage in our study of accounting. It
is important, however, to point out that the IFRSs are promulgated or issued
by the International Accounting Standards Board (IASB). Before then there
were the International Accounting Standards (IAS) which were issued by
the International Accounting Standards Committee (IASC). With effect
from April 2001, the IASB assumed accounting standard-setting
responsibilities from the IASC. Therefore, all standards issued by the IASB
whether they are IASs or IFRSs are termed as IFRS.
Conceptual Framework for Financial Reporting

The IASB has also set out an initial framework for the preparation and
presentation of financial statements. This framework spells out the concepts
that underlie the preparation and presentation of financial statements for
external users. In September 2010 the IASB developed a new project titled
Conceptual Framework for Financial Reporting. This replaces the
framework for the preparation and presentation of financial statements. The
framework deals with:
(a) The objective of financial reporting;
(b) User groups of financial statements;
(c) Assumptions underlying financial statement preparation;
(d) The qualitative characteristics of financial statements;
(e) The definition, recognition and measurement of the elements from
which financial statements are prepared; and
(f) The concepts of capital and capital maintenance.
The objective of financial reporting is to provide information about the

financial position, performance and changes in financial position of an
entity that is useful to a wide range of users in making economic decisions.
Financial statements prepared for this purpose meet the common needs of
most users. However, financial statements do not provide all the information
that users may need to make economic decisions since they largely portray
the financial effects of past events and do not necessarily provide non-
financial information. In order to ensure that the objective of financial
statements is met, financial statements are usually prepared on the accrual
basis of accounting and are also prepared on the assumption that the entity
would continue to be in operational existence into the foreseeable future –
going concern assumption.
User groups are identifiable groups who require financial information for
various purposes. They include management, investors, business contacts,
analysts and advisors, loan creditors, government and government agencies,
and general public.
The assumptions underlying financial statements are the going concern

and accrual basis. These are the two main assumptions specified by the
conceptual framework governing financial statements preparation. The
going concern basis assumes that the enterprise has neither the need nor the
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intention to liquidate or curtail materially the scale of its operation. The

accrual basis means that the effects of transactions and other events are
recognised as they occur and not as cash or its equivalent is received or
paid.
The qualitative characteristics are the attributes that make the information
provided in financial statements useful to users. The conceptual framework
has grouped the qualitative characteristics into fundamental and enhancing.
The fundamental qualitative characteristics are relevance, materiality and
faithful representation. The enhancing qualitative characteristics are
timeliness, verifiability, understandability and comparability. These
qualitative characteristics would be explained in detail in Section 4 of this
Unit.
The elements of the financial statements directly related to the

measurement of financial position are assets, liabilities and equity. These are
defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity.
(b) A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
(c) Equity (capital) is the residual interest in the assets of the entity after
deducting all its liabilities.
The other elements of the financial statements (which are related to the
measurement of financial performance) are income and expenses. These are
defined as follows:
(a) Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
(b) Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or increases of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.
An item that meets the definition of an element should be recognized if:

(a) it is probable that any future economic benefit associated with the item
will flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability.
Measurement is the process of determining the monetary amounts at which

the elements of the financial statements are to be recognised and carried in
the statement of financial position and income statement. This involves the
selection of the particular basis of measurement. The Framework identifies
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OF ACCOUNTING 1 Unit 1, Section 2: Regulatory and conceptual framework of Accounting
four possible measurement bases: historical cost, current cost, realizable

value and present value.
The concepts of capital and capital maintenance are concerned with how
an entity defines the capital that it seeks to maintain. It provides the linkage
between the concepts of capital and the concepts of profit because it
provides the point of reference by which profit is measured. This means that
inflows of assets in excess of amounts needed to maintain capital may be
regarded as profit. Hence, profit is the excess of income over expenses.
Expenses here include amount needed to maintain the capital of the entity.
In fact, two main concepts of capital maintenance have been indicated:

financial capital maintenance and physical capital maintenance. Under the
financial capital maintenance concept, a profit is earned only if the financial
(or money) amount of the net assets of the entity at the end of a period
exceeds the financial (or money) amount of net assets at the beginning of
the period. On the other hand, under the physical capital maintenance
concept, a profit is earned only if the physical productive capacity of the
entity at the end of the period exceeds the physical productive capacity of
the entity at the beginning of the period. The physical capital maintenance
concept requires the adoption of the current cost basis of measurement
whiles the financial capital maintenance uses the historical cost basis of
measurement.
Accounting Standards
Accounting has a number of concepts. There are several areas where
judgement is required in determining the appropriate accounting policy to
be followed. In particular, judgment is required when allocating certain
costs and revenues between accounting periods. Depreciation and the
treatment of doubtful debts provide examples of the need for subjective
judgement in cost allocation and asset valuation decisions. The problem of
employing subjective judgement in preparing accounts is that different
judgements concerning what is appropriate can lead to quite different views
of financial position and performance. To address this problem, accounting
standards have been developed as rules for preparing financial statements.
The accounting standards specify the type of information that financial
statements ought to contain and how that information ought to be prepared.
Accounting standards define what acceptable and unacceptable financial
accounting practices are. It is important that governments make every effort
to promote the use of internationally acceptable accounting standards and
methodologies in their countries.
The Standard Setting Process

In formulating an accounting standard on a particular topic the Professional
Accountancy Bodies undertake considerable deliberation and consultation.
The final outcome of these deliberations and consultations is a Reporting
Standard, often referred to as ‘accounting standards’. This is a document,
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which sets out rules prescribing the way in which accounting reports should
be prepared and/or presented. Generally, accounting standards are meant to
be adhered to in respect of all financial reports designed to give a true and
fair view of profits earned and of financial position.
The promulgation of accounting standard involves various stages. The

major stages are usually as follows:
1. identifying a suitable topic;
2. commissioning a research study on the topic;
3. preparing a draft standard which is then disseminated to stakeholders;
4. allowing a period of usually six months to give interested parties and
opportunity to comment;
5. summarizing and reviewing the comments received and producing a
final draft of the standard.
In some cases a published standard has been revised or withdrawn following
criticism of its operation in practice.
Currently, accounting standards (i.e. the IFRS) are set by the International
Accounting Standards Board (IASB). The following steps are followed by
the IASB before a new standard is issued:
 Step 1: IASB may establish an Advisory Committee to give advice on
issues arising from an accounting standard setting project [Agenda
Setting]
 Step 2: IASB develops and publishes Discussion Documents for public
comments [Discussion Paper]
 Step 3: Following the receipt and review of comments, the IASB would
develop and publish an Exposure Draft.
 Step 4: Following the review and receipt of comments the IASB will
issue a final IFRS.
Review Question
1. What are the five elements of financial statements identified by the
IASB’s Conceptual Framework?
2. State the definition for assets and liabilities according to the IASB’s
Conceptual Framework for Financial Reporting.
3. What are the two main concepts of capital maintenance?
4. Describe the standard setting process.
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PRINCIPLES
UNIT 1 SECTION
OF ACCOUNTING 1 3
Unit 1, USERS
Section 3: OF
UsersACCOUNTING INFORMATION
of Accounting Information
You are welcome to this third section of Unit 1. In the first section we
looked at the functions and purpose of accounting. We saw that accounting
is the means by which we measure and describe results of financial
activities. In this section we are going to discuss the users of accounting
information and their information needs.
After studying this section, you will be able to:

 identify the various users of accounting information
 explain the information needs of the various users of accounting
information
Users of Accounting Information

It is easy to assume that the only users of accounting information are owners
or shareholders. However, in reality there are many users of accounting
information. Generally, users of accounting information are the managers of
an entity, shareholders, suppliers and trade payables, customers and trade
receivables, loan providers, the government, employees, financial analysts
and advisors, and the general public. These users, together with their
information needs, can however be grouped as follows:
 Management – Management here refers to those who oversee the

affairs of the business entity such as board of directors, senior
managers, and departmental heads. This group of users need accounting
information to assess their stewardship or accountability over the affairs
of the business entity. They will need accounting information from the
trading and Income statement and from the Statement of financial
position to undertake the management functions of planning,
organising, directing and controlling. The profits made in the previous
year, for example, may be used to assess the performance of the
business entity as well as plan the profit for the following year.
Management may also have to decide whether to pay dividends to
shareholders depending on the profit earned and the cash balance in the
Statement of financial position. Information on cost will help
management to control costs in order to increase profits.
 Shareholders (or Owners) – Shareholders or owners can be described

as investors who are concerned about the risk and return in relation to
their investments. They can either be existing (those who already own
shares) or potential shareholders. These are people who are interested in
whether or not the business is profitable, and whether there are enough
financial resources for the payment of dividends to them. The
information contained in the income statement and statement of
financial position will help them to know the profitability of the
business and the amount of dividends to expect. This will enable them
to decide whether to maintain, increase, reduce or sell their
shareholdings or equity interest in the business.
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Unit 1, Section 3: Users of Accounting Information OF ACCOUNTING 1
 Suppliers and trade payables – They require information about the

ability of the business to survive and prosper. As business partners, they
have an interest in the entity's range of products and services. Suppliers
and trade payables require information that helps them understand and
assess the liquidity of a business. That is the ability of the business to
settle its debts as and when they are due.
 Customers and trade receivables – They are interested in the survival

of the business. They may be dependent on the business for certain
products or services. They are particularly interested in the ability of the
business to continue to supply them with goods and services.
 Government – There are many government agencies and departments

that are interested in accounting information. These include tax
authorities (e.g. the Ghana Revenue Authority), registrar of companies,
government departments and agencies, and local authorities. Besides,
businesses are also subject to a wide range of government regulations,
particularly, the payment of taxes. The Ghana Revenue Authority
would be interested in how much profits have been made by the
business in order to calculate the taxes payable and also for planning
purposes. The Registrar of Companies also needs the audited financial
statements of companies as a statutory requirement. The Statistical
Department will need information in the financial statements for
national income computation, and other statistics.
 Loan providers – Banks, debenture holders and other loan providers

who lend money to a business require information that helps them
determine whether loans and interest will be paid when due. They are
basically concerned with the entity’s ability to meet its debt obligations
as and when they fall due. They will also be interested in the future
viability or profitability of the business since the possibility of the
business failing to make repayments of loans and other debt obligations
may have adverse consequences on the loan providers.
 Employees and trade union – Employees and trade unions require

information about the profitability and long term survival of the
business. Once profits from operations are increasing, they will have
good grounds to agitate for better conditions of service such as increase
in wages and salary, promotions, and retirement benefits. Good working
conditions and job security are also their concerns. They are therefore
interested in the Statement of financial position for indicators that will
show that the business will continue to exist and provide employment.
 Financial and Investment analysts and advisors – Financial and

investment analysts are important users of accounting information -
specifically for companies listed on a stock exchange. They require
very detailed financial and other information in order to analyse the
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OF ACCOUNTING 1 Unit 1, Section 3: Users of Accounting Information
competitive performance of a business and its sector. Much of this is

provided by the detailed accounting disclosures that are required by
authorities such as the Ghana Stock Exchange and the provisions of the
International Financial Reporting Standards (IFRS). However,
additional accounting information is usually provided to analysts via
informal company briefings and interviews.
Review Questions
1. Explain four limitations of accounting information.
2. List and explain the major steps in the accounting process.
3. State five users of accounting information and explain their information
needs.
4. For each of the following user groups of accounting information,
describe who they are, their information requirements, and state the
extent to which accounting information is likely to meet their needs:
(a) Management
(b) Shareholders
(c) Lenders and Trade payables
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PRINCIPLES QUALITATIVE
UNIT 1 SECTION
OF ACCOUNTING 1 4
Unit 1, CHARACTERISTICS
Section 4: Qualitative Characteristics of Accounting Information
OF ACCOUNTING INFORMATION
The overriding quality of accounting information is decision usefulness.

However, for accounting information to be useful for decision making, it
must possess certain primary as well as secondary qualities. The
fundamental qualities are those qualities of accounting information that
relate to the content of the information. The enhancing qualities are those
qualities of accounting information that relate to the presentation of the
information. These qualitative characteristics of accounting information are
the essential issues to be discussed in this section.
By the end of this section, you must be able to:

 state and explain the fundamental qualities of accounting information
 state and explain the enhancing qualities of accounting information
Qualitative Characteristics of Useful Accounting Information

Accounting information aims at enabling users to make economic decisions.
Accounting information must therefore be useful for decision making. The
overriding quality of accounting information is therefore decision
usefulness. For accounting information to be useful for decision making, it
must possess certain qualities in terms of its content and its presentation.
Qualities relating to the content of accounting information are termed as
fundamental qualities and qualities relating to the presentation of accounting
information are termed as enhancing qualities.
Fundamental qualities:
1. Relevance
2. Faithful representation
3. Materiality
Relevance implies that the information under consideration bears directly on

the decision to be made. The information helps the user in his decision-
making. Relevant accounting information should have the capacity to
influence the decision making process of users. It should possess predictive
value and feedback value. Predictive value refers to that part of the
information which helps the user to estimate and evaluate present and future
events. Feedback value refers to the ability of the information to help the
user to correct or confirm past evaluations. Feedback value is also referred
to as confirmatory value.
Faithful representation, as another primary quality, implies that the

information can be depended upon to make decisions because the facts and
figures contained in the information are objective and verifiable. Reliable
accounting information should be neutral, complete, faithfully represented,
and free from material bias. That is, the information should not be bias
towards a predetermined result or not reported in such a manner as to
unduly influence the decision making of users in a particular direction.
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Unit 1, Section 4: Qualitative Characteristics of Accounting Information OF ACCOUNTING 1
Materiality is referred as the threshold quality of accounting information.

Accounting information is material if its omission or misstatement could
influence the economic decisions that users make on the basis of that
information about an entity. For example, a stapler machine can last for
about five years, but because its value is relatively insignificant or
immaterial, it would not be treated as a non-current asset, but rather as an
expense.
Enhancing qualities:
1. Comparability (and consistency)
2. Timeliness
3. Verifiability
4. Understandability
Comparability means that accounting information should be such that users

can compare the financial statements of an entity overtime to identify trends
in financial position and performance. The information should therefore
allow for two or more periods’ data to be compared on a reasonable basis.
The user should be in a position to compare the financial statements of
similar entities for the same period. Comparability goes hand in hand with
consistency. Consistency refers to the accounting information being
prepared on the same basis period after period. Once the basis of preparing
the financial statements is maintained, there will be some form of
consistency, and hence meaningful comparison can be made between or
among different periods.
Timeliness means having the information available to decision-makers in

time to be capable of influencing their decisions. Timeliness requires that
the information should be received on time before it loses its capacity to
influence decision making.
Understandability means that accounting information should be in a form

which is understandable by user groups. Presenting information clearly and
concisely makes it understandable. But understandability in itself is user-
specific. This implies that even though accounting information must be
presented in a form which is understandable by a user, the user must also
have reasonable knowledge in business and accounting. Financial reports
are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently.
Verifiability is the quality that ensures accounting information is supported

by sufficient, reliable and appropriate documentation which is evidenced by
underlining records. In other words, if the same set of records are used to
produce financial statements, the financial statements will reveal the same
accounting information.
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OF ACCOUNTING 1 Unit 1, Section 4: Qualitative Characteristics of Accounting Information
It is also worth mentioning that in as much as these qualities are very

essential if accounting information would be very useful for decision
making, in practice, not all the qualities can be present all the time. More
often, a balancing or trade-off, between the qualities, is necessary. Related
to this trade-off is the issue of the cost constraints. The costs of obtaining
and presenting quality information may exceed the benefits obtained from
using the information.
Review Questions
1. What are the two categories of qualitative characteristics of accounting
information?
2. List two fundamental qualities of financial information.
3. List two enhancing qualities of financial information.
4. Mr. Ben Mensah, a business man who deals in groceries, has spoken to
his bank manager about the possibility of borrowing GH¢30,000
repayable after 5 years. He has provided the bank manager with his
income statements, statement of financial positions and statements of
cash flows for the last three years as well as forecasts for the year
ending 31 December 2014. The ‘IASB’s Conceptual Framework for
Financial Reporting’ highlights qualitative characteristics of useful
financial statements. State and explain four of these qualitative
characteristics. Your explanation of each term should be supported by
simple examples, referring to any one of the financial statements
provided to the bank manager, of how Johnson would ensure that the
particular characteristic is enhanced.
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UNIT 1 SECTION
OF ACCOUNTING 1 5
Unit 1, ELEMENTS OFofFINANCIAL
Section 5: Elements STATEMENTS
financial statements
The outcome of the accounting process is the preparation and presentation

of financial statements. These financial statements are the means through
which the preparers of financial statement communicate the state of affairs
and the performance of the entity to end users. The nature of these financial
statements and the elements contained in these financial statements are the
subject for discussion in this section.
By the end of this section, you should be able to:

 define and explain financial statements
 state and explain the composition of financial statements
 state and explain the elements of financial statements
The nature of Financial Statements

Financial statements are the financial reports through which financial
information is reported. Financial statements show the results of the
stewardship of management. It is through financial statements that
management display accountability of management of resources entrusted to
them. The general objective of financial statements is to provide information
about the financial performance, financial position, and changes in financial
position of an enterprise that is useful to a wide range of users in making
economic decisions.
A complete set of financial statements comprise:

a) A statement of financial position as at the end of the reporting period;
b) A statement of profit or loss and other comprehensive income for the
reporting period;
c) A statement of changes in equity for the reporting period;
d) A statement of cash flows for the reporting period; and
e) Notes comprising a summary of significant accounting policies and
other explanatory information.
At this level of our study of financial accounting we will focus on the

statement of financial position, the statement of profit or loss and other
comprehensive income, and the statement of changes in equity. Let us
briefly explain these statements.
The statement of profit or loss and other comprehensive income – Also

known as the income statement, the statement of profit or loss and other
comprehensive income provide information about the performance of the
business which comprises the return obtained by the enterprise on the
resources it controls. It is a financial report used to determine the
profitability of the business entity for a period of time, usually a year. It is
usually in the form of a Trading and Income statement which is prepared for
a year to determine the net profit or loss of an entity. The income statement
contains the revenues and gains, less the expenses and losses, which will
reveal either a net profit or loss, or a break even. It is prepared based on the
double entry system of bookkeeping.
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Unit 1, Section 5: Elements of financial statements OF ACCOUNTING 1
The statement of financial position – the statement of financial position

is a representation of the assets, liabilities and capital of an entity as at a
given date. Literally speaking, a Statement of financial position is a
document or a ‘sheet’ which contains balances of assets, liabilities and
capital which must ‘balance’ at a point in time. These balances must agree
(or ‘balance’) to the extent that the assets must equal the liabilities plus
capital, hence, the Accounting equation: Assets = Liabilities + Capital. In
other words, the value of assets must equal the sum of the values of
liabilities and capital. A Statement of financial position therefore shows the
financial position of an entity at a given point in time. It should be noted
that the statement of financial position is not prepared based on the double
entry principle of accounting. Rather, it is a list of balances arranged
according to whether they are assets, liabilities or capital, to depict the
financial position of a business at a point in time.
The statement of cash flows – the cash flow statement is a financial report
prepared to show the movement or changes in the financial or cash position
of an entity. The objective of this statement is to communicate to the user,
information about the inflows and outflows of cash. A cash flow statement
therefore shows how cash has been generated and used by an organisation.
It is useful in providing the user with an additional perspective on the
performance of an enterprise by indicating the amounts and principal
sources of its cash inflows and outflows.
Elements of Financial Statements

The three major financial statements explained above contain the following
elements:
(a) Income (revenue or gains);
(b) Expenses (or losses);
(c) Assets;
(d) Liability; and
(e) Equity interest (capital).
Let us explain each of the elements listed above.
Income – this refers to increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants. Income can be in the form of revenue
or gains. They both result in inflows of resources that an entity receives.
However, whiles revenues result from the major operations of the business
entity, gains results from other transactions that are incidental to the major
activities carried on by the entity. A typical example of revenue is sales.
Examples of gains include discount received, interest received and
commission received.
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OF ACCOUNTING 1 Unit 1, Section 5: Elements of financial statements
Expense – this refers to decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decreases in equity, other than those
relating to distributions to shareholders. An expense can be in the form of a
normal business expense or a loss. Both result in outflows of resources that
an entity uses up. Like revenue, expenses result from the main operations of
the business entity. And like gains, losses do not result from the main
operations of the business. Example of expenses includes purchases, salary,
electricity and water bills, rent and rates. Examples of losses include bad
debts and discount allowed to customers.
It must be noted that the difference between revenues and expenses will lead
to either a profit or a loss or a break even. Net income or net loss is therefore
the difference between the revenue and gains put together less the expenses
and losses. If the value of revenue and gains are more than the value of
expenses and losses, then we have a net income (or net profit). On the other
hand, if the value of expenses and losses are more than the revenue and
gains, then we have a net loss. It is sometimes possible to have the value of
revenue and gains equal to the value of expenses and losses; this is called a
break even.
Asset – an asset is a resource controlled by the entity as a result of past

events and from which future economic benefits are expected to flow to the
entity. Assets are divided into non-current assets (Non-current assets) and
current assets. Non-current assets are assets acquired for use in the business
and not meant for resale. The benefits to be derived from the use of these
assets span more than one year. The costs incurred in acquiring non-current
assets are usually significant and substantial. Examples of non-current assets
include land and building, furniture and fixtures, motor vehicles, plant and
machinery. Current assets, on the other hand, are assets acquired for resale
or meant to be converted into cash. Benefits derived from current assets
span within one accounting period (one year). Examples of current assets
include inventory, trade receivables, cash at bank, and cash in hand.
Liability – a liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits. Liabilities refer to the
external claims against the resources controlled by the business. They are
divided into short-term (or current) liabilities and long-term liabilities.
Short-term liabilities are the obligations which fall due within one
accounting period. Examples of Short-term liabilities include trade
payables, expenses owing, bank overdraft, and bills payable. Long term
liabilities are the obligations which must be settled beyond the accounting
period. Examples of long term liabilities include long term loan and
debentures.
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Unit 1, Section 5: Elements of financial statements OF ACCOUNTING 1
Equity interest (Capital) – this is the residual interest in the assets of the
entity after deducting all its liabilities. It can be described as the internal
claims against the resources controlled by the business. It is the obligation
owed to the owners of the entity. It is obtained by deducting all liabilities
from all assets. It is therefore the residual interest of the owner(s) of the
entity.
Review Questions
1. List the constituents of a complete set of financial statements.
2. Using relevant examples, explain the following elements of financial
statements:
(a) Assets
(b) Liabilities
(c) Equity
(d) Income
(e) Expenses
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UNIT 1 SECTION
OF ACCOUNTING 1 6
Unit 1, ACCOUNTING CONCEPTS
Section 6: Accounting AND CONVENTIONS
concepts and conventions
Dear student, you may recall that in the second section of this unit, we
introduced you to the regulatory framework of accounting. We indicated
that accounting concepts and conventions form part of the basis of
accounting. In this last section of this unit, we will explain the fundamental
accounting concepts and other accounting concepts that underlie the
preparation and presentation of financial statements.
By the end of this section, you must be able to:

 state the role accounting concepts play in the regulation of accounting
 explain accounting concepts and their importance in financial
reporting
 distinguish among accounting concepts, bases and policies
 identify limitations of the various concepts
Accounting concepts and conventions

Accounting concepts and conventions are the set of rules, principles,
postulates, conventions and methods applied in the measuring and recording
of business transactions and reporting financial information. They are
applied in the accounting process or accounting procedures. There is
however a difference between the accounting bases and accounting policies.
Accounting bases are the methods used for applying fundamental
accounting concepts to financial transactions and events when preparing and
presenting financial statements, e.g. method of depreciation. The particular
accounting bases adopted by an organisation will form its accounting
policies; that is the specific accounting bases adopted and consistently
followed by an entity in the preparation of its financial statements. For
example, an organisation can decide to adopt the straight line method of
depreciation as a policy for deprecation of its non-current assets.
Accounting policies are in the opinion of management, appropriate to the
entity’s circumstances and best suited to prepare and present its financial
information. In Ghana, companies are required to disclose their accounting
policies in their annual accounts, in accordance with the provisions of the
Companies Code of 1963, Act 179. Policies on depreciation and valuation
of inventory must be disclosed.
Often, the accounting concepts are referred to as assumptions. This is

because they are the basic theoretical ideas devised to support accounting
practice. They are the underlying assumptions for the preparation and
presentation of periodic financial statements. Four fundamental concepts
have for a long time been recognised. These are:
1. Going concern/Continuity – this concept assumes that a business will

continue to be in normal operational existence for the foreseeable
future. It is also implied that the business enterprise does not intend to
curtail its operations significantly.
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Unit 1, Section 6: Accounting concepts and conventions OF ACCOUNTING 1
2. Prudence/Conservatism – this concept states that revenue and profits

are not anticipated, but are recognised in the Income statement only
when it can be realised with reasonably certainty. Provision is also
made for all known liabilities (expenses and loss). In other words,
underestimate profits and anticipate losses.
3. Accrual/Matching – this concepts states that revenue and expenses are

accrued or recognised as they are earned or incurred, not when money
is received or paid. Revenue earned must be matched against expenses
incurred in the Income statement of the period to which they relate.
4. Consistency/Comparability – this concept states that there should be

consistency of accounting treatment of similar items within each
accounting period and from one accounting period to another. Similar
items should be accorded similar accounting treatments. e.g. treatment
of depreciation.
Apart from the four fundamental concepts explained above, the following
are other accounting concepts:
1. Business Entity concept – a business is an entity which is separate and

distinct from its owners and from other units. This means that the assets
and liabilities of the business are separate and distinct from that of the
owners of the business.
2. Money measurement concept – accounting deals with only items to

which monetary values can be attributed. Thus, revenue, expenses,
assets, liabilities and capital are expressed in terms of money.
3. Materiality concept – in accounting only items which are significant

are given treatment in the books of accounts. Information is material if
its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements. Materiality is a
relative concept. It is dependent on the size of the entity.
4. Duality concept – for every transaction there are two aspects, the
giving and receiving aspects which must be identified, measured and
recorded as the debit and credit sides of the transaction.
5. Revenue Recognition or Realisation – revenue is recognised, realised

or earned when goods are sold to the customer, and not when money is
received from the customer.
6. Objectivity – financial information must be prepared and presented

without any subjective judgements or personal feelings. There must be
sufficient, appropriate and reliable documentation to support every
transaction in order to make them verifiable.
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OF ACCOUNTING 1 Unit 1, Section 6: Accounting concepts and conventions
7. Periodicity – financial statements are prepared for a given period of

time.
8. Historical cost – the values of assets, liabilities, capital, revenue and

expenses are recorded in the books of accounts at their original cost at
which they are acquired, earned or incurred.
9. Substance over form – accounting transactions should be recorded and

presented in accordance with their substance and financial reality, and
not merely with their strict legal form. For instance, when a non-current
asset is acquired on hire purchase basis, legally, the non-current asset
does not belong to the entity but because of the substantial and financial
nature of the transaction, the non-current asset can be included in
Statement of financial position of the entity.
10. Full Disclosure – in the presentation of financial statements, every

information that is relevant and material which could influence the
economic decisions of users taken on the basis of those financial
statements must fully be disclosed. For instance, the International
Financial Reporting Standards (IFRS) requires disclosure of the number
of employees of an entity as part of the full disclose requirement.
Let us now discuss these accounting concepts in detail, noting the

importance of the concept, its limitation, and its application in practice.
The Business Entity Concept

For accounting purposes, a distinction is made between the business and the
owner. The concept applies whether the business is a limited company and
so recognized in law as a separate entity having the legal right to own
property, incurs debts and enters into contracts, or a sole proprietorship or
partnership firm. Transactions of the owner(s) are not entered in the
business accounting records. For example, if Kow Foli buys a wrist watch to
use, it does not affect the statement of financial position of his business.
Following from this concept, the statement of financial position of a

business reflects only the assets of a business and does not include the
owner’s personal, non-business assets. The investment in business by the
owner is shown by way of owner’s capital or claim over business assets.
Any amount of withdrawal of business assets is shown as a deduction from
his capital. Hence, the reason for an owner having a claim against the
business arises from the convention of business entity.
The Double Entry (Dual Aspect) Concept

Every business transaction must affect two aspects of the accounting
records. For example, the purchase of an asset creates a corresponding
liability and vice versa. The dual aspect concept states that each business
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transaction must have two effects which are equal and opposite such that the
Statement of financial position or the accounting equation will always
holds.
Double entry is the name given to the method of recording business

transactions so that the dual aspect concept is upheld. The golden rule of
double entry book keeping is stated thus, for every credit there must be a
corresponding debit and vice versa.
Money Measurement Concept

Financial accounting records only show details of transactions capable of
being measured in economic terms. If a customer shifts to a competitor, no
record of it appears in the accounts. Similarly poor morale among
employees and the beauty of the manager of an enterprise are not reflected
in the accounting records. The money measurement convention states that
we should use money as the unit of measurement. The use of money as the
measurement unit has the advantage that the resources of a business can be
expressed in monetary terms. Thus, a business which holds diverse
resources such as land, buildings, machinery, motor vans and inventory, can
use money as a common denominator.
Historical Cost Convention

The historical cost convention asserts that assets should be shown on the
Statement of financial position at their original cost – the amount which
the business paid to acquire them, rather than at some assessment of current
value. Thus, under the historical cost convention, transactions are recorded
in the financial statements at the monetary amount relating to them at the
time they occurred. The cost of an asset purchased twenty years ago for say,
GH¢10,000 is disclosed in the accounts as GH¢10, 000 which was the cost
of its original purchase. Depreciation is calculated using the original cost as
a basis. Similarly, a sale on January 1 of GH¢2,000 is recorded as
GH¢2,000 in the books of account. At the end of the financial year, it is
aggregated with other sales in the year, but the value given to it is the same
value of GH¢2,000.
This means that the financial statements are essentially a record of past
transactions. Land purchased in the past may be worth in higher value in the
current period under review, yet this current value need not be reflected in
the accounts.
This convention is usually supported on the grounds that it provides an

objective, reliable base for financial reporting than the use of figures based
on estimates of current value. Historical cost can be determined by reference
to fact rather than opinion; hence the figures produced are free from bias
and capable of independent verification. The main advantage of this concept
is that the objectivity of accounts is maximized, for there is usually an
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objective documentary evidence to prove the amount paid to purchase an

asset or pay an expense.
Materiality
In drawing up a set of financial statements from the underlying accounting
records; an accountant will assess whether items are significant or not. If
they are not, then they will be deemed immaterial to the view presented by
those statements. By making this inherently subjective judgment, the
accountant is determining whether the impressions formed by the reader or
user of accounts will be affected by an item’s inclusion or exclusion.
Thus, immaterial item in a set of accounts is one too trivial to affect the
reader’s understanding and perception of the accounts. This is a subjective
area in that what is seen as immaterial depends on the context and on the
point of view of the user of accounts. Materiality therefore is an issue not so
much of size, but of significance.
Materiality has no absolute measure. Quantitative tests are often applied, for
an example an expense item representing, say ½ % of turnover or 2½% of
net profit may be deemed immaterial to a particular enterprise. There are,
however, qualitative measures – for instance liabilities, directors’
remuneration or an expense item which turns a net profit into a net loss will
be deemed as material.
Realisation Concept
The realization convention states that sales (or revenue) are normally
recognized when the good being sold passes to the customer, or the service
is rendered, and is accepted by the customer. This convention is closely
linked to the historic cost convention and holds that profit is normally
recognized at the time when the goods or services are passed to the
customer and he incurs liability for them rather than at date of payment, or
when the contract is signed, or else when the order is received.
This convention enables an objective measure of achievement of revenue to

be made at the time where there is acceptance by the customer of some kind
of obligation to pay, and there is good evidence or chance that such payment
will actually be made by him.
Matching Concept
The matching convention asserts that expenses should be matched to the
revenues to which they relate such that both the revenue and the associated
expenses incurred in earning the revenue are recognized in the same
accounting period. Following from this, where a manufactured product is
made over two accounting periods, it is necessary to carry forward costs of
production to the period in which the completed good is sold, so that these
costs can be matched against revenues arising from the actual sale. Costs
46 UEW/IEDE
PRINCIPLES
carried forward in this way are shown as a current asset on the Statement of
financial position as inventory of work in progress, or finished goods.
In a similar manner, cost of goods unsold at financial period end are carried
forward to the next accounting period where the cost in the goods that is
sold will be matched against the revenue derived from the sale accordingly.
In this respect also, the cost of unsold inventory carried forward is shown as
a current asset on the statement of financial position.
It may be noted, however, that with many types of expense, it is not possible
to directly match expenses to revenues in the way that cost of sales (i.e. cost
of inventory sold) can be matched with sales revenue. Examples include
rates, salaries, general expenses, selling and distribution expenses, finance
charges. In this instance the tendency is to match expenses on a time basis.
This means that the revenues recognized in the accounting period are
matched completely with the total expenses relating to the accounting
period. These costs consumed to generate revenue during a period are
referred to as expired costs or expenses of that period. These unexpired
costs are carried forward and shown as assets in the Statement of financial
position.
The matching convention has been subject to considerable criticism because

of the often arbitrary and subjective nature of determining the amount of
expired costs for the period. For example, depreciation charge represents an
expense for the period to which it relates, and is deducted from the original
cost (or residual value) of an asset in order to arrive at the unexpired cost
element to be carried forward and stated in the Statement of financial
position at the period end. However, it may be noted that depreciation
charges is highly subjective and depends in a greater degree on the one
making the assessment. Although various methods of calculating
depreciation are available, there is no conclusive means of deriving the most
appropriate method. The problem of matching is, of course, further
compounded by the practical difficulties associated with establishing the
useful life and residual value of an asset.
One effect of the matching convention is that assets stated in the Statement
of financial position provide details of unexpired costs to be allocated to
future accounting periods. Thus, it may be shown that values of assets may
create misleading information to users.
The Accrual (Matching) Concept

Underpinning the realisation and matching convention is the accruals
convention. The accruals concepts states that, in computing profits, revenue
earned must be matched against the expenditure incurred in earning it. The
convention asserts that the derivation of profits (or loss) is the difference
between revenues and expenses, properly matched for the financial period
under consideration, and not between receipts and payments. The benefit for
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PRINCIPLES
the adoption of this convention is that it results in a more meaningful profit

figure, and accounts that are more comparable over a period of time.
The accruals concept is described as follows “revenues and costs are

accrued (that is, recognized as they are earned or incurred, not as money is
received or paid), matched with one another so far as their relationship can
be established or justifiably assumed, and dealt with in the Income
statement of the period to which they relate. Revenue and profits dealt with
in the Income statement of the period are matched with associated costs and
expenses by including in the same account the costs incurred in earning
them (so far as they are material and identifiable).
In recognition of this convention appropriate adjustments of prepayments

and accruals are made to both expenses and revenue accounts such as to
obtain amounts relevant to the period under consideration. Following from
this convention, prepaid expenses and incomes are carried forward to the
following financial period when they will be matched with expected revenue
and expenses. As well accrued expenses and incomes are added to current
year’s values for statement in the Income statement. For example, rather
than charging to the Income statement the amount of cash paid in respect of
expenses (e.g. rent and rates), prepaid amounts are deductible whilst
amounts owing are added up.
The Prudence (Conservatism) Concept

This convention requires that losses, whether actual or anticipated, should
be recognized and accounted for whereas profit should only be recognised
when realised. The concept supports the historic cost and realisation
conventions and ensures that where alternative procedures or valuations
exist, the one selected should be that which would tend to understate rather
than overstate profit.
To achieve its purpose the prudence concept ensures the following:

(i) Statement of non-current asset values at cost rather than current
market value in the statement of financial position. The concept
gives rise to the valuation of inventory at the ‘lower of cost or
net realisable value’.
(ii) Profit on unsold inventory is not anticipated and credit taken of
the desired profit in the current period but deferred to the year of
sales when the sales revenue will be realized.
Objectivity Concept
This convention ensures that matters indicated in accounting statements
should be based upon facts, but not opinion. Financial statements should be
free from bias and capable of independent verification. Objectivity enables
users to place greater reliance on accounting information than would have
been if accounting information were substantially based on the opinions of
individuals. This is one of the justifications for showing assets at cost, rather
than some more subjective estimated current market value.
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The Consistency Concept

This asserts that where different accounting treatment could be made for a
particular type of transaction, the one selected should be applied
consistently, e.g. depreciation policy, basis of inventory valuation. The
concept may be observed in two respects as follows:
(a) Similar transactions should be treated in a similar manner during an
accounting period.
(b) The accounting policies for the treatment of items should be consistent
from period to period.
The consistency concept enables a more valid and meaningful comparison

of figures to be made from one period to the next. A meaningful comparison
is only appropriate if the underlying unit of currency measurement is of
consistent purchasing power in successive periods. In this sense, price level
changes undermine the validity of the assumption.
The concept is not intended to tie a firm down to the treatment of a

particular transaction in the books by the same method for all periods. A
change may be effected along the line if it is expected that the new method
of treatment will give a fairer presentation of the results of the financial
position of the business.
The Going Concern (Continuity) Concept

The going concern concept assumes that an enterprise will continue in
operational existence for the foreseeable future or for an indefinitely long
period of time, and there is no intention to put the company into liquidation
or a make a drastic cutbacks to the scale of operations. If this were not so,
various adjustments would have to be made to the accounts, for example,
provisions for losses, revaluation of assets to their possible market value,
and so forth.
The main significance of the going concern concept is that the assets of the
business should not be valued at their ‘break-up’ value, which is the amount
that they will sell for if they were sold off piecemeal and the business were
thus put to an end.
The concept ensures that where an asset is acquired and is intended to last
for say five years in use, it will be presumed that the business will continue
its operations and so the asset will live out its full five years in use.
Appropriate depreciation charge will be made each year, and the value of
the asset in the statement of financial position will be the cost less the
accumulated amount of depreciation charged to date. In this respect, if an
asset has no operational use outside the business, and there is a need for
immediate sale, the asset may only sell for a scrap value.
This convention is seen as providing a support for the historic cost

convention as it is argued that estimates of current value only become
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PRINCIPLES
relevant in the event that the business intends to cease trading and sell its
assets.
Accounting Bases
Extending from the accounting concepts are many other principles which
are known as accounting bases. These are defined as the methods which
have been developed for expressing or applying fundamental accounting
concepts to financial transactions and items.
By their nature, accounting bases are more diverse and numerous than
fundamental concepts since they have evolved in response to the variety and
complexity of types of business and business transactions, and for this
reason there may justifiably exist more than one recognised accounting
bases for dealing with particular items. Significantly matters for which
different accounting bases are recognized and which may have a material
effect on reported results and financial position include:
(a) Depreciation of non-current assets
(b) Inventory and work in progress;
(c) long-term contracts.
(d) Treatment of intangible assets.
Accounting Policies
Accounting policies are the specific accounting bases selected and
consistently followed by a business enterprise as being, in the opinion of the
management, appropriate to its circumstances and best suited to present
fairly its results and financial position.
For example, it is normal practice (and in accordance with the fundamental

accounting concepts) to depreciate non-current assets. There are many bases
in which this may be done (e.g. the straight-line method, the sum of the
digits method, the reducing balance method) and whichever bases
management selects becomes the accounting policy of the enterprise
concerned.
The International Accounting Standard 8 (IAS 8) requires that:

(a) Accounting policies should be applied consistently from one financial
year to the next;
(b) If accounts are prepared on the basis of assumptions which differ in

material respects from any of the generally accepted fundamental
accounting concepts (principles) the details, reasons for and the effect
of the departure from the fundamental concepts must be given in a note
to the accounts.
(c) The account policies adopted by a company in determining the

(material) amounts to be included in the statement of financial position
and in determining the profit or loss for the year must be stated by a
50 UEW/IEDE
PRINCIPLES
note to the accounts. For examination purposes, it is useful to give the

accounting policy note as the first note to the accounts, making sure that
the explanations are clear, fair and as brief as possible.
Review Questions
1. State and explain the significance of the fundamental accounting
principles underlying the preparation of periodic financial statements.
2. Distinguish between accounting bases and accounting policies.
3. Explain the following accounting concepts, indicating clearly, for each
of them, the meaning, significance and limitation.
(a) Going Concern
(b) Realisation
(c) Historical cost
(d) Money measurement
(e) Conservatism
(f) Consistency
4. Some businesses fold up a few days after the final accounts of an entity
has been prepared. Which accounting convention ignores this situation?
5. Inventory of goods should be valued at the lower of cost and net
realizable value. Which accounting concept governs this?
6. The money measurement concept means that items in account are
initially measured in their historical cost. True or False?
7. The accounting concept or convention which, in times of rising prices,
tends to understate asset values and overstate profits is
the.......................................
8. During the preparation of the financial statement of Goodness
Enterprise, the accountant was faced with a number of concerns
summarised as follows:
(a) The managing director wishes the company’s good public image to
be reflected in the accounts.
(b) The future existence of the company is extremely uncertain.
(c) At the end of the year, an amount for electricity consumed during
the accounting period is outstanding.
You are required to state the accounting principles, concepts or
convention, the accountant should apply in dealing with each of the
problems above.
9. For each of the items listed below explain the accounting concept or
conventions described.
(a) Adjustments are made to the provision for doubtful debt accounts
at the end of each year at 5% of credit sales for the year.
(b) A company uses the lower of cost and market price for valuing its
physical inventory.
(c) During the year, inflation of 5% occurred, however no adjustment
for this change is made in the books in respect of the assets.
(d) Mr. Rockson owns three enterprises engaged in transport, farming
and publishing. He demands separate account for each of the
enterprise.
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PRINCIPLES
10. Which accounting concept is best interpreted by the following:

“revenue is normally recognised when receipt is reasonably certain and
provision is made for known expenses and losses”.
11. Which accounting concept is best interpreted by the following:
“Revenues and expenses are brought into the accounting period to
which they relate and in which they are earned or incurred rather than in
the period they are paid or received”.
12. The following statements relate to concepts, principles and conventions
which govern the preparation of financial statements. State the correct
concepts or convention to which the statements relate.
(a) Our management team was judged the best in the country but our
Accounts cannot reflect this.
(b) Let us adopt a cautious approach because if we overstate our
income we may have serious consequences.
(c) The business can defer costs which are to be charged against
revenues of a future period, for example, prepaid expenses.
(d) The assumption that a business will exist for a long time into the
future is the....................................
13. At the directors’ meeting of KAN Limited at which the draft accounts
for the year ended December 31, 2014 were discussed, the marketing
manager made the following comment: “The cost of the recent
expenditure on the television campaign advertisement of our products
for Christmas 2014 will benefit profits in the year ending December 31,
2015. I cannot understand why this has all been treated as an expense in
the 2014 final accounts.” Evaluate this comment, making reference to
any accounting concepts and principles which seem appropriate.
End of Unit 1 Self-Assessment Questions

1. What do you understand by the term Accounting?
2. State the main purpose of accounting.
3. Enumerate five uses of accounting information.
4. Distinguish between bookkeeping and accounting.
5. Distinguish between financial accounting and management accounting.
6. Explain four limitations of accounting information.
7. List and explain the major steps in the accounting process.
8. State five users of accounting information and explain their information
needs.
9. What are the two categories of qualitative characteristics of accounting
information?
10. List two fundamental qualities of financial information.
11. List two enhancing qualities of financial information.
12. Distinguish between revenue and gains.
13. What is a loss?
14. The accounting equation expressed in a financial statement is called the
....................
52 UEW/IEDE
PRINCIPLES
15. In accounting, transactions and events recorded are basically

............................... in nature or character.
16. When drawings are made by the owner of a business, it results
in..........................
17. Comparability usually implies consistency in accounting policies from
one period to another. True or False?
18. Information in financial statement needs to be faithfully represented.
True or False?
19. Gains are increases in ownership interest resulting from contributions
from owners. True or False?
20. What is the objective of preparing financial statements?
21. What are the five elements of financial statements identified by the
IASB’s Conceptual Framework?
22. State the definition for assets and liabilities according to the IASB’s
Conceptual Framework for Financial Reporting.
23. What are the two main concepts of capital maintenance?
24. What is equity interest?
25. State and explain the relevant accounting principles that underpin the
preparation of:
a. Statement of profit or loss
b. Statement of financial position
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53
PRINCIPLES
OF ACCOUNTING 1 Unit 1,
This page
Section
is left6:blank
Accounting
for yourconcepts
notes and conventions
54 UEW/IEDE
MODERN ENGLISH THE THEORY OF
UNIT
DOUBLE ENTRY Structure
PRINCIPLE OF ACCOUNTING
You are mostly welcome to the second unit of this course module on
Principles of Accounting I. We hope you are gradually grasping the essence
of this course. In the first unit, we laid the foundation of this course by
explaining in detail the meaning and purpose of accounting, the users of
accounting information and the regulatory and conceptual framework of
accounting, among others. We will now focus on the theory of double entry
principle of accounting which is the main hub on which the recording of
business transactions and the reporting of financial information revolves.
We will begin with the accounting equation and the effects of transactions
on the statement of financial position. Then, we will concentrate on the
double entry principle for recording transactions involving assets, liabilities,
capital, revenues and expenses. The use of source documents in recording
transactions in the books of original entry will also be discussed. We will
conclude the unit with the cash book, the imprest system and the petty cash
book.
By the end of this unit, you should be able to:

 define the accounting equation;
 explain the various conditions of the accounting equation;
 show the effects of transactions on the accounting equation;
 show the effects of transactions on the statement of financial position;
 apply the double entry principle in recording transactions involving
assets, liabilities, capital, revenues and expenses;
 prepare a simple statement of financial position;
 describe a ledger and its divisions;
 describe the type of accounts opened in a ledger;
 make entries in ledger accounts;
 describe the various source documents used in business and their uses;
 make entries in the books of original entry using source documents;
 extract a trial balance after balancing off the ledger accounts.
56 UEW/IEDE
CURRICULUM STUDIES
PRINCIPLES
IN EARLY CHILDHOOD
Structure
EDUCATION
UEW/IEDE 57
PRINCIPLES Unit 2, THE ACCOUNTING
Section EQUATION
1: The accounting ANDand
equation EFFECTS OF
effects of transactions on
UNIT 2 SECTION
OF ACCOUNTING 1 1 TRANSACTIONS ON THEofSTATEMENT
the statement OF FINANCIAL POSITION
financial position
You are once again warmly welcome to the first section of this unit. The
accounting equation is one of the fundamental issues you will have to
understand in your study of accounting. It is an equation which is founded
on the premise of the duality principle; that is, the two sides to every
phenomenon. The accounting equation is a representation of the assets of an
entity on one side and, on the other side, the liabilities and capital which
provided the assets. The accounting equation is depicted by the statement of
financial position, commonly, known as the balance sheet. In this section,
we will explain the accounting equation and show the effect of transactions
on the statement of financial position.

 write the accounting equation
 define assets, liabilities and capital
 define a statement of financial position
 prepare a statement of financial position using appropriate assets,
liabilities and owners’ equity
 explain the effects of transactions on the accounting equation and the
statement of financial position
The Accounting Equation

The statement of financial position is a financial statement or report which
shows the financial position of the business concern at a point in time. It is
one of the financial reports which is generated at the end of the accounting
process. It is a representation of the assets, liabilities and capital of an entity.
The relationship between assets and liabilities and owners’ equity is called
the fundamental accounting equation. The entire accounting process of
analysing, recording and reporting business transactions is based on the
fundamental accounting equation which establishes the relationship between
assets, liabilities and capital of an entity.
In accounting, a firm’s assets are equal to the total of its liabilities and
capital. This equality is expressed in the form of an equation as follows:
Asset = Liabilities + Capital (or Owner’s Equity)
The expression can be restated in various forms as follows:

Capital = Assets – Liabilities
Liabilities = Assets – Capital (or Owner’s Equity)
Depending on the prevailing conditions of an entity, its accounting equation

can look like any one of the following:
Assets = Capital (1)
Assets = Liabilities (2)
Assets = Capital + Liabilities (3)
58 UEW/IEDE
Unit 2, Section 1: The accounting equation and effects of transactions on PRINCIPLES
the statement of financial position OF ACCOUNTING 1
Assets = Capital + Profit (4)
Assets = Liabilities + Profit (5)
Assets = Capital + Liabilities + Profit (6)
Assets = Capital – Loss (7)
Assets = Liabilities – Loss (8)
Assets = Capital + Liabilities – Loss (9)
Assets = Capital + Profit – Drawings (10)
Assets = Liabilities + Profit – Drawings (11)
Assets = Capital + Liabilities + Profit – Drawings (12)
Assets = Capital – Drawings (13)
Assets = Liabilities – Drawings (14)
Assets = Capital + Liabilities – Drawings (15)
Assets = Capital – Loss – Drawings (16)
Assets = Liabilities – Loss – Drawings (17)
Assets = Capital + Liabilities – Loss – Drawings (18)
The statement of financial position

The statement of financial position, also known as the balance sheet or
statement of affairs, is a representation of the assets, liabilities and capital of
an entity as at a given date. Literally speaking, a statement of financial
position is a document or a ‘sheet’ which contains balances of assets,
liabilities and capital which must ‘balance’ at a point in time. These
balances must agree (or ‘balance’) to the extent that the assets must equal
the liabilities plus capital, hence, the Accounting equation: Assets =
Liabilities + Capital. In other words, the value of assets must equal the sum
of the values of liabilities and capital. The elements of a statement of
financial position are therefore assets, liabilities and capital.
Asset – an asset is a resource controlled by an entity as a result of past

transactions and from which future economic benefits are expected to flow
to the entity. Assets are generally used in generating income for an entity.
Assets can be classified as current assets and non-current assets. The costs
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PRINCIPLES Unit 2, Section 1: The accounting equation and effects of transactions on
OF ACCOUNTING 1 the statement of financial position
incurred in acquiring non-current assets are usually significant and

substantial. Examples of non-current assets include land and building,
furniture and fixtures, motor vehicles, plant and machinery. Current assets,
on the other hand, are assets acquired for resale or meant to be converted
into cash. Benefits derived from current assets span within one accounting
period (one year). Examples of current assets include inventory, trade
receivables, cash at bank, and cash in hand.
Liability – a liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an outflow of
resources embodying economic benefits from the entity. Liabilities
represent the external claims against the resources of an entity. They can be
classified into short-term (or current) liabilities and long-term liabilities.
Short-term liabilities are the present obligations of an entity which must be
settled within one accounting period. Examples of short-term liabilities
include trade payable, expense payables, bank overdraft, and short-term
bank loans. Long term liabilities are the present obligations of an entity
which must be settled beyond one accounting year. Examples of long term
liabilities include long term loan and debentures.
Capital (Equity interest) – this is the residual interest in the assets of the
entity after deducting all its liabilities. It can be described as the internal
claims against the resources controlled by the business. It is the obligation
owed to the owners of the entity. It is obtained by deducting all liabilities
from all assets. It is therefore the residual interest of the owner(s) of the
entity.
Diagrammatically, the statement of financial position can be represented in

vertical format as follows:
Statement of financial position as at 31 December 2014
GH¢
Assets xxx
Capital xxx
Liabilities xxx
xxx
However, as a starting point, we will represent the statement of financial

position in a ‘T’ or horizontal format as follows:

GH¢ GH¢
Capital xxx Assets xxx
Liabilities xxx
xxx xxx
60 UEW/IEDE
Let us use the following illustration to explain the preparation of the

statement of financial position.
Illustration 1
Draw up a statement of financial position from the following information
relating to the state of affairs of an entity as at 31 December 2014:
GH¢
Motor Vehicles 23,750
Trade receivables 4,950
Loan 5,700
Trade payables 2,450
Fixtures 5,500
Inventory 8,800
Bank 1,250
Solution to Illustration 1
GH¢ GH¢
Capital ? Assets:
Liabilities: Motor Vehicles 23,750
Loan 5,700 Fixtures 5,500
Trade payables 2,450 Inventory 8,800
Bank 1,250
44,250 44,250
It can be observed that the figure for capital is not given. Since the statement
of financial position is a diagrammatical representation of the accounting
equation, the assets must equal the liabilities and capital. Therefore, the
figure for the capital is derived from the following computation:
Capital = Assets – Liabilities

Capital = 44,250 – 8,150
Capital = 36,100
Effects of transactions on the statement of financial position

Every business transaction has an effect on the accounting equation and
consequently on the statement of financial position. The nature of the
transaction will determine the effect of the transaction. Recall that we have
identified five main elements of the financial statements – assets, liabilities,
equity, revenue and expenses. The elements of the statement of financial
position are the assets, liabilities and equity, whiles the elements of the
statement of profit or loss are the revenues and expenses. Therefore, the
effect of transactions on the statement of financial position can only be
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depicted using the effects of increases and/or decreases in assets, liabilities

and equity.
Let us now use the following illustration to explain the effect of transactions
on the statement of financial position.
Illustration 2
For each of the following transactions relating to John Smith, state the
account to be debited and the account to be credited, and the effect on each
transaction on the statement of financial position.
(i) John Smith commenced business with Cash at bank GH¢8,000,
Cash in hand GH¢500 and Premises valued GH¢10,000.
(ii) Purchased a set of furniture for GH¢1,100 on credit from Kpogas
Ltd.
(iii) Bought goods for resale paying by cheque GH¢4,500.
(iv) Paid half the amount due to Kpogas, by cheque
(v) Sold goods for cash GH¢1,800.
(vi) Paid sundry expenses GH¢1,800 by cash.
(vii) Purchase motor vehicles for GH¢30,000 on credit from Ghamot
Ltd.
(viii) Used part of the goods meant for resale for his son’s birthday
party, costing GH¢100.
(ix) Withdrew cash from bank for office use GH¢400.
(x) Sold goods for cash GH¢1,500.
(xi) Paid his son’s school fees for GH¢30 out of business cash.
We will now take each of the transactions and explain the treatment of the
effects of increases and/or decreases in assets, liabilities, equity, revenue
and expenses on the statement of financial position. After each transaction,
we will show the financial position of the entity after using journal entries to
demonstrate the debit and credit entries in the respective accounts.
(i) John Smith commenced business with Cash at bank GH¢8,000,

Cash in hand GH¢500 and Premises valued GH¢10,000.
GH¢ GH¢
Dr Bank Account 8,000
Dr Cash Account 500
Dr Premises Account 10,000
Cr Capital Account 18,500
The statement of financial position of John Smith’s business has assets

of GH¢18,500 and capital of GH¢18,500. No liabilities.
62 UEW/IEDE
Statement of financial position

Assets GH¢ Capital GH¢
Premises 10,000 Owner’s equity 18,500
Bank 8,000
Cash 500
18,500 18,500
(ii) Purchased a set of furniture for GH¢1,100 on credit from

Kpogas Ltd.
Dr Furniture Account (Asset) GH¢1,100

Cr Kpogas Account (Liabilities) GH¢1,100
The Statement of financial position now has additional asset

(furniture) of GH¢1,100 and a liability (creditor – Kpogas) of
GH¢1,100.

Furniture 1100
Bank 8,000 Liability
Cash 500 Payable – Kpogas 1100
19600 19,600
(iii) Bought goods for resale paying by cheque GH¢4,500.
Dr Purchases Account (Inventory) GH¢4,500

Cr Bank Account GH¢4,500
There is an additional asset (inventory) of GH¢4,500 and a reduction

in asset (cash) of GH¢4,500.

Furniture 1,100
Inventory 4,500
Cash 500 Payable – Kpogas 1,100
19,600 19,600
(iv) Paid half the amount due to Kpogas, by cheque
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Dr Kpogas Account GH¢550

Cr Bank Account GH¢550
There is a reduction in assets (bank) of GH¢550 and a reduction in

liabilities (creditor – Kpogas) of GH¢550.

Furniture 1,100
Inventory 4,500
19,050 19,050
(v) Sold goods for cash GH¢1,800.
Dr Cash Account (Asset) GH¢1,800

Cr Sales Account (Inventory) GH¢1,800
There is an increase in assets (cash) of GH¢1,800, and reduction in

inventory (through sales) of GH¢1,800.

Furniture 1,100
Inventory 2,700
Cash 2,300 Payable – Kpogas 550
19,050 19,050
(vi) Paid sundry expenses GH¢1,800 by cash.
Dr Expenses Account (Capital) GH¢1,800

Cr Cash Account GH¢1,800
There is a decrease in assets (cash) of GH¢1,800, and an increase in

expense which will lead to a reduction in capital (owner’s equity) of
GH¢1,800.
64 UEW/IEDE

Furniture 1,100
Inventory 2,700
17,250 17,250
(vii) Purchase motor vehicles for GH¢30,000 on credit from Ghamot Ltd.
Dr Motor Vehicles Account GH¢30,000

Cr Ghamot Ltd. Account GH¢30,000
There is an increase in assets (motor vehicle) of GH¢30,000, and an

increase in liabilities (creditor – Ghamot Ltd.) of GH¢30,000.

Motor Vehicle 30,000
Furniture 1,100
Inventory 2,700 Liability
Bank 2,950 Payable – Kpogas 550
Cash 500 Payable – Ghamot Ltd 30,000
47,250 47,250
(viii) Used part of the goods meant for resale for his son’s birthday
party, costing GH¢100.
Dr Drawings Account (or Capital Account) GH¢100

Cr Purchases Account (Inventory) GH¢100
There is a decrease in capital (because of drawings) of GH¢100, and

a decrease in Assets (inventory) of GH¢100.

Furniture 1,100
47,150 47,150
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(ix) Withdrew cash from bank for office use GH¢400.
Dr Cash Account GH¢400

Cr Bank Account GH¢400
There is an increase in Assets (cash) of GH¢400, and a decrease in

Assets (bank) of GH¢400.

Furniture 1,100
47,150 47,150
(x) Sold goods for cash GH¢1,500.
Dr cash Account GH¢1,500

Cr Sales Account GH¢1,500
There is an increase in Assets (Cash) of GH¢1,500, and a decrease in

Assets (Inventory) of GH¢1,500.
Furniture 1,100
Cash 2,400 Payable – Ghamot Ltd 30,000
47,150 47,150
(xi) Paid his son’s school fees for GH¢30 out of business cash.
Dr Drawings Account (or Capital Account) GH¢30

Cr Cash Account GH¢30
There is a decrease in Capital (because of drawings) of GH¢30, and

a decrease in Assets (cash) of GH¢30.
66 UEW/IEDE

Furniture 1,100
Cash 2,370 Payable – Ghamot Ltd 3,000
47,120 .7,120
Review Questions
1. Complete the following table:
Transaction / Event Account to Account to
be debited be credited
a. Bought office equipment on credit
from D. Isaac
b. The proprietor paid a creditor, C.
Jones, from his private monies
c. A debtor, N. Fox, paid us in cash
d. Repaid part of loan from Exeter by
Cheque
e. Returned some of the office
equipment to D. Isaac
f. A debtor, N. Lyn, pays us by Cheque
g. Bought van by cash
2. Show the effects of the following transactions on the statement of

financial position:
Effects on
Transactions Assets Liabilities Capital
a. Bought a motor van on credit GH¢500
b. Repaid by cash a loan owed to P Smith
GH¢1,000
c. Bought goods for GH¢150 paying by
Cheque
d. The owner puts a further GH¢5,000
cash into the business
e. A debtor returns to us GH¢80 goods.
We agree to make an allowance for
them
f. Bought goods on credit GH¢220
g. The owner takes out GH¢100 cash for
his personal use
h. We paid a creditor GH¢190 by
Cheque
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67
PRINCIPLES Unit 2, THE DOUBLE
Section ENTRY
2: The double PRINCIPLE
entry principle forFOR ASSETS,
assets, liabilities, capital,
UNIT 2 SECTION
OF ACCOUNTING 1 2 revenues and expenses
LIABILITIES, CAPITAL, REVENUES AND EXPENSES
For every business transaction, there are at least, two aspects of the
transaction. For example, in every sale transaction, there must be a seller
and the buyer. Also, in every borrowing transaction, there must be a lender
and a borrower, and so for every receiver there is a giver. These examples
point to the fundamental accounting principle – for every debit entry, there
must be a corresponding credit entry, and vice versa.
There is the need, therefore, to record the two aspects of every business
transaction in order to obtain the financial information which practical
business demands. The universally adopted system, known as the double
entry book keeping, is the only system fulfilling this requirement of
recording the two fold aspect of every transaction. In this section, we will
discuss in detail, how this double entry principle of accounting is applied in
recording transactions involving assets, liabilities, capital, revenues and
expenses.

 explain the terms debit and credit in accounting
 explain the double entry principle
 enter transactions involving assets using the double entry principle for
assets
 enter transactions involving liabilities using the double entry principle
for liabilities
 records transactions involving capital using the double entry principle
for capital
 identify revenue and expenses as the elements of the income statement
 record transactions involving revenue items using the double entry
principle for revenues
 record transactions involving expenses items using the double entry
principle for expenses
 record transactions involving movements in inventory
The Double-Entry System of Accounting

The double entry system of accounting begins from the posting of
transactions from the journals to the ledger accounts. It is usually referred to
as the golden rule of double entry, which states that, “For every debit entry,
there must be a corresponding credit entry, and for every credit entry, there
must be a corresponding debit entry”.
Double entry accounting therefore requires that each transaction be recorded

in, at least two accounts. A T-account is usually used to represent a ledger
account. Its name comes from its shape, like the letter ‘T’. The double entry
rule implies that two recordings are made for every transaction. It is
sometimes referred to as the duality concept of accounting.
68 UEW/IEDE
Unit 2, Section 2: The double entry principle for assets, liabilities, capital, PRINCIPLES
revenues and expenses OF ACCOUNTING 1
The task of accounting for business activity becomes more complex as the
size of the business increases. Double entry accounting systems provide the
structure necessary to maintain the records for complex as well as simple
business organisations. A simplified account form known as the ‘T’-
account’ provides a good starting point for learning the recording
procedures used in double entry accounting systems. The account title is
placed at the top of the horizontal bar of the “T” and increases and decreases
are placed on either side of the vertical bar. This “T” form of accounting
omits the detailed information concerning a transaction. Accounts are
identified by their account classification; that is asset accounts, liability
accounts, owner’s equity (or capital) accounts, revenue or income accounts
and expenses or losses accounts. The title of each account describes the type
of account it is. The left hand side of any account is arbitrarily called the
debit side and the right hand side is called the credit side. Amounts entered
on the left hand sides are called debits and the amounts entered on the right
hand side are called credits.
The Double Entry Rule for Assets, Liabilities and Capital

The double entry accounting recording rules for assets, liabilities and capital
are:
1. Debit increases in assets and decreases in liabilities and capital
2. Credit increases in liabilities and capital and decreases in assets
These rules for debits and credits as shown in the “T” account form as
follows:
Assets = Liabilities + Capital

Debit Credit Debit Credit Debit Credit
+ – – + – +
Record Record Record Record Record Record
Increases Decreases Decreases Increases Decreases Increases
When an asset is acquired, the asset account is debited and the account that
gave the asset is credited. Remember that the double entry rule states that
the account that receives is debited and the account that gives is credited. If
the non-current asset is acquired with a cheque then the bank account would
be credited which means a decrease in asset but at the same time there is an
increase in asset which is the non-current asset account. However, if the
non-current asset is acquired on credit, then the creditor who gave the
non-current asset would be credited and the non-current asset that has been
received would be debited in the non-current asset account. The credit entry
in the creditor’s account indicates an increase in the liabilities of the entity.
When the creditor is later paid with cash, the cash account which is being
given out will be credited and the creditor who will receive the cash will be
debited. The debit entry in the creditor’s account indicates a decrease in the
liabilities of the entity. The credit entry in the cash account also indicates a
decrease in the assets of the entity.
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PRINCIPLES Unit 2, Section 2: The double entry principle for assets, liabilities, capital,
OF ACCOUNTING 1 revenues and expenses
In the case of capital, when the proprietor puts in cash or any form of asset
into the business, the asset that is received into the business will be debited
and the proprietor who gave the asset will be credited in the capital account.
The debit entry in the cash or asset account indicates an increase in the
assets of the entity. The credit entry in the capital account also indicates an
increase in the capital of the entity. On the other hand, when the proprietor
withdraws cash or any form of asset from the business, the asset account
will be credited because an asset has been given out and the proprietor who
has received the cash or asset will be debited in the drawings or capital
account. In this case, the credit entry in the asset account indicates a
decrease in the asset account and the debit entry in the capital account also
indicates a decrease in the capital account.
The Double Entry Rule for Revenue and Expenses

The double entry accounting recording rules for revenue and expenses are:
1. Debit increases expenses and decreases revenues
2. Credit increases revenue and decreases expenses
These rules for debits and credits as shown in the “T” account form as
follows have been explained below.
Revenue = Expense
Debit Credit Debit Credit
– + + –
Record Record Record Record
Decreases Increases Increases Decreases
When goods are sold or services are rendered, there is an inflow of asset.
The inflow of asset implies that an asset is received and so the asset account
is debited. The goods or services account that gave the asset is credited. In
this case, the goods or services are referred to as revenue, income or gains.
Remember again that the double entry rule states that the account that
receives is debited and the account that gives is credited. If the revenue
leads to cash (as in the case of cash sales) then the cash account will be
debited and sales account that gave the cash will be credited. But if the
revenue leads to Trade receivables (as in the case of credit sales) then the
debtor’s account will be debited and the sales account that gave the Trade
receivables will be credited. The credit entry in the sales account indicates
an increase in the revenue of the entity. When the goods sold are returned to
the entity, the cash account will be credited if a cash refund has to be made
in the case of cash sales. Since the revenue of the entity is being reduced,
the sales account which is receiving the returns of the goods will be debited.
The debit entry in the sales account or the returns inwards account indicates
a decrease in the revenue of the entity. The credit entry in the cash account
also indicates a decrease in the assets of the entity.
In the case of expenses, when an expense is incurred it implies that there is

an outflow of asset or incurrence of liabilities. If the expense is paid for in
70 UEW/IEDE
cash then the cash account that has given out will be credited and the
expense that received from cash will be debited. However, if the expense is
incurred but not paid for then the expense or trade creditor who provided the
service or goods will be credited and the service or goods (expense) that was
received will be debited. For instance, when there are cash purchases, the
cash that has been given out will be credited in the cash account and the
goods that have been received will be debited in the purchases account. The
credit entry in the cash account indicates a decrease in the assets of the
entity. The debit entry in the purchases account also indicates an increase in
the expense of the entity. On the other hand, when goods supplied are
returned outwards to suppliers and there is a cash refund made by the
supplier (as in the case of cash purchases), the cash received will be debited
in the cash account and the purchases account or returns outwards account
that gave out the goods will be credited. In this case, the debit entry in the
cash account indicates an increase in the asset account and the credit entry
in the purchases or returns outwards account also indicates a decrease in the
expenses account.
Recording Business Transactions Using “T” Accounts

At this point, let us remind ourselves of the two fundamental requirements
of the double entry accounting system.
1. The equality of the basic accounting equation:
Assets = Capital + Liabilities.
2. Total debits must equal total credits based on the fact that every debit
entry must have its corresponding credit entry.
A recording scheme, which maintains these two equalities simultaneously,
will now be discussed.
Assets accounts record the items of value owned by a business. The location
of items in the fundamental accounting equation determines where amounts
are recorded in the “T” accounts. Let us consider the following examples.
1. Gloria invested GH¢40,000 in a newly formed business – Glory Ltd.

The two-fold aspect of this transaction is:
a) The business had GH¢40,000 assets in the form of cash.
b) Gloria has a GH¢40,000 financial interest in the business called
capital
Separate accounts for cash and capital are set up. The cash investment
of GH¢40,000 is entered on the left side of the account because there
has been an increase in asset, hence debit the asset account.
Similarly, because owner’s equity has also increased, the GH¢40,000

Gloria invested is entered on the right hand side of Gloria’s Capital
account. To increase owner’s equity, credit the owner’s equity account.
And remember, every debit entry must have its corresponding credit
entry. The two accounts will appear as follows:
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71
Cash Capital
(a) Capital 40,000 (b) Cash 40,000
2. Paid rent in advance for a period of one year with cash of

GH¢ 16,000.
The transaction is analysed as follows:
c) The firm acquired an asset, totalling GH¢ 16,000 in the form of
prepaid rent.
d) The firm paid GH¢ 16,000 in cash.
To record the prepaid rent, a new asset account called Prepaid Rent is
opened, and the GH¢16,000 is entered on the debit or increase side of
the account. The rent paid can also be viewed as an expense of the firm,
hence debit rent expense account. Since cash payment reduces the
firm’s cash balance, the GH¢16,000 is recorded on the credit or
decrease side of the cash account as follows:
Prepaid Rent Cash

GH¢ GH¢ GH¢
(d) Cash 16,000 (a) Capital 40,000 (c) Rent prepaid 16,000
3. Purchase of equipment for cash GH¢14,000.

e) The firm acquired new assets in the form of equipment at a cost of
GH¢14,000.
f) The firm paid GH¢14,000 cash.
To record the purchase of equipment, new asset account for equipment

will be opened and GH¢14,000 is entered on the debit or increase side.
The payment in cash is entered on the credit side of the cash account
because decreases in assets are recorded on the right side. These are
shown below.
Equipment Cash
(e) Cash 14,000 (a) Capital 40,000 (d) Rent Prepaid 16,000
(f) Equipment 14,000
4. Purchased office equipment from IPMC at a cost of GH¢10,000 on

credit.
g) The firm purchased new assets in the form of equipment at a cost of
GH¢10,000.
h) The firm owed GH¢10,000 as account payable to IPMC.
72 UEW/IEDE
The GH¢10,000 increase in equipment is entered on the debit side of

the equipment account. A new account is opened for the liability –
Accounts payable or Trade payables, to record the amount owed to
IPMC. The GH¢10,000 is entered on the credit or increases side of this
account because increase in liabilities appear on the right side of the
liabilities account. Below are the necessary entries.
Equipment IPMC
GH¢ GH¢
(e) Cash 14,000 (h) Equipment 10,000
(g) IPMC 10,000
5. Purchased office stationery at a cost of GH¢2,000 and paid cash for

it.
i) The firm purchased new asset in the form of stationery at a cost of
GH¢ 2,000
j) The firm paid GH¢ 2,000 in cash.
To record the purchase of stationery, a new asset account for stationery

is opened and GH¢ 2,000 was entered on the debit or increase side. The
payment of GH¢2,000 cash is entered on the credit side of the cash
account because decreases in assets are recorded on the right side of the
asset account. These are shown below.
Cash Stationery
GH¢ GH¢ GH¢
(a) Capital 40,000(d) Rent Prepaid 16,000 (i) Cash 2,000
(i) Stationery 2,000
6. Glory Ltd paid GH¢6,000 cash to IPMC to reduce the firm’s debt.
Below is the analysis of this transaction:
(k) The firm paid GH¢6,000 cash.
(l) The claim of IPMC against the firm decreased by GH¢6,000.
The decreased in cash is entered on the credit side of the cash account.
The decrease in the liability is entered on the debit side of the Trade
payables’ accounts as shown below.
Cash IPMC
GH¢ GH¢ GH¢ ..... GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (l) Cash 6,000 (f)Equipment 10,000
(j) Stationery 2,000
(k) Trade payables 6,000
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73
7. Sold goods and services for cash GH¢10,500.

The receipt of this revenue is analysed below.
m) The firm received GH¢10,500 cash.
n) Revenue (sales) increased by GH¢10,500.
The cash received is recorded by entering GH¢10,500 on the debit

(increase) side of the asset account. The increase in revenue is credited
to the sales account.
Cash Sales
GH¢ GH¢ ... GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (n) Cash 10,500
(m) Sales 10,500 (f) Equipment 14,000
(j) Stationery 2,000
8. Sold goods and services to customers on credit GH¢3,500.

The analysis of this transaction is as follows:
(o) The firm acquired new asset; trade receivables of GH¢3,500.
(p) Revenue (sales) increased by GH¢3,500.
Trade receivables Sales

GH¢ GH¢
(o) Sales 3,500 (n) Cash 10,500
(p) Trade receivables 3,500
9. Received cash GH¢1,500 from customers.

The following is the analysis:
(q) The firm received GH¢1,500 cash.
(r) Trade receivables decreased by GH¢1,500.
These are recorded as follows:
Cash Account Trade receivables

GH¢ GH¢ GH¢ GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (o) Sales 3,500 (r) Cash 1,500
(q) T. receiv. 1,500 (j) Stationery 2,000
(k) Trade pay. 6,000
10. Paid employees’ salaries of GH¢2,500 with cash.

This transaction is analyzed as follows:
(s) Cash is reduced by payment of GH¢2,500 to cover salaries
(t) Expenses increased by the GH¢2,500 – decreased in owner’s
equity.
74 UEW/IEDE
The decrease in cash is recorded on the credit side of cash account. The
decrease in the owner’s equity that results from salaries expense could
be entered on the debit side of Gloria’s Capital Account. However, the
preferred way is to keep expense separate from the owners’ equity
account until financial reports are prepared.
A new account called Salaries is opened for Glory Ltd, as recorded

below:
Cash Salaries
GH¢ GH¢ GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (t) Cash 2,500
(q) Trade receivables1,500 (j) Stationery 2,000
(s) Salaries 2,500
11. Paid GH¢200 cash for utilities expenses.

The following is the analysis of this transaction:
(u) Cash was reduced by the payment of GH¢200 for utilities.
(v) The utilities expense account was increased by GH¢200.
Cash Utilities Expense

GH¢ GH¢ GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (v) Cash 200
(q) Trade receivables1,500 (j) Stationery 2,000
(s) Salaries 2,500
(u) Utilities Exp. 200
12. Gloria withdrew GH¢2,000 in cash from the business to pay her
child’s fee.
The effect of the withdrawal is shown below:
(w) Cash was reduced by GH¢2,000 cash withdrawal.
(x) Drawings increased by GH¢2,000.
Cash Drawings
GH¢ GH¢ GH¢
(a) Capital 40,000 (d) Rent Prepaid 16,000 (x) Cash 2,000
(q) Trade receivables 1,500 (j) Stationery 2,000
(s) Salaries 2,500
(u) Utilities Exp. 200
(w) Drawings 2,000
Note: Drawings account is a special type of owner’s equity account set up to

record withdrawals made by owners’ of a business for personal use. This
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75
account helps Accountants to adhere to the Business Entity Assumption.

Since withdrawals decrease owner’s equity, it can be recorded on the debit
side of the capital account. However, the preferred way is to separate
withdrawals from the owner’s equity account until the end of the financial
period.
It can be deduced from the recordings made so far that Accountants increase
assets by debiting assets accounts and decreases assets by crediting assets
accounts. However, they increase liabilities and owner’s equity by crediting
liability and owner’s equity accounts and decrease them by debiting the
respective accounts.
It can also be realized that the analysis of each transaction produces at least
two effects. The effect of an entry on a debit side of one account is
balanced by the effect of an entry on the credit side of another account. The
double-entry accounting system records both effects of every transaction to
present a complete picture. The balancing relationship also explains why
both sides of the fundamental accounting equation are always equal.
Illustration 1
The financial data below was extracted from the books of G & G Enterprise
as at 31/12/2013. Prepare its statement of financial position as at that date.
a. Owes GH¢15,000 to MEC Ltd.
b. Has cash balance of GH¢5,650.
c. Has inventory of GH¢2,340
d. Owes GH¢2,800 to WTC Ltd.
e. Has equipment of GH¢23,700
f. Has office furniture of GH¢3,450
G & G Enterprise
Statement of financial position as at 31 December, 2013
GH¢ GH¢
Cash 5,650 Capital 17,340
Inventory 2,340 Trade payables:
Equipment 23,700 MEC Ltd 15,000
Office Furniture 3,450 WTC Ltd 2,800
35,140 35,140
Note: You would have observed that in this illustration, contrary to the
earlier illustrations, the assets have been listed on the left hand side and the
liabilities and capital have been listed on the right hand side of the
horizontal (‘T’) presentation of the statement of financial position. This is to
empahsise that the statement of financial position is not a ledger account
with debit and credit sides. It is simply a representation of assets, liabilities
and capital where the sum of the values of liabilities and capital must equal
the sum of the values of assets. The assets can be listed on any side and the
liabilities and capital listed on the opposite side. In the case of the vertical
76 UEW/IEDE
presentation, the assets can be listed above and the liabilities and capital
listed below. What is important is that the equation is manintained.
Illustration 2
Koo Kwakye has been in business for some time and has the following
balances of assets and liabilities as at 30 September, 2014:
Cash GH¢5,000; Machinery GH¢10,000; Motor Vans GH¢20,000; Trade
receivables GH¢15,000; Inventory GH¢10,000; Loan GH¢3,000 and Trade
payables GH¢23,000.
The following transactions took place in the month of October, 2014:

Oct 1 Received a cheque from trade receivables GH¢2,000.
5 Took drawings in cash GH¢1,500.
10 Sold goods which cost GH¢1,000 for GH¢3,000 cash.
15 Purchased goods on credit for GH¢2,000.
21 Took a loan from bank to buy machine costing GH¢20,000.
31 Paid GH¢250 into bank.
You are required to draw up a statement of financial position as at 31

October, 2014.
Koo Kwakye
Statement of financial position as at 31 October,
GH¢ GH¢
Cash 6,250 Capital 36,000
Bank 2,250 Less Drawings 1,500
Trade receivables 13,000 34,500
Inventory 11,000 Trade payables 25,000
Motor vans 20,000 Loan . 23,000
Machinery 30,000
82,500 82,500
Workings
(a) Cash = Opening balance GH¢5,000 – Drawings GH¢1,500 + Cash
sales GH¢3,000 – Cash deposit into bank GH¢250 =
GH¢6,250.
(b) Bank = Cheque received from trade receivables GH¢2,000 + Cash

deposit into bank GH¢250 = GH¢2,250.
(c) Trade receivables = Opening balance GH¢15,000 – Cheque received

from trade receivables GH¢2,000
= GH¢13,000.
(d) Inventory = Opening balance GH¢10,000 – Cost of Sales GH¢1,000 +

Purchases GH¢2,000
= GH¢11,000.
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77
(e) Machinery = Opening balance GH¢10,000 + Purchase of machinery

GH¢20,000
= GH¢30,000.
(f) Trade payables = Opening balance GH¢23,000 + Purchases of goods

on credit GH¢2,000
= GH¢25,000.
(g) Loan = Opening balance GH¢3,000 + Loan to acquire machine

GH¢20,000
= GH¢23,000
Review Questions
1. Post the following transactions in the ledger and balance the account on
31 January, 2014.
a. Akosua started business with capital of GH¢10,000
b. She purchased goods from Efua on credit GH¢2,000
c. She paid cash to Efua GH¢1,000
d. She sold goods to Adjoa GH¢2,000
e. She received cash from Adjoa GH¢3,000
f. She further purchased goods from Efua GH¢2,000
g. She paid cash to Efua GH¢1,000
h. She further sold goods to Adjoa GH¢2,000
i. She received cash from Adjoa GH¢1,000
2. On 1 January, 2014, the following were the ledger balances in the books
of Koo Nimo & Compnay:
Cash in hand GH¢900, cash at bank GH¢21,000, Safo (Cr) GH¢3,000;
Gloria (Dr) GH¢12,400; inventory GH¢2,000; Peter (Cr) GH¢6,000;
Sarah (Dr) GH¢4,500; Linda (Cr) GH¢2,700. Ascertain the capital as
at 1 January 2014. Transactions during the month of January were:
GH¢
Jan 2 Bought goods from Peter 2,700
3 Sold goods to Sarah 3,000
5 Bought goods from Linda for cash, paid by cheque 3,600
7 Took goods for personal use 200
13 Received from Gloria in full settlement, by cash 12,350
17 Paid to Safo in full settlement 2,920
22 Paid cash for stationery 50
28 Paid to Peter by cheque 2,650
29 Discount allowed by him 50
30 Provided interest on capital 100
31 Rent due to Landlord 200
Enter the above transactions in the ledger and balance the accounts.
78 UEW/IEDE
This page is left blank
revenues
for your
andnotes
expenses OF ACCOUNTING 1
UEW/IEDE
79
PRINCIPLES Unit 2, THE LEDGER,
Section BALANCING
3: The ledger, balancing of accounts and extraction of trial
UNIT 2 SECTION
OF ACCOUNTING 1 3 balance
OF ACCOUNTS AND EXTRACTION OF TRIAL BALANCE
Welcome to the third section of unit 2. We hope you are enjoying your
study of the double entry principle of accounting. In this section, we will be
treating topics on the ledger, balancing of accounts and extraction of the
trial balance.

 state and define the principal books of accounts
 mention the divisions of the ledger
 post entries from books of original entry to the ledger
 state and explain the types of accounts in the ledger
 balance an account
 distinguish between debit and credit balances
 define and state the uses of a trial balance
 draw up a trial balance from a list of account balances
The Ledger
A ledger is a book that contains summaries of all the business or financial
transactions of an entity. It contains all the accounts of the business - assets,
liabilities, capital, revenues, expenses, incomes, gains and losses. It serves
as a final and permanent record of a business.
The format used for keeping records in accordance with the double entry
rule is called an account. Sometimes, it is called a ledger account.
Basically, an account is a page in a ledger whereas the ledger is a collection
of accounts of a similar type.
Double entry accounting requires that each transaction be recorded in, at

least two accounts. In one account the transaction would be debited and in
the other account the transaction would be credited. And so a ledger
account is an account in a ledger that holds the records for all the
transactions relating to a particular person, thing or activity. An account
(Account), therefore, has a debit side and a credit side as shown below:
Debit (Dr) Kofi Account Credit (Cr)

Date Particulars L/F Amount Date Particulars L/F Amount
The columns in the ledger account can be explained as follows:

Date – The date column is used to record the date on which the transaction
took place.
Particulars –This column gives a description of the transaction or the
destination of the corresponding entry.
80 UEW/IEDE
Unit 2, Section 3: The ledger, balancing of accounts and extraction of trial PRINCIPLES
balance OF ACCOUNTING 1
L/F (Ledger Folio) - Folio comes from the Latin word for leaf. Folio is a
page in a ledger or daybook on which an entry can be made. L/F is used as
a means of referencing a transaction. It is used for reference purposes,
quoting the number of the page on which the corresponding entry could be
found.
Amount – This column is used for recording the amount involved in a
particular transaction.
Debit side – Used for recording receipts, purchases, losses, expenses and
assets.
Credit side - Used for recording payments, sales, gains, income, capital and
liabilities.
It is important to note that traditionally, a ledger was a large book with

separate pages for each account. However, in modern systems they will
usually consist of computer records, even though the same principles of
accounting are applied. Therefore, in modern times, accounts are usually
presented in a vertical form, as shown below instead of the ‘T’ form.
Account
Date Particulars L/F Debit Credit Balance
An example of how transactions are recorded in accounts in the ledger is

illustrated below:
Transaction: Kofi Mensah invests GH¢1,000 cash into his business on 1st
January, 2014.
Debit (Dr) Cash Account Credit (Cr)

