Poa Book Notes 2u1h25

1

Principles of s

CSEC Ms Fergusson

2

ST. MARY’S COLLEGE CSEC REVISION NOTES TABLE OF CONTENTS

PAGE

INTRODUCTION TO ING

3

ING CONCEPTS AND CONVENTIONS

4

INTRODUCTION TO THE BALANCE SHEET

5

SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET

9

ING CYCLE

10

JOURNALS

12

LEDGERS

17

TRIAL BALANCE

22

CORRECTION OF ERRORS

23

ADJUSTING ENTRIES

24

FINAL A/CS OF SOLE TRADERS

28

CONTROL SYSTEMS

30

BANK RECONCILIATION STATEMENT

32

CONTROL A/CS

35

SUSPENSE A/CS & CORRECTION OF ERRORS

38

FINAL A/C FORMATS

43

RATIO ANALYSIS

63

INTRODUCTION TO ING

The Purpose of ing : 

Definition of ing o ing is the process of classifying, summarizing, recording, interpreting and communicating financial information.      



Identifying: Establishing the essential characteristics or features of. Classifying and summarizing: sorting out data in a useful order. o To Classify - to arrange or place items into categories or groups. o To Summarize – To create a short description that gives the main facts in a condensed form. Measuring: placing a value; asg numbers; determining the size Recording: make an official note of in writing, printing, or such. Interpreting: explain the meaning of something in clear, understandable . Communicating / Reporting: Presenting data to stakeholders like internal management and external s.

The purpose of ing o The purpose of ing is to provide information about financial situation of an organization, so that informed decisions can be made.



Difference between ing and bookkeeping o

o

Definition of Bookkeeping – Bookkeeping is the recording of the ing of a business. 

Bookkeeping consists of entering transactions into the journals, making adjustments, maintaining precise and accurate records, and preparing reports that keep management up to date on the financial condition of their company.



Bookkeeping is, therefore, a part of ing, the part concerned with recording information and preparing s. ing involves interpreting the information recorded by the bookkeeper, and preparing reports in a way that management can use for decision making.

ants are responsible for the design and management of the financial systems that bookkeepers use.   

They prepare monthly financial statements and tax returns at year end. ants may also prepare budgets for management and loan proposals for bankers; They may also perform cost analysis for the company’s products or services.

s of ing : 

The s of ing Information: need to know profitability & liquidity of business, resources and liabilities Internal s o o o

Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources Management: - need to know profitability & liquidity of business - decision-making Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.

External s o o o

Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans Suppliers – credit sales

The Types of Business Organizations : 

The various forms of business organizations are:   

 

Sole Trader: 1 owner Partnership: 2 – 20 owners / partners Limited Liability Companies o Private Limited Companies: 2 – 50 owners / shareholders o Public Limited Companies: 7 – unlimited owners / shareholders Cooperative Societies (purpose is furthering the economic welfare of its ): open hip Non-Profit Organizations

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4

ing Concepts and Conventions ing Concepts and Conventions are the ing rules that are followed when recording transactions in the books.

ING CONVENTIONS  These are the rules that standardize the  ing methods used to assure that   similar items are dealt with in similar ways. 

ING CONCEPTS  The rules that state how transactions are to be recorded. 

The Cost Concept

 

The Money Measurement Concept

states that assets are valued and shown in the s at their cost price (the amount asset is purchased for). states that only transactions that can be measured in monetary should be recorded in the books.

The Going Concern Concept

states that the business is assumed to be in operation in the foreseeable future.

The Business Entity Concept

states that the items recorded in the business’ books are transactions that affect the business (business transactions). The owner (s)’ private transactions are kept separate from business transactions.

The Realization Concept (Revenue Recognition Concept)

states that revenue is realized/recognized/earned and recorded as revenue when the goods or services are ed to the customers and a liability is incurred. It is NOT based on when cash has been received.

The Accrual Concept (Matching Concept)

states that the expenses incurred or used up in an ing period must be matched to the revenues earned in that period, and therefore, recorded in the ing period incurred.

The Dual Aspect Concept

states that there are two aspects of ing, and both aspects are always equal to each other. Assets must always equal Capital plus Liabilities (ing Equation). “Double entry” is the method of recording the transactions for the dual aspect concept.

Materiality

states that only relevant information, which has the ability to influence decisions, is reported. Small amounts are not considered material and may either not be reported, or do not have to follow ing concepts.

Prudence / Conservatism

Consistency

states that, in times of uncertainty, the figure that understates profit should be reported, rather than the figure that overstates profit. Expenses should be overstated rather than understated, and revenue should be understated rather than overstated. states that the same method should be used for the ing treatment of similar items, and the same method should be used from year to year. If the method is changed, the change should be disclosed.


The Five classes/categories of s : 

ALICE: Assets, Liabilities, Income, Capital, and Expenses.

A – Assets L – Liabilities I – income / Revenues C – Capital / Owner’s Equity E – Expenses

•

Assets Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. Simply, they are a company’s resources i.e. things the company owns.

•

Liabilities Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business i.e. amounts the business owes.

•

Income Income / revenues are amounts earned during the ing period from the daily operations of the business. Simply, they are what the business earns for providing goods and services.

•

Capital / Owner’s Equity Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.

•

Expenses Expenses are the costs incurred by a business in its daily operations in earning income. In other words, they are the cost of assets used by the business to generate revenues.

A company’s financial position The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity N.B. Every business transaction will have an effect on a company’s financial position.

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6


The Balance Sheet and its major components : 

Definition of Balance Sheet • •



The Balance sheet is a financial statement that is produced in order to show the financial position of the enterprise shows It is produced in order to show the assets of a business in relation to its liabilities and capital at a particular point in time.

The major components of the Balance Sheet The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity Assets, Liabilities and Capital are, therefore, Balance Sheet s •

Assets  Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business.  There are two types of assets:

•

o

Fixed Assets: assets used to carry on the business and generate profit. They are not purchased for resale but intended to be retained permanently for the purpose of carrying on the business e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.

o

Current Assets: assets consisting of cash and other assets that would be consumed or easily converted into cash within one year.

Liabilities  Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business (the money owed by the business).  There are two types of liabilities:

•

o

Long Term Liabilities: These are any debts or obligations owed by the business that are due more than one year from the current date e.g. Mortgages, Bank Loans etc.

o

Current Liabilities: These are any debts or obligations owed by the business that are due within one year from the current date e.g. Creditors (suppliers, short term loans), bank overdrafts etc.

Capital / Owner’s Equity  Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.  Capital is considered a special kind of liability. It is a loan by the owner to the business and is, therefore, money owed by the business to the owner. N.B. For ing purposes, a business is regarded as being a separate entity from its owner(s). (the business entity concept)

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The ing Equation : The ing Equation (also called the balance sheet equation.) • • •

The ing Equation is the basic equation of double entry ing that reflects the relationship between a company's assets, liabilities, and equity. It shows how assets were financed: either by borrowing money from someone (liability) or by paying your own money (ownership equity). It is expressed as:

Assets = Liabilities + Capital

The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.

Additional Information

The Expanded ing Equation : o

The expanded ing equation includes two components of Closing Capital: Revenue and Expenses 

Revenue – Expenses = the business’ Profit or Loss  

If Revenues > Expenses, there is a Profit If Revenues < Expenses, there is a loss



The owner of the business also has the option to withdraw capital from the business for personal use: Drawings



The expanded ing equation is, therefore: Assets = Liabilities + Capital + Revenues – Expenses – Drawings o o o

Revenues increase Capital / Owner’s Equity Expenses decrease Capital / Owner’s Equity Drawings decrease Capital / Owner’s Equity

The Simple Balance Sheet : o

An elaborate form of the ing equation is presented in a Balance Sheet, which lists all assets, liabilities, and equity, as well as totals to ensure that it balances.

The Format of a simple Balance Sheet (Horizontal) Balance Sheet as at $ Assets

X

$ Capital

X

Liabilities

X

XX

XX

Balance Sheet as at $

$

Fixed Assets

X

Capital

X

Current Assets

X

Long Term Liabilities

X

Current Liabilities

X

XX

XX

8


The Balance Sheet – Arrangement of Assets and Liabilities The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in the balance sheet is called 'Marshalling of assets and liabilities'. There are two systems of arrangement of assets and liabilities in the balance sheet: (a) Order of Liquidity. (b) Order of Permanence.

The Balance Sheet – Order of Permanence: PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life. ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e. land first, then buildings, then equipment etc).


$

Fixed Assets

X

Capital

X

Current Assets

X


X

Current Liabilities

X

XX

XX

The Balance Sheet – Order of Liquidity: LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current assets are listed in order of liquidity or nearness to cash (i.e. s Receivable first, then Inventory…).


$

Current Assets

X

Current Liabilities

X

Fixed Assets

X


X

Capital

X

XX

XX

N.B. The most permanent assets are the least liquid.

Assets and Liabilities in Order of Permanence and Liquidity : FIXED ASSETS

CURRENT ASSETS

Order of Permanence

Order of Liquidity

Order of Permanence

Order of Liquidity

Land Buildings Machinery Equipment Motor Vehicles

Motor Vehicles Equipment Machinery Buildings Land

Land Buildings Machinery Equipment Motor Vehicles

Motor Vehicles Equipment Machinery Buildings Land

LONG TERM LIAB. Order of Permanence Mortgage Bank Loan due in over a year

Order of Liquidity Bank Loan due in over a year Mortgage

CURRENT LIAB. Order of Permanence

Order of Liquidity

Creditors

Bank Overdraft

Bank Overdraft

Creditors

9

VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER Owner’s Name Balance Sheet as at _________ $

$

$

FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles

X X X X X

CURRENT ASSETS: Stock Debtors Bank * Cash Total Current Assets LESS: CURRENT LIABILITIES Bank Loan (1yr or less) Creditors Bank overdraft * Total Current Liabilities

X X X X X

X X X (X)

WORKING CAPITAL

X XX

FINANCED BY: CAPITAL: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital

X X OR (X) X (X) X

LONG-TERM LIABILITIES Mortgage Bank Loan (more than 1 year) Total Long Term Liabilities

X X X XX

10

Principles of s

ING CYCLE Ms Fergusson

11

ing Cycle The ing cycle is a series of steps for recording each transaction in the ing process, which are repeated every ing period.

NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the cycle is done at the end of a period.

Categories and Types of s Categories of s

Types of s

A

Assets

Personal s – Debtors and Creditors

L

Liabilities

Real s – Assets & Liabilities

I

Income / revenue

Nominal s – Revenue and Expenses

C

Capital

E

Expenses

12

Journals (Books of Original Entry) Transaction

Journal

ALL CASH / CHEQUE TRANSACTIONS Capital: investment by owner

Cash Book

Receipt from Loans and repayment of Loans

Cash Book

Purchase / Sale of Fixed Assets for cash or cheque

Cash Book

Purchase of Stock with cash or cheque (Cash Purchases)

Cash Book

Sale of Stock for cash or cheque (Cash Sales)

Cash Book

Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc.

Cash Book

Payment of creditors (suppliers) the amount owed to them

Cash Book

Receipt of income/revenue e.g. interest received, rent received, etc.

Cash Book

Receipt of cash/cheque from debtors (customers) the amount owed by them

Cash Book

Drawings: money withdrawn from business for personal use

Cash Book

Discounts Received and Discounts Allowed

Cash Book

CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS Purchase of Stock on credit (Credit Purchases) Sale of Stock on credit (Credit Sales) Sales Returns / Returns Inwards Purchases Returns / Returns Outwards Purchase / Sale of Fixed Assets on credit

Purchases Journal Sales Journal Ret. Inwards Journal Ret. Outwards Journal General Journal

TRANSACTIONS ENTERED IN THE GENERAL JOURNAL Transactions that are entered in the cash book are also entered in the GJ Capital: investment by owner

General Journal

Purchase / Sale of Fixed Assets for cash or cheque

General Journal

Payment of expenses e.g. rent, salaries, insurance, and... - Discounts Allowed - Carriage Inwards and Outwards Receipt of income/revenue e.g. interest received, rent received, and... - Discounts Received

General Journal General Journal General Journal General Journal General Journal

Payment of creditors (suppliers) the amount owed to them

General Journal

Drawings: money withdrawn from business for personal use

General Journal

Non Cash Transactions are entered in the GJ Adjusting Entries - Provision for Depreciation - Bad Debts written off - Provision for Bad Debts - Prepayments and Accruals

General Journal General Journal General Journal General Journal

OTHER ENTRIES OF THE BUSINESS Opening Entries (list of opening balances of assets, liabilities and capital a/cs)

General Journal

Correction of Errors

General Journal

Closing Entries (list of closing balances of assets, liabilities and capital a/cs)

General Journal

13

Name of the Business Sales Journal Date Year dt dt dt End of mth

Details

Invoice #

Debtor e.g. John Smith Debtor e.g. Jane Doe Debtor Transfer to Sales

Folio

Amount $

SL # SL SL GL

X X X XX

Folio

Amount $

PL # PL PL GL

X X X XX

Folio

Amount $

SL # SL GL

X X XX

Folio

Amount $

PL # PL GL

X X XX

Purchases Journal Date Year dt dt dt End of mth

Details

Invoice #

Creditor e.g. Will Browne Creditor e.g. Alice Williams Creditor Transfer to Purchases

Returns Inwards Journal Date Year dt dt End of mth

Details

Invoice #

Debtor e.g. John Smith Debtor e.g. Jane Doe Transfer to Returns inwards

Returns Outwards Journal Date Year dt dt End of mth

Details

Invoice #

Creditor e.g. Will Browne Creditor e.g. Alice Williams Transfer to Returns outwards

Cash Book Date

Details

Year dt dt dt dt dt dt *dt *dt

Balance b/d Capital Sales Debtor Interest received Loan Bank Cash

Folio

GL GL SL GL GL GL GL

Discount Allowed

Cash

Bank

Date

Details

$

$ X

$ X X

Year dt dt dt dt *dt *dt dt dt

Purchases Motor Vehicle Creditor Drawings Cash Bank Interest on Loan Balance c/d

X X X X X X

dt

Balance b/d

X

XX X

X XX X

Folio

Discount Received

Cash

Bank

$

$

$ X X X

GL GL PL GL GL GL GL

X X

X X X X XX

X XX

X

The Journal Date Year dt

Details debited e.g. Motor Vehicle credited e.g. Bank Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle

Folio GL GL

DR $ X

CR $ X

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TheJournal

The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.

Opening Journal (opening balances for assets, liabilities and capital s) At the beginning of an ing period, there is one journal entry which shows all the opening balance of assets, liabilities and capital called an opening journal entry. Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit balance, so these are credited in opening journal entry. Capital is credited.

It is based on ing equation The balances can be taken from the balance sheet of previous year. To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side.

The Journal Date Year dt

Details

Folio

Land and Buildings Plant and machinery Motor Vehicles Stock (Inventory) Debtors Bank Cash Mortgage Bank Loan Creditors Accrued Expenses Provision for Depreciation: Motor Vehicles To record assets, liabilities and capital of business at beginning of period

DR $ X X X X X X X

CR $

XX

XX

Folio

DR

CR $

GL GL

$ X

GL GL GL GL GL GL GL GL GL GL GL GL

X X X X X

Correction of errors, Adjusting entries, etc. The Journal Date Year dt

Details debited e.g. Motor Vehicle credited e.g. Bank Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle

X

15

Petty Cash Book  Receipts

Folio

$ X

Date

Details

2011 CB

Total

Motor Expenses

Travel Expenses

Postage

Cleaning

Sundry Expenses

Ledger Folio

Ledger s

$ 

$ 

$ 

$ 

$ 

$ 

 

$ 

PL

X

Jan 3

Cash

Jan 7 

Postage

X 

Jan 10 

Motor Exp.

X 

Jan 14 

R. King

X 

Jan 19 

Travel Exp.

X 

Jan 25 

Sundry exp.

X 

Jan 26 

Cleaning

X  X

Jan 31 X

Balance c/d

CB

X X X X X X

X

X

X

X

X

X X

X

Feb 1

Balance b/d

X

Feb 1

Cash

  Petty Cash Book  Receipts

Motor Expenses

Travel Expenses

Postage

Cleaning

Sundry Expenses

Ledger Folio

Ledger s

$ 

$ 

$ 

$ 

$ 

$ 

 

$ 

PL

X

Date

CB

Jan 3

Cash

Jan 7 

Postage

X 

Jan 10 

Motor Exp.

X 

Jan 14 

R. King

X 

Jan 19 

Travel Exp.

X 

Jan 25 

Sundry exp.

X 

Jan 26 

Cleaning

X 

$ X

Details

Total

Folio

2011

X X

CB

Jan 31

Cash

Jan 31

Balance c/d

XX X

X X X X X X

X

X XX

Feb 1

Balance b/d

 

X

X

X

X

16

Petty Cash Book  Receipts

Folio

$ 300

Date

Details

2011 CB

Total

Motor Expenses

Travel Expenses

Postage

Cleaning

Sundry Expenses

Ledger Folio

Ledger s

$ 

$ 

$ 

$ 

$ 

$ 

 

$ 

PL

30

Jan 3

Cash

Jan 7 

Postage

5 

Jan 10 

Motor Exp.

20 

Jan 14 

R. King

30 

Jan 19 

Travel Exp.

15 

Jan 25 

Sundry exp.

12 

Jan 26 

Cleaning

14  96

Jan 31

Balance c/d

300

20 15 12 14 20

15

5

14

12

30

204 300

204 96

5

CB

Feb 1

Balance b/d

Feb 1

Cash

  Petty Cash Book  Receipts

Motor Expenses

Travel Expenses

Postage

Cleaning

Sundry Expenses

Ledger Folio

Ledger s

$ 

$ 

$ 

$ 

$ 

$ 

 

$ 

PL

30

Date

CB

Jan 3

Cash

Jan 7 

Postage

5 

Jan 10 

Motor Exp.

20 

Jan 14 

R. King

30 

Jan 19 

Travel Exp.

15 

Jan 25 

Sundry exp.

12 

Jan 26 

Cleaning

14 

$ 300

Details

Total

Folio

2011

96 96 396 300

Jan 31

Cash

Jan 31

Balance c/d

CB

5 20 15 12 14 20

15

300 396

Feb 1

Balance b/d

 

5

14

12

30

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Ledgers (Double entry – T s) A T- is an individual record of business transactions that result in increases and decreases in the specific asset, liability, or capital item. An consists of three parts: - The Title/Name of the - The left side (known as debit / Dr) - The right side (known as credit / Cr)

Name of e.g. Capital Date

• •

Details

Folio

Dr$

Date

Details

Folio

Cr$

Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits. Debit and credit, therefore, indicate on which side of a T numbers will be recorded. For some types of s debit means an increase in the balance, while for others debit means a decrease in the balance, as seen below: Category of

Entry to Increase

Entry to Decrease

Debit Credit Credit Credit Debit

Credit Debit Debit Debit Credit

Assets Liabilities Income / revenue Capital Expenses

LEDGERS are books of final entry containing the T-s of the business in which transactions are posted in the form of debit and credits.

Ledgers

T-s

Sales Ledger

Debtor a/cs (personal s) e.g. John Smith

Purchases Ledger

Creditor a/cs (personal s) e.g. Alice Williams

General Ledger

Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc. Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received

Ledger

Debtor a/cs (personal s) e.g. John Smith

Sales Ledger

Creditor a/cs (personal s) e.g. Alice Williams

Purchases Ledger

Sales , Purchases, Returns Inwards, Returns Outwards a/cs

General Ledger

Fixed Asset a/cs (real s) e.g. Buildings, Motor Vehicles etc.

