Principles of Accounts

CSEC Syllabus
2023

SECTION 1: ACCOUNTING AS A PROFESSION

Students should be able to:

1.) Explain the concept and purposes of Accounting

Accounting and bookkeeping

Accounting is the process of recording, interpreting and reporting financial information or

transactions in the form of financial statements,
Unlike bookkeeping, this refers to the process of mainly recording financial information.

2.) Identify the users of accounting information; Internal and external users of
accounting information and their needs.

Users of Accounting information

The main users of accounting information identified as either:

(I) internal users or (II) external users of the information.

The internal users:

These are people within the company which require the information for making decision for the
company. Such as owner, managers, supervisors

The external users are the parties outside the company which require the information relating to
the company. Such as shareholders, bank, future investors and government.

3. Describe traditional and emerging careers in the field of Ac Careers in areas such
as:
For Government and Non-Profit organization accounting jobs:

a. Fund Accountancy- Manage and keep track of the business monetary fund activity
b. Tax department- Acts as auditors ensure that the correct of tax is collected from businesses
and individuals
For Accounting, banking and insurance companies:

a. Forensic Accountant- Responsible for finding discrepancy in financial records

b. Tax Accountant- Prepares and investigates tax issues
c. Accounting Clerk- records the transactions and post transactions to the ledgers
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d. Accounts Payable/Receivable Clerk- Records all receivables and payables are paid to and
by the company.
e. Actuarial Accountant/Insurance Accountant- determine and analyzes probabilities and
statistical information.

4. Discuss ethical issues in the field of Accounting.

As a person studying finance and finance related matters, when you eventually join the work force,
you should bring a standard of “what is right” and “what is wrong’, known as “Ethics”.

Types of ethics

There are TWO types of ethics. These are personal ethics and professional ethics:
a. Personal ethics- refers to the morals governing human behaviour.
b. Professional ethics-refers to the code of behaviour considered correct for a specific
group of workers, association or profession.

Factors which affect a person’s ethical view

FOUR factors which affect the ethical view of an individual are:

a. Cultural: The way in which someone grew up influences how they see things. What is
considered acceptable in one culture, may be unacceptable or frown upon in another.

b. The law: The law is the law, even if it is different from your home country. All businesses
must obey the law of the country in which they are operating.

c. Consequences: Some people morals and behaviour and how they react to certain
situation may depend on the consequences.

d. Code of ethics: If a code of ethics exist within the business, employee’s behaviour is
judged based on the code.

The IFAC (International Federation of Accounting Committee) issues the “Code of Ethics for
Professional Accounting”. Its sole purpose is to strengthen the moral behaviour of accountants
worldwide.

The Code of Ethics: Fundamental Principles of Ethical Behaviour

FIVE fundamental principles when it comes to ethical behaviour in the workplace are:

* Integrity: Be honest in all business involvements

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* Objectivity: Do not allow personal bias to interfere or override any professional judgment
* Professional competency and due care: You must always stay abreast of the latest
development in your profession.
* Confidentiality: Any information gathered while during business should be considered
private and should not be disclose (shown or told) to other parties (third party).
*Professional behaviour: Adhere to the principles of accounting and do not conduct
oneself in a manner in which to discredit the accounting profession.

In other words, an accountant should have the following ethical behaviour in the workplace:
*Treat colleagues and associates respectfully
* Act responsible and be honest
* Follow all laws and rules
* Be competent by applying all necessary technical skills

Some Violations of the accounting principles

*Fraudulent financial reporting

*Failure to record all sales

*Theft of inventory

*Misappropriation of funds

*Ghost employees

*Tax evasion

Penalties for violating the accounting principles

*Disciplinary action by the professional board

*Instant termination

*Prosecution

*Inability to gain employment

*Future rejection of loans by bank

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SECTION 2: ACCOUNTING AS A SYSTEM

Students should be able to:

1. Outline the concepts and conventions that guide the accounting process;

Accounting concepts and conventions

These accounting rules or principles are known as accounting “concepts” or “conventions.”

A concept is a rule which sets how the financial activities or transactions are recorded.
A convention is an acceptable method but not a rule used in a certain situation.

The MAIN accounting principles used:

A. Business Entity or Entity Concept:

A business must be treated as a totally separate being from its owner. (Any personal assets or
debts of the owner should not appear in the records of the business)

B. Duality Principle or Dual Aspect Principle: Every transaction has two aspect or view.
There is a receiving view (DR.) and a giving view (CR). (The double-entry system is used to
describe how these two views are recorded or entered in the books (ledgers) of the business).

C. Consistency Principle:
When choosing an accounting method, the method with the most realistic numbers should be the
method use and that chosen method has to be used every time

D. Accruals or Matching principle:

It states that any revenue or income earned during a specific financial period should be matched
against any expenses paid for that same period. (Even if the money is not yet received or paid, it
needed the amounts must be adjusted for any amounts prepaid or owing.)

E. Prudence or Conservatism Principle:

It is used to make sure that a business’ financial records shows a realistic pic ture of the business
finances at a specific period of time. (It is best not to over-value OR under-value assets and
liabilities)

2. Describe the EIGHT STEPS TO THE Accounting Cycle

Step 1: Collect source documents

Step 2: Prepare Books of Original Entry
Step 3: Post to the ledger (ac/s)
Step 4: Prepare Trial Balance
Step 5: Prepare adjusting entries
Step 6: Prepare TPL a/c
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Step 7: Prepare Statement of Position

Step 8: Prepare closing entries

3. Identify the main financial statements prepared by various business organisations;

The Financial Statements of a business

(a) Income Statement (Trading and Profit and Loss A/C);

(b) Income and Expenditure A/C;
(c) Statement of Position (Balance sheet)
(d) Cash Flow Statements

4. Assess the role and impact of technology on the accounting process

Accounting technology enables accountants to perform their daily task using computer software
known as, Accounting Software Applications (ASA).

Purpose of technology in accounting

Accounting software helps to:

* Track business transactions
* Identify various income and expenses
* Calculate taxes
* Bill payments
* Create financial reports
* Analyze the business performance

Accounting Information System Vs Accounting System Software

An Accounting Information System is a system used for collecting, storing and processing
accounting information to help the user make decisions.

Accounting Software is a type of application software (is an app APP)used in accounting. It

records and process accounting activity (transactions) by putting the information in various
functional areas or modules. E.g. Accounts payable, Accounts receivable, Payroll, Cashbook, General
ledger, etc…

Accounting software is application software which operates as an accounting information system.

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Types of Accounting Software

There are TWO types of accounting software are available, a single-entry system and a double-
entry systems.
Single-entry systems are used for bookkeeping. It is designed for record
The double-entry system support accounting functions Ledgers and financial statements

The top accounting software AND payroll software programs

a. Freshbooks
b. Intuit QuickBooks
c. Xero
d. Sage Business Cloud Accounting

Advantages of technology in accounting

Technology is the most important benefit to accounting. Accounting software allows for:

* The easy generation of source documents such as invoices and cheques

* Financial reports are created in a timely manner

* Transactions are posted to their respective ledger accounts automatically

* Fewer errors occur automatedly than manual

Disadvantages of technology in accounting

No matter which accounting software is used, the information must be entered manually. The
disadvantages of using an accounting software application are:

* All information still has to be examined for accuracy before entering into the system.

* Many of the accounting software has to be customized to the business

* Employees has to be trained to use the software

5. Explain the concept of a Statement of Position (Balance Sheet) and the Accounting
equation

A Statement of Position is a statement used to record the assets, liabilities and capital of a
business as at a specific date.
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The Accounting Information

The accounting equation is used to calculate the value of capital. To find the value:

Total assets (TA)= Total Liabilities (TL) + Capital

Statement of Position (simple format)

Statement of Position
as at ………….
Cost Price - Accumulated = Net Book Value
$ Depreciation ($) (NBV) $
Fixed assets:
Long-term investments $ ($) $
Premises $ ($) $
Furniture $ ($) $
$ ($) $

Current Asset:
Inventory $
Accts. Receivable (debtor) $
Bank
Cash $
$
Less: Current Liab. :
Personal loan<1year ($)
Accts. Payable ($)
Bank overdraft (o/d) ($)
Equal: Working Capital $

Less: Long-term Liab.:

Bank loan ($)
Mortgage ($)
Equal: Net assets $

Financed by:
Capital, at start $
+/- Net profit (loss) $ or ($)
-Drawings ($)
=New or end capital $
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There are FIVE Types of accounts

According to ALCIE OR RECAL, they are: Assets, Liabilities, Capital, Income, Expenses.

There is ONE account used for each item.

Every transaction is entered twice, as a debit entry and as a credit entry.

Assets are on the Dr. side (+): Therefore increases on DR and decreases on CR

Liabilities are on the Cr. side (+): Therefore increases on CR and decreases on DR

Capital are on the Cr. side (+): Therefore increases on CR and decreases on DR

Expenses are on the Dr. side (+): Therefore increases on DR and decreases on CR

Liabilities are on the Cr. side (+): Therefore increases on CR and decreases on DR

1. Assets-are resources owned by the business which has future benefits for the business
-Normal side (Bal. b/d) is the CR. SIDE.
(Account value increases on the CR (+) and decreases on the DR side (-) )

. Fixed or Noncurrent assets:

Items or resources owned which will last more than one year.
Such as: Land, Building, Fixtures, Fittings, Equipment, Machinery, Furniture, Motor vehicle, and
Long-term investments in other companies

Current or short-term assets:

Resources owned by a business which will last less than one year
Such as: Inventory, Accounts receivable, Cash at bank, Cash in hand and Prepaid expenses &
Revenue accrued (or owing)

Orders of listing Assets

Assets are listed in TWO orders:

A) Order of Permanency- Assets are listed from the most permanent to the least
permanent
-Fixed assets are always more permanent than current assets.

Fixed: Land, building, fixtures, fittings, equipment, machinery, furniture, motor vehicle,
Current: Inventory, Accounts receivable, Cash at bank and Cash in hand
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B) Order of liquidity: How easily an asset can be turned into cash. It is the opposite order
of the order of permanency

2. Liabilities- refer to the debts or anything owed by a business.

-Normal side (Bal. b/d) is the CR. SIDE.
(Account value increases on the CR (+) and decreases on the DR side (-) )

Types of Liabilities

Liabilities may be classified as a short-term liability or Long-term liability.

Short-term or current liabilities are debts or anything owed by a business that has to be paid within
the next year. Such as: Accounts payable (creditors), Personal loans (less than a year), Bank
overdraft, and Expenses owing, Revenue prepaid

Long-term liabilities are debts of a business that last more than a year. Such as: Bank loans,
Mortgage, Personal loans (more than a year) and Debentures

3. Capital- refers to the resources put into a business by its owners or the resources a business
has (after all obligations are met).
-Normal side (Bal. b/d) is the CR. SIDE.
(Account value increases on the CR (+) and decreases on the DR side (-) )

Things that INCREASE capital

a. Money introduced to the business by the owner.

b. Net profit
c. Goodwill

Things that DECREASE capital

a. Withdrawals made by the owner (Drawings) b. Net loss

4. Income or revenue- Refers to the money a business receives in return for providing a good or
service.
-Normal side (Bal. b/d) is the CR. SIDE.
(Account value increases on the CR (+) and decreases on the DR side (-) )
Such as: Sales, Interest received, Discounts received, Return-outwards, net profit
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5. Expenses -represents the costs a business must incur in order to operate on a day-to-day basis.
-Normal side (Bal. b/d) is the DR. SIDE.
(Account value increases on the DR (+) and decreases on the CR side (-) )
Such as: Rent, utilities, wages, discounts allowed, Return-inwards, Depreciation (for the year), Bad
debts.

SECTION 3: Books of Original entry

The Books of Original Entries or Daybooks is used to record all transactions. There are SEVEN
books of Original Entry.

SEVEN (7) Books of Original Entries

1. General Journal
Records all transactions involving of a business which involves:

-Fixed assets on credit

-Opening entries
-Closing entries

Also such transactions as:

-Error corrections
-Adjustments

(Includes a “narration” which explains the entry)

Format

General Journal (Journal entry):

Date Particular Dr. Cr.

$ $
Name of a/c $
Name of a/c $
narration
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Example

June 1: Account balances:

Cash $1000
Bank $500
Accounts payable $75

June 5 Paid rent by cash to Lee $90

June 8 Bought goods on credit to Sue $45

a. Prepare the OPENING ENTRY in the general journal of the business

To do so: Assets are Dr., Liabilities are CR. Then use A-L for find capital.
General Journal (Journal entry)

Date Details Dr. Cr.

$ $
June 1 Cash a/c 1,000
Bank a/c
Accounts payable a/c 75
Capital (a-l) 925
To record opening entry

b. Prepare the journal entry to record the transaction for the month.

General Journal (Journal entry)

Date Details Dr. Cr.

$ $
June 5 Rent a/c 90
Cash a/c 90
To record expense payment

June 8 Purchases a/c 45

Sue a/c 45
To record inventory bought
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C. Prepare the closing entry for the expense and income accounts
General Journal (Journal entry)

Date Details Dr. Cr.

