Acc 210 - Principles of Accounting - pdf-1

STUDY SESSION 1 INTRODUCTION TO ACCOUNTING
Introduction
Accounting is a tool that is used by organisations both in public and private sectors.
Individuals also use accounting ideas every day. For example, when we receive our salary,
we plan how to spend it as to how much we would spend in house keeping, clothing, shelter
and how much to save. In the case of corporate organisations, the volume of the transactions
is enormous that they have to make a record of these business transactions in a permanent
place such as books of account. It is this recording and keeping the records of business
transaction that is called Accounting. The permanent books are called Accounting Books.
In this module, you will be introduced to the background of what is accounting and the
functions of accounting, generally.
Learning Outcomes for Study Session 1
When you have studied this session, you should be able to :
1.1 explain the history and the development of Accounting
1.2 define Accounting and Book-keeping
1.3 outline the branches of Accounting
1.4 explain the importance of Accounting in any economy.

1.5 state the users of accounting information.
1.1 History and the Development of Accounting

Accounting is as old as the beginning of business transactions among humanity. There is no
specific date that can be referred to as the beginning of accounting. However, it is imperative
to say that human beings have always been involved in some form of business transactions
that involved exchange which parties to the business must settle between themselves through
accounting system. Accounting historians had, in fact, traced some accounting concepts to
the early Greek and Roman periods.
The first record of a complete system of double entry book-keeping was found in the records
of a medieval merchant of Genoa, Italy at about 1340 AD. The development of accounting
became rapid as a result of increase in business transactions among individuals, and corporate
organizations. The development of accounting is also due to complete departure from trade
by barter to the common use of money as a means of exchange, coupled with the ability to
write, and the development of arithmetic.
The first published work that documents complete double entry book-keeping system was
authored by Luca Pacioli in 1494 in Venice, Italy in his book called “Summa de Arithmetrica,
Geometrica, Proportioni et Proportionalita ”. The book was written on Arithmetic,
Geometry and Proportions. It contains a chapter on double entry book-keeping which the
accounting profession developed to form the basis of accounting records.
In 1683, the first book on Book-keeping was published in UK and in 1796 an American,
William Mitchell published a complete system of book-keeping which was a great
improvement on the previous publications. By 1900, the subject - Book-keeping - was
included as a chapter in most of accounting text books. Book-keeping and Accounts are also
taught in most universities and other tertiary institutions.
Nigeria gained independence from British colonial masters in 1960. The evolution and
development of accounting in Nigeria is closely tied to the development of accounting in the
United Kingdom. Most of the Nigerians in the employment of British institutions that
functioned as Accounts clerk, Supervisors or Accountants were trained as professional
Accountants and eventually formed an association that led to the enactment of the Institute of
Chartered Accountants of Nigeria (ICAN) Act in 1965.
ITQ for 1.1
When, where and by whom was the first record on book-keeping published?
(ITQA for 1.1)

Accounting historians have traced the development of Book-keeping and Accounts to the
Greece and Romans; the first book that documents the complete double entry book-
keeping was written by Luca Pacioli in 1494 in Venice, Italy.
1.2 Definition of Accounting and Book-keeping
1.2 .1 What is Book-keeping?
Book keeping is an aspect of accounting as arithmetic is part of mathematics, so the main

function of a book-keeper is to collect and record financial data. Thousands of years ago,
there were no standard permanent records of business transactions, but with the advancement
in education and civilization, accounting data are recorded in books, hence, the term book-
keeping. Book-keeping is therefore the art that is concerned with recording of business
transactions in monetary term-. Book-keeping can also be defined as the science of recording
transactions involving money or money‟s worth in a regular and systematic manner in such a
way that the books of accounts will show a true and fair state of the financial worth of a
business.
1.2.2 What is Accounting?
Accounting has been variously defined. For instance, the Institute of Certified Public
Accountants (year) defined Accounting as the art of recording, classifying, and summarizing
in a significant manner and in terms of money, transactions, and events which are, in part at
least, of a financial character and interpreting the result thereof. Accounting can also be
described as a service activity, a descriptive and or analytical discipline and as an information
system.
From the definitions, we can see that accounting is principally involved in the classification
of business transactions, recording the business transactions, the determination of the strength
and weakness of the business and the communication of the results to the owners of the
business or to other users of the financial information.
ITQ for learning outcome 1.2
You can see that Accounting and Book-keeping have been separately defined. From the
definitions, what are the functions of the Book-keeper and the Accountant?
ITQA for 1.2 learning outcome 1.2
The main function of the Book-keeper from the text are to collect and record financial
transactions in the books of account, while the Accountant is principally involved in the
classification of financial transactions, determination of the strength and weakness of an
organisation and communication of the result to the owners of the business.
1.3 Branches of Accounting
Accounting can be classified in various ways. This includes accounting as an information

system, as a Profession, Pubic Accounting, Private Accounting, Government Accounting,
Financial Accounting, Cost Accounting and Management Accounting. Financial Accounting
is prepared to ascertain the strengths and weaknesses of an organisation in terms of Profit and
Loss of the business. Cost Accounting is concerned with the ascertainment of the cost of a
product or service while Management Accounting is concerned with the provision of data
that will aid management in making decisions. Some authorities further classify accounting
to include Auditing, Tax Accounting, Financial Management, and Consulting Services.
Let us briefly look at the first three classifications:
 ACCOUNTING AS AN INFORMATION PROCESSING SYSTEM

Accounting is a means of social communication and involves a flow of information.
Accounting uses words and symbols to communicate financial information to managers,
investors, decision makers and so on.
 ACCOUNTING AS A PROFESSION
Over the years, accounting has developed as a profession attaining a status equitable to the
practice of law and medicine. However, an accountant who wants to practice as an auditor
needs to obtain a license. Accountants generally work in one of three areas:
 Public Accounting
 Private Accounting
 Government Accounting
 Public Accounting
Public Accountants are engaged in offering professional services to the public. The area of
specialization available to public Accountants are:
 Auditing
 Tax Services
 Management advisory services
 Private Accounting
An Accountant that works in an organization or company and earns salary from such a
company is said to be engaged in private Accounting. Generally, accountants in this category
perform Accounting services which include recording, classifying and preparing reports for
users, handling of tax matters; auditing and budgeting.
 Government Accounting
Accountants in the employment of government deal with the recording of government
financial transactions, preparing summaries of financial transactions, and preparation of
budgets. They also prepare income and expenditure accounts and other financial reports of
the government for a given period. Those employed in government services and perform
accounting functions are said to be in Government accounting. An example of such officers
is the Accountant-General of the Federation.
ITQ for 1.3
Accounting can be classified in various ways, mention five of the classifications and
explain three major areas in which the Accountant can work.
ITQA for 1.3
Accounting can be classified as Public Accounting, Private Accounting, Government

Accounting, Financial Accounting and Cost Accounting. The three major areas in which
the Accountant can work are: Public, Private and Government Accounting. Those in the
Public accounting are professionals. They specialize in the areas of Auditing, Tax
Services and Management advisory services. Those in the private accounting are
employed by organisations to perform Accounting services while those in government
accounting are those employed by the government to perform accounting services for the
government.
1.4 Importance of Accounting in an Economy
Conducting business without proper accounting system in place is like building a house
without a solid foundation. Such a building will collapse and in a similar way, a business
without a proper accounting system will eventually go into liquidation. In the business where
there is no proper accounting system, there would be no proper records of financial
transactions, there would be no laid down procedure for processing accounting transactions;
it would be easy to perpetrate a fraud and corrupt practice. It would be difficult for owners to
know whether they are making a profit or loss; the owners will be unable to determine
whether they should continue to be in business or diversify. Decision making becomes very
difficult. Accounting results form the basis of government taxation. Accounting information
is used to prepare government budget for resource allocation.
The only solution for effective decision making process, for investors and all interested
parties to be assured that their investments are safe and for economic growth is proper and
well laid down accounting structures.
It is on the basis of the foregoing that accounting is regarded as very important in every
economy and has been introduced as a compulsory course to students in business and allied
subject areas at both tertiary institutions and professional levels.
The person charged with the responsibility of recording business transactions in books of
accounts is called the Book-keeper or Accounting Technician while those charged with the
responsibilities of preparing the financial statements and analysing them and writing a report
for decision making are called Accountants.
ITQ for 1.4
Enumerate four reasons why accounting is considered to be very important in an

economy.
ITQA for 1.4
Accounting is considered to be very important in any economy based on the following

reasons:
 It is a tool for decision making process.