General Ledger

Cash and Bank separate a/cs

General Ledger

Liability a/cs e.g. Mortgage

General Ledger

Capital a/c and Drawings a/c

General Ledger

Revenue a/cs and Expense a/cs (nominal s) e.g. rent , salaries, etc

General Ledger

DOUBLE ENTRY requires that for each transaction, the amount entered into the ing records is entered in at least two different s, with one being debited and the other credited. All debit amounts equal all credit amounts provided the double-entry ing was properly followed.

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Ledgers (Double entry – T s) Name of the Business Sales Ledger Debtor a/c e.g John Smith Date Year dt

Details Sales

Folio

Dr$

SJ

X

Date Year dt dt dt

Details Returns Inwards Cash/Bank Discounts Allowed

Folio

Cr$

RIJ CB CB

X X X

Folio

Cr$

RIJ CB CB

X X X

Folio

Cr$

RIJ CB CB

X X X

Folio

Cr$

Debtor a/c e.g Jane Doe Date Year dt

Details Sales

Folio

Dr$

SJ

X

Date Year dt dt dt


Debtor a/c Date Year dt

Details Sales

Folio

Dr$

SJ

X

Date Year dt dt dt


Name of the Business Purchases Ledger Creditor a/c e.g Will Brown Date Year dt dt dt

Details Returns Outwards Cash/Bank Discounts Received

Folio

Dr$

ROJ CB CB

X X X

Date Year dt

Details Purchases

PJ

Creditor a/c e.g Alice Williams Date Year dt dt dt


Folio

Dr$

ROJ CB CB

X X X

Date Year dt

Details Purchases

Folio

Cr$

PJ

Creditor a/c Date Year dt dt dt


Folio

Dr$

ROJ CB CB

X X X

Date Year dt

Details Purchases

Folio PJ

Cr$

19

Name of the Business General Ledger Sales a/c Date

Details

Folio

Dr$

Date Year dt dt

Details

Folio

Cr$

CB

X

SJ

X

Details

Folio

Cr$

Details

Folio

Cr$

Details

Folio

Cr$

Total Return Outwards for the month

ROJ

X

Details

Folio

Cr$

Details

Folio

Cr$

CB

X

Folio

Cr$

CB

X

Details

Folio

Cr$

Details

Folio

Cr$

CB

X

Cash / Bank Total credit Sales for the month

Purchases a/c Date Year dt dt

Details

Folio

Dr$

Cash/Bank Total credit Purchases for the month

CB

X

PJ

X

Date

Returns Inwards a/c Date Year dt

Details Total Return Inwards for the month

Folio

Dr$

RIJ

X

Date

Returns Outwards a/c Date

Details

Folio

Dr$

Date Year dt

Motor Vehicles a/c Date Year dt

Details Bank

Folio

Dr$

CB

X

Folio

Dr$

Date

Capital a/c Date

Details

Date Year dt

Bank

Bank Loan a/c Date

Details

Folio

Dr$

Date Year dt

Details Bank

Rent a/c Date Year dt

Details Cash / Bank

Folio

Dr$

CB

X

Date

Commissions received a/c Date

Details

Folio

Dr$

Date Year dt

Cash / Bank

20

Balancing off Personal and Real s An balance is the difference between the debit and credit amounts. Bank Date 2010 March 1 March 13 March 25

Details Balance b/d Sales Loan

Folio

Dr$

CB GJ

12 500 2 000 1 000

Date 2010 March 14 March 20 March 27 March 28

Details Purchases Equipment Drawings Rent

Folio CB GJ GJ GJ

Cr$ 1 300 1 000 200 2 000

Simple steps: 1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below: Bank Date 2010 March 1 March 13 March 25


Folio

Dr$

CB GJ

12 500 2 000 1 000



Folio CB GJ GJ GJ

Cr$ 1 300 1 000 200 2 000

2. Total the side with the larger amount and enter the amount in both total boxes, as seen below: Bank Date 2010 March 1 March 13 March 25


Folio

Dr$

CB GJ

12 500 2 000 1 000



Folio CB GJ GJ GJ

15 500

Cr$ 1 300 1 000 200 2 000 15 500

3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the difference between the debit and credit amounts ( balance), as seen below: 4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the balance. Bank Date 2010 March 1 March 13 March 25


Folio

Dr$

CB GJ

12 500 2 000 1 000 15 500

April 1

Balance b/d

Date 2010 March 14 March 20 March 27 March 28 March 31

Details Purchases Equipment Drawings Rent Balance c/d

Folio

Cr$

CB GJ GJ GJ

1 300 1 000 200 2 000 10 000 15 500

10 000

5. balances are entered in the Balance Sheet to show the financial position of the business.

21

Closing off Nominal s Nominal s are temporary s, which are closed off at the end of a period. The steps are the same as Real and Personal s, except that Nominal a/c balances are NOT carried forward to following period but are transferred to the Trading a/c or the Profit & Loss a/c as follows: Nominal

Transfer to:

Sales Purchases Returns Inwards / Outwards Expenses Revenue

Trading a/c Trading a/c Trading a/c Profit & Loss a/c Profit & Loss a/c

Name of Business The Journal Date 2010 March 31 March 31 March 31 March 31

Details

Folio

Sales Trading a/c

DR $ X

CR $ X

Trading a/c Purchases a/c

X

Profit and Loss a/c Expense a/c e.g. Rent

X

Revenue a/c e.g. Commissions Received Profit and Loss a/c

X

X X X

Sales a/c Date 2010

Details

Folio

March 31 Transfer to Trading a/c

GJ

Dr$

Date 2010 March 13 March 31

24 000

Details Bank Total Credit Sales for the month of March

Folio

Cr$

CB

2 000

SJ

22 000

24 000

24 000

Purchases a/c Date 2010 March 14 March 31

Details

Folio

Dr$

Bank Total Credit Purchases for the month of March

CB

1 300

PJ

22 000

Date 2010

Details

Folio

Cr$

March 31

Transfer to Trading a/c

GJ

24 000

24 000

24 000

Expense a/c e.g. Rent a/c Date 2010 March 14 March 25

Details

Folio

Bank Cash

CB CB

Dr$ 300 600 900

Date 2010

Details

Folio

March 31

Transfer to P&L a/c

GJ

Cr$ 900 900

Revenue a/c e.g. Commissions Received Date 2010 March 31

Details

Folio

Transfer to P&L a/c

GJ

Dr$ 1 000 1 000

Date 2010 March 13

Details Bank

Folio CB

Cr$ 1 000 1 000

22

Trial Balance The Trial Balance is a list of all the debit and credit balances for a period.

Type of

Balance in Trial Balance

Personal and Real s Nominal s

Balance c/d Transfer to Trading or P&L a/c

The balances for a period are entered in the Trial Balance as follows:

Category of

Balances

Assets Liabilities Income / revenue Capital Expenses

Debit Credit Credit Credit Debit

Trial Balance as at ___________________ Dr $ Asset s Liability s Income s Capital Expense s

Cr $

X X X X X XX

XX

Trial Balance as at ___________________ Dr Cr $ $ Cash Bank * Stock (Opening Stock) Bank Loan Debtors Creditors Sales Purchases Returns Inwards Returns Outwards Rent Carriage Inwards Carriage Outwards Commissions received Wages and Salaries Interest Received Discounts Allowed Discounts Received Interest on Loan Motor Vehicles Equipment Bank Overdraft * Capital Drawings

X X X X X X X X X X X X X X X X X X X X X X X X XX

XX

All debit amounts equal all credit amounts provided the double-entry ing was properly followed.

23

Correction of Errors Types of errors There are two main classifications: Errors NOT affecting / revealed by the Trial Balance 1. 2.

Errors of Commission (correct amount, wrong personal ) Errors of Principle (correct amount, wrong type / category of )

3.

Errors of Original entry (incorrect amount entered in the journal / book of original entry)

4. 5.

Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger s cancelling out error)

6.

Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c

Errors affecting / revealed by the Trial Balance Errors of transposition in half of the double entry (resulting in overstatement or understatement of amts). Errors caused by entries on the wrong side of one half of the double entry. Errors caused by the omission of one half of the double entry. Errors of calculation (miscalculation of the balances) Errors made in the Trial Balance.

• • • • •

Suspense (Errors affecting / revealed by the Trial Balance) A temporary called a suspense has to be opened in the general ledger with the difference to make the Trial Balance totals agree with each other. It is opened with a balance, on the side of the a/c that the Trial Balance is less, as seen below: General Ledger Suspense Date

Details

Dr$

Difference in trial balance (DR side of TB less)

 

Date

X

Details

Cr$

Difference in trial balance (CR side of TB less)

X

A credit balance in the Suspense is a Current Liability in the Balance Sheet. A debit balance in the suspense is a Current Asset in the Balance Sheet.

N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to the ledger s affected by the error, including the suspense .

The Statement of Corrected Net Profit Name of business st

Statement of corrected Net Profit for the year ended 31 March 2007 $ Net Profit per s Add: Expenses amount overstated Income / Revenue amount understated / omitted

$ X

X X X

Less: Income / Revenue amount overstated Expenses amount understated / omitted

X X (X)

Corrected Net Profit for the year

XX

24

Adjusting Entries Adjusting entries are entries made at the end of an ing period to allocate revenue and expenses to the period in which they belong, as required by the Matching / Accruals Concept. Expenses to be transferred to the Profit and Loss is the expenses incurred in the period, whether they have been paid or not. Revenue to be transferred to the Profit and Loss is the revenue earned in the period, whether it has been received or not. TYPES OF ADJUSTING ENTRIES: 1. 2. 3. 4.

Accruals – Accrued Expenses and Accrued Revenue Prepayments – Prepaid Expenses and Prepaid Revenue Provision for Depreciation Bad Debts and Provision for Bad Debts

Accruals and Prepayments 1.

Accruals and Prepayments adjust revenue and expense amounts in the Trial Balance as follows: Notes to s

EXPENSES

Trial balance

Expense Transferred to P&L a/c

=

Expense paid

+ Accrued Expense

Expense Transferred to P&L a/c

=

Expense paid

- Prepaid Expense

REVENUE

Profit and Loss Amount

Revenue Transferred to P&L a/c

=

Revenue received

+ Accrued Expense

Revenue Transferred to P&L a/c

=

Revenue received

- Prepaid Expense

ADD ACCRUALS LESS PREPAYMENTS

2.