$ $
June 30 Profit & Loss a/c 90
Rent a/c 90
To record Closing entry*

*A closing entry represents the “Ending balance” in all income and expenditure accounts which appears on
the TPL a/c). The entry shows the side in which the balance will be found in each account.

2. The 3 - Column Cashbook

The 3- column cashbook records all transaction that occurred by cash or cheque. It records all cash
and cheque received and paid to and from the business.

-If transaction results in money coming in DR.

-If transaction results in money going out CR.

Terms associated with Cash and Cheque

Trade discount is a reduction given by a supplier for buying in bulk. (It’s not recorded
in the books or ledgers)

Cash discount is a reduction given by a supplier for paying bill quickly. There are TWO types of cash
discounts. They are:

i. Discount received is a cash discount given by a supplier when goods are being
purchased

ii. Discount allowed is a cash discount given to a customer when goods are being sold.

Contra-entry- is an entry made on both side of the cashbook.

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Example

Feb. 1 Started business by cash $8,000

Feb. 2 Transferred $500 cash to bank

Feb. 4 Bought van by cash $5,000 less 10% cash Discount

Feb. 5 Received $100 by cheque after a $20

cash discount from Lee

Feb. 7 Paid leslie $30 for goods bought by

cheque

a. Prepare a 3-Column cashbook and balance it.

Bob’s Bakery
3-Column Cashbook for the month of February 2022
Date Details Disc. Cash Bank Date Details Disc. Cash Bank

Feb 1 Capital 8,000 Feb 2 Bank 2,000

Feb 2 Cash 2,000 Feb 4 Van 500 4,500

Feb 5 Lee 20 100 Feb 7 Purchase 30

Feb Bal c/d 1,500 2,070

28
20 8,000 2,100 500 8,000 2,100

b. Prepare (Post to) the Double-Entry accounts (Ledgers) accounts of::

-Capital a/c
-Lee
-Van
Capital a/c
Date Details Amount Date Details Amount
Feb 1 Cash 8,000
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Lee a/c
Date Details Amount Date Details Amount

Feb 5 Disc 20
Bank 100

Van a/c
Date Details Amount Date Details Amount

Feb 4 Disc 500

Cash 4500

3. Petty Cashbook- A small cashbook used to record small cash payments

Petty cash is used to record small cash payments.

Terms to know

Cashfloat or imprest -is the amount of money used to create the petty cash

Imprest system, used in petty cash, states that any money paid out of the petty cashbook must be
reimbursed to the petty cash.

Petty cash vouchers or Petty cash receipts are documents used to verify payments
made from the petty cash book. The cash float and any other reimbursements are taken from the
CASHBOOK.

Format of the Petty cashbook

Analysis columns
Receipts Date Details Total
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Example

Angie Lane has decided to create a Petty Cashbook with $100 on June 1, 2020. It will be
used for office supplies, Motor expenses and mailing expenses under $20. The following
transactions occurred during the month of June:

June 5 Paid taxi $18

June 8 Paid FedEx for shipping$15

June 12 Paid for taxi $19

June 15 Paid for Copying paper $14

June 20 Reimbursed the petty cash book (for the money spent)

June 26 Paid for Pens and ink $17

Prepare the Petty Cashbook for the month of June 2020

Analysis columns
Receipts Date Details Total Office Motor Mailing
$ Supplies Expenses Expenses
2020
$100 June 1 Cash
June 5 Taxi 18 18
June 8 Fedex 15 15
June 12 Taxi 19 19
June 15 Copy paper 14 14
June 20 Total 66 14 37 15
66 June 20 Cash
June 26 Pens & ink 17 17
June 30 Total 83 31 37 15
Bal c/d 83
$166 $166
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4, 5, 6 & 7 Subsidiary Journals or Daybooks

All credit transactions related to goods bought for resale are recorded in the books called
subsidiary journals.

The journals are NOT part of the double entry system of debit and credit.

4. Purchases Journal- Records goods or inventory bought on credit

5. Sales Journal – Records goods or inventory sold on credit

6. Return-out Journal- Records returns made by the business to its suppliers

7. Return-in Journal – Records returns made by customers back to the business.

Example

June 3 Bought goods on credit from Lisa $2000 (pl 10)

June 5 Bought goods on credit from Tom $1000 (pl 15)

June 8 Sold goods on credit to Marcy $4000 (sl 5)

June 10 Sold goods on credit to Arthur $5500 (sl 8)

June 12 Returned goods to Tom $300

June 19 Arthur returned goods to the business $550

i. Purchases Journal or daybook

Date Account Folio Invoice # Amount

# $
June 3 James Pl 10 00000 2,000
June 5 Tom Pl 15 00000 1,000
June 30 Transfer to Gl 1 3,000
purchases a/c
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ii. Sales Journal or daybook

Date Account Folio Invoice # Amount

# $
June 8 Marcy Sl 5 00000 4,000
June 10 Arthur Sl 8 00000 5,500
June 30 Transfer to Gl 2 9,500
sales a/c

iii. Return-in Journal or daybook

Date Account Folio Invoice # Amount

# $
June 19 Arthur Sl 8 00000 550
June 30 Transfer to Gl 3 550
return-in a/c

iv. Return-out Journal or daybook

Date Account Folio Invoice # Amount

# $
June 12 Tom Pl 15 00000 300
Transfer to Gl 4 300
31 return-out a/c

Double-Entry Accounts or ledgers

Sales ledger (Debtors)

Marcy a/c SL 5
Date Details fo Amount Date Details fo Amount
June 8 Sales SJ 4,000
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Arthur a/c SL 8
Date Details fo Amount Date Details fo Amount
June 10 Sales SJ 5,500 June Ret-in RIJ 550
19
June Bal c/d 4,950
30
5,500 5,500

SALES LEDGER (DEBTORS) CONTROL ACCOUNT

+ --
Date Details fo Amount Date Details fo Amount
June1 Bal b /d 0 Ret-in 550
(credit)
Sales 9,500 June Bal c/d 8,950
30 (debit)
9,500 9,500

Purchases ledger (creditors)

James a/c PL 10
Date Details fo Amount Date Details fo Amount
June Purchase PJ 2,000
3 (Credit)

Tom a/c PL 15
Date Details fo Amount Date Details fo Amount
June Ret-out ROJ 300 June Purchase PJ 1,000
12 5
June Bal c/d 700
30
1,100 1,000
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PURCHASES LEDGER (CREDITORS) CONTROL ACCOUNT

-- +
Date Details fo Amount Date Details fo Amount
Ret-out 300 June1 Bal bld 0
(credit)
June Bal c/d 2,700 Purchases 3,000
30 (Debit)
3,000 3,000

General ledger

Purchases a/c
Date Details fo Amount Date Details fo Amount
June Total PJ 3,000
30 credit

Sales a/c
Date Details fo Amount Date Details fo Amount
June Total SJ 9,500
30 credit

Return-in a/c
Date Details fo Amount Date Details fo Amount
June Total RIJ 550
30 credit

Return-out a/c
Date Details fo Amount Date Details fo Amount
June Total ROJ 300
30 credit
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SECTION 4: Ledgers & Trial Balance

1. Trial Balance

A trial balance is a statement showing a list of balances on the accounts in the ledger at a specific
time. It shows if the total of the debit balances is equal to the total credit balances.

Purpose of a trial balance

The trial balance is prepared to:

a. Check the arithmetical accuracy of the double entry bookkeeping

b. Prepare the financial statements of the business.

The trial balance is not a part of the double entry system. It is simply a list of balance b/ds. It does
not prove the balance b/s is correct.

Format:

Name of business
Trial balance as at…..
Details fo Dr. Cr.
$ $

Example

Thomas Lee had the following information available:

January 1 Started business with cash $1000

7 Transferred $350 cash into the bank

11 Paid rent by cash $150

16 Bought goods on credit from Andy Smith $200

22 Sold goods by cheque $400

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a. Post (enter) in the appropriate accounts of the business

b. Prepare a Trial Balance as at Jan. 31 2020

a. Post to the ledgers

General ledger

Capital a/c
Date Details fo Amount Date Details fo Amount
Jan 31 Bal c/d 1000 Jan 1 Cash 1000
1000 1000
Feb 1 Bal b/d 1000

Cash a/c
Date Details fo Amount Date Details fo Amount
Jan 7 Bank 350
Jan.1 Capital 1000 Jan 11 Rent 150
Jan 31 Bal c/d 500
1000 1000
Feb 1 Bal b/d 500

Rent a/c
Date Details fo Amount Date Details fo Amount
Jan.11 Cash 150
Jan.31 Profit & 150
loss a/c
150 150
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Purchases a/c
Date Details fo Amount Date Details fo Amount
Jan 16 Andy 200
Smith
Jan.31 Trading 200
a/c
200 2000

Sales a/c
Date Details fo Amount Date Details fo Amount
Jan22 Bank 400
Jan 31 Trading 400
a/c
400 400

Bank a/c
Date Details fo Amount Date Details fo Amount
Jan 7 Cash C 350
Jan 22 Sales 400
Jan 31 Bal c/d 750
750 750
Feb 1 Bal b/d 750

Purchases Ledger (Creditor)

Andy Smith a/c

Date Details fo Amount Date Details fo Amount
Jan 11 Purchases 200
Jan 31 Bal c/d 200
200 200
Feb 1 Bal b/d 200
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b. Prepare the trial balance

Thomas Lee
Trial balance as at Jan. 31st, 2022
Details fo Dr. Cr.
$ $
Capital Gl1 1000
Cash Gl2 500
Rent Gl3 150
Purchases Gl4 200
Sales Gl5 400
Bank Gl6 750
Andy smith Pl1 200
1600 1600

SECTION 5: Interpretation and Analysis of a Soletrader

A person who starts a business aims to make a profit. This profit is calculated in the financial
statements which are usually prepared at the end of the financial year.

The financial statements consist of two statements:

1. Trading profit and loss account (or Income statement)

2. Statement of Position

1. The Trading profit and loss account consists of TWO sections:

a. Trading account (top) – its purpose is to calculate the gross profit or loss (before any
deductions are made)

b. Profit and Loss account (bottom)- This account is used to calculate the net profit (after
deductions)
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Format

The Trading,Profit and Loss Account

Sales I $
-Return-inwards ($)
=Net sales $ Trading
A/c
Cost of goods sold:
Opening stock $II
Purchases III $
-Return-out ($)
+Carriage-inward $
=Net purchases $III
Goods available for sale $
-Closing stock IV ($)
=Cost of goods sold V $

Gross profit or loss $

P&L
Add: Additional income A/c
(Received):
‘’’’’’ received $
$
Less: Expenses:
Name of expense ($)
Name of expense ($) ($)
Equals: Net profit or loss $

2. Statement of Position

It is a statement used to record the assets, liabilities and capital of a business as at a specific date.
It shows the business financial position at a specific time.
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Format- Simple

Statement of Position (Balance Sheet)

as at --------
Cost Accumulated Net Book
price Depreciation Value (NBV)
Fixed (noncurrent) assets:
Premises $ ($) $
Furniture $ ($) $
$ ($) $

Current Asset:
Inventory $
Accts. Receivable $ $
Bank $
Cash $
$
Less: Current Liab. :
Personal Loan<year ($)
Accts. Payable ($)
= Working Cap. $

Less: Long-term Liab.:

Mortgage ($)
Bank loan ($) ($)
=Net assets $

Financed by:
Capital, at start $
+/- Net profit (loss) (From $ or ($)
TPL a.c)
-Drawings ($)
=New or end capital $

3. Liquidity and Profitability Ratios

When a business analyse its financial information, it examines the information or data available. It
then interprets this information by comparing the information against other business of similar size
and objectives.
The comparison of accounting information is usually expressed to others, inside and outside the
business, in ratios.
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These ratios are normally identified as TWO separate groups:

A. Liquidity ratios.
B. Profitability ratios

Types of accounting ratios

A. Liquidity ratios
Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities

1. Current ratio or Working Capital ratio

This ratio let the business know if there are enough assets in the short run to cover any obligations
coming due.

Current assets = #: 1

Current liabilities

Any answer which is 1:5 or greater is considered satisfactory

2. Acid test ratio or Quick ratio

It is similar to the current ratio, but it shows the business ability to meet its obligations without
needing to sell it inventory.

Current assets – ending inventory = #: 1

Current liabilities

If there is a great difference between the current ratio result and the Quick result, then the company
is too reliant on inventory to meet its debt.

Other liquidity ratios which are also known as “efficiency ratios”

3. Rate of inventory or stock turnover

It measures the number of times the business sold out and reordered inventory

Cost of goods sold or “Cost of sales” = # times

Average stock or inventory

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4. Debtors (Accounts Receivable) ratio

It measures the amount of time it takes a business to collect its debts.

