Principles of Accounts
CSEC Ms Fergusson
INTRODUCTION TO ACCOUNTING
The purpose of accounting o The purpose of accounting is to provide information about financial situation of an organization, so that informed decisions can be made.
Accountants are responsible for the design and management of the financial systems that bookkeepers use.
Users of Accounting :
The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities Internal Users
o o o o o o Owners of the Business need to know profitability & liquidity of business; money in and out; financial resources Management: - need to know profitability & liquidity of business - decision-making Employees / Trade Unions Collective bargainingnegotiations for better wages etc.
External Users
Potential Investors general public and financial institutions e.g. unit trust risk and return of investment The Bank and other financial institutions need to know credit rating risk of non-repayment of loans Suppliers credit sales
ACCOUNTINGCONCEPTS Therulesthatstatehowtransactionsaretoberecorded.
Materiality
Prudence / Conservatism
Consistency
Assets Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. Simply, they are a companys resources i.e. things the company owns.
Liabilities Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business i.e. amounts the business owes.
Income Income / revenues are amounts earned during the accounting period from the daily operations of the business. Simply, they are what the business earns for providing goods and services.
Capital / Owners Equity Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.
Expenses Expenses are the costs incurred by a business in its daily operations in earning income. In other words, they are the cost of assets used by the business to generate revenues.
A companys financial position The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owners Equity N.B. Every business transaction will have an effect on a companys financial position.
The major components of the Balance Sheet The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owners Equity Assets, Liabilities and Capital are, therefore, Balance Sheet accounts Assets Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. There are two types of assets: o Fixed Assets: assets used to carry on the business and generate profit. They are not purchased for resale but intended to be retained permanently for the purpose of carrying on the business e.g. Land and Buildings, Fixtures and Fillings, Machinery etc. Current Assets: assets consisting of cash and other assets that would be consumed or easily converted into cash within one year.
Liabilities Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business (the money owed by the business). There are two types of liabilities: o o Long Term Liabilities: These are any debts or obligations owed by the business that are due more than one year from the current date e.g. Mortgages, Bank Loans etc. Current Liabilities: These are any debts or obligations owed by the business that are due within one year from the current date e.g. Creditors (suppliers, short term loans), bank overdrafts etc.
Capital / Owners Equity Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations. Capital is considered a special kind of liability. It is a loan by the owner to the business and is, therefore, money owed by the business to the owner. N.B. For accounting purposes, a business is regarded as being a separate entity from its owner(s). (the business entity concept)
The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.
Additional Information
The owner of the business also has the option to withdraw capital from the business for personal use: Drawings The expanded accounting equation is, therefore: Assets = Liabilities + Capital + Revenues Expenses Drawings o o o Revenues increase Capital / Owners Equity Expenses decrease Capital / Owners Equity Drawings decrease Capital / Owners Equity
The Format of a simple Balance Sheet (Horizontal) Balance Sheet as at $ Assets X Capital Liabilities XX Balance Sheet as at $ Fixed Assets Current Assets X X Capital Long Term Liabilities Current Liabilities XX $ X X X XX $ X X XX
Balance Sheet as at $ Fixed Assets Current Assets X X Capital Long Term Liabilities Current Liabilities XX $ X X X XX
CURRENT ASSETS
Order of Permanence Land Buildings Machinery Equipment Motor Vehicles Order of Liquidity Motor Vehicles Equipment Machinery Buildings Land
CURRENT LIAB.
Order of Permanence Creditors Bank Overdraft Order of Liquidity Bank Overdraft Creditors
VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER Owners Name Balance Sheet as at _________ $ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Bank * Cash Total Current Assets LESS: CURRENT LIABILITIES Bank Loan (1yr or less) Creditors Bank overdraft * Total Current Liabilities WORKING CAPITAL FINANCED BY: CAPITAL: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank Loan (more than 1 year) Total Long Term Liabilities X X X XX X X OR (X) X (X) X X X X X X X X X X X $ $
X X X (X) X XX
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Principles of Accounts
Accounting Cycle
The accounting cycle is a series of steps for recording each transaction in the accounting process, which are repeated every accounting period.
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NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the cycle is done at the end of a period.
Types of Accounts
Personal Accounts Debtors and Creditors Real Accounts Assets & Liabilities
Nominal Accounts Revenue and Expenses
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Journal
Purchases Journal Sales Journal Ret. Inwards Journal Ret. Outwards Journal General Journal
General Journal General Journal General Journal General Journal General Journal General Journal General Journal General Journal General Journal
OTHER ENTRIES OF THE BUSINESS Opening Entries (list of opening balances of assets, liabilities and capital a/cs) Correction of Errors Closing Entries (list of closing balances of assets, liabilities and capital a/cs)
Name of the Business Sales Journal Date Year dt dt dt End of mth Details Debtor e.g. John Smith Debtor e.g. Jane Doe
Debtor
Transfer to Sales account
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Invoice #
Folio SL # SL SL GL
Amount $ X X X XX
Purchases Journal Date Year dt dt dt End of mth Details Creditor e.g. Will Browne Creditor e.g. Alice Williams
Creditor
Transfer to Purchases account
Invoice #
Folio PL # PL PL GL
Amount $ X X X XX
Returns Inwards Journal Date Year dt dt End of mth Details Debtor e.g. John Smith Debtor e.g. Jane Doe
Transfer to Returns inwards account
Invoice #
Folio SL # SL GL
Amount $ X X XX
Returns Outwards Journal Date Year dt dt End of mth Details Creditor e.g. Will Browne Creditor e.g. Alice Williams Transfer to Returns outwards account Invoice # Folio PL # PL GL Amount $ X X XX
Cash Book
Date Details Folio Discount Allowed Cash Bank Date Details Folio Discount Received Cash Bank
$ Balance b/d Capital Sales Debtor Interest received Loan Bank Cash Balance b/d
GL GL SL GL GL GL GL
$ X X
$ X X X
X X X X XX X
X X XX X
$ Purchases Motor Vehicle Creditor Drawings Cash Bank Interest on Loan Balance c/d
GL GL PL GL GL GL GL
X X X X X XX
$ X X X X X X XX
The Journal Date Year dt Details Account debited e.g. Motor Vehicle Account credited e.g. Bank Account
Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle Folio GL GL DR $ X
CR $ X
TheJournal
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The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts)
At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets, liabilities and capital called an opening journal entry.
Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit balance, so these are credited in opening journal entry. Capital is credited.
The Journal Date Year dt Details Land and Buildings Plant and machinery Motor Vehicles Stock (Inventory) Debtors Bank Cash Mortgage Bank Loan Creditors Accrued Expenses Provision for Depreciation: Motor Vehicles To record assets, liabilities and capital of business at beginning of period Folio GL GL GL GL GL GL GL GL GL GL GL GL DR $ X X X X X X X CR $
X X X X X XX
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PettyCashBook
Receipts $ X CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 Jan 31 X X X CB Feb 1 Feb 1 Balance b/d Cash Cash Postage Motor Exp. R. King Travel Exp. Sundry exp. Cleaning Balance c/d X X X X X X X X X X X X X X X X X X X PL X X Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
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PettyCashBook
Receipts $ X CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 X XX X Feb 1 Balance b/d CB Jan 31 Jan 31 Cash Postage Motor Exp. R. King Travel Exp. Sundry exp. Cleaning Cash Balance c/d X XX X X X X X X X X X X X X X X X X X PL X X Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
PettyCashBook
Receipts $ 300 CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 Jan 31 300 204 96 CB Feb 1 Feb 1 Balance b/d Cash Cash Postage Motor Exp. R. King Travel Exp. Sundry exp. Cleaning Balance c/d 5 20 30 15 12 14 96 204 300 20 15 5 14 14 12 30 15 12 20 PL 30 5 Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
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PettyCashBook
Receipts $ 300 CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 96 396 300 CB Feb 1 Balance b/d Jan 31 Jan 31 Cash Postage Motor Exp. R. King Travel Exp. Sundry exp. Cleaning Cash Balance c/d 300 396 5 20 30 15 12 14 96 20 15 5 14 14 12 30 15 12 20 PL 30 5 Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
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Name of account e.g. Capital Date Details Folio Dr$ Date Details Folio Cr$
Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits. Debit and credit, therefore, indicate on which side of a T account numbers will be recorded. For some types of accounts debit means an increase in the account balance, while for others debit means a decrease in the account balance, as seen below: Category of Account
Assets Liabilities Income / revenue Capital Expenses
Entry to Increase
Debit Credit Credit
Credit
Debit
Entry to Decrease
Credit Debit
Debit
Debit
Credit
LEDGERS are books of final entry containing the T-accounts of the business in which transactions are posted in the form of debit and credits.
Ledgers
Sales Ledger Purchases Ledger General Ledger
T-Accounts
Debtor a/cs (personal accounts) e.g. John Smith Creditor a/cs (personal accounts) e.g. Alice Williams Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc. Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received
Account
Debtor a/cs (personal accounts) e.g. John Smith Creditor a/cs (personal accounts) e.g. Alice Williams Sales , Purchases, Returns Inwards, Returns Outwards a/cs Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. Cash and Bank separate a/cs Liability a/cs e.g. Mortgage Capital a/c and Drawings a/c Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc
Ledger
Sales Ledger Purchases Ledger General Ledger
General Ledger
General Ledger
General Ledger
General Ledger
General Ledger
DOUBLE ENTRY requires that for each transaction, the amount entered into the accounting records is entered in at least two different accounts, with one account being debited and the other credited. All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
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Debtor a/c e.g Jane Doe Date Year dt Details Sales Folio SJ Dr$ X Date Year dt dt dt Details Returns Inwards Cash/Bank Discounts Allowed Folio RIJ CB CB Cr$ X X X
Debtor a/c Date Year dt Details Sales Folio SJ Dr$ X Date Year dt dt dt Details Returns Inwards Cash/Bank Discounts Allowed Folio RIJ CB CB Cr$ X X X
Name of the Business Purchases Ledger Creditor a/c e.g Will Brown Date Year dt dt dt Details Returns Outwards Cash/Bank Discounts Received Folio ROJ CB CB Dr$ X X X Date Year dt Details Purchases Folio PJ Cr$
Creditor a/c e.g Alice Williams Date Year dt dt dt Details Returns Outwards Cash/Bank Discounts Received Folio ROJ CB CB Dr$ X X X Date Year dt Details Purchases Folio PJ Cr$
Creditor a/c Date Year dt dt dt Details Returns Outwards Cash/Bank Discounts Received Folio ROJ CB CB Dr$ X X X Date Year dt Details Purchases Folio PJ Cr$
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Name of the Business General Ledger Sales a/c Date Details Folio Dr$ Date Year dt dt Details Cash / Bank Total credit Sales for the month Folio CB SJ Cr$ X X
Purchases a/c Date Year dt dt Details Cash/Bank Total credit Purchases for the month Folio CB PJ Dr$ X X Returns Inwards a/c Date Year dt Details Total Return Inwards for the month Folio RIJ Dr$ X Returns Outwards a/c Date Details Folio Dr$ Date Year dt Details Total Return Outwards for the month Folio ROJ Cr$ X Date Details Folio Cr$ Date Details Folio Cr$
Motor Vehicles a/c Date Year dt Details Bank Folio CB Dr$ X Capital a/c Date Details Folio Dr$ Date Year dt Details Bank Folio CB Cr$ X Date Details Folio Cr$
Bank Loan a/c Date Details Folio Dr$ Date Year dt Details Bank Folio CB Cr$ X
Rent a/c Date Year dt Details Cash / Bank Folio CB Dr$ X Date Details Folio Cr$
Commissions received a/c Date Details Folio Dr$ Date Year dt Details Cash / Bank Folio CB Cr$ X
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Simple steps: 1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below:
Bank account Date 2010 March 1 March 13 March 25 Details Balance b/d Sales Loan Folio CB GJ Dr$ 12 500 2 000 1 000 Date 2010 March 14 March 20 March 27 March 28 Details Purchases Equipment Drawings Rent Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2 000
2. Total the side with the larger amount and enter the amount in both total boxes, as seen below:
Bank account Date 2010 March 1 March 13 March 25 Details Balance b/d Sales Loan Folio CB GJ Dr$ 12 500 2 000 1 000 15 500 Date 2010 March 14 March 20 March 27 March 28 Details Purchases Equipment Drawings Rent Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2 000 15 500
3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the difference between the debit and credit amounts (account balance), as seen below: 4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the account balance.
