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 What is Accounting? Accounting is using book-keeping records to prepare financial statements and to assist in decision-making.
What is Bookkeeping? The recording of financial information, particularly transactions, in a systematic way.

Assets: resources with a monetary value that are owned by Liabilities: amount owed by a business to other Capital: the investment made by the owner of the
the business or amounts that are owed to the business. business, organisations or individuals. business. This is called ‘equity’ also.

Assets = Capital + Liabilities

Capital = Assets—Liabilities

Double entry bookkeeping System Trial Balance :

• To check arithmetical accuracy of the double entry/ the ledgers.
Advantages:
• A list/ summary of all the accounts in books of accounts.
• Full details are available about the assets, liabilities, revenue and ex-
penditure of the business. Advantages: Ensure the arithmetical accuracy of the entries in the books as both sides must
be equal.
• The preparation of financial statements is relatively straightforward
Disadvantages: It does not identify all the types of errors.
• The calculation of profit or loss for the year is likely to be reliable and
Income Statement
accurate.
• A statement that shows a business’s gross profit and profit for the financial period.
• More informed decision making is possible
Reason for produce Income Statement
• The possibility of fraud is reduced • To calculate the profit/loss for the year
• Comparisons with results of previous year and with other business are • To assess of the improvement of business
• To provide the calculation of ratios
possible.
• For comparison purposes/ for planning/ for tax purposes/ for remedial actions
• Detailed records are available for reference purposes

Disadvantages:
Statement of financial position
• May be complex and harder to understand for non accountant
• a statement that shows an organization’s assets, liabilities and capital at a particular date,
• Time consuming/ may be costly to set up
which is prepared at the end of a financial period.
• Not all errors will be identified 3
 Book-keeping – Bookkeeper Accounting – Accountant
Source Document Books of prime entry Ledgers Trial Financial Statements Analysis
(original entry) balance
1. Invoice 1. Purchase day book (Journal) 1. Purchase ledger 1. Income Statement 1. Profitability
2. Debit note 2. Sale day book (Journal) 2. Sale ledger 2. Statement of financial position
3. Credit note 3. Purchase return day book 3. Nominal ledger (SOFP) 2. Liquidity
4. Statement of account (Journal) 3. Statement of changes in equity
4. Sale return day book (SOCIE)
(Journal) 4. SOCF
5. Notes

5. Till rolls 5. Cash book

6. Cash receipt
7. Copy of cash receipt
8. Cheque / Remittance advice
9. Cheque counterfoil
10. Paying-in-slip counterfoil
11. Bank statement

12. Petty cash voucher/ Voucher 6. Petty cash book

7. Journal/ General journal

Books of original entry Ledger

• a book in which transactions are recorded before being entered in the ledger. 1. Purchase ledger—Trade payables accounts (Supplier a/c)
• this is where transactions are listed prior to being posted to the double entry 2. Sale ledger—Trade receivable accounts (Customer a/c)
records. 3. Nominal ledger— Impersonal accounts

Reason for using Books of Original Entry Reason for dividing the ledger into three sections
1. Reduce the no. of entries in the ledger 1. Reduce the possibility of fraud
2. Helps to summarise the similar types of transactions 2. Easier for reference as same type of accounts are kept together
3. Helps in preparation of control accounts 3. Easier to introduce checking procedures
4. Allow work to be divided between several people 4. Work can be shared among several people (division of work) 4
Books of Prime entry
1 Purchase Journal Purchase of Inventory on credit from credit supplier
2 Sale Journal Sale of Inventory on credit to credit customer
3 Purchase Return Journal Return of Inventory to credit supplier
4 Sale Return Journal Return of Inventory from credit customer
5 Cash book Purchase/Sale of Inventory/NCA by cash or cheque
Receipt/Payment of income and expenses
6 Petty Cash book Payment of small expenditure
7 General Journal 1. Opening entries
2. Purchase/Sale of NCA on credit
3. Correction of errors
4. Year end transfer
5. Non regular transactions/Special entries
(e.g. Irrecoverable debt, Disposal)

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 Supplier Customer
Credit sale
Sale day book (Journal) Invoice Purchase day book

Returns
No record Debit note No record

Sale return day book Credit note Purchase return day book

At the end of the month

No record Statement of account No record

Debit note A source document used by a purchaser to notify the seller that goods are being returned and the amount that should be
deducted from the amount due.
Purpose of Debit note • Issued by the customer to request a reduction in an invoice.
• To notify the supplier of an overcharge/goods being returned/ faulty goods
Credit note The source document that records the amount to be deducted from a previous invoice to avoid a business being overcharged.
Purpose of Credit note • for damaged goods/ faulty goods
• Goods returned
• Correction of overcharged
Statement of account A summary of transaction that have taken place between a supplier and a credit customer.
Purpose: The statement provides a means of checking the accuracy of accounts and of reminding customers how much they owe.
• to inform the buyer/customer of the amount due
• To provide a summary of the transaction for the month/period
• To allow buyer to check his records
Statement of account did not The statement is a summary of the transaction which have already been recorded in the accounting records.
Record in the ledger. Why?
Remittance advice To inform the supplier of the transaction being settled.
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 Discount

Trade Discount Cash Discount

Trade discount—a reduction in price given as a reward for buying in large quan- Cash discount—a reduction in the amount paid by credit customers, or to credit
tities. suppliers, when accounts are settled within an agreed time limit (credit period)
Reason for Cash discount To encourage for prompt payment before an
Reason for Trade Discount 1. For buying in bulk (large order) agreed time limit
2.In the same trade (same line of activity)
3. Loyal/regular customer (repeat order) Cash discount is calculated on the amount due
Trade discount is calculated on the cost (list price)
Record: is recorded in the ledger
Record: is deducted on the invoice and journal
No record in the ledger

Discount Allowed Discount Received

State why it was necessary to deduct trade discount on the credit note.
(Expense) (Income)
* The amount on the credit note must equal the amount originally charged for
those goods, so trade discount must deducted from the list price.
* Trade discount was deducted on invoice or when purchased.

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Cash book A book of prime entry in which all cash and bank transactions are recorded.