Accruals and Prepayments are included in the Balance Sheet as follows: CURRENT ASSETS

CURRENT LIABILITIES

Prepaid Expenses

Accrued Expenses

Accrued Revenue

Prepaid Revenue

Bad Debts Profit and Loss a/c

Expense (amount written off)

Provision for Bad Debts Profit and Loss a/c

Increase in Provision for Bad Debts (Expense) Decrease in Provision for Bad Debts (Revenue)

Balance Sheet

Total Provision for Bad Debts (Current Assets: Debtors less Provision)

Depreciation Profit and Loss a/c

Annual Depreciation (Expense)

Balance Sheet

Accumulated Depreciation (Fixed Assets less Depreciation)

25

A djusting Entries: Journal entries ACCRUALS AND PREPAYMENTS

Expenses (Rent, Salaries, Insurance, etc.) The Journal Date Year dt

End of yr

End of yr

End of yr

Details

Folio

DR $ X

Expense a/c Cash / Bank a/c To record payment of expense during the year

GL CB

Expense a/c Accrued Expense a/c To record expense incurred but still owing at the end of period

GL GL

X

Prepaid Expense a/c Expense a/c To record expense not incurred but paid in advance

GL GL

X

Profit & Loss a/c Expense a/c To close off Expense a/c and transfer to Profit & Loss a/c

CR $ X

X

X

X GL

X

Revenue (Interest received, commissions received, rent received, etc.) The Journal Date Year dt

End of yr

End of yr

End of yr

Details

Folio

DR $ X

Cash / Bank a/c Revenue a/c To record revenue received during the year

CB GL

Accrued Revenue a/c Revenue a/c To record revenue earned but still owing at the end of period

GL GL

X

Revenue a/c Prepaid Revenue a/c To record revenue not earned but received in advance

GL GL

X

Revenue a/c Profit & Loss a/c To close off Revenue a/c and transfer to Profit & Loss a/c

GL

X

CR $ X

X

X

X

NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue s are not opened for CSEC. The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the Balance sheet as Current assets or Current liabilities.

26

A djusting Entries: Journal entries Bad Debts and Provision for Bad Debts The Journal Date Year dt

End of yr

End of yr

End of yr

End of yr

Details

Folio

Bad Debts a/c Debtors a/c To write off Bad debts and reduce Debtor amount Profit & Loss a/c Bad Debts a/c To close off Bad Debts a/c and transfer to Profit & Loss a/c Profit & Loss a/c Provision for Bad Debts a/c To create a Provision for Bad debts a/c and transfer to P& L a/c as an expense. Profit & Loss a/c Provision for Bad Debts a/c To transfer an increase in Provision for Bad debts to P& L a/c as an expense. Provision for Bad Debts a/c Profit and Loss a/c To transfer a decrease in Provision for Bad debts to P& L a/c as revenue.

GL SL

DR $ X

CR $ X

X GL

X

X GL

X

X GL

X

X GL

X

NB. Bad Debts is treated as an expense . It is, therefore, debited when a debt is written off. At the end of the period, the amount of Bad Debts is transferred to the P & L like all expenses. Bad Debts is NOT recorded in the Balance Sheet. Provision for Bad Debts is a contra asset as it reduces Debtors in the Balance Sheet. It, therefore, has a credit balance. Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated as expenses in the P&L a/c while decreases are revenue in the P&L a/c. Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.

Depreciation The Journal Date Year End of yr

Details Profit & Loss a/c Provision for Depreciation a/c To transfer annual depreciation to P& L a/c as an expense.

Folio

GL

DR $ X

CR $ X

NB. Provision for Depreciation is a contra asset as it reduces the value of Fixed Assets in the Balance Sheet. It, therefore, has a credit balance. Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense. Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset to record the Net Book Value of the Asset.

CONTRA ASSET s have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.

27

A djusting Entries: Ledger entries Accruals and Prepayments Expense a/c e.g. Rent a/c Date

Details

Folio

Dr$

CB

X X

Year Opening dt

Prepaid Expense b/d Cash / Bank

Closing

Accrued Expense c/d

X

Prepaid Expense b/d

XX X

Opening

Date Year Opening

Details

Folio

Cr$

GJ

X X

End of yr

Accrued Expense b/d Transfer to P & L a/c

Closing

Prepaid Expense c/d

X

Accrued Expense b/d

XX X

Opening

Revenue a/c e.g. Commissions Received a/c Date Year Opening

Details

Folio

Dr$

Date

X X

Year Opening dt

Prepaid Revenue b/d Cash / Bank

Closing

Accrued Revenue c/d

X

Accrued Revenue b/d

XX X

End of yr

Accrued Revenue b/d Transfer to P & L a/c

Closing

Prepaid Revenue c/d

X

Prepaid Revenue b/d

XX X

Opening

GJ

Opening

Details

Folio

Cr$

CB

X X

Bad Debts Bad Debts a/c Date

Details

Folio

Dr$

Year Dt

Date

Details

Folio

Cr$

Year Debtor

X

End of yr

Transfer to P & L a/c (expense)

X

XX

XX

Provision for Bad Debts Provision for Bad Debts a/c Date

Details

Folio

Dr$

Date

X

End of yr

P & L a/c

Beginning

Year End of yr

Details

Folio

Cr$

Year Balance c/d

End of yr

Balance c/d

End of yr

P & L a/c

End of yr

Balance c/d

(revenue)

(expense)

X XX

End of yr

Balance b/d P & L a/c (expense)

X

Beginning

Balance b/d

Beginning

Balance b/d

X X X XX X

X XX

XX X

Depreciation Provision for Depreciation Date

Details

Folio

Dr$

Date

X

End of yr

P & L a/c

Beginning

X X XX X

Year End of yr

Details

Folio

Cr$

Year Balance c/d

(expense)

End of yr

Balance c/d

X XX

End of yr

Balance b/d P & L a/c

End of yr

Balance c/d

X

Beginning

Balance b/d

X

28

Final A ccounts: Income Statement

Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________ $

$

Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for sale Less: Closing Stock

X X X (X) X X X X (X)

Cost of Goods Sold

(X)

GROSS PROFIT (or GROSS LOSS) **Add: Rent Received Interest received Discount received Decrease in Provision for bad debts

$ X (X)

X or (X) X X X X X

**Less: Expenses Wages/salaries Utilities Increase in provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount allowed

X X X X X X X

Total expenses NET PROFIT (or NET LOSS)

(X) X or (X)

**These are a few examples, however the list can be exhaustive in reality

NB. This is an Income Statement for a sole trader. For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out the net profit amongst the owners and calculate profit retained in business. For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit and Loss a/c.

29

Final A ccounts: Balance Sheet

Owner’s Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles

COST $ X X X X X

ACC DEP. $ (X) (X) (X) (X) (X)

NBV $ X X X X X

CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank Cash Total Current Assets

X X (X) X X X X X X

LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities WORKING CAPITAL

X X X X (X) X XX

FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital

X X OR (X) X (X) X

LONG-TERM LIABILITIES Mortgage Bank Loan

X X X XX

NB. This is a Classified Balance Sheet for a sole trader. For other types of businesses there may be other items like proposed dividends, current a/c (partnership) etc.

30

Principles of s

CONTROL SYSTEMS Ms Fergusson

31

St. Mary’s College Principles of s

Control Systems Control Systems are the procedures designed and established to check, record, regulate, supervise, and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be accurate, by reducing the incidence of unintentional errors and intentional irregularities. The need for Control Systems in ing. -

Control systems are needed to protect the organization’s assets and ensure the preparation of reliable and timely financial statements.

THE THREE COMMON CONTROL SYSTEMS ARE: 1. Bank Reconciliation Statements 2. Control s 3. Suspense s  

Bank Reconciliation Statement A Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances in the bank column of the cash book and the bank statement on any given date.

 

Control s Control s are general ledger s whose balances reflects the total of balances of related subsidiary ledger s. Debtors /s Receivable and Creditors / s Payable are the most commonly used control s, and their balances serve as a crosscheck (control) of the accuracy of the associated subsidiary records (personal s).

Suspense s A suspense is an in the general ledger in which amounts are temporarily recorded until the correct entry could be determined. When the proper / amount is determined, the amount will be moved from the suspense acc. Suspense s are used when ing for errors to ‘balance” the trial balances until the bookkeeper finds the errors and finishes recording the transactions.

 

   

 

32

St. Mary’s College Lesson Notes

Bank Reconciliation Statement : SET INDUCTION: The Cash Book and the Bank Statement

BANK

BUSINESS

Cash Book

BANK

The business records all the bank ’s cheque and cash transactions in the Cash Book.

Bank Statement

The bank records all the bank ’s cheque and cash transactions in a Bank Statement, which is sent to the business periodically.

The Cash Book: • •

The Cash Book is the business’ record of the business’ bank . It consists of information regarding the bank ’s cash and cheque receipts and payments and the balance at the end of the period, as prepared by the business.

The Bank Statement • • •

The Bank Statement is the bank’s record of the business’ bank . It is a summary that consists of information regarding the bank ’s cash and cheque receipts and payments and the balance at the end of the period, as prepared by the bank. A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.

Main ing difference between the Cash Book and the Bank Statement: Receipts / Deposits

Payments / Withdrawals

CASH BOOK – business’ record

DR

CR

BANK STATEMENT – bank’s record

CR

DR


33

Differences / Discrepancies between the Cash Book balance and the Bank Statement balance at the end of a specific period. • •

There are usually timing differences between when the transaction information is recorded / entered in the banks systems and when it is recorded in the business’ cash book. Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) balance and the bank statement balance at the end of the specific period.

Reasons for the differences between the Cash Book balance and the Bank Statement balance:  Entries recorded in the Bank Statement but not in the Cash Book •

Direct Deposits - Dividends received - Credit transfers – receipts from debtors made into the bank directly through the bank.