2014 GH¢ GH¢
1Jan Capital GL1 1,000
Debit (Dr) Capital Account Credit (Cr)

GH¢ 2014 GH¢
1Jan Cash CB1 1000
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PRINCIPLES Unit 2, Section 3: The ledger, balancing of accounts and extraction of trial
OF ACCOUNTING 1 balance
Explanation: The cash of GH¢1,000 invested in the business by the owner,

Kofi Mensah, is debited to the cash account, and the corresponding credit
entry is made in the capital account.
Note: In the L/F column in the cash account, G.L.1 means General Ledger
page 1, and that of the capital account means Cash Book page 1. As
mentioned earlier, the L/F is used to indicate the corresponding entries of a
transaction.
Alternatively, the same transaction could have been entered in a vertical

form of accounts, as follows:
Cash Account
GH¢ GH¢ GH¢
1Jan Capital G.L.1 1,000 1,000 Dr
Capital Account
GH¢ GH¢ GH¢
1Jan Cash C.B. 1 1,000 1,000 Cr
Divisions of the Ledger

Tracing transactions in the ledger can be very tedious and time consuming if
accounts are opened as and when required in the ledger. In that way the
ledger will have no sense of order and one will have to go through the
accounts until a particular account is found. If the accounts are many in the
ledger it is not going to be an easy task. To make it easy to trace
transactions, the ledger is divided into manageable sections and each of
these sections is called a division of the ledger. These divisions are usually
referred to as the principal books of accounts. All accounts of a business can
be found in any one of these ledgers. There are four basic divisions of the
ledger and these are:
(a) sales ledger
(b) purchases ledger
(c) the cash book
(d) the general ledger
Let us consider each of these in turn.
Sales Ledger
The sales ledger contains all the personal accounts of credit customers, that
is, Trade receivables of a business. The sales ledger can be handled by a
sales ledger clerk who will be in charge of the book-keeping entries. If the
82 UEW/IEDE
business is a big one sales ledger can be divided into smaller sections so that
each section is more easily handled. It is to be noted that the sales ledger
does not contain the sales account.
The Purchases Ledger

Like the sales ledger, the purchases ledger contains personal accounts of the
Trade payables of the business. It can also be handled by a purchases ledger
clerk who will take care of the book-keeping entries in the purchases ledger.
The purchases ledger does not contain the purchases account. The purchases
account is rather found in the general ledger.
The General Ledger

The general ledger which is also known as the nominal ledger contains all
the accounts that do not appear in the other three divisions. The general
ledger contains accounts of assets, liabilities, capital and others such as
sales, purchases, expenses and income.
The division of the ledger facilitates the tracing of errors if the trial balance
fails to agree. The division of the ledger also helps the business to take
advantage of the division of labour. This is because different officers will be
working on different ledgers at the same time.
Types of Account in the Ledger

The accounts in the ledger can also be categorized into personal and
impersonal accounts.
(a) Personal Account

The personal accounts consist of accounts of people and other organizations
with which a business deals. These are accounts of natural persons and other
businesses. It is normally accounts of Trade receivables and Trade payables
and kept in the sales ledger and purchases ledger respectively.
The capital and drawings accounts are also personal accounts (of the
proprietor). So also are loan accounts, overdrafts accounts, expenses
prepaid and accrued accounts, and incomes accrued and received in
advance accounts.
(b) Impersonal Account

Impersonal accounts are accounts of items other than people or
organisations. The impersonal accounts can further be divided into two, that
is, real and nominal accounts.
(i) Real accounts - These are accounts representing the assets or

physical properties of the business. An asset is any tangible or
intangible possession of the business, which has value. It is a
resource controlled by the business (as a result of past events) from
which future economic benefits are expected to flow to the
enterprise. It is therefore kept in the business to be used for a number
UEW/IEDE
83
of financial years to generate economic benefits to the business,

which could be the production of goods and services, exchanged for
other assets, used to settle a liability or distributed to the owners of
the business. Some assets may not have a physical form, e.g. copy
right, patent, etc. Others can be seen and touched. Examples include
land and building, motor van, furniture and fittings.
(ii) Nominal accounts - These are accounts which represent things or

items which do not have physical existence. They exist only in name,
hence the term ‘nominal’. They are usually concerned with incomes,
profits or gains, losses and expenses. Nominal accounts which
represent incomes, profits or gains have credit balances. For example
commission received account, sales account, interest receivable
account etc. However, nominal accounts representing losses or
expenses have debit balances e.g. Salaries account, motor vehicle
expense account, etc.
The types of accounts mentioned above can be shown in the diagram

below:
ACCOUNT
Personal Accounts Impersonal Accounts
Trade Trade Real Nominal

receivables payables accounts accounts
Tangible Intangible Revenues Expenses

Assets Assets
Fig. 3.1: Types of ledger account
84 UEW/IEDE
Balancing or Summarising Accounts

As stated earlier on, management of firms review the status of their
organisations’ transactions to show the firm’s financial performance and
financial position on a given data. Before such review could be done,
various account balances should be determined. An account balance is
therefore the difference between the amounts recorded on the two sides of
an account. It is computed by first adding the figures on each side of the
account. The smaller total is subtracted from the larger and the result is the
account balance. It should be noted that if the total figures on the credit side
is greater than the total of the debit side, the balance is recorded on the
credit side and vice versa.
In other words, balancing off accounts involves determining the side of the
account which has the greater amount. The difference between the side with
the greater amount and the side with the smaller amount, is indicated as the
balance carried forward (bal c/f) or the balance carried down (bal c/d).This
simply means the balance is being carried forward or down to the following
period. Once the balance has been carried forward, it is denoted as a balance
brought forward (bal. b/f) or as a balance brought down (bal. b/d). Note that
it is the balance brought forward or brought down which is usually
identified as the balance on the account, and which is extracted to a trial
balance. The balance could either be a debit or credit balance.
Illustration 1
Assume the entries in Kofi Messiah’s cash book for the month of January,
2014 are as follows:
Cash Book
GH¢ 000 GH¢ 000
Jan 1 Capital 100 Jan 3 Office equipment 25
Jan 12 Sales 20 Jan10 Photocopier 30
Jan 25 Office papers 15
To determine the balance on the cash book as at the end of January, 2014
the credit side total of GH¢25,000 + 30,000 + 15,000 = 70,000 will be
deducted from the debit side total of GH¢100,000 + 20,000 = 120,000, to
give a difference of GH¢120,000 – 70,000 = 50,000. The balance on the
cash book is therefore a debit of GH¢50. This is represented as follows:
Cash Book
GH¢ 000 GH¢ 000
Jan 1 Capital 100 Jan 3 Office equipment 25
Jan10 Photocopier 30
Jan 25 Office papers 15
Jan 12 Sales 20 Jan 31 Bal c/d 50
120 120
Feb 1 Bal b/d 50
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85
It should be noted that the balance of an account is normally recorded on the

increase side of the account. This is called the normal balance of account. It
should also be noted that the account balances help to fulfil the second
fundamental requirement of the double entry accounting system – total
debits must be equal to total credits.
Every transaction is entered twice in the ledger, one on a debit side of an

account and the other, on a credit side of another account. This is the
principle of double entry as was explained in chapter 2. If this principle is
followed for every transaction then in extracting the trial balance the totals
for debit and credit sides will agree, that is, it will balance. The
disagreement of the trial balance totals gives a clear indication that an error
has been made somewhere in the books. For example, if cash sales
GH¢450,000 debited to the cash book is not credited to the sales account,
and this is the only error committed, the trial balance total would show a
difference of GH¢450,000. However, there are some errors which will not
be disclosed by the trial balance. Hence, we can say that the agreement of
the trial balance is not a proof that there are no errors in the books of
accounts. This chapter deals with errors that can be committed in the books.
The errors are those that do not affect the agreement of the trial balance and
those that affect the agreement of the trial balance.
Meaning and Purpose of a Trial Balance

A trial balance is a list of all the ledger account balances with debit balances
in one column and credit balances in the other column. If the rules of double
entry book-keeping have been accurately applied, the totals columns should
be the same. The basic objective of preparing a trial balance is to provide
assurance of the arithmetical (mathematical) accuracy of the ledger postings.
And this should always be the case because the entries made in the ledger
accounts from which the trial balance was extracted is based on the double
entry principle – every debit entry must have a corresponding credit entry
and vice versa. And every credit entry must have a corresponding debit
entry and vice versa. It should however be noted that the preparation of the
trial balance itself does not form part of the double entry system. It is just a
memorandum listing of all the ledger accounts balances in two columns,
placing the amounts of accounts with debit balances in the debit column,
and those with credit balances in the credit columns.
A trial balance usually contains the following account balances.
86 UEW/IEDE
Trial Balance as at 31 December 200x

Particulars Debit Credit
Assets accounts xxxx
Liabilities and capital accounts xxxx
Expense and losses accounts xxxx
Revenue and gains accounts xxxx
Drawings accounts xxxx
xxxx xxxx
The balances or figures in the trial balance (after some adjustments e.g. for
closing inventory, prepayments and accruals and depreciation) are used to
prepare the final accounts (trading and Income statements and the Statement
of financial position) of the business entity.
Uses and Limitations of the Trial Balance

When a trial balance is in agreement, it is implied that:
 equal debit entries and credit entries were recorded in the accounts for
each transaction;
 the debit and credit entries were posted in the accounts;
 the accounts balances were correctly determined.
The basic objective therefore, of preparing a trial balance is to

determine that the total debits entries equal the total credit entries,
and this provides assurance of the mathematical accuracy of the
ledger posting. This means that, the mathematical operations of
addition and subtraction in balancing accounts, and in extracting the
trial balance are correct. This in a way, helps in a sense to disclose
some particular errors, because if the trial balance does not balance, it
signals that something is wrong somewhere. This signal helps to
locate and correct the errors so made.
The above notwithstanding, one main limitation of the trial balance is

that even though the balances may agree there could still be some
errors which may not be disclosed. These would be explained soon.
Preparation (or Extraction) of the Trial Balance

A trial balance can be extracted at any time. However, it is usually prepared
before the final accounts are prepared. The preparation or extraction of a
trial balance involves the following five steps:
1. After recording the ledger accounts, determine the balance on each
account;
2. List the accounts with debit balances in the debit column, and those
with credit balances in the credit column of the trial balance. Note: The
balances to be listed are the balances brought down (b/d) NOT balances
carried down (c/d);
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87
3. Cast (add up) the debit column of the trial balance;

4. Cast the credit column of the trial balance;
5. Compare the sum of the debit balances (the totals of debit column) and
the sum of the credit balances (the totals of the credit column). Note
whether the totals agree or not.
Remember that, a trial balance is a memorandum listing of all the ledger

account balances, in two columns, placing debit balances in the debit
column, and credit balances in the credit column. It is a memorandum
listing because the concept of double entry is not applied in extracting the
balances.
It should also be remembered that the ledger accounts from which the
balances are extracted are recorded on the basis of double entry system of
bookkeeping. Therefore, totals of all the debit entries should be equal to the
totals of all the credit entries. Thus, the trial balance helps to provide
assurance on the mathematical accuracy of ledger postings, in a sense,
disclosing some errors, which may have been made. It is therefore advisable
to extract a trial balance at quite regular intervals, sometimes, monthly.
Illustration 2
Kwasi Prempeh started business with GH¢50 cash and GH¢150 in a bank
account on March 1, 2014. During the month of March 2014, the business
entered into the following transactions.
March 2: Rented a store and paid rent for a year of GH¢60 with a cheque
March 3: Bought goods for resale with cash of GH¢40, and a cheque
GH¢60
March 4: Cash sales GH¢80. Bought goods of GH¢300 from Adom
Stores
March 6: Sold goods and received a cheque of GH¢250
March 8: Sold goods of GH¢80 to Danso on credit
March 15: Cash sales GH¢190. Paid Adom Stores less a cash discount of
4% with cash (50%) and cheque (50%)
March 17: Purchased goods of GH¢150 from Ama on credit
March 20: Purchase Furniture and Fittings with a cheque of GH¢50
March 22: Sold goods of GH¢100 to Ofosua
March 25: Paid general expenses of GH¢20 with cash
March 26: Danso and Ofosua settled their accounts with cash, less 5%
cash discount.
March 26: Paid Ama with cash less 4% cash discount.
March 27: Kwasi Prempeh took cash of GH¢10 and a cheque of GH¢15
for his personal use
March 31: Paid all cash into bank except a balance of GH¢3
Required: Record the above in the appropriate ledger accounts of Kwasi

Prempeh, balance the accounts, and extract a trial balance as at 31 March,
2013.
88 UEW/IEDE
In the Books of Kwasi Prempeh
Cash Book
Date Details Disc. Cash Bank Date Details Disc. Cash Bank
Allwd Rec
GH¢ GH¢ GH¢ GH¢ GH¢ GH¢
Mar 1. Capital 50 150 Mar 2. Rent 60
Mar 4. Sales 80 Mar 3. Purchases 40 60
Mar 6. Sales 250 Mar 15 Adom 12 144 144
Mar 15. Sales 190 stores 50
Mar 26. Danso 4 76 Mar 20. F & 20
Mar 26. Ofosua 5 95 furniture 6 144
Mar 31. Cash (c) 130 Mar 25. Gen. Exp. 18 10 15
Mar. 26 Ama 130
Mar 27. Drawings 3 201
491 530 Mar 31. Bank (c) 491 530
April 1. Bal b/d 3 201 Mar 31. Bal c/d
Capital account
GH¢ GH¢
Mar 31 Bal c/c 200 Mar 1. Cash account 50
Mar 1 Bank account 150
200 200
Mar 3. Bal b/d 200
Rent account
GH¢ GH¢
Mar 1 Bank account 60 Mar 31 Balance c/d 60
April 1 Balance b/d 60
Purchases account
GH¢ GH¢
Mar 3 Cash account 40
Mar 4 Adom stores 300 Mar 31. Bal c/d 550
Mar 17 Ama 150
550 550
April 1 bal b/d 550
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89
Sales account
GH¢ GH¢
Mar 8. Danso’s account 80
Mar 31 Bal c/c 700 Mar 22 Ofosua’s account 100
700 700
Adom stores account

GH¢ GH¢
Mar 15 Cash account 144 Mar 4 Purchases account 300
Bank account 144
Discount received 12
300 300
Danso’s account
GH¢ GH¢
Mar 8 Sales account 80 Mar 26 Cash account 76
Mar 26 Discount allow. 4
80 80
Ama’s account
GH¢ GH¢
Mar 26 Cash account 144 Mar 17 Purchases account 150
Mar 26 Discount received 6
150 150
Furniture and fittings account

GH¢ GH¢
Mar 20 Bank account 50 Mar 31 Balance c/d 50
Ofosua’s account
GH¢ GH¢
Mar 22 Sales account 100 Mar 26 Cash account 95
Mar 26 Discount allowed 5
100 100
General expenses account

GH¢ GH¢
Mar 25 Cash account 20 Mar 31 Balance c/d 20
90 UEW/IEDE
Drawings account
GH¢ GH¢
Mar 27 Cash account 10 Mar 31 Bal. c/d 25
Bank account 15
25 25
April 1 Bal. b/d 25
Discount Allowed account

GH¢ GH¢
Mar 31 Sundries account 9
April 1 Balance b/d 9 Mar 31 Balance c/d 9
Discount received account

GH¢ GH¢
Mar 31 Balance c/d 18 Mar 31 Sundries account 18
Kwasi Prempeh: Trial Balance as at 31 March, 2014

Dr GH¢ Cr GH¢
Cash account 3
Bank account 201
Capital account 200
Rent account 60
Purchases account 550
Sales account 700
Furniture account 50
General expenses account 20
Drawings account 25
Discount allowed account 9
Discount received account 18
918 918
Review Questions
1. In which ledger can the following accounts be found:
(a) Capital account
(b) Statement of profit or loss
(c) Trade receivables account
(d) Suppliers account
(e) Cash account
(f) Loans account
2. State the type of ledger accounts you know and give two examples of
each.
3. The sales account can be found in the sales ledger. True or False?
Explain.
4. The purchases account can be found in the purchases ledger. True or
False? Explain.
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91
PRINCIPLES SOURCE DOCUMENTS
UNIT 2 SECTION
OF ACCOUNTING 1 4
Unit 2, AND
Section 4: Source
BOOKS OFdocuments
ORIGINAL andENTRY
books of original entry
We hope you have really grasped the essence of making entries in the
ledger. As you may recall, entries in the ledger accounts are referred to as
ledger postings. But where do you think they are posted from? And what
documents are used as reference point before these postings are made. Jot
down your thoughts and find out, at the end of this section, whether you got
them right.
In this section we are going to discuss two very important stages in the
accounting process. Firstly, the use of source documents, and secondly,
making entries in the books of original entry before these entries are posted
to the ledger accounts.
Now read on……

 describe the various source documents used in business
 identify the source documents used to write up the books of original
entry
 list the books of original entry
 define the books of original entry and their uses
 make entries in the books of original entry
 post transactions from the books of original entry to the ledgers
Source Documents
Source documents are business documents that identify and describe
transactions and events entering the accounting process. They are the
sources of accounting information and they provide evidence of business
transactions. They are usually referred to as printed papers that are used in
the process of completing business transactions. They include invoices,
receipts, paying-in-slips, cheques and cheque counterfoils, bank statements,
purchase orders, credit notes and debit notes, till roll, credit notes, postal
orders, inventory record cards, way bills, pay slips, vouchers, bills from
suppliers, advice slips and delivery note.
Let us now explain some of these source documents in detail.
Purchase Requisition
This is a document filled by a department/unit within an organisation, by a
person with authority to do so requesting for some items needed by the
department/unit. The document is forwarded to the purchasing department.
Some of the information to be disclosed on the purchase requisition include
the quantity and when the item is needed.
Letters of enquiry
If a buyer regularly buys the same goods from the same supplier; he will
know what the prices are. Sometimes, however, it will be necessary to ask
what the price(s) would be. To get the best price the buyer would probably
92 UEW/IEDE
PRINCIPLES
Unit 2, Section 4: Source documents and books of original entry OF ACCOUNTING 1
approach more than one supplier. Businesses send out letters of enquiry to
potential suppliers to find out what suppliers are able to offer and the
different prices charged. Among the approaches used in enquiry are
supplier’s catalogues, price lists, advertisements, telephone and formal
letters. If the potential order involves substantial expenditure, and there are a
large number of possible suppliers, the purchasing department may decide
to advertise and ask for tenders or quotations.
Catalogues and price lists

This is a booklet or pamphlet, which gives information about full range of
goods a seller, is prepared to sell. The information is one likely to be
needed by a potential buyer, e.g. prices description, terms of payment, uses
of the product. A price list will usually show current prices and recent
amendments and should be referred to before placing an order.
Quotation
In response to a letter of enquiry or a telephone call, the supplier would send
a quotation, in which the goods on which enquiries were made and their
prices as well as terms of sale are provided. A quotation should be sent to
the customer as soon as his enquiry is received otherwise there is the danger
that he may decide to buy from another firm which has dealt more promptly
with his enquiry. According to Austin (1974) it is important that all
quotations should be followed up if, after a short period, no firm order has
been placed by the customer and for this reason a carbon copy should be
retained by the firm.
OFFICE SUPPLIES LTD

14 Agyenkwa Road
Kumasi
Tel: 0227-637251
QUOTATION
Mr K Harrison
Buyer
Contact Ltd
Nkrumah Lane
Accra
IN23 BAL
15th September
To Supply and delivery of
250 Reams of A4 white bond paper
24 Red lever arch files GH¢28
GH¢20
All prices subject to VAT @ 17.5%
Trade Discount 5%
Terms 21/10 days
Delivery within 7 days of receipt of order
Signed ……………………………………………….....................…….
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93
PRINCIPLES
OF ACCOUNTING 1 Unit 2, Section 4: Source documents and books of original entry
Purchase Order
Whenever firms wish to buy products, they complete an order form such as
that shown below and send it to the supplier. A purchase order is prepared
by a prospective buyer to a supplier to indicate his wish to buy certain
goods. It gives authority to suppliers to supply goods or services. The
purchase order contains the following details:
a) the name of the prospective buyer;
b) the name of the supplier who is to supply the goods;
c) the date;
d) full description of the goods showing type, size and colour of the
goods.
e) quantity required;
f) the price and when it will be paid;
g) the delivery date required;
h) the number of the purchase order (reference number);
i) the signature of the person making the order; and
j) the other terms and conditions which the buyer wishes to include in
the contract.
It should be signed by someone with sufficient authority to sanction the

amount of money, which is being spent. It is usually made out in three
copies and distributed as follows: one to the supplier, one to the accounts,
and one to the department making the requisition.
PURCHASE ORDER
Contact Ltd
Nkrumah Lane
Accra
Tel; 027 482937
TO: Office Supplies Ltd ORDER NO: 2948/90

14 Agyenkwa Road DATE: 15 October
Kumasi
Please supply:
Quantity Description Catalogue Number Unit price
250 Reams A4 white bond paper K/38279 GH¢28 per ream
24 Red lever arch files K/D02938 GH¢20 each
Delivery ………………………………..
Signed ………….………………………
94 UEW/IEDE
PRINCIPLES
Advice Note
When an order is received from a buyer, an advice note may be forwarded
to the buyer informing him that:
1. The order is acknowledged and has been dealt with.
2. The products have been sent by a stated method of transport, e.g.
freightliner, lorry.
An advice note may sometimes be sent to give a delivery date.
Delivery Note (Dispatch Note)

This document is sent with the goods. It is usually a copy of the invoice,
except that the prices are omitted. A common practice is to type both
documents together but the delivery note would contain only the first two
columns of the invoice shown. Thus, a delivery note is a list of the
products, which have been sent by a supplier. The delivery note is given to
the driver who is to convey the goods. The driver has to ensure that the
delivery note is signed by the receiver and then retained by the driver of the
goods as proof that the goods have been delivered. It is a useful document
for checking the quantity and condition of the product when received by the
purchaser.
Invoice
An invoice is a document stating the types of goods that have been sold,
their quantity, prices and terms of sales. It serves as evidence of a sale or
purchase transaction. Usually, sales on credit to customers are evidenced by
sending invoices to the customer. The invoice shows detailed description
and the values of the goods or services provided. The seller of goods
prepares the invoice and addresses it to the buyer. To the seller the invoice
that is issued to the buyer is called a sales invoice, while to the buyer it is
called purchases invoice.
The invoice is the bill for the goods supplied. It is the important legal and
financial document used in business. Its main purpose is to indicate to the
buyer the amount he owes the firm for the goods received, so that in theory
it might be sufficient to make out any two copies (one original for the
customer and one copy for the seller's file), but in practice this form is used
for other purposes such as filing VAT returns and it is useful to make
several copies. Various bits of information are included on an invoice, for
example:
(a) Name and address of seller;
(b) Name and address of buyer;
(c) The invoice number or reference number;
(d) Product code, description, quantity, type, size, and colour of the
products;
(e) Unit prices, subtotalled amounts, any discounts being offered and the
final total;
(f) Value added tax where applicable;
(g) Terms of delivery, e.g. carriage paid, carriage forward;
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95
PRINCIPLES
(h) Terms of payment;

(i) The date of the invoice or date of transaction. This is important
because the payment date (here one month) is calculated from it. The
date is often described as the “tax point” because it is the transaction
date as far as VAT calculations are concerned, i.e. when the sale took
place and the VAT was charged. Note: VAT (Value Added Tax) is a
tax on the supply of goods and services. The rate of VAT applicable in
Ghana as at is 17.5%.
In essence the invoice repeats the terms given in the quotation.
Office Supplies Ltd

14 Agyekwa Road
Kumasi
Tel: 0277-637251 Vat Reg N o

Fax: 0392-398273 483/28372/75
INVOICE
TO: Contact. Ltd

2 Nkrumah Lane
Accra
Your Order No Invoice Date Invoice no Despatch date

Tax Point
2948/90 2nd Nov., PS/29837 2nd Nov.,
Quantity Description Cat Unit Total VAT VAT

No Price price rate amount
GH¢ GH¢ GH¢
250 Reams of A4 white paper YL 28 7,000
24 Red lever-arch file 29 20 480
7,480 17.5% 1,309
Delivery 500 17.5% 87.5

charges
Sub-total 7,980
VAT 1,396.5
Total amount 9,376.5

due
Terms: Net monthly
E&OE
Many firms write ‘E. &O. E.’ on the bottom of the invoice. These letters
mean ‘Errors and Omissions Excepted’. This means that if there is an error
96 UEW/IEDE
PRINCIPLES
or something left off the invoice by mistake, resulting in an incorrect final

price, the supplier has the right to rectify this mistake and demand the
correct amount.
Credit Note
A credit note is issued by a seller to a buyer when the buyer returns goods to
the seller. A credit note tells the buyer that his/her account has been credited
or reduced by the amount stated on the note. A credit note is used as
evidence when goods have been returned by the buyer because the goods are
faulty, unsatisfactory or damaged or when the buyer’s account have been
overcharged. It is sent by a seller to a buyer with the intention of reducing
the buyer’s indebtedness. In other words, a credit note is a record of refund
to or from the business. If it is from the business, it shows a claim against a
supplier either in respect of goods returned or overpayment made to them
and vice versa.
Whenever a client is overcharged or returns unsuitable or damaged

products, a credit note (c/n) may be issued by the supplier. Credit notes
tend to be printed in red ink, and let the purchaser know that he will
ultimately pay less or be entitled to a full refund for the returned items. The
credit note is also used when:
(a) defective/damaged goods are returned or when a buyer, having been
charged for goods returns them to seller;
(b) not all goods have been sent by the seller – a situation referred to as
‘shortages’;
(c) the unit price on the invoice was too high
(d) the buyer does not want some or all of the goods, and the supplier
agrees to accept them back.
It should be noted that it is by the use of the credit note that the seller can
reduce the balance due to him, - he cannot alter the original invoice which
has already been sent out. It is often prepared by the seller following the
receipt of a returns note (sent with returned goods) or a debit note (issued,
for example, when the buyer has been overcharged).
The credit note shows:

(a) Name, address, and other contact details of the seller;
(b) Name, address, and other contact details of the buyer;
(c) Date of the credit note;
(d) Brief details of the reason for the credit (e.g. empties/containers
returned, allowance for defective goods,)
(e) Amount of credit.
The original copy is sent to the customer and a copy will be sent to the
Accounts Department for entry in the appropriate account.
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Debit Note
A debit note is a special invoice sent by a seller to a buyer informing the
buyer that his/her account is debited for reasons given on the note. A debit
note is issued by the seller to the buyer if the buyer has been undercharged
for goods supplied or more goods have been supplied to the buyer. In some
cases a buyer can also send a debit note along with the goods he is returning
to the seller. This is to inform the seller that his account has been debited
thus reducing the buyer’s indebtedness to the seller.
A debit note is used in cases where a purchaser has been undercharged. The
debit note requires the purchaser to pay an additional charge in settlement of
the account or invoice. Another possibility is for a debit note to be sent by
the retailer to the wholesaler, when an overcharge has been made or as in
the example when goods are returned for some reason.
Pro Forma Invoice

A proforma invoice is of the same form as the invoice. It offers guidance to
a buyer who may wish to know what the final invoice will look like before
goods are forwarded to him. The pro forma invoice can also be used when
goods are sent for customer's inspection. It serves to tell the customer how
much he has to pay if he decides to take the goods.
In home trade, the pro forma invoice has two main functions:
(a) It can request payment from retailers when a wholesaler is not prepared
to grant credit facilities.
(b) It can be enclosed with products sent on approval or on a sale or return
basis. In this case, the pro-forma invoice acts as a bill or normal
invoice, and should be paid if the buyer decides to keep the goods.
Statement of Account
A number of business transactions is usually conducted on credit basis. For
this reason, a statement of account is sent out by a supplier to his receivables
(customers) usually at the end of each month. The statement shows the total
amount owing by the customer, lists the transactions which have occurred
between them over a given period, the balance outstanding on the
customer's account at the start is shown, together with dates and particulars
of all deliveries and payments received by the supplier.
Often, a running balance is shown which records the sum remaining on

account after each successive transaction. Finally, the balance on account at
the end of the period is given for the customer's information. In effect, the
statement of account is a request from the supplier for payment of all
outstanding invoices. The statement of account shows:
(a) Name, address, and other contact details of the seller;
(b) Name, address, and other contact details of the buyer;
(c) Date of statement;
(d) Brief details of transactions:
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i. Invoice issued for goods supplied – the full amount due,

including VAT
ii. Refunds made on credit notes
iii. Payments received from the buyer
STATEMENT Number 428637
Office Supplies Ltd Date 30 Dec.,

14 Agyenkwa Road
Kumasi VAT Registration
Number
TO: Contact Ltd 483/28372/75
2 Nkrumah Lane
Accra Account No.: 6342
Date Particulars Debit Credit Balance

GH¢ GH¢ GH¢
2 Nov. Invoice PS/29837 9,376.5 - 9,376.5
23 Nov. Cheque 7,000 2,376.5
Receipt
A receipt is a document used in trade to acknowledge receipt of money by
the seller and as evidence of payment by the purchaser for goods bought or
services rendered. It shows evidence of payment of money. It is issued by
the person receiving the money. It is a record which confirms that monies
have been received. When issued, the receipt should show:
(a) Name, address, and other contact details of the firm issuing the
receipt;
(b) Name, address, and other contact details of the payer;
(c) Number of the receipt;
(d) Amount received (in words and figures)
(e) Description of the transaction
(f) Method of payment (e.g cash, cheque)
(g) Signature of the cashier receiving payment.
Paying-in-slip
A paying-in-slip is a document used to show that some amount of money
has been deposited into a bank account. It is usually completed in duplicate
or triplicate. It has the name of the bank at the top and it shows the amount
paid into the bank account with the respective denominations indicated and
the total amount in figures corresponding with the amount in words. The
details and signature of the person paying in the money is also shown. A
paying-in-slip can be used for both cash and cheque deposits.
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Voucher
A voucher is an internally generated document used within an organisation
to control cash disbursements and to ensure that a transaction is properly
authorised and recorded. Often known as payment voucher, it serves as
proof and trace of any payment made by the accounts/finance department of
an organisation.
Books of Prime Entry

A book of prime entry is a book in which transactions are first recorded
before being posted to the ledger accounts. Generally, journals are used to
record daily transactions on credit. A journal is a chronological record of
accounting transaction showing the names of accounts that are to be debited
or credited, the amount of the debits and credits and any useful
supplementary information about the transaction. It also provides
chronological record of other economic events that affect the entity. Simply
put, they are books of original entry in which accounting data is entered
before being entered into the ledger accounts. Journals are also known as
books of prime entry, books of original entry, books of first entry, day
books, and subsidiary books of accounts, among others. The use of journals
in the accounting process does not form part of the double entry system of
book keeping. The books of original entry are, simply put, day books in
which financial transactions are first recorded before they are posted to the
ledgers.
There are two main types of journals – General Journal and Special
Journals. The special journals comprise the sales journal, the purchases
journal, the returns journal and the cash book. These are explained as
follows:
1. Purchases journal or purchases day book: used to record daily

credit purchases using copy of purchase invoices received.
2. Sales journal or Sales day book: used to record daily sales

transactions on credit basis using copy of sales invoices issued.
3. Sales returns (or Returns inwards) journal or day book: used to

record transactions involving goods returned by customers using
copy of credit notes issued or copy of debit note received.
4. Purchases returns (or Returns outwards) journal or day book:

used to record transactions involving goods returned to suppliers
using copy of credit note received or copy of debit note issued.
5. The Cash book or Receipts and Payments book: used to record

transactions involving cash receipts and cash disbursements using
cheque book stubs, paying-in stubs and copies of receipts.
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6. The Petty cash book: used to record cash receipts and cash
payments which are of a routine nature using copies of cash receipts
and petty cash vouchers.
7. General journal: used to record transactions that are not recorded in

the other journals. E.g. recording opening and closing entries and
correction of errors. The general journal is also referred to as the
journal proper.
The sales journal, purchases journal, returns inwards journal, returns

outwards journal, cash book and petty cash book are all referred to as the
special journals, since they are used to record and post transactions of
similar nature. They are those journals that are designed to improve the
efficiency of recording specific types of repetitive transactions. They are
meant for recording transactions of a specific type. With the exception of
the cash book and petty cash book, we will discuss all the special journals as
well as the general journal in this section. In the next section (that is, section
five), we will treat the cash book. The petty cash book will be treated in the
last section of this unit.
Functions of the Books of Original Entry

The books of original entry perform some functions in the accounting cycle
and these include the following:
(i) They serve to collect together all transactions of similar nature in order
and therefore make it easier to trace transactions when there is the need.
(ii) They reduce the volume of entries made in the ledger accounts since
only periodic totals need to be posted to the relevant accounts in the
ledger.
(iii) Different accounting staff can be assigned to different books to work on
at the same time, thus taking advantage of division of labour.
(iv) The use of the books of original entry makes reference to original
document very easy.
(v) The use of the books of original entry ensures the completeness of all
information posted to the ledger account.
The Purchases Journal

Purchases journal or day book is a type of special journal used to record all
credit purchases of goods of a business. It contains the names of suppliers
from whom goods are bought on credit. It shows in chronological order the
names of these suppliers and the amount payable for each purchase.
The term goods means items purchased for resale. Thus, credit purchases of
items other than goods on credit are recorded in the general journal.
Similarly, cash purchases are recorded in the Cash Book. Posting of credit
purchases is done every day from the purchases journal to the personal
accounts in the purchases ledger. At the end of the financial period, the total
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of the purchases day book is transferred to the debit of the purchases

account in the general ledger.
Format / Layout
A layout of a purchases journal is presented below.
Purchases Journal
Date Particulars Invoice no. Folio Amount
Illustration 1
Amansia has the following purchases for the month of January, 2014 on
credit.
January 1 From Koo Nimo; 10 bales of cloth invoice No. 165 at
GH¢240 each
January 12 From Asana Enterprise; 150 bags of cement invoice No. 060
at GH¢15 each.
January 20 From Atta Ama and Sons; invoice No. 024, 60 bags of flour
at GH¢60 each.
January 25 From Ntiamoah, 70 bags of sugar invoice No. 0124 of
GH¢75 each
January 30 From Acquah Ltd, 80 bags of flour invoice No. 205 at
GH¢62 each
Required: Write up the purchases journal for the month.
Purchases Journal
Date Particulars Invoice No. Amount
2014 GH¢
January 1 Koo Nimo 165 2,400
January 12 Asana Enterprise 060 2,250
January 20 Atta Ama & Sons 024 3,600
January 26 Ntiamoah 0124 5,250
January 30 Acquah Ltd 205 4,960
Transferred to Purchases Ledger 18,460
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Illustration 2
Adamu Suglo, a sole trader, made the following purchases for the month of
May, 2014:
May 1 From Mensah Kwarpong: 6 packets of roofing sheets at GH¢120
each, 60 bags of cement at GH¢10.20 invoice No. 642. Less 25% trade
discount.
May 10 From Kofi Nti: 5 tonnes of iron rods at GH¢1023 each; 4 packets of
roofing sheets at GH¢125 each invoice No. 57. Less 20% trade discount.
May 16 From Boampong & Sons: 10 packets of nails atGH¢80 each.
May 25 From Asempa & Co.: 20 packets of nails at GH¢78 each, 100 bags
of cement at GH¢10.80 each. Less 25% trade discount.
May 30 From Kofi Nti: 8 tonnes of iron rods at GH¢1,030 each; 60 packets
of nails at GH¢75 each. Less 25% trade discount.
Required: Write up the purchases journal for Adamu Suglo.
Workings
May 1 Mensah Kwarpong GH¢

6 packets of roofing sheets at GH¢120 each 720
60 bags of cement at GH¢10.20 612
1,332
Less 25% trade discount 333
Net 999
May 10 Kofi Nti.

5 tonnes of iron rods at GH¢1,023 5,115
4 Packets of Roofing sheets at GH¢125 500
5,615
Less 20% trade discount 1,123
Net 4,492
May 16 Boampong & Sons

10 packets of nails at GH¢80 each 800
May 25 Asempa & Sons

20 packets of nails at GH¢78 1,560
100 bags of cement at GH¢10.80 1,080
2,640
Less 25% trade discount 660
Net 1,980
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May, 30 Kofi Nti

8 tonnes of iron rods at GH¢1,030 8,240
60 packets of nails at GH¢75 4,500
12,740
Less 25% trade discount 3,185
Net 9,555
Purchases Journal
Date Particulars Invoice Folio Amount(GH¢)
No.
May 1, Mensah Kwarpong. 00642 999
2014
May 10 Kofi Nti. 0057 4,492
May 16 Boampong & Sons 000113 800
May 25 Asempa & Co. 002890 1,980
May 30 Kofi Nti. 000012 9,555
May 31 Transfer to Purchases Account 17,826
The Sales Journal

The sales journal, also known as the sales day book, is a type of special
journal used to record credit sales of a business. It shows in chronological
order the names of customers to whom sales have been made on credit and
the amount receivable for each sale. It should be noted that cash sales are
recorded in the cash book. Postings are done in the personal accounts every
day from the sales day book by debiting them with individual amounts. The
sales account is credited with the total credit sales made during the period at
the end of the period. That is, the total amount for a period in the sales
journal is posted to the credit of the sales account in the general ledger while
the individual entries in the sales journal are posted to debit of the individual
personal accounts in the sales ledger.
Format / Layout
A layout of a sales journal is presented below.
Sales Journal
Date Particulars Invoice no. Folio Amount
Illustration 3
The following sales were made by K. Ananse on credit terms: for January,
2014.
January 1 To K. Arhin & Co. GH¢480
January 6 To A. Owusu & Sons GH¢950
January 14 To B. Adade & Sons GH¢500
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January 19 To K Arhin & Sons GH¢320

January 27 To K. Ntiamoah GH¢650
January 30 To B. Adade & Co. GH¢700
Required: Enter up the sales journal for the month of January, 2014.
Sales Journal
Date Particulars Folio Amount
2014 GH¢
January 1 K. Arhin & Co. S.L. 1 480
January 6 A. Owusu & Sons. S.L. 2 950
January 4 B. Adade & Co. S.L. 3 500
January 19 K. Arhin & Co. S.L. 1 320
January, 27 K. Ntiamoah S.L. 4 650
January 30 B. Adade S.L. 3 700
January 31 Transferred to Sales Account 3,600
Illustration 4
The following sales were made by Amansia and Sons for the month of
March, 2014, on credit terms to:
March, 2 UAC: 10 bales of cloth at GH¢450 each
March, 12 Koo Nimo & Sons 25 bags of flour at GH¢68 each.
March, 18 UTC, 75 bags of rice at GH¢55 each.
March, 22 Asabee and Co. 48 gallons of Gino cooking oil at GH¢15
each
March, 28 UAC 12 bales of cloth at GH¢445 each
March, 31 Asabee & Co. 65 bags of rice at GH¢52 each
Required: Write up the sales journal for the Month of March, 2014.
Sales Journal
Date Particulars Folio Amount
2014 GH¢
March, 2 UAC 4,500
March, 12 Koo Nimo & Sons 1,700
March, 18 UTC 4,125
March, 22 Asabee & Co. 720
March 28 UAC 5,340
March, 31 Asabee & Co 3,380
March, 31 Transferred to Sales Account 19,765
The Returns Inwards Journal

Goods bought from a seller may be returned to the seller when it happens
that some of the goods are damaged, or not in good condition or they may
not be of the right specification. When goods are returned to the seller, the
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seller will record this in the Returns Inwards journal. The seller will then
issue a credit note to the buyer. When this happens the personal account of
the buyer will be credited and the Returns Inwards account is debited.
The Returns Outwards Journal

A return outwards is the exact opposite of returns inwards. Goods returned
to the supplier, for the reason that, they are damaged or not in good
condition or not of the right specification etc. are recorded in the returns
outwards journal. The individual personal accounts are later debited in the
Purchases Ledger. The total of the returns outwards journal for the period is
transferred to the credit of the Returns outwards account in the general
ledger.
Illustration 5
From the following details write up the Returns Inwards Journal for the
month of June, 2014.
June 1 Received goods returned from Patoo Enterprise worth GH¢600
June 6 Received goods worth GH¢450 returned by Asabee & Co. for being
bad.
June 16 Received goods returned by K. Atiamo worth GH¢850
June 25 Received good returned by Antrofie Enterprise worth GH¢280
June 30 Received goods worth GH¢650 returned by Koo Dwomo.
Returns Inwards Journal
Date Particulars Folio Amount(GH¢)
June, 1, 2014 Patoo Enterprise S.L. 2 600
June, 6 Asabee & Co. S.L. 3 450
June, 16 K. Atiamo S.L. 5 850
June, 25 Antrofie. S.L. 1 280
June, 30 Koo Dwomo S.L. 4 650
June 30 Transferred to Returns Inwards Account G.L. 5 2,830
Illustration 6
You are to enter the following items in the Returns outwards Journal for the
month of June, 2014:
June, 2 Returned goods worth GH¢900 to K. Kofi.
June, 8 Returned goods worth GH¢640 to D. Daniel & Co.
June, 19 Returns outwards to K. Asante GH¢260.
June, 28 Returned goods worth GH¢870 to K. Kwakye.
June, 30 Returned goods worth GH¢130 to K. Kofi.
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Returns Outwards Journal
Date Particulars Folio Amount(GH¢)
June, 2, 2014 K. Kofi P.L. 2 900
June, 8 D. Daniel P.L. 3 640
June, 19 K. Asante P.L. 5 260
June, 28 K. Kwakye P.L. 1 870
June, 30 K. Kofi P.L. 4 130
June, 30 Transferred to Returns Outwards Account G. L. 6 2,800
The General Journal

The general journal also known as the journal proper is a book used in
recording transactions that are not recorded in the other books of prime
entry (i.e. the special journals). Thus, it is for recording economic
transactions, which do not occur frequently in the business and, therefore,
do not warrant setting up a special journal. It shows the account to debit
and which to credit and explanations or narrations of the entries.
Uses of the General Journal

The journal has a number of uses which include the following:
1. Opening Entries - At the beginning of new financial periods, old
account balances from previous financial period’s Statement of
financial position are to be brought forward. The general journal is
meant for recording these transactions.
2. Closing Entries - At the end of a financial period, the nominal
accounts are closed by transferring them to trading account or
Income statement. The entries for this purpose are called ‘closing
entries’.
3. Adjustment Entries - These are entries passed at the end of the
financial period for outstanding or prepaid expenses and accrued or
outstanding income, etc. Entries for all these adjustments are passed
in the general journal.
4. Transfer Entries - They are required for transferring one account to
the other. Entries for such transfer are passed in the general journal.
5. Correction of Errors - They are passed for rectifying or correcting
the errors which might have been committed in the books of
accounts.
6. Purchase and Sale of Non-current Asset on Credit - The entries
for the purchase and sale of non-current assets on credit such as
purchase and sale of plant and machinery, fixtures and fittings, and
vehicles, on credit are also passed in general journal.
7. Purchase and Sale of a business – Whenever there is a sale and
purchase of a business, the entries required to close the ‘old’
business and those required to open the ‘new’ one are all done
through the use of the general journal.
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8. Issue or Sale of shares by Companies - the entries for the sale of

shares by companies are recorded with the aid of the general journal
before they are posted to their respective ledger accounts.
It should be noted that the general journal is the single most important
journal that can be used to record all types of business transactions. Thus,
even though it has specific uses as outlined above, it can be used to
journalise all kinds of business transactions before recording them in their
respective accounts. The process of recording transactions in the general
journal is referred to as Journalising.
Format of the General Journal

Date Particulars Debit Credit
Ledger
Folio
Date: The date column shows the date of the transaction.