Cash book is books of original entry and also part of the double entry. Why?
It is a book of prime entry because it is written up from business documents.
It is part of the double entry system as it acts as ledger accounts for cash and bank.

Explain why there can never be a credit balance on the cash account?
• Cash is a physical asset so it is impossible to pay out more cash than is available.

Petty cash Small cash payments

Petty cash book The book of prime entry used to make the first record of petty cash payment/expenditure.

Imprest System At any time the amount paid out from the float plus remaining cash must equal the fixed amount of float.
Float money = Amount paid out from float + Remaining cash
$100 = $80 + $20

Reason for using petty cash book / • To control/limit small expenditures of the business by using imprest system
Advantages of using Petty cash book • To train the junior staffs/ allow the chief cashier to delegate some of work/ provides training for junior staffs.
• To reduce work load in a main cash book / to reduce the no. of entries in main cash book
• To remove small amount of cash payments from the main cash book
• Can help to reduce fraud
• The cash remaining and the vourchers received should equal the imprest

General Journal A book of prime entry used to make the first record of transactions that it would not be appropriate to record in other
books of prime entry.
Purpose of the narratives in the Journal / • To explain the reasons for the entries which are to be made in the ledger
Useful of Narration in Journal • It is impossible to remember the reason for every entry/ useful because it may be necessary to recall the reason
• Transaction to be understood
• Journal entries sometimes involve 'out of ordinary' transaction/ non regular transactions. e.g disposal
• Can contain a reference to any prime documents

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 Correction of Errors
Error doesn't revealed by trial balance (Trial balance agree) Error revealed by trial balance (Trial balance disagree)

1. Error of Principle This occurs when a transaction is entered using the 1. Addition error Incorrect additions in any journal
correct amount and on the correct side, but in the
wrong class of account
2. Partial omission Making an entry on only one side of the account
2. Error of Commission This occurs when transaction is entered using the
(single entry)
correct amount and on the correct side but in the
wrong account of same class. 3. Entries do not match Entering a different amount on the debit side from the
3. Error of Omission This occurs when a transaction has been completely amount on the credit side
omitted from the accounting records. Neither a debit
entry or credit entry has been made. Suspense Account a temporary account used to make the totals of a trial
balance agree.
4. Error of Original entry This occurs when an incorrect figure is used when a
transaction is first entered in the accounting records. Reason for opening Suspense Account
The double entry will therefore use the incorrect • To balance the trial balance
figure. • Because there are errors on the trial balance
5. Complete reversal of Correct amount but wrong side of both accounts • To allow draft financial statement to be prepared
entries
6. Compensating errors Two or more errors are cancelled off by two other
errors
7. Error of transposition When a number is recorded backward on both sides.
E.g $123>>$132

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Bank Reconciliation Statements Bank Statement A copy of a customer’s bank account, sent to the customer at regular intervals.
Step (1) Tick (compare)
Step (2) Cash book (updated cashbook)
Bank • A statement prepared by business at regular intervals
reconciliation statement • To check the balance of the cash book and the balance of bank statement
Date $ Date $
Advantages/Reason for preparing Bank Reconciliation Statement
31 Dec Bal b/d xxx 31 Dec Bal b/d (overdraft) xxx 1. Obtain the correct bank balance
Standing order xxx 2. Identify the errors in the bank statement/ bank account in the cash book
Credit transfer xxx Direct debit xxx 3. Assist/ helps in discovering fraud
4. Identify amounts that not credited yet/ that not presented yet
by credit customer
Dishonoured cheque xxx
Why the bank statement balance is on the opposite side to that shown in the cash book?
 The bank statement is a copy of the account of the business as it appears in the books of the bank.
Bank interest xxx Bank interest xxx The bank statement is prepared from the viewpoint of the bank.
Bank charges xxx  The bank account in the cash book is prepared from the viewpoint of the business.
Error xxx Error xxx State whether the cash book balance or the bank statement balance should be shown in SOFP.
31 Dec Bal c/d xxx 31 Dec Bal c/d xxx
 Cash book balance
xxx xxx
 Reason: The statement of financial position would not balance if the bank statement balance was in-
1 Jan Bal b/d xxx 1 Jan Bal b/d xxx cluded. (or) Only balances on the books of the business can be included in the statement of financial
(SOFP: CA) (SOFP: CL) position of the business.

Step (3) Bank Reconciliation Statement

$
Balance as per Cash Book (updated cash book) xxx Dr.bal
Add: Unpresented cheque xxx
Dishonoured cheque A cheque which has been returned unpaid by the bank.
Less: Uncredited cheque (xx) Reason for Dishonoured cheque
Balance as per Bank Statement xxx Cr. bal • Drawer has insufficient funds in accounts.
• Incomplete cheque/ Out of date/Cheque unsigned/ Amount in words and figures disagree

Reason for difference between cash book balance and bank statement balance
Bank Reconciliation Statement • Items on bank statement not shown in cash book
$ (accept individual items, bank charges, bank interest, etc.)
Balance as per Bank Statement (xxx) Dr. bal • Items in cash book not on bank statement
(accept individual items, cheques not yet presented, etc.)
Add: Uncredited cheque xxx
• Errors in cash book or made by bank (accept only one type of error)
Less: Unpresented cheque (xx) • Dishonoured cheques
Balance as per Cash Book xxx Dr. bal 10
Standing order A bank's customer gives instructions for the automatic Unpresented Cheque that have not been cleared by the bank and have not yet been
payment to another organisation of a fixed amount at regular cheque recorded on a business's bank statement.
intervals. (Timing difference)
Direct debit Authority is given to a bank by one of its customers to make Uncredited deposits Amounts paid into a business's bank statement but which have not yet
payments on its behalf to another organisation. The amount (Timing difference) been recorded on the bank statement as credit entries.
paid will be the sum requested by that organisation up to a
specified limit.
Credit transfer The automatic transfer of funds into a business's bank account
by one of the business's customers.

Bank charges Payments deducted automatically from a current account at

regular intervals as a reward to the bank for operating the
account.

Capital Expenditure Money spend on acquiring, improving and installing Revenue Expenditure Money spend on the running on a business on a day to day basis.
non-current assets.