Bank account Date 2010 March 1 March 13 March 25 Details Balance b/d Sales Loan Folio CB GJ Dr$ 12 500 2 000 1 000 15 500 April 1 Balance b/d 10 000 Date 2010 March 14 March 20 March 27 March 28 March 31 Details Purchases Equipment Drawings Rent Balance c/d Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2 000 10 000 15 500
5. Account balances are entered in the Balance Sheet to show the financial position of the business.
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Transfer to:
Trading a/c Trading a/c Trading a/c
Profit & Loss a/c
Profit & Loss a/c
Sales a/c Date 2010 Details Folio Dr$ Date 2010 March 13 March 31 Details Bank Total Credit Sales for the month of March Folio CB SJ Cr$ 2 000 22 000 24 000
GJ
Folio CB PJ
Details
Folio
Cr$
GJ
24 000 24 000
Expense a/c e.g. Rent a/c Date 2010 March 14 March 25 Details Bank Cash Folio CB CB Dr$ 300 600 900 Date 2010 March 31 Details Transfer to P&L a/c Folio GJ Cr$ 900 900
Revenue a/c e.g. Commissions Received Date 2010 March 31 Details Transfer to P&L a/c Folio GJ Dr$ 1 000 1 000 Date 2010 March 13 Details Bank Folio CB Cr$ 1 000 1 000
Trial Balance
The Trial Balance is a list of all the debit and credit account balances for a period.
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Type of Account
Personal and Real accounts Nominal accounts
The account balances for a period are entered in the Trial Balance as follows:
Category of Account
Assets Liabilities Income / revenue Capital Expenses
Account Balances
Debit Credit Credit
Credit
Debit
Cr $
All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
Correction of Errors
Types of errors
There are two main classifications: Errors NOT affecting / revealed by the Trial Balance
1. 2. 3. 4. 5. Errors of Commission (correct amount, wrong personal account) Errors of Principle (correct amount, wrong type / category of account) Errors of Original entry (incorrect amount entered in the journal / book of original entry) Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error) Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
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6.
A credit balance in the Suspense account is a Current Liability in the Balance Sheet. A debit balance in the suspense account is a Current Asset in the Balance Sheet.
N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to the ledger accounts affected by the error, including the suspense account.
Adjusting Entries
Adjusting entries are entries made at the end of an accounting period to allocate revenue and expenses to the period in which they belong, as required by the Matching / Accruals Concept. Expenses to be transferred to the Profit and Loss account is the expenses incurred in the period, whether they have been paid or not. Revenue to be transferred to the Profit and Loss account is the revenue earned in the period, whether it has been received or not. TYPES OF ADJUSTING ENTRIES: 1. 2. 3. 4. Accruals Accrued Expenses and Accrued Revenue Prepayments Prepaid Expenses and Prepaid Revenue Provision for Depreciation Bad Debts and Provision for Bad Debts
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Accruals and Prepayments 1. Accruals and Prepayments adjust revenue and expense amounts in the Trial Balance as follows:
Profit and Loss Amount Trial balance Notes to accounts
EXPENSES
Expense Transferred to P&L a/c Expense Transferred to P&L a/c Revenue Transferred to P&L a/c Revenue Transferred to P&L a/c
= = = =
REVENUE
2.
Bad Debts Profit and Loss a/c Provision for Bad Debts Profit and Loss a/c Balance Sheet Increase in Provision for Bad Debts (Expense) Decrease in Provision for Bad Debts (Revenue) Total Provision for Bad Debts (Current Assets: Debtors less Provision) Expense (amount written off)
Depreciation Profit and Loss a/c Balance Sheet Annual Depreciation (Expense) Accumulated Depreciation (Fixed Assets less Depreciation)
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Expenses (Rent, Salaries, Insurance, etc.) The Journal Date Year dt Details Expense a/c Cash / Bank a/c To record payment of expense during the year Expense a/c Accrued Expense a/c To record expense incurred but still owing at the end of period Prepaid Expense a/c Expense a/c To record expense not incurred but paid in advance Profit & Loss a/c Expense a/c To close off Expense a/c and transfer to Profit & Loss a/c Folio GL CB DR $ X CR $ X
End of yr
GL GL GL GL
X X X X
End of yr
End of yr
X GL X
Revenue (Interest received, commissions received, rent received, etc.) The Journal Date Year dt Details Cash / Bank a/c Revenue a/c To record revenue received during the year Accrued Revenue a/c Revenue a/c To record revenue earned but still owing at the end of period Revenue a/c Prepaid Revenue a/c To record revenue not earned but received in advance Revenue a/c Profit & Loss a/c To close off Revenue a/c and transfer to Profit & Loss a/c Folio CB GL DR $ X CR $ X
End of yr
GL GL GL GL
X X X X
End of yr
End of yr
GL
X X
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC. The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the Balance sheet as Current assets or Current liabilities.
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End of yr
End of yr
X GL X
End of yr
X GL X
End of yr
X GL X
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off. At the end of the period, the amount of Bad Debts is transferred to the P & L account like all expenses. Bad Debts is NOT recorded in the Balance Sheet. Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet. It, therefore, has a credit balance. Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated as expenses in the P&L a/c while decreases are revenue in the P&L a/c. Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.