 It is a means of reducing/preventing fraud.
 It is used to determine the profit and loss of an organisation.
 It is the basis for government taxation.
1.5 Users of Accounting Information
Different people involved in one business or the other will be interested in the accounting
information of such business organisations. The accountant needs to take cognizance of the
fact that various people will be interested in the accounts, hence he needs to prepare it in a
manner that will present a true and fair view of the position of the business so as to satisfy the
needs of various users.
The following are users of financial information:

i. Owners of the business. The business owners want to be able to see whether or not the
business is profitable. In addition, they want to know what the financial resources of
the business are.
ii. Prospective Investor. A person that wants to invest his money will like to ensure that
their investments are secured and that a reasonable return will be made. It is the
information from the financial statements that will reveal the strengths and
weaknesses of the organisation to the prospective investor.
iii. Prospective buyer. When the owners of a business organisation want to sell the
business or there is a take over bid, the prospective buyer needs to carry out financial
analysis of the organisation using the company‟s financial statements before making
any financial commitment.
iv. The Bank. The bank will be interested in the financial information of an organisation
in case the bank wants to make banking transactions with them. These transactions
may include lending of money, importation of goods on behalf of the organisation,
among others.
v. Tax Inspectors. They are interested in the financial information of business
organisation for the purpose of calculating the taxes payable.
vi. Prospective Partner. If the owner wants to admit a partner into the business, the
would-be partner would want to assess the financial information in order to make a
rational economic decision.
ITQ for 1.5
List six users of financial information and explain the purposes for which three of the
users seek financial information.
ITQA for 1.5
Users of financial information are (i) 0wners of the business (ii) Prospective Investors,
(iii) Prospective Buyer, (iv) Bank, (v) Tax Inspectors, (vi) Prospective Partners. The
purposes for which the following users – Owners of the business, Prospective Investors
and Tax Inspectors - use financial information are: Owners of the business - the owners
of the business would want to know whether or not the business is making profit or loss.
Prospective Investor - Investors who want to invest will like to review the financial
performance of the organisation in the recent past to be sure that the business is making
profit and that adequate returns will be made and that the capital is secured. Tax
Inspectors - Accounting Information is the basis of tax computation; hence the tax
inspectors use financial information to assess citizens and corporate organisations.
1.6 Purpose of Preparing Financial Statements
Financial statements are prepared to:
i. enable the directors to render report of their activities during the financial year
to the owners of the company;
ii. record all money receivable in the accounting books;
iii. record all money payable in the accounting books of the company;
iv. show the indebtedness of the company;
v. show the total creditors of the company;
vi. reveal the strength and weakness of the company through the profit and loss
account; and
vii. facilitate decision making.
ITQ for 1.6
State five reasons why financial accounting is prepared.
ITQA for 1.6
Financial accounting statements are prepared to:
i. enable the directors to render report of their activities during the financial year
to the owners of the company;
ii. record all money receivable in the accounting books;
iii. record all money payable in the accounting books of the company;
iv. show the indebtedness of the company; and
v. show the total creditors of the company.
Summary of Study Session 1
In study session 1, you have learnt:
1. that Accounting was developed during the Greek and Roman Period; the first book on
double entry book-keeping system was written by Luca Paciolo in the year 1494;
2. the definition of Accounting, and Book-keeping;
3. that Accounting can be classified as: Public, Private and Government Accounting;
4. about Six users of financial accounting information; and
5. the purposes of preparing financial accounting
Self- Assessment Questions for Study Session 1
Part A
You are required to state whether this statement is TRUE or FALSE:
a. Accounting is all about knowing the total cash that has been received and paid.
b. Proper accounting system will aid accountability.
c. Accounting and book-keeping are the same.
d. The only purpose of preparing financial statements is to know the profit or loss of an
organization.
e. Accounting started in 1494 by an Italian called Luca Pacioli.
f. A prospective buyer is one of the users of financial information.
g. The Director of an organisation prepares the financial statements and directs the
accountant to authenticate its accuracy.
h. The financial statements cannot be used for planning.
i. Cost Accounting is primarily prepared to ascertain the profit and loss of an
organization for a given period.
j. Accounting is not very important for the development of an economy.
Part B
1) Define the term „Book-keeping‟.

2) Write a short note on the development of accounting.
3) Write short notes on three users of accounting information
4) Accounting is not important in an economy. Discuss.
STUDY SESSION 2 ACCOUNTING CONCEPTS AND CONVENTIONS
Introduction
You learnt about the development of Accounting in Study Session 1. You will learn about the
procedure of recording and posting various business transactions in the appropriate books of
accounts and testing the arithmetical accuracy of these records in Study Session 4. Having
recorded the transactions and tested the accuracy of the books of accounts, we prepare a
summary at the end of the accounting period to ascertain (i) the profit or loss, and (ii) the
financial position of the business. The summary is prepared in the form of a Profit and Loss
Account (also called Income Statement) and a Balance Sheet (also called Position Statement).
These two financial statements are termed as the 'Final Accounts'.
Before you can prepare the final accounts properly, it is necessary that you understand the
basic concepts and conventions which guide their preparation. Concepts and Conventions in
this regard simply mean rules and regulations that should be followed in the preparation of
the accounts and financial statements. In this Session, you will learn about these concepts and
conventions. You will also study how each concept influences the measurement of income
and the financial position of the business. Clarity on the distinction between capital and
revenue is equally relevant for the correct ascertainment of profit or loss and the financial
position of the business. Hence, it is important that you know whether a particular
expenditure or receipt is of a capital nature or of a revenue nature.
When you have studied this session, you should be able to:
2.1 explain the concepts and conventions underlying the preparation of financial
accounts;
2.2 describe various bases of accounting;
2.3 explain the importance of distinction between capital and revenue; and
2.4 evaluate correctly whether an expenditure/receipt is of a capital or revenue nature.

2.1 Concepts and Conventions Underlying the Preparation of Financial Statements
Accounting concepts are broad working rules adopted by the accounting profession as guides
for recording and reporting the affairs and activities of corporate organisations. Let us now
discuss the basic concepts which are to be observed at the reporting stage, i.e., at the time of
preparing the final accounts.
2.1.1 Lists of Concepts
Concepts that are applied in the preparation of financial statements are listed below:
(a) Going Concern Concept
(b) Accounting Period (Periodicity) Concept
(c) Matching Concept
(c) Conservatism (or Prudence) Concept
(d) Consistency Concept
(e) Full Disclosure Concept
(f) Materiality Concept
Let us discuss each of the concepts in detail.
2.1.2 Going Concern Concept: Normally, businesses commence operation with the
intention of continuing indefinitely or at least for the foreseeable future. The investor’s lend
money and the creditors supply goods and services with the expectation that the enterprise
would continue for a long time. Unless there is strong evidence to the contrary, the enterprise
is normally viewed as a going (continuing) concern. Hence, financial statements are prepared
on a going concern basis and not on liquidation (closure) basis. Business transactions are
based on the presumption that the business will be in operation for a long period, for
example, expenditure such as, purchases of a building and machinery is spread over a longer
period because it will be used over a long period. If the benefit of expenditure is limited to
one accounting year it is charged to the Profit and Loss Account of that year. But, if the
benefit of expenditure is available for a number of accounting years, it must be spread over a
number of years. Hence, only a portion of such expenditure is charged to the Profit and Loss
Account every year. The balance is shown in the Balance Sheet as an asset. Let us take an
example. Suppose a firm purchases a delivery van for N60,000 and its expected life is 10
years. It means that the business will use the van for a period of 10 years. So, the accountant
has to spread the cost of the van over 10 years. Assuming the residual value of the delivery
van is zero, the accountant would charge N6,000 (1/10 of its cost) every year to the Profit and
Loss Account in the form of depreciation, and show the balance in the Balance Sheet as an
asset. This is based on the assumption that the business will continue for an indefinite period
and the asset will be used for its expected life. Thus, this concept is regarded as the basic
assumption in accounting according to which the fixed assets are valued at historical cost less
depreciation and not at its realisable value.
2.1.3 Accounting Period Concept: You know from 2.1.2 that the going concern concept
assumes that the business will continue for a long period, almost indefinitely. But, the
businessman cannot postpone the preparation of financial statements indefinitely. Therefore,
he prepares them periodically to find out the profit or loss and financial position of the
business. This will also enable other interested parties such as owners, investors, creditors,
tax authorities to make periodic assessment of its performance. So, the life of the business
enterprise is divided into what are called 'accounting periods'. Profit and loss accounts
showing the financial position at the end of each accounting period are regularly prepared and
assessed. Conventionally, the duration of the accounting period is twelve months. It is called
an 'accounting year'. Accounting year can be a calendar year, i.e., January 1 to December 31
or any other period of twelve months, say, April 1 to March 31. In some special cases an
accounting period may be longer or shorter than twelve months.
Normally, the final accounts are prepared at the end of each accounting year. The Profit and
Loss Account is prepared for the year so as to ascertain the profit earned or loss incurred
during that year, and the Balance Sheet is prepared as on the last date of the accounting year.
However, for internal management purposes, accounts can be prepared even for shorter
periods, say monthly, quarterly, or half yearly. Accounting period concept simply refers to
the period or time which an organization prepares its accounts.
2.1.4 Matching Concept: This is called 'Matching of Operating Expenses against Revenues
Concept'. To work out profit or loss of an accounting year, it is necessary to bring together all
revenues and costs pertaining to that accounting year. In other words, expenses incurred in an
accounting year should be matched with the revenues earned during that same year. The crux
of the problem, therefore, is that appropriate expenses must be matched against appropriate
revenues. For this purpose, first we have to recognize the inflows (revenues) during an
accounting period and the expenses incurred in bringing about those inflows. Then, the sum
of the expenses should be deducted from the sum of the revenues to arrive at the net result of
that period.
The matching concept, therefore, holds that the expenses should be recognised in the same
period as the associated revenues. For example,
i. Costs of goods have to be matched with their sales revenue. This means that while
preparing the Profit and Loss Account for a particular year, you should not take the
cost of goods produced during that year but consider only the cost of goods that have
actually been sold during that year. The cost of goods sold is arrived at by deducting
the cost of closing stock from the cost of goods produced.
ii. Expenses such as salaries, wages, interest, rent, insurance, etc., are recognised on time
basis. In other words, they are related to the year in which the service is enjoyed or
the expense is incurred, whether paid immediately or payable at a later date.
iii. Expenses and charges such as depreciation of fixed assets are also allocated over the
periods during which the benefit is derived.
The Matching Concept thus has the following implications for ascertaining of profit or loss
during a particular period.
(a) We should ensure that expenses relate to the same accounting period as the revenues.
For example, when we prepare the Profit and Loss Account for 2008, we shall take
into account all those incomes that were earned during 2008, and similarly consider
those expenses which occurred in 2008 only. Any expenses or incomes which relate
to 2007 shall be excluded.
(b) We should ensure that all expenses incurred during the accounting period (whether
paid or not) and all revenues earned during that year (whether received or not) are
fully taken into account.
(c) We should consider only those expenses which relate to the revenue taken into
account. That is why we consider only the cost of goods sold, and not the cost of
goods produced during that period.
2.1.5 Revenue Recognition Concept: This concept simply provides for the ways and manner
in which business organisations should recognize earned revenue. Revenue is recognized in
the period in which it is earned or realized. The revenue recognition is primarily based on
realization principle which clearly states that in identifying revenues within a specific period
one must look at the time of various transactions rather than cash inflow. Thus,
i. In case of the sale of goods (or services) revenue is regarded as realised when sales
actually take place and not when cash is received. In other words, credit sales are
treated as revenue when sales are made and not when money is received from the
buyer.
ii. Income such as rent and interest on commission are recognised on a time basis. The
revenue from such items is taken to the Profit and Loss Account of the year during
which it is earned. Let us assume that the business purchased some government
securities on October 1, 2010 for N20,000 carrying interest at 12 per cent, the interest
is payable half yearly on April 1 and October 1 every year. The first installment of
interest is N1,200 and the interest is received on April 1, 2011. The Profit and Loss
Account is being prepared for year 2010 (January 1, 2010 to December 31, 2010). By
applying the provision of revenue recognition concept, the interest amounting to N600
earned during October 1 to December 31 must be shown as the income from interest
on investments in the Profit and Loss Account for 2010 though the amount was not
received in 2010.
2.1.7 Prudence Concept: This concept tries to ensure that all uncertainties and risks inherent
in business are adequately provided for. Accountants generally prefer understatement of
assets or revenues, and overstatement of liabilities or costs. This is in accordance with the
traditional view which states ‘anticipate no profits but anticipate all losses’. In other words,
you should account for profits only when they are actually realized, but in case of losses, you
should take into account even those losses which may be a remote possibility. That is why the
closing stock is valued at cost price or market price whichever is lower. Provision for
doubtful debts and provision for discounts on debtors are also made according to this
concept. This reflects a generally pessimistic attitude of the accountants but it is regarded as
the best way of dealing with uncertainty and protecting creditors against an unwarranted
distribution of the firm's assets as dividends.
2.1.8 Consistency Concept: The principle of consistency means conformity from period to
period with unchanging policies and procedures. It means that the accounting method
adopted should not be changed from year to year. For example, the principle of valuing
closing stock at cost price or market price whichever is lower should be followed year after
year. Similarly, if depreciation on fixed assets is provided on straight line basis, it should be
followed consistently, year after year. Consistency eliminates personal bias and helps in
achieving comparable results.
If this principle of consistency is not followed, the accounting information about an enterprise
cannot be usefully compared with similar information about other enterprises and so also
within the same enterprise for some other period. Consistent use of the same methods and
bases from one period to another enhances the comparability of the financial statements of
different years.
However, consistency does not prohibit change. Desirable changes are always welcome. But
such changes should be completely disclosed while presenting the financial statements.
2.1.9 Full Disclosure Concept: You know the financial statements are the basic means of
communicating financial information to all interested parties. These statements are the only
source for assessing the performance of the enterprise for investors, lenders, suppliers, and
others. Therefore, financial statements and their accompanying footnotes should completely
disclose all relevant items of information of a material nature which relate to the profit and
loss and the financial position of the business. This enables the users of the financial
statements to make correct assessment about the profitability and financial soundness of the
enterprise. It is therefore necessary that the disclosure should be full, fair and adequate.
2.1.10 Materiality Concept: This concept is closely related to the Full Disclosure
Concept. Full disclosure does not mean that everything should be disclosed. It only means
that all relevant and material information must be disclosed. Materiality primarily relates to
the relevance and reliability of information. An item is considered material if there is a
reasonable expectation that the knowledge of it would influence the decision of the users of
the financial statements. All such material Information should be disclosed through the
financial statements and the accompanying notes. For example, commission paid to sole
selling agents, if any, should be disclosed separately in the Profit and Loss Account.
Similarly, if there is a change in the method or rate of depreciation, this fact must be duly
reported in the financial statements.
A strict adherence to accounting principles is not required for items of little significance or of
non-material nature. For example, erasers, pencils, scales, etc. are used for a long period, but
they are not treated as assets. They are treated as expenses. This does not affect the amount of
profit or loss materially.
Similarly, while showing the amounts of various items with decimal point in the financial
statements they can be approximated up to the nearest Kobo. Even if they are shown to the
nearest naira or hundreds, there may not be any material effect. For example, if an amount of
N145,923.28 is shown as N145,923 or N145,900 it does not make much difference for
assessment of the performance of the enterprise.
However, there are no specific rules for ascertaining material or non-material items. It is just
a matter of personal judgment.
ITQ for study session 2 learning outcome 2.1
(1) List five Accounting Concepts that you know and explain one of them.
(2) What is the implication of applying or not applying Consistency Concept?
ITQA for study session 2 learning outcome 2.1
(i) Five Accounting Concepts that I know is (a) Going Concern Concept, (b)
Accounting Period Concept, (c) Matching Concept (d) Prudence Concept, (e)
Consistency Concept
(ii) Going Concern Concept.
Businesses operate with the intention of continuing indefinitely or at least for a