E.g Purchase of NCA, Legal costs, Installation cost, Cost of carriage on NCA, E.g Wages, Insurance, Rent
Upgrades to existing NCA
Capital Receipt Amount received which do not from part of day to day Revenue Receipts Amount received in the day to day trading activities and other
trading activities. items of income.

E.g Receipt of loan, Additional capital, Proceeds of sale of NCA E.g Sales, Commission received, Interest received, Rent received

Why does the distinction between capital and revenue matter?

Revenue receipts and expenditure directly affect a business’ income statement and so if item are wrongly classified, the business’ profit or loss will be inaccurate.
On the other hand, capital receipts and expenditure directly affect a business’s statement of financial position. If items are wrongly classified/recorded a statement of financial
position could show incorrect totals for assets, liabilities and capital.

Errors in end of year financial statement can have serious consequences. Any inaccuracies in profit, capital or asset values could mislead those who depend on these figures
and result in poor decision making.
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Sale ledger control account A technique for checking the arithmetical accuracy of Advantages/Benefits of maintaining Sale Ledger Control Accounts
the sale ledger • Helps to prove arithmetical accuracy of Sale ledger
Purchase ledger control account A technique for checking the arithmetical accuracy of • Helps to reduce fraud
the purchase ledger • Can locate errors/ assist in the location of errors
• Easy access to total trade receivables figures/ provide total of trade receivable
Sale Ledger Control Account amount
• Quicker production of financial statements/ provide SOFP to prepare
(Total Trade Receivable Account) • Provide a summary of transaction relating to trade receivables
2019 $ 2019 $ Disadvantages of control accounts
Jan 1 Balance b/d xxx Jan 1 Balance b/d (minor) xxx • Compensating errors and errors of original entry in the business documents will be
carried through
Dec 31 Credit sale xxx Dec 31 Sale return xxx • Errors of omission will not be revealed
Interest charged xxx Cash / Bank / Receipt xxx • Errors of commission will not be revealed
Refund to customers xxx Discount allowed xxx Reason for preparing Trade Payable Control Account
Dishonoured cheque xxx Irrecoverable debt xxx • Provides the total of trade payables which can be used to prepare the financial
statements.
Contra xxx
• Helps to prevent fraud as the control accounts are normally produced by a different
Dec 31 Balance c/d (minor) xxx Dec 31 Balance c/d xxx person to those who produced the subsidiary ledger accounts.
xxx xxx Reason for a credit balance on Sale Ledger Control Account
2020 2020 • Overpayment by a credit customer of the amount owing
Jan 1 Balance b/d xxx Jan 1 Balance b/d (minor) xxx • Credit customer failing to deduct available cash discount
• Credit customer returning goods after settling the account
• Credit customer making payment in advance
Purchase Ledger Control Account
Contra entry (control account)
(Total Trade Payable Account)
Reason: When a business deals with another business or organization as both a customer
2019 $ 2019 $ and a supplier, the balance of the two accounts are set off against one another to find the
Jan 1 Balance b/d (minor) xxx Jan 1 Balance b/d xxx net balance.
Dec 31 Purchase return xxx Dec 31 Credit purchase xxx (the entry is made when a sale ledger account is set off against a purchase ledger control
Cash / Bank / Payment xxx Interest charged account of the same person/business. Same person is the buyer and seller.)

Discount received xxx Refund from suppliers Xxx Meaning: a contra entry is an entry which appears in the purchase ledger control account
Contra xxx
(debit side) and also in the sale ledger control account (credit side)

Dec 31 Balance c/d xxx Dec 31 Balance c/d (minor) xxx Contra entry (cash book)
xxx xxx The transfer of cash to the bank, or the withdrawal of cash from the bank.
2020 2020 These transactions result in both the debit entry and credit entry for the transaction being
Jan 1 Balance b/d (minor) xxx Jan 1 Balance b/d xxx recorded in the cash book columns. 12
Valuation of Inventory Inventory Account
2019 $ 2019 $
Prudence principle : Assets and profits should not be overstated.
Jan 1 Balance b/d 1,000 Dec 31 Income Statement 1,000
Liabilities and losses should not be understated.
(Opening inventory)
Inventory (Asset) should not be overstated.
Dec 31 Income Statement 2,000 Dec 31 Balance c/d 2,000
Valuation of inventory: Lower of Cost and Net Realisable Value (NRV) (Closing inventory)
Cost = Purchase price + Carriage inward 3,000 3,000

NRV = Estimated selling price - Selling expenses 2020

Jan 1 Balance b/d 2,000

Net realisable value: sale value less any costs to be incurred in order to make
Trial balance at 31 December 2022 Trial balance at 31 December 2022
items saleable.
Dr Cr Dr Cr
$ $ $ $
Purchase Sale
Supplier Business Customer

Carriage inwards Carriage outwards Sale 10,000 Gross profit 3,000

Purchase 8,000
Cost = Purchase price + Carriage inwards Carriage outwards—recorded as an expense Inventory at Inventory at
1 January 2022 2,000 31 December 2022 3,000
Income Statement for the year ended …
$ $
Sale xxx
Less: Cost of sale Additional information:
Opening inventory xx Inventory at 31 December 2022 valued $ 3,000
Purchase xx
Add: Carriage inwards xx Double entry for Drawings;
Less: Goods drawings (xx) 1. Cash Drawings;

(xx) (xxx) Drawings account—Dr

Less: Closing inventory
Gross profit xx Cash/Bank account—Cr
Less: Expenses
2. Goods Drawings;