Depreciation The Journal Date Year End of yr Details Profit & Loss a/c Provision for Depreciation a/c To transfer annual depreciation to P& L a/c as an expense. Folio DR $ X CR $ X
GL
NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the Balance Sheet. It, therefore, has a credit balance. Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense. Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.
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Details Accrued Expense b/d Transfer to P & L a/c Prepaid Expense c/d Accrued Expense b/d
Folio
Cr$ X X X XX X
CB
GJ
Closing Opening
Details Accrued Revenue b/d Transfer to P & L a/c Prepaid Revenue c/d Prepaid Revenue b/d
Folio
Dr$ X X X XX X
Details Prepaid Revenue b/d Cash / Bank Accrued Revenue c/d Accrued Revenue b/d
Folio
Cr$ X X X XX X
GJ
CB
Details Debtor
Folio
Dr$ X XX
Date Year
End of yr
Folio
Cr$ X XX
Provision for Bad Debts Provision for Bad Debts a/c Date Year
End of yr End of yr End of yr End of yr
Details Balance c/d Balance c/d P & L a/c Balance c/d (revenue)
Folio
Dr$ X X XX X X XX
Date Year
End of yr Beginning End of yr Beginning
Folio
Cr$ X X X XX X XX
Beginning
Balance b/d
Folio
Dr$ X X XX X
Date Year
End of yr Beginning End of yr Beginning
Folio
Cr$ X X X XX X
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Owners Name Trading & Profit & Loss A/c for the _______ ended _________ $ Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) **Add: Rent Received Interest received Discount received Decrease in Provision for bad debts **Less: Expenses Wages/salaries Utilities Increase in provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount allowed Total expenses NET PROFIT (or NET LOSS) X X X X X X X X X X X X (X) X or (X) $ $ X (X) X X X (X) X X X X (X) (X) X or (X)
**These are a few examples, however the list can be exhaustive in reality
NB. This is an Income Statement for a sole trader. For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out the net profit amongst the owners and calculate profit retained in business. For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit and Loss a/c.
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Owners Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank Cash Total Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank Loan X X X XX X X OR (X) X (X) X X X X X (X) X XX X X (X) X X X X X X COST $ X X X X X ACC DEP. $ (X) (X) (X) (X) (X) NBV $ X X X X X
NB. This is a Classified Balance Sheet for a sole trader. For other types of businesses there may be other items like proposed dividends, current a/c (partnership) etc.
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Principles of Accounts
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Control Systems
Control Systems are the procedures designed and established to check, record, regulate, supervise, and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be accurate, by reducing the incidence of unintentional errors and intentional irregularities. The need for Control Systems in Accounting. Control systems are needed to protect the organizations assets and ensure the preparation of reliable and timely financial statements.
THE THREE COMMON CONTROL SYSTEMS ARE: 1. Bank Reconciliation Statements 2. Control Accounts 3. Suspense Accounts
Control Accounts
Control Accounts are general ledger accounts whose balances reflects the total of balances of related subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the most commonly used control accounts, and their balances serve as a crosscheck (control) of the accuracy of the associated subsidiary records (personal accounts).
Suspense Accounts
A suspense account is an account in the general ledger in which amounts are temporarily recorded until the correct entry could be determined. When the proper account / amount is determined, the amount will be moved from the suspense acc. Suspense accounts are used when accounting for errors to balance the trial balances until the bookkeeper finds the errors and finishes recording the transactions.
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BANK ACCOUNT
BUSINESS
Cash Book
BANK
Bank Statement
The business records all the bank accounts cheque and cash transactions in the Cash Book.
The bank records all the bank accounts cheque and cash transactions in a Bank Statement, which is sent to the business periodically.
The Cash Book: The Cash Book is the business record of the business bank account. It consists of information regarding the bank accounts cash and cheque receipts and payments and the balance at the end of the period, as prepared by the business.
The Bank Statement The Bank Statement is the banks record of the business bank account. It is a summary that consists of information regarding the bank accounts cash and cheque receipts and payments and the balance at the end of the period, as prepared by the bank. A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.
Main accounting difference between the Cash Book and the Bank Statement: Receipts / Deposits CASH BOOK business record BANK STATEMENT banks record DR CR Payments / Withdrawals CR DR
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Differences / Discrepancies
between the Cash Book balance and the Bank Statement balance at the end of a specific period.
There are usually timing differences between when the transaction information is recorded / entered in the banks systems and when it is recorded in the business cash book. Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account balance and the bank statement account balance at the end of the specific period.
Reasons for the differences between the Cash Book balance and the Bank Statement balance:
Entries recorded in the Bank Statement but not in the Cash Book Direct Deposits - Dividends received - Credit transfers receipts from debtors made into the bank account directly through the bank. Standing Orders and Direct Payments - These are payments made by the bank from the bank account on behalf of the business - E.g. Insurance payments Bank Charges (service charges on the bank account taken directly from the account by the bank) Interest Received (interest on the bank account deposited directly into the account by the bank) Dishonoured / Returned cheques - bounced cheques that were deposited and have been returned to the bank as dishonored. - The business was not notified as yet because it takes a few days (timing difference)
Entries recorded in the Cash Book but not in the Bank Statement These occur because of a time lag between the recording of the receipt or payment in the cash book and the recording in the bank: Unpresented / Outstanding Cheques - These are cheques issued by the business as payment to persons / businesses that have not been presented to the bank for payment yet. NB The payee has 6 months to present / cash a cheque. - The business has it recorded in the cash book as a payment made but the bank has not because they have not cashed the cheque as yet. Unrecorded deposits - These are mainly cheque deposits to be made in the bank account that have been recorded in the cash book but not by the bank as they have not received the deposits as yet. - The business records the cheques as having been received / deposited on one day, while the bank records the deposit on another day when the cheques are brought in from the business.