I. Debtor’s x 12 months = # months

Credit sales

ii. Debtor’s x 365 days = # days

Credit sales

iii. Debtor’s x 52 weeks = # weeks

Credit sales

5. Creditors (Accounts Payable) ratio

It measures the amount of time it takes a business to pays its suppliers. It can be measured in
months, days or weeks.

i. Creditor’s x 12 months = # months

Credit purchases

ii. Creditor’s x 365 days = # days

Credit purchases

iii. Creditor’s x 52 weeks = # weeks

Credit purchases

B. Profitability ratios
These ratios are used to inform a company about the profitability of its operations.

Types of profitability ratios

1. Return on capital employed (ROCE)

It measures how efficiently a company is using its capital to generate profits

Net profit for the year x 100= %

Capital employed *
Total assets – Current liabilities
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2. Gross profit percentage of sales

It shows the profit made by the company for every $100 of sales before any deductions are made.

Gross profit for the year x 100= %

Net sales

3. Net profit percentage

It states the amount of profit that is earned on every $100 of sales after all deductions are made.

Net profit for the year x 100= %

Net sales

4. Gross profit mark-up

It reflects the additional profit added to the cost price of an item bought for resale.

Gross profit for the year x 100= %

Cost of goods sold

5. Expense to sales ratio

This ratio helps to measure the amount of sales which is spent to meet the amount needed to pay all
expenses.

Total expenses x 100= %

Net sales

SECTION 6: Adjustments

Adjustments, to the final accounts (TPL & SOP) of a business, are changes made at the end of the
period to reflect the true or fair value of assets, liabilities, capital, income and expense accounts.

Adjustments affect BOTH the Trading, Profit and Loss A/c (TPL) and the Statement of Position (SOP).
On the:

I. TPL: It is ADDED or DEDUCTED from the INCOME OR EXPENSE amount.

II. SOP: It will listed as under heading of the Current Asset (CA) or the Current Liability (CL)
 P a g e | 29

Types of adjustments

1. Prepaid and Accrual

2. Provision for Doubtful Debts
3. Provision for Depreciation
4. Errors

1. Prepayments and Accruals.

A. Prepayments (Paid in advance)-are payments made to the business by individuals for services
not yet rendered or performed.

I. Prepaid revenue or income- is money paid to you for services not yet performed by you.
-Therefore, you owe someone, and anyone you owe is a CREDITOR
- Result: prepaid revenue is a current liability

II. Prepaid expense- is money paid by you to someone for services not yet rendered by them. -
Therefore, they now owe you, and anyone who owes you is a DEBTOR
-Result: Prepaid expenses is a current asset

B. Accrual (Owing)- is payments not yet made or received for services already rendered or
performed.
-Also known as “owing, outstanding, due, arrears.

I. Revenue accrued- money owed to the business for services already performed by you.
- Anything or anyone owing the business is a DEBTOR
-Result: Revenue owing is a current asset

II. Expenses accrued- money owed by the business for services already performed for them.
-Anything or anyone the business owes is a CREDITOR
-Result: Expenses owing is a current liability

Effect of PREPAID and ACCRUED on income and expenses on the TPL a/c

Adjustments to be made
Beginning End of
of year/period
year/period
Prepaid Add (+) Deduct (-)
Accrual Deduct (-) Add (+)
(owe)
Amount received/Paid Add (+)
during the year
 P a g e | 30

Posting entries to the ledger (the books)

Since expense accounts are on the DEBIT side, all entries to INCREASE the account will be recorded
on the DEBIT side.

Also, revenue accounts are on the CREDIT side, therefore all entries to INCREASE the account will
be entered on the CREDIT side of the account.

Types of Account

Debit side Credit side

Dr. Cr.
Expense Add (+) Deduct (-)
Revenue Deduct (-) Add (+)

Posting to the revenue or expense account

“Revenue” a/c
Dr. (-) Cr.(+)
Revenue (owing), at start $ Revenue prepaid, at start $
(Bal b/d) (Bal b/d)

Profit & loss A/c $ Revenue received $

Revenue prepaid , end $ Revenue (owing), end $

(Bal c/d) (Bal c/d

$ $
 P a g e | 31

“Expense” a/c
Dr. (+) Cr. (-)
Expense prepaid, at start $ Expense owing, at start $
(Bal b/d) (Bal b/d)

Expense paid $ Profit & loss A/c $

Expense owing , end $ Expenses prepaid, end $

(Bal c/d) (Bal c/d)
$ $

Preparing the journal entry to show adjustment @ END OF THE PERIOD

General Journal (Journal entries)

Date Details Fo Dr. Cr.

Expenses: $ $
To add:
(Same side)
Name of Expense a/c $
Profit & Loss (P & L) $

To deduct:
(Prepaid)
Profit & Loss (P & L) $
Name of expense a/c $

Revenue:
To add:
(Same side)
Profit & Loss (P & L) $
Name of revenue a/c $

To deduct:
(Prepaid)
Name of revenue a/c $
Profit & Loss (P & L) $
 P a g e | 32

Example

Electricity Expense Account: For the month of June 2020:

June 1 Prepaid electricity was $70, Electricity in arrears $10. Electricity paid for the
month $600. June 30 Electricity owing $90, Electricity prepaid $25

a. Prepare the electricity expense account, stating the amount to be transferred to the
Profit and Loss Account (P & L a/c)

Electricity Expense a/c

Date Details fo Amount Date Details fo Amount
June 1 Bal b/d 70 June 1 Bal b/d 10
(Prepaid) (owing)
Cash 600 P & L a/c 725
June 30 Bal c/d 90 June Bal c/d 25
(Owing) 30 (Prepaid)
760 760

b. Prepare journal entry to record the electricity payment

General journal (Journal entry)

Date Details Fo Dr. Cr.

$ $
2020
Electricity expense a/c 600
Cash 600
To record payment
 P a g e | 33

c. Prepare journal entry to record adjustments, at the end of the period

General journal (Journal entry)

Date Details Fo Dr. Cr.

2020
Ending
adjustments
June 30 Electricity expense a/c 90
P & L a/c 90
To add to the expense account

P & L a/c 25
Electricity expense a/c 25
To deduct from the expense account

d. Show the Effect on the Profit and Loss Account for the period ended 30 June 2020

Profit and Loss a/c for the period ended 30 June 2020
Gross profit $10,000
Add: Additional income 0
10,000
Less: expenses
Rent (900)
Electricity (70-10+600+90-25) (725) (1625)
=Net profit $8375
 P a g e | 34

e. Show the effect on the Statement of Position as at June 30, 2020

Statement of Position as at 30 June 2020

Fixed (noncurrent) assets: Cost price Acc. Depr Net Book
Value
$ $ $

Current assets:
Cash at bank 5,000
Cash in hand 4,300
Expense prepaid-Electricity 25
9325
Less: Current liability:
Accounts payable (1,500)
Expense accrued (owing)-Electricity (90)
(1,590)
=Working Capital 7,735

The next month, on July 15, 2020 paid electricity owing of $90 cash.

Date Details Fo Dr. Cr.

$ $
July 15 Electricity expense accrued 90
cash 90

2. (A) Bad Debts Expense

A Bad Debt occurs when a company is sure that the customer’s (Debtors) debt is not collectible.
-It is also known as “Uncollectible debt”.
-That amount of the accounts receivable (debtors) has to be written-off as uncollectible.

How to write off a Bad Debt

To write off (cancel) a debtor’s debt that’s gone bad,

Debit: Bad Debt Expense

Credit: Accounts receivable (debtors)
 P a g e | 35

Example

R. Farmer, a debtor, who owed $380, sent a cheque for $95 along with a letter stating
he filed for bankruptcy on June 10.
His debt was written off as a gesture of sympathy on August 1.
On September 5, received a cheque from R. Farmer for $200

a. Prepare the journal entry to record the transactions on June 10, and August 1.
*August 1 Bad debt of $380-95=$285 to be cancelled from the debtor.

General journal (journal entry)

Date Details Fo Dr. Cr.

2021 $ $
June 10 Bank 95
Accounts receivable (R. Farmer) 95

August 1 Bad Debt (uncollectible) Expense 285

(380-95)
Accounts receivable (R. Farmer) 285

b. Post the Bad Debts (Uncollectible) Expense account

Bad Debt(Uncollectible) expense a/c

Date Details Amount Date Details Amount
2016
Aug.1 Acct Rec- R. 285 Dec.31 Profit & loss 285
Farmer
285 285
 P a g e | 36

c. Prepare the journal entry to record the transaction on September 5.

General journal (journal entry)

Date Details Fo Dr. Cr.

2021 $ $
June 10 Bank 200
Bad Debt Recovered 200

To record money recovered from a bad

debt

………………………………………………………………………………………………………………………………………………………………………..

2 (C) Provision for Bad Debts or Doubtful Debts accounts

i.) This is an estimate of the amount of the company’s debtor’s debt that will not be collected.
ii.) The estimate has to be adjusted at the end of each period.
iii.)It is a “contra-asset” account (This means it will bring down the value of an asset. In this case,
that asset is Debtors or Accounts receivable.
iv.) This is done in accordance to the “Conservatism or Prudence Concept”.

To record the CREATION OR ORIGINAL estimate for Provision for Bad debt A/c

Step 1: Find the Percentage of the debtors which is estimated to be not collected.

Step 2: The entry:

Debit: Profit and Loss Account

Credit: Provision for Bad Debts or doubtful debts account

Example 1
Jason Neek debtors or accounts receivable for the period ending December 31, 2020 was
$2100. He created a provision for doubtful debts account with a rate of 5%.

Calculation: $2100 x .05=$105 estimated not to be collected from debtors

 P a g e | 37

a. Prepare the journal entry to record the creation of the doubtful debt account.

General Journal (Journal entry)

Date Details Fo Dr. Cr.

2020 $ $
Dec. 31 Profit and loss account 105
Provision for doubtful debts a/c 105

b. Post to the Provision for Doubtful A/c

Provision for Doubtful Debts a/c

- +
Date Details Amount Date Details Amount
2020
Dec. 31 Bal. c/d 105 Dec.31 Profit & 105
loss
105 105

To INCREASE the Provision for doubtful debts estimate

The original estimated amount has to be adjusted to reflect the current estimated amount of debt
which will not be collected.

-Find the DIFFERENCE between the “previous” estimate and the “current” estimate.

-This difference is entered on the same side (credit side) as the original estimate

Debit: Profit and Loss account

Credit: Provision for Bad Debts

Example 2

Jason Neek provision for doubtful debts rate remained at 5% at the end of 2021 on
accounts receivable of $2440.

Calculations: New Estimate $2440 x 0.05= $122

 P a g e | 38

Old estimate vs new estimate

Old $105 - New $122= +17; since it’s now more, the difference stays on the same side as
the original entry.

a. Prepare the journal entry to record the increase in the doubtful debt account.

General Journal (Journal entry)

Date Details Fo Dr. Cr.

2021 $ $
Dec. 31 Profit and loss account 17
Provision for doubtful debts a/c 17

b. Post to the Provision for Doubtful Debt a/c

Provision for Doubtful Debts a/c

Date Particular Amount Date Particular Amount
` 2020
Dec. 31 Bal. c/d 105 Dec.31 Profit & loss 105
105 105
2021
Dec 31 Bal c/d 122 Jan. 1 Bal b/d 105
Dec. 31 Profit & loss 17
122 122

To DECREASE the Provision for Bad Debts account estimate

-Find the DIFFERENCE between the previous estimate and the current estimate.

-This difference is entered on the opposite side (debit side) of the original estimate

Debit: Provision for Bad Debts account

Credit: Profit and Loss account
 P a g e | 39

Example

IN 2022, Jason Neek accounts receivable totaled $2360 and the provision for doubtful
debts rate was still 5%

Calculations: New estimate $2360 x 0.05= $118

Old estimate vs new estimate
Old 122 – New $118 = -4; since it’s less, the difference now goes on the opposite side of
the original entry.

a. Prepare the journal entry to record the decrease in the doubtful debt account.

General Journal (Journal entry)

Date Details Fo Dr. Cr.