Particulars: The particulars column shows the name of the account to be
debited or credited. The account to be debited is written first and the amount
is recorded at the debit (Dr) column. The account to be credited is written
below the account to be debited but a bit to the right and the amount
recorded at the credit (Cr) column. A brief narration is given below the
credit entry. It is worth mentioning that the act of recording or making an
entry in the journal is called journalizing.
Let us now illustrate how the journal is used in some of the above cases.
Illustration 7
K. Amponsah started business on 2nd January, with the following assets and
liabilities.
Assets: Land & Buildings GH¢60,000; Furniture & Fixtures GH¢10,000;
Motor
Van GH¢15,000; Inventory GH¢40,000; Bank GH¢100,000.
Liabilities: Trade payables GH¢30,000; Loan GH¢55,000.
Required: Prepare the opening journal.
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The General Journal
Date Particulars Dr Cr
GH¢ GH¢
2/1/ Land & Buildings 60,000
Furniture & Fixtures 10,000
Motor Vans 15,000
Inventory 40,000
Bank 100,000
Loan 55,000
Capital 140,000
Asset and Liabilities to 225,000
start a business 225,000
Note: Assets – Liability = Capital
Illustration 8
K. Amponsah engaged in the following purchase and sale of non-current
assets on credit during the month of January, 2013.
12 Jan, 2013 Motor Van is bought on credit from K. Ameyaw for
GH¢25,000.
20 Jan, 2013 Furniture & Fittings sold to K. Bonsu for GH¢8,000 on
credit.
Required: Show the journal entry necessary to record the above

transactions.
The General Journal
Date Particulars Dr Cr
GH¢ GH¢
12/01/13 Motor Van 25,000
K. Ameyaw 25,000
Purchase of motor van on credit
20/01/13 K. Bonsu 8,000

Furniture and Fittings 8,000
Sale of furniture and fittings on credit
Illustration 9
Mr. Akwasi Kotey started business on 1 January 2014 dealing in building
materials. The transactions below relate to the month of January, 2014.
Jan. 1 bought the following on credit from AB Ltd:
100 bags of cement at GH¢10.50 each.
50 bags of white cement at GH¢5.00 each.
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1,000 iron rods at GH¢6.00 each.

Invoiced subject to 10% trade discount.
Jan. 5 sold the following to F & S Ltd:

10 bags of cement at GH¢10.50 each
30 iron rods @ GH¢7.00 each
All invoiced subject to 15% trade discount.
Jan. 6 Returned 10 bags of white cement to AB Ltd because they were

inferior quality.
Jan. 6 Received credit note from AB LTD in respect of goods returned.
Jan. 7 Sold the following on credit to Kate:

10 bags of white cement @ GH¢7.00 each
50 iron rods @ GH¢6.80 each
All invoiced to 15% discount.
Jan. 10 F & S Ltd returned 5 bags of cement, 10 iron rods out of the sales on
Jan. 5
Jan. 12 Sold the following to Amissah on credit:

200 iron rods @ GH¢6.50 each less 10% trade discount
40 bags of cement @ GH¢10.50 each
5 bags of white cement at GH¢8.00 each.
Jan. 14 Bought the following on credit from KK Ltd:

200 packets of filler at GH¢5.00 each
1,000 tins of putty at GH¢6.00 each
3,000 meters of PVC pipes at GH¢1.00 per meter.
Jan. 25 Bought the following on credit from P & P Ltd:

2,000 gallons of white paints at GH¢30.00 each
3,000 gallons of blue paints at GH¢32.50 each
500 gallons thinner at GH¢1.00 each
300 brushes at GH¢0.85 each.
All invoiced subject to 10% trade discount.
Jan. 25 Made a claim for faulty goods delivered by KK Ltd and a credit note
was received for GH¢50,000.
Jan. 29 Made a claim for faulty goods delivered by P & P Ltd and a credit
note was received for GH¢60,000.
You are required to write up:

a) the sales journal and returns inwards journal, and
b) The purchases journal and returns outwards journal.
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Note: Show the details of the transactions in the respective journals.
In the Books of Mr. Kotey
a)
Sales Journal / Day Book
Date Particulars Invoice L/F Details Total
No. GH¢ GH¢
2014 F & S Ltd. 0001 SL1
Jan. 5th 10 bags of cement @ GH¢10.50 105
30 iron rod @ GH¢ 7.00 each 210
315
Less 15% trade discount (47.25) 267.75
7th Kate 0002 SL 2
10 bags of white cement @
GH¢7.00 70
50 iron rods @ GH¢6.80 340
410 348.5
Less 15% trade discount (61.5)
12th Amissah 0003 SL 3
200 iron rods @ GH¢6.50 each 1,300
less 10% trade discount (130)
1,170
40 bags of cement @ GH¢10.50 420
GH¢8.00 40 1,630
Total Sales credited to Sales 2,246.25
Account GL1
Returns Inwards Journal

Date Particulars L/F Details Total
2014 F & S Ltd. SL 1
Jan. 5 bags cement @ 10.50 each 52.5
10th 10 iron rods @ 7.00 each 70.0
122.5
Less 15% trade discount (18.375)
Total debited to Returns Inwards Account GL 2 104.125
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Purchases Journal
Date Particulars Invoice L/F Details Total
No. GH¢ GH¢
2014 AB Ltd 00001 PL 1
Jan. 100 bags of cement @
1st 10.50 each 1050
5.00 each 250
1,000 iron rod @ 6.00 each 6,000
7,300
Less 10% trade discount (730) 6,570
14th KK Ltd. 00002 PL 2
200 packets of filler @
GH¢5.00 each 1,000
1000 tins of putty @
GH¢6.00 each 6,000
3,000 meters of PVC pipes
at GH¢1.00 each 3,000 10,000
25TH P & P Ltd. 00003 PL 3
2,000 gals. of white paint
@ GH¢30.00 60,000
3,000 gals. of blue paints
@ GH¢32.50 97,500
500 gals. of thinner @ 1.00 500
300 brushes @ 0.85 each 255
158,255
Less 10% trade discount (15,825.5) 142,429.5
Total Purchases debited to
Purchases Account GL3 158,999.5
Returns Outwards Journal

Date Particulars L/F GH¢ GH¢
2014 AB Ltd PL 1
Jan. 10 bags of white cement @ 10.50 105
6th each 10.5 94.5
Less 10% discount
25th KK Ltd PL2
Claim for faulty goods 50
29th P & P Ltd PL3
Claim for faulty goods 60
Total returns outwards credited to
returns outward Account GL4 204.5
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Review Questions
1. Describe six source documents used in business.
2. Design a sample receipt showing clearing the respective details.
3. What is the difference between a debit note and a credit note.
4. The following are the balances of accounts appearing in the books of
Sam Mensah, Iron and Steel Merchant, on 31 December 2013:
a. Debit Balances: Inventory in Warehouse GH¢21,000; Fixtures and
fittings GH¢6,300;
i. Motor Vehicle GH¢35,000; Hawa GH¢9,600; James GH¢3,200;
ii. Sowah GH¢8,900; Cash at bank GH¢17,300.
b. Credit Balances: Sarah GH¢17,900; Gyan GH¢9,900.
c. Enter the above and the following transactions into appropriate

ledger accounts and prepare a trial balance as at 31 January 2014.
2014 GH¢
Jan 1 Sold to Sowah, 3 tonnes of steel angles @ GH¢5,000 per tonne 15,000
Jan 2 Paid Sarah by cheque on account 10,000
Jan 3 Received cheque from James in settlement of his account owing
on 31 December 2011 less 5% discount
Jan 5 Bought from Gyan 5 tonnes of J.C. Tubes 15,000
Jan 6 Allowed discount to Sowah on 3 tonnes angles invoiced on
1 January 2012. These having been cut to wrong length 600
Jan 8 Sundry cash sales 16,000
Jan 11 Drew and cashed cheque for office purposes 2,000
Jan 12 Paid cash for carrying charges 250
Jan 14 Sold to James 5 tones steel rounds 10,000
Jan 16 Received cheque on account from Sowah 8,500
Jan 16 Paid Gyan his account by cheque less discount of GH¢450
Jan 18 Received from Hawa cheque on account 8,000
Jan 19 Bought from Sarah 6 tonnes steel frame 12,000
Jan 20 Sent debit note to James for under charge on 5 tone Bar
supplied to him on 14 January 2012 500
Jan 21 Sold to Efua 4 tonnes J.C Tubes 8,000
Jan 22 Paid rent by cheque 2,500
Jan 22 Paid wages in cash 2,150
Jan 23 Received information that Hawa had wound up the business
and gone abroad. Write off balances of her Account as bad debt.
Jan 25 Paid Sarah by cheque less 2%
Jan 26 Paid cash for cleaning warehouse windows 70
Jan 29 Sam Mensah withdrew cash for his own use 2,500
5. Outline the purposes of those books of prime entry referred to as day

books.
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PRINCIPLES
6. Describe the contents, and state which documents are used to write up
each of the following:
(a) The sales day book;
(b) The purchases day book:
(c) The sales returns day book:
(d) The purchases returns day book
(e) The cash book
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Unit 2,
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PRINCIPLES
UNIT 2 SECTION
OF ACCOUNTING 1 5
Unit 2, THE CASH
Section BOOK
5: The cash book
In the previous section we noted that the cash book is one of the special
journals in which specific transactions relating to cash and bank transactions
are recorded. In this section, we will deal with the cash book and
demonstrate how transactions are entered in the single column, double
column and triple column cash books. We hope you will find your study of
the cash book very rewarding.

 identify the cash book as a ledger
 write up two column cash book
 write up three column cash book
The Cash Book

The cash book is the combination of the cash account and the bank account.
It is the book in which record is made of all money received and all money
paid out. The cash book is ruled so that the debit column of the cash account
is placed alongside the debit column of the bank account, and the credit
columns of the cash and the bank accounts are likewise placed alongside
each other.
To make entries in the cash book all cash received are debited in the cash
column of the cash book and all cash payments are credited in the cash
column of the cash book. Similarly, all cash or cheques paid into the bank
account are debited in the bank column of the cash book and cheques issued
or cash withdrawn from the bank account are credited to the bank column of
the cash book.
The cash book can be described as a journal and as an account at the same
time. It is described as a journal because it serves as a book of original entry
for cash receipts and cash payments. As an account, the cash book has a
debit side and a credit side. Double entry principle is observed in writing up
the cash book. As a journal cash transactions are first entered in the cash
book before postings are made into other respective accounts.
We have two column cash book and three column cash book. Let us take
each in turn and see how they are written up.
The Two-Column Cash Book

The two column cash book is merely a combination of cash and bank
accounts in one account columnar form. Cash receipts are debited to the
cash column of the cash book and cash payments are credited to the cash
column of the cash book. Likewise, payment of cheques or cash into the
bank account is debited to the bank column of the cash book and cheque
drawn on the bank account is credited to the bank column of the cash book.
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Unit 2, Section 5: The cash book OF ACCOUNTING 1
Illustration 1
The following cash and bank transactions were undertaken by Koo Nimo
Enterprise for the month of March 2014.
GH¢
March 1, Balances brought forward from last month:
Cash 840
Bank 2,000
Transactions during the month of March 2014 were as follows:

March, 2 Received cheque from K. Mensah 500
7 Paid rent by cash 250
10 Cash sales 820
12 Banked part of the cash in hand 500
16 Paid cheque to B. Bonsu 650
20 Cash sales paid direct into the bank 340
25 Withdrew cash from bank 640
30 Paid wages in cash 350
31 Received cheque from K. Ananse 450
Required:
Write up the two-column cash book from the details given and balance off
as at the end of the month.
Dr Two-Column Cash Book Cr
Date Details Cash Bank Date Details Cash Bank
GH¢ GH¢ GH¢ GH¢
March 1 Bal b/d 840 2,000 March 7 Rent 250
2 K. Mensah 500 12 Bank (c) 500
10 Sales 820 16 B. Bonsu 650
12 Cash (c) 500 25 Cash (c) 640
20 Sales 340 30 Wages 350
25 Bank (c) 640 31 Bal c/d 1,200 2,500
31 K. Ananse 450
2,300 3,790 2,300 3,790
April 1 Bal b/d 1,200 2,500
If you look at the transactions on 12 March, 2014 and 25 March, 2014 you
will see that the entries for these transactions have ‘C’ in bracket in front of
cash or bank. The debit and credit entries of these particular transactions are
in the same book. On 12 March, cash in hand was paid into the bank. Here
the asset cash is reduced, hence the credit entry and the asset bank is
increase and, therefore, the debit entry. The letter ‘C’ is the abbreviation for
contra which is a Latin word meaning opposite or against. It is used to show
that the double entry is on the same page of the same book.
On the 25 March, cash was withdrawn from the bank for use as cash. Cash
in hand here is increased and bank decreased. Hence the credit entry in the
bank column and debit entry in the cash column.
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PRINCIPLES
OF ACCOUNTING 1 Unit 2, Section 5: The cash book
Illustration 2
K. Peters started business on 1 January 2012 with GH¢2,500 in the bank
account.
The following transactions took place in the month of January, 2012.
January 1 Paid for furniture & Fittings by cheque GH¢2,000
2 Purchased goods paying by cheque GH¢5,000
4 Cash sales GH¢4,000; paid for Motor Van by cheque
GH¢8,000
6 Received cheque from Atipa & Co. GH¢6,000
7 Cash sales paid direct into the bank GH¢2,400
10 M. Mensah paid K. Peters in cash GH¢7,000
17 Took a loan of GH¢5,000 from A. Adu paying by cheque.
20 Bought stationery paying by cash GH¢250.
21 Paid B. Bonsu by cheque GH¢2,600
24 K. Peters took cash GH¢350 for personal use.
25 A. Asana paid K. Peters by cheque GH¢720
29 Bought goods paying cash GH¢1750
30 Paid wages by cheque GH¢1,000
31 Paid cash in hand into the bank GH¢5,500
Required:
Write up a two-column cash book from the details above carrying the
balances down to the following month.
Dr Two-Column Cash Book Cr

Date Details L/F Cash Bank Dat Details L/F Cash Bank
e
GH¢ GH¢ GH¢ GH¢
Jan. Capital 25,000 Jan. Furniture & 2,000
1 1 Fittings
4 Sales 4,000 2 Purchases 5,000
6 Atipa & Co 6,000 4 Motor Van 8,000
7 Sales 2,400 20 Stationery 250
10 M. Mensah 7,000 21 B. Bonsu 2,600
17 A. Adu (Loan) 5,000 24 Drawings 350
20 A. Asana 720 29 Purchases 1,750
31 Cash C 5,500 30 Wages 1,000
31 Bank C 5,500
31 Bal c/d 3,400 25,770
11,000 44,620 11,000 44,620
Feb.1 Bal. b/d 3,400 25,770
The Three-Column Cash Book

In the three-column cash book, discounts received and discounts allowed are
added to the two-column cash book. Discounts received are entered in the
discounts column on the credit side of the cash book and discounts allowed
in the discounts column on the debit side of the cash book.
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The total of the discounts received column of the cash book is transferred to
the credit of the discounts received account and the total of the discounts
allowed column is transferred to debit of the discount allowed account.
It is to be noted that the discounts columns in the cash book are not part of
the double entry system. The discounts columns are added to the two
column cash book to avoid repeated references to the general ledger as far
as discounts are concerned.
Let us look at the types of discounts and their implications on the accounts.
Businesses normally grant two types of discounts. These are the trade
discounts and cash discounts. Trade discount is a reduction on the list price
to encourage bulk purchases. Trade discount is not entered into the
accounts. The amount of trade discount is taken off before any entries are
made.
For example, if the list price of a bag of rice is GH¢110 and a customer
receives 20% trade discount on 100 bags purchased, the customer will pay
GH¢8,800 (i.e. 100 x 110 – 20% of 100 x GH¢110) = 11,000 – 2,200). The
seller will make a credit entry of GH¢8,800 in the sales account and debit
the customer’s account with the GH¢8,800. The customer will debit his
purchases account and credit the account of the seller with the amount owed
to him.
The discounts which are shown in the three column cash book are cash
discounts. Cash discount is the amount of reduction of the sum to be paid by
a customer to encourage prompt payment of his account. Cash discount can
be looked at in two ways from the view point of a business. These are
discount allowed and discount received. Discount allowed is an amount
which a business allows to its Trade receivables for quick settlement of their
debts. On the other hand, a business also buys from other businesses on
credit and enjoys cash discounts if accounts are settled quickly. To the
buyer, the discount enjoyed is discount received. This is an income and
credited to the discount received account.
Writing up the Three-Column Cash Book

The same procedure in writing up the two-column cash book is followed in
writing up the three column cash book. Cash or cheque receipts are debited
to the cash book and cash payments or cheques drawn on the bank account
are credited to the cash book. The only difference in the two cash books is
the addition of the discount columns to the two-column cash book to make
the three-column cash book. Remember that discounts received are entered
in the discounts column on the credit side of the cash book, and discounts
allowed in the discounts column on the debit side of the cash book.
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OF ACCOUNTING 1 Unit 2, Section 5: The cash book
Illustration 3
Write up a three-column cash book from the following details:
March 1 Balances brought forward: GH¢
Cash in hand 4,500
Cash at bank 40,000
3 Paid each of the following accounts by cheque, deducting 5%
discount in each case:
M. Adama GH¢800; B. Bonsu GH¢3,000; A. Adu GH¢560
5 Received cheque from K. Mensah in settlement of his debt
GH¢1,900
6 Cash sales paid direct into the bank GH¢2,500
8 Paid Rent by Cash GH¢1,500
10 Paid Motor expenses by cash GH¢800
12 The following persons paid us their account by cheque, in
each case deducting a discount of 3%.
A. Arhin GH¢1,800; K. Ananse GH¢7,400; K. Ntiamoah
GH¢6,600.
17 Cash sales GH¢2,000
18 Paid for stationery by cheque GH¢450
25 Received a cheque for GH¢7,500 being a loan from K.
Suglo.
28 Paid rent by cash GH¢780
30 Paid salaries by cheque GH¢6,000
31 Cash Sales GH¢3,400; Paid GH¢6,000 cash to the bank
Three-Column Cash Book
Date Particulars Disc. Cash Bank Date Particulars Disc. Cash Bank
All. Rec.
GH¢ GH¢ GH¢ GH¢ GH¢ GH¢
March Bal b/d 4,500 40,000 March M. Adama 40 760
1 2
5 K. Mensah 1,900 2 B. Bonsu 150 2,850
6 Sales 2,500 2 A. Adu 28 532
12 A. Arhin 54 1,746 8 Rent 1,500
12 K. Arnanse 222 7,178 10 Motor Exp. 800
12 K. 198 6,402 18 Stationery 450
Ntiamoah
17 Sales 2,000 28 Rent 780
25 K. Suglo 7,500 30 Salaries 6,000
(Loan)
31 Sales 3,400 31 Bank (c) 6,000
31 Cash (c) 6,000 31 Balance c/d 820 62,634
474 9,900 73,226 218 9,900 73,226
April1 Bal. b/d 820 62,634
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Review Questions
1. Why is a cash book described as journal and ledger?
2. Enumerate three types of cash book.
3. Prepare a three-column cash book from the following information:
GH¢
January 1, 2014 Balance brought forward from last year:
Cash 1,000
Bank 2,500
5 Cash Banked 800
7 Cash Sales 1,200
10 Cash Sales Banked 700
15 Paid salaries by cheque 900
21 Cash withdrawn from Bank 5,300
25 Paid Trade payables less 10% discount 2,050
27 Cash sales less 10% discount 6,100
28 Customers paid their account less 10%
discount 2,400
29 Cash purchases 900
30 Additional Capital introduced 1,000
31 Cash drawings 480
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UNIT 2 SECTION
OF ACCOUNTING 1 6
Unit 2, THE IMPREST
Section SYSTEM
6: The imprest system AND THE
and the pettyPETTY CASH
cash book BOOK
This is the last section that concludes this unit. In this unit we will be
treating the imprest system and the use of the petty cash book in recording
petty cash transactions. It is worth mentioning that although the petty cash
book also follows the double entry principle in recording transactions, its
ledger rulings (or columns) is quite different from the normal ledger rulings
(or columns).
By the end of this section you should be able to:

 outline the purpose of the petty cash book and the imprest system;
 write up the petty cash book using analysis columns;
 post from petty cash book to the ledger.
The Petty Cash Book and the Imprest System

The recording of transactions in the petty cash book operates on what is
known as the imprest system. At the start of each accounting period, the
petty cashier is supplied with a round sum of cash often called cash float or
accountable imprest. At the end of the period the petty cashier must
ascertain the total amount spent and he will be reimbursed out of the general
cash book, for the amount of the balance in hand to be restored to the
original starting figure.
The initial amount received as well as subsequent cash float received is

debited to the petty cash book in the general ledger and credited to the main
cash book. Any payment made out of the imprest must be supported by a
petty cash voucher, which shows the amount and the purpose of each
payment and the accounts against which the payments must be charged. All
monies paid out are entered on the credit side of the petty cash book and
extended in the analyses column, the totals of which are posted at suitable
periods at the debit of the appropriate nominal account in the general ledger.
Let us use the following illustration to explain the application of the imprest
system using the petty cash book.
Illustration
On Sept. 1, 2014 Amen & Co set up a petty cash fund with an imprest of
GH¢1,000. The petty cash transactions for the month of September 2014
were as follows:
Sept. 1 Voucher 1 Purchase of postage stamps GH¢21.50 and telephone
of GH¢50
Sept. 3 Voucher 2 Taxi fare GH¢120 and GH¢40 for typewriter repair
kits.
Sept. 4 Voucher 3 Payment to a carpenter on a minor repair on fixtures
GH¢15
Sept. 6 Voucher 4 For pencils, erasers and other office supplies GH¢100.
Sept. 8 Voucher 5 Payment for travelling expenses of John Arthur
GH¢10
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Unit 2, Section 6: The imprest system and the petty cash book OF ACCOUNTING 1
Sept 11 Voucher 6 GH¢25 for sending EMS and GH¢12 for buying
typewriter correcting fluid.
Sept 13 Voucher 7 GH¢12 for snack for visitors
Sept.16 Voucher 8 Photocopier repairs GH¢20
Sept.22 Voucher 9 Delivery of goods to customer GH¢60
Sept. 25 Voucher 10 Payment for coffee and other beverages GH¢98
Oct. 2 Voucher 11 Payment of postage GH¢200
Required: Record these petty cash transactions with columns for Postage,
Repairs, Transportation and Delivery, Snacks and Entertainment and Office
Stationery.
Solution to Illustration
Petty Cash Book
Debit Date Particulars L/F Credit Postag Repair Transport Snacks Office
Voucher
(Receipts) (Payments) e s & & Stationery

Delivery Entertain
No
.
GH¢ 2014 GH¢ GH¢ GH¢ GH¢ GH¢ GH¢
1,000 Sept 1 Cash CB1
1 Postage 1 GL1 21.50 21.50
1 Telephone 1 GL2 50 50
3 Taxi fair 2 GL3 120 120

3 Repairs 2 GL4 40 40
6 Office 4 GL5 100 100
Supplies
8 Trav. 5 GL6 10 10
Exps
11 Postage 6 GL1 25 25
11 Stationery 6 GL7 12 12
13 Snacks 7 GL8 12 12
22 Travel 9 GL6 60 60
25 Snacks 10 GL8 98 98
Totals 583.5 96.50 75 190 110 112
30 Bal. c/d 416.5
1,000 1,000
416.5 Oct 1 Bal. b/d
583.5 Oct 1 Cash
Oct 2 Postage 11 GL9 200
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OF ACCOUNTING 1 Unit 2, Section 6: The imprest system and the petty cash book
Review Questions
1. What is the imprest system?
2. What is the difference between the main cash book and the petty cash
book?
3. Helena Boafo operates an imprest system with analysed petty cash
book. There are columns for Stationery, Transport, Postage and Medical
Expenses. A float of GH¢200 is maintained by the petty cashier who is
re-imbursed as and when necessary. The following transactions were
recorded in the month of September, 2014.
GH¢
September 2 Balance on hand 200
6 Bought postage stamps 28
7 Paid medical expenses 48
12 Bought stationery 28.50
16 Paid transport expenses 68
20 Paid medical expenses 40.80
22 Paid for postage stamps 6.20
Paid transport expenses 18.80
24 Bought stationer)' 6.80
Paid transport expenses 32.60
28 Bought postage stamps 8.50
30 Paid medical expenses 26.50
You are required to enter the details above in a columnar petty cash book.
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MODERN ENGLISH ACCOUNTING FOR
UNIT
NON-CURRENT Structure
ASSETS AND DEPRECIATION
Welcome to unit 3. Remember that in unit 1 we learned that assets can be

broadly classified into current and non-current assets. Basically, current
assets are short term (i.e. used within one operating year) while non-current
assets are long-term (i.e. its usage travels beyond a year) in nature. In this
unit, we will be learning how to book or record transactions involving non-
current assets. The unit begins by identifying what a non-current asset
transaction involves, showing how to calculate and book depreciation and
concludes with how to record sale of non-current assets.
We hope you will find this unit interesting, just as you did for the other
units.
Now, you may read on……..
By the end of this unit you should be able to:

 distinguish between capital expenditure and revenue expenditure
 explain depreciation and the various causes of depreciation
 state and describe the various methods of depreciation
 calculate annual deprecation charge using the various methods
 make ledger entries for acquisition of non-current assets and its related
depreciation
 apply the procedure for recording the disposal of non-current assets
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PRINCIPLES
IN EARLY CHILDHOOD
Structure
EDUCATION
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UNIT 3 SECTION
OF ACCOUNTING 1 1
Unit 3, REVENUE ANDand
Section 1: Revenue CAPITAL EXPENDITURE
capital expenditure
Not all expenditures give rise to non-current assets. Expenditure incurred to

acquire non-current assets is referred to as capital expenditure. All other
costs and expenses are referred to as revenue expenditure. Some
expenditure expires in one accounting year (revenue expenditure) while
others result in the acquisition of non-current assets that are useful beyond a
financial year. It is pertinent for us to identify which expenditure gives rise
to non-current assets for which the principles in this unit apply. Thus, in this
section, we shall look at the differences between revenue and capital
expenditure in order to facilitate our understanding of how non-current
assets are accounted for.

 explain the meaning of revenue expenditure
 identify examples of revenue expenditure
 explain the meaning of capital expenditure
 identify examples of capital expenditure
 distinguish between capital expenditure and revenue expenditure
 explain why the distinction is important
The Nature of Revenue and Capital Expenditures

Revenue expenditure is the expenditure which is incurred not for increasing
the value of non-current assets, but for running the business on a day-to-day
basis. Revenue expenditures benefit only the current accounting period and
that are made in order to maintain the normal operating efficiency of the
business. Since revenue expenditure usually expires within a year, it is
written off in the income statement. It is matched against the revenue
generated in a period. Examples of revenue expenditure are costs of
cleaning, lubricants, replacements of minor parts (spark plugs in a vehicle),
repainting of a building, stapling machine and cost of replacing the damaged
part of machine installation.
Capital expenditures increase the values or earning capacity of long-term

assets. It is expenditure incurred for the acquisition of non-current assets.
Capital expenditure is accounted for by recording the value in the statement
of financial position. The portion of the capital expenditure which is used up
or which is expired is recorded in the income statement. Examples of capital
expenditure include expenditure relating to the initial acquisitions,
installation, additions and betterment of non-current assets, and extra-
ordinary repairs and maintenance expenditures. These expenditures increase
both the value and the useful life of a non-current asset.
Distinction between Capital and Revenue Expenditures

The benefits of revenue expenditures are used up in one accounting period
and are written off in to the income statement. On the other hand, with
respect to capital expenditures, it is only the part of the non-current assets
which is used up during the period in question, by way of depreciation,
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Unit 3, Section 1: Revenue and capital expenditure OF ACCOUNTING 1
which is written off to the income statement. The remaining value is carried
forward to the nest period, as shown on the statement of under fixed assets.
The distinction between capital and revenue expenditure is summarised in
Table 1.
Table 1: Distinction between Capital and Revenue Expenditures

Basis for Capital Expenditure Revenue Expenditure
Differentiating
Time Effects of Long-term: is useful Short-term; Normally
Transaction for more than one expires in one
accounting year. accounting year.
Ultimate Effect of Leads to the No asset is acquired or
Transaction acquisition of a additions made to any
non-current asset or asset. Leads to the
additions to such maintenance and
assets. repairs of assets.
Frequency of Limited frequency: Not Highly frequent: It is
Transaction a recurrent or regular recurrent and regular.
transaction. Has to be incurred on a
day-to-day basis.
Effect on Financial Leads to improvement Helps to maintain
Position in financial position of operational efficiency
the entity. of the business entity.
Treatment in Income It leads to the charging No related depreciation
Statement of depreciation in the is charged in the
income statement. So income statement. The
only a portion of the whole amount is
amount is written off written off in the year
annually. in which it is incurred,
per the matching
concept. Thus deferred
revenue expenditure
temporarily appears in
the financial position.
It is important to distinguish between revenue and capital expenditures. This

is necessary in order to obtain a true and fair view of the results of operation
for a given period, and portray a true and fair view of the state of affairs as
at the end of the period. In determining the income or loss for the period, all
expenses must be matched with the revenues recognised during the period.
If therefore, a revenue expenditure is treated as capital expenditure or vice
versa, the income or loss so determined for the period will not show the true
and fair result of operation for the period. Secondly, the values of non-
current assets shown in the statement of financial position will not portray
their fair values if revenue expenditures were treated as capital expenditures
or vice versa.
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OF ACCOUNTING 1 Unit 3, Section 1: Revenue and capital expenditure
Review Questions
1. Explain the following terms:
(a) Expenditure
(b) Revenue Expenditure
(c) Capital Expenditure
2. List two examples of:
(a) Revenue expenditure
(b) Capital expenditure
3. Distinguish between revenue and capital expenditures
4. Why is the distinction between revenue and capital expenditure
important?
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capital expenditure OF ACCOUNTING 1
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UNIT 3 SECTION
OF ACCOUNTING 1 2
Unit 3, DEPRECIATION:
Section 2: Depreciation:MEANING AND CAUSES
Meaning and causes
Hi students! Now you know which transactions either create or increase

non-current assets and transactions which do not. After non-current assets
have been acquired, they are used for the generation of income year on year.
Due usage, these non-current assets acquired would not have their value and
condition remaining the same as when they were acquired sometimes
because of wear and tear. Accounting principles allows you to record the
reduction in value or consumption of a part of the non-current assets
through depreciation accounting. In this section, we will go through the
meaning and causes depreciation.

 explain depreciation
 identify the various causes of depreciation
Meaning of Depreciation
The easiest way to think of depreciation is to think of a car. How often do
you hear people talk about how much the value of their car has depreciated?
So depreciation is concerned with the reduction in value of an asset. It refers
to “the measure of wearing out, consumption, other reduction in useful
economic life of a non-current asset, whether through use, effluxion of time
or obsolescence through technological change”.
The purchase of a non-current asset occurs in one year but the benefits
generated from its use normally arise over a number of years in the future.
This is referred to as its useful economic life. If the cost of non-current
assets were treated as an expense in the Income statement in the year of
purchase this would probably result in an excessive loss in that year, and
excessive profits in the year in which the benefits will arise. This gives a
misleading view of the profit and losses of each year and distorts
comparisons over time. Therefore, the cost of a current asset is not treated as
an expense in the year of purchase but rather carried forward and written off
to the Income statement over the useful economic life of the asset in the
form of depreciation. This is an application of the matching principle.
According to the matching principle, that part of the cost of an asset which
is ‘used up’ or ‘consumed’ in each year of the asset’s useful economic life
must be set against the benefits or revenue that it generates. That part of the
cost of a non- current asset which is ‘used up’ or ‘consumed’ during an
accounting period is referred to as depreciation. Thus depreciation may be
defined as the allocation of the cost of a non- current asset over its estimated
useful economic life.
Depreciation also refers to the measure of the wearing out, consumption or

other reduction in the useful economic life of a non-current asset arising
from use, effluxion of time or obsolescence through technological or market
changes. Obsolescence through technological change refers to where a new
model of the asset which is significantly more efficient or performs
additional functions comes onto the market. Obsolescence through market
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Unit 3, Section 2: Depreciation: Meaning and causes OF ACCOUNTING 1
changes occurs when there is a substantial reduction in demand for the

firm’s product because of, for example, technological advances in
competitors’ products. Both of these causes of obsolescence usually result in
a sudden relatively large decrease in value of the asset, particularly where it
cannot be used for any other purpose.
In another sense, depreciation can be defined as the permanent decrease in

value of a non-current asset during a given accounting period. Depreciation
can also be viewed as a provision for the replacement of non-current assets.
The annual charge for depreciation in the income statement represents a
setting aside of some of the income so that over the useful life of the asset
sufficient ‘funds’ are retained in the business to replace the asset. In this
sense, depreciation helps to reduce the amount of profits available for
distribution as dividends to shareholders. However, it must be emphasised
that no money is specifically set aside. Thus, when the time comes to
replace the asset, the money needed to do so will not automatically be
available. Furthermore, where depreciation is based on the historical cost of
the asset the amount of funds set aside will be insufficient to provide for any
increase in the replacement cost of the asset. Depreciation can therefore be
said to be also an application of the prudence concept in that it is a provision
for the loss in value of a non-current asset.
Causes of Depreciation
Some of the common causes of depreciation can be summed up as follows:
Wear and tear – This signifies loss of value arising from use. For example,
a motor vehicle may suffer from physical deterioration with passage of time.
A brand new car is usually in good condition than the same model of the car
which has been used for five years.
Obsolescence – This arises when an asset loses its usefulness, not because it
is worn out, but because it has been superseded by inventions and better
models. Example, computers are usually replaced for this reason.
Inadequacy – this is when the asset becomes useless because the firm has
grown or changed its requirements.
Depletion – If an asset is of a wasting nature such as a quarry, mining

activities reduces the amount of inventory of the stone quarry.
Time factor – If an asset is acquired for a limited period only, it ceases to be

of use to the business at the end of that time. Example, a lease on premises
for ten years will expire at the end of ten years unless another agreement is
entered into.
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PRINCIPLES
OF ACCOUNTING 1 Unit 3, Section 2: Depreciation: Meaning and causes
Review Questions
1. What is depreciation?
2. What is referred to as the depreciable amount of a non-current asset?
3. Mention four (4) Objectives of providing for depreciation.
4. What are the general causes of depreciation?
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Meaning and causes OF ACCOUNTING 1
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UNIT 3 SECTION
OF ACCOUNTING 1 3
Unit 3, METHODS OF of
Section 3: Methods DEPRECIATION
depreciation I I
We believe by now you are familiar with the meaning of depreciation and
can explain some of the major causes of depreciation. In this section, we
continue our discussion on depreciation by looking at the theoretical
description of the various methods of calculating depreciation.
By the end of this section you should be able:

 state and describe the various methods of depreciation.
Methods of Depreciation
A number of different methods have been developed for measuring
depreciation, each of which will give a different annual charge to the
Income statement. There is no one method of depreciation that is superior to
all others in all circumstances. The most appropriate method will depend on
the type of asset and the extent to which it is used in each period. There is a
range of acceptable depreciation methods. Management should select the
method regarded as most appropriate to the type of asset and its use in the
business so as to allocate depreciation as fairly as possible to the periods
expected to benefit from the asset's use.
The method of depreciation that is chosen is referred to as one of the

business entity's accounting policies, and should be applied consistently
each year. Whichever method is used to calculate depreciation, at least three
pieces of data relating to the asset in question are needed:
(1) the historical cost;
(2) the estimated useful economic life of the asset to the business entity;
and
(3) the estimated residual value of the asset at the end of its useful
economic life.
The historical cost is the original cost at which the asset was acquired. The
useful life of the asset refers to the period which the business regards as
being the most economical length of time to keep the particular asset. This
will depend on a number of factors, such as the pattern of repair costs, etc.
The useful life of an asset may well be considerably shorter than its total
life. Residual value refers to the estimated proceeds of sale that can be
realised at the end of the asset's useful life. It should be noted that both the
useful life and the residual value have to be estimated when the asset is
purchased.
There are a number of methods which are used in determining the annual
depreciation charge. Some of the methods are:
a) Straight line
b) Reducing balance
c) Sum of the year’s digits
d) Production units
e) Service hour
f) Revaluation
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Unit 3, Section 3: Methods of depreciation I OF ACCOUNTING 1
g) Sinking fund
h) Annuity
Let us explain these methods in turns.
Straight Line/Fixed Installment Method

The straight line method, also known as fixed installment method charges
an equal amount of depreciation in each year of the asset’s life. It assumes
that the non-current asset is equally beneficial during each year of its useful
life, therefore the same amount of depreciation is charged as an expense for
each year.
Diminishing/Reducing Balance Method

This method of depreciation assumes that the efficiency of the non-current
asset decreases year by year so the annual depreciation charged is decreased
accordingly. The depreciation written off in each year is a fixed percentage
not of the cost but of the book value (written down value) at the beginning
of the year.
Sum of the Year’s Digits Method

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

units of output of the non-current asset.
Service Hour Method

hours of service of the non-current asset.
Revaluation Method
Here the asset is actually revalued at the end of each financial year and the
difference between the opening and closing valuations is written off to the
income statement, through the deprecation account. This method is suitable
for loose tools, patents and copyrights; but it is not suitable for plant and
machinery.
Annuity Method
Under this method, the amount expended on the asset is regarded as earning
interest at a definite rate per cent. This interest is debited annually to the
asset account and credited to the Income statement.
Sinking Fund Method

Under this method, an amount equal to the annual depreciation expense is
invested outside the entity, and this with compound interest provides
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sufficient cash at the end of the asset’s life to allow for its replacement. The
amount of depreciation to be written off as an expense in each period is
determined using one of the methods described earlier.
Review Questions
1. The methods of depreciating non-current assets can be classified into
two (2) groups, name them. And in each case, give examples.
2. When will it be appropriate to apply the activity-based methods of
depreciation instead of the time-based methods?
3. The reducing balance method is also referred to as the
….................................
4. Mention Two (2) merits of the reducing balance method over the fixed
instalment method.
5. Accounting for Depreciating is aimed at providing funds for the
placement of non-current assets. True or False? Explain.
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UNIT 3 SECTION
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Unit 3, METHODS OF of
Section 4: Methods DEPRECIATION
depreciation II II
We hope you will be able to describe some of the methods of calculating

depreciation like straight-line method, reducing balance method and sum of
the digits method. The two most common methods of depreciation are the
straight line and reducing balance methods. In this section we shall look at
how to actually calculate depreciation charges using the common methods
of charging depreciation.

 calculate annual deprecation charge using the various methods.
Straight Line/Fixed Installment Method