Errors in the Cash Book and in the Bank Statement The most common types of errors are the overstatements and the understatements of receipts and payments due to errors in the amounts and receipts being entered as payments and vice versa.
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Bank Reconciliation :
It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash book against those shown on a bank statement:
to locate the reasons for the discrepancies, adjust cash book with those items which must be included and clarify and support any remaining difference between adjusted cash book balance and bank statement balance.
2. Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB.
3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in the Bank Statement. There are two methods:
- Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.
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Control Accounts
A control account is a summary account in the general ledger that shows the totals of transaction amounts entered in a subsidiary ledger such as sales or purchases ledger during the month. Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and creditors quickly when a trial balance is being prepared. Control accounts are an important system of control on the reliability of ledger accounts. They indicate that errors may have occurred in the ledgers they control.
Ledger Sales Ledger Purchases Ledger Accounts debtors personal accounts creditors personal accounts Control Account Sales Ledger Control Account (totals of items in the sales ledger) Purchases Ledger Control Account (totals of items in the purchases ledger)
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CONTROL ACCOUNTS
Ledger Sales Ledger Purchases Ledger Accounts debtors personal accounts creditors personal accounts Control Account Sales Ledger Control Account (totals of items in the sales ledger) Purchases Ledger Control Account (totals of items in the purchases ledger)
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CONTROL ACCOUNTS - FORMAT
Notes A credit balance may be caused by overpayment or return of goods already paid for by debtor. Credit balances must NOT be deducted from debit balances, but shown separately on the credit side of the control account. A debit balance may be caused by overpayment or return of goods already paid for to creditor. Debit balances must NOT be deducted from credit balances, but shown separately on the debit side of the control account.
Purchases Ledger
Credit Sales Credit Purchases Discounts Allowed / Discounts Received Sales Returns Purchases returns Cash / Cheque received and paid Bad Debts written off Refunds from suppliers / to customers Dishonoured cheques Contra Entries
Sales Journal Purchases Journal Cash Book Sales Returns Journal Purchases Returns Journal Cash Book General Journal Cash Book Cash Book General Journal A Contra Entry in a control account is when the smaller amount is offset against the larger amount.
The Sales Ledger Control Account Date Details Balance b/d (total debtors debit bals from previous period) Credit Sales Refunds to debtors/customers Dishonoured cheques Interest on overdue accounts Balance c/d (if any) Balance b/d X Dr$ Date X X X X Balance b/d (if any) (total debtors credit bals from previous period) Sales Returns Cash/Cheques received from debtors Discount allowed Bad Debts written off Contra Entries / set offs Balance c/d Balance b/d (if any) Cr$ X X X X X X X
The Purchases Ledger Control Account Date Details Balance b/d (if any) (total creditors debit bals from previous period) Purchases Returns Cash/Cheques paid to creditors/suppliers Discount received Contra Entries / set offs Balance c/d Balance b/d (if any) Dr$ Date X X X X X X Balance b/d Balance b/d (total creditors credit bals from previous period) Credit purchases Refunds from suppliers/creditors Balance c/d (if any) X Cr$ X X X X
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Principles of Accounts
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit. This would result in the Trial balance Debit balance being more by $2000!!!!!
N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the ledger accounts affected by the error.
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CorrectionofErrorsNOTaffectingtheTrialBalance
Errors of Commission (correct amount, wrong personal account) Correcting the error requires journal entries to be posted to: The account incorrectly posted to - DR if the account was credited / CR if the account was debited The correct account post to the correct account
Errors of Principle (correct amount, wrong type / category of account) Correcting the error requires journal entries to be posted to: The account incorrectly posted to - DR if the account was credited / CR if the account was debited The correct account post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of original entry) 1. 2. 3. Identify whether the correct incorrect amount entered was overstated or understated. Calculate the amount by which the entry was understated or overstated i.e. the difference. Prepare the journal entry to correct the error: If the amount was understated: DR: the account debited CR: the account credited With the difference calculated to increase the amount to the correct amount If the amount was overstated: DR: the account credited CR: the account debited With the difference calculated to decrease the amount to the correct amount Errors of Omission (no entry made in the books for transaction) Correcting the error requires journal entries to be posted to the relevant accounts in the double entry. Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error) Correcting these errors require the same steps as correcting Errors of Original entry. Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account) The journal entry to correct the error: DR: the account credited CR: the account debited With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)
NB.Theremustbeadoubleentrytocorrecttheerrors.
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Suspense Account A Suspense account is a temporary holding account in the General ledger that is opened to place the difference in the trial balance to make it balance when the causes of the difference cannot immediately be found and corrected. How to open a Suspense Account A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less. The Suspense Account will, therefore, have a credit balance when the credit total in the Trial Balance is less and a debit balance when the debit total is less. General Ledger Suspense account Date Details Difference in trial balance (DR side of TB less) Dr$ X Date Details Cr$
Suspense account Date Details Dr$ Date Details Difference in trial balance (CR side of TB less) Cr$ X
Example: S. James st Trial Balance as at 31 December 2009 DR $ 100 000 100 000 CR $ 99 960 40 100 000
Details
Difference in Trial Balance
Cr$
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AcreditbalanceintheSuspenseaccountisaCurrentLiabilityintheBalanceSheet. AdebitbalanceinthesuspenseaccountisaCurrentAssetintheBalanceSheet.