foreseeable future. Businesses are not expected to liquidate in the near future. This
assumption is referred to as going concern concept.
2) The implication of not applying the principle of consistency is that the accounting
information produced by an enterprise cannot be usefully compared with similar
information about other enterprises and so also within the same enterprise for some
other period. The implication of applying the principle of consistency is that financial
statements can be compared from one period to another and it will aid decision making
process.
2.2 Bases of Accounting
The accounts are prepared by the business either on cash basis or on accrual basis. In the
Cash basis system, accounting entries are made on the basis of cash received or cash paid. In
other words, no entry is made when an income is earned or an expense is incurred. It will be
recorded in books only when the amount involved is actually received or paid. Thus, the
incomes earned but not yet received (accrued income) or the expenses incurred but not yet
paid (accrued expenses) are completely ignored while preparing the final accounts. For
example, rent for the month of December, 2007 paid in January 2008 will be taken to the
Profit and Loss Account of 2008 even though the expenditure relates to 2007. This leads to
incorrect ascertainment of profit or loss of the business, but it is not true of the accounts
maintained on accrual basis. Under the Accrual System the financial effect of transactions is
recorded in the books as and when they occur and not when the amount involved is received
or paid by the business. This system attempts to relate the revenues and expenses to the
accounting period during which they are actually earned or incurred. Thus, rent for the month
of December, 2007 paid in January, 2008 will be taken into the Profit and Loss Account of
2007 and not of 2008. This is more logical because the benefit is enjoyed in the year 2007
and not in 2008.
The main difference between accrual basis of accounting and cash basis of accounting is the
timing of recognition of revenues, gains, expenses and losses. The objective of accrual
accounting is to account for the effect of transactions and events to the extent their financial
effect are recognisable and measurable in the periods in which they occur. The adjustments
made in the final accounts in respect of outstanding expenses, prepaid expenses, income
received in advance and income earned but not yet received are in fact based on accrual
accounting. You will learn about these adjustments in Module 10. In practice most
enterprises adopt the accrual basis of accounting.
ITQ
What did you consider as the difference between Accrual basis of Accounting and Cash
basis of Accounting?
ITQA
The main difference between accrual basis of accounting and cash basis of accounting is
the timing of recognition of revenues, gains, expenses and losses
2.3 Capital and Revenue
You know that a firm prepares Profit and Loss Account for ascertaining the net result of
business operations and the Balance Sheet for determining the financial position of the
business. These are prepared with the help of a Trial Balance which shows the final balances
of all ledger accounts. All items appearing in the Trial Balance are transferred either to the
Profit and Loss Account or to the Balance Sheet. As per the rules, the items of revenue nature
are taken to the Profit and Loss Account and the items of capital nature are shown in the
Balance Sheet. In other words, whether an item appearing in the Trial Balance is to be taken
to the Profit and Loss Account of the Balance Sheet, depends upon the capital and revenue
nature of the item. If any item is wrongly classified, i.e., if an item of revenue nature is
treated as a capital item or vice versa, the Profit and Loss Account will not reveal the correct
amount of profit and the Balance Sheet will not reflect the true and fair view of the affairs of
the business. It is therefore necessary to determine correctly whether an item is of capital
nature or of a revenue nature and record it in the books accordingly. There are certain rules
governing the allocation of expenditures and receipts between capital and revenue which
should be clearly understood.
2.3.1 Distinction between Capital and Revenue Expenditure

You can recollect from your daily activities that you incur expenditure on various items every
day. You buy food items, stationery, cosmetics, utensils, furniture, etc. Some of them are
consumables and some are durables. The benefits of expenditure on consumables like
stationery, cosmetics, food items, etc., is derived over a short period, but in case of durables
like furniture, utensils, etc., the benefit spreads over a number of years. Same is true of
business organisations. Business organizations, also incur expenses on two types of items
like you, i.e., (i) routine items like stationery, and (ii) fixed assets like machinery, building
and furniture.. The benefits of the first category are available over one accounting period
while the benefits of the second category are available over a number of years. In accounting
terminology the first category of expenditure is called revenue expenditure and the second
one is called capital expenditure. Let us now study the exact nature of capital and revenue
expenditures.
2.3.2 Capital Expenditure: As stated above, when the benefit of an expenditure is not
exhausted in the year in which it is incurred but is available over a number of years, it is
considered as capital expenditure. The following expenditures are usually treated as capital
expenditures.
(a) An expenditure which results in the acquisition of fixed assets such as land, buildings,
plant and machinery, furniture and fixtures, office equipment and copyright. You should
note that such capital expenditure includes not only the purchase price of the fixed assets
but also the expenses incurred in connection with their acquisition. Thus, the brokerage or
commission paid in connection with the acquisition of an asset, the freight and cartage
paid for transport of machinery, the expenses incurred on its installation, the legal fees
and registration charges incurred in connection with purchase of land and buildings are
also treated as capital expenditure.
(b) Any expenditure incurred on a fixed asset which results in (i) expansion, (ii)
substantial increase in its life, or (iii) improvement in its revenue earning capacity.
Improvement in the revenue earning capacity can be in the form of (1) increased product
capacity, (2) reduced cost of production, or (3) increased sales of the firm. Thus, costs of
making additions to buildings and amount spent on renovation of the old machinery are
also regarded as capital expenditure. If you buy a second hand machinery and incur
heavy expenditure on reconditioning it, such expenditure is also to be treated as capital
expenditure. Similarly, expenditure on structural improvements or alterations to existing
fixed assets whereby their revenue earning capacity is increased, is also treated as capital
expenditure.
2.4 Treatment of various expenditure
When the benefit of an expenditure is not likely to be available for more than one year, it is
treated as revenue expenditure so all expenses which are incurred during the regular course of
business are regarded as revenue expenditures. The examples of such expenses are:
(a) Expenses incurred in day-to-day conduct of the business such as wages, salaries, rent,
postage, stationery, insurance and electricity.
(b) Expenditure incurred for buying goods for resale or raw materials for manufacturing.
(c) Expenditure incurred for maintaining the fixed assets such as repairs and renewals of
building and machinery.
(d) Depreciation on fixed assets. This can also be termed as revenue loss.
(e) Interest on loans borrowed for running the business. You should note that any interest
on loan paid during the initial period before production commences, is not treated as
revenue expenditure. It is treated as capital expenditure.
(f) Legal charges incurred during the regular course of business such as legal expenses
incurred on collection from debtors and legal charges incurred on defending a suit for
damages.
2.4.1 Deferred Revenue Expenditure: Sometimes, certain expenditure which is normally