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

Estimated useful life in years
However, in practice, and in examination questions, the rate of depreciation

is usually expressed as a percentage. The annual amount of depreciation is
then calculated by applying the percentage to the cost of the asset. This
method gives the same charge for depreciation in each year of the asset's
useful life. It is therefore most appropriate for assets which are depleted as a
result of the passage of time (e.g. buildings, leases, pipelines, storage tanks,
patents and trademarks). The method may also be suitable where the
utilisation of an asset is the same in each year.
The main advantages of the straight line method are that it is easy to
understand and the computations are simple. The main disadvantage is that
it may not give an accurate measure of the loss in value or reduction in the
useful life of an asset.
Illustration 1: The original cost of a motor van bought on 1 Jan. 2014 is

22,000. The estimated salvage value is GH¢6,000 and the estimated useful
life is four years.
Calculation:
Annual Depreciation = GH¢22,000 – 6,000 = GH¢4,000
4
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The year by year position of this motor van is shown as follows:
Year Original Depreciation Accumulated Net Book

Cost for the year Depreciation Value
GH¢ GH¢ GH¢ GH¢

1 22,000 4,000 4,000 18,000
2 22,000 4,000 8,000 14,000
3 22,000 4,000 12,000 10,000
4 22,000 4,000 16,000 6,000
The net book value or written down value (WDV), is the difference between
the original cost and the accumulated depreciation at any point in time.
Diminishing/Reducing Balance Method

This method of depreciation assumes that the efficiency of the non-current
asset decreases year by year so the annual depreciation charged is decreased
accordingly. The depreciation written off in each year is a fixed percentage
not of the cost but of the book value (written down value) at the beginning
of the year. The percentage rate of deprecation to be charged is calculated
by using the formula:
Rate of Depreciation =
Where:
n = the estimated useful life
s = the estimates salvage/residual value
c = the original cost of the asset
If we apply the formula to the motor van that cost GH¢22,000 and that has
estimated economic life of four years with salvage value GH¢6,000, the
annual rate of depreciation would be 28%.
Note that under this method, the annual depreciation charged to the Income
statement is computed as follows:
Annual depreciation charge = Rate of depreciation x Written down value

of asset
The written down value (WDV) of the asset refers to its cost less the
accumulated depreciation of the asset since the date of acquisition. This
method thus gives a decreasing annual charge for depreciation over the
useful life of the asset. It is therefore most appropriate for non-current assets
that deteriorate primarily as a result of usage where this is greater in the
earlier years of their life (e.g. plant and machinery, motor vehicles, furniture
and fittings, office equipment). However, this method may also be suitable
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even if the utilization is the same in each year. The logic behind this
apparently contradictory assertion involves taking into consideration the
pattern of repair costs. These will be low in the earlier years of the asset's
life and high in later years. Thus the decreasing annual amount of
depreciation combined with the increasing repair costs will give a relatively
constant combined annual charge in each year of the asset's useful life
which is said to reflect the constant annual usage.
The reducing balance method is also said to be a more realistic measure of

the reduction in the market value of non-current assets, since this is likely to
be greater in the earlier years of the asset's life than later years. However, it
is highly questionable whether the written down value of a non-current asset
is intended to be a reflection of its market value.
The main criticisms of this method relate to its complexity, and there is an
arbitrary assumption about the rate of decline built into the formula.
Illustration 2:
Using the question on the motor van and applying the rate of 28%, the year
by year position will be as follows:
Solution to illustration 2
Year Original Depreciation Accumulated Book
Cost for the year Depreciation Value
GH¢ GH¢ GH¢ GH¢

1 22,000 28% x 22,000 = 6,160 6,160 15,840
2 22,000 28% x 15,840 = 4,435 10,595 11,405
3 22,000 28% x 11,405 = 3,193 13,788 8,212
4 22,000 28% x 8,212 = 2,299 16,087 5,913
Sum of the Year’s Digits Method

proportion of its useful life remaining at the commencement of each year
and the cost of the asset less the salvage value.
Using the earlier example of the motor van, the expected life is four years;
therefore the sum of the year’s digit year is 10 which is computed as
follows.
Year Digit
1 1
2 2
3 3
4 4
Sum of the digits = 10
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Review Questions
1. Compare and contrast the straight line method of depreciation with the
sum of the years’ digits method under the following headings:
(a) Underlying assumption
(b) Nature of annual depreciation charge
(c) Merits
(d) Demerits
2. A machine cost GH¢12,000 and has a useful life of 4 years and an

expected disposal value of GH¢400. Determine the annual deprecation
charges for each of the four years using:
(a) Straight line method of depreciation
(b) Reducing balance method of depreciation
(c) Sum of the years’ digits’ method of depreciation
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UNIT 3 SECTION
OF ACCOUNTING 1 5
Unit 3, ACCOUNTING FOR
Section 5: Accounting DEPRECIATION
for depreciation
After learning how to calculate the various methods of depreciation from

section 4, our focus in this section is to demonstrate how to book the
calculated depreciation. So we will be introducing you to the non-current
account, provision for depreciation account and also how to capture
depreciation in the income statement and statement of financial position.

 make ledger entries for acquisition of non-current assets and its related
depreciation.
Accounting for Depreciation of Tangible Non-Current Assets

Accounting for depreciation involves the systematic allocation of the
depreciable amount of an asset over its estimated useful life. As explained
above this is important if we are to calculate the true profit figure for the
year. The matching concept requires the depreciation expense to be charged
to the accounting periods which benefit from the use of the asset. That is, if
a motor van is expected to last for three years then the depreciation should
be spread over the three years, as each year will benefit from its use and
should therefore share in the cost until the end of year 3 when the van is
scrapped or sold.
In accounting for depreciation of non-current assets, an account is opened

for each type of non-current asset. For example, motor vehicles account or
equipment account. The asset account is debited with the cost of the relevant
non-current asset. In addition, corresponding accounts are required to record
depreciation, for example, a provision for depreciation of motor vehicle
account. The annual charge for depreciation is credited to provision for
depreciation account and debited to the Income statement.
In the preparation of the final accounts, the accounting entries in respect of

the annual depreciation charge are made as follows:
Debit Depreciation expense account
Credit Provision for depreciation account
The depreciation expense account is transferred to the Income statement,

thus:
Debit Income statement
Credit Depreciation expense account
The effect is to accumulate the provision while making a charge in the

Income statement each year.
Illustration 1:
Good Luck Enterprise uses the straight line method of depreciation. It
acquired a machine for GH¢22,000 on Jan 1, 2014. The salvage value is
estimated at GH¢2,000 and the useful life is four years. Show the relevant
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Unit 3, Section 5: Accounting for depreciation OF ACCOUNTING 1
ledger entries relating to the purchase and the provision for depreciation in
each year as well as the relevant statement of financial position extracts.
Solution to Illustration 1:
First of all, calculate the annual depreciation charge as
The ledger entries will be as follows:
Machinery Account
2014 GH¢ GH¢
Jan. 1 Bank 22,000
Provision for Depreciation of Machinery Account

2014 GH¢ 2014 GH¢
Dec 31 Balance c/d 5,000 Dec 31 Profit and Loss 5,000
2015 2015
Dec 31 Balance c/d 10,000 Jan 1 Balance b/d 5,000
. Dec 31 Profit and loss 5,000
10,000 10,000
2016 2016
Dec 31 balance c/d 15,000 Jan 1 Balance b/d 10,000
. Dec 31 Profit and loss 5,000
15,000 15,000
2017 2017
Dec 31 balance c/d 20,000 Jan 1 Balance b/d 15,000
. Dec. 31 profit and loss 5,000
20,000 20,000
2018
Jan 1 balance b/d 20,000
The statement of financial position (extracts) in respect of the machinery

and provision for depreciation are as follows:
Statement of financial position (Extract)

Cost Accumulated Depreciation Book Value
GH¢ GH¢ GH¢
As at 31 Dec 2014
Non-current assets machinery 22,000 5,000 17,000
As at 31 Dec 2015
As at 31 Dec 2016
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As at 31 Dec 2017
Review Questions
1. State the journal entries in respect of annual depreciation charges to
the income statement.
2. Glory Ltd commenced business on 1 January 2011 with two vehicles

— Vehicle A and Vehicle B. Vehicle A cost GH¢ 1,000 and Vehicle
B cost GH¢ 1,600. Both vehicles were insured with BIC Insurance
Company. On 3 March 2011, Vehicle A was written off in an accident
and Glory received GH¢750 from the Insurance Company. This
vehicle was replaced on 10 March 2011 by a new vehicle – Vehicle C
which cost GH¢2,000.
A full year's depreciation is charged in the year of acquisition and no

depreciation is charged in the year of disposal.
You are required to:

(a) Prepare the motor vehicle account, the depreciation account and the
provision for depreciation account for all the relevant years, assuming
that:
(i) the vehicles are depreciated at 20% on the straight line method, and
(ii) the vehicles are depreciated at 25% on the reducing balance
method.
(b) Show the appropriate extracts from Glory's statement of financial
position and income statement for the three years to 31/12/2011,
31/12/2012 and 31/12/2013 assuming that:
(i) the vehicles are depreciated at 20% on the straight line method, and
(ii) the vehicles are depreciated at 25% on the reducing balance
method.
(c) Comment briefly on the advantages and disadvantages of using the
straight line and reducing balance methods of depreciation.
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UNIT 3 SECTION
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Unit 3, DISPOSAL OF of
Section 6: Disposal NON-CURRENT
Non-Current assets ASSETS
In this section, we will conclude our discussions on accounting for non-

current assets by looking at the various entries needed when a non-current
asset is being de-recognised (excluded) from our books either because it has
been sold, fully depreciated, destroyed or donated to another entity.
Specifically, we shall be looking at accounting entries relating to disposal of
non-current asset.

 apply the procedure for recording the disposal of non-current assets.
Disposal of Non-Current Assets

It is common in business for non-current assets such as motor vehicle to be
disposed off (sold) after its estimated useful life or even before the end of its
estimated useful life. Normally, when an asset is sold at the end of (or
during) it’s useful life, the proceeds of sale differ from the estimated
residual value (or written down book value if sold during its useful life).
Where the proceeds are less than the written down value, this is referred to
as a loss on sale. Where the proceeds are greater than the written down
value this is referred to as a profit on sale.
The disposal of non-current assets and the resulting profit or loss on sale
must be recorded in the ledger. The procedure is as follows:
1. Transfer the cost of the non-current asset disposed from the non-
current asset account to the non-current asset disposal account. Debit
non-current asset disposal account, Credit non-current asset account.
The balance remaining on the non-current asset account represents the
cost price of the assets retained.
2. Credit the proceeds of sale to the non-current asset disposal account,
Debit the cash account.
3. Transfer the aggregate depreciation up to the date of disposal from the
provision for depreciation account to the non-current asset disposal
account. Debit provision for depreciation account and credit non-
current asset disposal account. The balance on the Provision for
Depreciation Account represents the accumulated depreciation on
these retained assets.
4. From the ledger entries in respect above, the disposal account would
have been debited with the cost of the asset and credited with the
accumulated depreciation. The amount received from the disposal of
the asset is credited to the disposal account. The balance remaining on
the disposal account represents either an under-provision for
depreciation (that is, a Loss on Disposal) or an over-provision for
depreciation (that is, a Profit on disposal). This is transferred to the
Income statement. A loss on sale should be credited to the non-current
asset disposal account and debited to the Income statement. A profit
on sale should be debited to the non-current asset disposal account and
credited to the Income statement.
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Unit 3, Section 6: Disposal of Non-Current assets OF ACCOUNTING 1
Illustration 1
Let us assume that on January 1, 2011 a business bought two motor vehicles
for GH¢30,000 and GH¢40,000. It was decided that depreciation on both
cars should be 25% per annum on cost price using the straight-line method.
On January 1, 2012 the vehicle purchased for GH¢ 30,000 was sold for GH¢
20,000.
The relevant accounts will appear as follows:
Motor Vehicles Account

2011 GH¢ 2011 GH¢
Jan. 1 Balance b/f 70,000 Jan. 1 Disposals 30,000
. Dec 31 Bal. c/d 40,000
70,000 70,000
2013
Jan 1 Balance b/d 40,000
Provision for Depreciation of Motor Vehicle Account

2011 GH¢ 2011 GH¢
Dec 31 Bal. c/d 17,500 Dec 31 Profit and Loss 17,500
2012 2012
Jan 1 Disposals 7,500 Jan 1 Bal. b/d 17,500
Dec. 31 Bal. c/d 20,000 Dec 31 Profit and Loss 10,000
45000 45000
2013
Jan 1 Bal. b/d 20,000
Disposal of Motor Vehicle Account

2012 GH¢ 2012 GH¢
Jan 1 Motor Vehicle 30,000 Jan 1 Prov. for Dep. 7,500
Jan 1 Bank 20,000
. Dec 31 P&L Account (Loss) 2,500
30,000 30,000
Depreciation in Years of Purchase and Disposal (Partial Year

Depreciation)
It is not likely that all purchases and disposals of non-current assets will take
place on the first day of each accounting period. New assets are acquired
and existing assets are sold at various intervals during the year, so it is
difficult to know what depreciation to charge in the year of purchase and
sale. The problem is usually solved in one of the following ways:
(a) Depreciation is calculated on the basis of one month’s
ownership, that is, proportionate basis.
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(b) The dates of purchase and disposal are ignored. In the case of a
purchase, a full year’s depreciation is provided regardless of the
month of purchase. In the case of a sale no depreciation is
charged in the year of disposal.
Review Questions
1. In what ways can a non-current asset be disposed?
2. What do you understand by the term ‘trade-in disposal’?
3. Believe in Him Enterprise has the following trucks as at 01/04/2006
Truck Number Date Acquired Cost ERV EUL

GH¢ GH¢ Years
GT 1245A 01/10/03 42,500 12,500 5
GT 3467B 01/04/04 60,000 10,000 8
(Note: ERV=Estimated Residual Value, EUL=Estimated Useful Life)
The company’s policy is to provide, at the end of each financial year, a

charge for depreciation using the straight line method applied on a month
by month basis.
During the financial year ended 31/03/2007, the following occurred:

i) On 30th June, GT 1245A was traded in and replaced by GE 1478T.
The trade-in allowance was GH¢25,000. GE 1478T cost GH¢75,000
and the balance due (after deducting the trade-in allowance) was
paid partly in cash and partly by a loan of GH¢30,000 from Portbay
Financial Services. GE 1478T is estimated to have a residual value
of GH¢20,000 after an estimated economic life of 5 years.
ii) The estimated remaining economic life of GT3467B was reduced
from 6 years to 4 years with no change in the estimated residual
value.
Required:
a) Journal entries to record the above transactions which occurred during
the financial year ended 31/03/2007;
b) Journal entry to record depreciation on Trucks for the year ended
31/03/2007;
c) Trucks Account and Provision for Depreciation Account for the year
ended 31/03/2007.
Show the necessary calculations clearly.
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MODERN ENGLISH FINANCIAL STATEMENTS
UNIT
Unit 1 Introduction: Structure
OF SOLE PROPRIETORSHIP BUSINESS
Welcome, dear student! If you would recall, in Section 5 of unit 1 we

introduced you to the various components of a set of financial statements.
These included statement of profit and loss, statement of financial position
and cash flow statement. In this unit, we shall be looking at how to prepare
basic financial statements for a sole proprietorship form of business
(a business owned by an individual) by making use of an extracted trial
balance. We hope you have not forgotten how to extract a trial balance.

 determine periodic profits using the two approaches to income
determination;
 prepare the trading account from a trial balance;
 prepare the income statement from trial balance;
 prepare a statement of financial position;
 state the uses of cash flow statements;
 state and explain the components of the cash flow statement and;
 prepare the cash flow statement using the indirect method only.
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IN EARLY CHILDHOOD
Structure
EDUCATION
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PRINCIPLES Unit 4, STATEMENT OF PROFIT
Section 1: Statement of profit or loss and other comprehensive
UNIT 4 SECTION
OF ACCOUNTING 1 1 Income I
OR LOSS AND OTHER COMPREHENSIVE INCOME I
We begin our discussion with the statement of profit and loss and other
comprehensive income. Recall that in unit 1 we learned that this is the
statement that enables us to know the performance of the entity. It helps us
to determine whether the entity is operating at a profit or loss by either
comparing the income and expense made for a period or the opening and
closing capitals for the period. In this section our discussion will be
concentrated on the two main approaches to income determination.
By the end of this section you must be able to:

 determine periodic profits using the two approaches to income
determination
Approaches to Income Determination

The final accounts of a sole proprietor comprise the Statement of profit or
loss, and the statement of financial position. As mentioned earlier, the
Statement of profit or loss which is also referred to as the income statement,
is prepared to determine the net profit or loss of the business entity over a
period of time.
Since the objective of preparing an income statement is to determine the net

profit or loss, it is important to note that there can be two ways or
approaches to determining the net profit and loss. In other words, net profit
or loss, which is the result of operations of an entity for a given period of
time, can be measured by two main approaches.
These are:
1. Asset and Liabilities approach
2. Revenue and Expenses approach
Assets and Liabilities Approach

This approach uses the change in net assets from one period to another as a
measure of net profit or loss. Net asset is Assets less liabilities. Net assets
are also referred to as Capital. Therefore, to determine income or loss
deduct the net assets or capital at the beginning of the period from the net
assets at the end, then adjust for any additional capital introduced and
distributions or drawings made in the period.
In other words, the difference between the two capitals, assuming no

additions to capital or no withdrawals from capital can be explained as the
profit or loss for the period.
Note that, subject to adjustments for additional capital and drawings, net
income arises if the closing capital is more than the opening capital.
Similarly, net loss arises if the closing capital is less than the opening
capital. The assets and liabilities approach is also referred to as the capital
maintenance approach, the net worth approach or the Statement of financial
position approach.
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Income I OF ACCOUNTING 1
Illustration 1
The following are the assets and liabilities of Glory Enterprise, a trading
business.
Assets and liabilities:

As at 1st January, 2014 As at 31st December, 2014
GH¢ GH¢
Premises 5,200 4,680
Vehicle 3,000 4,600
Inventory 1,320 1,260
Trade receivables 3,560 2,520
Bank - 1,420
Trade payables 2,400 1,680
Expenses owing 1,280 -
Loan - 2,000
Additional information:
During the year 2014, there were no additions to, or drawings from the
owner’s equity (capital).
Required: Using the assets-liabilities approach, what is the net profit or loss
for the period?
Owner’s equity (capital) as at Jan. 1, 2014:

Assets: GH¢ GH¢
Premises 5,200
Vehicle 3,000
Inventory 1,320
13,080
Less Liabilities:
Expenses Owing 1,280
3,680
Capital as at Jan 1, 2014 9,400
Owner’s equity (capital) as at Dec 31, 2014:

GH¢ GH¢
Assets:
Premises 4,680
Vehicles 4,600
Inventory 1,260
Bank 1,420
14,480
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OF ACCOUNTING 1 Income I
Less Liabilities:
Loan 2,000
3,680
Capital as at Dec 31, 2014 10,800
Statement of Profit or Loss for the period ended 31 December, 2014.

GH¢
Capital as at Dec 31, 2014 (Closing Capital) 10,800
Less:
Capital as at Jan 1, 2014 (Opening Capital) 9,400
Net Income (Profit) for the period 1,400
It is obvious from the above illustration that the assets and liabilities
approach to income determination is quite simple and straightforward.
However, the approach does not provide detailed information about how the
net income was generated. This makes it difficult for further analysis to be
made.
Revenues and Expenses Approach

With this approach, the net income or loss is the difference between the sum
of revenues and gains on one hand and the sum of expenses and losses on
the other hand. It measures the basic income-related transactions which
have occurred during a period and summarises them in an income statement.
It is also referred to as the transaction approach.
Net Income or Loss = (Revenues + Gains) - (Expenses + Losses).
This approach provides sufficient details to enable effective decision

making. It uses the Statement of profit or loss to determine net profit or
loss. It should be noted that for a sole trader, the final account will comprise
the Statement of profit or loss otherwise known as the income statement and
the statement of financial position.
The Statement of Profit or Loss

The statement of profit or loss is prepared to determine how well the
business is doing in terms of making profit or loss. This is very important
because the main purpose of every business is to operate to make profit. It is
made up of two parts. These are Trading Account and Income statement.
The Trading Account

The trading account is the first part of the statement of profit or loss. It is
prepared to ascertain the gross profit or loss of trading for a period. Gross
profit is the difference between the value of sales and the cost of sales.
Cost of sales is found by the following:
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Income I OF ACCOUNTING 1
Cost of sales = Opening inventory + cost of purchases – closing

inventory
Hence, the gross profit is determined as Gross Profit = Sales – Cost
of Sales.
The Income statement

The Income statement is prepared to determine the net profit or net loss for a
period. It normally follows the trading account. The net profit is determined
by deducting operating expenses from total income of a business for a
period. We can express the net profit as follows: Net profit = Gross profit +
Other income – Operating expenses.
Other income may include discount received, rent received, commissions

received, profit on sale of non-current asset, and decrease in provision for
doubtful debts. Operating expenses also include electricity, rent, salaries and
wages, interest on loan, and stationery expenses.
Review Questions
1. State the two main approaches to income determination.
2. What is the main purpose of preparing the trading account?
3. Awura Ama has been in business for some years but has never kept
records of her takings or expenditure. She has now received an estimated
assessment for income tax from the Internal Revenue Service and
wishes to check the business profit shown in her assessment. She
provides the following information as at 31 August, 2012 and 31
August, 2013.
31 August, 2012 31 August 2013
GH¢ GH¢
Equipment 20,000 24,000
Delivery van 15,000 26,000
Inventory 14,800 15,600
Payables 3,750 4,650
Rent prepaid 850 940
Receivables 1,680 1,720
Bank 250 340
Electricity owing 860 740
Bank Loan 2,000 1,500
Awura Ama has withdrawn GH¢100 per week from the business, and
during the year introduced additional capital of GH¢6,940.
We will now ascertain Awura Ama’s profit or loss for the year ended
31 August 2013 by preparing the statements of affairs as at 31 August
2012 and 31 August 2013 to determine the opening and closing capital
respectively. Then using the opening and closing capitals and
considering the drawings and capital introduced we will compute the
profit or loss for the year.
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PRINCIPLES Unit 4, STATEMENT OF PROFIT
Section 2: Statement of profit or loss and other comprehensive
UNIT 4 SECTION
OF ACCOUNTING 1 2 Income II
OR LOSS AND OTHER COMPREHENSIVE INCOME II
Hello! We continue our discussions on the preparation of statement of profit

and loss and other comprehensive income by focusing on the preparation of
trading account and income statement.
Enjoy your reading

 prepare the trading account from a trial balance;
 prepare the income statement from trial balance.
The statement of profit or loss can be presented in two different formats.

These are the horizontal and the vertical formats. The modern trend is that
the vertical presentation is more popular and we are going to use that.
Let us look at the format of presentation using the vertical format.
ABC Enterprise
Statement of Profit or Loss for the year ended 30 June 2013
Sales xxx
Less sales returns (returns inwards) (xxx)
Net sales xxx
Less: Cost of sales
Opening inventory xxx
Add: Purchases xxx
Add: carriage inwards xxx
xxx
Less: returns outwards (xxx)
Net Purchases xxx
Cost of goods available for sale xxx
Less: Closing inventory (xxx)
Cost of goods sold xxx
Add: Direct expenses (e.g. warehousing exps, wages) xxx
Cost of sales xxx
Gross Profit xxx
Add other income:
Rent received and receivable xxx
Discount received and receivable xxx
Interest received and receivable xxx
Dividend received and receivable xxx
Commission received and receivable xxx
Bad debt recovered xxx
Decrease in provision for doubtful debts xxx
Total Gross Income xxx
Less: Expenses:
General and Administrative Expenses:
Salaries xxx
Rent and Rates xxx
158 UEW/IEDE
Income II OF ACCOUNTING 1
Insurance and Telephone xxx

General office expenses xxx
Repairs to premises xxx
Accounting and audit xxx
Depreciation xxx
xxx
Selling and Distribution Expenses:
Bad debts xxx
Increase in provision for doubtful debts xxx
Motor vehicle running expenses xxx
Advertising expenses xxx
Sales and distribution of staff salaries xxx
Carriage outwards xxx
xxx
Financial Charges:
Interest on debenture xxx
Interest on loans xxx
Interest on overdraft xxx
Discount allowed xxx
Bank charges xxx
xxx
Total Expenses xxx
Net profit/Net Loss xxx
Illustration 1
The following balances were extracted from the books of Kwabena Dwomo
Enterprise for the period to 30 June, 2014.
GH¢
Sales 64,000
Purchases 25,000
Inventory at 30 June, 2013 3,000
Inventory at 30 June, 2014 4,500
Motor van 25,000
Electricity 2,000
Insurance 1,500
Salaries 6,000
Rent & Rates 500
Drawings 3,500
Required:
Select the information that is relevant and prepare a trading and Income
statement for the period of 30 June, 2014.
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OF ACCOUNTING 1 Income II
Kwabena Dwomo Enterprise
Statement of profit or loss for the period to 30 June, 2014
GH¢ GH¢
Sales 64,000
Less: Cost of Sales:
Opening inventory 3,000
Add: Purchases 25,000
28,000
Less: Closing inventory 4,500
Cost of sales 23,500
Gross Profit 40,500
Less: Operating Expenses
Electricity 2,000
Insurance 1,500
Salaries 6,000
Rent & Rates 500 10,000
Net Profit 30,500
Illustration 2
The following balances relate to Kofi Kwakye and Sons for the period to 30
June, 2012.
GH¢
Purchases 25,500
Sales 48,500
Wages and Salaries 13,800
Inventory (at 1/7/11) 8,500
Inventory (at 30/6/12) 9,400
Carriage Inwards 1,500
Returns inwards 550
Returns outwards 600
Motor expenses 1,020
Repairs and maintenance 650
Electricity 1,800
Postages 700
Stationery 200
Rent & Rates 2,500
Interest Received 250
Discount Received 1,350
Discount Allowed 1,050
160 UEW/IEDE
Income II OF ACCOUNTING 1
Kofi Kwakye & Sons

Statement of profit or loss for the period to 30 June, 2012.
GH¢ GH¢ GH¢
Sales 48,500
Less: Returns Inwards 550
47,950
Less: Cost of Sales

Opening Inventory 8,500
Add: Carriage Inwards 1,500
27,000
Less: Returns Outwards 600
Net Purchases 26,400
C.O.G.A.F.S. 34,900
Gross Profit 22,450
Interest Received 250
24,050
Wages & Salaries 13,800
Electricity 1,800
Postages 700
Stationery 200
Rent & Rates 2,500
Motor Expenses 1,020
Repairs 650
Discount Allowed 1,050
21,720
Net Profit 2,330
Review Question
Goodnews Enterprise is a retail organisation. On 30 April 2012, the
following trial balance was extracted from the ledger.
GH¢ GH¢
Land and building 35,000
Plant and machinery 15,000
Motor vans 45,000
Furniture and fittings 5,000
Sundry Trade payables 16,000
Cash in hand 1,200
Cash at bank 18,000
Inventory 1st May 2011 900
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OF ACCOUNTING 1 Income II
Rent and rates 600

Lighting and heating 400
Insurance 500
Sales 80,000
Carriage inwards 200
Carriage outwards 450
Purchases 45,000
Returns 700 400
Discounts 700 800
Bad debts 300
Sundry trade receivables 25,000
Repairs (building) 1,500
Salaries 10,000
Drawings 2,000
Capital 110,250
207,450 207,450
You are given the following additional information.

(a) Inventory-in-trade at 30 April 2012 was GH¢12,500.
(b) Insurance prepaid was GH¢100.
(c) Lighting and heating bills outstanding were GH¢200.
(d) Unpaid bills due for billing repairs were GH¢250.
(e) Goods valued at GH¢800 (cost price) were withdrawn by the
proprietor for personal use and this had not been recorded in the
books as at the close of the period.
(f) Provisions for bad debts at 5% on sundry trade receivables
should be made.
(g) Depreciation should be provided for at cost price on the
following assets:
(i) Land and building 10%
(ii) Motor vans 20%
(iii)Plant and machinery 20%
(iv) Furniture and fittings 20%
You are required to prepare the Statement of profit or loss for the
year ended 30 April, 2012.
162 UEW/IEDE
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Income
for II
your notes OF ACCOUNTING 1
UEW/IEDE
163
PRINCIPLES
UNIT 4 SECTION
OF ACCOUNTING 1 3
Unit 4, STATEMENT OFofFINANCIAL
Section 3: Statement POSITION
financial position I I
Welcome to section 3. We believe you are now familiar with how to

determine the performance of sole proprietorship form of business. In
sections 3 and 4 we will shift our attention to the determination of the
financial wealth of sole proprietorship through the preparation of statement
of financial position. Particularly, in this section, we will limit our
discussion to the meaning of statement of financial position and its
elements. You may now read on….

 explain the statement of financial position;
 identify the elements of the statement of financial position.
The Statement of Financial Position

The statement of financial position is a statement which is prepared to show
the assets, liabilities and capital of a business at a particular point in time. In
other words, the statement of financial position shows at a glance the
financial position of a business at a particular date. The components of the
statement of financial position are assets, liabilities and capital.
Assets are the resources owned by a business and are used in earning the
income of the business. In the Statement of financial position, we can
classify assets into current and non-current assets. Non-current assets are
assets which are purchased for use in the business for the production of the
business income. They have long life in the business and are not meant for
resale. Examples include land and buildings, plant and machinery, motor
vans, fixtures & fittings. Expenditure incurred in the acquisition or
improvement of non-current assets is called capital expenditure. Current
Assets, on the other hand, are assets which can easily be converted to cash.
They have short life span in the business, usually less than one year after the
last accounting date. Examples are inventory, Trade receivables, cash at
bank and cash in hand. The expenditure incurred in the acquisition of
current assets is called revenue expenditure. Revenue expenditure may in
the broad senses include all expenditure incurred in running the business on
a day to day basis.
Liabilities are the debts or obligations owed by the business to others

outside the business. They are also classified into current and long-term
liabilities. Long-term liabilities are liabilities which are due to be paid in
more than one year. They include bank loan, debentures and other long-term
loans. Current liabilities are debts or obligations which are due to be paid
within one year. They include Trade payables, bank overdrafts, and
short-term loans.
Capital refers to the owner’s equity in the business. It represents the interest
or the amount of investment made by the owner(s) in the business. Capital
could be in the form of cash or some other form of assets.
164 UEW/IEDE
PRINCIPLES
Unit 4, Section 3: Statement of financial position I OF ACCOUNTING 1
Review Questions
1. What is a statement of financial position?
2. Identify the elements of the statement of financial position.
UEW/IEDE
165
PRINCIPLES
UNIT 4 SECTION
OF ACCOUNTING 1 4
Unit 4, STATEMENT OFofFINANCIAL
Section 4: Statement POSITION
financial position II II
We continue our discussion on statement of financial position by

concentrating on its format and how actual preparation is carried out. You
should not forget that the preparation of the statement of financial position
makes use of the accounting equation. Kindly read on…..

 prepare a statement of financial position.
The statement of financial position therefore presents a situation where the

assets equal the liabilities and capital; mathematically, depicted as follows:
Assets = Liabilities + Capital.
The following is a vertical presentation of the statement of financial position

format.
ABC Enterprise
Non-current assets: Cost Acc. Depn Net Book Value
Land and Building xxx xxx xxx
Plant and Machinery xxx xxx xxx
Equipment xxx xxx xxx
Delivery Vans xxx xxx xxx
Furniture and Fittings xxx xxx xxx
xxx xxx xxx
Goodwill xxx
Total Net Non-current assets xxx
Current Assets:
Inventory xxx
Trade receivables xxx
Less provision for doubtful debts xxx
xxx
Prepaid Expense xxx
Accrued Income xxx
Bills receivable xxx
Treasury bills xxx
Cash and bank xxx
xxx
Less: Current Liabilities

Trade payables xxx
Accrued Expense xxx
Prepaid Income xxx
Bills payable xxx
Bank overdraft xxx
Short term loan xxx
xxx
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PRINCIPLES
Unit 4, Section 4: Statement of financial position II OF ACCOUNTING 1
Working Capital/Net Current Assets xxx

xxx
Less: Long-term Liabilities
Long term loan xxx
Capital Employed xxx
Financed By:
Capital at beginning of year xxx
Add: Net Profit xxx
xxx
Less: Drawings xxx
Capital at the end of year xxx
Let us use the following illustrations to demonstrate the how the statement
of financial position is prepared.
Illustration 1
The following balances have been extracted from the books of Ama
Nsiah, a sole trader, as at 31 December, 2011.
Dr. Cr.
GH¢ GH¢
Sales 105,500
Purchases 58,000
Carriage outwards 1,200
Carriage inwards 1,600
Insurance 500
Rent Received 890
Discount allowed 620
Rates 680
Wages & Salaries 44,200
Premises 75,200
Furniture & Fittings 24,500
Drawings 2,400
Inventory (1/1/2011) 6,860
Returns inwards 650
Bank loan (long-term) 25,500
Capital (1/1/2011) 111,900
Cash at Bank 2,800
Motor vans 26,000 _______
253,610 253,610
The following additional information is also available as at 31 December,
2011.
a) Closing inventory is valued at GH¢7,620.
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PRINCIPLES
OF ACCOUNTING 1 Unit 4, Section 4: Statement of financial position II
b) Insurance Prepaid is GH¢120

c) Rates accrued is GH¢220.
d) Rent Receivable accrued is GH¢310
Required: Prepare the Statement of profit or loss for the year ended 31
December, 2011 and the statement of financial position as at that date.
Solution
Insurance Account
GH¢ GH¢
Bal b/d 500 Profit & Loss Account 380
__ Bal. c/d 120
500 500
Bal. b/d 120
Rates Account
GH¢ GH¢
Bal b/d 68 Profit & Loss Account 900
Bal. c/d 220 ___
900 900
Bal. b/d 220
Rents Receivable Account

GH¢ GH¢
Profit and Loss 1,200 Bal b/d. 890
____ Bal. c/d 310
1,200 1,200
Bal. b/d 310
Ama Nsiah
Statement of profit or loss For The Period To 31 December, 2011
GH¢ GH¢ GH¢
Sales 105,500
Less: Returns Inwards 650
104,850
Less: Cost of sales:
Add Carriage Inwards 1,600
59,600
Less: Returns Outwards (840)
Cost of Goods Available for Sale 65,620
Cost of Sales 58,000
Gross Profit 46,850
168 UEW/IEDE
PRINCIPLES
Add: Other Income

Rent Received 1,200
49,530
Carriage Outwards 1,200
Insurance 380
Rates 900
Wages & Salaries 44,200 47,300
Net Profit 2,230
Ama Nsiah
GH¢ GH¢ GH¢
Non-current assets:
Premises 75,200
Furniture & Fittings 24,500
Motor vans 26,000
125,700
Current Assets:
Inventory 7,620
Prepaid insurance 120
Rent Receivable 310
Bank 2,800
19,250
Less: Current Liabilities:
Accrued Rates 220
7,720
Net Current Assets 11,530
137,230
Less: Long-term Liabilities:
Bank Loan 25,500
111,730
Represented By:
Capital 111,900
Add: Net Profit 2,230
114,130
Less: Drawings 2,400
111,730
Illustration 2
Below is a trial balance extracted from the books of Glory Enterprise.
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PRINCIPLES
Trial balances as at 30 September, 2012
Dr. GH¢ Cr. GH¢

Goodwill 10,000
Motor vehicles 47,500
Bad debts 4,260
Commission received 12,850
Furniture 4,500
Premises 38,000
Drawings 5,000
Rent 6,000
Sales 195,870
Capital 82,665
Warehouse wages 11,500
Carriage inwards 820
Bank 15,000
Returns inwards 1,410
Cash in hand 2,480
Machinery 12,500
Office salaries 23,760
Inventory, October 1, 2011 14,500
Postage 565
Office expenses 2,755
Bank loan 20,000
Rates and insurance 4,505
Light and heat 2,768
Purchases 85,726
General expenses 2,406
Interest received 7,500
Treasury bills 25,000
332,775 332775
Inventory at 30th September 2012 amounted to GH¢ 15,000.
Required:
Prepare a Statement of profit or loss of Glory enterprise for the year ended
30 September 2012.
170 UEW/IEDE
PRINCIPLES
Glory Enterprise
Statement of profit or loss for the year ended 30 September, 2012
GH¢ GH¢ GH¢
Sales 195,870
Less: Returns inwards 1,410
Net Sales 194,460
Less: Cost of sales:
Add Carriage inwards 820
86,546
Less returns outwards 805
Cost of Goods available for sale 100,241
Less Closing inventory 15,000
Cost of Goods Sold 85,241
Add Warehouse wages 11,500
Gross Profit 97,719
Add: Other income
Commission received 12,850
Interest received 7,500
118,314
Less: Expenses
Bad debt 4,260
Rent 6,000
Office salaries 23,760
Postage 565
Office expenses 2,755
Rate and insurance 4,505
Light and heat 2,768
Carriage outwards 1,000 48,219
Net profit 70,095
The statement of financial position below has been has prepared using the
net asset model. This is derived as follows:
Total Non-current assets + (Total current assets – Total current liabilities)

– Total long term liabilities = Capital.
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PRINCIPLES
Glory Enterprise
Statement of financial position as at 30 September 2012
Non-current assets: GH¢
Goodwill 10,000
Premises 38,000
Machinery 12,500
Furniture 4,500
Motor vehicle 47,500
112,500
Current Assets:
Inventory 15,000
Treasury bill 25,000
Bank 15,000
Cash 2,480
68,100
Less: Current liabilities
Net current assets 55,260
Total assets less total current liabilities 167,760
Less: Long term liabilities:

Bank loan 20,000
147,760
Represented by:
Capital 82,665
Add: Net profit 70,095
152,760
147,760
The treatments of the adjustments in the final accounts will be explained

further using following illustrative examples.
172 UEW/IEDE
PRINCIPLES
Illustration 3
The trial balance of Agape Enterprise as at 31 December 2011 is as
follows:
GH¢ GH¢
Capital, Jan 1, 2011 20,000
3 Years Loan account 2,000
Drawings 1,750
Furniture and Fittings (Cost) 500
Freehold premises 8,000
Plant and Machinery (Cost) 5,500
Inventory, Jan 1, 2011 650
Cash at bank 7,800
Cash at hand 200
Provision for doubtful debts 740
Purchases 86,046
Sales 124,450
Bad Debts 256
Bad debts recovered 45
Bank charges 120
Rent 2,000
Returns 186 135
Salaries 3,500
Wages 8,250
Travelling expenses 1,040
Carriage inwards 48
Discounts 156 138
Water and electricity 2,560
Salesmen salaries and commission 5, 480
Printing and stationery 640
Goodwill 100
Treasury bills 200
Rent received 180
Commission received 120
157,864 157,864
1. Inventory at 31 December 2011 amounted to GH¢7,550.
2. Interest at 10% per annum on the loan had not been paid as at 31
December 2011.
3. Rent includes GH¢1,000 paid for premises on April 1, 2011 for the
year to 31 March, 2012.
4. Depreciate plant and machinery by 10% per annum, and furniture
fittings by 5% p.a.
5. Adjust the provision for doubtful debts to 5% of Trade receivables.
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PRINCIPLES
6. Show wages as part of cost of sales.

7. Commission receivable of GH¢30 was outstanding at 31 December
2011.
8. Rent of GH¢120 was received from the occupants of the property of
Ebeyeyie Enterprise on March 1, 2011 for the year to February 28,
2012.
Required: Draw up the

a) Statement of profit or loss of Ebeyeyie Enterprise for the year ended
31 December, 2011.
b) Statement of financial position of Ebeyeyie Enterprise as at 31
December, 2011.
Show all workings
First, the necessary adjustments have to be made as workings as follows:
Workings:
(i) Interest on loan:
At 10% per annum, the interest for the year is 10% of the amount
of loan obtained. This is computed as: 2,000 x 0.1 = GH¢200.
(ii) Rent paid in advance:

Rent of GH¢1,000 had been paid for the period April 1, 2011 to
March 31, 2012. Only 9 months of this period, (April 1, 2011 to
December 31, 2011) falls within the period under consideration.
This means that the rent paid for the period January 1, 2012 to
March, 31 2012, has been paid in advance. The amount prepaid is
for a period of three months, and is calculated as follows:
Rent prepaid = 3/12 x GH¢1,000 = GH¢250
We can use either the statement or the ‘T’ account approach to

make the necessary adjustment (Both are presented below).
Rent Account
2011 GH¢ 2011 GH¢
Dec 31 (Bal as per trail bal) 2,000 Dec31Profit & Loss A/c 1,750
Dec 31 Bal c/d 250
2,000 2,000
2012 2012
Jan 1 Bal b/d 250
Statement approach: GH¢

Rent (as per trial balance) 2,000
Less: rent paid in advance 250
Rent to Income statement 1,750
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PRINCIPLES
Note that the rent of GH¢250 paid in advance is a current asset.