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Some errors do not affect the double entry and would, therefore, be corrected with a single entry in the Suspense account. These errors include: - account balance entered incorrectly in the Trial Balance e.g. $248 entered as $284 - account balance placed on the wrong side in the Trial balance (double the amount)
Examples: The total of the Sales a/c of $1500 had been omitted from the Trial Balance. The credit side of the TB would have been less by $1500 so the Suspense account would have been credited. Therefore, the journal entry to correct the error: DR: Suspense a/c $1500 The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200. The debit side of the TB would have been less by $200 so the Suspense account would have been debited. The journal entry to correct the error: CR: Suspense a/c $200 Discount received of $67 was entered as $76 in the Trial Balance. The credit side of the TB would have been more (debit side less) by $9 so the Suspense account would have been debited. The journal entry to correct the error: CR: Suspense a/c $200 The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance. As the entry was made on the wrong side of the account, the credit side would have been less by $3000 so the Suspense account would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500
N.B.THEBALANCEINTHESUSPENSEACCOUNTMAYBECAUSEDBYMORETHANONEERROR
Enter each journal entry to correct the error separately. Post each entry to the Suspense account and close off.
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To correct Net Profit, amounts resulting in Net profit being understated have to be added, and amounts resulting in Net Profit being overstated have to be lessened. This is done using a Statement of Corrected Net Profit. Name of business Statement of corrected Net Profit for the year ended 31 March 2007 $ Net Profit per accounts Add: Expenses amount overstated Income / Revenue amount understated / omitted Less: Income / Revenue amount overstated Expenses amount understated / omitted Corrected Net Profit for the year X X X X X (X) XX $ X
st
Example:
On January 17 2010, an error was found where an invoice of $100 had been credited to the suppliers a/c but had not been debited to the purchases account.
If Purchases was understated, then Net Profit was overstated and has to be corrected as follows:
th
Statement of Corrected Net profit for the year ended 31 December 2009 Net Profit per accounts Less: Purchases undercast Corrected Net Profit for the year $ $ 2 120 (100) 2020
st
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Principles of Accounts
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VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER
Owners Name Trading & Profit & Loss A/c for the _______ ended _________ $ Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Add: Carriage Inwards Less: Purchases Returns Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) **Add: REVENUE Interest received Rent Received Discount received Decrease in Provision for bad debts Total Revenue **Less: EXPENSES Wages/salaries Utilities Increase in provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount allowed Total expenses NET PROFIT (or NET LOSS) X X X X X X X (X) X or (X) X X X X (X) X X (X) (X) X or (X) X X X X X X $ $ X (X) X
**These are a few examples, however the list can be exhaustive in reality
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VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER Owners Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank * Cash Total Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft * Total Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank Loan Total Long Term Liabilities COST $ X X X X X ACC DEP. $ (X) (X) (X) (X) (X) X X (X) X X X X X X NBV $ X X X X X
X X X XX
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP Partnership Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $ Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Add: Carriage In Less: Purchases Returns Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) Add: Revenue Rent Received; Discount Rec. etc Decrease in Provision for bad debts Less: Expenses Carriage Outwards; Discount allowed etc. Wages/salaries etc Increase in Provision for Bad Debts Depreciation NET PROFIT (or NET LOSS) Add: Interest on drawings Partner 1 Partner 2 Less: Interest on Capital Partner 1 Partner 2 Salary: Partner 1 X X X X X X X (X) XX Share in Profits: Partner 1 Partner 2 X X XX
* The last section (starting from Net Profit) is called the Approriation A/C
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$ X (X) X
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TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS Interest on Capital is based on number of months the capital was in use.
Capital in use: Date of capital investment to Year end e.g. Capital $5000 on June 1 to Dec 31 (year end) = 7 months Interest on capital (10%): Partner 1: ($5000 x 10%) x 7/12mths
PROFIT SHARING Profits or Losses may be shared according to a stated Profit Sharing ration or in proportion to Partners Capital (Partnership Deed). If it is not stated how to share profits, share equally according to the Partnership Act. THE PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS (Columnar Format) Partnership Co. Capital Account
Date 2010 Dec 31 Balance c/d Details Partner 1 $ X XX Partner 2 $ X XX 2011 Jan 1 Balance b/d Date 2010 Jan 1 Feb 1 Details Balance b/d Bank Partner 1 S X X XX X Partner 2 $ X XX X
Current Account
Date 2010 Dec 31 Dec 31 Details Drawings
P&L Appropriation: Interest on drawings
Partner 1 $ X X
Partner 2 $ X X
Partner 1 S X X X X XX
Partner 2 $ X X X XX X
Dec 31
Balance c/d
X XX
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VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP Partnership Balance Sheet as at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
X X X X
X X X X
CURRENT ASSETS:
Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash Total Current Assets
LESS: CURRENT LIABILITIES
X X (X) X X X X X X
Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities WORKING CAPITAL
X X X X (X) X XX
FINANCED BY: CAPITAL ACCOUNTS Partner 1 Partner 2 CURRENT ACCOUNTS Partner 1 Partner 2 LONG-TERM LIABILITIES Mortgage X X X X XX
X X X
FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS Partnership Balance Sheet as at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
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X X X X
X X X X
Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash Total Current Assets
LESS: CURRENT LIABILITIES
X (X) X X X X X X
Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities WORKING CAPITAL
X X X X (X) X XX
FINANCED BY: CAPITAL ACCOUNTS Opening Capital Capital introduced CURRENT ACCOUNTS Opening balance Add: Interest on Capital Salary Share in Profits Less: Drawings Interest on drawings LONG-TERM LIABILITIES Mortgage X X X X (X) (X) X X X X (X) (X) X Partner 1 X X X Partner 2 X X X
X X XX
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FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS) When forming a partnership by merging two sole traders, an opening journal is prepared as follows: State partnership name Draw Journal with DR and CR columns, as seen below List the assets and liabilities of the new partnership. Combine / Add each asset and liability of the sole traders forming the partnership * Bank and Bank overdrafts are combined into one net figure which is EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability) *The Capital of EACH partner (former sole traders) must be stated separately. The Capital of each partner is calculated using C = A-L, using the individual sole trader figures.