treated as revenue may be unusually heavy and its benefit is likely to be available for more
than one year. In such a situation, it is considered appropriate to spread the cost of the
expenditure over a number of accounting years. Hence, it is capitalised and only a portion of
the total amount spent is charged to the Profit and Loss Account of the current year. The
balance is shown as an asset which will be written off during the subsequent accounting
years. Such expenditure is called a Deferred Revenue Expenditure because its charge to Profit
and Loss Account has been deferred to future years. Some examples of such expenditure are:
a) Expenditure incurred on advertising campaign to introduce a new product in the

market.
b) Expenditure incurred on formation of a new company (preliminary expenses)
c) Brokerage charges, underwriting commission paid and other expenses incurred in

connection with the issue of shares and debentures.
d) Cost of shifting the plant and machinery to a new site which may involve dismantling,
removing and re-erection of the plant and machinery.
Let us take the case of expenditure on advertising campaign. It is not a routine advertisement
and the amount involved is unusually heavy. Its benefits will not be completely exhausted in
one accounting year but will continue over two to three years. Hence, it is not proper to
charge such expenditure to the Profit and Loss Account of one year. It is better to distribute it
carefully over three years. So, in the first year we may charge one-third of the amount spent
to the Profit and Loss Account and show the balance in the Balance Sheet as an asset. In the
second year again, we may charge a similar amount to the Profit and Loss Account and show
the balance as an asset. In the third year, we may charge this balance to the Profit and Loss
Account. Every expenditure which is regarded as deferred revenue is treated in this way in
the final accounts.
ITQ
State whether the following items of expenditure would be treated as (a) capital expenditure, (b)
revenue expenditure, or (c) deferred revenue expenditure:
(i) Carriage on goods purchased N25
(ii) N2,000 spent on repairs of machinery
(iii) N5,000 spent on white washing
(iv) N8,000 paid for import duty and freight o the purchase of machinery from Germany
(iv) 25,000 spent on issue of equity shares
ITQA
i. It is a revenue expenditure as it relates to the goods for resale.
ii. It is revenue expenditure as it relates to the maintenance of a fixed asset.

iii. Same as no. (ii).
iv. It is a capital expenditure as it is spent in connection with the purchases of a fixed

asset.
v. It would be treated as deferred revenue expenditure. It is a heavy amount incurred in

connection with raising of capital for the company and so the amount would be
capitalised.
Summary of financial statements are prepared at the end of an accounting period in the form
of Profit and Loss Account and Balance Sheet to ascertain the profit or loss and the financial
position of the business. These are called final accounts. There are seven accounting concepts
which are to be observed while preparing the final accounts. The going concern concept
implies that the firm is a continuing unit. Hence, expenditure on long term assets could be
spread over a number of years. According to the Matching Concept, appropriate costs have
to be matched against the appropriate revenues for the accounting period. The concept of
Prudence implies that while calculating the profit of an accounting period, all possible losses
should be taken into account while only those incomes should be included which have
actually arisen and not just expected. According to consistency concept the accounting
methods followed from period to period should be the same so as to ensure meaningful
comparisons. The full disclosure and the materiality concepts signify that the financial
statements should disclose all material information so that the users can draw rational
conclusions about the enterprise.
There are two bases of accounting viz.: cash basis and accrual basis. The accrual basis is
considered more logical because it takes into account all expenses incurred (whether paid or
not) and all incomes earned (whether received or not) during the accounting period and thus
ensures correct ascertainment of profit or loss.
It is also important to distinguish between capital and revenue expenditure, otherwise, the
ascertainment of profit or loss and the financial position of the business will be incorrect
There are certain rules which guide us to determine whether a particular expenditure or
receipts is of a capital nature or of a revenue nature.
Self-Assessment Questions for study section 2

Part A
1. What is the assumption under Going Concern Concept?
……………………………………………………………………………....…………
…………………………………………………………………....
2. What is the significance of an Accounting Period?
……………………………………………………………………….
3. Name three items of costs.
……………………………………………………………………………....…………
…………………………………………………………………....
4. Name three items of revenue.
……………………………………………………………………………....…………
…………………………………………………………………....
5. Fill in the blank spaces:
i. Profit is the excess of revenue over ...................................
ii. Cost of goods ............ is matched with their sales- revenue.
iii. Conservatism concept is also known as ................. Concept.
iv. Consistency enhances the ..................... of financial statements.
v. An item is considered ................... if its knowledge influences the decision the users of the
financial statements.
6. Choose one of the alternatives given within brackets and fill in the blank spaces.
i. Proper allocation of expenditure between capital and revenue is necessary for the
ascertainment of ……………………. (Profit or loss/Cash /n hand)
ii. All items of revenue nature are shown in the ………………. (Profit and Loss
Account/Balance Sheet)
iii. Any expenditure where the benefit is spread over a number of years is ….....................
expenditure (capital/deferred revenue).
iv. When a revenue expenditure is capitalised, it is called……………………
expenditure(capital/deferred revenue).
v. Any expenditure incurred in acquiring a right like goodwill or patent is treated

as………………. expenditure (capital/revenue)
Part B
1. What do you understand by matching costs against revenue? Explain the main
implications of the Matching Concept.
2. Distinguish between cash basis and accrual basis of accounting. Why do you consider
accrual basis more rational?
3. Write short notes on the following concepts
i. Going Concern Concept
ii. Conservatism
iii. Consistency
Why is distinction between capital and revenue important? Give examples to show how
wrong classification can affect the ascertainment of profit.
STUDY SESSION 3 DOUBLE ENTRY PRINCIPLE
Introduction
We learnt about all the rules and regulations that we must know in the preparation of
financial statements in Study Session 2. We will start learning about the applications of these
rules from this study session. One of the rules is the double entry system of recording
financial transactions in the books of accounts. In this study session, we shall examine the
Principle of Double entry book-keeping system in detail.
This study session is intended to develop your skills of in the preparation of financial records,
that is, making entries in the books of accounts. Double entry principle is the bedrock of
financial accounting, hence you need to take proper care to read and understand the principle.
Learning Outcomes for study session 3
3.1 Explain Double Entry Book-keeping System.
3.2 Explain books of accounts and source documents.
3.3 Discuss double entry accounting records using double entry book keeping system.
3.4 Balance ledger account.
3.1 Double Entry Book-keeping System
At the end of every business transaction, such transaction must be recorded (or posted or
entered) in the books of accounts. Every business transaction involves two parties. Entries in
the book. must be made for the two parties. Making two entries in respect of one transaction
is called double entry bookkeeping. Therefore, double entry book-keeping is the system of
keeping account which takes advantage of the two-fold aspect of every transaction, whereby
one account that receives is debited and another account which gives, is credited. You will
remember from Study Session 1 that the principle of double entry originated with the
Venetian merchants of the fifteen century. Luca Pacioli started his writings on double entry
principle in 1494. The system is the method of recording transactions so that both parties i.e.,
the giver and the receiver are brought into records. Double entry system is the entry of the
debit and credit for each transaction in the ledger. Hence the double entry rules, “Debit the
receiver, Credit the giver”.
3.1.2 Rules of Double Entry
There are certain rules that you must know to effectively apply the double entry book-
keeping system. These rules are:
 There must be entries for all business transactions in the books of account
 For every credit entry in an account there must be a corresponding debit entry in
another account.
 For every debit entry in an account, there must be a corresponding credit entry in
another account.
 All transactions must be recorded in two accounts, one account is debited and another
account is credited.
State three rules of double entry book-keeping system
ITQA for learning outcome 3.1
The three rules of double entry book-keeping system that must be observed when
making entries in the books of accounts are:
 For every credit entry in an account there must be a corresponding debit entry
in another account.
 For every debit entry in an account, there must be a corresponding credit entry
in another account.
 All transactions must be recorded in two accounts, one account is debited and
another account is credited.
3.2 Books of Account/Source documents
Transactions are not normally posted from the source documents directly to the ledger. They
are normally recorded first in the subsidiary books before they are posted therefrom to the
ledger. Subsidiary books can be defined as the books into which transactions are recorded on
a daily basis from the source documents and from which transfers are made at suitable
periodic intervals to the relevant accounts in the ledger.
3.2.1 The subsidiary books normally used in financial accounting are listed below:
 Sales Day Book.