2022 $ $
Dec. 31 Provision for doubtful debts a/c 4
Profit and loss account 4

b. Post to the Provision for Doubtful Debt a/c

Provision for Doubtful Debts a/c

`Date Particular Amount Date Particular Amount
2020
Dec. 31 Bal. c/d 105 Dec.31 Profit & loss 105
105 105
2021
Dec 31 Bal c/d 122 Jan. 1 Bal b/d 105
Dec. 31 Profit & loss 17
122 122
2022
Dec. 31 Profit & loss 4 Jan. 1 Bal b/d 122
Dec. 31 Bal c/d 118
122 122
2023
 P a g e | 40

Effects of Provision for Doubtful Debts on the

TRADING PROFIT AND LOSS ACCOUNT

The difference or the adjusted amount is shown on the Trading Profit and Loss account as a (n)
EXPENSE (if the amount is increasing) or as an INCOME (if the amount is decreasing)

Extracts (Showing effects)

Profit and Loss Account

For the period ended Dec 31, 2020
Gross profit $10,000
Add: Additional income: +0
10,000
Less: Expenses
Prov. For Doubtful debts (105)
Rent (650) (755)
=Net profit $9245

Profit and Loss Account

For the period ended Dec 31, 2021
Gross profit $18,000
Add: Additional income: +0
18,000
Less: Expenses
Prov. For Doubtful debts -Increased (17)
Rent (650) (667)
=Net profit $17,333
 P a g e | 41

Profit and Loss Account

For the period ended Dec 31, 2022
Gross profit $22,000
Add: Additional income:
Prov. For Doubtful debts-Decreased +4
20,004
Less: Expenses
Rent (650) (650)
=Net profit $17,983

STATEMENT OF POSITION
The NEW ESTIMATE is shown as a deduction from ACCOUNTS RECEIVABLE

Statement of Position
As at Dec. 31, 2020
Current assets:
Inventory 2500
Accounts receivable 2100
Less: Prov. For Doubtful debts (105) 2995

Bank 5000
10,495

Statement of Position
As at Dec. 31, 2021
Current assets:
Inventory 3000
Accounts receivable 2440
Less: Prov. For Doubtful debts (122) 2318

Bank 7500
12,818
 P a g e | 42

Statement of Position
As at Dec. 31, 2022
Current assets:
Inventory 1950
Accounts receivable 2360
Less: Prov. For Doubtful debts (118) 2242

Bank 9300
13,492

If there is Bad Debts written & Provision for Doubtful Debts

What to do if BAD DEBT is written off from Provision for Doubtful Debts?
-In other words, what happens if there is Bad Debts and Provision for Bad Debts in the same
situation?

Step 1: Calculate the true accounts receivable value for each year (Debtors – Bad debts)

Step 2: Calculate the Provision for Doubtful debt amount, for each year (This is your “BAL C/D”)

Step 3: Calculate the adjustment needed at the end of each year (This is your “PROFIT & LOSS”
AMOUNT)

Example

Luxic Enterprises gross profit for the period was $55,000 and operational expenses were
$2,000. The following information is provided for the period:

Year Accounts Bad Debts Provision for

receivable Expense Doubtful debt rate
$ $ %
2019 6,200 200 8%
2020 5,900 325 8%
2021 5,950 100 8%
 P a g e | 43

Calculations:

Year Accounts Bad Debts True Accounts Provision Adjustment

receivable Receivable Amount @8% Needed $
2019 6200 200 6200-200=6000 $480 Original
adjustment
$480
2020 5900 325 5900-325=5575 $446 -$34

2021 5950 100 6050-100=5950 $476 +$30

Bal c/d P&L

A. Prepare the journal entries to show the adjustment in the provision for doubtful

General Journal (Journal entry)

Date Details Fo Dr. Cr.

2019 $ $
Dec. 31 Profit and loss account 480
Provision for doubtful debts a/c-Original est. 480

2020
Dec. 31 Provision for doubtful debt a/c-Decrease 34
Profit & Loss a/c 34

2021
Profit and Loss a/c 30
Provision for doubtful debts –increased 30
 P a g e | 44

b. Post to the Provision for Doubtful Debt a/c

Provision for doubtful debts a/c

Date Particular Amount Date Particular Amount
2019
Dec. 31 Bal. c/d 480 Dec.31 Profit & loss 480
480 480
2020
Dec. 31 Profit & loss 34 Jan. 1 Bal b/d 480
Dec 31 Bal c/d 446
122 480

2021
Jan. 1 Bal b/d 446
Dec. 31 Bal c/d 476 Dec. 31 Profit & loss 30
476 476
2022
Jan. 1 Bal b/d 476

c. Effect on the Trading, Profit and Loss a/c for the period ended December 31 2020

Profit and Loss Account

For the period ended Dec 31, 2020
Gross profit $55,000
Add: Additional income:
Prov. For Doubtful debts- 34
Decreased
55,034
Less: Expenses
Rent Expense (1200)
Bad Debts Expense (325) (1525)
=Net profit $53509
 P a g e | 45

d. Effect on the Statement of Position as at December 31 2020

Statement of Position
As at Dec. 31, 2020
Current assets:
Inventory 4,800
Accounts receivable 5900
Less: Prov. For Doubtful (446) 5454
debts
Bank 11,000
21,254

Schedule of Aging Accounts

There are TWO ways of estimating the amount of Doubtful debts.

They are:

i. Looking at the debt itself and making an estimate (shown previously) OR

ii. Based on experience, what percentage will result in bad debt

The longer a debt is owed, the more likely it will not be collected.

An “Aging Schedule” shows the length of time a debt has be owed to the business. The older the
debt, the higher the percentage is of not collecting.

Format –AGING SCHEDULE

Aging Schedules of Doubtful Debts

Period of Amount of % of doubtful Provision for

debt debt debt doubtful debt
$ $
Less of
1 month x x x
1 -2 months x x x
Months x x x
X
 P a g e | 46

Example

Aging Schedules of Doubtful Debts

Period of Amount of % of doubtful Provision for

debt debt debt doubtful debt
$ $
Less of
1 month 5,000 10 500

1 -2 months 3,000 30 900

Over 2
Months 2,000 40 800
$ 10,000 $2,200

3. Provision for Depreciation

It is an estimate of the lost or reduction in the value of a fixed asset over its useful economic life.

The causes of depreciation

a. Physical deterioration factor- wear and tear, erosion

b. Economic factors- Asset may have become obsolete (outdated) or inadequate (The size of the
business may have changed)

c. Time factor- (The life of the asset may have expired)

d. Depletion factor- (This occurs with natural resources)

Methods of calculating depreciation cost

1. Straight-line method
-Equal (fixed) amount is deducted each year

Formula:

Cost price – Scrap Residual) value= Depreciation per year

Economic life
 P a g e | 47

**Note: Depreciation expense is the same amount each year. An exception could occur in year one
or year of sale if bought or sold during the year. The time factor (n/12)

2. Reduced (Diminishing) Balance Method

-A fixed annual percentage is of the book value is deducted each year.

Formula:

Cost price or book value x Depreciation rate= Depreciation for the year

An exception could occur in year one or year of sale if bought or sold during the year. The time
factor (n/12)

3. Straight-line with percentage

-The first year of depreciation is calculated using the percentage rate. Then, that amount is used for
each of the following years

Formula:

First year only: Cost price x Depreciation rate = Depreciation each year

An exception could occur in year one or year of sale if bought or sold during the year. The time
factor (n/12)

Example

July 1, 2019 John bought 2 trucks for $5000 each by cheque. He plans to keep it for 5
years with a scrap value of $500 each. It has a depreciation rate of 20%.

On March 1, 2021 sold one of the trucks for $2,100 cash. On December 30, 2021 bought
another truck for $6,000.

The year ends on December 31 each year.

 P a g e | 48

a. Calculate the DEPRECIATION EXPENSE for the first THREE years, using the:

Straight-line Method Reduced Diminishing / Straight-line (%)

Return method
Formula: Formula
10 000 – 1000 = 9000 = $1800year - No formula- Cost price 10 000
5 5 fi -Depr. (20%) (2 000) a year
=Book value 8 000
Book Value:
Book Value: Book Value:
2019 Cost price 10,000
-Deprec. (6/12) (900*) 2019 Cost price 10, 000 2019 Cost price 10 000
2020 Book value 9,100 -Depr. (20%) (6/12) (1, 000*) -Depr. (6/12) (1 000*)
-Deprec. (1 800) 2020 Book value 9 000 2020 Book value 9 000
2021 Book value 7,300 -Depr. (20%) (1, 800) -Depr. (2 000)
-Deprec. (1,800) 2021 Book value 7,200 2021 Book value 7 000
2022 Book value 5,500 -Depr. (20%) (1,440) -Depr. (2000)
2022 Book value 5,760 2022 Book value 5,000

To prepare the Journal Entries in the general journal

b(i). Prepare the Journal entries for the PURCHASE OF THE ASSETS

To record the receipt of the asset and the payment of the money, it is necessary to debit the fixed
asset account and credit the method of payment.

Debit: The fixed asset

Credit: Cash, bank or name of creditor

Date Particular Dr. Cr.

2019 $ $
July 1 Motor vehicles 10,000
Bank 10,000
Purchased a fixed asset

2021
Dec. 30 Motor vehicle 6,000
Cash 6,000
Purchased a fixed asset
 P a g e | 49

b(ii). Prepare the Journal entries for the SALE OF THE ASSETS

Date Particular Dr. Cr.

2021
March 1 Cash 5,000
Motor vehicle 5,000
Sold an asset

b(iii). To record the Journal entry for the DEPRECIATION EXPENSE each year, using
the straight-line method

- The depreciation each year is recorded as an expense.

- In the Profit and loss Account (Income Statement) section of the Trading Profit and Loss Account.

Debit: The Profit and Loss a/c

Credit: The Provision for Depreciation Account

General Journal (Journal entries)

Date Details Dr. Cr.

2019
Dec. 31 Profit and Loss a/c 900
Provision for depreciation 900
2020
Dec. 31 Profit and Loss a/c 1,800
Provision for depreciation 1,800
2021
Mar. 1 Prov. For depreciation 1,500*
Disposal a/c 1,500
Accumulated Deprec. On Truck 1

Dec. 31 Profit and Loss a/c 900

Provision for depreciation 900
Depreciation expense on truck 2
 P a g e | 50

Truck 1: 2019 $900 / 2 =$450

2020 $1800/2= $900
2021 $1800/2=$900 x 2/12= $150
$1500

To prepare the Double-Entry accounts (ledgers)

c(i). The asset Account

-Records the day of purchase and the amount ONLY. No depreciation is recorded.

Truck a/c
Date Details Amount Date Details Amount
2019
July 1 Cash 10,000 Dec. 31 Bal c/d 10,000
1 0,000 10,000

2020
Jan. 1 Bal b/d 10,000 Dec. 31 Bal c/d 10,000
10,000 10,000

2021
Jan. 1 Bal b/d 10,000 March 1 Disposal a/c 5,000
Dec. 30 Cash 6,000 Dec. 31 Bal c/d 11,000
16,000 16,000

c(ii). Prepare the Provision for Depreciation Account

-Records the yearly depreciation expense as a “P&L” entry
 P a g e | 51

Provision for Depreciation a/c

Date Details Amount Date Details Amount
2019
Dec. 31 Bal c/d 900 Dec. 31 P & L a/c 900
900 900

2020
Dec. 31 Bal c/d 2,700 Jan. 1 Bal b/d 900
Dec. 31 P & L a/c 1800
2,700 2,700

2021
March 1 Disposal a/c 1,500 Jan. 1 Bal b/d 2,700
Dec 31 Bal c/d 2,100 Dec. 31 P &L a/c (for 900
truck 2 only)
3,600 3,600

c(iii). Prepare the Disposal Account

Disposal a/c
Date Details Amount Date Details Amount
2021
March 1 Motor 5,000 March 1 Provision 1,500
vehicle for
Depreciation
Cash 2,100
Loss on sale 1,400
5,000 5,000
 P a g e | 52

d. Prepare the Profit and Loss A/c, assuming gross profit each year was:
2019 $55,000; 2020 $62,000; 2021 $69,000. Rent expense is $1200.

Profit and Loss Account

For the period ended Dec 31, 2019
Gross profit $55,000
Add: Additional income: 0
55,000

Less: Expenses
Rent Expense (1200)
Provision for Depreciation (900) (2100)
=Net profit

Profit and Loss Account

For the period ended Dec 31, 2020
Gross profit $62,000
Add: Additional income: 0
62,000

Less: Expenses
Rent Expense (1200)
Provision for Depreciation (1800) (3000)
=Net profit

Profit and Loss Account

For the period ended Dec 31, 2021
Gross profit $69,000
Add: Additional income: 0
69,000

Less: Expenses
Rent Expense (1200)
Provision for Depreciation (1800) (3000)
=Net profit
 P a g e | 53

e. Prepare the Statement of Position

-It is ADDED to the accumulated (total) depreciation
-It affects the FIXED ASSET section of the Statement of Position (Balance sheet).

Statement of Position
As at Dec. 31 2019
Fixed (noncurrent) assets: Cost Accu. Deprec Net BookValue
$ $ $
Motor vehicle 10,000 (900) 9,100

Statement of Position
As at Dec. 31 2020
Fixed (noncurrent) assets: Cost Accu. Deprec Net BookValue
$ $ $
Motor vehicle 10,000 (2,700) 7,300

Statement of Position
As at Dec. 31 2020
Fixed (noncurrent) assets: Cost Accu. Deprec Net BookValue
$ $ $
Motor vehicle 11,000 (2,100) 8,900

Note: Provisions accounts are treated as a “contra-asset” account.

(This means the value of the provision account will decrease its related fixed asset account net book
value).

4. Types of Receipts and Expenditures

It is extremely important to classify and treat a business expenditure and receipt properly. These
expenditure and receipt can be classified in two different ways: Capital or Revenue.

Types of expenditures

A) Capital expenditure is an expenditure for fixed assets which will benefit a business over a
number of years.
-It is the purchase of a fixed asset or the addition of value to an existing fixed asset.