This should be shown in the statement of financial position.
(iii) Depreciation:
Plant and Machinery: GH¢5,500 x 0.1 = GH¢550
Furniture and Fittings: GH¢500 x 0.05 = GH¢25
Thus the annual depreciation charge for the plant and machinery is
GH¢550 and that for furniture and fittings, GH¢25. These amounts
will be debited to the respective provision for depreciation accounts
(iv) Provision for doubtful debts:

The new provision amount is 20,280 x 0.05 = GH¢1,014. The
existing provision is 740. Thus, the provision is to be increased by
GH¢274 (GH¢1,014 – GH¢740). To effect this, the Income
statement is to be debited with GH¢274, and the existing provision
for doubtful debts of GH¢740, credited with GH¢274. The provision
for doubtful debts account will look as follow:
Provision for Doubtful Debts Account

2011 GH¢ 2011 GH¢
Jan 1 Bal b/f 740
Dec 31 Bal c/d 1,014 Dec 31 P & L Account 274
1,014 1,014
2012
Jan 1 Bal b/d 1,014
(v) Wages as part of cost of sales:

This means that the wages is to be treated in the trading account,
and not in the Income statement.
(vi) Commission receivable outstanding:

Commission receivable of GH¢30 had not been received by 31
December, 2011. Since it is commission for the period, it is
adjusted by adding to the commission receivable in the trial balance
and transferring that (GH¢ 150) to the credit of the Income
statement. Using the statement approach, this is dealt with as
follows:
GH¢
Commission receivable as per trial balance 120
Add amount outstanding at the year-end 30
Commission receivable credited to P & L Account 150
The amount of GH¢30 outstanding is a current asset to be shown in

the statement of financial position.
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PRINCIPLES
(vi) Rent receivable in advance:

In this case, the rent of GH¢ 120 was paid for the period of March
1, 2011 to February 28, 2012. The period January 1, 2012 to
February 28, 2012 pertains to the subsequent period. Thus the rent
for this period of two months is received in advance. This amounts
to 2/12 x 120 = 20. This amount is received for a period which is
outside the current period. It is thus excluded from the rent
receivable for the year and also shown as a current liability in the
statement of financial position.
GH¢
Rent receivable per trial balance 180
Less: amount received in advance at the end 20
Rent receivable credit to P & L Account 160
The main body of the solution is presented as follows:
Ebeyeyie Enterprise
Statement of Profit or Loss for the year ended 31 December, 2011
GH¢ GH¢ GH¢
Sales 124,450
Less: returns inwards 186
Net Sales 124,264
Less Cost of Sales:
Opening inventory 650
Add carriage inwards 48
86,094
Less return outwards 135
Net purchases 85,959
Cost of good available for sale 86,609
Less closing inventory 7,550
Cost of goods sold 79,059
Add Wages 8,250
Gross profit 36,955
Add Other income:
Bad Debt recovered 45
Rent receivable 160
Commission receivable 150
37,448
Less Expenses:
Interest on loan 200
Rent 1,750
Depreciation:
Plant and machinery 550
Furniture and fittings 25 575
176 UEW/IEDE
PRINCIPLES
Provision for doubtful debt 274

Bad debt 256
Bank charges 120
Salaries 3,500
Travelling expenses 1,040
Water and Electricity 2,560
Salesmen salaries and commission 5,480
Printing and stationery 640 19,153
Net Profit 18,295
Ebeyeyie Enterprise
GH¢ GH¢ GH¢
Non-current assets:
Goodwill 100
Freehold Premises 8,000
Plant and machinery (cost) 5,500
Less provision for depreciation 550 4,950
Furniture and fittings (cost) 500

Less provision for depreciation 25 475
Total Non-current assets 13,525
Current Assets:
Inventory 7,550
Less provision for doubtful debts 1,014 19,266
Rent prepaid 250
Commission receivable outstanding 30
Treasury Bills 200
Cash at Bank 7,800
Cash in hand 200
35,296
Less Current Liabilities:
Interest on Loan outstanding 200
Rent received in advance 20
Total Current Liability 10,276
Net Current Assets 25,020
38,545
Less Long Term Liabilities
3 years loan account 2,000
36,545
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PRINCIPLES
Represented By:
Capital 20,000
Add Net Profit 18,295
38,295

36,545
Review Question
The following trial balance extracted as at 30 September 2012 relates to
Goodnews Enterprise.
GH¢ GH¢
Capital (Oct 1, 2011) 29,600
Drawings 7,500
Loan from ADB Ltd 5,000
Purchases and sales 101,640 131,860
Motor Vans at Cost 11,600
Fittings at Cost 2,400
Provision
Vans 5,920
Fittings 1,140
Offices Equipment 5,000
Inventory (Oct 1, 2011) 17,360
Petty Cash 40
Office Expenses 6,400
Vehicle Expenses 3,960
Motor Car at Cost (Oct 1, 1,600
2011)
Trade receivables and Trade 12,200 4,200
payables
Bank 540
Insurance 620
Wages and Salaries 7,360
Discount allowed and 2,560 1,500
received
180,240 180,240
Additional Information:
(i) Inventory at September 30, 2012 was valued at GH¢26,380
(ii) Depreciation is to be provided at 10% per annum on the written
down value of the fitting and at 20% per annum on the written
down value of the vans and car. No depreciation is to be charged on
the office equipment.
(iii) No rent has been paid on the business premises during the year.
The rent is GH¢928 per annum.
(iv) Insurance of GH¢70 has been paid in advance.
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PRINCIPLES
(v) Bad debts of GH¢200 are to be written off and the provision for
doubtful debts is to be adjusted to 2½% of Trade receivables.
(vi) The owner took goods of GH¢1,000 for his personal use.
(vii) Interest on the loan is at 10% per annum.
(viii) Wages of GH¢370 were outstanding as at 30 September 2012, and
an item of GH¢70 for bank charges appeared in the bank
statement.
Required: Prepare a statement of profit or loss for the year ended 30

September, 2012, and a statement of financial position as at that date.
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PRINCIPLES
UNIT 4 SECTION
OF ACCOUNTING 1 5
Unit 4, STATEMENT OFofCASH
Section 5: Statement FLOW
cash flow I I
Hi, we hope you are enjoying your lessons on preparation of final accounts
for sole proprietorship form of business. So far we have treated income
statement and statement of financial position. In Section 5 and 6 we shall be
looking at the cash flow statement, the statement that gives information of
how cash was raised and used in the entity for the period as well as the
existing cash balance. Specifically, this section dwells on the meaning, uses
and components of cash flow statements. Enjoy your reading…….

 state the uses of cash flow statements.
 state and explain the components of the cash flow statement.
Statement of Changes in Financial Position (Cash Flow

Statement)
A cash flow statement is one of the financial statements prepared by a
company to show the changes in the financial position of the company for
the period to which it relates. The objective of preparing this statement is to
communicate to the user, information about the inflows and outflows of
cash. A cash flow statement therefore shows how cash has been generated
and used by an organisation. It is useful in providing the user with an
additional perspective on the performance of an enterprise by indicating the
amounts and principal sources of its cash inflows and outflows.
Uses of Cash Flow Statements

1. It is prepared to show the overall view of cash flowing in and out of a
business.
2. It assists users of financial statements to develop models to predict
future cash flows.
3. Users of financial statements can gain further insights into changes in
net assets.
Components of Cash Flow Statements

A cash flow statement has the following components:
 Cash flows from operating activities
 Cash flows from investing activities
 Cash flows from financing activities
 The net increase or decrease in cash
 A reconciliation of the opening cash balance with the closing cash
balance
Review Questions
1. What is a cash flow statement?
2. State three uses of cash flow statement.
3. What are the main components of a cash flow statement?
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Unit 4,
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UNIT 4 SECTION
OF ACCOUNTING 1 6
Unit 4, STATEMENT OFofCASH
Section 6: Statement FLOW
cash flow II II
In this last Section of Unit 4, we shall be going through basic rudiments of

preparing a cash flow statement. There are two main methods of preparing
this statement; direct and indirect methods. But our discussions would be
limited to only the indirect method. We hope you will enjoy this lesson, as
well. Kindly read on……

 prepare the cash flow statement using the indirect method only.
Let us begin our discussion of preparing the cash flow statement using the
indirect method by reproducing the format of the cash flow statement.
Format (Indirect method)
Statement of Changes in Financial Position (Cash Flow Statement)

for the Year Ended 31 December 2014
GH¢ GH¢
Cash flows from Operating Activities:
Net Profit before Interest and tax xxx
Adjustment for non-cash movements:
Depreciation xx
Profit on Sale of Plant (xx)
Loss on sale of Fixtures & Fittings xx
Premium on Redemption Debentures xx
Discount on issue of Debentures xx
xxx
Changes in Operating working capital:
Increase in Trade payables xx
Decrease in Trade payables (xx)
Increase in Inventory (xx)
Decrease in Inventory xx
Increase in Trade receivables (xx)
Decrease in Trade receivables xx
xxx
Cash generated from operations xxx
Interest paid (xx)
Taxes paid (xx)
Net Cash flow from Operation Activities xxx
Cash flow from Investing Activities:

Purchase of Non-current assets (xx)
Proceeds from Sale of Non-current assets xx
Proceeds from Sale of Investments xx
Interest received xx
Dividends received xx
Net Cash flow from Investing Activities xxx
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Unit 4, Section 6: Statement of cash flow II OF ACCOUNTING 1
Cash flow from Financing Activities:

Proceeds from Issue of Shares xx
Redemption of Shares (xx)
Proceeds from Issue of Debentures xx
Redemption of Debentures (xx)
Proceeds from long-term loan xx
Dividends paid (xx)
Net cash flow from Financing Activities xxx
Net Increase in cash and cash equivalents xxx
Cash and cash equivalent at the beginning of the year (xx)

Cash and cash equivalents at the end of year xx
xxx
Analysis of Changes in Cash and Cash Equivalent:

Bal. at Bal. at
Start Close Change
GH¢ GH¢ GH¢
Cash in hand xx xx xx
Cash at bank xx xx xx
Short-term investment (T-Bills) xx xx xx
Short-term loan (Bank Overdraft) (xx) xx xx
(xx) xx xx
Illustration 1
The following are the financial statements of Adom Ltd
Adom Ltd
Statement of financial position as at 31 December
2014 2013 Increase/
(Decrease)
GH¢ GH¢ GH¢
Capital & Liabilities
Stated capital 9,900 9,900 -
Capital surplus 47,430 83,062 (35,632)
Income surplus 208,636 167,649 40987
Share deals 812 812 -
Shareholders’ funds 266,778 261,423 5,355
Deferred liabilities 17,221 15,693 1,528
283,999 277,116 6,883
Assets
Property plant and equipment 173,066 204,259 31,193
Investments 128,987 128,987 -
Current Assets: 223,085 224,330 1,245
Inventories 149,109 116,542 32,567
Trade and other receivables 40,303 50,257 (9,954)
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OF ACCOUNTING 1 Unit 4, Section 6: Statement of cash flow II
Tax asset 828 - 828

Cash and bank balance 32,845 57,531 (24,686)
Current liabilities (241,139) (280,640) (39,501)
Trade and other payables 137,711 145,388 (7,677)
Dividend payable 4,430 28,132 (23,702)
Dividend proposed 56,000 56,000 -
Tax - 7,085 (7,085)
National reconstruction levy 373 455 (82)
Bank overdrafts 42,625 43,400 (775)
Net current (liabilities)/asset (18,054) (56,130) (38,076)
Net assets 283,999 277,116 6,883
Adom Ltd
Profit and Loss Account (Income Statement) For the Year Ended 31
December 2014
GH¢
Turnover 1,019,871
Operating costs 954,647
Cost of sales (799,796)
Selling general and administrative expenses (1) (154,851)
Operating profit 65,224
Extraordinary item 23,419
Profit (loss) before other income 41,805
Other Income (2) 67,467
Profit before financial charges 109,272
Net financial charges (3) (3,403)
Profit before tax and national reconstruction levy 105,869
Tax 7,294
National reconstruction levy 1,588
Profit after tax 96,987
Notes:
(1) Included in selling, general and administrative expenses is
depreciation of GH¢9,992.
(2) Included in other income is profit on disposal of property, plant and
equipment of GH¢60,081.
(3) Net financial charges comprises interest charge of GH¢4,028 and
interest credit of GH¢625.
Based on the question above, the cash flow statement using the indirect
method can now be prepared as follows.
Cash flow from operating activities:

Profit before tax and national reconstruction levy 105,869
Add: Depreciation 9,992
Profit on sale of property, plant and equipment (60,081)
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Increase in inventories (32,567)

Decrease in trade and other recoverable 9,954
Decrease in trade and other payables (7,677)
Increase in deferred liabilities 1,528
Dividends received (7,386)
Interest charge 4,028
Interest credit (625)
Cash generated from operations 23,035
Based on the foregoing the cash flow statement of Adom Ltd can be
presented as follows:
Cash Flow Statement for the Year Ended 31 December, 2014

GH¢ GH¢
Cash flows from operating activities:
Cash generated from operation 23,035
Interest received 625
Interest paid (4,028)
Tax paid (9,505)
National reconstruction levy (1,670)
Net cash inflow from operating activities 8,457
Cash flows from investing activities:

Purchases of property, plant and equipment (29,197)
Proceeds from sale of property, plant and equipment 69,145
Dividends received 7,386
Net cash inflow from investing activities 47,334
Net cash inflow before financing activities 55,791
Cash flows from financing activities:

Dividends paid (79,702)
Net decrease in cash and cash equivalents during the year (23,911)
Add cash and cash equivalents at beginning of year 14,131
Cash and cash equivalents at end of year (9,780)
Analysis of Changes in Cash and Cash Equivalent

for the year ended 31 December 2014
Bal. at Bal. at
1 Jan 31 Dec
2014 2014 Change
GH¢ GH¢ GH¢
Cash and bank balance 57,531 32,845 (24,686)
Bank overdrafts (43,400) (42,625) 775
Cash and cash equivalents 14,131 (9,780) 23,911
Let us use another illustration to explain the preparation of cash flow

statement using the indirect method.
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PRINCIPLES
Illustration 2
The following financial statements relate to Blessing Limited.
Income Statement for the year ended 31 December, 2013.

GH¢’000
Profit before tax 9,332
Taxation (current and deferred) (3,468)
Profit after tax 5,864
Statement of Financial Position as at

31/12/2013 31/12/2012
GH¢’000 GH¢’000
Assets
Buildings 13,680 9,600
Machinery 16,800 13,200
Inventories 20,160 13,200
Trade and other receivables 11,760 7,680
Short term Investments 500 400
Cash at bank 64 2,000
Totals 62,964 46,080
Equity and Liabilities

Stated Capital 19,320 14,400
Retained Earnings 11,720 7,536
Debenture 12,000 7,200
Provision for deferred tax 5,748 4560
Trade and other payables 10,164 7,824
Interest Payable 516 396
Tax payable 3,420 2,700
Proposed dividend - 1440
Provisions for warranties 76 24
Totals 62,964 46,080
1. During the year a building which cost GH¢720,000 with
accumulated depreciation of GH¢120,000 was sold and a profit of
GH¢480,000 reported in the income statement. An amount of
GH¢900,000 is still outstanding on the sale and this figure is
included in accounts receivable. Depreciation on buildings charged
to income statement amounted to GH¢600,000 and GH¢5,040,000
charged on machinery.
2. Creditors for machinery of GH¢480,000 and GH¢720,000 for 2012

and 2013 are included in trade and other payables.
3. The company made a bonus issues at the beginning of the year for
GH¢960,000. 1,200,000 shares were issued in exchange for a
186 UEW/IEDE
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building valued at GH¢1,440,000. Rights issues of one share for

every five already held were made. Total shares in issue by year end
were 14,000,000. The rights were fully exercised.
4. Interim dividends of GH¢720,000 were paid in the current year and

interest of GH¢32,000 received. Total interest charged to income
statement amounted to GH¢1,176,000.
Required:
Prepare a Statement of Cash Flow for Blessing Limited for the year
ended 31 December 2013 in accordance with IAS 7, using the
indirect method. Show an analysis of the components/movements of
cash and cash equivalents at the beginning and end of the period by
way of reconciliation.
Solution
a)
Statement of Cash Flow for the year to 31 December
2013
Operating Activities GH¢'000 GH¢'000
Operating Profit before tax 9,332
Depreciation 5,640
Profit on sale of PPE (480)
Increase in warranty 52
Interest Received (32)
Interest Charged 1,176
Increase in Inventory (6,960)

Increase in Receivables (3,180)
Increase in Payables 2,100
Interest Paid (1,056)
Tax Paid (1,560)
Net Cash Inflow from Operating
activities 5,032
Investing Activities
Purchase of PPE (12,240)
Interest Received (32)
Sale of PPE 180
Net Cash Outflow from Investing
activities (12,028)
Financing Activities
Proceeds from issue of shares 2,520
Dividend Paid (2,160)
Debenture Issued 4,800
Net Cash Inflow from Financing 5,160
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PRINCIPLES
activities
Net Decrease in Cash Flow (1,836)
Analysis of Changes in Cash and

Cash Equivalents GH¢'000
Balance as at 31/12/12 2,400
Net Decrease in Cash flow (1,836)
Balance as at 31/12/13 564
Analysis of
Movements/Components of Cash
And Cash Equivalents Bal-31/12/13 Bal-31/12/12 Movement
Cash 64 2,000 (1,936)
Short Term Investment 500 400 100
Total 564 2,400 (1,836)
Review Question
The following financial statements relate to Believe in Him Limited.
Statement of Financial Position as at 31 December

2013
2012
GH¢’000
GH¢’000
Stated capital 4,900 2,500
Retained earnings 920 280
Debentures stocks 600 1,400
Corporate Tax payable 660 430
Trade payable 860 680
Bank overdraft - 280
Proposed dividend 300 150
Provision for depreciation: Fixtures and fittings 1,380 1,160
9,620 6,880
Capital work-in-progress 600 400

Building at cost and valuation 3,200 2,000
Fixtures and fittings 3,600 2,880
Inventory 1,020 740
Trade receivables 880 856
Treasury bills 100 -
Cash and bank 220 4
9,620 6,880
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Statement of Profit or Loss for the year ended 31 December,

2013
GH¢
Operating profit 1,960
Debentures interest (120)
Profit before tax 1,840
Tax (750)
Profit after tax transferred to retained earnings 1,090
Statement of Retained Earnings for the year ended 31

December, 2013
GH¢’000
Balance b/d 280
Transfer from profit and loss account 1,090
Proposed dividend (250)
Capitalisation issue (200)
Balance c/d 920
The following additional information is provided:

(i) During the year GH¢250,000 of capital work-in-progress was
completed and transferred to buildings.
(ii) Fixtures and fittings costing GH¢100,000 four years ago with a
net book value of GH¢40,000 was sold for GH¢30,000.
(iii) Premium of GH¢50,000 was paid on redemption of debentures
and charged to profit and loss account.
(iv) During the year GH¢300,000 debentures were converted into
600,000 ordinary shares valued at GH¢300,000.
(v) During the year capitalisation issue of 10,000 ordinary shares
was made to existing shareholders for GH¢200,000.
Required: Prepare a cash flow statement using the indirect method.
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OF ACCOUNTING 1 Unit 4,
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MODERN ENGLISH
UNIT
STRUCTURE AND USAGE 5 ADJUSTMENTS
Unit 1 Introduction: Structure TO FINAL ACCOUNTS
Welcome to Unit 5. You will recall that in Unit 4, we learned how to

prepare final accounts of sole proprietorship. Most of the illustrations
discussed had additional information like prepaid or accrued expenses,
provision for depreciation or doubtful and depreciation that would lead to
the adjustment of the final accounts. In this unit, we are going to take a
critical look at how these adjustments affect final accounts. Enjoy your
study….

 adjust expense accounts for a accruals and prepayment
 adjust income accounts for accrued income and unearned income
 treat depreciation in final accounts correctly
 explain bad debts
 define doubtful debts
 statement why bad debts arise in business
 apply procedures for recording provision for doubtful debts
 adjust for provision for bad and doubtful debts in the Income
statement and the statement of financial position
 identify the effects of adjustments on the final accounts
 explain discount allowed
 adjust for provision for discount allowed and
 explain inventory
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PRINCIPLES
IN EARLY CHILDHOOD
Structure
EDUCATION
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UNIT 5 SECTION
OF ACCOUNTING 1 1
Unit 5, ACCRUED EXPENSES
Section 1: Accrued AND
expenses and UNEARNED
unearned income INCOME
Hello, welcome to Section 1. The first pair of adjustments that we would

want to work on is accrued expenses and unearned income. In other words,
we will look at how to book expenditure items when they have been
incurred but are yet to be paid (accrued expenses) and how to book revenue
when the product or service has been paid for but it is yet to be supplied or
rendered (unearned income). Now, you may read on……

 explain accrued expenses and unearned income
 show the accounting treatments for accrued expenses and unearned
income
Accrued Expenses
Accrued expenses are expenses which have been incurred but not yet paid
for and brought into the books of accounts. Expenses are recorded when
they are paid for in cash. At the end of the year any expenses which have
been incurred but have not been paid for will not appear in the books of
account. Such expenses must therefore, be added to those provided in the
trial balance and charged against the Income statement.
Illustration 1
Rent of GH¢15,000 per year is payable at the end of each quarter for three
month’s tenancy that has just expired. The tenancy commenced on 1
January, 2014 and payments for 2014 were as follows: 31 March, 5 July, 4
October, 2014 and 10 January, 2015.
Required
Prepare the rent account for 2014 indicating clearly the amount to be taken
Income statement.
Rent Account
GH¢ GH¢
31/3/2014 Bank 3,750 31/12/2014 Income statement 15,000
05/7/2014 Bank 3,750
04/10/2014 Bank 3,750 .
31/12/2014 Bal. c/d 3,750
15,000 15,000
1/1/2015 Bal. b/d 3,750
The rent for the period is GH¢15,000, but as at 31 December, 2014 the
amount paid was GH¢11,250 which was for the first three quarters of the
year. The rent for the last quarter of the year which is GH¢3,750 was still
outstanding and will only appear in the books in 2014. The amount of
GH¢3,750 will be recorded as balance carried down on the debit side to
make the total for the year GH¢15,000.
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Unit 5, Section 1: Accrued expenses and unearned income OF ACCOUNTING 1
Unearned Income/ Income Received in Advance

As prepaid expenses are expenses paid for before their economic benefits
are enjoyed, unearned income is also income received in advance before
they are earned. Example is rent income received in advance or insurance
premium received in advance.
Illustration 2
A business rents part of its premises to another business and the rent is
GH¢2,500 for each quarter of the year payable on or before the first day of
each quarter or earlier. Rent income received during 2011 are as follows:
1 January, for 3 months to 31 March GH¢2,500.

31 March, for 3 months to 30 June GH¢2,500.
29 June, for 3 months to 30 September GH¢2,500.
1 October, for 3 months to 31 December GH¢2,500.
29 December, for 3 months to 31 March, 2012 GH¢2,500.
Required
Prepare the rent receivable account showing clearly the amount to be
transferred to the Income statement.
Rent Receivable Account
GH¢ GH¢
31/12/11 Profit & Loss Account 10,000 1/1/11 Bank 2,500
Balance c/d 2,500 31/3/11 Bank 2,500
29/06/11 Bank 2,500
01/10/11 Bank 2,500
. 30/12/11 Bank 2,500
12,500 12,500
1/1/12 Bal. b/d 2,500
It is clear from the accounts that the tenant has paid the first quarters rent of
2014 few days early. Since the amount for the first quarter of 2011 is
received in 2012, it is an unearned rent income. The transfer to Income
statement for the year ended 31 December, 2011 will be GH¢10,000 and the
additional GH¢2,500 will be earned in 2012.
On the statement of financial position the amount of rent received in

advance will appear under current liabilities as rent received in advance or
unearned rent income.
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UNIT 5 SECTION
OF ACCOUNTING 1 2
Unit 5, PREPAID EXPENSES
Section 1: Accrued AND
expenses and ACCRUED
unearned income INCOME
Remember that in Section 1 we discussed how to book accrued expenses

and unearned income. In this section we shall look at how to book prepaid
expenses and accrued income which are the direct opposite of what we did
in Section 1. Consequently, in this section we shall be looking at how to
record expenditures, which although have been paid in the current year
actually relates to subsequent year (s) (prepaid expenses) and how to record
income when it is in arrears (accrued income). Now, continue reading……

 explain prepaid expenses and accrued income
 show the accounting treatments for prepaid expenses and accrued
income
Prepaid Expenses
A prepaid expense is an expense which is paid for in advance prior to its
maturity. In other words they are economic benefits paid for in advance.
Prepaid expenses are also called prepayments. They are assets to the
business and are, therefore, stated under current assets in the Statement of
financial position as prepaid expenses or prepayments. Because these
expenses are paid for in advance at the end of the accounting period, they do
not belong to the current year. They are therefore, deducted from the
particular expenses provided for in the trial balance.
Illustration 1
Insurance premiums have been paid as follows:
February, 28 2014 - GH¢1,500 for period of six months to 30
June, 2014.
July 31, 2014 - GH¢750 for three months to 30 September,
2014.
October 31, 2014 - GH¢1,500 for period of six months to 31
March, 2015.
Required
Prepare the Insurance Account and show clearly the amount to be
transferred to the Income statement for the period to 31 December. 2014.
Insurance Premium Account
GH¢ GH¢
28/2/2014 Bank 1,500 31/12/14 Profit and loss 3,000
31/2/2014 Bank 750 31/12/14 Prepaid c/d 750
31/10/2014 Bank . 1,500 .
3,750 3,750
1/1/2015 Prepaid b/d 750
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Unit 5, Section 2: Prepaid expenses and accrued income OF ACCOUNTING 1
The last payment of GH¢1,500 is not all for the year 2014. Half of this (i.e.
GH¢750) relates to the year 2012 and, therefore, the amount to be charged
to Income statement is GH¢3,750 – 750 = GH¢3,000.
The balance carried down of GH¢750 is a benefit paid for but not yet
enjoyed. It is an asset to the business, and will be shown in the Statement of
financial position under current assets.
Accrued Revenues/Income
Like expenses many revenues are recorded when cash is received from the
customers. Other revenues are also recorded when goods and services are
sold on credit. However, some revenues may be earned but remain
unrecorded at the end of the period because cash has not been received.
Example includes accrued interest income, and accrued rent income.
Accrued revenue then can be defined as revenue earned and receivable but
not yet received in the form of cash.
Illustration 2
Part of a Company’s premises is rented to another company for GH¢6,000
per annum. For the year ended 31 December, 2014 the following payments
were received:
GH¢1,500 - 10 April, 2014, For 3 months to 31 March, 2014.
GH¢1,500 - 5 July, 2014, For 3 months to 30 June, 2014.
GH¢1,500 - 8 October, 2014, For 3 months to 30 September,
2014.
GH¢1,500 - 7 January, 2014, For 3 months to 31 December, 2014.
Required
Prepared the rent receivable account for the year 2014.
Rent Receivable Account
GH¢ GH¢
31/12/2014 Profit & Loss A/c 6,000 10/3/14 Bank 1,500
5/7/14 Bank 1,500
8/10/14 Bank 1,500
. 31/12/41 Bal. c/d 1,500
6,000 6,000
1/1/2015 Bal. b/d 1,500 07/01/2015 Bank 1,500
The amount transferred to the income statement for 2014 is GH¢6,000. This
is the rent income earned for the year, but out of this amount GH¢1,500 had
not been received as at 31 December, 2014. This amount is an accrued rent
income which is recorded as balance carried down on the credit side and
brought down on the debit side on the 1st of January, 2015. Although this
amount will be received on 7th January 2015, it will be stated in the
statement of financial position as at 31 December 2014 as a current asset.
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UNIT 5 SECTION
OF ACCOUNTING 1 3
Unit 5, BAD DEBTS
Section AND and
3: Bad debts PROVISION FOR
provision for DOUBTFUL
doubtful debts DEBTS
When goods are sold to customers, not all the customers fulfil their debt
obligations. Some customers due to bankruptcy or insincerity may not pay
their debt to the business. These uncollected debts are termed as bad debts.
An estimate for the possibility that some customers may not pay their debt is
provision. Because of the prudence concept, it is imperative that the
accounting systems capture these expenses in order not to overstate profit.
In this section, we shall not only look at the meaning of bad and doubtful
debts but also consider their effects on the final accounts. Enjoy your
reading…..

 explain bad debts
 define doubtful debts
 state why bad debts arise in business
 apply procedures for recording provision for doubtful debts
 adjust for provision for bad and doubtful debts in the Income
statement and the statement of financial position
Bad Debts and Doubtful Debts

When goods are sold on credit terms, the sales account is credited and an
account in the Trade receivables’ ledger is debited. The amount involved is
treated as current asset, because it is expected that the customer will pay
within the credit period.
There is however, a possibility that some customers will not be able to pay
their debts and these result in bad debts, that is, uncollectible amounts.
Some of the reasons why bad debts arise in business are:
 Insolvency – where the debtor does not have money to pay.
 Death of debtor – most of the time it may be difficult to collect the debt
after the death of the customer.
 Amount involved is too small to waste time on money chasing or
collecting it.
Bad debts
These are debts which are to be written off during the year. It is usual to
review carefully the list of Trade receivables outstanding when the annual
accounts are being prepared and write off any additional bad debts at the
year end. The fact that a debt is likely to prove bad is seen when a great deal
of time has elapsed since the goods were supplied and no cash has been
received from the customer despite repeated efforts to collect the amount
outstanding. This emphasizes the importance of monitoring Trade
receivables on a routine basis so that, when the terms for payment are
exceeded, further supplies can be stopped; such action or sanction
encourages the customer to pay the amount owed and also minimizes the
loss if the debt should prove to be bad. When it becomes apparent that the
full amount of the debt will not be received from the debtor, it is necessary
198 UEW/IEDE
PRINCIPLES
Unit 5, Section 3: Bad debts and provision for doubtful debts OF ACCOUNTING 1
to remove the value of the irrecoverable (uncollectible) debt from the total
Trade receivables account and record the loss. This is referred to as the
direct write-off method. The double entry to achieve this is:
Debit Bad Debt Account with the value of bad debts

Credit Trade receivables Accounts
The balance on the bad debts account appears as a debit balance in the trial
balance, and is written off to the Income statement when the final (annual)
accounts are prepared since it represents the loss of an asset and, therefore,
is an expense.
Doubtful Debts
In addition, a business may know, from experience that a consistent
proportion of the debts outstanding at the Statement of financial position
date will prove to be bad, although it is not possible to tell in advance which
specific debts will remain unpaid. The most prudent course of action to take
in these circumstances is to make a provision (an allowance) for the likely
bad debts contained in the value of Trade receivables outstanding at the
year-end by the introduction of a provision for doubtful debts. When the
amount of the provision has been determined, the provision is created by a
debit to the Income statement with the corresponding credit to a provision
for doubtful debts account; this credit balance is offset against the value of
Trade receivables in the Statement of financial position to show the net
amount that is expected to be collected. The fact that this provision is
general, or not related to any particular Trade receivables, means that no
consequential adjustments are made in the debtor’s individual sales ledger
personal accounts.
Once a provision has been created, it appears as a credit balance in the trial
balance prepared at the end of the period. In subsequent periods it is
necessary only to account for the increase or decrease in the provision. The
provision required is likely to change from year to year as the amount of
trade receivables at the end of each accounting period is not the same. The
balance in the provision accounts is therefore based on the amount of debt
outstanding at the end of any particular year. The double entry to record
adjustments for doubtful debts is:
Debit P&L account

Credit Provision for Doubtful debt account
With increase in the provision for doubtful debts
Or
Debit Provision for Doubtful debts account

Credit P&L account
With decrease in the provision for doubtful debts
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OF ACCOUNTING 1 Unit 5, Section 3: Bad debts and provision for doubtful debts
Illustration 1
The following balances appeared in the books of Asemsebe at the end of
2014
Debit Credit
GH¢ GH¢
Bad debts written off during 2014 950
Provision for doubtful debts brought forward 900
Trade receivables account 125,000
It is decided, after a review of the Trade receivables balances at the end of

the year, to write off a further GH¢1,000 of bad debts and create a provision
of 1 per cent of the value of the remainder for doubtful debts.
Required:
Write up the accounts to record the decreases and show the appropriate
extracts from the Income statement and Statement of financial position.
Solution to illustration1
Bad Debts Account
2014 GH¢ 2014 GH¢
Jan 1 Trade receivables 950 31 Dec Profit and loss 1,950
31 Dec Trade receivables 1,000 .
1,950 1,950
Trade receivables Account

2014 GH¢ 2014 GH¢
31 Dec Balance b/d 125,000 31 Dec Bad debts 1,000
. . 31 Dec Balance c/d 124,000
125,000 125,000
Provision for Doubtful Debts Account

2014 GH¢ 2014 GH¢
31 Dec Balance c/d 1,240 31 Dec Balance b/d 900
. 31 Dec P&L Account 340
1,240 1,240
Note: *1% of GH¢124,000 = GH¢1,240
Income statement (extract)

GH¢ GH¢
Bad debts 1,950
Prov for Doubtful debts 340
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Unit 5, Section 3: Bad debts and provision for doubtful debts OF ACCOUNTING 1
Statement of financial position (Balance Sheet extract)

GH¢
Less: Provision for doubtful debt 1,240
122,760
Notes:
1. The bad debts of GH¢950 have already been written off the value of
Trade receivables and so no further adjustment to the Trade
receivables control account is required in respect of this loss.
2. All bad debts arising during 2014 have been written off against profit.
It is therefore necessary only to increase the provision to the revised
value, that is, by GH¢340 to GH¢1,240. In some cases the review of
debtor balances results in a reduction of the provision and hence a
credit to the Income statement.
Bad Debt Recovered

When a customer fails to pay and the account is written off as bad, his or her
credit standing reduces. It sometimes happen that several months after a
debt has been declared bad, the customer decides to pay in order to restore
his credit standing. The customer may decide to pay all or part of the
amount owed which had been previously written off. Two accounting
entries will have to be made in the books to record the amount recovered
from the customer. The first is to reverse the write-off and reinstate the
customer’s account. The second entry records the amount recovered. The
entries are as follows:
(1) Debit Customer’s Account To reinstate the debt that was

Credit Bad Debt Recovered Account previously written off
(2) Debit Cash Account To record the cash received in

Credit Customer’s Account respect of the bad debt recovered.
At the end of the year, the bad debt recovered account is closed by debiting
the Bad Debt Recovered account and crediting the Income statement.
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PRINCIPLES Unit 5, DISCOUNT ALLOWED
Section 4: Discount allowed AND PROVISION
and provision for discounts on account
UNIT 5 SECTION
OF ACCOUNTING 1 4 receivable
FOR DISCOUNTS ON ACCOUNT RECEIVABLE
You are welcome to section 4. We believe that you are enjoying our lessons
on adjustments to the final accounts. In this section we shift our attention to
accounting for recording discounts. Do you know what a discount is? Are
you familiar with the difference between cash and trade discounts? What
about their accounting entries? We will answer the above questions in this
section, as you go through. Enjoy your reading….
By the end of this section, the student should be able to

 explain discount allowed
 differentiate between trade discount and cash discount
 adjust for provisions for discount allowed on account receivables
Discounts are reductions or deductions made to the basic price of goods or

services. Discount can be either allowed or received.
Discount Allowed
This is discount offered on sales of goods to attract buyers. Discount
allowed may be classified into two types: trade discounts and cash
discounts.
Trade Discount
This refers to discounts offered at the time of purchase especially when
goods are purchased in bulk or to retain loyal customers. Trade discounts
are generally ignored for accounting purposes in that they are omitted from
accounting records.
Therefore, sales, along with any receivables in the case of a credit sale, are
recorded net of any trade discounts offered.
Illustration 1
Univision enterprise, as part of their sales promotion campaign has offered
to sell their snack packs at a 10% discount on their listed price of GH¢10.
How would you record the sale transaction below?
GH¢
Sales revenue 10
less: trade discount 1
Net Sales revenue 9
Sale revenue and any accounts receivable will be recorded net of trade
discount, which is GH¢9 per snack pack.
Cash Discount
This refers to discount offered to customers as an incentive for timely
payment of their liabilities in respect of credit purchases. Cash discounts
result in the reduction of sales revenue earned during the period. However,
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receivable OF ACCOUNTING 1
not all customers may qualify for the cash discount. It is therefore necessary
to record the initial sale and account receivables at the gross amount, after
deducting any trade discounts, and subsequently decreasing the sale revenue
and accounts receivable by the amount of discount that is actually allowed.
Following double entry is required to record the cash discount:

Debit Discount Allowed (income statement)
Credit Account Receivable
Debiting discount allowed ledger has the effect of reducing gross sales
revenue by the amount of cash discount allowed. Consequently, account
receivables are credited to reduce their balance to the amount that is
expected to be recovered from them, that is, net of cash discount.
Illustration 2
Univision Enterprise, as part of their sales promotion campaign has offered
to sell their boxes of snack packs at a 10% discount on their listed price of
GH¢100. If customers pay within 10 days from the date of purchase, they
get a further GH¢5 cash discount. Univision enterprise sells a box of snack
pack to Adoma who pays within 10 days.
Required:
Make the entries in the books of Univision Enterprise.
Before we proceed with the accounting entries, it is necessary to first
distinguish between the two types of discounts being offered by Univision
Enterprise. The 10% discount is a trade discount and should therefore not
appear in Univision's accounting records. The GH¢5 discount is a cash
discount and must be dealt with accordingly.
The initial sale of the box of snack pack will be recorded as follows:
GH¢ GH¢
Debit Adoma (receivable) 90
Credit Sales 90
As Adoma qualifies for the cash discount, the following double entry will be
required to record the discount allowed:
GH¢ GH¢
Debit Discount Allowed (income statement) 5
Credit Adoma (receivable) 5
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PRINCIPLES Unit 5, Section 4: Discount allowed and provision for discounts on account
OF ACCOUNTING 1 receivable
The above entries have resulted in sales of Univision being reduced to

GH¢85 (100-90-5). The receivable from XYZ has also been reduced to this
amount effectively.
Provision for Discount Allowed on Account Receivable

A provision is a liability of uncertain timing or amount.
Provision for discount allowed on account receivable shows the reserve

amount for adjusting loss due to discount allowed to our debtors. Some
debtors may pay promptly and take advantage of any cash discount
offered. As a result the business must make a provision for this discount
allowed on receivables in anticipation of the reduction from total receipts of
cash from its debtors.
Exactly how much is set aside as a Provision for Discount Allowed on

Account receivable will depend on the past experience of the business.
Normally, it is calculated as a percentage of the net outstanding debtors.
Reasons for making the Provision for Discount Allowed

1. There is the need to record an item of expense in the same period that
the related revenue is recognized. In other words, the matching concept
has to be applied. Cash discount given to trade debtors who pay their
bills promptly is considered an operating cost of selling goods sold on
credit and should be charged as an expense in the same period that the
sales is recognized.
2. When the total debtors in the year-end Balance Sheet is shown less
Provision for Bad Debts as well as less Provision for Discount
Allowed, we will have a more conservative and truer estimate of total
debtors. This is in line with the concept of conservatism which
recognizes all anticipated, though unrealized, losses.
The Provision for Discount Allowed on account receivable is always carried

forward to the next accounting period as a current liability. It is also an
expense and must be debited to the Profit and Loss Account. To complete
the double entry, the Provision for Discount Allowed Account is credited.
The Provision for Discount Allowed must also be deducted from the net
amount of total account receivable; otherwise, the amount of Account
receivable in the Balance Sheet will be overstated.
Current Asset
Account receivable xxx
Less: bad debt (xxx)
Provision for bad debt (xxx)
xxx
less: provision for discount on Account receivable (xxx)
xxx
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receivable OF ACCOUNTING 1
Illustration 3
Suppose the trial balance Mireku Stores is showing GH¢5 as provision for
discount allowed on account receivable in the credit side. The trial balance
is also showing bad debts of GH¢15, discount allowed of GH¢10 and
debtors GH¢100. The following information have also been provided as
additional information:
a) provision for doubtful debts 10%

b) bad debts GH₵10
c) provision for discount on debtors 5%.
Required:
Make provision for discount on debtor account and show these adjustments
in final accounts.
Discount Allowed Account
GH¢ GH¢
Discount Allowed 10 Bal b/d 5
Provision 4 P&L 9
14 14
Current Asset GH¢

Account receivable 100
Less: Bad debt 10
90
provision for bad debt (10% of 90) 9
81
Less: provision for discount allowed (5% of 81) 4
77
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PRINCIPLES
UNIT 5 SECTION
OF ACCOUNTING 1 5
Unit 5, VALUATION OFofINVENTORY
Section 5: Valuation inventory I I
All organizations work with inventories or stocks either for production, sale
or administrative purposes. Most organizations spend a lot of money on this
kind of working capital. In this section, we shall be concentrating our
discussions on the meaning, types and valuation of inventory for accounting
purposes. Enjoy your reading.

 explain the meaning of inventory;
 list the various types of inventory;
 state the methods of inventory valuation and;
 describe the various methods for accounting for inventory.
Inventory or stock refers to the goods and materials that a business holds
for the ultimate purpose of resale.
Types of inventory
Inventories are in three forms, finished goods, work-in-progress, and raw
materials.
Raw materials: This represents goods, materials and supplies purchased

from other manufacturers that are consumed in production that will become
part of the finished product. That is what the company uses currently in the
production of goods to be sold.
Work-in-progress: This refers to the products that are not yet complete and
in the production process for sale in the ordinary course of business. That is
what the company has in production for future sale.
Finished goods: This refers goods that have completely gone through the
manufacturing process and the firm intends to sell in the normal course of
business. That is, assets held for sale in the ordinary course of business.
Valuation of Inventory
Inventories are usually the largest current assets of a business, and proper
measurement of them is necessary to assure accurate financial statements. If
inventory is not properly measured, expenses and revenues cannot be
properly matched and a company could make poor business decisions.
Inventory valuation is the monetary value associated with the items

contained in a company’s inventory. Initially the amount is the cost of those
items. However, under certain situations the cost could be replaced with a
lower of cost. The inventory valuation includes all of the costs to get the
inventory items in place and ready for sale. The inventory valuation
excludes the costs of selling and administration. Since the inventory items
are constantly being sold and restocked and since the cost of the items is
constantly changing, a company must select a cost flow assumption.
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Unit 5, Section 5: Valuation of inventory I OF ACCOUNTING 1
Cost Flow Assumptions