Carriage outwards xx Drawings account—Dr

(xx) Purchase account—Cr
Profit for the year xxx 13
Depreciation of Non Current Asset
Cause of depreciation 1. Physical deterioration/ wear and tear/ usage/ rust/ erosion/ rot and decay
2. Economical factor/ obsolescence
3. Time factor/ passage of time
4. Depletion / Technological factor
Reason for charging depn: • to spread the cost of the asset over its useful life to avoid the profit overstating
• To match the cost against the revenue of the years which benefit from the use of the asset.
• To recognise that most non-current assets lose value with the passage of time.
Depreciation Method 1. Straight line method
2. Reducing balance method
3. Revaluation method
Depreciation method:
1 Straight line method = Cost - Residual value • Jamil decided to depreciate his office machinery at 20% per annum using the straight line (equal
useful life instalment) method calculated on a month-by-month basis from the date of purchase to the date
= Cost x % of disposal.
= (Cost - Residual value) x %
2 Reducing balance method = Depreciation for the first year = Cost x 20% x used months/ 12 months
Year 1 Cost x % Depreciation for the second year = Cost x 20%
Year 2 Net book value x %
(Cost - Acc.depn:) x % Depreciation for the disposal year = Cost x 20% x used months / 12 months

3 Revaluation method = Opening + Additional - Closing

balance balance • Sariah’s policy is to provide depreciation on fixtures and fittings at 10% per annum using the reduc-
ing balance method. A full year’s depreciation is charged in the year of purchase but none in the
year of disposal.
Depreciation for the first year = Cost x 10%
Depreciation for the second year = (Cost - Accumulated depn:) x 10%
Depreciation for the disposal year = no depreciation

• Jas depreciates fixtures on a straight-line basis. She assumes fixtures will have a useful life of four
years, at which time the residual value will be 10% of original cost. Depreciation is charged for each
part of the year for which the fixtures are owned.
Depreciation for the first year = Cost-(cost x10%) / 4 years x (used months / 12 months) 14
Straight line method Where the annual depreciation charge is based on the cost of Easier to calculate/ only one calculation needed
(Equal instalment method) non current asset and is the same amount each year. Suitable when lose equal value each year
Depn: = Cost x % ; (Cost—Residual value) x % Suitable when annual usage is the same
Depn: = (Cost—Residual value) / useful life ; Should not change method without good reason/ apply consistency

Reducing balance method Where the annual depreciation charge is based on the value of Has to be recalculate each year
(Diminishing balance method) the non current asset at the beginning of the year under review. Suitable when lose more value in early years
Depn: = Net Book Value x % Shows a more realistic book value
Depn: = (Cost—Acc.depn:) x % Matches cost more closely with revenue
Unable to compare with previous accounts

Revaluation method Where the annual depreciation charge is based on comparing the estimated value of a group of non current assets at the end of
a financial year with the value at the beginning of the financial year.
Depn: = Opening balance of NCA+ Purchase of NCA—Closing balance of NCA

Reason: Straight line method • Principle of Materiality - not practical/ too many items/ too difficult/ too costly to depreciate each item separately.
could not used for hand tools • Do not depreciate by an equal amount each year
May be certain amount of loss of tools each year.

Reason: Reducing Balance • More depn: is charged in the early years of its life.
method is appropriated for • Most of the benefit of the asset is gained in the early years.
Delivery vehicle. • The net book value is more likely to relate to the amount which will be realised on sale.
• The vehicle may become out of date quickly depending on the vehicle type.
• As repair costs are likely to be minimal in the early years, the overall charge to the income statement each year is more likely to be
fairly constant if the reducing balance method is used.

Reason for using

Revaluation method Low value items which are not easy to depreciate separately/ Not practical to keep detailed records of such assets.

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Disposal of Non Current Asset Explain how providing for Depreciation of NCA is an application of the princi-
Non Current Asset Account ple of Accrual (Matching)?
2019 $ 2019 $ • The loss in value of NCA during the year is set against the revenue of the
Jan 1 Balance b/d xx same period.
Jan_Dec Cash/ Bank xx Jan_Dec Disposal xx • The cost of NCA is spread over the year which benefit from the use of the
Dec 31 Balance c/d xx assets.
xx xx
Explain how charging Depreciation of NCA is an example of the application of
2020 the Prudence principle?
Jan 1 Balance b/d xx
• Ensure that NCA are shown at more realistic value.
Provision for depreciation of Non Current Asset Account
• Ensure that the profit for the year is not overstated.
2019 $ 2019 $
Jan 1 Balance b/d xx
Jan_Dec Disposal xx Dec 31 Income statement xx

(Depn: for the year)

Dec 31 Balance c/d xx
xx xx
2020
Jan 1 Balance b/d xx

Disposal of Non current asset Account

2019 $ 2019 $
Jan_Dec Non current asset xx Jan_Dec Provision for depn: xx
Jan_Dec Cash/Bank/ Receivable xx

Dec 31 I/S: Profit ??? Dec 31 I/S: Loss ???

xx xx

Depn: for the year = [ ( Cost - Disposal ) - ( Acc.depn: - Disposal) ] x %

(RBM) Cost Acc.depn: 16
Accrual and Prepayment Accrual Expenses—An amount owing for expenses at the end of a financial period
Prepaid Expenses—The payment of an expenses in advance of the accounting year
Income Current Asset b/d—Dr to which it relates.
c/d—Cr
Accrual Other receivable—Term used on a statement of financial position to include prepaid
Expense Current Lia expenses and income accrued.
(Arrear, outstanding,
Other payable—Term used on a statement of financial position to include accrued
unpaid, due, owed) expenses and income prepaid.
Income * Current Lia b/d—Cr