•

Standing Orders and Direct Payments - These are payments made by the bank from the bank on behalf of the business - E.g. Insurance payments

•

Bank Charges (service charges on the bank taken directly from the by the bank)

•

Interest Received (interest on the bank deposited directly into the by the bank)

•

Dishonoured / Returned cheques - bounced cheques that were deposited and have been returned to the bank as dishonored. - The business was not notified as yet because it takes a few days (timing difference)

 Entries recorded in the Cash Book but not in the Bank Statement These occur because of a time lag between the recording of the receipt or payment in the cash book and the recording in the bank: •

Unpresented / Outstanding Cheques - These are cheques issued by the business as payment to persons / businesses that have not been presented to the bank for payment yet. NB The payee has 6 months to present / “cash” a cheque. - The business has it recorded in the cash book as a payment made but the bank has not because they have not “cashed” the cheque as yet.

•

Unrecorded deposits - These are mainly cheque deposits to be made in the bank that have been recorded in the cash book but not by the bank as they have not received the deposits as yet. - The business records the cheques as having been received / deposited on one day, while the bank records the deposit on another day when the cheques are brought in from the business.

 Errors in the Cash Book and in the Bank Statement The most common types of errors are the overstatements and the understatements of receipts and payments due to errors in the amounts and receipts being entered as payments and vice versa.

34


Bank Reconciliation : It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that both are correct.

Bank reconciliation is the process of comparing and matching figures from the cash book against those shown on a bank statement: • to locate the reasons for the discrepancies, • adjust cash book with those items which must be included and • clarify and any remaining difference between adjusted cash book balance and bank statement balance.

The Steps of Bank Reconciliation: 1. Compare the Bank Statement and the Bank column of the Cash Book. Check for: -

Entries made in the Bank Statement but not the Cash Book. Entries made in the Cash Book but not the Bank Statement. Incorrect amounts. Entries made on the incorrect side of the Cash Book.

2. Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB. -

Start with the Cash Book balance at the end of the period / month in question. Enter all the items that appear in the Bank Statement but not the Cash Book e.g. Bank Charges, Int. Rec… Correct any errors made in the Cash Book. Balance / Close off the Revised cash Book.

Revised Cash Book (Bank Column) Date

Details

Dr$

Balance b/d Interest received Credit Transfer (debtor personal a/c) Other Receipts not entered in CB Receipts understated Payments overstated

X X X X X X

Date

Details

Cr$

Bank Charges Standing Order e.g. Insurance Dishonoured chqs (debtor personal a/c) Other Payments not entered in CB Receipts overstated Payments understated Balance c/d

XX Balance b/d

X X X X X X X XX

X

3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in the Bank Statement. There are two methods: - Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.

Bank Reconciliation Statement Revised Cash Book Balance Add: Unpresented cheques Less: Unrecorded deposits Bank Statement Balance

$ X X X (X) XX

- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.

Bank Reconciliation Statement Bank Statement Balance Add: Unrecorded deposits Less: Unpresented cheques Revised Cash Book Balance

- For both methods, correct errors by adding or subtracting amounts.

$ X X X (X) XX

35


Control s A control is a summary in the general ledger that shows the totals of transaction amounts entered in a subsidiary ledger such as sales or purchases ledger during the month. Its balance reflects the aggregate balance of the related subsidiary ledger s and is, therefore, used to control the subsidiary ledgers and that entries have been made. They provide totals of debtors and creditors quickly when a trial balance is being prepared. Control s are an important system of control on the reliability of ledger s. They indicate that errors may have occurred in the ledgers they control. Ledger

s

Control

Sales Ledger

debtors’ personal s

Sales Ledger Control (totals of items in the sales ledger)

Purchases Ledger

creditors’ personal s

Purchases Ledger Control (totals of items in the purchases ledger)

The purpose of Control s The reasons for having control s are as follows: 1. To check on the accuracy They provide a check on the accuracy of entries made in the personal s in the sales ledger and purchase ledger. It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make. - Figures might get transposed while some entries might be omitted altogether, so that an invoice or a payment transaction does not appear in a personal as it should. It is possible to identify the fact that errors have been made by comparing: • The total balance on the debtors with the total of individual balances on the personal s in the sales ledger. • The total balance on the creditors with the total of individual balances on the personal s in the purchase ledger. 2. To locate errors By using the control , a comparison with the individual balances in the sales or purchase ledger can be made for every week or day of the month, and the error found much more quickly than if s did not exist. 3. To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet. A single balance on a control is obviously simpler and quicker than many individual balances in the sales or purchase ledger. This means also that the number of s in the double entry bookkeeping system can be kept down to a manageable size.

36


CONTROL S Ledger

s

Control

Sales Ledger

debtors’ personal s

Sales Ledger Control (totals of items in the sales ledger)

Purchases Ledger

creditors’ personal s

Purchases Ledger Control (totals of items in the purchases ledger)

The Sales Ledger Control The sales ledger control is also known as the Debtors Control and the Total Debtors . It comprises the totals of all s of a similar nature related to debtors. All items that appear in a debtor’s are also recorded in the debtors control . The total of each type of transaction related to debtors is entered on the relevant side of the control . Items / types of transactions related to debtors include: • • • • • • • •

Total opening balances of all debtors for the period Total credit sales for the period Total sales returns for the period Total cash received and cheques received from debtors for the period. Total Discounts Allowed for the period Total Bad Debts written off for the period Dishonoured / Returned cheques from debtors for the period Total closing balances of all debtors for the period

The Purchases Ledger Control The purchases ledger control is also known as the Creditors Control and the Total Creditors . It comprises the totals of all s of a similar nature related to creditors. All items that appear in a creditor’s are also recorded in the Creditors Control . The total of each type of transaction related to creditors is entered on the relevant side of the control . Items / Types of transactions related to creditors include: • • • • • •

Total Opening balances of all creditors for the period Total Credit Purchases for the period Total Purchases Returns for the period Cash payments and cheque payments to creditors for the period Total Discounts received for the period Total closing balances of all creditors for the period

Contra entries (appear in both Control s) A contra entry is an item that offsets, cancels or partially reduces another item. There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate s are kept to record the relevant transactions. Instead of making a payment by cheque for the full amount owed to him as a creditor, his s can be settled by “setting off” the amount owed to him by the company and the amount owed by him to the company. A contra entry which is recorded in the personal s in the Sales and Purchases Ledger needs to be reflected in both Control s to ensure that they balance with the sum of the balances in the ledger s. The amount that is set off in the s would be the smaller amount.

37 CONTROL S - FORMAT

Items Opening and Closing Balances:

Source

Notes

Sales Ledger Control

Sales Ledger

A credit balance may be caused by overpayment or return of goods already paid for by debtor. Credit balances must NOT be deducted from debit balances, but shown separately on the credit side of the control .

Purchases Ledger Control

Purchases Ledger

A debit balance may be caused by overpayment or return of goods already paid for to creditor. Debit balances must NOT be deducted from credit balances, but shown separately on the debit side of the control .

Credit Sales Credit Purchases

Sales Journal Purchases Journal

Discounts Allowed / Discounts Received

Cash Book

Sales Returns Purchases returns

Sales Returns Journal Purchases Returns Journal

Cash / Cheque received and paid

Cash Book

Bad Debts written off

General Journal

Refunds from suppliers / to customers Dishonoured cheques

Cash Book Cash Book

Contra Entries

General Journal

A Contra Entry in a control is when the smaller amount is offset against the larger amount.

The Sales Ledger Control Date Details

Dr$ Date

Cr$

Balance b/d (total debtors’ debit bals from previous period)

X

Balance b/d (if any) (total debtors’ credit bals from previous period)

X

Credit Sales

X

Sales Returns

X

Refunds to debtors/customers Dishonoured cheques

X X

Cash/Cheques received from debtors Discount allowed

X X

Interest on overdue s

Bad Debts written off

X X

Balance c/d (if any)

Contra Entries / set offs Balance c/d

X

Balance b/d

X

Balance b/d (if any)

The Purchases Ledger Control Date Details

Dr$ Date

Cr$

Balance b/d (if any) (total creditors’ debit bals from previous period)

X

Balance b/d (total creditors’ credit bals from previous period)

X

Purchases Returns

X

Credit purchases

X

Cash/Cheques paid to creditors/suppliers Discount received

X X

Refunds from suppliers/creditors

X X

Contra Entries / set offs

X

Balance c/d (if any)

Balance c/d

X

Balance b/d (if any)

X Balance b/d

St. Mary’s College

Principles of s

Suspense s and Correction of Errors TYPES OF ERRORS There are two main classifications of errors: 1. Errors that affect the Trial Balance (errors revealed by the Trial Balance) 2. Errors that DO NOT affect the Trial balance (errors not revealed by the Trial Balance)

Errors that affect the Trial balance Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These include: • Errors of transposition in half of the double entry (resulting in overstatement or understatement of amounts). • Errors caused by entries on the wrong side of one half of the double entry. • Errors caused by the omission of one half of the double entry. • Errors of calculation (miscalculation of the balances) • Errors made in the Trial Balance. Examples: A cash payment of $450 is entered in the Cash Book as $540. This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB. (A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)

Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales as a Debit. This would result in the Trial balance Debit balance being more by $2000!!!!!

Errors that do not affect the Trial Balance • Errors of Commission (correct amount, wrong personal ) • • • • •

Errors of Principle (correct amount, wrong type / category of ) Errors of Original entry (incorrect amount entered in the journal / book of original entry) Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger s cancelling out error) Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c Examples: Errors of Commission (correct amount, wrong personal ) e.g. Goods sold to M. Smith on credit is entered in N. Smith’s in error. Errors of Principle (correct amount, wrong type / category of ) e.g. Motor expenses ( expense) were entered in the Motor vehicles’ (asset) in error. Errors of Original Entry (incorrect amount entered in the journal / book of original entry) e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error. As a result, the incorrect amount of $457 was posted to the ledger s: T. Tall and Purchases. Errors of Omission (no entry made in the books for transaction) e.g. Rent received of $1200 was never entered in the cash book, and therefore the s. Compensating Errors (incorrect amounts entered in each ledger (double entry), cancelling out error) e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger s as $300 (DR: J. Bond CR: Sales). Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each ) e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent

N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the ledger s affected by the error.