 Purchases Day Book.
 Returns Inward Day Book.
 Returns Outward Day Book.
 Cash Book .
 Journal Proper.
Sales Day Book
This book records only credit sales. You should note that if the sales is made on cash basis, it
will not be entered in this book.
Purchases Day Book

This is the book in which the transactions relating to purchase of goods on credit basis are
recorded. If the purchases are made on cash basis, they will not be recorded in the purchases
day book.
Returns Inward Day Book
This is the book in which we record particulars of goods returned to us by our customers and
we did not replace the goods immediately or for which cash is not immediately refunded. If a
customer returns goods to us and is immediately replaced, the information relating to the
goods returned and replaced will not be recorded in this book
Return Outward Day Book
This is the book in which we record particulars of goods that we returned from our purchases
to our customer from whom we made the purchases and we did not replace the goods
immediately or for which cash is not immediately refunded. If we make the returns and the
goods were replaced or appropriate money was refunded, then the information relating to the
goods returned and replaced will not be recorded in this book
Cash Book
All daily transactions already recorded in the journal proper on daily basis, which involve
movement of money in and out of the organisation, are transferred to cash book on a daily
basis. This is done in order to update on daily basis the cash book records which need to be
updated daily so as to have an up to date record of cash for control purposes.
Journal Book
All other transactions that occur in the business organisation outside purchases on credit,
return of goods to suppliers, sale of goods on credit and return of goods by customers, are all
recorded in the journal book. This book is called journal proper so as to distinguish it from
each of the other four day books which are also called journals.
3.2.2 Source documents used in financial accounts.

 Invoices : This is the document issued to a customer to show the detail
transactions of purchases
 Receipts: It is the document issued to a customer as evidence of payment
 Payment Voucher: It is a preliminary document that is prepared in the accounts
department to detail the particulars of certain transactions for payment
 Debit Note: This is a document issued to a customer that purchased goods from us
and part of the goods were return to us for which we have not paid.
 Credit Note: This is a document issued by a customer that we purchased goods
from and made a return for which the amount has not been refunded to us.
 Cheque Books: These are issued by the banks to their customers for the purpose of
withdrawing money from their accounts and for payement too.
(a) List 4 subsidiary books of Accounts . (b) Diferrentiate between Returns Inward
and Returns Outward.
(a) Four Subsidiary books are:
 Sales Day Book

 Purchases Day Book
 Returns Inward Day Book
 Returns Outward Day Book
(b) The difference between Returns Inward and Returns Outward is derived from
the uses of the two books. Basically, Returns Inward occurs when an organization
makes sales to a customer and the customer returns part of the sales for one reason
or the other while Returns outward occurs when some goods purchased are
returned to the vendor. Returns Inward concerns sales while Returns Outward
concern purchases
3.3 Business Transactions Recorded in Double Entry System Form
Practical examples will be used to illustrate how to make entry of business transactions in a
double entry form.
Illustration 1
Erubami Adedeji commenced a trading business on 1st of Jan., 2009 under the name Erudite
Enterprises. On that day, he converted his personal cash of N50,000 to the business use. He
also deposited into the bank account of the business a cheque of N30,000, which he won from
a lottery play out. Of the cash earmarked for the business use, N35,000 was deposited in the
business bank account .
On 10th Jan. – He paid for the premises to be used by the business N2,400 in form of cash
plus N600 agreement fees. On that day, he acquired furniture & fittings of N3,000 and paid in
full by cheque.
On 15th Jan. – He converted for the business use, his Motor Van bought in year 20X0 for
N10,000 at an agreed second hand value of N35,000 on 15th Jan. 2009.
18th Jan. – Obtained a loan of N10,000 from Jekojeko at an interest rate of 15% per annum.
The loan was given in form of cash N7,000, the balance of N3,000 was in cheque.
On 21st Jan. he bought goods for sale as follows:-
· From Ojo & Co. N6, 500 paid fully by cash
· From Ibe & Sons N3,600 paid fully by cheque
· From Binta Enterprises – N5,100 on credit
· From Loko & Co N3,000 on credit

· From Agama & Sons N2,700 paid cash N700 cheque N1,300, and the balance of
N700 was not paid immediately.
· From Ekaete N2,700 on credit
· From Olu-Young Ent. N4,600 on credit
25th Jan. Sales were made as follows:
· To Baba & Co N5,000 in Cash
· To Yerima N7,000 by Cheque
· To Mutiu N5,200 on Credit
· To Benue Enterprises N6,000 on credit.
· To Niger & Sons N5,100 paid cash N2,000 cheque N1,600 and balance of N1,500
was not collected immediately.
On 31st January, unsold stock was valued at a cost of N7,300
You are required to prepare for the month of January 20X9.
(a) The necessary ledger accounts to record the above transactions.
(b) Extract a trial balance as at 31st January, 20X9.
Solution to illustration 1
ERUDITE ENTERPRISES
Transaction I:
Step a Identify business transaction converted to business use N50,000 personal cash.
Step b Ledger accounts affected are :
(i) Capital account (account of the owner)
(ii) Cash account

Step c Ledger accounts that gave and received :
Capital Account – gave the cash to the business
Cash Account – received the cash on behalf of the business.
Step d None of the ledger account given and received at the same time.
Step e Application of Rule of Double entry
Debit Cash Account with N50,000 (because is the ledger account that
received the cash on behalf of the business).
Credit Capital Account with N50,000 (because is the ledger account that
gave the cash to the business) (Entries 1 & 2)
Transaction 2:
Step a Identify business transaction:-
Deposited N30,000 cheque won from lottery to business account.
Step b Ledger accounts affected are –
Bank Account
Capital Account
Step c Ledger Account that gave and received
Capital Account – giver (personal money of the owner won from lottery)
Bank Account – receiver
Step d No giver and receiver at the same time
Step e Debit receiver ledger account i.e. Bank Account with N30,000
Credit giver ledger account i.e. Capital Account with N30,000 (Entries 3
and 4)
Transaction 3
Step a Deposited N35,000 cash to business bank account
Step b Ledger account affected:-
Bank Account
Cash Account
Cash Account – Giver Ledger Account
Bank Account – Receiver Ledger Account
Step d No giver and receiver ledger account at the same time.
Step e Debit Bank Account with N35,000
Credit Cash Account with N35,000 (Entries 5 and 6)
Transaction 4:
Step a Payment of rent plus agreement fee in cash – all amounting to N3,000
Step b Ledger Account affected :-
Rent Account – Receiver Ledger Account
Rent Account – Receiver Ledger Account
Step d No Ledger Account given and received at the same time.
Step e Debit Rent Account with N3,000
Credit Cash Account with N3,000 (Entries 7 and 8)

Transaction 5:
Step a Acquired Furniture and Fittings of N3,000 and paid cheque.
Step b Furniture and Fittings Account and Bank Account
Step c Ledger Account that gave and received Furniture & Fittings Account –
Receiver Ledger Account
Bank Account – Giver Ledger Account
Step d No Ledger Account given and received at the same time
Step e Debit Furniture & Fittings Accounts with N3,000
Credit Bank Account with N3,000 (Entries 9 and 10)
Transaction 6:
Step a The business transaction is :- He converted for business use, his Motor Van
bought in 20X0 for N10,000 at an agreed second hand value of N35,000 on
5th Jan. 20X0.
(The relevant figure here is N35,000 because the figure is the agreed value at
the point when the business had access to the use of the vehicle. The historical
figure of N10,000 if recorded will distort information because when the
business had access to the use of the vehicle, its worth was not N10,000 but
N35,000. In order to be true and fair, the relevant figure is therefore N35,000).
Step b Motor Van Account and Capital Account
Ledger Account that gave and received
Step c Motor Van Account Receiver
Capital Account Giver
Step e Debit Motor Van Account N35,000
Credit Capital Account N35,000 (Entries 11 & 12)

Transaction 7:
Step a Obtained a loan of N10,000 from Jekojeko at an interest rate of 15% per
annum inform of cash N7,000 and balance in cheque.
Step b 15% Loan Account, Bank Account and Cash Account
Step c 15% Loan Account – Giver Account (gave N10,000)
Bank Account – Receiver Account (Received N3,000)
Cash Account – Receiver Account (Received N7,000)
Credit 15% Loan Account with N3,000 (Entries 13 and 14) and
Debit Cash Account with N7,000
Credit 15% Loan Account with N7,000 (Entries 15 and 16)
Transaction 8:
Bought goods for resale from Ojo & Co. For N6,500 and paid fully by cash
Step a Purchases Account, Cash Account and Ojo & Co Account
Step b Purchases Account – Received N6,500 worth of goods.
Cash Account – gave N6,500 to pay Ojo & Co.
Step c Ojo & Co. Account – gave N6,500 worth of goods and received cash worth
N6 ,500.
Step d Ojo & Co. Account received N6,500 cash and gave goods worthN6,500
amount given cancels out amount received cash . No account will be opened
because amount given equals to amount received and therefore cancels out.
Step e Debit Purchases Account with N6,500
Credit Cash Account with N6,500 (entries 17 and 18)
Transaction 9:
Step a Bought goods for resale from Ibe & Sons for N3,600 and paid fully by
cheque.
Step b Purchases Account, Ibe & Sons Account, Bank Account.
Step c Purchases Account received goods worth N3,600 from Ibe &
Sons Account
Ibe & Sons Account - gave goods worth N3,600 to Purchases Account
Received cheque of N3,600 from Bank Account
Bank Account – gave cheque of N3,600 to Ibe Account
Step d Ibe & Sons Account gave N3,600 and received N3,600
Therefore what the account gave equals what it received.
No account will be opened for Ibe & Sons because amount
given equals to amount received, thus they cancelled out. No entry

is made in the account.
Step e Debit Purchases Account with N3,600 {Entries 19 and 20}
Credit Bank Account with N3,600 { Entries 19 and 20}
Transaction 10:
Step a Bought goods for resale from Binta Enterprises N5,100 on credit.
Step b Purchases Account, Binta Enterprises Account
Step c Purchases Account received goods worth N5,100
Binta Enterprises Account – gave goods worth N5,100.
Step e Debit Purchases Account with N5,100 ( Entries 21 and 22)
Credit Binta Enterprises Account with N5,100
Transaction 11:
Step a Bought goods for resale from Loko & Co on credit for N3,000
Step b Purchases Account, Loko & Co Account
Step c Purchases Account received goods worth N3,000
Loko & Co. Account gave goods worth N3,000
Step d No Ledger Account received and given at the same time
Step e Credit Loko & Co Account with N3,000 {Entries 23 and 24}
Debit Purchases Account with N3,000 { Same as above }
Transaction 12 (a)
Step a Bought goods from Agama & Sons N2,700.
Step b Agama & Sons Account and Purchases Account.
Step c Purchases Account received
Agama & Sons Account gave
Step d No account given and received at the same time.
Step e Debit Purchases Account Receiver N2,700 (Entries 25 & 26)