Prepaid c/d—Dr
Difference between Accruals and Prepaids.
(in advance) Expense Current Asset Prepaid expenses are the advance payments for goods and services that are
to be used up in the future and are classified as an asset on the statement of
Income Account
financial position, while expense accruals are liabilities, amounts that have
2019 $ 2019 $ been incurred but have not been paid by a period's end.
Jan 1 Balance b/d (Accrual) xxx Jan 1 Balance b/d (Prepaid) xxx
Mar 31 Bank xxx Evaluate: It is necessary to account for other receivable and other payable.
Why?
Dec 31 Income statement ? Jun 30 Bank xxx
This is an application of the accrual concept.
Sep 30 Bank xxx To apply the concept, it is necessary to transfer to the income statement only
Dec 31 Balance c/d (Prepaid) xxx Dec 31 Balance c/d (Accrual) xxx the amounts covered by that period.
xxx xxx This allows a more meaningful comparison of financial statements year on
year and allows the business to present a true and fair view of its financial
2020 2020
position.
Jan 1 Balance b/d (Accrual) xxx Jan 1 Balance b/d (Prepaid) xxx It is necessary to account for other receivable and other payable to present
a more accurate view of profit and loss and / or current asset and current
Expense Account liability.
2019 $ 2019 $
Jan 1 Balance b/d (Prepaid) xxx Jan 1 Balance b/d (Accrual) xxx
Mar 31 Bank xxx
Jun 30 Bank xxx Dec 31 Income Statement ??
Sep 30 Bank xxx
Dec 31 Balance c/d (Accrual) xxx Dec 31 Balance c/d (Prepaid) xxx
xxx xxx
2020 2020
Jan 1 Balance b/d (Prepaid) xxx Jan 1 Balance b/d (Accrual) xxx 17
Irrecoverable debts and Provision for doubtful debt Bad debt An amount owing to a business which will not be paid by credit
Trade receivable Account (Irrecoverable customer
debt)
2019 $ 2019 $
Recovery of When a credit customer pays some or all of the debt previously written
Jan 1 Balance b/d xx Dec 31 Irrecoverable debt xx
debts off as a bad debt.
Dec 31 Balance c/d xx
Provision for an amount set aside from profits to take account of the likelihood that
xx xx doubtful debt some trade receivable will not pay the amount due and so will reduce
2020 the value of this asset on SOFP.
Jan 1 Balance b/d xx How maintaining a provision for doubtful debt as an application of prudence principle?
1. Ensures that the profit for the year is not overstated by anticipating losses.
2. Ensures that trade receivable are shown at a realistic level in SOFP.
Irrecoverable Debt Account
2019 $ 2019 $ How maintaining a provision for doubtful debt as an application of accrual principle?
Dec 31 Trade receivable xx Dec 31 Income statement: xx 1. In order to calculate a true and fair profit, income for a financial year is matched
against with expenses that relate to that accounting year whether paid or not.
2. The sale for which a business is unlikely to be paid are regarded as an expense of the
xx xx year in which those sales are made.
Recovery of debt Account
To reduce the possibility of bad debts
2019 $ 2019 $ 1. Offering cash discount for prompt payment
Dec 31 Income statement: Xx Dec 31 Cash/Bank xx 2. Charge interest on overdue account
3. Refuse further supply until the outstanding amount is paid
4. Reduce credit sale
xx xx

Provision for doubtful debt Account 5. Issue invoices and monthly statement of account
6. Introduce/ improve credit control
2019 $ 2019 $ 7. Obtain reference from new credit customers
Jan 1 Balance b/d xx 8. Fix credit limit to each customers
(trade receivable x %) Credit Control Policy
Dec 31 I/S: Income (decrease) xxx Dec 31 I/S: Expense (increase) xx
Advantages: 1. cash received earlier
Dec 31 Balance c/d xx 2. Reduces the possibility of irrecoverable debts
(Remaining 3. May reduce bank overdraft interest charges
trade receivable x %)
Disadvantages: 1. may lose customers/ may reduce sales
xx xx
2. Will increases administration costs/ may reduce profit for the year
Jan 1 Balance b/d xxx 3. May damage relationship with customers
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Sole Trader’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $ Cost Accumulated Carrying
value
Revenue xxx Depreciation
Less: Sale return (Return inward) (xx) Assets $ $ $
Net Sale xxx Non Current Asset:
Less: Cost of Sale Building xxx xxx xxx
Opening Inventory xxx Motor vehicle xxx xxx xxx
Purchase ( xxx—goods drawings) xxx xxx xxx xxx
Less: Purchase return (Return outward) (xx) Current Asset:
Add: Carriage inward xxx xxx Closing inventory xxx
xxx Trade receivable xxx
Less: Closing Inventory (xx) (xx) Less: Allowance for irrecover debts (xx) xxx
Gross Profit xxx Cash at bank xxx
Add: Income Cash in hand xxx
Discount received, Commission received xxx Other receivable: (P:E ; A: I) xxx xxx

Rent received xxx Total Assets xxx

Allowance for irrecoverable debt (decrease) xxx Equity and Liabilities
Recovery of bad debt xxx Capital at 1 January 2019 xxx
Profit on disposal of Non Current Asset xxx xxx Add: Profit for the year xxx
Less: Expenses Less: Drawings (Cash drawings + Goods drawings) (xx)
Discount Allowed, Irrecoverable debt (bad debt) xx xxx
Carriage outward xx Non Current Liabilities:
Electricity, Water charges, Insurance, Rent xx Bank Loan xxx
Provision for depreciation of NCA xx Current Liabilities:
Loss on disposal of NCA xx Trade payables xxx
Administration expenses (xxxx + accrual) xx Bank overdraft xxx
Selling and distribution expenses (xxxxx - prepaid) xx (xxx) Other payable: (A: E ; P : I) xxx xxx
Profit for the year xxx Total Capital and Liabilities xxx
P:E—Prepaid: Expenses A:I—Accrual: Income
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A:E-Accrual: Expenses P:I– Prepaid: Income
 Sole Trader (Sole Proprietor) Partnership Limited company
Person 1 owner 2~20 partners unlimited shareholders

Advantages easy set up sharing loss/ responsibilities Better access to capital

Quick decision making better decision making Separate legal entity
complete control/all profits to owner additional finance available Limited liability of owners

Disadvantage difficulty raising capital /financing sharing profit costly and complicated set up
no check and balance on decisions taken Unlimited Liability Public disclosure of accounts
Unlimited Liability disagreement may occur Limited role of shareholders

Income Statement for the year ended 31 Dec 2021 Income Statement for the year ended 31 Dec 2021 Income Statement for the year ended 31 Dec 2021
$ $ $ $ $ $
Revenue Revenue Revenue
Cost of sale Cost of sale Cost of sale
Gross profit Gross profit Gross profit
Add: Income Add: Income Add: Income
Less: Expenses Less: Expenses Less: Expenses
Profit for the year Operation Profit (PBIT)
Add: Interest on drawing
Less: Interest on capital Less: Finance charges
Less: Partner's salary
Profit for the year Residual profit Profit for the year (PAT)