Narrative for formation of partnership DR and CR Totals must balance (Accounting equation) Partnership The Journal
Date
Details
DR $
CR $
Buildings Fixtures and Fittings Motor Vehicles Stock Debtors Bank * Cash Mortgage Bank Loan Creditors Bank Overdraft * *Capital: Partner 1 Partner 2 To record assets and liabilities at formation of partnership
X X X X X X* X X X X X* X X
XX
XX
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Non-profit making organizations belong to their members. Members pay subcriptions. The Cash book is called the Receipts and Payments Account and the Trading and Profit and Loss Account is called the Income and Expenditure Account. Differences in accounting terms / procedures PROFIT MAKING FIRMS Cash Book Trading a/c for buying and selling of goods for profit Profit & Loss a/c Net Profit Net Loss Capital a/c Balance Sheet NON PROFIT ORGANIZATIONS Receipts and Payments a/c Trading a/c for fundraising activities only e.g. Bar Trading a/c Income and Expenditure a/c Surplus of income over expenditure (Surplus) Excess of expenditure over income (Deficit) Accumulated Fund Balance Sheet
_________________________________________________________________________________________
FORMAT FOR RECEIPTS AND PAYMENTS A/C Non Profit Organization Receipts and Payments Account for the period ended ________________________ Receipts Balance b/f Bar Sales Subscriptions Donations Received Other Receipts e.g. Rent Received Gate Receipts Raffles and other competitions Interest Received on bank a/c Sale of old equipment Balance b/f $ X X X X X X X X XX X Payments Bar Purchases General Expenses Other Payments e.g. Insurance Purchase of refreshments Purchases of Prizes Purchase of new equipment Rent of hall for Annual Dinner Maintenance Balance c/f $ X X X X X X X X X XX
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Non Profit Organization Subscription a/c Date Year Dt @ start Year end Details Accrual b/d Income & Expenditure** Prepayment c/d Dr$ X X X XX Date Year Dt @ start Year end Details Prepayment b/d Bank (Receipts) Accrual c/d Cr$ X X X XX
**The amount for Income & Expenditure is entered in the Income & Expenditure account for Subscriptions in the Income section. ___________________________________________________________________________________
LIFE MEMBERSHIP Many clubs and societies have life membership schemes where members can pay a relatively large amount at the beginning and then never pay any more membership fees. The payment of a life membership fee should be spread over the estimated / expected membership period. An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the remainder would be entered in the Balance Sheet as a long-term liability. Example: A member paid $20 000 life membership at age 20 and expected to be a member until 40 years old. Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be $20 000 / 20 years which is $1 000. In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability. In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability.
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Non Profit Organization Bar Trading a/c for the period ended ____________________________ $ Bar Sales Less: Cost of Goods Sold Opening Stock Add: Purchases Less: Closing Stock Gross Profit Less: Barmans Salary Profit / Loss transferred to Income & Expenditure a/c* $ X X X X (X) (X) X (X) XX
Income & Expenditure a/c for the period ended ____________________________ $ Income Profit from bar* Subscriptions** Donations received Rent received Interest Received Receipts from Raffles etc. Any other income for period Expenditure Loss from bar* Wages General Expenses Donations Depreciation of Equipment Depreciation of Furniture & Fittings Any other payments in period Surplus of income over expenditure ** X X X X X X X X X X X X X X X (X) XX $
**If Expenditure exceeds Income, the difference is Excess of expenditure over income N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments. Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.
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Non Profit Organization Balance Sheet as at ________________ FIXED ASSETS: Club Premises Furniture & Fittings Sports Equipment CURRENT ASSETS: Bar Stock Prepaid Expenses Accrued Revenues e.g. Accrued Subscriptions * Bank Cash Total Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues e.g. Advanced Subscriptions * Total Current Liabilities WORKING CAPITAL X X X (X) X XX FINANCED BY: ACCUMULATED FUND Accumulated Fund @ start of period (Opening Balance) Add: Surplus of income over expenditure Less: Excess of expenditure over income OR X X OR (X) X X X X X X X COST $ X X X X ACC DEP. $ (X) (X) (X) NBV $ X X X X
Accumulated Fund @ end of period (Closing Balance) LONG-TERM LIABILITIES Mortgage Life Membership Fee** Total Long Term Liabilities X X
X XX
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Name of the Business Income and Expenditure Account for the year ended ___________________________________ $ Income Membership dues Interest and Dividends Other Expenditure Telephone Stationary & Office Supplies Traveling Repairs and Maintenance Motor Vehicle expense Bank Charges Interest on members deposits Interest on Loans Application: Subscriptions and dues Annual General Meeting (AGM) expenses Auditors fees/remuneration Provision for Depreciation $ X X X X X X X X X X X X X X X X (X) X X X X X X X X (X) Undistributed surplus c/f to next year XX $
Surplus/Deficit for the year Add: Undistributed surplus at the beginning of year b/f Less: Appropriations Transfer to reserves: Statutory reserve Special reserve Honoraria Proposed dividend
Note: Statutory Reserves by law / statute a minimum percentage of net income should be transferred to this reserve. Special Reserve a reserve for any specific named purpose e.g. Investment reserve; Building reserve Honoraria voluntary payments to members of the committee of management as appreciation for services performed. Proposed Dividends dividends fixed at the AGM.