Cost flow assumptions refer to the methods available for moving the costs of
a company's products from its inventory to its cost of goods sold.
The cost flow assumptions include
 First-in-first-out (FIFO)
 Weighted average and
 Standard costing
First-in-first-out (FIFO) method

The basic assumption underlying FIFO method is that items bought first are
the first to be issued out.
Advantages
 Based on realistic assumption
 Valuation of closing stock is at latest prices paid
 Easy to understand and simple to operate
 Materials are issued at actual cost and thus no unrealized profit
arises from the operation of this method
Disadvantages
 Cost of production may lag behind the current economic value
because materials aare charged to production at the old prices
 This method does not allow comparison of costs of similar jobs or
cost units
 During inflationary periods the method involves cumbersome
records and calculations.
Weighted average method

This method calculates a weighted average price for all units in stock.
Advantages
 It is simple to operate
 It averages out the effect of price fluctuations
 Suitable to process industries
Disadvantages
 Not suitable for job order costing
 Closing stock does not correspond with the conventional accounting
way of valuing stock.
Standard cost method

Under this method issues of stock are at predetermined standard price. The
predetermined standard price may not be the same as price paid for
materials delivered. Closing stocks are usually valued at standard price.
Advantages
 Very simple to apply
 Provides check on efficiency of purchasing department
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PRINCIPLES
OF ACCOUNTING 1 Unit 5, Section 5: Valuation of inventory I
 Eliminates price fluctuations from costs enabling satisfactory

manufacturing cost comparisons to be made
 Does not change over accounting period
Disadvantages
 Requires careful initial determination
 Profits and losses arise
 Disregard price trends
The business must constantly follow its stated cost flow assumption. A
manufacturing business’s inventory valuation will include the cost of
production, namely direct materials, direct labour, and manufacturing
overheads. Manufacturers are also required to consistently follow their cost
flow assumption.
Inventory Accounting Systems

The two most widely used inventory accounting systems are the periodic
and the perpetual.
Perpetual: The perpetual inventory system requires accounting records to
show the amount of inventory on hand at all times. It maintains a separate
account in the subsidiary ledger for each good in stock, and the account is
updated each time a quantity is added or taken out.
Periodic: In the periodic inventory system sales are recorded as they occur
but the inventory is not updated. A physical inventory must be taken at the
end of the year to determine the cost of goods.
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Unit 5,
This page
Section
is left5:blank
Valuation
for your
of inventory
notes I OF ACCOUNTING 1
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PRINCIPLES
UNIT 5 SECTION
OF ACCOUNTING 1 6
Unit 5, VALUATION OFofINVENTORY
Section 6: Valuation inventory II II
In Section 5, we looked at some theoretical underpinnings of inventory

valuation. In this section, we are going to look at some basic calculations for
some perpetual inventory valuation methods (FIFO, Weighted Average and
Standard Costing) and how their periodic valuations would look like.
At the end of this section you should be able to:

 perform basic calculations for inventory valuation using FIFO,
weighted average and standard costing methods
 calculate periodic stock levels
Let us use the following illustration to demonstrate the computation of

inventory valuation using FIFO, weighted average and standard costing
methods.
Illustration
The data below relates to product Q of Mama Bee Company Limited for the
month of June 2010.
DATE RECEIPTS ISSUES

1-Jun Bal. 150 units @GH¢ 5
3-Jun 600 units @GH¢ 5.5
5-Jun 300 units
12-Jun 450 units @GH¢ 6
15-Jun 600 units
22-Jun 200 units @ 6.50
30-Jun 200 units
Using FIFO, Weighted Average Method and Standard Costing Methods

(assume a standard price of GH¢5) of pricing, calculate the value of units
issued during the month and the value of the closing stock, using perpetual
inventory system.
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PRINCIPLES
Unit 5, Section 6: Valuation of inventory II OF ACCOUNTING 1
Solution
Using FIFO Method

DATE RECEIPTS ISSUES BALANCE
Qty Price Amount Qty Price Amount Qty Amt
GH¢ GH¢ GH¢ GH¢ GH¢
1-Jun 150 750
3-Jun 600 5.5 3,300 750 4,050
5-Jun 150 5 750
150 5.5 825 450 2,475
12-Jun 450 6 2,700 900 5,175
15-Jun 450 5.5 2,475
150 6 900 300 1,800
22-Jun 200 6.5 1,300 500 3,100
30-Jun 200 6 1,200 300 1,900
Using Weighted Average Method

1-Jun 150 750
3-Jun 600 5.5 3,300 750 4,050
5-Jun 300 5.4 1,620 450 2,430
12-Jun 450 6 2,700 900 5,130
15-Jun 600 5.7 3,420 300 1,710
22-Jun 200 6.5 1,300 500 3,010
30-Jun 200 6.02 1,204 300 1,806
Using Standard Costing Method (Assuming the standard issue price is

GH¢5)
1-Jun 150 750
3-Jun 600 5.5 3,300 750 4,050
5-Jun 300 5 1,500 450 2,550
12-Jun 450 6 2,700 900 5,250
15-Jun 600 5 3,000 300 2,250
22-Jun 200 6.5 1,300 500 3,550
30-Jun 200 5 1,000 300 2,550
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PRINCIPLES
OF ACCOUNTING 1 Unit 5, Section 6: Valuation of inventory II
Periodic System of Stock Valuation and using the illustration above
FIFO Method
Calculation of Closing Stock in units
Opening Stock 150
Purchases 1,250
1,400
Less issues 1,100
Closing Stock 300
Value of Closing Stock

200 @ GH¢6.5 1,300
100 @ GH¢6 600
1,900
Value of Stock Issued = Value of Op. Stock + Value of St. Purchased - Value of Cl. St
(750 + 3,300 + 2,700 + 1,300) - 1,900
8050-1900
GH¢6150
WEIGHTED AVERAGE METHOD

Total Cost = GH¢750 + GH¢3,300 + GH¢2,700 + GH¢1,300 = GH¢8,050
Total Units = 1,400
Average Cost per unit = GH¢8,050 / 1,400 = GH¢5.75
Total Cost of Issues = 1,100 x GH¢5.75 = GH¢6,325
Cost of Closing Stock = 300 x GH¢5.75 = GH¢1,725
STANDARD PRICING METHOD

Total Number of units issued = 1,100
Standard Cost per unit = GH¢5
Total Cost of Issues = GH¢5,500
Closing Stock Valuation
Total Value of Stock = GH¢ 8,050
Less standard cost of Stock Issued = GH¢5,500
GH¢2,550
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MODERN ENGLISH CORRECTION OF ERRORS, BANK RECONCILIATION
UNIT
STATEMENTS Structure
AND
CONTROL ACCOUNTS
Welcome to the last unit of this course. Although we are bringing the
curtain down on this course, we hope you have enjoyed the lessons so far.
This unit will help compliment the previous ones. But in this last unit we
really have some work to do. Sections 1 and 2 concentrate on how to correct
errors which affect or do not affect the Trial Balance, Sections 2 and 4 are
on how to reconcile a bank statement with its cash book, whiles Section 5
and 6 are devoted to preparation of control accounts. We assure you that the
lessons in this unit are very interesting, just like the previous ones. So why
stop reading, kindly read on….

 list and explain example of the errors which do not affect the
agreement of the trial balance;
 describe the errors which will affect the agreement of the trial balance;
 make journal entries to correct errors;
 state the reasons for the use of the suspense account;
 identify and correct errors involving suspense account;
 post journal entries to the ledger accounts;
 correct the net profit/loss after correction of errors;
 redraft the statement of financial position after the correction of
errors;
 explain why the bank reconciliation statement is prepared;
 state reasons why the bank statement balance and the cash book
balance (bank column) may not agree;
 identify and explain specific items of difference in the cash book and
the bank statement;
 prepare the adjusted cash book;
 prepare a bank reconciliation statement after up-dating the cash book;
 identify the nature and purpose of control accounts;
 explain the need for divisions of the ledger and the need to prepare
control accounts;
 list major types of control accounts;
 outline advantages of control accounts;
 list items used to prepare sales ledger control account;
 list items used to prepare purchases ledger control account;
 reconcile the purchases ledger and sales ledger balances with the
control accounts balances.
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PRINCIPLES
IN EARLY CHILDHOOD
Structure
EDUCATION
UEW/IEDE 215
PRINCIPLES CORRECTION OF
UNIT 6 SECTION
OF ACCOUNTING 1 1
Unit 6, ERRORS
Section 1: Correction of errors not affecting
NOT AFFECTING THE TRIALthe trial balance
BALANCE
Generally, if the double entries are correct, it is expected that the trial
balance would agree i.e. the debit and credit sides would be the same. But in
some circumstances, the agreement of the trial balance is not guaranteed due
to mistakes in the double entry. In fact there are some instances where even
though there are mistakes in the Trial Balance, these mistakes will not affect
the agreement of the trial balance. So how would you recognize these
errors? In this section our lessons will dwell on how to identify and
journalize errors that do not affect the agreement of the trial balance. Enjoy
your reading…

 list and explain example of the errors which do not affect the
agreement of the trial balance
 make journal entries to correct errors
Disclosed and Undisclosed errors

Every transaction is entered twice in the ledger, one on a debit side of an
account and the other, on a credit side of another account. This is the
principle of double entry as was explained earlier. If this principle is
followed for every transaction then in extracting the trial balance the totals
for debit and credit sides will agree, that is, it will balance. The
disagreement of the trial balance totals gives a clear indication that an error
has been made somewhere in the books. For example, if cash sales GH¢ 450
debited to the cash book is not credited to the sales account, and this is the
only error committed, the trial balance total would show a difference of
GH¢ 450. However, there are some errors which will not be disclosed by the
trial balance. Hence, we can say that the agreement of the trial balance is not
a proof that there are no errors in the books of accounts. Let us now deal
with errors that can be committed in the books. The errors are those that do
not affect the agreement of the trial balance and those that affect the
agreement of the trial balance.
Errors that do not affect the Agreement of the Trial Balance

Certain errors when committed will not affect the agreement of the trial
balance. These errors include:
a) Error of Omission: This error occurs when a transaction is
completely omitted from the books. For example, if a sale of GH¢650
to K. Kwakye is not entered in the books the trial balance will still
balance.
b) Error of Commission: This occurs when a transaction is entered in

the wrong account of the same class. For example, a purchase of
GH¢2,500 worth of goods from K. Dwomo is entered in A. Dwomo’s
account.
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Unit 6, Section 1: Correction of errors not affecting the trial balance OF ACCOUNTING 1
c) Error of Principle: This occurs where a transaction is entered in the

wrong class of account. For example, a purchase of motor van
GH¢25,000 is entered in the purchases account.
d) Error of Original Entry: This occurs where the original figure of a

transaction entered in the books is wrong. For example, if purchases
of GH¢9,800 is entered as GH¢8,900. Here both debit and credit are
wrong and this will not affect the trial balance agreement.
e) Compensating Errors: Here two errors cancel out each other. For
example, if the purchases journal is overcast by GH¢4,500 and the
sales journal is also overcast by GH¢4,500. The error in the purchases
account having a debit balance would be compensated by the error in
the sales account which has a credit balance.
f) Complete Reversal Entries: This error occurs where a transaction

has been entered in the correct accounts with the correct amount, but
entered on the wrong side of both accounts. For example, a payment
of cash of GH¢1,500 to K. Nketia, a creditor, is debited to bank
account and credited to K. Nketia’s account. This error will not be
disclosed because there has been both a debit and a credit entry for the
same amount.
g) Error of Duplication: This occur where a transaction is entered

twice or more in the books. When this happens, there will be two or
more debits and two or more credits instead of one each.
Correction of errors not affecting the trial balance agreement

When errors not disclosed by the trial balance are found, they have to be
corrected by means of journal entries and then posted to the appropriate
accounts. The treatment for the correction of errors will be explained using
the following illustrative examples with respect to each error.
Illustration 1
a) Error of Omission
Credit sales of GH¢ 6,500 to K. Kwakye is omitted from the books.
To correct this error, the entry in the journal will be to debit K.

Kwakye account and credit sales account.
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PRINCIPLES
OF ACCOUNTING 1 Unit 6, Section 1: Correction of errors not affecting the trial balance
Date Details Folio Dr. Cr.
Jan 10, 2013 GH¢ GH¢
K. Kwakye account SL 6,500
Sales account GL 6,500
Correction of credit sales
omitted from the books.
SL = Sales Ledger GL = General Ledger
Illustration 2
b) Error of Commission
A purchase of GH¢2,500 worth of goods from K. Dwomo, a supplier,
is entered in A. Dwomo’s account in error.
To correct this error, A. Dwomo’s account (the account which was

credited in error) be would debited, K. Dwomo would be credited.
Jan 15, GH¢ GH¢
2013 A. Dwomo account PL 2,500
K. Dwomo account PL 2,500
Correction of a wrong entry in
a personal account.
PL = Purchases Ledger
Illustration 3
c) Error of Principle
A purchase of a motor van GH 25,000 is entered in the purchases
account.
A motor van account in the books of an entity that does not trade in
motor vans is considered a real account. A purchase of a motor van for
used in each an entity should not be treated as normal purchases of
goods for resale. Rather, it should be treated as a purchase of a non-
current asset. The entry in the purchases account for the motor van
purchased is therefore in error. To correct this error, the motor van
account should be debited and the purchases account should be
credited.
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PRINCIPLES
Jan 16, GH¢ GH¢

2013 Motor Van account GL 25, 000
Purchases account GL 25,000
Correction of purchase of motor van
entered in error to purchases account.
Illustration 4
d) Error of Original entry
Purchase of goods worth GH¢ 9,800 from K. Effah, a supplier, has
been entered in the books of original entry (purchases journal) as
GH¢8,900.
This error is described as an error of original entry because an

incorrect amount has been entered in the books of original entry; in
this case, the purchases journal. The same error would be committed
when the transaction is posted to the purchases account and K. Effah’s
account. To correct this error purchases account will be debited with
the difference (GH¢9,800 - GH¢8,900 = GH¢900) to increase the
figure entered in error. Similarly, K. Effah’s account will be credited
with GH¢900.
Jan 18, GH¢ GH¢
2013 Purchases account GL 900 900
K. Effah account PL
Correction of purchases of goods
entered wrongly.
Illustration 5
e) Compensating error
The purchases journal is overcast by GH¢4,500 and the sales journal
also overcast by GH¢4,500.
This type of error occurs in situations where two errors which have
been committed separately, cancel each other. In this example the total
of the purchases journal and that of the sales journal have been over
added. Since the totals of the purchases journal and that of the sales
journal are posted to the purchases account and the sales account
respectively, the error committed will result in the purchases and sales
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PRINCIPLES
OF ACCOUNTING 1 Unit 6, Section 1: Correction of errors not affecting the trial balance
accounts being over stated GH¢4,500 each.
To correct this error, the sales account should be debited (to reduce it)
and the purchases account should be credited (to also reduce it) with
an amount of GH¢4,500 each.
Jan 20, GH¢ GH¢
2013 Sales account GL 4,500 4,500
Purchases account GL
Correction of overcast on
purchases and sales accounts.
Illustration 6
f) Complete Reversal of Entries
A payment of cash of GH¢1,500 to K. Nketia, a creditor, was debited
to cash book in error and credited to K. Nketia’s account.
A cash payment to a creditor should have resulted in a debit to the

creditor’s account and a credit in the cash book. To correct this error a
double amount (GH¢1,500 x 2 = GH¢3,000) needs to be entered into
the opposite sided of both accounts. This will ensure that the correct
entry is made in the respective accounts. For instance, K. Nketia
accounts, a creditor to whom a payment was made, had be credited in
error with GH¢1,500. Once his accounts is debited with GH¢3,000 a
balance of five hundred will be left at the debits side which is
supposed to be the correct entry which should have being made.
Jan 25, GH¢ GH¢
2013 K. Nketia account PL 3,000
Cash book CB 3,000
GH¢ 1,500 cash paid debited to

K. Nketia and credited to cash
book now corrected.
CB = Cashbook
It is instructive to note that when correcting an error of reversal of

entries, it is important to cancel out the incorrect entries and then put
through the correct entries. Hence, twice the amount of the error is
needed to correct the error as illustrated above.
220 UEW/IEDE
PRINCIPLES
Illustration 7
g) Error of Duplication
A credit sale of GH¢ 600 to K. Dwomo, a customer, has been entered
twice in the books of account.
This error is simply corrected by reversing one of the entries in each

of the accounts involved.
Jan 31, GH¢ GH¢
2013 Sales account GL 600
K. Dwomo accounts SL 600
Credit sale of goods GH¢ 600

entered twice, now corrected.
Review Questions
1. Explain the two (2) types of errors mentioned in this section, giving
examples in each case.
2. What is the difference between an error of principle and an error of

commission?
3. For each of the following events indicate the kind of error which has
occurred.
(i) Purchase of a non-current asset posted to purchases account.
(ii) The monthly total discount received from trade payables on the
credit side of the cash book posted to the debit of discount
received account.
(iii) An invoice amount incorrectly recorded in the sales day book.
(iv) Returns inwards for the week posted to the personal account of
trade receivables only.
(v) A careless addition of the purchases day book resulting in the
total purchases for the month being overstated.
(vi) Receipts for a cheque from a customer entered in the credit side
of the cashbook and debited to the customer’s account.
(vii) Repairs to motor vehicle wrongly entered in wages and salaries
accounts.
(viii) Purchases of a car, not meant for resale, wrongly debited to
purchases account.
(ix) The debit side of the cash account has been overcast by GH¢ 10,
and the sales day book has also been overcast by the same
amount.
(x) The credit column of the trial balance has been overcast by
GH¢50.
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221
PRINCIPLES Unit 6, CORRECTION OF ERRORS
Section 2: Correction AFFECTING
of errors affecting the trial balance and
UNIT 6 SECTION
OF ACCOUNTING 1 2 suspense accounts
THE TRIAL BALANCE AND SUSPENSE ACCOUNTS
We believe you are now familiar with errors not affecting the trial balance
agreement. In this section, we move our lessons to errors which affect the
Trial Balance, how to journalize their corrections and the use of the
suspense account to facilitate such corrections. Kindly read on……

 describe the errors which will affect the agreement of the trial balance;
 state the reasons for the use of the suspense account;
 identify and correct errors involving suspense account;
 post journal entries to the ledger accounts;
 correct the net profit/loss after correction of errors and;
 redraft the statement of financial position after the correction of errors.
Errors which affect the agreement of the trial balance

We have looked at errors which do not affect the agreement of the trial
balance. However, the moment the trial balance fails to agree, it becomes
clear that some error has been committed and efforts have to be made to
trace it. Errors which affect the agreement of the trial balance include the
following:
(a) Single Entry: This occurs when one half of the double entry book-
keeping is omitted. That is, where only the debit or credit entry is
made. For example, cash sales of GH¢3,500 is debited to the cash
book but no entry is made in the sales account.
(b) Error in Posting: This involves wrong entry of an item as two debits
or as two credits. For example, a credit sale of GH¢750 to A
Adjapong is credited to his account.
(c) Error of Transposition: This involves the entry of different amounts

for the same transaction on the debit and credit sides of the accounts
concerned. For example, a sales invoice of GH¢4,800 correctly
recorded in the sales ledger had been entered in the sales journal as
GH¢8,400.
(d) Omission of a Balance: This is where a balance on an account is

omitted from the trial balance. For example, a credit balance of
GH¢740 in the purchases ledger has been omitted from the trial
balance.
(e) Error in Addition i.e. undercast or overcast of a day book or an

account. This involves errors in the addition of a day book or
calculation of balances. For example, purchases day book has been
overcast by GH¢ 850.
(f) Extraction Error: This is where the correct balance is shown in the
ledger account but the wrong amount is entered in the trial balance, or
222 UEW/IEDE
Unit 6, Section 2: Correction of errors affecting the trial balance and PRINCIPLES
suspense accounts OF ACCOUNTING 1
the correct amount is extracted but placed on the wrong side of the
trial balance. For example, discount received balance of GH¢680 has
been placed on the debit side of the trial balance instead of the credit
side.
The Use of Suspense Account

When a trial balance fails to agree certain steps are taken to trace the errors
and correct them as soon as possible. If these errors are not located
immediately to make the two sides of the trial balance equal, the difference
is put in an account called the suspense account. If the debit side of the trial
balance is short, suspense account will be debited with the difference and
the suspense account will be credited if the credit side is short.
After the difference in the trial balance is debited or credited to the suspense
account as the case may be, correction of the errors will be done by passing
journal entries. The account to be corrected will be debited or credited and
the journal entry will be completed by crediting or debiting the suspense
account. After all the corrections have been done, the suspense account will
have a nil balance.
A suspense account is therefore an account in which the difference in the

trial balance is placed until the error that caused the difference is located and
corrected.
Illustration 1
After preparing a trial balance an accounts clerk realized that the total of the
debit side was GH¢46,500 and the credit side was GH¢48,000. The
difference was posted to a suspense account. The following errors were later
detected:
(a) Trade receivables balance of GH¢500 has been left out.
(b) Discount allowed of GH¢450 has been posted to Discount Received
Account.
(c) There was an overcast of sales by GH¢350.
(d) Wages of GH¢540 has been posted as GH¢450.
(e) There was an overcast of purchases by GH¢240.
(f) Motor Expenses was overcast by GH¢100.
You are required to journalize the correction of the errors and to show the
suspense account as it would appear after the correction of the errors.
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223
PRINCIPLES Unit 6, Section 2: Correction of errors affecting the trial balance and
OF ACCOUNTING 1 suspense accounts
General Journal
Particulars Dr. Cr.
GH¢ GH¢
(a) Trade receivables Account 500
Suspense Account 500
Omission of trade receivables balance corrected
(b) Discount Allowed Account 450

Discount Received Account 450
Discount allowed wrongly posted to discount received
account now corrected
(c) Sales Account 350

Sales overcast corrected
(d) Wages Account 90

Suspense Account 90
Amount wrongly posted to the wages account corrected
(e) Suspense Account 240

Purchases Account 240
Purchases overcast corrected
(f) Suspense Account 100

Motor Expenses Account 100
Motor Expenses overcast corrected
Suspense Account
GH¢ GH¢
Difference in trial balance 1,500 Trade receivables 500
Purchases 240 Discount Allowed 450
Motor Expenses 100 Discount Received 450
Sales 350
Wages 90
1,840 1,840
Illustration 2
The trial balance of Atia and Sons Enterprise was extracted on 31 May,
2014. A difference of GH¢2,500 (Cr.) was disclosed. Upon investigations,
the following errors were detected.
(a) A purchase invoice for GH¢1,500 posted to the purchase ledger had
been recorded in the sales day book.
(b) The purchases day book has been overcast by GH¢1,700.
224 UEW/IEDE
(c) A folio in the cash payments book has been carried forward as
GH¢5,300; the correct amount should have been GH¢3,500.
(d) A cheque of GH¢1,200 received from K. Nketia had been correctly
entered in the cash book but had not been entered in K. Nketia’s
account.
(e) Discount received balance of GH¢1,680 has been posted to the wrong
side of the trial balance.
(f) The sales account is undercast by GH¢1,040.
Required: Pass journal entries to correct the errors and post to the suspense
account.
General Journal
Particulars Dr. Cr.
GH¢ GH¢
(a) Sales Account 1,500
Purchases Account 1,500
Purchases invoice recorded in sales day book corrected
(b) Suspense Account 1,700

Purchases Account 1,700
Purchases day book overcast corrected
(c) Cash book 1,800

Suspense Account 1,800
Error in cash payment book corrected
(d) Suspense Account 1,200

K. Nketia Account 1,200
Cash received from K. Nketia now recorded in his
account
3,360
(e) Suspense Account 3,360
Discount Received Account (Trial
Balance)
Discount received balance wrongly posted now 1,040
corrected 1,040
(f) Suspense Account

Sales Account
Sales undercast, now corrected
UEW/IEDE
225
Suspense Account
GH¢ GH¢
Purchases 1,700 Difference in books 2,500
K. Nketia 1,200 Sales 1,500
Discount Received (TB) 3,360 Purchase 1,500
Sales 1,040 Cash book 1,800
7,300 7,300
Adjustment of Net Profit/Loss

If errors are found and corrected after the preparation of the final accounts,
it is likely that there will be some effect on the gross profit or the net profit
and eventually the statement of financial position. When this happens there
is a need to adjust the net profit or loss to arrive at the true net profit or loss.
For example, if purchases account is found to be overcast, its correction will
decrease the cost of sales and increase the gross profit; net profit will be
increased too, which will change the statement of financial position. Every
error will have to be examined properly to know how it will affect reported
profit or the statement of financial position.
Let us look at the following errors and how it can affect the reported profit
and the statement of financial position: Sales of goods on credit to K. Oti for
GH¢450 is omitted from the books completely. Here, sales will be short by
GH¢450. This error can be corrected by crediting Sales by GH¢450 and
debiting K. Ofi account by GH¢450. After the correction, gross profit and
net profit will increase by GH¢450. Trade receivables figure and eventually,
current assets will increase by GH¢450. Also in the statement of financial
position, capital will increase by GH¢450.
ERROR EFFECT CORRECTION

1. Overcast of opening inventory Lower profits Add to profit
2. Undercast of opening inventory Increase profits Less from profit
3. Overcast of closing inventory Increase profits Less from profit
4. Overcast of return outwards Increase profits Less from profit
5. Undercast of return outwards Lower profits Add to profit
6. Undercast of closing inventory Lower profits Add to profit
7. Overcast of purchases Lower profits Add to profit
8. Undercast of purchases Increase profits Less from profit
9. Undercast of expenses Increase profits Less from profit
226 UEW/IEDE
10. Overcast of expenses Lower profits Add to profit
11. Overcast of revenue Increase profits Less from profit
12. Undercast of revenue Lower profits Add to profits
13. Overcast of sales Increase profits Less from profit
14. Undercast of sales Lower profits Add to profit
15. Undercast of return inwards Increase profits Less from profit
16. Overcast of return inwards Lower profits Add to profit
Illustration 3
An accountant having prepared his trial balance and failed to agree, placed
the difference in suspense account and prepared his statement of profit or
loss, and arrived at a profit of GH¢2,500. The following errors were
subsequently discovered:
(i) Purchases day book was overcast by GH605.
(ii) A discount allowed to K. Dwomo, GH¢205 was omitted from the
books.
(iii) A sales of goods GH¢3,250 to K. Kwakye was written as GH¢2,350 in
the sales account.
(iv) A purchase of goods GH¢430 from K. Nimo was not posted to his
account.
(v) Equipment sold for GH¢500 has been correctly entered in the disposal
account but credited to the sales account.
Required
a. Write journal entries to correct the errors.
b. Prepare a statement of corrected net profit.
UEW/IEDE
227
(a) General Journal

Particulars Dr. Cr.
GH¢ GH¢
(i) Suspense Account 605
Purchases Account 605
Purchases overcast now corrected
(ii) Discount Allowed Account 205

K. Dwomo Account 205
Discount allowed omitted now recorded
(iii) Suspense Account 900

Sales Account 900
Sales wrongly transposed now corrected
(iv) Suspense Account 430

K. Nimo Account 430
Purchases omitted from K. Nimo Account now entered
(v) Sales Account 500

Sales of equipment entered in sales Account now corrected
(b) Statement of Corrected Net Profit

GH¢ GH¢
Reported Net Profit 2,500
Add: Purchases overcast 605
Wrong posting of sales 900
4,005
Less: Discount allowed 205
Sale of Equipment 500 705
Corrected Net Profit 3,300
Illustration 4
The final accounts of Yorro Sallah for the year ended 31/12/2014 showed a
net loss of D2,000. You are asked to examine the figures and you
ascertained the following:
(a) Closing inventory had been undervalued by D1,800
(b) Discount allowed amounting to D1,000 had been entered as discount
received
(c) Purchases had been overcast by D3,000
(d) A provision of D1,600 for doubtful debt should be made
(e) Rent prepaid for next year of D3000 was charged to the year
228 UEW/IEDE
(f) Interest accrued on investments D370 was ignored

(g) Goods costing D250 were taken away by the trader for his personal
use, goods costing D500 were given away free to a hospital, but none
has been recorded.
(h) Wages outstanding for the year D950 was not charged to the year
You are required to prepare a statement showing the revised net profit or
loss figure for the year.
Yorro Sallah
Statement of Corrected Net Profit for the year ended 31/12/2014
D D
Uncorrected Net Loss (2,000)
Add: Inventory Undervalued 1,800
Purchases Over cost 3,000
Drawings – Goods 250
Donations – Goods 500
Rent Prepaid 3,000
Interest on Investment 370 8,920
6,920
Less: Discount Allowed 2,000
Provision for doubtful debts 1,600
Donations – Goods 500
Wages Outstanding 950 (5,050)
Corrected Net Profit 1,870
Review Questions
1. On 31 March, 2013, the books of account of Kwame Appiah did not
agree. The difference in trial balance amounting to GH¢13,870 was
credited to a suspense account. Later, the following errors were noticed:
(a) The purchase day book was overcast by GH¢3,000.
(b) A cheque paid to Adama for GH¢4,000 was wrongly debited to
Janneh account.
(c) A piece of machinery purchased for GH¢123,500 has been debited
to purchases account.
(d) The sales book has been overcast by GH¢1,500.
(e) A credit sales of GH¢12,000 to Donkor has been passed through
the purchases day book.
(f) Cash of GH¢1,170 received from Kofi Ntiamoah, a debtor, though
entered in the cash book has not been posted to Kofi Ntiamoah’s
account.
(g) Goods returned by Ama Atta, a debtor, GH¢2,250 have been
entered in the return outwards day book. However, Ama Atta’s
account is correctly credited.
UEW/IEDE
229
(h) A sales invoice of GH¢8,000 was correctly entered and posted to

the sales account but no entry was made in the customer’s account.
(i) Discount received amounting to GH¢1,200 had been charged as
discount allowed.
(j) A cheque paid for GH¢2,500 for rent was entered in the cash book
as GH¢5,200.
Required:
Show the journal entries for rectification of the errors and prepare the
suspense account.
2. The trial balance of Distressed Company Limited for the financial year
end 31 December 2013 failed to agree. The difference was placed at the
debit side of a suspense account. Upon thorough investigation, the
following errors were detected.
(a) A piece of machinery purchased for GH¢3,600 had been written off
to repairs and maintenance.
(b) The receipts side of the cash book had been undercast by
GH¢1,800.
(c) A sum of GH¢5,000 representing credit sales to Auntie Beatrice
was posted to credit side of her account.
(d) A credit note for GH¢2,400 received from Victoria Boateng, a
supplier, had been posted to the wrong side of her account.
(e) Discount allowed was overcast by GH¢4,000.
(f) Rent of GH¢3,700 received from a sub-tenant was rather debited to
the rent and rates account.
(g) A cheque for GH¢4,500 paid into the bank and subsequently
dishonoured was correctly reversed in the cash book but debited to
the customer’s account as GH¢450,
(h) The purchases day book was overcast by GH¢1,920.
Note: The income statement for the year ended 31 December 2013
disclosed a net profit of GH¢12,550.

(i) Pass journal entries to rectify the errors.
(ii) Prepare suspense account to disclose the difference in the trial
balance.
(iii) Prepare a statement showing the adjusted net profit or loss.
3. The final accounts of Boafo Yena Enterprise for the year ended 31
December 2013 showed a net loss of GH¢2,000. You were asked to
examine the figures and you ascertained the following:
(a) Closing inventory of goods had been undervalued by GH¢1,800.
(b) Discount allowed amounting to GH¢1,000 had been entered as
discount received.
(c) Purchases had been overcast by GH¢3,000.
230 UEW/IEDE
(d) A provision of GH¢1,600 for doubtful debts should have been

made.
(e) Rent prepaid for next financial year of GH¢3,000 was charged to
the current financial year.
(f) Interest accrued on investments GH¢370 was ignored.
(g) Goods costing GH¢250 were taken away by the trader for his
personal use, goods costing GH¢500 were given away free to a
hospital, but none of these transactions have been recorded.
(h) Wages outstanding for the year amounting to GH¢950 was not
charged to the current year’s account.
Required:
Prepare a statement showing the revised net profit or loss figure for the
year.
4. On December 31, 2013, the Financial Accountant of Believe in Better

Enterprise extracted the trial balance from the ledger accounts but found
that it did not agree. The difference of GH¢4,070 was placed on the
credit side of the suspense accounts. The income statement was then
prepared which showed a net profit of GH¢263,400. Subsequently, an
investigation was conducted and the following errors were detected:
(i) A motor vehicle worth GH¢75,000 purchased from the personal
resources of the proprietor and introduced into the business by the
proprietor had been debited correctly to the motor vehicle account
but wrongly credited to the cash book as GH¢57,000.
(ii) The salaries account balance was understated by GH¢4,500.
(iii) A comprehensive insurance premium of GH¢1,400 paid in
respect of the motor vehicle had completely been omitted from
the books of accounts.
(iv) Rates unpaid of GH¢300 had been recorded in the rates account
as GH¢800.
(v) Goods valued at GH¢1,300 withdrawn by the proprietor had been
recorded as GH¢3,100 in the purchases account and the goods
stolen account.
(vi) Rent receivable account was overcast by GH¢650
(vii) The purchases account was understated by GH¢1,000 whiles the
sales account was overcast by GH¢2,000.
(viii) No entry was made in the receivable account regarding a
dishonoured cheque of GH¢5,300.
(ix) An office equipment was purchased for GH¢20,000 on 1 Jan
2013 but it was debited to general expenses. Depreciation of the
office equipment is at 10% per annum.
(x) A customer returned goods worth GH¢5,000. The returned goods
were debited to the customer’s account and credited to returns
inwards account.
(xi) Rent expense prepaid of GH¢1,100 was recorded in the rent
expense account as GH¢1,600.
UEW/IEDE
231
(xii) A debit note of GH¢3,000 covering goods returned to a supplier,

was credited to the supplier’s account and debited to the returns
outwards account.
(xiii) Motor vehicle repairs costing GH¢1,530 was debited to motor
vehicle account as GH¢1,350. Motor vehicles are depreciated at
the rate of 20% on cost.
(xiv) A debit balance of GH¢1,600 on a creditor’s account was omitted
from the list of balances.
You are required to prepare

a) Journal entries, with narrations, necessary to correct the errors.
b) Suspense account
c) A statement of corrected net profit
5. After unsuccessful attempts at securing a gainful employment after

graduation from the university, Johnson decided to set up his own retail
business. He decided to pay himself a salary of GH¢10,000 per year.
All operational receipts and payments go through the bank current
account. Details of the bank current account are recorded in a cash book
which is part of the double entry system. Depreciation on property,
plant and equipment is charged at 40% using the reducing balance
method. A full year’s depreciation is charged in the year of acquisition,
with no depreciation charged in the year of an asset’s disposal.
His bookkeeper has been having trouble balancing the books and has
finally produced the following list of balances as at 31 December 2013.
GH¢
Capital account @ 1 January 2013 98,000
6% Loan Account repayable on 31 December 2014 10,000
12% Loan Account repayable on 31 December 2015 20,000
Drawings 2,800
Sales 243,000
Bad debts recovered 1,000
Sales returns 6,000
Discounts allowed 1,000
Discounts received 2,000
Purchase returns 7,000
Inventory at 1 January 2013 20,000
Purchases 154,000
Account receivables 71,200
Account payables 76,880
Allowances for receivables 2,500
Irrecoverable debts 4,000
232 UEW/IEDE
Other Operating expenses 52,000

Land at cost 28,280
Other Property, Plant & Equipment at cost 120,000
Provision for depreciation on Property, Plant &
Equipment 40,000
8% Bank Deposit account 20,000
Interest on Bank Deposit Account 1,200
Overdraft on Bank current account per the Cash book 3,000
Suspense account ?
The following information is available:

(i) The initial valuation of closing inventory was GH¢36,000 based
on original cost. The auditors pointed out that the valuation
included one hundred (100) damaged items at their original cost
of GH¢50 each.
(ii) The total of the sales returns daybook has been under-cast by
GH¢1,000.
(iii) A purchase invoice for GH¢ 3,000 was incorrectly entered in the
purchase day book as GH¢300
(iv) The receipts side of the cash book which totaled GH¢28,000 was
mistakenly stated as GH¢20,800 in November 2013.
(v) Johnson is of the view that allowances for receivables should be
adjusted to be 5% of the year-end receivables’ balance.
(vi) Some Equipment bought on 1 April 2012 for GH¢10,000 was
sold on 30 April 2013. The proceeds of GH¢4,700 were entered
on the receipts side of the cash book but no other entries in
connection with the disposal were made in the nominal ledger.
(vii) The depreciation charge for the year has not yet been accounted
for.
(viii) It is agreed that hotel bills for GH¢1,000 paid by Johnson from
his personal bank account are proper business expenses. These
should be included in operating expenses. Johnson has taken
trading goods costing GH¢1,500 out of the business for his own
personal use. No entry has been made for either of these items.
(ix) Included in operating expenses is a payment of GH¢4,800 for an
insurance premium. This payment was made on 1 April 2013 to
provide insurance cover for the year ended 30 April 2014.
(x) No loan interest has yet been accounted for.
(xi) Interest on the 8% Bank Deposit Account is calculated twice a
year on 31 March and 30 September for the preceding six months.
The interest earned is initially credited to the deposit account but
then immediately transferred to the business’ Bank Current
Account. Thus the Bank Deposit account has a constant balance
of GH¢20,000.
UEW/IEDE
233
Required:
(a) Set out the list of balances in the form of a trial balance and
determine the balance on the suspense account.
(b) Prepare journal entries (with narrations) to deal with any
omissions, corrections or adjustments as indicated in the additional
notes to the list of balances.
(c) Prepare Johnson’s income statement for the year ended 31
December 2013.
(d) Prepare Johnson’s statement of financial position as at 31
December 2013.
6. On December 31, 2011, the Financial Accountant of Believe in Better

Enterprise extracted the trial balance from the ledger accounts but found
that it did not agree. The difference of GH¢4,070 was placed on the
credit side of the suspense accounts. The income statement was then
prepared which showed a net profit of GH¢263,400.
Subsequently, an investigation was conducted and the following errors

were detected:
(i) A motor vehicle worth GH¢75,000 purchased from the personal
resources of the proprietor and introduced into the business by the
proprietor had been debited correctly to the motor vehicle account
but wrongly credited to the cash book as GH¢57,000.
(ii) The salaries account balance was understated by GH¢4,500.
(iii) A comprehensive insurance premium of GH¢1,400 paid in
respect of the motor vehicle had completely been omitted from
the books of accounts.
(iv) Rates unpaid of GH¢300 had been recorded in the rates account
as GH¢800.
(v) Goods valued at GH¢1,300 withdrawn by the proprietor had been
recorded as GH¢3,100 in the purchases account and the goods
stolen account.
(vi) Rent receivable account was overcast by GH¢650
(vii) The purchases account was understated by GH¢1,000 whiles the
sales account was overcast by GH¢2,000.
(viii) No entry was made in the receivable account regarding a
dishonoured cheque of GH¢5,300.
(ix) An office equipment was purchased for GH¢20,000 on 1 Jan
2011 but it was debited to general expenses. Depreciation of the
office equipment is at 10% per annum.
(x) A customer returned goods worth GH¢5,000. The returned goods
were debited to the customer’s account and credited to returns
inwards account.
(xi) Rent expense prepaid of GH¢1,100 was recorded in the rent
expense account as GH¢1,600.
234 UEW/IEDE
(xii) A debit note of GH¢3,000 covering goods returned to a supplier,

was credited to the supplier’s account and debited to the returns
outwards account.
(xiii) Motor vehicle repairs costing GH¢1,530 was debited to motor
vehicle account as GH¢1,350. Motor vehicles are depreciated at
the rate of 20% on cost.
(xiv) A debit balance of GH¢1,600 on a creditor’s account was omitted
from the list of balances.
You are required to prepare

(a) Journal entries, with narrations, necessary to correct the errors.
(b) Suspense account
(c) A statement of corrected net profit
UEW/IEDE
235
PRINCIPLES
UNIT 6 SECTION
OF ACCOUNTING 1 3
Unit 6, BANK RECONCILIATION
Section 3: STATEMENTS
Bank Reconciliation Statements I I
Dear learner, you may recall that in Unit 2 Section 5 of this course module,
we learned about how an entity can record cash and bank transactions using
the Cash Book. If all bank transactions are appropriately recorded in the
bank column of the cash book kept by the entity and the bank account kept
by the entity’s bankers, then generally it is expected that the two balances
would agree i.e. be the same. But rarely does it happen that the two balances
are the same. What really creates this? In this section we shall learn about
the meaning of bank reconciliation and the causes of the differences
between bank balance in cash book and bank balance as shown on the face
of the entity’s bank statement.