This expense includes all money spent from the time of purchase of the fixed asset to the actual
working of the fixed asset. Any money spent after operational is revenue related
 P a g e | 54

Example
Bought new machinery for the business

B) Revenue expenditure is a cost which relates to the daily operation of the business or the up keep
of an existing fixed asset (after the asset has been in use).

Example
- Paid utilities for the office
-Paid to repair the engine on a machine

Types of receipts
This refers to money collected by the business

A) Capital receipts is the money received from the sale of a fixed asset or the introduction of a fixed
asset by the owner of a business.

Example
Sold a motor vehicle on credit

B) Revenue receipts refers to money received by the business from the operating of the business or
money received not related to fixed assets.

Example
Received a cheque from interest on investments

SECTION 7: Control Accounts

The Control Systems are areas within a process that can be ensure the integrity or truthfulness of
financial statements and complying with accounting rules and laws.

Uses of Control Systems

a. Lower the risk of fraud

b. Helps to detect errors

c. Helps to avoid the waste of resources

 P a g e | 55

Various types of control systems

There are THREE types of control accounts. They are:

1. Errors and Suspense Accounts

2. Control Accounts
Control Accounts of a business acts as a trial balance for the accounts receivables (debtor’s)
and accounts payable (creditor’s) accounts.

a. Sales ledger (Debtors or Account Receivable) Control Account

b. Purchases ledger (Creditors or Accounts Payable) Control Account

3. Bank Reconciliation

1. Errors and Suspense Accounts

The correction of any errors is necessary in order to ensure that the amounts being transferred to
the final accounts (The TPL a/c & the SOP) are the true amount.

Types of errors

There are TWO types of errors which can be made when prepare a company’s financial statements.

A- Errors that DO NOT AFFECT the trial balance (COPCOR)

This means that even though the error was made, the trial balance will still balance.
-These types of errors relate to errors made with “Accounts”, not “Amounts”

B- Errors that AFFECT the trial balance (Suspense account)

This means that if the error was made, the trial balance will not balance.
-These types of errors relate to errors made with “Amounts.”

A) Errors that DO NOT affect the trial balance-(COPCOR)

These errors are:

1. Error of Commission
2. Error of Omission Error with the “accounts”
3. Error of Principle
4. Error of Compensation
5. Error of Original entry Error with the “amounts”
6. Error of Complete reversal
 P a g e | 56

1. Error of commission (C)

-Correct amount, but the wrong person’s account
-Why was the error made? The people’s names are usually similar
-Error hint: the terms “Names are usually similar sounding or looking”.

To correct:
-Cancel the wrong personal account, and enter the correct personal account

Example
bought goods for $100 on credit from John Smith but was recorded in Jean Smith account.
Dr. Cr
General Journal (Journal entry)

Date Particular Dr. Cr.

Error made: Purchase 100

Jean Smith 100

To correct: Jean Smith 100

John Smith 100

Practice Questions

5. A chair sold on credit to Missy Day for $40 was entered in Misty Dennis account.

6. Cash received from Monica Sue $75 was entered in Monique Szue account.

2. Error of complete omission (O)

The entire transaction was omitted from the books.
-No amount AND No account
-Error hint: the terms “omitted “, “not recorded”

To correct:
-Enter the transaction in the books of the business
 P a g e | 57

Example
Goods sold by cash $50, was omitted from the books of the business
Sales cr. Dr.

General Journal (Journal entry)

Date Particular Dr. Cr.

Error made: -------
--------

Corrections made: Cash 50

Sales 50

Practice Questions

You are required to prepare the journal entry showing the correction of the error.

7. Rent paid to landlord $500 cash was omitted from the books.

8. Purchases of goods $1000 on credit from James Lloyd was omitted from the books.

3. Error of Principle (P)

The correct amount recorded BUT in the wrong nominal or real account

To correct:
Cancel the wrong nominal or real account, and enter the correct nominal or real account

Example
Equipment bought by cheque $95, was entered in the purchases account
Dr. Cr.

General Journal (Journal entry)

Date Particular Dr. Cr.

Error made: Purchases 95
Bank 95
 P a g e | 58

Corrections made: Equipment 95

Purchases 95

Practice questions

You are required to prepare the journal entry showing the correction of the error.

9. Bought fixtures of $45 from John James by cash and was entered on the fittings
account.

10. A cheque paid to the landlord of $650 was entered in the cash account

4. Error of compensation (C)

The wrong amounts BUT entered in correct accounts
-Error hint: the terms “overcast, undercast, overstated, understated, too little or too much”.

To correct:
i. Find the DIFFERENCE in the amounts
ii. Add: the difference to the accounts, by staying on the same side as the original side.
iii. Deduct: the difference to the accounts, by going on the opposite side of the original side

Example
The sales journal and the purchases journal were overcast by $1000
Cr. Dr.
Result: This error was result in too much amount recorded. To correct error, the money
has to be deducted from both. Therefore, opposite side of the normal side of both
accounts

General Journal (Journal entry)

Date Particular Dr. Cr.

Error made: ---- ----
------- ----

To correct: Sales 1000

Purchases 1000
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Practice questions

You are required to prepare the journal entry showing the correction of the error.

11. Rent paid of $300 was overstated and rent received was overstated at $300.

12. The interest received account was under-casted by $150 and Commission expense was
under-casted by $150

5. Error of original entry (O)

The wrong amount entered BUT in the correct accounts.
-Error hint: The amounts are usually similar

To correct:
Similar to Error of Compensation
-Step 1: Find the DIFFERENCE in the amounts
-Step 2: Add: the difference to the accounts, by staying on the same side as the original.
Or, Deduct: the difference to the accounts, by going on the opposite side of the original.

Example
A cheque received from Smith for $513 was entered as $531 in the books of the business.
Dr. Cr.

Calculate the difference: 513 – 531 = $18 too much in both accounts. So, need to deduct
from both accounts. Therefore, Opposite side for both accounts

General Journal (Journal entry)

Date Particular Dr. Cr.

Original entry: Bank 513
Smith 513

Error made: Bank 531

Smith 531

To correct: Smith 18
Bank 18
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Practice questions

You are required to prepare the journal entry showing the correction of the error.

13. A discount received for $25 from Ace Enterprise was entered as $52

14. Utilities paid by cash for $132 was recorded in the books at $123

6. Error of complete reversal (R)

The correct amount was entered and in the correct accounts but on the wrong side.
-Error hint: It usually uses the term “debited” or “Credited”

To correct:
-Put the accounts on their correct sides AND DOUBLE the amount

Example

Dr. Cr.
Paid rent by cheque $800, was credited to the rent account and debited to the bank
account

General Journal (Journal entry)

Date Particular Dr. Cr.

Original entry: Rent expense 800

Bank 800

Error made: Bank 800

Rent expense 800

To correct: Rent expense 1600

Bank 1600
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Practice questions

15. A car bought for $4000 cash was credited to the motor vehicle account and debited to
the cash account.

16. Returns made by the company to its suppliers $75 was debited to the returned-out
account and credited to the supplier’s account

B) Errors that AFFECT the trial balance

They Causes the Trial balance not to balance

The Suspense Account

It’s an account used to correct errors that cause the trial balance to not balance.

-These are errors made to ONE, not BOTH, accounts in a transaction.

-You open a Suspense a/c (means: you create an account name “Suspense a/c”), and you enter the
difference amount from the trial balance. AND YOU RECORD THE DIFFERENCE AMOUNT ON THE
SIDE THAT WAS THE LESSER SIDE OF THE TRIAL

There are TWO types of errors which are normally not associated with the suspense account. These
exceptions are:
-Error of commission
- Error of principle

Why the exceptions?

These two types of errors are similar. They both require you to cancel ONE account and enter
another account. Therefore, two accounts are always affected.

Example
Trial balance as at Dec. 31, 2020
Dr. Cr.
Debtors 100
Cash 740
Furniture 160
Capital 980
1000 980
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The following errors were discovered:

i. Bought fixtures by cheque $60 but it was omitted from the fixtures a/c.
ii. A discount received of $40 was recorded on the debit side of the discount allowed
account.
iii. A cheque received from D. James for $55 was entered in the account of T. Jaymes

a. Open the suspense account

b. Prepare the journal entries to make the necessary error corrections
c. Enter all the appropriate corrections in the suspense account
d. State which errors would have an effect on the Trading Profit and loss account.

a. Open the suspense account

The difference per trial balance is $1000-980= $20. And it is missing from the credit side.

Suspense a/c
Date Particular Amount Date Particular Amount
Difference 20
per trial
balance

b. Prepare the journal entry to correct the errors

General Journal

Date Particular Dr. Cr.

The 2 accounts are fixtures and bank.
(i) Dec. 31 Fixtures 60 Bank was correctly recorded on the
CR. Side. So, the CR. Side is suspended.
Suspense a/c 60
We fix only the DR. Side.
Record error of omission
 P a g e | 63

Date Particular Dr. Cr. Discount received was recorded on the Dr. side
of Discount allowed.
(ii) Suspense a/c 80
Discount received (2) 40 1. Discount allowed was not involved in the
transaction. So you have to cancel this entry
Discount allowed (1) 40
from the Dr. side by putting it on the CR. Side

Record error of 2. Now, we have to put the original entry

where it was supposed to be recorded. Disc.
compensation & reversal Rec normal side is the Cr. Side
(both not the same a/c) -
3. All corrections have been made. Since, a
Suspense involved journal entry requires an equal Dr. and Cr. Side
and both correcting entries were made to the
CR. Side, in order to make an equal journal
entry; you will suspend the Dr. Side.

Date Particular Dr. Cr.

The 2 accounts are D. James and bank.
(iii) T. Jaymes (10 55 1. Bank was correctly recorded on the DR. Side
D. James 55 but T. Jaymes was entered by error instead of D.
James on the CR. Side. Therefore, T. James has
Record error of to go, CANCELLED fron the CR. Side.
commission- NO
suspense involved 2. D. James is entered where he was supposed to
be.

c. Post corrections to the suspense account

-Errors are found if Suspense account Dr. and Cr. Side are equaled

Suspense a/c
Date Particular Amount Date Particular Amount
(ii) Discount Difference 20
received 80 per trial
balance
(i) Fixtures 60
80 80
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D. State which error would have an effect on the Trading profit and loss account.

Error (i): NO EFFECT: Why? Involved accounts from the Statement of Position, no
account from the Trading Profit and Loss

Error (ii): EFFECT: Why? Both accounts involved accounts from the Trading Profit and
Loss but no accounts from the Statement of Position

Error (iii): NO EFFECT: Why? Involved accounts from the Statement of Position, no
account from the Trading Profit and Loss

Practice question
2. Jennifer Hassell adjusted trial balance for the period ending June 30, 2015 showed the
following balances:
Jennifer Hassell
Trial Balance as at June 30, 2015
Dr. Cr.
$ $
Cash 5,000
Trade receivables 450
Inventory 1,100
Machinery 8,000
Accounts payable 300
Notes payable 275
Owner’s equity (capital) 10,000
14,550 10,575

a. What is the difference per trial balance?

b. Open the suspense account, showing the difference per trial balance.

On checking the books, some errors were found:

i. Cash received from a debtor for $210 was recorded as $120

ii. Machinery bought for $500 was recorded in the inventory account
iii. Machinery sold for $900 on account (credit) to Lumber Ltd. was omitted from the
books
 P a g e | 65

iv. A receipt of $550 cash from Lumber Ltd. was credited to the cash account
v. A cheque paid for $5075 for machinery was omitted from the cashbook only.

c. Prepare the journal entry (journalize) to correct the errors.

d. Post the necessary entries to the Suspense Account.

e. State which entries will affect the net profit. (e.g. I, ,iii ,iv ,v)

2. Control Accounts
Various types of control accounts

There are TWO types of control accounts. They are:

a. Sales ledger (Debtors or Account Receivable) Control Account

b. Purchases ledger (Creditors or Accounts Payable) Control Account

I. Sales (Debtors or Account Receivable) Control Account

It records all the information relating to the debtors or account receivable of a business

Sales (Debtors or Accounts Receivable) Control A/c

Date Particular Amount Date Particular Amount
+ -
1st Debit bal. b/d x 1st Credit bal. b/d x

Bad debts x
Credit sales x Cash received x

Dishonoured cheque x Cheque x

received
Late charges x Return-in x

Discount x
allowed
Set off sales
ledger to
purchases ledger x
30/31 Credit bal. c/d x 30/31 Debit bal. c/d x
x x
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II. Purchases (Creditors or Account payable) Control Account

It records all the information relating to the creditors or account payable.