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Errors that do NOT affect the Trial Balance There are certain errors that are not revealed by the Trial Balance, as the debit and credit totals are not affected by the error so they are equal. These errors are:

 • • • • • •

Errors of Commission (correct amount, wrong personal ) Errors of Principle (correct amount, wrong type / category of ) Errors of Original entry (incorrect amount entered in the journal / book of original entry) Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger s cancelling out error) Errors of Complete reversal of entries (correct amts entered in the wrong sides (DR/CR) of each a/c



When these errors are discovered, correcting the errors require double entry journal entries which will

be posted to the s affected by errors.

  Correction of Errors NOT affecting the Trial Balance  Errors of Commission (correct amount, wrong personal ) Correcting the error requires journal entries to be posted to: • •

The incorrectly posted to - DR if the was credited / CR if the was debited The correct – post to the correct

Errors of Principle (correct amount, wrong type / category of ) Correcting the error requires journal entries to be posted to: • •

The incorrectly posted to - DR if the was credited / CR if the was debited The correct – post to the correct

Errors of Original Entry (incorrect amount entered in the journal / book of original entry) 1. 2. 3.

Identify whether the correct incorrect amount entered was overstated or understated. Calculate the amount by which the entry was understated or overstated i.e. the difference. Prepare the journal entry to correct the error: If the amount was understated: DR: the debited CR: the credited With the difference calculated to increase the amount to the correct amount If the amount was overstated: DR: the credited CR: the debited With the difference calculated to decrease the amount to the correct amount

Errors of Omission (no entry made in the books for transaction) Correcting the error requires journal entries to be posted to the relevant s in the double entry. Compensating Errors (incorrect amounts entered in each ledger (double entry), cancelling out error) Correcting these errors require the same steps as correcting Errors of Original entry. Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each ) The journal entry to correct the error: DR: the credited CR: the debited With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)

  NB. There must be a double entry to correct the errors. 

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Errors that affect the Trial Balance 

When the Trial Balance totals are not equal, the errors affecting the Trial Balance may not immediately be found and corrected.



A temporary called a suspense has to be opened in the general ledger with the difference to make the Trial Balance totals agree with each other.



A suspense should only be opened when all attempts to find the error(s) have been unsuccessful and the final s are needed urgently.

Suspense A Suspense is a temporary ‘holding’ in the General ledger that is opened to place the difference in the trial balance to make it balance when the causes of the difference cannot immediately be found and corrected. How to open a Suspense A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less.   The Suspense will, therefore, have a credit balance when the credit total in the Trial Balance is less and a debit balance when the debit total is less. General Ledger Suspense Date

Details Difference in trial balance (DR side of TB less)

Date

Details

Dr$ X

Date

Details

Cr$

Details

Cr$

Suspense Dr$

Date

Difference in trial balance (CR side of TB less)

X

Example: S. James st Trial Balance as at 31 December 2009 DR $ 100 000

Totals (sum of all balances)

CR $ 99 960

Suspense a/c

40 100 000

100 000

Suspense Date

Details

Dr$

Date 31 Dec

Details Difference in Trial Balance

The Suspense and the Balance Sheet

 A credit balance in the Suspense  is a Current Liability in the Balance Sheet.   A debit balance in the suspense  is a Current Asset in the Balance Sheet. 

Cr$ 40


Correction of Errors and the Suspense When the errors are discovered after a Suspense a/c has been opened, the errors have to be corrected by moving the amount from the suspense  to the proper .



Correcting the errors require double entry journal entries which will be posted to: 1. The Suspense 2. The other (s) affected by the error N.B. To correct the error, there MUST be an entry in the suspense to cancel the amount entered. Examples: A Creditor for $95 was posted as $68 in the personal a/c. The credit side would have been less by $27 so the Suspense would have been credited. Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR: Creditor’s personal a/c $27 Discounts Received $70 had been posted to the Purchases ledger but NOT to the Discounts Received. The credit side would have been less by $90 so the Suspense would have been credited. The journal entry to correct the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70 Rent expense of $200 was recorded twice on the same side of the cash , but entered correctly in the Rent expense a/c The credit side would have been more (debit side less) by $200 so the Suspense would have been debited. The journal entry to correct the error is: DR: Cash a/c $200 CR: Suspense a/c $200 A cheque for $225 received from Jays Co had been posted to the debit side of their . As the entry was made on the wrong side of the , the credit side would have been less (debit side more) by $248, so the Suspense would have been credited with $450. The journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450

Some errors do not affect the double entry and would, therefore, be corrected with a single entry in the Suspense . These errors include: - balance entered incorrectly in the Trial Balance e.g. $248 entered as $284 - balance placed on the wrong side in the Trial balance (double the amount)



Examples: The total of the Sales a/c of $1500 had been omitted from the Trial Balance. The credit side of the TB would have been less by $1500 so the Suspense would have been credited. Therefore, the journal entry to correct the error: DR: Suspense a/c $1500 The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200. The debit side of the TB would have been less by $200 so the Suspense would have been debited. The journal entry to correct the error: CR: Suspense a/c $200 Discount received of $67 was entered as $76 in the Trial Balance. The credit side of the TB would have been more (debit side less) by $9 so the Suspense would have been debited. The journal entry to correct the error: CR: Suspense a/c $200 The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance. As the entry was made on the wrong side of the , the credit side would have been less by $3000 so the Suspense would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500

N.B. THE BALANCE IN THE SUSPENSE  MAY BE CAUSED BY MORE THAN ONE ERROR    • •

Enter each journal entry to correct the error separately. Post each entry to the Suspense and close off.

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The Statement of Corrected Net Profit 



Errors affect the calculation of the Net Profit if the errors affect any of the components of the Trading and Profit and Loss . •

Income and Net Profit have a direct relationship: - When an error results in Income being overstated, Net profit is also overstated. - When an error results in Income being understated, net profit is also understated.

•

Expenses and Net Profit have an inverse relationship: - When an error results in Expenses being overstated, net profit is understated. - When an error results in Expenses being understated, net profit is overstated.

To correct Net Profit, amounts resulting in Net profit being understated have to be added, and amounts resulting in Net Profit being overstated have to be lessened. This is done using a “Statement of Corrected Net Profit”.

  Name of business st

Statement of corrected Net Profit for the year ended 31 March 2007 $

$ X

Net Profit per s Add: Expenses amount overstated Income / Revenue amount understated / omitted

X X X

Less: Income / Revenue amount overstated Expenses amount understated / omitted

X X (X)

Corrected Net Profit for the year

XX

      Example:  •

th

On January 17 2010, an error was found where an invoice of $100 had been credited to the supplier’s a/c but had not been debited to the purchases . If Purchases was understated, then Net Profit was overstated and has to be corrected as follows: st

Statement of Corrected Net profit for the year ended 31 December 2009 Net Profit per s Less: Purchases undercast Corrected Net Profit for the year

 

$

$ 2 120 (100) 2020

43

Principles of s

FINAL S Ms Fergusson

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VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER

Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________ $

$

Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Add: Carriage Inwards Less: Purchases Returns Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) **Add: REVENUE Interest received Rent Received Discount received Decrease in Provision for bad debts

X X X X (X) X X (X) (X) X or (X) X X X X X X

Total Revenue **Less: EXPENSES Wages/salaries Utilities Increase in provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount allowed Total expenses NET PROFIT (or NET LOSS)

$ X (X) X

X X X X X X X (X) X or (X)

**These are a few examples, however the list can be exhaustive in reality

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VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER Owner’s Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank * Cash Total Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft * Total Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank Loan Total Long Term Liabilities

COST $ X X X X X

ACC DEP. $ (X) (X) (X) (X) (X)

NBV $ X X X X X

X X (X) X X X X X X

X X X X (X) X XX X X OR (X) X (X) X

X X X XX

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP Partnership Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $

$

Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Add: Carriage In Less: Purchases Returns Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS)

$ X (X) X

X X X X (X) X X (X) (X) X / (X)

Add: Revenue Rent Received; Discount Rec. etc Decrease in Provision for bad debts

X X

Less: Expenses Carriage Outwards; Discount allowed etc. Wages/salaries etc Increase in Provision for Bad Debts Depreciation

X X X X

X

(X) NET PROFIT (or NET LOSS) Add: Interest on drawings Partner 1 Partner 2

X / (X) X X X

Less: Interest on Capital Partner 1 Partner 2 Salary: Partner 1

X X X X (X) XX

Share in Profits: Partner 1 Partner 2

X X XX

* The last section (starting from Net Profit) is called the Approriation A/C

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TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS Interest on Capital is based on number of months the capital was in use. Capital in use: Date of capital investment to Year end e.g. Capital $5000 on June 1 to Dec 31 (year end) = 7 months Interest on capital (10%): Partner 1: ($5000 x 10%) x 7/12mths

Interest on Drawings is based on number of months the drawings was in use. Drawings in use: Date of drawings to Year end e.g. Drawings $300 on April 1 to Dec 31 (year end) = 9 months Interest on drawings (5%): Partner 1: ($300 x 5%) x 9/12mths

PROFIT SHARING Profits or Losses may be shared according to a stated Profit Sharing ration or in proportion to Partners’ Capital (Partnership Deed). If it is not stated how to share profits, share equally according to the Partnership Act. THE PARTNERSHIP CAPITAL AND CURRENT S (Columnar Format) Partnership Co. Capital Date