Credit Agama & Sons Account Giver N2,700
Transaction 12 (b)
Step a Paid cash N700 and cheque N1,300 all to Agama & Sons
Step b Cash Account
Bank Account
Agama & Sons Account
Step c Cash Account Giver, Bank Account Giver
Agama & Sons Account Receiver
Step d No account given and received at the same time
Step e Debit Agama & Sons Account (receiver) N700
Credit Cash Account (giver) N700 (Entries 27 & 28)
Debit Agama & Sons Account (receiver)N1,300 (Entries 29 & 30)
Credit Bank Account (giver) N1,300
Transaction 13
Step a Bought goods from Ekaette N2,700 on credit
Step b Purchases Account and Ekaette Account
Step c Purchases Account received goods worthN2,700
Ekaette Account given goods worth N2,700
Step d No ledger Account given and received at the same time.
Step e Debit Purchases Account with N2,700
Credit Ekaette Account with N2,700
(Entries 31 & 32)

Transaction 14
Step a Sales made to Baba & Co. N5,000 cash
Step b Sales Account, Baba & Co. Account and Cash Account.
Step c Sales Account gave goods worth N5,000 Cash Account
received Cash of N5,000.
Step d Baba & Co. Account received goods worth N5,000 and at the
same time gave cash of N5,000
The amount given out N5,000 cancelled the amount received N5,000 for Baba &
Co. Account
Step e Debit Cash Account with N5,000
Credit Sales Account with N5,000
(Entries 33 and 34)
Transaction 15:
Step a Sales made to Yerima N7,000 by cheque
Step b Sales Account, Yerima Account and Bank Account
Step c Sales Account gave out goods worth N7,000 to Yerima
Yerima Account received N7,000 worth of goods and gave out N7,000
cheque
Bank Account received N7,000 cheque from Yerima Account
Step d Yerima account received goods worth N7,000 from sales and
gave out a cheque of N7,000 to Bank Account
Amount received = N7,000 worth of goods
Amount given = N7,000 cheque

Amount received = Amount given. The two cancelled out.
Therefore no account opened for Yerima
(Entries 35 and 36)
Transaction 16:
Step a Sales to Mutiu N5,200 on credit
Step b Sales Account and Mutiu Account
Step c Sales Account gave N5,200 worthy of goods to Mutiu
Mutiu Account received N5,200 worth of good and gave nothing
Step d No ledger Account given and received at the same time
Step e Debit Mutiu Account with N5,200 (Entries 37 and 38)
Transaction 17:
Step a Sales to Benue enterprises N6,000 on credit
Step b Sales Account and Benue Enterprises Account
Step c Sales Account gave N6,000 worth of goods to Benue Enterprises Account
Benue Enterprises Account received goods worth N6,000 from
sales Account.
Step e Debit Benue Enterprises Account with N6,000 (Entries 39 and 40)
Credit sales account with N6,000

Transaction 18 (a) & (b)
Sales to Niger & Sons N5,100 paid cash N2,000, cheque N1,600 and balance deferred.
This can be broken to transactions 18(a) for credit and 18(b) for settlement as follows:
Transaction 18 (a)
Step a Sold goods to Niger & Sons N5,100
Step b Niger & Sons Account and Sales Account.
Step c Niger & Sons Account received goods and Sales Account gave goods
Step e Debit Niger & Sons Account with N5,100
Transaction 18 (b)
Step a Niger & Sons Account paid in cash N2,000 and cheque N1,600.
Step b Niger & Sons Account, Cash Account & Bank Account
Step c Niger & Sons Account gave cash and cheque
Cash Account received cash
Bank Account received cheque
Step e (i) Debit Cash Account with N2,000
Credit Niger & Sons Account with N2,000
( Entries 43 & 44) and

(Ii) Debit Bank Account with N1,600 (Entries 45 & 46)
Credit Niger & Sons Account with N1,600
Transaction 19:
Step a Sales to Olu Young Enterprises N4,600 on credit
Step b Sales Account, Olu Young Enterprises Account
Step c Sales Account – gave goods of N4,600 to Olu Young Enterprises
Olu Young Enterprises Account received goods of N4,600
Step e Debit Olu Young Enterprises with N4,600
Credit Sales Account with N4,600 (entries 47 and 48)
Transaction 20:
Step a Unsold stock valued at N7,300
Step b This transaction will not be recorded because the unsold stock is part of
the goods purchased and already recorded in the purchases account.
Recording it again will amount to duplication of entries. This
information will only be noted and later be used when preparing the final
account of the enterprise.
ERUDITE CASH BOOK
(Entries from illustration 1 above)
Cash Account
1/1/X9 Capital 50,000 (1) 10/1/X9 Bank 35,000 (6)

18/1/X9 15% Loan 7,000 (15) 10/1/X9 Rent 3,000 (8)
28/1/X9 Sales 5,000 (33) 21/1/X9 Purchases 6,500 (18)
28/1/X9 Niger & Sons 2,000 (43) 21/1/X9 Agama & son 700 (28)
31/1/X9 Bal b/d 18,800

64,000 64,000
1/2/X9 Bal b/d 18,800
Bank Account
1/1/X9 Capital 30,000 (3) 10/1/X9 Fur. & Fittings 3,000 (10)
10/1/X9 Cash 35,000 (5) 21/1/X9 Purchases 3,600 (20)
15/1/X9 15% Loan 3,000 (13) 21/1/X9 Agama & Sons 1,300 (30)
28/1/X9 Sales 7,000 (35) 31/1/X9 Bal. c/d 68,700
28/1/X9 Niger & Sons 1,600 (45)
89,200 89,200
1/2/X9 Bal. b/d 68,700
Creditors Ledger Account
Agama & Sons Account
21/1/X9 Bal. C/d 700 (27) 21/1/X9 Purchasing 2700 (26)
21/1/X9 Bank 1,300 (29)
31/1/X9 Bal. c/d 700
2,700 2,700
1/2/X0 Bal. b/d 700
Loko & Co. Account

31/01/X9 Bal c/d. 3,000 (53) 21/1/X9 Purchases 3,000 (24)
1/2/X9 Bal. b/d 3,000
Ekaette Account
31/1/X9 Bal. c/d 2,700 21/1/X9 Purchases 2,700 (32)
1/2/X9 Bal. b/d 2,700
Binta Entprises Account
31/1/X9 Bal c/d 5,000 21/1/X9 Purchases 5,100 (22)
1/2/X9 Bal b/d 5,100
Inside The Debtors Ledger
Mutiu Account
28/1/X9 Sales 5,200 (37) 31/01/X9 Bal c/d 5,200
1/2/X9 Bal b/d 5,200

Olu Young Ent. Account
28/1/X9 Sales 4,600 (47) 31/1/X9 Bal. c/d 4,600
1/2/09 Bal. b/d 4,600
Benue Enterprises Account
15/1/X9 Sales 6,000 (39) 31/1/X9 Bal c/d 6,000
1/2/X9 Bal b/d 6,000
Erudite Enterprises
Trial Balance as at 31/1/90
Particulars Dr Cr.
N N
Cash 18,800
Bank 68,700
Agama & Sons 700
Loko & Co 3,000
Ekaette 2,700
Binta Enterprises 5,100
Mutiu 5,200
Olu Young Ent. 4,600
Benue Enterprises 6,000
Niger & Sons 1,500

Furniture & Fittings 3,000
Motor Vehicles 35,000
15% Loan 10,000
Capital 115,000
Sales 32,900
Rent 3,000
Purchases 23,600
169,400 169,400
3.3.1 Notes on Recording and Balancing of Books of Account
In balancing each of the above ledger accounts, the following simple rules were observed.
(1) Every credit entries must have a corresponding debit entry.
(2) When a ledger account has been opened, all entries relating to that ledger
account will be passed into that ledger account, that is a new one will not be
opened for the same ledger account unless they are not in the same ledger.
(3) All entries involving double entries have identification numbers. Each of these
numbers can be used to trace the corresponding entry. Note the balance carried
down or brought down have no identification numbers since they are not part
of the double entries.
(4) The date of balancing the ledger account is the last day of that period. The
transactions recorded above covered the whole month of January 2009. The
date of balancing the ledger account is therefore the last date of the month that
is 31/1/X9. Assuming the transaction covered a period of twelve calendar
months ending on 31/12/X9 the date of balancing the ledger account should
have been 31/12/X9.
(5) The ledger account having the total of its debit side equal to that of the credit
side will not have any balance carried forward, hence no balance will be
brought forward in the next period in this ledger account.
(6) When the item recorded in a particular account is just an entry, that ledger
account will still be balanced at the end of the period.
(7) In situations involving item 6 above, the same item will serve as balance c/d
and also as the total.
(8) Each total is underlined twice, indicating the end of that period and the
beginning of the next period.
(9) The balance carried down to close a particular ledger account is the same
balance carried forward to open that ledger account in the next period. That is,
the closing balance of one period (balance carried down) will serve as the
opening balance (balance brought forward) of the next period.
(10) The whole records are distributed into four ledgers, namely, cash book,
creditors ledger, debtors ledger and general ledger. A debit entry may be found
in one ledger while the corresponding credit entry is found in another ledger. It
is also possible for both entries credit and debit involved in a transaction to be
found in the same ledger.
Dr. Adewara of Olorun Agbaeo Enterprises has the following transactions for the
month of February, 2012.
Cash Purchases 6,000
Cash Sales 20,000
Paid wages by cash 400