Statement of financial position at 31 Dec 2021 Statement of financial position at 31 Dec 2021 Statement of financial position at 31 Dec 2021
$ $ $ $ $ $
Non Current Asset Non Current Asset Non Current Asset
Current Asset Current Asset Current Asset

Capital Capital account: Capital and Reserve:

Add: Profit for the year Ordinary share capital
Less: Drawing Current account: Preference share capital
Retained earning/profit
General reserve

Non Current Lia: Non Current Lia: Non Current Lia:

Current Lia: Current Lia: Current Lia:
20
Partnership’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $ Assets: $ $ $
Sale /Revenue xxx Non Current Asset: xxx
Cost of Sale (xx) Current Asset: xxx
Gross Profit xxx Total assets xxx
Less: Expenses (xx)
Equity and Liabilities:
Loan interest to partners Equity A B
Profit for the year xxx Capital Account: xxx xxx xxx
Add: Interest on Drawing Current Account xxx (xxx) (xx)
A (Drawing x %) xxx
xxx
B (Drawing x %) xxx xxx
Non Current Liabilities: xxx
xxx
Current Liabilities: xxx
Appropriation Account

Less: Interest on Capital

xxx
A (Capital x %) xxx
B (Capital x %) xxx Partners’ Current Account
Less: Partners’ salary Date Detail A B Date Detail A B
A xxx 2019 $ $ 2019 $ $
B - (xxx) Jan 1 Balance b/d xxx Jan 1 Balance b/d xxx
xxx Drawing xxx xxx Dec 31 Interest on capital xxx xxx
Residual Profit / Profit to be shared: Interest on drawing xxx xxx Partners’ salary xxx -
A (5000 x 1/2) xxx Trans: to capital Interest on loan xx -
B (5000 x 1/2) xxx (xxx) Residual loss xxx xxx Residual profit xxx xxx
- Dec 31 Balance c/d xxx Dec 31 Balance c/d xxx
Partners’ Capital Account xxx xxx xxx xxx
Date Detail A B Date Detail A B 2020 2020
$ $ 2019 $ $ Jan 1 Balance b/d xxx Jan 1 Balance b/d xxx
Jan 1 Balance b/d xx xx
Dec 31 Balance c/d xx xx Dec 31 Bank (additional capital) xx xx
Partner owed to the business Partner owed by the business
xx xx xx xx
Asset Liability
Jan 1 Balance b/d xx xx 21
Partnership’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $
$ $ $
Sale /Revenue xxx Non Current Asset
Cost of Sale (xx)
Gross Profit xxx Current Asset
xxx
Less: Expenses (xx)
A B Total
Loan interest to partners $ $ $
Profit for the year xxx Capital Account xx xx xxx
Add: Interest on Drawing
A (Drawing x %) xxx Current Account:
B (Drawing x %) xxx xxx
Opening balance (xx) xx
Interest on capital xx xx
xxx
Partner's salary xx -
Less: Interest on Capital Loan interest xx -
A (Capital x %) xxx Residual profit xx xx
B (Capital x %) xxx xxx xxx
Less: Partners’ salary Drawing xx xx
Interest on drawing xx xx
A xxx
Residual loss xx xx
B - (xxx) xxx xxx
xxx Closing balance xx (xx) xxx
Residual Profit / Profit to be shared: xxx
A (5000 x 1/2) xxx Non Current Liabilities xxx

B (5000 x 1/2) xxx (xxx)

Current liabilities xxx
- xxx
Partners’ Capital Account
Date Detail A B Date Detail A B
$ $ 2019 $ $
Jan 1 Balance b/d xx xx
Dec 31 Balance c/d xx xx Dec 31 Bank (additional capital) xx xx
xx xx xx xx
Jan 1 Balance b/d xx xx 22
Partnership agreement Do not have agreement
1. Rate of Interest on drawing 1. No interest on drawing
2. Rate of Interest on capital 2. No interest on capital
3. Partner's salary 3. No partner's salary
4. Capital contribution 4. Profit and loss sharing equally
5. Profit and loss sharing ratio 5. 5% loan interest (Partner’s loan)
Advantages of being Partners rather than Sole Trader Disadvantages of being Partners rather than Sole Trader
1. Share losses 1. Share profit
2. Share responsibilities 2. Decision must be recognised by all partners
3. Share risk 3. Decision may be take longer to implement
4. Share decision making 4. One partner's action can blind other partner
5. Additional finance available 5. Disagreement may occur
6. Additional skill and experience available 6. All partners are responsible for all the debts of the business.
Each partner has both a current and a capital account. Why?
1. To keep a separate record of capital introduced/ be able to calculate the interest on capital
2. To allow easy comparison of drawing and profit shares
3. To see if partner has overdrawn on profit allocation

One Personal benefit to partnership if it is transform to Company limited. Double entry for interest on partner’s loan;
The members of limited liability company have limited liability and their personal Income statement (Expense) - Dr
assets are not at risk is the business fails. Partner’s current account - Cr

Reason for partnership agreement; The credit balance of current account meant_
• To avoid misunderstanding and disagreement in the future • The partnership owes to the partners

State the debit balance of Partner's current Account.

• The amount owes the partnership

Reason for charging interest on drawing Reason for charging interest on capital
• To discourage partners from taking drawing • To reward the partners for their investment
• To reduce the level of drawing • To encourage for more capital introduced