Purchases (Creditors or Accounts payable) Control A/c

Date Particular Amount Date Particular Amount

- +
1st Debit bal. b/d x 1st Credit bal. b/d x
Cash paid x Credit x
purchases
Cheques paid x
Return-out x
Discount x
received
Set off to x
sales ledger
30/31 Credit bal. c/d x 30/31 Debit bal. c/d x
x x

3. Bank Reconciliation
It is a statement used to make the cashbook of the company and the bank statement from the bank
balance agree (or the same)

Terms to know

i. Unpresented cheques- Cheques paid out by the business but not yet paid out by the bank.

ii. Banking not lodged- Money deposited by the business but not recorded as received by the bank

iii. Standing order- Permission given by the bank to deduct a fixed amount each month.

iv. Dishonoured cheque- A cheque paid by you which a bank refuse to pay out due to insufficient
funds

v. Debit transfer- Withdrawals of funds made directly from one bank account to another bank
account

vi. Credit transfer- Deposit of funds made directly to one account from another account.
 P a g e | 67

vii. Refer to drawer- A cheque received by you and recorded on the cashbook that is later deemed
dishonoured by the bank

viii. Bank charges- are fees charged by a bank for maintaining an account

Steps to preparing a Bank Reconciliation Statement

Step 1 Update or adjust the cashbook

-Check to make sure the beginning balances are the same

- Check the bank statement for any OMISSIONS from the cashbook
which is already recorded on the bank statement.

-Correct any ERRORS made in the cashbook

Step 2 Prepare the Bank Reconciliation Statement

- Check the bank statement for any OMISSIONS from the bank
statement which is already recorded in the cashbook

-Correct any ERRORS made on the bank statement

Methods of preparing the Bank Reconciliation Statement

Method 1 Starting with the bank statement balance

If starting with the bank statement balance:

Balance per bank statement

PLUS: Banking not lodged
LESS: Unpresented cheques
=Adjusted cashbook balance

Method 2 Starting with the adjusted cashbook balance

If starting with the adjusted cashbook balance

Adjusted cashbook balance

LESS: Banking not lodged
PLUS: Unpresented cheques
=Balance per bank statement
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Example: (Formatted)

+ Cashbook (Bank column only) --

Date Details Amount Date Details Amount
Jan. 1 Balance b/d 650 Jan. 10 Purchase 100
Jan. 3 Sales 3 850 Jan. 15 Drawings 210
Jan. 5 T. Barnes 718 Jan. 22 A. Khan 3 000
Jan. 8 R. Simon 485 Jan. 31 Bal. c/d 2 393
5 703 5 703

Bank Statement
Date Particular Dr. -- Cr. + Balance
Jan. 1 Balance 650Cr.
Jan. 3 Deposit 3850 4500Cr.
Jan. 10 Cheque #800 100 4400Cr.
Jan. 15 Cheque #801 210 4190Cr.
Jan. 18 Credit transfer 1000 5190Cr.
Jan. 23 Bank charges 50 5140Cr.
Jan. 25 Standing order (S/O) 160 4980 Cr.

You are required to: (a) Prepare an updated cashbook.

(b) Prepare the Bank Reconciliation Statement
 P a g e | 69

Identify the entries that are located in both statements (These entries do not need to be fix)
Identify Errors and/or Omissions from each statement (These need to be fix)

Cashbook (Bank column only)

Date Particular Amount Date Particular Amount
Jan. 1 Balance b/d 650 Jan. 10 Purchase 100
Jan. 3 Sales 3 850 Jan. 15 Drawings 210
Jan. 5 T. Barnes √718 Jan. 22 A. Khan √3 000
Jan. 8 R. Simon √485 Jan. 31 Bal. c/d 2 393
5 703 5 703

Bank Statement
Date Particular Dr. Cr. Balance
Jan. 1 Balance 650 Cr.
Jan. 3 Deposit 3850 4500 Cr.
Jan. 10 Cheque #800 100 4400 Cr.
Jan. 15 Cheque #801 210 4190 Cr.
Jan. 18 Credit transfer √1000 5190 Cr.
Jan. 23 Bank charges √50 5140 Cr.
Jan. 25 Standing order (S/O) √160 4980 Cr.

Note:
There are 3 items in the cashbook that needs to go down into the bank statement.
There are 3 items in the bank statement that needs to up into the cashbook.

a. To bring the cashbook up to date.

Cashbook (Bank column only)

Date Details Amount Date Details Amount
Jan. 31 Balance b/d 2 393 Bank charges 50
Credit transfer 1 000 Standing order 160
Jan. 31 Adjusted bal c/d 3 183
3 393 3 393
 P a g e | 70

b. To prepare the Bank Reconciliation statement

i. If starting with the bank statement balance.

Bank Reconciliation statement as on Jan. 31, 2013

Balance per bank statement 4 980
Add: Banking not lodged 718
Starting with
the bank 485 1 203
balance 6 183
Less: Unpresented cheques (3 000)
Equal: Adjusted CB balance 3 183

ii. If starting with the Adjusted Cashbook balance.

Bank Reconciliation statement as on Jan. 31, 2013

Adjusted CB Balance 3 183
Starting with
the Adjusted Less: Banking not lodged (718)
CB balance (485) (1 203)
1 980
Add: Unpresented cheques 3 000
=Bank statement balance 4 980

Example: (Written)

Debby Smith cashbook on March 31, 2018 should a debit balance at bank of $456.48. On
attempting a reconciliation with her bank statement, the following matters were
discovered:

i. A payment from B. Green to Debbie Smith of $40 by direct bank transfer had not
been recorded in the cashbook.

ii. Cheques drawn but not presented to the bank were: A. Roe $21.62 and C.Mils
$36.55

iii. A paying-in slip dated 27 March 2018 totaling $372.31 was not credited by the
bank until 1 April 2008.
 P a g e | 71

iv. A standing order for $21.58 payable on 20 March 2018 for fire insurance had
been paid by the bank but not entered on the cashbook.

v. Bank charges $15 had not been entered in the cashbook.

You are required to: (a) Open the cashbook and make all updated entries
(b) Prepare the Bank Reconciliation Statement

Firstly, identify errors and/or omissions

i. A payment from B. Green to Debbie Smith of $40 by direct bank transfer had not
been recorded in the cashbook.
 Omission for the Cashbook  Goes CB and it’s an addition

ii. Cheques drawn but not presented to the bank were: A. Roe $21.62 and C.Mils
$36.55
Omission for the Bank statement  Goes BR and it’s a deduction

iii. A paying-in slip dated 27 March 2008 totaling $372.31 was not credited by the
bank until 1 April 2008.
 Omission for the Bank statement  Goes BR and it’s an addition

iv. A standing order for $21.58 payable on 20 March 2008 for fire insurance had
been paid by the bank but not entered on the cashbook.
 Omission for the Cashbook Goes CB and it’s a deduction

v. Bank charges $15 had not been entered in the cashbook.

 Omission for the Cashbook Goes CB and it’s a deduction
 P a g e | 72

a. To bring the cashbook up to date

Cashbook (Bank column only)

Date Details Amount Date Details Amount
Mar. Balance b/d 456.48 Bank charges 15
31
Credit 40 Standing order 21.58
transfer
Adjusted bal 459.90
c/d
496.48 496.48

Since there’s no bank statement balance, you MUST start with the adjusted cashbook
balance

Bank Reconciliation statement as on Jan. 31, 2018

Adjusted CB Balance 459.90
Starting with
Adjusted CB Less: Banking not lodged (372.31)
balance
87.59
Add: Unpresented cheques: 21.62
36.55 58.17
Balance per bank statement 145.76
 P a g e | 73

SECTION 8: Partnership Accounts

Partnership Accounts -are records kept to record the capital and profit of the partnership business.

1. Terms to know

i. Appropriation account -is a record kept to show the distribution of net profit among the partners.

ii. Current account- is an account kept by the business for each partner showing their share of the
profits or return in investment

iii. Profit share ratio – shows each partner share of any profit or loss in the business.

iv. Drawings- Money taking out of the business for personal use

v. Interest on drawings – is the fee charged to a partner by the business on any money
taking out of the business.

vi. Interest on capital- is the fee paid to a partner by the business on any money
invested into the business.

2. Capital Account
Records the each partner’s initial investment in the business

Calculating each partner’s individual capital AT THE START

Partner 1 Capital = Assets -Liabilities (or C= A – L)

Partner 2 Capital = Assets -Liabilities (or C= A – L)

Types of capital accounts:

There are TWO types of Capital Accounts:

1. Fixed Capital

2. Fluctuating Capital
 P a g e | 74

1. Fixed Capital Account- consists of the INITIAL CAPITAL BALANCE ONLY.

Format-Capital Account-FIXED

A) If it’s a NEW PARTNERSHIP, list the partner’s asset on the CR. Side and Liabilities on the Dr. side.
Find the Capital amount using A-L

B) If it’s an ONGOING PARTNERSHIP, enter the Bal b/d on the CREDIT side

- Capital Account - “Name of partner” +

Date Details Fo Amount Date Details Fo Amount

(A)List of liabilities: (A)list of assets:

(A) Balance c/d

(B) Balance b/d

Format of the Current Account

a.) This is a separate part of the capital account

b.) It records the sources of income, from the business, for each partner, since the business started.

- Current Account - “Name of partner” +

Date Details Fo Amount Date Details Fo Amount
Balance b/d (dr.) $ Balance b/d (cr.) $

From Appropriation
a/c:
Interest on drawings $ Goodwill $
Drawings $ Partner’s salary $
Interest on capital $
=Balance c/d $ Share of profit $
$ $
 P a g e | 75

2. Fluctuating Capital Accounts - consists of BOTH the Capital Account and the Current Account

.
- Capital Account - “Name of partner” +
Date Details Fo Amount Date Details Fo Amount
Balance b/d $
Current a/c
Balance b/d (dr.) $ Balance b/d (cr.) $
From Appropriation
a/c:
Interest on drawings $ Goodwill $
Drawings $ Partner’s salary $
Interest on capital $
=Balance c/d $ Share of profit $
$ $

Columnar Format
ONE account is used to record all capital information of all the partners

- Capital Account - “Name of partner” +

Date Details Fo Partner Partner Date Details Fo Partner Partner
1-Name 2-Name 1-Name 2-Name
Balance b/d $
Current a/c
Balance b/d (dr.) $ Balance b/d (cr.) $
From Appropriation
a/c:
Interest on $ Goodwill $
drawings
Drawings $ Partner’s salary $
Interest on capital $
=Balance c/d $ Share of profit $
$ $
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Format of the Appropriation Account

Appropriation Account for the period ended ….

Net profit, for the year $
+ Interest on drawings:
Name of partners (Drawings x rate x 12/12) $
$
- Bonus or goodwill:
Name of partners ($)
- Partner’s Salary:
Name of partners ($)
- Interest on capital:
Name of partner 1 (capital x rate x 12/12) ($)
Name of partner 2 (capital x rate x 12/12) ($) $
=Share of profits $
Name of partners ( share of profit x share ratio) $
Name of partners ( share of profit x share ratio) $

Statement of Position (Balance sheet) Extract – Capital Section only

Statement of Position as at ….
Financed by:
Partner 1-Name Partner 2-Name Total
Capital account, Bal b/d $ $ $
+/-Current account Bal. c/d $ $ $
=Total investment $ $ $
(end Capital)
 P a g e | 77

Example:

Andy and Lenny are sole traders. On July 1, 2019, they decided to start a partnership.
The following information is available:
Andy Lenny
Cash 10000 500
Bank 2000 3500
Debtors nil 600
Creditors 100 250

During the period:

-Net profit was $22 000
-Drawings: Andy $ 400 and Lenny $700

Under the partnership agreement between Andy and Lenny:

-Interest on drawings is 5 percent and interest on capital is 10 percent per annum.
-All profits and losses will be shared in the ratio 2:1 respectively
-Lenny will be paid an annual salary of $2500

a. Calculate EACH partner’s capital

Andy C= A – L $10000 +2000 – 100= $ 11900

Lenny C= A – L $ 500 +3500 + 600 – 2500= $ 4350 16250

b. Prepare each partner’s Capital Account

Capital A/c-Andy
Date Details Fo Amount Date Details Fo Amount
2019
July 1 Balance b/d $11,900
 P a g e | 78

Capital A/c-Lenny
Date Details Fo Amount Date Details Fo Amount
2019
July 1 Balance b/d $4,350

c. Prepare the Appropriation Account for the period ending December 31, 2019.