Paid Insurance by cash 1,600
Settle Olayiwola by cash 600
You are required to record the transactions, balance off the ledger and prepare a
Trial Balance.
Cash Account Sales Account
N N N N
Sales 20,000 Purchases 6,000 Bal c/d 20,000 Cash 20,000
Wages 400
Insurance 1,600 Purchases Account
Olayiwola 600 N N
Bal c/d 11,400 Cash 6,000 Bal c/d 6000
20,000 20,000
Wages Account Insurance Account

N N N N
Cash 400 Bal c/d 400 Cash 1600 Bal c/d 1600
Olayiwola’s Account
N N
Cash 600 Bal c/d 600
3.4 Balancing of Ledger Accounts
After the debit and credit entries have been completed, each Ledger Account will then be
balanced. Balancing of ledger account involves finding the difference between the debit and
credit sides and making the side with smaller total to agree with the side with the higher total.
This is done by carrying the difference to the side with lower total. The narration or
description for this difference is balance carried down or balance carried forward. This
balance will be the balance to commence with at the beginning of the next period when it will
be known as balance brought forward or balance brought down. This balance serves as the
beginning of operation in the next financial period. These balances are normally described in
shortened forms as Balance c/d or c/f for carried down or carried forward and as Balance b/d
of b/f for brought down or brought forward.
Note that, a ledger account having the total of its debit side equal to that of its credit side will
not have balance carried forward and no balance to bring forward for the next period.
3.4.1 Preparation of Trial Balance
After balancing the ledger accounts, the book-keeper may wish to find out the arithmetical
accuracy of the double entries made so far. This accuracy can be tested by collecting the
balances brought forward or brought down from each ledger account together under debit or
credit balances arranged side by side. If the total of all debits agree with the total of all
credits, it will be said that the act of debiting and crediting transactions have been accurately
recorded. However, this does not mean that errors have not been committed in such
recording. What happened is that items credited have been equally debited during the book-
keeping. The ledger account balances arranged under the vertical headings of debit and credit
is known as trial balance (meaning the balances that we are trying to find out whether or not
will balance). The totals of the credit side and debit side of a trial balance should balance if
the double entry system of recording has been well observed and some obvious errors have
not been made in recording or balancing of the ledger accounts. As already indicated above,
the trial balance total may even agree despite the fact that some hidden errors exist in the
recording. In the meantime we shall assume that the trial balance totals agree and no errors
have been made. The major purpose of trial balance is to test the arithmetical accuracy of the
double entry book-keeping.
Trial balance is normally having a heading of ”as at” indicating that it is balances at a brief
moment of time. This means that these balances are temporary and will change immediately
if any other business transactions should occur.
3.4.2 Notes to the Trial Balance
After preparation of the trial balance, it may be discovered that some of the items in the trial
balance have been affected by some other information. The practice is to list all these
information one after the other below the trial balance and state how they affect any item(s)
in the trial balance. These information listed one after the other below the trial balance is
known as notes to the trial balance.
These notes are information that are needed when the trial balance will be further used to
prepare more useful accounting information. Example of such information include:
(1) Stock of goods purchased remaining unsold.
(2) Expenses due not yet paid or expenses not yet due already paid.
(3) Income received though not yet earned or income due but not yet received.
(4) Business transactions that have occurred after the ledger accounts have been balanced.
(5) Statement of accounting policies to be adopted when using the trial balance figures to
prepare further useful financial accounting information.
(6) Other important information to assist in using the items in the trial balance to prepare
further financial accounting information.
Explain the term Trial Balance.
The ledger account balances arranged under the vertical headings of debit and
credit is known as trial balance (meaning the balances that we are trying to find out
whether or not will balance). The totals of the credit side and debit side of a trial
balance should balance if the double entry system of recording has been well
observed and some obvious errors have not been made in recording or balancing of
the ledger accounts.
Illustration 2
Abigail Obebe commenced trading business on 1st Jan. 20X1 with the name of Abi
Enterprises. On that day, the proprietor converted his personal cash of N50,000 for the
business use. She also deposited into the business bank account a cheque of N30,000 which
she won from a lottery.
(a) On 2nd Jan.20X1 he deposited N35,000 of the cash into the business bank account.
He paid for the premises to be used by the business N2,400 in form of cash plus N600
agreement fees. On that day, he acquired furnitures and fittings N3,000 and paid by
cheque.
(b) On 5th Jan. 20X1, he converted for the business use his motor van bought in 1990 for
N10,000 but worth N35,000 on the date of converting it for business use.
(c) On 10th Jan. 20X1, obtained a loan of N10,000 from Jekojeko at an interest rate of
15% per annum. The loan was given in form of cash N7,000 and balance in cheque.
(d) On 11th Jan. 20X1, bought goods for sales as follows:
From Ojo & Co., N6,500 paid fully by cash.
From Ibe & Sons N3,600 paid fully by cheque.
From Binta Enterprises N5,100 on credit.
From Loko & Co., N3,000 on credit.
From Agama & Sons N2,700 paid cash N700 cheque N1,300 and balance deferred.
From Ekaette N2,900 on credit.
(e) 15th January 20X1, sales were made as follows:
To Baba & Co., N5,000 on cash.
To Yerima N7,000 by cheque.
From Mutiu N5,200 on credit.
To Benue Enterprises N6,000 on credit.
To Niger & Sons N5,100 paid cash N2,000 cheque N1,600 and balance deferred.
To Olu Young Enterprises N4,600 on credit.
(f) On 17th January 20X1, paid Binta Enterprises N5,000 as full settlement of account by
cheque.
Paid Loko & Co., N1,000 cash after returning goods worth N700 to Loko & Co.,
(g) On 20th Jan. 20X1.
Received from Mutiu cheque of N5,000 as full settlement of account.
Received the information that Benue Enterprises has been liquidated and collected
cheque of N5,700 from the liquidator for settlement of amount owed by Benue
enterprises.
(h) Goods were returned by Niger & Sons for N300 on 23rd January,. 20X1.
(I) Received another cheque of N100 from liquidator of Benue Enterprises on 23rd Jan.
20X1
(j) Paid the following expenses: Advertisement in cash N600
Carriage of goods to customers in cash N520
Carriage of goods from customers N720 cash
Salaries of workers N3,200 by cheque on 25th January, 20X1.
(k) 27th January. 20X1:
(i) Took for personal consumption stock of goods costing N1,200.
(ii) Withdrew from bank for personal use N600.
(iii) Used cash of N550 to settle personal expenses.
(iv) Cheque from Yerima was returned as dishounoured
(v) Ibe & Sons returned to the business cheque of 11th January for non payment.
(l) 31st Jan. 20X1:
(i) The unsold stock was value at N7,300.
(ii) The business uses the practical method of keeping its record in which the record in the
day books are transferred to the respective ledgers after the transactions on 7th , 14th ,
27th and 31st January 20X1.
You are required to prepare for the month:
(a) The Record in each of the day books.
(b) The Ledger Entries.

(c) The Trial Balance as at 31st January after balancing each of the ledgers.
Records in the Ledgers
CASH BOOK
Date Particulars DA Cash Bank Date Particulars DR Cash Bank
N N
1/1/X1 Capital = 50,000 30,000 2/1/X1 Bank (c ) 35,000
2/1/X1 Cash (c ) = = 35,000 2/1/X1 Rent 3,000
10/1/X1 15% Loan = 7,000 3,000 2/1/X1 Fur./Fittings 3,000
15/1/X1 Sales = 5,000 7,000
15/1/X1 Niger & Sons = 2,000 1,600
20/1/X1 Mutiu 200 = 5,000 11/1/X1 Purchases 6,500 3,600

11/1/X1 Agama & Sons 700 1,300
20/1/X1 Benue Entp. = = 5,700 17/1/X1 Binta Ent. 100 = 5,000
23/1/X1 Bad Debt. Rec. = = 100 17/1/X1 Loko & Co., = 1,000 =
17/1/X1 Ibe & Sons = = 3,600 25/1/X1 Advert = 600 =
31/1/X1 To Dis. All
A/C in GL 200 = 25/1/X1 Carriage out = 520 =
25/1/X1 Carriage inw. = 720 =
25/1/X1 Salary = = 3,200
27/1/X1 Drawings = 550 600

27/1/X1 Yerima = =
7,000
31/1/X1 To Dis. Rec.

A/C in GL 100
31/1/X1 Bal. c/d 15,410

67,300
64,000 91,000 64,000 91,000

01/1/X1 Bal. b/d 15,410 67,300
CREDITORS LEDGER
Ibe & Sons Account
31/1/X1 Bal. C/d 3,600 31/1/X1 C/Bal. 3,600
1/2/X1 Bal. B/d 3,600

Binta Enterprises Account
21/1/X1 Cash Book 5,100 14/1/X1 Purch. Day book 5,100
Loko & Co., A/C
21/1/X1 Purch. Return Book 700 4/1/X1 Purch. Day book 3,000
21/1/X1 C.B 1,000
31/1/X1 Bal. c/d 1,300

3,000 3,000
1/2/X1 Bal. b/d 1,300
Agama & Sons A/c
31/1/X1 Bal. c/d 700 31/1/X1 Purch. Day Book 700
1/ 2 /X1 Bal. b/d 700
Ekaette A/C
21/1/X1 Bal c/d 2,900 11/1/X1 Purchases 2,900
1/2/00 Bal b/d 2,900
Schedule of Creditors
Loko & Co 1,300

Agama & Sons 700
Ekaette 2,900
Ibe & Sons 3,600
8,500
Debtors Ledger
Mutiu Account Yerima Account
21/1/X1 SDB 5,200 21/1/X1 C.B 5,200 31/1/X1 CB 7,000 31/1/X1 Bal. c/d 7,000
1/2/X1 Bal. b/d 7,000
Benue Enterprises Account
21/1/X1 SDB 6,000 21/1/X1 C.B 5,700
21/1/X1 Bad Debt 300
6,000 6,000
Niger & Sons Account
21/1/X1 SDB 1,500 21/1/X1 SRB 300