 explain why the bank reconciliation statement is prepared
 state reasons why the bank statement balance and the cash book
balance (bank column) may not agree
 identify and explain specific items of difference in the cash book and
the bank statement
Definition and Purpose of Bank Reconciliation Statement

The purpose of preparing a bank reconciliation statement is to ensure that
the balance shown in the cash book at the end of a given accounting period
agrees with that shown on the bank statement or passbook supplied by the
bank. In practice, these two figures are rarely the same because of errors,
omissions and the timing of bank deposits and cheque payments. The bank
reconciliation statement is usually prepared by a current account holder. It is
not done in a book of account and thus is not a part of the double entry
system. It must be prepared at least yearly before the final accounts are
compiled. Because most businesses usually have a large number of bank
transactions they often prepare a bank reconciliation statement either
monthly or at least quarterly.
Differences between Cash Book Balance and Bank Statement Balance

As noted above, in most instances the balance shown in the cash book (often
referred to as book balance) and the balance shown on the bank statement
are often not the same. This may be due to any of the following:
(i) Unpresented cheques: These are cheques drawn or issued for
payment and entered in the cash book but which have not yet been
presented to the bank for payment or which have been presented for
payment but have not yet passed through the bank clearing system and
thus have not appeared on the bank statement. These cheques are
credited to the cash book but not yet debited on the bank statement.
They can be referred to as undebited cheques. Such cheques should be
added to the cash book balance or deducted from the bank statement
balance.
(ii) Uncredited cheques or deposits: These are cheques received and

deposited into the bank for which the cash book had been debited but
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Unit 6, Section 3: Bank Reconciliation Statements I OF ACCOUNTING 1
which is yet to be credited to the bank statement. Uncredited cheques

also result from situations where the bank statement had been printed
before cheques or deposits were received by the bank. Such cheques
will not reflect in the bank statement until the next bank statement is
printed. Such cheques or deposits should be added to the bank
statement balance or deducted from the cashbook balance.
(iii) Bank charges: These are charges made by the bank for the various
services it renders to the customer. For example, charges for issuing
cheque books, ATM cards and commission on turnover (C.O.T.).
They represent deductions in the customer’s balance with the bank,
the knowledge of which the customer gains only at the receipt of the
bank statement. Bank charges should be credited to the cash book or
deducted from the cashbook balance.
(iv) Standing order: These are instructions given to the bank by a

customer to receive on his behalf or to make some payments on his
behalf. For example, an instruction given to the bank to pay a regular
amount into an investment account in another financial institution.
Standing order should be debited or credited to the cash book, as the
case may be, or added to or deducted from the cashbook balance.
(v) Dishonoured cheques: Cheques which have been received from trade
receivables, sent to the bank to be credited to the entity’s account but
which have been returned. Cheques are dishonoured by a bank for
various reasons. For example, when the amount in words is different
from the amount is figures; when there is no date on the cheque;
insufficient funds; no signature; and counter instruction from the
customer. Dishonoured cheques may have been entered in the bank
statement but not in the cash book. These cheques should be credited
in the cashbook or deducted from the cash book balance.
(vi) Errors by the bank: These are errors of posting the Bank statement
which may not be reflected in the Cash Book. They include cheques
debited and credited in error by the bank. They should be treated
appropriately to effect the corrections.
(vii) Errors in the cash book: These are errors that occur in making
entries in the Cash Book. They should be treated appropriately to
effect the corrections.
(viii) Dividend/Interest received: These are amounts which are

occasionally credited to a customer’s bank account. Dividends are
usually received on behalf of customers who have instructed their
banks to credit their accounts with their dividend entitlements.
Interests are also credited to customer’s accounts as and when they are
due. The treatment is to debit them to the cash book balance.
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PRINCIPLES
OF ACCOUNTING 1 Unit 6, Section 3: Bank Reconciliation Statements I
(ix) Credit transfer: This refers to the payment of an amount directly

from one bank account to the other. The payment is effected by bank
transfer. The amount is usually credited to the receiving bank account
before the entity entitled to the amount is made aware of it. The
treatment is to debit such transfers to the cash book.
(x) Deposits-in-transit: These are amounts that have been deposited into
the bank accounts but have un-cleared effect on the bank account
because they have not yet gone through the cheque clearing process.
They should be treated similar to that of uncredited cheques. That is,
they should be added to the bank statement balance or deducted from
the cashbook balance.
Review Questions
1. What is a bank reconciliation statement?
2. A friend says to you: ‘I don’t know why companies bother to prepare

bank reconciliations statements – it seems a waste of time. Why don’t
they just do like I do and adjust the cash account for any difference
between what the bank shows as a balance and what shows up in their
books?’ Explain to your friend why a Bank Reconciliation Statement
should be prepared as soon as a bank statement is received.
3. Distinguish between the following:

(a) Bank statement and bank reconciliation statement
(b) Bank overdraft and bank loan
(c) Uncredited cheque and unpresented cheque
(d) Stale cheque and dishonoured cheque
(e) Credit transfer and debit transfer
(f) Cheque book and pass book
4. Explain six items which may contribute to the difference between the
bank balance shown in the cash book and the balance shown on the
bank statement at a specific date.
5. State four items that can be found on a bank statement but not in the
cash book.
6. State four causes of dishonoured cheques.
7. Explain the reason for uncredited cheques.
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Unit 6,
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Section
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Bankfor
Reconciliation
your notes Statements I OF ACCOUNTING 1
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PRINCIPLES
UNIT 6 SECTION
OF ACCOUNTING 1 4
Unit 6, BANK RECONCILIATION
Section 4: STATEMENTS
Bank reconciliation statements II II
Once we now know what really causes differences in bank balances, our
attention in this section will be concentrated on how to book these
differences in order to correct or reconcile the bank balance in the entity’s
cash book to the bank balance as shown on the face the entity’s bank
statement. To do this, we will make use of the Adjusted Cash Book and a
Bank Reconciliation Statement

 prepare the adjusted cash book
 prepare a bank reconciliation statement after up-dating the cash book
Preparation of the Bank Reconciliation Statement after

Up-dating the Cash Book
The first step in the preparation of a bank reconciliation statement involves
identifying payments, and receipts that are on the bank statement but which
have not been entered in the cash book. Two key issues are unpresented
cheques and uncredited cheques, discussed earlier. Other issues may include
cheques dishonoured, bank charges and interest, standing orders for hire
purchase instalments, insurance premiums, and loan interest which appear
on the bank statement but not in the cash book. Occasionally, receipts such
as interest and dividends received by credit transfer are also found to be on
the bank statement but not in the cash book.
Illustration 1
On 30 June 2014 the bank column of Oti Akenten’s cashbook showed a
debit balance of GH¢12,000.
A bank statement written up to 30th June, 2014 disclosed that the following
items had not been entered in the cashbook:
i. Bank charges GH¢3,600
ii. The sum of GH¢4,500 received from K. Effa by credit transfer
iii. Standing order in respect of Rent GH¢1,200
iv. Interest received on behalf of Oti Akenten GH¢500
You are required to write the cashbook up to date.
OTI AKENTEN
Updated Cash Book

GH¢ GH¢
Balance b/d 12,000 Bank charges 3,600
K. Effa-Credit transfer 4,500 Standing Order-Rent 1,200
Interest received 500 Balance c/d 12,200
17,000 17,000
Balance b/d 12,200
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Unit 6, Section 4: Bank reconciliation statements II OF ACCOUNTING 1
The second step is that the omissions of receipts and payments which were
noted in step one are entered in the cash book to bring it up to date and a
new balance computed. This new balance is usually referred to as the
adjusted (corrected) cash book balance. However, in examination questions
the student is sometimes required to build them into the bank reconciliation
statement instead.
Below is the format for preparing a bank reconciliation statement.
Bank Reconciliation Statement as at 31st December, 2013

GH¢
Balance as per bank statement XXX
Add: Uncredited cash/cheques XX
XXX
Less: Unpresented cheques (XX)
Balance as per cash book XXX
This format is used when the bank reconciliation statement is prepared

beginning with the balance as per bank statement and ending with the
balance as per cash book.
Alternatively, the bank reconciliation statement can be prepared beginning

with the balance as per cash book and ending with the balance as per bank
statement as presented below:
Bank Reconciliation Statement as at 31st December, 2013

GH¢
Balance as per cash book XXX
Add: Unpresented cheque XX
XXX
Less: Uncredited cash/cheques (XX)
Balance as per bank statement XXX
Let us use the following illustration to explain the preparation of a bank

reconciliation statement using the above format as a guide.
Illustration 2
The cash book of Kende Enterprise at 30th June 2014 showed a debit
balance of GH¢2,520 but his bank statement at the same date was a credit
balance of GH¢4,166.5. A subsequent investigation showed that the
following items caused the discrepancy between the cash book balance and
the bank statement balance:-
(i) The bank had received dividends of GH¢125 on behalf of Kende
Enterprise.
(ii) Unpresented cheques amounted to GH¢1,734.
(iii) Deposits not yet credited by the bank amounted to GH¢137.
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PRINCIPLES
OF ACCOUNTING 1 Unit 6, Section 4: Bank reconciliation statements II
(iv) Bank charges amounting to GH¢48.5 had not been recorded in the
cash book.
(v) A standing order of GH¢9 for insurance premium payment had been
effected by the bank.
(vi) A cheque of GH¢487 issued to Mansah was recorded as GH¢397.
(vii) A cheque of GH¢28 has been returned by the bank marked “refer to
drawer”.
(viii) A customer of Kende Enterprise had made a direct payment of
GH¢100 into its bank account.
Kendie Enterprise wants its cash book updated and a bank reconciliation
statement (reconciling the balance as per the bank statement with the
updated cash book balance) prepared.
Kende Enterprise
Updated Cash Book

GH¢ GH¢
Balance b/d 2,520 Bank Charges 48.50
Dividends 125 Standing Order: Insurance 9.00
Direct Transfer 100 Cheques Understated 90.00
Dishonoured cheques 28.00
. . Bal. c/d 2,569.50
2,745 2,745
Bal. b/d 2,569.50
Bank Reconciliation Statement as at 30th June, 2014

GH¢
Balance as per bank statement 4,166.50
Add: Uncredited Deposit 137.00
4,303.50
Less: Unpresented Cheques (1,734.00)
Balance as per updated cash book 2,569.50
In a case where the bank statement shows an overdraft, the format for
preparing the bank reconciliation statement will look slightly different from
the earlier ones presented.
Bank Reconciliation Statement as at 31 December, 2013

GH¢
Overdraft as per adjusted cash book XXX
Less: Unpresented cheques (XX)
XXX
Add: Uncredited cash/cheques XX
Overdraft as per bank statement XXX
This format is used when the bank reconciliation statement is prepared
242 UEW/IEDE
PRINCIPLES
beginning with the overdraft as per adjusted cash book and ending with the
overdraft as per bank statement.
Alternatively, the bank reconciliation statement can be prepared beginning

with the overdraft as per bank statement and ending with the overdraft as
per adjusted cash book as presented below:
Bank Reconciliation Statement as at 31 December, 2013

GH¢
Overdraft as per bank statement XXX
Less: Un-credited cash cheques ( XX)
XXX
Add: Un-presented Cheques XX
Overdraft as per adjusted cash book XXX
Let us use the following illustration to explain the preparation of a bank

reconciliation statement using the above format as a guide.
Illustration 3
The following is a summary from the cash book of Glory Ltd for March
2014.
Cash Book
2014 GH¢ 2014 GH¢
Mar 1 Bal. b/d 5,610 Payments 41,890
Receipts 37,480 Mar 31 Bal. c/d 1,200
43,090 43,090
April 1 Bal. b/d 1,200
When checking the cash book against the bank statement the following
discrepancies were found:
(a) Bank charges of GH¢80 shown in the bank statement have not been
entered in the cash book.
(b) The bank has debited a cheque for GH¢370 in error to the company's
account.
(c) Cheques totalling GH¢960 have not yet been presented to the bank for
payment.
(d) Dividends received of GH¢420 have been credited on the bank
statement but not recorded in the cash book.
(e) There are cheques received of GH¢4,840 which are entered in the cash
book but not yet credited to the company's account by the bank.
(f) A cheque for GH¢170 has been returned by the bank marked 'refer to
drawer' but no entry relating to this has been made in the books of the
company.
(g) The opening balance in the cash book should have been GH¢6,510
and not GH¢5,610.
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PRINCIPLES
OF ACCOUNTING 1 Unit 6, Section 4: Bank reconciliation statements II
(h) The bank statement shows that there is an overdraft at 31 March 2014
of GH¢1,980.

(i) Make the entries necessary to correct the cash book; and
(ii) Prepare a bank reconciliation statement as at 31 March 2014.
Corrected Cash Book
GH¢ GH¢
Bal b/d 1,200 Bank charges 80
Dividends 420 Dishonoured cheque 170
Error in opening balance 900 Balance c/d 2,270
2,520 2,520
Bal b/d 2,270
Glory Ltd
Bank reconciliation statement as at 31 March 2014
GH¢ GH¢
Balance per corrected cash book 2,270
Add: Cheques not yet presented 960
3,230
Less: Cheques not yet credited 4,840
Cheques debited in error 370 (5,210)
Balance as per bank statement (overdrawn) (1,980)
Note: The cheque debited in error is shown in the bank reconciliation

statement rather than the cash book because it will presumably be
corrected on the bank statement in due course and thus not affect the
cash book.
Review Questions
1. The bank account of Kofi Mensah in his cashbook showed a debit
balance of GH¢1,100,000 on 31 March, 2013. Investigations however
revealed the following:
(a) Unpresented cheques GH¢226,000
(b) Deposits not credited by the bank GH¢450,000
(c) A cheque for GH¢190,000 was received from a customer and a
discount of GH¢10,000 was allowed, but GH¢200,000 had been
entered in the bank column of the cash book.
(d) A standing order of GH¢24,000 had been paid by the bank for a
trade subscription.
(e) A credit transfer of GH¢70,000 had been entered on the bank
statement.
(f) Bank charges of GH¢36,000 had been omitted from the cash book.
(g) Balance per bank statement as at 31 March 2013 was GH¢876,000.
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PRINCIPLES
Required:
(i) Update Kofi Mensah’s bank account in his cash book.
(ii) Reconcile the bank statement balance with the updated cash book
balance.
2. The balance as at 30 April, 2013 on the cash book (bank column) of

Marcon Ventures was a credit of GH¢2,850,005.00. An examination of
the cash book and bank statement revealed the following:
(a) Cheques amounting to GH¢908,000 had been issued but had not
been presented by 30 April, 2013.
(b) Bank charges of GH¢30,000 had been charged by the bank but had
not been entered in the cash book.
(c) GH¢885,400 receipts from customers had been credited to
Marcon’s bank account but no entry had been made in the cash
book.
(d) A cheque drawn in favour of Marcon by a debtor for GH¢50,446
had been dishonoured. No entry regarding the dishonour had been
made in the cash book.
(e) Marcon paid cheques amounting to GH¢1,044,085 into his bank
account on 30th April 2013 but this deposit had not been recorded
in the bank statement.
(f) The balance on the payment side of Marcon’s cash book of
GH¢2,968,500 had been carried forward as GH¢2,698,500 instead
of GH¢2,968,500.
Required:
(i) Prepare an adjusted cash book.
(ii) Prepare the bank reconciliation statement as at 30 April, 2013.
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PRINCIPLES SALES LEDGER AND
UNIT 6 SECTION
OF ACCOUNTING 1 5
Unit 6, PURCHASES
Section 5: SalesLEDGER
ledger andCONTROL
purchases ledger control accounts
ACCOUNTS
In Sections 1 and 2 of this unit we looked at errors that affect the agreement
of the trial balance and errors that do not affect the trial balance agreement.
By having these categories of errors in accounting, we are admitting,
needless to say, that there could be errors in bookkeeping. Accountants,
being prudent, do not want to wait for the errors to occur before they correct
them. That is why, for instance, we do bank reconciliation statements. In
this section and section 6 we shall be looking at one of the ways in which
accountants prevent errors in the Sales Ledger (which keeps debtors
accounts) and Purchases Ledger (which keeps creditors accounts) by
making use of debtors control account and creditors control account
respectively. Specifically, this section concentrates on the explanations of
the basic terms, the format for preparing these two control accounts and
applications to practical situations.

 identify the nature and purpose of control accounts;
 explain the need for divisions of the ledger and the need to prepare
control accounts;
 list major types of control accounts;
 outline advantages of control accounts;
 list items used to prepare sales ledger control account;
 list items used to prepare purchases ledger control account.
Enjoy your reading…..
Nature and Purpose of Control Accounts

For the simplest business organisation, a single ledger, the general ledger,
may suffice for an efficient recording of its transactions. Errors affecting the
trial balance can easily be located within the ledger and corrected. However,
as a business grows in size and complexity, the single ledger becomes
inappropriate and this calls for the subdivision of the general ledger into the
following: the sales ledger, the purchases ledger, the cash book and the
general or nominal ledger.
The main reasons for dividing the general ledger are:

1. Where there are a large number of transactions a single ledger becomes
physically too heavy to handle;
2. It allows more than one person to work on the ledgers at the same time;
3. It provides a means of internal control for checking the accuracy of the
ledgers, facilitates the location of errors, and can deter fraud and the
misappropriation of cash. This is achieved through the use of control
accounts which are described below.
It is important to note that where the accounting system is computerised the

advantages of dividing the general ledger, and having control accounts,
would be insignificant.
246 UEW/IEDE
PRINCIPLES
Unit 6, Section 5: Sales ledger and purchases ledger control accounts OF ACCOUNTING 1
However, in a manual accounting system, the use of many ledgers makes it

very difficult to trace book-keeping errors which affect the balancing of the
trail balance and this negatively affects the completion of the final accounts.
This is because unlike the case where there is just a single ledger, in a multi-
ledger situation, all of them will have to be combed when an error occurs.
That is, one must go through all the ledgers in order to detect an error. To
minimise the time and human efforts required to trace and correct errors in a
multi-ledger situation, control accounts (also referred to as total accounts)
are employed. These control accounts contain in total the entries that are
made in the personal ledgers, and are normally written up monthly from the
total of the relevant books of prime entry. For example, in the case of credit
sales, the individual invoices shown in the sales day book are entered in
each of the debtor's personal accounts in the sales ledger, and the total sales
for the month as per the sales day book is debited to the Trade receivables'
control account in the impersonal ledger and credited to the sales account.
Note that the preparation of the trade receivables and trade payables ledger
control accounts does not constitute part of the double entry system.
The main purpose of a control account is to provide a check on the accuracy

of the ledger to which it relates. Since the entries in the control account are
the same (in total) as those in the ledger to which it relates, the balance on
the control account should equal the total of a list of balances of the
individual personal accounts contained in the ledger. If the balance on the
control account is the same as the list of balances, this proves that the ledger
is arithmetically accurate and that all the items in the books of prime entry
have been entered in the ledger on the correct side.
Advantages of Control Accounts

The advantages of the control accounts are to:
 Facilitate the location of errors highlighted in the trial balance by
pinpointing the personal ledger in which these errors are likely to be
found.
 Deter fraud and the misappropriation of funds since it is usually
prepared by the accountant as a check on the clerk who is responsible
for the personal ledger.
 Facilitate the output of work since the work of a junior accounting
officer is supervised by senior officer through the preparation of the
control account
 Facilitate the preparation of interim final accounts since the total values
of Trade receivables and Trade payables are immediately available.
Sales Ledger Control Account

The sales ledger control account (also known as Trade receivables control
account) may be considered as one big account for all Trade receivables,
prepared from total figures, but not from figures obtained from individual
debtor’s account. The total figures required to prepare the Trade receivables
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OF ACCOUNTING 1 Unit 6, Section 5: Sales ledger and purchases ledger control accounts
control account are found in the day books. The most important point to
note here is that while postings to an individual Trade receivables account is
made individually on the day of the transaction, recordings in the sales
ledger control account is made from the total figure in the day books at the
end of the month.
The sales ledger control account is drawn up in the same way as individual
debtor’s account. Thus the items in the Trade receivables control account
will appear on the same side as the items in the individual Trade receivables
account.
A typical sales ledger control account is presented as follows:

GH¢ GH¢
Balance b/d xxx Balance b/d xxx
Credit sales xx Cash received from
trade receivables xx
Dishonoured cheques xx Cheque received from trade
receivables xx
Refund to customers xx Bills receivable xx
Interest on customers’ Discount allowed xx
overdue Account xx
Dishonoured bills xx Bad debts xx
Balance c/d xxx Allowance to customers xx
Sales returns xx
Transfer to purchases ledger (c) xx
Set-off (c) xx
Balance c/d xx
xxx xxx
Purchases Ledger Control Account

The principles behind the construction of the sales ledger control account
also apply to the purchases ledger control account. The purchases ledger
control account may be considered as one big account for all Trade
payables, prepared from total figures, but not from figures obtained from
individual creditor’s account. The total figures required to prepare the Trade
receivables control account are found in the day books. The most important
point to note here is that while postings to an individual Trade payables
account is made individually on the day of the transaction, recordings in the
Trade payables control account is made from the total figure in the day
books at the end of the month.
The purchases ledger control account is also referred to as Trade payables

control account, the suppliers’ ledger control account or the bought ledger
control account. The purchases ledger control account is drawn up in the
248 UEW/IEDE
PRINCIPLES
same way as individual creditor’s account. Thus the items in the purchases
ledger control account will appear on the same side as the items in the
individual creditor’s account. A typical purchases ledger control account
will look as follows:

GH¢ GH¢
Cash paid to suppliers xx Credit Purchases xx
Cheque paid to suppliers xx Interest on Bills Payable xx
Bills payable xx Refund from Suppliers xx
Discount received xx Balance c/d xxx
Returns Outwards xx
Transfer from Sales Ledger (c ) xx
Set-off (c) xx
Balance c/d xxx
xxx xxx
Explanation of Key Points in the Preparation of Control Accounts

It is worthwhile to bear the following points in mind when preparing the
Trade receivables and Trade payables control accounts:
a. Carriage inwards, carriage outwards and provisions for bad debts are
not entered in the control accounts since they do not appear in the
individual Trade receivables' or Trade payables' accounts in the
personal ledgers.
b. Transfers (or setoffs) between the trade receivables' and trade payables'
control accounts is intended to reflect the total of the transfers between
the Trade receivables' and Trade payables' ledgers during the year.
These usually occur where the business buys and sells goods to the
same person. Thus instead of exchanging money, the amount due as
shown in the Trade receivables' ledger is set off against the amount
owed as shown in the Trade payables' ledger.
c. It is possible for the trade receivables control account to have a credit

balance, and also possible for the Trade payables control account to
have a debit balance. A credit balance in the Trade receivables’ ledger
may arise due to a number of reasons. A customer (or a debtor) may
have been overcharged for the goods supplied to him, the customer may
have paid an amount in advance in anticipation of receipt of goods or
the customer may have returned goods to the firm for various reasons.
A credit balance in the Trade receivables control account therefore
implies that the firm owes that customer. This may require the firm to
make a refund to the customer. On the other hand, a debit balance in the
Trade payables' ledger usually arises because a supplier has been
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PRINCIPLES
overpaid as a result of either duplicating a payment or paying for goods

that have been returned to the supplier for various reasons.
d. Bills of exchange are a method of payment where the business which

owes the money signs a document undertaking to make payment on or
after the expiry of a specified period of time (usually 30, 60 or 90 days).
This document is referred to as a bill of exchange receivable in the case
of a debtor and a bill of exchange payable in the case of a creditor. The
essential point is that in the Trade receivables' and Trade payables'
personal accounts the debt is treated as paid on the date the bill of
exchange is signed (and not when the money is actually received or
paid which is at a later date). The same therefore applies in the control
accounts.
e. The balances carried down on the control accounts at the end of the
period are the difference between the two sides of the accounts.
f. The entries for any bad debts recovered are the reverse of those for bad
debts. Bad debt recovered therefore appears at the two sides of the
Trade receivables control account. An entry is made at the debit side of
the Trade receivables control account in order to reinstate the debt that
has now been recovered. Another entry is made at the credit side of the
same Trade receivables control account in order to record the actual
amount received in respect of the bad debt recovered.
g. Allowances given and allowances received should be treated in the

same way as returns inwards and returns outwards respectively.
h. Any interest charged on overdue (Trade receivables') accounts should

be debited to the Trade receivables' control account and credited to an
interest receivable account. This is sometimes termed as overdraft
interest.
Illustrations
The following illustrative questions will help explain the preparation of
control accounts.
Illustration 1
On 1st January, 2014, the purchases ledger control account of Asempa Ltd
showed a credit balance of GH¢13,845 and a debit balance of GH¢950. On
the same date, the sales ledger control account showed a debit balance of
GH¢9,460.
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PRINCIPLES
Transactions during the year ended 31 December, 2014 were as follows:

GH¢
Credit Purchases 65,200
Credit Sales 97,340
Cash Purchases 16,425
Cash Sales 15,230
Returns Inwards 4,410
Returns outwards 3,450
Cheques paid to suppliers 53,475
Cheques received from customers 83,925
Cash paid to suppliers 5,220
Cash received from customers 1,420
Discounts received 1,250
Discounts allowed 820
Bills payable 2,130
Bills receivable 3,620
Bad debts written off 500
Customers’ cheques dishonoured 815
Debit balance transferred from the trade receivables
Ledger to the trade payables ledger 950
You are required to prepare purchases and sales ledger control accounts for
Asempa Ltd showing the closing balances for the year ended 31 December,
2014.
Asempa Ltd
GH¢ GH¢
Balance b/d 950 Balance b/d 13,845
Returns Outwards 3,450 Credit Purchases 65,200
Cheques paid (Bank 53,475
Cash paid (Cash) 5,220
Discount received 1,250
Bills payable 2,130
Transfer from Sales Ledger (c) 950
Balance c/d 11,620 . .
79,045 79,045
Balance b/d 11,620
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PRINCIPLES

GH¢ GH¢
Balance b/d 9,460 Returns Inwards 4,410
Credit sales 97,340 Bank 83,925
Dishonoured Cheques 815 Cash 1,420
Discount Allowed 820
Bad debts 500
Transfer to Purchases Ledger 950
. Balance c/d 11,970
107,615 107,615
Balance b/d 11,970
Illustration 2
The following details relate to Boamah Enterprise:
2012 GH¢
February 1: Trade receivables Ledger - Debit Balance 800
- Credit Balance 20
Trade payables Ledger - Debit Balance 50
- Credit Balance 650
February 28:
Credit purchases 10,500
Credit Sales 15,700
Cheques dishonoured 100
Debit balance in the Trade receivables' ledger
transferred to the Trade payables' Ledger 50
Returns Outwards 250
Returns Inwards 190
Bills payable 340
Bills receivable 270
Sundry charges to customers 150
Cash sales 8,500
Cash purchases 7,500
Payment to suppliers (including a refund of an
overpayment of GH¢50 to a customer) 9,900
Receipts from customers (Including
a bad debt recovered of GH¢20) 14,750
Balance carried down to debit side of the Trade receivables Ledger 15
Balance carried down to credit side of the Trade payables Ledger 30
Required:
(a) Record the above in the appropriate control accounts of Boamah
Enterprise as at 28 February 2012.
(b) State the Trade receivables and Trade payables figure to be shown
in the trial balance of Boamah Enterprise drawn up on 28
February, 2012.
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PRINCIPLES
(a) Boamah Enterprise
Trade receivables Ledger Control Account
GH¢ GH¢
Bal. b/d 800 Bal. b/d 20
Credit sales 15,700 Transfer to Purchases ledger 50
Dishonoured cheques 100 Bad Debts 15
Sundry charges 150 Returns Inwards 190
Refund to Customers 50 Bills receivables 270
Bal. c/d 15 Receipts from customers 14,730
Bal. c/d 1540
16,815 16,815
Bal. b/d 1,540 Bal. b/d 15
Trade payables Ledger Control Account

GH¢ GH¢
Discount received 250 Credit Purchases 10,500
Transfer from Sales ledger 50 Bal. c/d 30
Bills payable 340
Payment to suppliers 9,850
Bal. c/d 390
11,180 11,180
(b) Trade receivables and Trade payables balances to be shown in the

trial balance:
Trade receivables balance: GH¢ 1,540 + GH¢ 30 = GH¢ 1,570
Trade payables balance: GH¢ 15 + GH¢ 390 = GH¢ 405
Illustration 3
The books of Naa Dromo Ltd include three ledgers comprising a general
ledger, Trade receivables' ledger and Trade payables' ledger. The
following information relates to the accounting year ended 31 December
2014:
GH¢
Trade receivables' ledger control account balance on 1 Jan 2014 (debit) 5,740
Trade payables' ledger control account balance on 1 Jan 2014(credit) 6,830
Sales 42,910
Purchases 38,620
Cheques received from Trade receivables 21,760
Cheques paid to Trade payables 19,340
Returns outwards 8,670
Returns inwards 7,840
UEW/IEDE
253
PRINCIPLES

Discount received 4,560
Discount allowed 3,980
Bills of exchange payable 5,130
Bills of exchange receivable 9,720
Bad debts 1,640
Provision for doutful debts 2,380
Amounts due from customers as shown by Trade receivables' ledger,
transferred to Trade payables' ledger 950
Cash received in respect of a debit balance on a Trade payables'
ledger account 810
You are required to prepare the Trade receivables' ledger and Trade
payables' ledger control accounts.
Trade receivables' ledger control account
GH¢ GH¢
Balance b/d 5,740 Bank 21,760
Sales 42,910 Returns inwards 7,840
Bad debts 1,640
Transfer to Trade payables 950
Balance c/d 2,760
48,650 48,650
Balance b/d 2,760
Trade payables’ ledger control account

GH¢ GH¢
Bank 19,340 Balance b/d 6,830
Returns outwards 8,670 Purchases 38,620
Discount received 4,560 Cash 810
Bills payable 5,130
Transfer from
Trade receivables 950
Balance c/d 7,610
46,260 46,260
Balance b/d 7,610
Review Questions
1. What is a control account?

2. Enumerate five advantages of preparing a control account?
3. State the two main types of control account?
4. Distinguish between a sales ledger and a sales account.
5. Distinguish between a debtor’s account and a receivables’ control
254 UEW/IEDE
PRINCIPLES
account.
6. The following is extracted from the books of Johnson and Co. Ltd.
GH¢
Cash received from customers 90,980
Sales Ledger balances at 31/3/2011 Dr. 20,500
Purchases Ledger Balances at 31/3/2011 Cr. 12,450
Credit Purchases 101,150
Credit Sales 132,850
Cash Sales 8,000
Cash paid to Trade payables 71,560
Cheques received from Trade receivables 22,800
Dishonoured Cheques 300
Cash purchases 6,000
Returns Inwards 4,880
Bad Debts Written Off 2,200
Cheques paid to Trade payables 23,850
On 30/4/2012 there were credit balances in the Sales
Ledger amounting to 200

(a) Prepare Sales Ledger and Purchases Ledger Control accounts for
the month of April, 2012;
(b) Calculate the total sales and purchases.
7. The following details were extracted from the books of Blessings

Company Limited for the first quarter of 2011 (1 January to 31 March).
GH¢
Sales - cash 344,890
- credit 268,187
Purchases - cash 14,440
- credit 496,600
Total receipts from customers 600,570
Total payments to suppliers 503,970
Discount allowed (all to credit customers) 5,520
Discount received (all from credit suppliers) 3,510
Refund given to cash customers 5,070
Balance in the sales ledger set off against balance in
purchases ledger 70
Increase in the provision for bad debts 90
Interest on bills payable 10
Credit notes issued to credit customers 4,140
Credit notes received from credit suppliers 1,480
UEW/IEDE
255
PRINCIPLES
According to the audited financial statements for the previous year,

trade receivables and trade payables as at 31st December 2011 were
GH¢26,555 and GH¢43,450 respectively.
Required:
Draw up the relevant total accounts entering end-of-period totals for
trade receivables and trade payables.
256 UEW/IEDE
PRINCIPLES
Unit 6,
This page
Section
is left5:blank
Salesfor
ledger
your and
notes
purchases ledger control accounts OF ACCOUNTING 1
UEW/IEDE
257
PRINCIPLES Unit 6, RECONCILIATION OF CONTROL
Section 6: Sales reconciliation ACCOUNT
of control account balances and
UNIT 6 SECTION
OF ACCOUNTING 1 6 ledger account balances
BALANCES AND LEDGER ACCOUNT BALANCES
Hello! At long last we are on the last Section of Unit 6 and for the entire
course. We hope you remember what we have gone though in this course.
It’s been an exciting course, we believe. In this last section, we shall look at
a reconciliation of the sales and purchases ledgers with their respective
control accounts. Reconciliation of control account balances with the ledger
account balances helps to achieve the objective of minimizing errors in the
sales and purchases ledger balances.

 reconcile the purchases ledger and sales ledger balances with the
control accounts balances.
Reconciliation of Ledger Balances and Control Account

Balances
When the balance on the Trade receivables control account and Trade
payables control account tally with the debtor’s schedules and Trade
payables schedule respectively, then the arithmetic accuracy of the
recordings has been achieved. However, in practice, differences may occur
between the two balances (i.e. the balance on the control account and the
total of the ledger account balances – the schedule of Trade receivables or
Trade payables). Such differences may result from errors made in the sales
or purchases ledger control accounts, or errors in the Trade receivables and
Trade payables ledger or in both.
Remember that control accounts are prepared from the totals in the day
books (subsidiary books). Therefore an error made in the totalling (casting)
of a day book will affect the control account, while an error affecting an
individual’s account will rather affect the appropriate schedule (of Trade
receivables or Trade payables). Thus, for example, errors of incorrectly
casting the sales day book, cash receipts book or sales returns book will
affect the control account, while incorrect balancing of an individual’s
account in the purchases ledger for instance, omitting an individual’s
balance in the purchases ledger will affect the Trade payables schedule, not
the control account. In the same vein, omitting to post or wrongly posting an
individual entry from a subsidiary book to the individual ledger account will
affect the appropriate schedule, not the control account.
The guiding principle to use in reconciling or correcting such differences is

that all errors emanating from the control account(s) or the day books are
corrected in the respective control accounts. Where the error is caused in the
individual ledger account, the correction is made in a reconciliation
statement. The reconciliation statement is a statement prepared to reconcile
the corrected control account balance with the schedule of balances of Trade
receivables and of Trade payables.
The following illustration will explain the points made above.
258 UEW/IEDE
Unit 6, Section 6: Sales reconciliation of control account balances and PRINCIPLES
ledger account balances OF ACCOUNTING 1
Illustration 1
The book-keeper of Naa Djoomo & Sons Enterprise prepared a schedule of
balances of individual Trade receivables’ accounts from the Trade
receivables ledger at 31 May, 2014 and arrived at GH¢25,594. He passed
the schedule over to the accountant who compared this total with the closing
balance on the sales ledger control account which was GH¢25,100.
Upon investigation, the following errors were discovered:

(i) Returns Inwards valued GH¢400 had not been included in the control
account.
(ii) Cash received of GH¢160 had been credited to a personal account as
GH¢16.
(iii) A bad debt of GH¢1,000 had not been entered in the control account.
(iv) A contra item of GH¢800 in the purchases ledger had not been entered
in the control account.
(v) A debtor’s account balance of GH¢600 had not been included in the
list of balances.
(vi) Cash received ofGH¢1,500 had been entered in the personal account
as GH¢1,150.
(vii) Sales for the week ending 12th April, 2014 amounting to GH¢1,700
had been omitted from the control account.
(viii) Discounts allowed totalling GH¢200 had not been entered in the
control account.
(ix) A personal account balance had been undercast by GH¢400.
(x) Cash received of GH¢500 had been debited to a personal account
(xi) A cheque for GH¢600 received from a customer had been
dishonoured by the bank, but no entry had been made in the control
account.
(xii) Discount received of GH¢100 had been debited to a customer’s
account in the sales ledger.

(a) Prepare the part of the sales ledger control account reflecting the
above information.
(b) Prepare a statement reconciling the original total of the individual
balances with the corrected balance on the control account.
UEW/IEDE
259
PRINCIPLES Unit 6, Section 6: Sales reconciliation of control account balances and
OF ACCOUNTING 1 ledger account balances
Naa Djoomo & Sons Enterprise
GH¢ GH¢
Balance /d 25,100 Returns Inwards 400
Omitted Sales 1,700 Bad debt 1,000
Dishonoured Cheques 600 Contra 800
. Balance c/d 25,000
27,400 27,400
Balance b/d 25,000
A statement reconciling the Original Total of the Individual Balances

with the corrected Balance on the Control Account.
GH¢ GH¢
Original Total of the Individual balances 25,594
Add: Omitted Trade receivables balance 600
Personal account bal. undercast 400
26,594
Less: Cash received understated 144
Cash received understated 350
Wrong entry of cash received 1000
Wrong entry of discount received 100
1,594
Corrected Balance on Control Account 25,000
Review Question
The sales ledger control account of Benson Ltd is shown below:

GH¢ GH¢
Bal b/d 386,000 Sales returns 56,000
Sales 330,000 Payments 460,000
Discount received 28,000 Contra 48,000
Bills payable 49,000 Discount allowance 22,000
Bad Debt 26,000 Dishonoured cheque 42,000
. Bal c/d 191,000
819,000 819,000
Bal b/d 191,000
The above records were made by an inexperienced accountant. On listing

of the individual customer balances in the sales ledger, it resulted in a
260 UEW/IEDE
Unit 6, Section 6: Sales reconciliation of control account balances and PRINCIPLES
ledger account balances OF ACCOUNTING 1
balance of GH¢257,400. The following facts have however been

discovered:
(a) No entry has been made in the sales ledger for the bad debt
written off.
(b) An invoice for GH¢26,000 has been entered in the sales day
book as GH¢62,000.
(c) A prompt discount of GH¢18,000 allowed to a customer had
been completely omitted.
(d) Sales of GH¢38,000 had been entered on the wrong side of a
customer’s account in Sales ledger.
(e) The sales day book has been over-added by GH¢30,000.
(f) The account of a customer who settled by contra was debited
with GH¢48,000.
(g) A dishonoured cheque had been entered in the sales ledger as
credit GH¢48,600.
(h) A credit balance of GH¢45,000 has been taken as a debit balance
in the listing of customer balance.
(i) A balance on a customer’s account of debit GH¢47,800 has been
entered on the listing of balances as debit GH¢87,400.
(j) The sales returns day book had been over-added by GH¢16,000.
(k) A credit sales of GH¢47,000 had not been entered in the sales
ledger control account.
(l) One page of the sales day book had been incorrectly totalled as
GH¢1,126,900 instead of GH¢1,162,900.
You are required to prepare:

(i) The sales ledger control account reflecting the above
information;
(ii) A statement reconciling the original total of the individual
balances with the corrected balance on the control account.
UEW/IEDE
261

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PRINCIPLES

Accounting has been called the financial language of business. This is

Unit one covers the nature, function and regulatory framework of

We have prepared this module using a step-by-step approach that allows

module, worked-out illustrative examples. There are end of section

At the end of the course you will be able to:

At the end of this unit you will be able to:

The keeping of records is very essential to any field of endeavour. In

By the end of this section you will be able to:

Definition and Meaning of Accounting

The American Accounting Association defines accounting as “the process

transactions and reporting financial information, to interested parties, as a

During the thirteenth to the fifteenth centuries, there was advancement in

Due to the industrial revolution which was characterized by great changes in

An emerging trend in accounting is the gradual shift from mechanical

Distinction between Bookkeeping and Accounting

The aspect of accounting which is concerned with the recording of business

The information that accounting provides is usually quantitative and

Functions (Uses) of Accounting Information

Limitations of Accounting Information

Financial accounting information reports past or historical data which may

The Accounting Process

Stages/Steps in the Accounting Process

The stages in the accounting process can explained as follows:

2. Collection and analysing of source documents: With the aid of source

3. Journalising: The information collected are recorded in the appropriate

4. Posting the transactions recorded in the journal to the ledgers: The

5. Balancing off accounts in the ledgers and extracting a trial balance:

6. Preparation of financial statements: After considering end-of-period

7. Interpretation of accounts: Where the need arises, the financial

Fig. 1 – The accounting process

Sales Purchases Receipts/Paying-in Credit/Debit

Sales day Purchases day Return inwards and Return

Sales ledger Purchases ledger Cash book (Cash General ledger

Statement of Profit Statement of

Accounting is a regulated profession. There are several rules and regulations

By the end of this section, you will be able to:

Regulatory Framework of Accounting

Generally Accepted Accounting Principles (GAAP) refer to the rules,

International Financial Reporting Standards (IFRS)

 IFRS 5 Non-current Assets Held for Sale and Discontinued

Conceptual Framework for Financial Reporting

The objective of financial reporting is to provide information about the

The assumptions underlying financial statements are the going concern

intention to liquidate or curtail materially the scale of its operation. The

The elements of the financial statements directly related to the

An item that meets the definition of an element should be recognized if:

Measurement is the process of determining the monetary amounts at which

four possible measurement bases: historical cost, current cost, realizable

In fact, two main concepts of capital maintenance have been indicated:

The Standard Setting Process

The promulgation of accounting standard involves various stages. The

After studying this section, you will be able to:

Users of Accounting Information

 Management – Management here refers to those who oversee the

 Shareholders (or Owners) – Shareholders or owners can be described

 Suppliers and trade payables – They require information about the

 Customers and trade receivables – They are interested in the survival

 Government – There are many government agencies and departments

 Loan providers – Banks, debenture holders and other loan providers