Andy and Lenny

Appropriation Account for the period ended Dec. 31, 2019
Net Profit $22000
+ Interest on drawings:
Andy ($400 x5% x 6/12) 10
Lenny ($700 x5% x 6/12) 17.50
22027.50

- Bonus or Goodwill: (0)

- Partner’s Salary:
Lenny ($2500 x 6/12) (1250)
- Interest on capital:
Andy ($11900 x 10% x 6/12) (595)
Lenny ($4350 x 10% x 6/12) (217.50) (2062.50)
=Share of profits: $19965
Andy (19965 x 2/3*) $13310
Lenny (19965 x 1/3*) $6655
*Ratio 2:1 is equal to 3. Therefore, the results will be 2/3 and 1/3.
 P a g e | 79

d. To prepare the Current Accounts

Current A/c-Andy
Date Details Fo Amount Date Details Fo Amount
July 1 Balance b/d $0 July 1 Balance b/d $0

Int. on 10 From Approp. a/c:

drawings
Drawings 400 Bonus 0
Salary 0
Dec. 31 Balance c/d 13495 Int. on Capital 595
Share of 13310
profits
$13905 $13905

Current A/c-Lenny
Date Details Fo Amount Date Details Fo Amount
July 1 Balance b/d $0 July 1 Balance b/d $0

Int. on 17.50 From Approp. a/c:

drawings
Drawings 700 Bonus 0
Salary 1250
Dec. 31 Balance c/d 7405 Int. on Capital 217.50
Share of 6655
profits
$8122.50 $8122.50
 P a g e | 80

Current A/c- Columnar

Date Details Fo Andy Lenny Date Details Fo Andy Lenny

July 1 Balance b/d $0 July 1 Balance b/d $0 $0

Int. on 10 17.50 From Approp.

drawings a/c:
Drawings 400 700 Bonus 0
Salary 1250
Dec. 31 Balance c/d 7405 Int. on Capital 595 217.50
Share of profits 13310 6655
$13905 $8122.50 $13905 $8122.50

e.. Prepare the Statement of Position as at December 31, 2019

Andy and Lenny

Statement of Position as at December 31, 2019
Fixed assets: Cost Acc. Deprec. Net book
value
$ ($) $

Current assets: $

Less: Current liabilities: ($)

=Working capital (CA-CL) $

Less: Long-term liabilities: ($)
=Net assets (NBV +WC-LL) $37150

Financed by:
Andy Lenny Total
Capital account $ 11900 cr. $ 4350 cr. $16250cr.
+/-Current account bal. c/d + $13495 cr. $ 7405 cr. $20900cr.
=Total investment or Ending $25395 cr. $ 11755 cr. $37150cr.
Capital
 P a g e | 81

SECTION 9: Limited Liability Companies, Cooperatives & Non-profit Organisations

Part A :Limited Liability Companies

1. What is a limited liability company?

It’s a business which operates as a separate entity from its owners.

The owners are known as shareholders. Shareholder is anyone who has capital (also known as
equity in a company

2. How these businesses raises Capital (or Equity)

They raise money by:

a.) Selling shares of stock in the business
b.) Selling Debenture bonds
c.) Bank loans

a.) Shares of stocks or Stock certificates- Certificates which shows an investors investment or
ownership in a specific business.
In return for their investments in the company, the investor is paid a portion of the company’s
profit each year. This portion is known as a “Dividend”.

Types of dividends:

Proposed dividends- is the total amount of dividends to be paid.

(Proposed dividends= Interim dividends + Final dividends)

i. Interim dividends-is the part of the proposed dividends that HAS BEEN PAID

ii. Final dividends-is the amount of the proposed dividends YET TO BE PAID

To calculate the dividend amount:

# of Shares x dividend rate (%) x par value ($).

 P a g e | 82

Types of values

Par value- is the stated price or given price of each share

Market value- the value customers are willing to pay to buy a share

-If the market value is ABOVE the par value, it is called “selling at a PREMIUM”

-If the market value is BELOW the par value, it is called “selling at a DISCOUNT”

Types of shares

I. Preferred or preference shares

-Dividends are paid out to preference shareholders before ordinary shareholders

-It has a fixed dividend rate

-Preference shareholders cannot vote at annual shareholder’s meeting

II. Ordinary shares

-Dividends are paid out to ordinary shareholders after preference shareholders

are paid

-It does not have a fixed dividend rate

-Preference shareholders have voting rights

(b.) Debentures – It’s a LOAN made to the business by investors.

-The holders of debentures do not have any ownership in the business

-Debentures have a fixed interest rate

-It’s paid out whether the business has a loss or a profit

-Debenture holders do not have any voting rights at the annual meeting.

To calculate the dividend amount:

# of Debentures x Interest rate (%) x par value ($)

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3. To record the issuance of stock and debentures

-Step 1: Record the cash received from the share applicants and debentures

-Step 2: Record the capital from share capital & loan from debentures # of shares

Example: Mason Ltd. has the following information on:

# of shares Dividend rate Par value

Authorized shares on January 1: They issued the following on July 1:

10 000 8% preference shares at $1 each 5 000 8% preference shares at $1 each
30 000 ordinary shares at $1 each 15 000 ordinary shares at $1 each
2 000 10% debentures at $2 each. 1000 10% debentures at $2 each.

Interest rate

I. Issuance of share capital (or equity)

It is recorded in TWO steps:

Step 1: Record the money received from the issuance of

-Each type of share
-Debentures
Step 2: Record the issuance of the share capital & Debentures

Example
Atlantic Company issued the following financial instruments in order to raise capital or
equity for the company;
2500 5% Preferences shares $2 each
15,000 Ordinary shares $1 each
2,000 8% Debentures $1 each

Prepare the journal entry to record the issuance.

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General Journal (Journal entry) for the issuance

Date Details Dr. Cr.

$ $
Step 1 Cash 22 000
Preference share applicants 5 000
Ordinary share applicants 15 000
Debentures applicants 2 000
To record the cash received from
the issuance

Step 2 Preference share applicant 5 000

Ordinary share applicant 15 000
Debentures applicant 2 000
Preference share capital 5 000
Ordinary share capital 15 000
Debentures 2 000
Record the issuance of share capital

4. To prepare the Appropriation Account.

Step 1: You will need Net Profit.

Step 2: If net profit is not given, you will need to prepare the Profit & Loss account to find it.

Step 3: Enter the Net Profit in the Appropriation Account.

Then, Add 2 and Subtract 3.

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a. Prepare the Profit & Loss Appropriation A/c

Net Profit was not giving, so went up to Profit and Loss a/c to calculate the net profit.

Mason Ltd.
Profit and Loss Account as of Dec. 31, 20xx
Gross Profit (or loss) 4 500
Add: Additional income or revenue (receives)
Discount received 50
4 550
Less: Expenses
General operating expenses: (1000)
Debenture interest expense(NEW!!!!!) (200)
Director’s remuneration (NEW!!!!!) * (455) (1 655)
Equal: Net profit (or loss) 2 895
*Money paid to the company’s director for his effort and performance

Mason Ltd.
Appropriation Account as of Dec 31, 20xx
Net Profit (or loss), this year 2 895
Add: Retained earnings from previous year 1 400 Add 2
items
4 295

Less: Preliminary expenses (120)

Less: Transfers to reserve (600)
Less: Proposed dividends; Deduct
Preference shares (10000 x 8% x $1) (800) 3 items

Ordinary shares (30000 x 5% x $1) (1500) (3 020)

Equal: Retained earnings to next year 1 275
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5. Prepare the Statement of Position-Comprehensive

Mason Ltd.
Statement of Position as at Dec 31, 20xx
Fixed assets: Cost Accumulated Net Book
price Depreciation Value
$ $ $
Fixtures and fittings 9 000 (0) 9 000
Equipment 7 000 (700) 6 300
15 300
Current assets:
Prepaid expense-rent 500
Inventory, end 3 270
Account receivable 1 000
-Provision for bad debts, current (100) 900
Cash in hand 17 570
22 240
Less: Current liabilities:
Accounts payable (3 000)
Proposed dividends (final) NEW (200)
Expenses owing-Electricity (465)
Equals: Working Capital 18 575
Less: Long-term liability:
Debentures 2000 8% $1 (2 000)
Bank loan (8 000)
=Net assets $23 875
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Financed by:
Authorized shares: `
Preference shares (at value) 10 000
Ordinary shares (at value) 30 000
$40 000

Issued shares:
Preference shares at value (2500 @ 5 000
$2)
Ordinary shares at value (15 000 @$1) 15 000
Reserves:
General ( Balance $2000 + 2 600
Transfer$600)
Prof it & Loss or Retained earnings: 1 275
(balance from Appropriation a/c)
=Ending or closing share capital $23 875

Part B: Cooperatives

6. Purpose of a cooperative
-It is the mixture of a non-profit organization and a limited liability company.

-It is owned and controlled by its members.

-The members are the customers

-The purpose is to provide a service to its members

7. To record the issuance of share capital

-It is similar to Limited Liability Company.

-There is only ONE type of share

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Example

Agricultural Group Cooperatives have the following authorized and issued shares on
March 1.
They issued the following on March 1:
400 5% shares at $1 each
The members are charged a $100 fee upon registration.

a. Prepare the journal entry to record the issuance of share capital

General Journal (Journal entry)

Date Particular Dr. Cr.

Cash 500
Registration fee 100
Share capital 400
To record money received

8. How to prepare the Appropriation Account

-It is similar to Limited Liability Company.

-The net profit is now known as “Undistributed Income”

Agricultural Group Cooperative

Appropriation Account as of Dec 31, 20xx
Undistributed profits, this year 3 000
Add: Undistributed profits, last year 900
3 900
Less: Transfers to reserve: (400)
Statutory reserve
Less: Honoraria (NEW!!!!!) (600)
Less: Proposed dividends;
Member share Capital (400 x (20) (1 020)
5% x $1)
Equal: Undistributed income to next year 2 880
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Part C: Nontrading or Nonprofit Organisations

9. The difference in recording non-trading and for profit organizations information

It records the information of a business which operates to provide a service, and not to make a
profit such as clubs and purpose driven groups and businesses.

10. The Raising of Funds are usually collected from:

Funds are usually collected from:

I. Fundraisers (known as a BAR)
II. Donations

11. The Receipts and Payments Account

Receipts and Payments – is similar to a cashbook. It records all money coming into and going out of
the organization.

Example

Girls United Club, an afterschool organization for girls had the following balances on
January 1, 2019:

Cash $3000
Bank $5500

The following transactions relate to the Girls United Club during the year 2019:
$
Subscription received by cash 2250
Refreshment sales by cash 400
Bought equipment by cash 650
Bar sales by cash 3000
Bar purchases by cheque 1100
Rent paid by cheque 500
Electricity paid by cheque 100
Donations received by cheque 1000
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Bar wages paid by cash 700

You are required:

Prepare the Receipts and Payments Account

Girls United Club

Receipts and Payment Account as of Dec.31, 2019
Date Details Cash Bank Date Details Cash Bank
2019
Jan. 1 Balance b/d 3000 5500 Equipment 650
Subscription 2250 Bar purchases 1100
Received
Refreshment 400 Rent 500
Sales
Bar sales 3000 Electricity 100
Donations 1000 Bar wages 700
Dec.31 Balance c/d 7300 4800
8650 6500 8650 6500

SECTION 10: Manufacturing Account

It is a statement used to calculate the cost of production for a manufacturing company.

1. Terms to know

Direct cost-is the cost in producing a product than can be traced to a particular product.
There are THREE types of direct costs.
-Direct material-Cost of the raw materials
-Direct labour – Cost of the manufacturing workers or productive workers
-Direct expense – Any special expense associated directly to a product

Indirect cost- is the cost in producing a product than cannot be traced to a particular
product.

Prime cost- consists of the TOTAL of all direct costs of manufacturing a product.

Work in progress (WIP)- Products started in the production phase but not completed
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Finished goods- are the goods which has been completed by the business and waiting to be
sold or bought from another business already completed.

2. Format of the manufacturing account

-Direct materials
-Plus: Direct labour
-Plus: Direct expense
- Equal: Prime cost D + I + W (beg) – W (end)
-Plus: Indirect cost (or overhead cost)
-Plus: Work-in progress (WIP), beginning
-Less: Work-in progress (WIP), ending
=Cost of goods manufactured or produced

Things to remember

Manufacturing Account TPL account Statement of Position

1. Cost of goods manufactured Cost of goods manufactured
Added to: Net Purchases

2. Raw materials, ending NO EFFECT Current assets:

Inventory:
Raw materials, ending
3. WIP, Ending NO EFFECT WIP, ending

4. NO EFFECT Finished goods FG, ending

Example:

Frack furniture had the following information available for the period ending Dec. 31,
2019:
Dec. 31, 2018 Dec. 31, 2019
Raw materials $1000 $1200
Work in progress $1400 $2100
Finished goods $ 100 $5250

During the year, the following information is available:

Purchases of raw materials $10000 M

Direct labour or productive labour 14500 M
Direct expense 500 M
Rent 300 M/T (See addition information below)
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Carriage inwards on raw materials 500 M

Return outwards on raw materials 300 M

Utilities 400 M/T (See addition information below)
Factory equipment at cost 82000 S
Accumulated depreciation-equipment 100 S
Sales 85000 T
Return inwards on finished goods 5000 T
Purchase of finished goods 200 T
Carriage inwards on finished goods 100 T
Return outwards on finished goods 50 T
Cash in hand 500 S
Cash at bank 600 S
Accounts receivable 1450 S

Additional information:

-Utilities and Rent is divided 50% factory and 50% administrative T/M

-Factory rent in arrears $50 M/S

-Factory utilities paid in advance $100 M/S

-Depreciation on factory equipment for the year is $300 M/S

a. Prepare the Manufacturing Account

b. Prepare the Trading, Profit and Loss Account
c. Prepare a Statement of Position extract.
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a. Prepare the Manufacturing Account

All cost related to the manufacturing of the product is recorded in the Manufacturing
Account. This consists of all cost of running the factory.