Details

2010 Dec 31

Balance c/d

Partner 1

Partner 2

Date

$

$

2010 Jan 1 Feb 1

X

X

XX

XX 2011 Jan 1

Details Balance b/d Bank

Balance b/d

Partner 1

Partner 2

S X X

$ X

XX

XX

X

X

Partner 1

Partner 2

S X

$ X

X X X

X X

XX

XX

X

X

Current Date 2010 Dec 31 Dec 31

Details Drawings

Partner 1

Partner 2

Date

$ X

$ X

2010 Jan 1 Dec 31

P&L Appropriation: Interest on drawings

X

X

Details Balance b/d P&L Appropriation: Interest on Capital Salary Share of profits

Dec 31

Balance c/d

X

X

XX

XX 2011 Jan 1

Balance b/d

48

VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP Partnership Balance Sheet as at _________ FIXED ASSETS:

Land & Buildings Plant & Machinery Motor Vehicles

COST $

ACC DEP. $

NBV $

X X X X

(X) (X) (X) (X)

X X X X

CURRENT ASSETS:

Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash

X X (X) X X X X X

Total Current Assets

X

LESS: CURRENT LIABILITIES

Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities

X X X X (X)

WORKING CAPITAL

X XX

FINANCED BY: CAPITAL S Partner 1 Partner 2

X X X

CURRENT S Partner 1 Partner 2

X X X

LONG-TERM LIABILITIES Mortgage

X XX

FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS Partnership Balance Sheet as at _________ FIXED ASSETS:


COST $

ACC DEP. $

NBV $

X X X X

(X) (X) (X) (X)

X X X X

CURRENT ASSETS:

Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash

X X (X) X X X X X


X


Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities

X X X X (X)

WORKING CAPITAL

X XX

FINANCED BY: CAPITAL S Opening Capital Capital introduced

Partner 1 X X X

Partner 2 X X X

X

X X X X (X) (X) X

X X X (X) (X) X

X

CURRENT S Opening balance Add: Interest on Capital Salary Share in Profits Less: Drawings Interest on drawings LONG-TERM LIABILITIES Mortgage

X XX

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50

FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS) When forming a partnership by merging two sole traders, an opening journal is prepared as follows: •

State partnership name

•

Draw Journal with DR and CR columns, as seen below

•

List the assets and liabilities of the new partnership. -

Combine / Add each asset and liability of the sole traders forming the partnership

-

* Bank and Bank overdrafts are combined into one net figure which is EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability)

-

*The Capital of EACH partner (former sole traders) must be stated separately. The Capital of each partner is calculated using C = A-L, using the individual sole trader figures.

•

Narrative for formation of partnership

•

DR and CR Totals must balance (ing equation) Partnership The Journal

Date

Details

DR

CR

$

$

Buildings

X

Fixtures and Fittings

X

Motor Vehicles

X

Stock

X

Debtors

X

Bank *

X*

Cash

X

Mortgage

X

Bank Loan

X

Creditors

X

Bank Overdraft *

X*

*Capital: Partner 1

X

Partner 2

X

To record assets and liabilities at formation of partnership XX

XX

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FORMATS FOR FINAL S OF NON PROFIT ORGANIZATONS Non Profit Organizations include: • • • • • • •

Associations Clubs Societies Unions Charities Universities Churches

Non-profit making organizations belong to their . pay subcriptions. The Cash book is called the Receipts and Payments and the Trading and Profit and Loss is called the Income and Expenditure . Differences in ing / procedures PROFIT MAKING FIRMS

NON PROFIT ORGANIZATIONS

Cash Book

Receipts and Payments a/c

Trading a/c for buying and selling of goods for profit

Trading a/c for fundraising activities only e.g. Bar Trading a/c

Profit & Loss a/c

Income and Expenditure a/c

Net Profit

Surplus of income over expenditure (Surplus)

Net Loss

Excess of expenditure over income (Deficit)

Capital a/c

Accumulated Fund

Balance Sheet

Balance Sheet

_________________________________________________________________________________________

FORMAT FOR RECEIPTS AND PAYMENTS A/C Non Profit Organization Receipts and Payments for the period ended ________________________ Receipts Balance b/f Bar Sales Subscriptions Donations Received Other Receipts e.g. Rent Received Gate Receipts Raffles and other competitions Interest Received on bank a/c Sale of old equipment

$ X X X X X X X X XX

Balance b/f

X

Payments Bar Purchases General Expenses Other Payments e.g. Insurance Purchase of refreshments Purchases of Prizes Purchase of new equipment Rent of hall for Annual Dinner Maintenance Balance c/f

$ X X X X X X X X X XX

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THE SUBSCRIPTION OF NON PROFIT ORGANIZATONS Non Profit Organizations receive subscriptions from its . The Subscription is a revenue (credit balance). The Subscription must for any Accruals and Prepayments, like all revenue s, as follows:

Non Profit Organization Subscription a/c Date Year Dt @ start Year end

Details Accrual b/d Income & Expenditure** Prepayment c/d

Dr$ X X X

Date Year Dt @ start Year end

Details

Cr$

Prepayment b/d Bank (Receipts) Accrual c/d

XX

X X X XX

**The amount for “Income & Expenditure” is entered in the Income & Expenditure for Subscriptions in the Income section. ___________________________________________________________________________________

LIFE HIP Many clubs and societies have life hip schemes where can pay a relatively large amount at the beginning and then never pay any more hip fees. The payment of a life hip fee should be spread over the estimated / expected hip period. An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the remainder would be entered in the Balance Sheet as a long-term liability. Example: A member paid $20 000 life hip at age 20 and expected to be a member until 40 years old. Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be $20 000 / 20 years which is $1 000. In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability. In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability. …

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FORMATS FOR FINAL S OF NON PROFIT ORGANIZATONS The Trading a/c is prepared to calculate whether the non profit organization made a profit or a loss on its fundraising activities e.g. bar, disco, dances, etc. The Income & Expenditure shows whether the accumulated fund (capital) has increased or decreased over the period.

Non Profit Organization Bar Trading a/c for the period ended ____________________________ $ Bar Sales Less: Cost of Goods Sold Opening Stock Add: Purchases Less: Closing Stock

$ X

X X X (X) (X)

Gross Profit

X

Less: Barman’s Salary

(X)

Profit / Loss transferred to Income & Expenditure a/c*

XX

Income & Expenditure a/c for the period ended ____________________________ $

$

Income Profit from bar* Subscriptions** Donations received Rent received Interest Received Receipts from Raffles etc. Any other income for period… Expenditure Loss from bar* Wages General Expenses Donations Depreciation of Equipment Depreciation of Furniture & Fittings Any other payments in period

X X X X X X X X X X X X X X X (X)

Surplus of income over expenditure **

XX

**If Expenditure exceeds Income, the difference is Excess of expenditure over income N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments. Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.

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FORMAT FOR THE BALANCE SHEET OF NON PROFIT ORGANIZATONS

Non Profit Organization Balance Sheet as at ________________ FIXED ASSETS: Club Premises Furniture & Fittings Sports Equipment

COST $

ACC DEP. $

NBV $

X X X

(X) (X)

X X X

X

(X)

X

CURRENT ASSETS: Bar Stock Prepaid Expenses Accrued Revenues e.g. Accrued Subscriptions * Bank Cash

X X X X X


X

LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues e.g. Advanced Subscriptions * Total Current Liabilities

X X X (X)

WORKING CAPITAL

X XX

FINANCED BY: ACCUMULATED FUND X

Accumulated Fund @ start of period (Opening Balance) Add: Surplus of income over expenditure Less: Excess of expenditure over income

OR

X OR (X)

Accumulated Fund @ end of period (Closing Balance)

X

LONG-TERM LIABILITIES Mortgage Life hip Fee** Total Long Term Liabilities

X X X XX

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FORMATS FOR FINAL S OF COOPERATIVE SOCIETIES

Name of the Business Income and Expenditure for the year ended ___________________________________ $ Income hip dues Interest and Dividends Other

$

$

X X X X

Expenditure Telephone Stationary & Office Supplies Traveling Repairs and Maintenance Motor Vehicle expense Bank Charges Interest on deposits Interest on Loans Application: Subscriptions and dues Annual General Meeting (AGM) expenses Auditors’ fees/remuneration Provision for Depreciation

X X X X X X X X X X X X (X) X X X

Surplus/Deficit for the year Add: Undistributed surplus at the beginning of year b/f Less: Appropriations Transfer to reserves: Statutory reserve Special reserve Honoraria Proposed dividend

X X X X X (X)

Undistributed surplus c/f to next year

XX

Note: • • • •

Statutory Reserves – by law / statute a minimum percentage of net income should be transferred to this reserve. Special Reserve – a reserve for any specific named purpose e.g. Investment reserve; Building reserve Honoraria – voluntary payments to of the committee of management as appreciation for services performed. Proposed Dividends – dividends fixed at the AGM.

56

FORMATS FOR FINAL S OF COOPERATIVE SOCIETIES

Name of Business Balance Sheet as at _________________________________________ Employment of Capital Fixed Assets Premises Equipment Motor Vehicles

$ Cost X X X X

Current Assets Stock Receivables: hip dues Prepayments Bank Cash Less: Current Liabilities Honoraria Owing Proposed Dividends *

$ Accumulated Depreciation -(X) (X) X

$ Net Book Value X X X X

X X X X X X X X (X)

Working Capital Net Assets

X XX

Capital Employed Share Capital Reserves: Statutory reserve Special reserve Undistributed surplus income

X X X X X XX

Note: A Cooperative Society’s primary source of capital is from its .