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Name of Business Balance Sheet as at _________________________________________ Employment of Capital Fixed Assets Premises Equipment Motor Vehicles Current Assets Stock Receivables: Membership dues Prepayments Bank Cash Less: Current Liabilities Honoraria Owing Proposed Dividends * Working Capital Net Assets Capital Employed Share Capital Reserves: Statutory reserve Special reserve Undistributed surplus income X X X X XX $ Cost X X X X $ Accumulated Depreciation -(X) (X) X X X X X X X X X (X) X XX $ Net Book Value X X X X
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY Limited Liability Company Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $ $ $ Sales X Less: Sales Returns (X) Net Sales X LESS: COST OF GOODS SOLD: Opening Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) Add: Revenue Rent Received; Discount Rec. etc Decrease in Provision for bad debts Total revenue Less: Expenses Carriage Outwards Utilities ; Wages/salaries etc Discount allowed Increase in provision for bad debts Bad debts expense Depreciation *Directors Remuneration *Debenture Interest Total expenses NET PROFIT (or NET LOSS) Add Retained Earnings b/f Less: Appropriations Transfer to General reserves Proposed dividends: Preference share dividends Ordinary Share Dividends Retained Earnings for the year * The last section (starting from Net Profit) is called the Approriation A/C X X (X) X X X X (X) (X) X / (X) X X X X X X X X X X X (X) X / (X) X X X X X (X) X
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VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY Limited Liability Company Balance Sheet as at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
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X X X X X (X)
X X X X
Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash Total Current Assets
LESS: CURRENT LIABILITIES
Creditors *Debenture Interest Payable Accrued expenses Advanced revenues *Proposed Dividends: Ordinary Preference Bank overdraft Total Current Liabilities WORKING CAPITAL FINANCED BY: Authorized Share Capital Ordinary Shares @ $ par value % Preference Shares @ $ par value Issued Share capital Ordinary Shares @ $ par value % Preference Shares @ $ par value Reserves General Reserves Retained Earnings
LONG-TERM LIABILITIES
X X X X X X X (X) X XX
X X X X X X X X X X
Mortgage * % Debentures
X X X XX
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Trading and Profit and Loss Account for the ________ended ________
$ Sales Less: Sales Returns (Finished Goods) NET SALES Less: Cost of Goods Sold Opening Stock of Finished Goods
Add: Purchases of Finished Goods (if any) Less: Purchases Returns of Finished Goods (if any) X X .
$ X X X
X X X X (X) (X) X X X
X
Net Purchases *Add: Production cost of goods completed b/d* Less: Closing Stock of Finished goods GROSS PROFIT Less: Administrative Expenses Administrative Staff pay Rent; Insurance; Depreciation etc Less: Selling and Distribution Sales Staff pay Commission on sales; Carriage Outwards, etc Financial Charges Bank Charges Discounts Allowed NET PROFIT
X X
X
X X
X
(X) X
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PRIME COST
Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance Depreciation of Plant and machinery Lubricants PRODUCTION COST Add: Opening Work-in-Progress Less: Closing Work-in-Progress PRODUCTION COST OF GOODS COMPLETED C/D* X X X X X X
X X X X (X) X
* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even though it appears to be under the Boxes Column.
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The following format is the long way of including the Cost of Packaging in the Manufacturing Account. The Packaging cost is calculated after the Cost of Raw Materials consumed as follows:
PRIME COST
Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance Depreciation of Plant and machinery Lubricants PRODUCTION COST Add: Opening Work-in-Progress Less: Closing Work-in-Progress PRODUCTION COST OF GOODS COMPLETED C/D* X X X X X X
X X X X (X) X
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Manufacturing business Balance Sheet as at ________________ FIXED ASSETS: Land & Buildings Plant & Machinery COST $ X X X CURRENT ASSETS: Stock* Raw materials Work in progress Finished Goods Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank * Cash Total Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft * Total Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank Loan Total Long Term Liabilities X X X XX X X OR (X) X (X) X X X X X (X) X XX X X X X X (X) X X X X X X ACC DEP. $ (X) (X) (X) NBV $ X X X
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Principles of Accounts
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Accounting Ratios:
A ratio that expresses the relationship between one accounting result and another, intended to provide a useful comparisons.
Liquidity Ratios: assesses the business ability to cover its short-term debt as they become due.
Current Ratio =
Also known as Working Capital Ratio Ratio expressed as the number of times current assets can cover the current liabilities in the accounting period. 2.5 Current assets cover 1 Current liability
Example:
Quick Ratio =
Also known as Acid Test Ratio Ratio expressed as the number of times quick assets can cover the current liabilities in the accounting period.
Example:
2:1
Debtors / Acc. Receivable x 12mths Annual Sales $3 600 x 12mths = 1.35 months $32 000
Expressed as the average no. of months debtors take to pay business amounts owed. Debtors take 1.35 months on average to pay business amounts owed.
Example:
Debtors Sales
Expressed as the average no. of months the business takes to pay creditors / suppliers amounts owed.
Example:
The business takes 1.04 months on average to pay creditors amounts owed.
Debtor . Creditor
1.5:1
Measures the relationship between how much credit is granted by the business to customers and how much credit is received from suppliers. for every $1.50 owed by a debtor, the business owes $1 to a creditor.
Example:
Debtors Creditors
= $3 600 = $2 400
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x 100
x 100
Expressed as a % Amt of Sales that business keeps as profits after cost of sales & expenses
Example: Net Profit x 100 = $7 200 x 100 = 22.5% Net Sales $32 000
The business made a profit of $0.22 for every $1 of Sales after deducting all costs & expenses.
Expressed as a %
This ratio measures the amount of returns a business receives from resources made available to them from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are included in capital employed as well. There are different Formulas for Capital Employed. Most popular for CSEC: Capital Employed = Opening Capital + Closing Capital 2 Example: Net Profit x 100 = $7 200 Capital Employed $21 600 x 100 = 33.3%
The business earned $0.33 for every $1 of Capital Employed.
Expressed as the no. of times per annum stock is sold or turned over. Expressed as the average no. of months or days the stock is sold or turned over.
x 12mths / 365dys
Average Stock = Opening Stock + Closing Stock 2 Example1: $19 100 $2 300 = 8.3 times Example2: $2 300 $19 100 x 12mths = 1.45 months
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X 100
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE Margin (%) = Gross Profit Selling Price / Sales
NB: Cost of Goods Sold = Sales Margin Profit
X 100
Gross Profit = 25% x $6400 = $1600 Therefore, Cost of Goods Sold = $6400 + $1600 = $4800
RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary) MARGIN = Mark-up numerator . (fraction) Mark-up numerator + Mark-up denominator MARK UP = (fraction) Margin numerator . Margin numerator - Margin denominator