Frack furniture
Manufacturing Account as of Dec. 31, 2019
Direct materials:
Beginning stock, Raw materials 1000
+ Raw materials purchased 10000
+ Carriage-in on raw materials 500
- Return-out on raw materials (300)
= Raw materials available for sale 11200
- Ending stock, Raw materials (1200)
=Raw materials used or consumed 10000
+Direct Labour:
Productive labour 14500
+Direct Expense: 500
= Prime Cost (All directs) 25000

+Indirect cost or factory overhead:

Factory rent (150 + 50) 200
Factory utilities (200 – 100) 100
Factory depreciation-equipment 300 600

+ Work in progress (WIP), Beginning 1400

- Work in progress (WIP), Ending (2100)

=Cost of goods manufactured or produced $24900

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b. To Prepare the Trading Profit and Loss Account.

All cost not related to the manufacturing of the product is recorded in the Trading Profit and Loss
Account. This consists of all cost of running the business on a day to day basis.

Frack furniture
Trading Profit and Loss Account as of Dec. 31, 2019
$ $ $
Sales 85000
- Return-inwards (5000)
= Net sales 80000

Cost of goods sold:

Opening stock, Finished goods 100

Purchases of finished goods 200

+Carriage-in on finished goods 100
- Return-out of finished goods (50)
=Net purchases 250
+Cost of goods manufactured 24900
=Goods available for sale 25250

-Ending stock, Finished goods (5250)

=Cost of goods sold 20000
Gross profit 60000
+Other income received: 0
60000
-Expenses:
Rent (150)
Utilities (200) (350)
=Net profit $59650
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C. Prepare the Statement of Position

Frack furniture
Balance Sheet as at Dec. 31, 2019
Fixed assets: Cost Price$ Acc. Deprec.$ Net book
value$
Equipment 82000 (400) 81600

Current Assets:
Prepaid expense - Utilities 50
Inventory, end:
Raw materials, end 1200
Work in progress, end 2100
Finished goods, end 1450
Bank 600
Cash 500
5850
-Current liabilities:
Accounts payable (0)
Expenses owing- rent (50)
=Working capital 5800

-Long-term liability: (0)

=Net assets 87400

Financed by:
Capital, at beginning $27750*
+Net profit (from TPl a/c) 59650
-Drawings (---)
=Capital, at end $87400
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Ending capital is 87400. It states that 59650 have to be added to some beginning capital # in order to
find the 87400. If drawings for the year is 0, then beginning capital would have to have been
$27750.*

3. Basic Cost Principles

A. Cost-Plus-Pricing Or Mark-up Pricing

It is a PRICING METHOD
The SELLING PRICE of a product is determined by its:

Unit cost price PLUS a mark-up percentage

B. Absorption Costing
It is used in MANUFACTURING
It is used to determine the value of INVENTORY

All Direct cost

PLUS
ALL INDIRECTION MANUFACTURING OVERHEAD COST
(FIXED AND VARIABLE)

4. Inventory Valuation
It is used to calculate the closing inventory or ending inventory of a business.

A. Methods used to keep track of the amount of inventory

I). Perpetual method-also known as Point of Sale;

Stock is updated after each purchase, sale or return.
It is done using a computer.

II). Periodic method

A physical count is done at the end of the period.
It is done by hand.

B. Methods used to find closing inventory

I. FIFO- First in -First out. The first items bought, should be the first items sold.

II. LIFO- Last in-First out. The last items bought, should be the first items sold

III. AVCO-Average Cost. The average cost per item must be recalculated after each
transaction, except when you are selling. When selling, the previous average cost must be
use
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Example:

Transactions:
January 1 Balance 300 items @ $35 each.
January 2 Bought 500 items @$40 each.
January 3 Bought 350 items @$43 each.
January 5 Sold 700 items @$50
January 6 Bought 50 items @$46 each.
January 8 Sold 320 items @$50

FIFO Method

Date Received Issued Balance after

# Cost # Cost # Cost
Units each Value Units each Value Units each Value
$ $ $ $ $ $
Jan 1 300 35 10,500
b/d
Jan 2 500 40 20,000 300 35 10,500
500 40 20,000
Jan 3 350 43 15,050 300 35 10,500
500 40 20,000
350 43 15,050
Jan 5 700 50 35,000 0 35 0
100 40 4,000
350 43 15, 050
Jan 6 50 46 2,300 100 40 40
350 43 15,050
50 46 2,300
Jan 8 320 50 16,000 0 40 0
130 43 5,590
50 46 2,300
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LIFO Method
# Cost # Cost # Cost
Units each Value Units each Value Units each Value
$ $ $ $ $ $
Jan 1 300 35 10,500
b/d
Jan 2 500 40 20,000 300 35 10,500
500 40 20,000
Jan 3 350 43 15,050 300 35 10,500
50 40 20,000
350 43 15,050
Jan 5 700 50 35,000 300 35 10,500
150 40 6,000
0 43 0
Jan 6 50 46 2,300 300 35 10,500
150 40 6,000
50 46 2,300

Jan 8 320 50 16,000 180 35 6,300

0 40 0
0 46 0

AVCO Method
# Cost # Cost # Average
Units each Value Units each Value Units Cost Value
$ $ $ $ $ $
Jan 1 300 35.00 10,500
Jan 2 500 40 20,000 800* 38.13 30,500
Jan 3 350 43 15,050 1150 39.61 4,550
Jan 5 700 50 35,000 450** 39.61 17,824.5
Jan 6 50 46 2,300 500 40.25 20,124.5
Jan 8 320 50 16,000 180 40.25 7,245
When you are:
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*Purchasing: Total value /Total # of items

**Selling: #of items remaining x the last previous average cost.

C. The Trading Account under each of the methods

Trading a/c
for the period ended January 31 202x
FIFO LIFO AVCO
Sales 51000 51000 51000
-Return-in (0) (0) (0)
=Net sales 51000 51000 51000

Opening stock 10500 10500 10500

Purchases 37350 37350 37350
+Carriage-in 0 0 0
-Return-in (0) (0) (0)
=Net purchases 37350 37350 37350
Good available 47850 47850 47850
-End stock (7890) (6300) (7245)
=Cost of sales 39960 41550 40605
Gross profit
11040 9450 10395

SECTION 11: Accounting for Entrepreneur

1. Methods of Payments
There are various ways in which a business can pay its employees, creditors and suppliers. It may
be done by:
a. Cheque
b. Standing order directly from the bank
c. Direct transfer (debit transfer)

2. Documents used to prepare employee’s payroll

a. Time card
b. Electronic time clocks
c. Earning records

3. Employee payroll sheet

It is used to calculate the gross pay and net pay of employees.
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Terms to know

Basic pay- the amount earned for normal time or hours

Overtime pay- the amount earned for the hours worked beyond the normal time
Gross pay- the amount earned in total. It consists of basic pay and overtime pay
Statutory deductions- are reductions in salary which the government deemed
mandatory.
Voluntary deductions- are reductions in salary which the employee chooses to have
withdrawn.
Net pay- “take home pay” is the actual amount earned after all deductions have
been made.

Methods of calculating overtime rates

Time and a half- Regular rate per hour x half of it.

Time and a quarter- Regular rate per hour x ¼ of it.
Double time-Regular rate per hour x 2

Example
Regular or basic pay rate is $20 per hour.

The overtime rate per hour under:

i. Regular rate $20 + half of it $10=$30 per hour
ii. Regular rate $20 + quarter of it $5= $25 per hour
iii. Regular rate $20 + Regular rate $20=$40 per hour

Format for the payroll register

Deductions
Employee Total Regular Overtime Gross National Income Other Total Net
Hours Pay Pay Pay Insurance Tax Deductions Pay
$ $ $ $ (PAYE) $ $ $ $
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Example

Tucson Ltd has the following information available for Jesse Maybert. He works a normal 40 work week
from Monday to Friday. Normal overtime is paid at time & half. Weekend is paid at double time.

Mon. Tues. Weds. Thurs. Frid. Sat. Sun.

8-12pm 8-12pm 8-12pm 8-12pm 8-12pm 9-1pm 9-12pm
1-4pm 1-5pm 2-7pm 1-6pm 1-5pm

Normal rate is $30 per hour.

Deductions are:
National insurance (NIS) 2.5% of gross pay
Union dues $25
Pension fund 8% of gross pay
Income tax 28% of gross pay excluding national insurance

Prepare the payroll register

Deductions
Employe Total Basic Overtime Gross NIS Tax Dues Pension Tot Net
e Hrs Pay $ Pay $ Pay $ $ $ $ $ Ded. $ Pay $
Jessie 48 1200 465 1665 41.63 454.50 25 133.20 654.33 1010.67

5. Budgets and Forecasts:

A budget is a financial plan which covers the activities of a business enterprise for a specific
amount of time.

Budgetary control
Budgetary control occurs when different parts or sections of the total budget is assigned to different
managers.

Budgetary meetings are timetabled to ensure that the individual managers are maintaining or
achieving the targeted goal.

Purpose of a budget
The main purpose of any budget is to:
a. Helps a business to plan for any future goals and objectives
b. It communicates to management and employees future goals
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Forecast vs. Budget

A forecast is a prediction of what may happen. It could be right, or it could be wrong.

A budget is a planned goal that the business is hoping to achieve

Fixed, Flexible, and Functional budgets

A fixed budget is based on a specific level of activity.

E.g. The company will be producing 5,000 units this year.

b. Flexible budget is based on an unspecific level of activity.

E.g. The company may produce as low as 2,000 units one month and as much as 6,000 units another
month.

c. Functional budget are budgets prepared for various departments in the business.
E.g. For a specific amount of sales, the company will need a Sales Budget.
For a specific amount of units needed to be produced to meet the sales demand, the company
will need a Production Budget.

6. Forecasts: Statement of Cash flow or Cash Projection

A cash flow forecast shows the details of the expected cash and bank receipts (inflows) and
payments (outflows) on a month to month basis. This will show also the estimated bank balance at
the end of each month throughout the period.

Step by step guide to preparing a cashflow projection

Step 1: Find the opening bank balance. (you will need it in step 5)
Step 2: Enter all the cash inflows for each appropriate month.
Step 3: Enter all cash outflows for each appropriate month.
Step 4: Add up each month total for inflows and outflows.
Step 5: At the end of each month column, enter
-Beginning cash balance amount
-Add: Total receipts
-Deduct: Total payments
=Ending cash balance amount.

*Note the ending cash balance one month, becomes the beginning cash balance of the next month.
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Example:
Cash balance on January 1 was $5,000.

The following is expected for the next three months:

-Sales: January $2000, February $2,600 and March $3,200

-Loan from WIB bank is expected in the month of February $6,000

-Material purchases: January $150, February $220 and March $180

-Labour or wages: January $300, February $425, March $500

Rent is $750 a month

-Carriage cost: January $40, February is expected to have a $20 increase and for the
month of March a $10 decrease from February

Prepare a Cash flow projection for the first quarter of the financial year.

Forecast Statement of cash flow or Cash Projection

Details January February March
Receipts $ $ $
Sales 2000 2,600 3,200
Loan --- 6,000 ---
2,000 8,600 3,200

Payments
Materials 150 220 180
Labour 300 425 500
Rent 750 750 750
Carriage 40 60 50
1,240 1,395 1,480

Balance (b/d) 5,000 5,760 12,965

Add: Receipts 2,000 8,600 3,200
7,000 14,360 16,165
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Deduct: 1.240 1.395 1,480

Payments
Ending cash (c/d) 5,760 12,965 14,685

7. Budgets: Sales Budget

It is a financial plan that estimate the total revenue a company makes in a specific period

To calculate:
Number of units x Selling price

Example

Carol runs a small bakery in the mall. She expects to sell the following units of cookies each
quarter of the upcoming year.
1st Quarter 80,000; 2nd Quarter 95,000; 3rd Quarter 120,000; 4th Quarter
104,200
Each unit will be sold at $8

Prepare a Sales Budget for the financial year

Sales budget
Carol’s Cookies

Sales Budget Selling price: $8

For the quarter: 1st 2nd 3rd 4th
Jan- Mar Apr- June July- Sept Oct - Dec

Budgeted sales (Units) 80,000 95,000 120,000 104,200

=Total sales (Dollars) $640,000 $760,000 $960,000 $833,600

8. Budgets: Production Budget

The production budget is used to ensure a business can meet the demands (in units) of the sales
department

To Calculate
Beginning inventory (units) PLUS production needed (units) = Total inventory (units)
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DEDUCTION: SALES (units)

= Ending inventory(units)

Example
The following information is giving related to the amount of production needed for the
next financial quarter. Copy the budget giving and fill in the missing information.

Production budget
Units: Jan. Feb. Mar.
Opening inventory 80 ? ?
Add: Production requirements ? 400 ?
=Total inventory ? ? ?
Deduct: Sales of inventory 200 300 220
= Closing inventory 120 220 340

Production budget:

Units Jan. Feb. Mar.

Opening inventory 80 120 220
Add: Production requirements 240 400 440
=Total inventory 320 520 560
Deduct: Sales of inventory 200 300 220

= Closing inventory 120 220 340