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY Limited Liability Company Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $ $ $ Sales X Less: Sales Returns (X) Net Sales X LESS: COST OF GOODS SOLD: Opening Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS)

X X (X) X X X X (X) (X) X / (X)

Add: Revenue Rent Received; Discount Rec. etc Decrease in Provision for bad debts Total revenue

X X

Less: Expenses Carriage Outwards Utilities ; Wages/salaries etc Discount allowed Increase in provision for bad debts Bad debts expense Depreciation *Directors’ Remuneration *Debenture Interest Total expenses

X X X X X X X X

X

(X)

NET PROFIT (or NET LOSS)

X / (X)

Add Retained Earnings b/f

X X

Less: Appropriations Transfer to General reserves Proposed dividends: Preference share dividends Ordinary Share Dividends

X X X

Retained Earnings for the year * The last section (starting from Net Profit) is called the Approriation A/C

(X) X

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58

VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY Limited Liability Company Balance Sheet as at _________ FIXED ASSETS:


COST $

ACC DEP. $

NBV $

X X X X

(X) (X) (X) (X)

X X X X

CURRENT ASSETS:

Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued revenue Bank Cash Total Current Assets

X X (X) X X X X X X


Creditors *Debenture Interest Payable Accrued expenses Advanced revenues *Proposed Dividends: Ordinary Preference Bank overdraft Total Current Liabilities WORKING CAPITAL

X X X X X X X (X) X XX

FINANCED BY: Authorized Share Capital Ordinary Shares @ $ par value % Preference Shares @ $ par value Issued Share capital Ordinary Shares @ $ par value % Preference Shares @ $ par value

X X X X X X

Reserves General Reserves Retained Earnings

X X X X

LONG-TERM LIABILITIES

Mortgage * % Debentures

X X X XX

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FORMAT OF THE MANUFACTURING Manufacturing Business Manufacturing for the _______ ended ________ $

$

Opening Stock of Raw Materials Add: Purchases of Raw Materials Carriage Inwards (Raw Materials) Less: Closing Stock of Raw Materials

$ X X X X (X)

Cost of Raw Materials consumed (Direct Materials)

X

Direct Labour Direct expenses

X X

PRIME COST Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance… Depreciation of Plant and machinery Lubricants

X X X X X X X X X X X (X)

PRODUCTION COST Add: Opening Work-in-Progress Less: Closing Work-in-Progress PRODUCTION COST OF GOODS COMPLETED C/D*

X

Trading and Profit and Loss for the ________ended ________ $

$

Sales Less: Sales Returns (Finished Goods) NET SALES Less: Cost of Goods Sold Opening Stock of Finished Goods Add: Purchases of Finished Goods (if any) Less: Purchases Returns of Finished Goods (if any)

X X X

Net Purchases *Add: Production cost of goods completed b/d*

.

X X X (X)

Less: Closing Stock of Finished goods

(X) X

GROSS PROFIT Less: istrative Expenses istrative Staff pay Rent; Insurance; Depreciation etc

$ X X X

X X X

Less: Selling and Distribution Sales Staff pay Commission on sales; Carriage Outwards, etc

X X X

Financial Charges Bank Charges Discounts Allowed

X X X

NET PROFIT

(X) X

60

MANUFACTURING (INCLUDING COST OF PACKAGING) The Cost of Production may include the cost of the packaging of the finished goods e.g. boxes, bottles, cases etc. This Cost has to be included in the Manufacturing in addition to the cost of Raw Materials. This can be done after Cost of Raw Materials Consumed is calculated, or in columnar format as seen below:

Manufacturing Business Manufacturing for the _______ ended ________

Opening Stock Add: Purchases Carriage Inwards Less: Closing Stock of Raw Materials Cost of Direct Materials & Boxes consumed Direct Labour Direct expenses

$ Raw Materials

$ Packaging e.g Boxes

X X X X (X)

X X X X (X)

X

X

$ Total

XX X X

X

PRIME COST Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance… Depreciation of Plant and machinery Lubricants

X X X X X X X


X X X (X) X

* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even though it appears to be under the “Boxes” Column.

61

The following format is the long way of including the Cost of Packaging in the Manufacturing . The Packaging cost is calculated after the “Cost of Raw Materials consumed” as follows:

Manufacturing Business Manufacturing for the _______ ended ________ $

$

Opening Stock of Raw Materials Add: Purchases of Raw Materials Carriage Inwards (Raw Materials) Less: Closing Stock of Raw Materials Cost of Raw Materials consumed (Direct Materials) Opening Stock of Packaging e.g. Boxes Add: Purchases of Boxes Carriage Inwards (Boxes) Less: Closing Stock of Boxes

$ X X X X (X) X

X X X X (X) X

Cost of Direct Materials and Boxes consumed Direct Labour Direct expenses

XX X X

PRIME COST

X

Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory Insurance… Depreciation of Plant and machinery Lubricants

X X X X X X X


X X X (X) X

62

FORMAT OF THE BALANCE SHEET OF A MANUFACTURING BUSINESS The Current Asset Section is the only section that differs in the Balance Sheet for a Manufacturing as Stock is now divided into THREE types: 1. Raw Materials 2. Work-in-Progress 3. Finished Goods

Manufacturing business Balance Sheet as at ________________ FIXED ASSETS: Land & Buildings Plant & Machinery

COST $

ACC DEP. $

NBV $

X X

(X) (X)

X X

X

(X)

X

CURRENT ASSETS: Stock* Raw materials Work in progress Finished Goods

X X X X

Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank * Cash Total Current Assets

X (X) X X X X X X

LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft * Total Current Liabilities WORKING CAPITAL

X X X X (X) X XX

FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital

X X OR (X) X (X) X

LONG-TERM LIABILITIES Mortgage Bank Loan Total Long Term Liabilities

X X X XX

63

Principles of s

RATIO ANALYSIS Ms Fergusson

64


ing Ratios: A ratio that expresses the relationship between one ing result and another, intended to provide a useful comparisons.

Liquidity Ratios: assesses the business’ ability to cover its short-term debt as they become due.

Example:

Current Assets Current Liabilities

Quick Ratio =

Example:

Current Assets - Stock Current Liabilities

Debtors Sales

=

2.5 Current assets cover 1 Current liability

Also known as “Acid Test Ratio” Ratio expressed as the number of times quick assets can cover the current liabilities in the ing period.

= $12 500 - $2 500 = $5 000

2:1

$3 600 x 12mths = 1.35 months $32 000

Debtors Creditors

2 Quick Assets cover 1 C. Liability

Expressed as the average no. of months debtors take to pay business amounts owed. Debtors take 1.35 months on average to pay business amounts owed.

Creditors / Acc. Payable x 12mths Annual Purchases

Creditors = $2400 x 12mths = 1.04 months Purchases $27 700

Debtor: Creditor Ratio =

Example:

2.5:1

Debtors / Acc. Receivable x 12mths Annual Sales

Creditor: Purchases Ratio =

Example:

= $12 500 = $5 000

Current Assets - Stock . Current Liabilities

Debtor: Sales Ratio =

Example:

Also known as “Working Capital Ratio” Ratio expressed as the number of times current assets can cover the current liabilities in the ing period.

Current Assets . Current Liabilities

Current Ratio =

Debtor . Creditor

= $3 600 = $2 400

1.5:1

Expressed as the average no. of months the business takes to pay creditors / suppliers amounts owed.

The business takes 1.04 months on average to pay creditors amounts owed.

Measures the relationship between how much credit is granted by the business to customers and how much credit is received from suppliers. …for every $1.50 owed by a debtor, the business owes $1 to a creditor.

65

St. Mary’s College Lesson Notes Profitability Ratios: assesses the business’ overall efficiency and performance during a specific period.

Gross Profit Net Sales

Gross Profit as a Percentage of Sales = Example: Gross Profit x 100 = Net Sales

$12 900 $32 000

x 100 = 40.3%

Net Profit Net Sales

Net Profit as a Percentage of Sales =

Example: Net Profit x 100 = $7 200 x 100 = 22.5% Net Sales $32 000

Net Profit as a Percentage of Capital Employed = (Return on Capital Employed)

Expressed as a %

x 100

x 100

Amount of Sales that result in Gross Profit

The business made a Gross profit of $0.40 for every $1 of Sales.

Expressed as a % Amt of Sales that business keeps as profits after cost of sales & expenses

The business made a profit of $0.22 for every $1 of Sales after deducting all costs & expenses.

Net Profit x 100 Capital Employed

Expressed as a %

This ratio measures the amount of returns a business receives from resources made available to them from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are included in capital employed as well. There are different Formulas for Capital Employed. Most popular for CSEC: Capital Employed = Opening Capital + Closing Capital 2 Example:

Net Profit x 100 = $7 200 Capital Employed $21 600

Rate of Turnover or Stock turnover =

Rate of Turnover or Stock turnover =

x 100 = 33.3%

Cost of Goods Sold . Average Stock Average Stock

The business earned $0.33 for every $1 of Capital Employed.

Expressed as the no. of times per annum stock is sold or turned over.

x 12mths / 365dys

Cost of Goods Sold

Expressed as the average no. of months or days the stock is sold or turned over.

Average Stock = Opening Stock + Closing Stock 2 Example1: $19 100 $2 300

= 8.3 times

Example2: $2 300 $19 100

x 12mths = 1.45 months

66

ing Ratios and Incomplete Records: MARK UP AND MARGIN (PROFIT EXPRESSED AS A % OF PRICE) MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE FORMULAS: MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD Mark up (%) =

X 100

Gross Profit Cost Price / Cost of Goods Sold

NB: Sales = Cost of Goods Sold + Mark up Profit

MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE Margin (%) =

X 100

Gross Profit Selling Price / Sales

NB: Cost of Goods Sold = Sales – Margin Profit

USING MARK UP AND MARGIN IN INCOMPLETE RECORDS MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can be calculated as follows: Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($) Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up) Example:

Cost of Goods Sold = $5000

Mark up = 20%

Solution:

Gross Profit = 20% x $5000 = $1000 Therefore, Sales = $5000 + $1000 = $6000

MARGIN: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD NB: If Margin % is given and Sales Revenue, Gross Profit and Cost of Goods Sold can be calculated as follows: Gross Profit ($) = Margin (%) x Sales ($) Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin) Example:

Sales = $6400

Margin = 25%

Solution:

Gross Profit = 25% x $6400 = $1600 Therefore, Cost of Goods Sold = $6400 + $1600 = $4800

RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary) MARGIN = Mark-up numerator . (fraction) Mark-up numerator + Mark-up denominator

MARK UP = (fraction)

Margin numerator . Margin numerator - Margin denominator

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