Reason for partner salary included in the partnership agreement

• To compensate partner for extra workload
• To reward partner for extra skills 23
Manufacturing’s Financial Statements Income Statement for the year ended 31 December 2019
$ $ $
Manufacturing Account for the year ended 31 December 2019
Sale /Revenue Xxx
$ $
Less: Cost of Sale
Cost of Raw Material Consumed :
Opening Inventory of Finished goods Xx
Opening inventory of Raw material xx
Purchase of Finished goods xx
Purchase of Raw material xx
Less: purchase return of finished goods (xx)
Less: Purchase return of Raw material (xx)
Add: carriage inward of finished goods xx xxx
Add: Carriage inward of Raw material xx xxx
Production cost of Finished goods xxx
Closing inventory of Raw material (xx)
Less: Closing Inventory of finished goods (xx) (xx)
xxx
Gross Profit xxx
Add: Direct expenses
Add: Manufacturing profit xxx
Direct wages / labour (operation salary) xx
Less: Expenses
Direct expenses / Royalities xx
Depreciation of office xx
xx
Rent (office %) xx
Prime Cost xxx
Insurance (office %) xx xx
Add: Production Overhead/Indirect cost/ Factory overhead
Profit for the year xxx
Factory wages (Supervisor salary) xx
Electricity (+ accrual ; - prepaid) xx Statement of Financial Position at 31 December 2019
Rental (Factory %) xx $ $
Insurance (Factory %) xx Non Current Asset: xxx
Depreciation of Machinery xx Current Asset:
Depreciation of Tools xx xxxx Closing inventory: Raw material xxx
Work in progress xxx
xxxx Finished goods xxx xxx
Add: Opening inventory of Work in progress xx xxx
Less: Closing inventory of Work in progress (xx) Capital xxx
xxx Non current liabilities: xxx
Production cost of Finished Goods / Cost of production xxxx Current liabilities: xxx
Add: Manufacturing profit ( cost of production x %) xxx xxx
Transfer to income statement xxxx 24
 Manufacturing Account Principle of Professional ethics
1. Integrity—Honesty, Straight forward, Truthful)

Raw material • Goods were purchased for converting into finished goods 2. Objectivity—Accountant must be free from errors and bias

• Resources needed to make finished goods - Accountant must have own judgement on the account.

Work in progress • Goods which are partly made 3. Professional competence and due care—Accountant knowledge
must be appropriate level
Finished goods • Completed products which are waiting for sale
4. Confidentiality—Accountants have a legal obligation to maintain the
confidentiality of materials they have been given.
Direct cost Manufacturing costs that are attributable to a single product, 5. Adopt professional behavior—Accountant comply with all relevant
particularly direct materials and direct labour.
laws and regulations so as not to bring the accounting professional into
Indirect cost Manufacturing costs that cannot be attributed to one product disrepute.
6. Public interests—Accountant need to behave in the public interest.

Prime cost Total cost of direct material, direct labour and direct expenses

Cost of raw material The direct cost of raw materials used during a financial year
consumed
Factory overhead The total of indirect cost.
(Production overhead)

Manufacturing account The first part of the end of year financial statement of a manu-
facturing organization that shows the total cost of producing
goods.

Reason for purchasing 1. Cheaper price than make

finished goods 2. Production cannot meet up with the demand
3. Cannot manufacture those particular item themselves.

Reason for calculating 1. To set prices

the cost of production 2. To compare the cost of production and the cost of buying
the product. 25
 Statement of affair at opening date
$ $ Incomplete Records
Assets at opening date
Motor van xxx
Inventory xxx Cash Sale >>> Cash book (Debit side)
Trade receivable xxx Total Sale = +
Credit sale >>> Trade receivable Account
Bank xxx
xxx $ $
Other receivable
Bal b/d
xxx
Credit sale ??? Sale return
Less: Liabilities at opening date
Bank loan xxx Bank (receipt)
Trade payable xxx Discount allowed
Other payable xxx Bal c/d
Bank overdraft xxx (xxx)
Capital at opening date xxx Bal b/d

Statement of affair at closing date Credit sale = Bank (receipt) + c/d - b/d + Sale return + Discount allowed
$ $
Assets at closing date Cash purchase >>> Cash book (Credit side)
Motor van xxx Total Purchase = +
Inventory xxx Credit purchase >>> Trade payable Account
Trade receivable xxx $ $
Bank xxx Bal b/d
Other receivable xxx Pur.return Credit purchase ??
xxx Bank
(payment)
Less: Liabilities at closing date
Discount received
Bank loan xxx
Bal c/d
Trade payable xxx
Other payable xxx
Bank overdraft xxx (xxx) Bal b/d
Capital at closing date xxx
Credit purchase = Bank (payment) + c/d - b/d + Pur.return + Discount received

Opening + Additional + Profit - Drawings = Closing

Capital Capital for the year Capital

Profit = Closing - Opening - Additional + Drawings

for the year Capital Capital Capital
26
 Profitability Ratio Liquidity Ratio Income statement ratio Statement of financial position ratio

1. Gross profit margin 1. Current ratio (Working capital ratio) 1. Gross profit margin 1. Current ratio

2. Gross profit mark up 2. Liquid/Quick/Acid test ratio 2. Gross profit mark up 2. Liquid ratio

3. Profit to revenue margin 3. Trade receivable collection period 3. Profit to revenue margin 3. Trade receivable turnover

4. Return on Capital Employed (ROCE) (Debt collection period) 4. Rate of inventory turnover 4. Trade payable turnover
4. Trade payable payment period 5. Return on capital employed (ROCE)
5. Rate of inventory turnover

Profitability Ratio Liquidity Ratio

- is the ability to generate profit from the activity of the business - is the ability of a business to pay off its liability
1. Gross Profit margin Gross profit x 100 1. Current ratio /Working capital ratio Current Asset
Revenue (2:1, Ideal, Benchmark) Current Lia:

2. Gross profit mark-up Gross profit x 100 2. Quick ratio / Liquid / Acid test ratio Current Asset - Inventory
Cost of sale Current Lia:

3. Profit margin Profit for the year (PAT) x 100 3. Trade receivable collection period Trade receivable x 365
Revenue (Trade receivable turnover days) Credit Sale
4. Return on Capital Employed (ROCE) Profit for the year (PBIT) x 100 4. Trade payable payment period Trade payable x 365
Capital Employed (Trade payable turnover Credit Purchase

Capital Employed Closing Capital + Non-Current Lia: • Sole Trader >>> Capital employed = Closing capital + Non current lia:

• Partnership>>> Capital employed = Capital account + Current account + NCL

• Company >>> > Capital employed = Closing capital & reserve + NCL

5. Rate of Inventory turnover Cost of sale

(in times) Average inventory Working Capital Ratio = Current Asset / Current Lia:

Rate of Inventory turnover Average inventory x 365 Working Capital = Current Asset—Current Lia:

(in days) Cost of sale

27
 Accounting Principles Stakeholders Interested

In order to calculate a true and fair profit, income for a financial 1 Owner • To assess the business is going well
1 Accrual (Matching) year is matched exactly with expenses that relate to that
• To determine for additional capital
accounting year whether paid or not.
An accounting principle that required that where there is doubt, 2 Manager • To compare results with previous year
asset and profit values are understated rather than overstated,
• To compare with other business
and that losses and liabilities are overstated rather than
understated. • To assess the post performance
2 Prudence
Inventory valuation • To see where improvements can be make/ take remedial action

Lower of Cost and Net Realisable Value (NRV) • To compare with budgets and forecasts
Cost = Purchase price + Carriage inward 3 Credit supplier • Check on liquidity position of the business
NRV = Expected selling price—selling cost
• Check the likelihood of the account being paid
All transactions should be recorded using original cost of • Check the trade payable payment period
3 Historic cost
purchase
• To help determine the credit period/ limit/ the length of credit
allowed
Financial statements should not take account of items which are
4 Materiality
trivial or which may be misleading 4 Customer • Check on likelihood of supplies being continued

Accounting policies should be carried out in the same way year 5 Employee • to see if the business is likely to continue operating
5 Consistency
on year. • To access job security

• To assess likelihood of wages increases

A business's transactions and the owner's private transactions are
6 Business entity
recorded separately in a business's accounting system. 6 Bank/lender • Check on security for overdraft/ loan to check collateral in case of
bankruptcy
Every transaction has two aspects leading to the making of two • Check the ability of the business to repay any loan/overdraft when
7 Duality
entries for each transaction in the accounting system. due

• Check the ability of the business to pay any interest when due
In accounting, only transactions that have a definite monetary
8 Money measurement 7 Investors • To see the returns of the business for their investments
value are recorded.

While a business continues to trade, assets are valued at cost less

9 Going concern depreciation. When a business ceases to trade, assets are valued 8 Government/ • Check the likelihood of the tax amount of the business.
at their realisable value. tax authority
A sale occurs when the customers pays or when an invoice is
10 Realisation
issued for the goods and services. 28
 Comparing with other business
International Accounting Standards (IAS) • Should compare with a business in the same trade.
A set rules and guidelines that business in many countries must follow in producing
financial statements.
• Should compare with a business of approximately the same size
• Should compare with a business of the same type (sole trader)
Accounting Policies • The financial statements may be for one year, which will not show trends.
1. Comparability - when it can be compared with other periods.
2. Relevant - when it affects business decisions • The financial statements may be for one year which is not a typical year.
3. Reliability - when it is free from error and bias • The businesses may apply different accounting policies.
4. Understandability - when it can be understood by the users
• The statements do not show non-monetary factors
Comparability • It may not be possible to obtain all the information needed to make
• They can identify similarities with the financial statements of other business. comparisons.
• Financial statement can be compared with similar business/ year to year.
• Accounting policies should be applied consistently so that financial statement
can be compared from year to year Business wishes to compare the results with those of a similar business and was able
to obtain the financial statements of a business in the same trade.
Relevance
• Financial statements must provide information in time for financial decision to
be made. State how Historical Cost may be regarded as a limitation of financial statements
• They can be sure that information in the financial statement is up to date. • Transaction are recorded at actual cost/ purchase price.
• Information is relevant if it is capable of influencing the decisions being made. • It is difficult to compare transactions taking place at different time.
• Information must be available in time for decisions to be taken.
• Relevant information helps the directors to evaluate past, present and future How Non Financial Factors may be regarded as a limitation of financial statements
events. • Only information which was be expressed in monetary terms is recorded.
Many important factors which affect the business are not recorded.
Reliability
• Financial information is reliable only.
• If it can be depended on to represent actual events
• If it is free from error/ bias
• Financial statement must be prepared in such a way as to ensure they present a
true and fair view of the financial position.
• They can use the financial statement in decision making
•
Understandability
• A financial report must be capable/grasp of being understood by the users of
that report.
State how IAS help to achieve understandability?
• by narrowing areas of difference in financial statements.
29
 Money measurement principles
Explain how providing for Depreciation of NCA is an application of the principle of Accrual
(Matching)? • Non monetary items cannot be recorded

• The loss in value of NCA during the year is set against the revenue of the same period. • Money is widely used/ understood unit of measure

• The cost of NCA is spread over the year which benefit from the use of the assets. • Transaction are traditionally recorded in money terms

Explain how charging Depreciation of NCA is an example of the application of the • Subjectivity/ personal opinion is avoided
Prudence principle? • Easier to make comparison year on year/ with other business
• Ensure that NCA are shown at more realistic value. Explain how the realisation principle is applied to the recording of credit sales.
• Ensure that the profit for the year is not overstated.  revenue is regarded as being earned when title to the goods is passed.
 The profit on sales is not recognized until it is earned.

How maintain a provision for doubtful debts is an application of the principle of Accrual  Profit is recognized when earned not when payment is received.
(Matching)?  Profit is earned when the sale is completed/ legal title passes

 in order to calculate a true and fair profit, income for a financial year is matched  No profit is recognized when goods are ordered.
exactly with expenses that relate to that accounting year whether paid or not. Reasons why business did not record calculator as a non-current asset
 The sale for which a business is unlikely to be paid are regarded as an expenses of the  The principle of materiality was applied
year in which those sales are made.
 The cost of the calculator was an immaterial amount
Explain how the prudence principle is applied to the maintenance of provision for
doubtful debts.  The cost of recording the calculator as a non current asset would have
outweighed the benefit.
 to ensure that profits/ trade receivable are not overstated.
 The amount of depreciation would be insignificant.
 To ensure that trade receivable are shown at a realistic amount in the statement of
financial position.  The calculator may not last over 12 months.
 Profits and assets are reduced when the provision for doubtful debts is increase/
profit and assets are increased when the provision is reduced. Going concern principle
 Assume the business will operate for an indefinite period of time.
 Assume there is no intention to close the business down/ reduce the size of
the business significantly
 Non current assets are valued at net book value/ not expected sales value.

30