31/1/X1 Bal. c/d 1,200
1,500 1,500
1/2/X1 Bal. b/d 1,200
Olu Young Account

21/1/X1SDB 4,600 31/1/X1 Bal. c/d 4,600
1/2/X1 Bal. b/d 4,600
Schedule of Debtor
Yerima 7,000
Niger & Sons 1,200
Olu Young 4,600
12,800
General Ledger
Assets Section
Furniture and Fittings Account
7/1/X1 C.B. 3000 31/1/X1 Bal c/d 3000
1 / 2 /X1 Bal b/d 3000

Expenses Section
Rent Account
7/1/X1 C.B 3000 31/1/X1 Bal c/d 3000
1 / 2 /X1 Bal b/d 3000
Discount Allowed Account
31/1/X1 C. B. 200 31/1/X1 Bal c/d 200
1/1/X1 Bal b/d 200
Bad Debt Account
21/1/X1 C. B 200 31/1/X1 Bal c/d 200
1/1/X1 Bal b/d 200
Motor Vehicle Account
7/1/X1 Capital 35,000 31/1/X1 Bal c/d 35,000
1/ 2/X1 Bal. b/d 35,000
Advertisement Account
31/1/X1 Cash 600 31/1/X1 Bal. c/d 600
1/ 2/X1 Bal. b/d 600

Carriage Outwards Account
31/1/X1 Cash 520 31/1/X1 Bal. c/d 520
1/ 2/X1 Bal. b/d 520
Carriage Inwards Account
31/1/X1 Cash 720 31/1/X1 Bal. C/d 720
31/1/X1 Bal. b/d 720
Purchases Account
14/1/X1 PDB 11,700 31/1/X1 Drawing 1,200
31/1/X1 C. B 12,100 31/1/X1 Bal. c/d 22,600
23,800 23,800
31/1/X1 Bal. b/d 22,600
Return Inwards Account
22/1/X1 SRB 300 31/1/X1 Bal c/d 300
1/ 2/X1 Bal. b/d 300
Equity Section
31/1/X1 Bal. c/d 115,000 7/1/X1 C. B 80,000
7/1/X1 M.V 35,000
115,000 115,000
1/ 2/X1 Bal b/d 115,000
Liabilities Section
15% Loan Account
31/1/X1 Bal c/d 10,000 14/1/X1 C. B 10,000
1/ 2/X1 Bal b/d 10,000
Drawings Accounts
31/1/X1 purchase 1,200 31/1/X1 Bal c/d 2,350
31/1/X1 C. B 1,150
2.350 2.350
1/2/X1 Bal b/d 2,350
Income Section
Return Outwards Account
31/1/X1 Bal c/d 700 21/1/X1 PRB 700
1/1/X1 Bal b/d 700

Sales Account
31/1/X1 Bal. c/d 32,900 21/1/X1 SDB 17,300
21/1/X1 C.B 15,600
32,900 32,900
1/ 2/X1 Bal. b/d 32,900
Bad Debt Recovered Account
31/1/X1 Bal. c/d 100 31/1/X1 Bank 100
1/ 2/X1 Bal. b/d 100
Abi Enterprises
Trial Balance As At 31/01/X1
Particulars Dr. Cr.
N N
Cash 15,410 =
Bank 67,300 =
Trade Creditors = 8,500

Trade Debtors 12,800 =
Furniture & Fittings 3,000 =
Motor Vehicle 35,000 =
Purchases 22,600 =
Salary 3,000 =
Rent 3,200 =
Discount Allowed 200 =
Bad Debt 300 =
Advertisement 600 =
Carriage Outward 520 =
Carriage Inward 7 20 =
Capital = 115,000
Drawing 2,350 =
15% Loan = 10,000
Return Outward = 700
Return Inward 300 =
Sales = 32,900
Bad Debt Received = 100
Discount Received = 100
167,300 167,300
Note: Stock on hand on 31/1/X1 was valued at N7,300
Summary to study session 3
The study session discussed the techniques of making entries into the books of accounts using
double entry book keeping system. Entries were made into the books of accounts. The
records in the ledger account were balanced at the end of relevant period and the balances
were used to prepare the trial balance.
Self Assessment Questions for study session 3
Question 1
Yerima Enterprises was established by Alhaji Tanko Yerima on 1st April, 20X3. For the first
month of operation the following transactions were recorded:
1/4/X3 Tanko Yerima introdued cash of N50,000 to the business and issued a cheque from
his personal savings for the use of the business amounting to N60,000. Alhaji Tanko also
negotiated and obtained a loan of N10,000 inform of cheque from Papa Eze his friend at an
agreed interest rate of 15% per annum.
1/4/X3 Alhaji Tanko employed certain staff to manage the business. A loan of N5,000 in cash
was given to some of these member of staff repayable from the monthly salary at N1,120 per
month of which N120 was to serve as interest on the loan.
2/4/X3 Bought goods for resale as follows:
From Jones and Co. N6,300 on credit
From Abass & Sons N7,700 on credit
From Okon & Co. N4,000 paid by cheque
From Haruna Enterprises N5,300 paid cash N3,000
From Tom Tom N6,000 on credit

From Yola & Co. N3,200 on credit
From Keshi & Sons N2,700 on credit
3/4/X3 Sold goods as follows:
To Obanor N9,000 on credit
To TomTom N5,600 on credit
To Rasheed N3,300 on credit
To Keshi N4,300 on credit
To Garuba N1,900 and received from Garuba cash N700 and cheque N300
To Yola N3,000 on credit
To Kano N3,900 on credit
To Pye & Co. N2,000 and received from Pye & Co. cash of N400 and cheque of N400
3/4/X3 A sum of N1,200 was set aside to offset petty cash item of N100 and below this was
to be reimbursed on a fortnight basis
4/4/X3 The following were paid from the Petty cash
Carriage on goods bought N80
Electricity bill N90
Purchase of stamp N95
Sundry Expenses N87
5/4/X3 Paid rent as follows: Cash N3,700 and cheque N2,300
6/4/X3 Payment from Petty cash
Carriage on Purchase N97
Cleaning N77
Entertainment of office N96

Office Stationery N99
9/4/X3 Bought goods on credit from:
Kano N2,700
Abass & Sons N3,000
Pye & Co. N5,100
10/4/X3 Paid, Jones & Co. N6,000 cheque for full settlement of account.
Paid Abass & Sons N1,000 cheque.
Paid Yola & Co. N1,000 cheque.
11/4/X3 Paid Abass & Sons N500 cheque and Yola & Co. N300 cash
Paid Insurance by cheque N1,500
12/4/X3 Received from Obanor cheque of N1,500
12/4/\X3 Received from Rasheed cheque N700
12/4/X3 Received from Garuba cheque of N800 for full settlement of account.
13/4/X3 Paid the following Petty expenses
Carriage on sales N66
Carriage on Purchases N40
Sundry Expenses N67
Cleaning Expenses N60
13/4/X3 Received cheque of N4,000 from Tom Tom with an instruction to set off the
amount due from this customer against equivalent amount owing to the
customer by the business.
13/4/X3 Agreed with Keshi to set off the amount due from the business against the
amount owing the business by him.
14/4/X3 A cash of N10,000 on hand was deposited into the business bank
account.
15/4/X3 The following transactions took place:
Paid Insurance N200 by cash
Paid Abass & Sons N450 cash
Paid Yola & Co. N300 cheque
15/4/X3 Received from Obanor cash of N2,000
Received from Rasheed N700 cash
Received from Kano N4,500 cheque for amount owing and deposits for future
supplies.
16/4/X3 Paid TomTom N7,000 cheque for settlement of account and deposits for future
supplies.
16/4/X3 Paid Insurance of N180 by cash and Pye & Co. N6,000 by cheque
17/4/X3 Petty cash was reimbursed.
18/4/X3 Paid Abass & Sons N1,000 cheque.
Paid Yola & Co. N1,500 cheque for full settlement of accounts.
19/4/X3 The cheque given to Jones & Co. on 10th April, for full settlement of account
was returned for non payment by the banker.
20/4/X3 The following were paid from Petty cash
Carriage on Purchases N80
Carriage on sales N95
Cleaning Expenses N80
Sundry Expenses N95

22/4/X3 Abass & Sons was paid cash N450
23/4/X3 Cheque collected from Obanor on 12th April was dishonoured by the banker.
24/4/X3 Obanor sent in N1000 cheque for payment of account.
Rasheed sent in cheque of N350 for payment of account.
25/4/X3 N3,000 was withdrawn from the bank for office use.
26/4/X3 Paid Insurance by cash N1,200
26/4/X3 Received from Rasheed a cheque of N1,700
26/4/X3 Received from Obanor a cheque of N2,000
27/4/X3 Paid Rent N1,200 by cash
27/4/X3 Paid Insurance N650 by cheque
28/4/X3 Paid the following from Petty cash.
Rent N80
Entertainment N70
Stationery N100
30/4/X3 Paid Salary for the month N6,700 net by cheque after deducting pay
as you earn tax of N900, Union dues of N400, repayment of loan
with interest N1,120.
30/4/X3 The balance owing to Kano was transferred from debtors ledger to his account
in creditors ledger and the amount due from Pye & Co. was transferred from
its account in creditors ledger to its account in debtors ledger.
30/4/X3 Paid N100 interest on 15% Loan by cash
30/4/X3 The unsold stock was valued at N9,700

Yerima Enterprises uses the practical method of book keeping with two columns cash
book. Summary were transferred from day books to ledgers at close of transaction on
7th 14th, 21st and 30th April.
You are required to show:
(a) The record in each of the subsidiary books
(b) The records in each of the ledgers
(c) The trial balance as at 30th April, 20X3.
Question 2
Okon commenced a trading business on 1st of April 20X9. The following transactions were
recorded in his business for the first month of trading.
1/4/20X9 Introduced cash of N50,000 into the business.
1/4/20X9 Converted for the business use the following:
Personal computer bought for N65,000 in 20X6 but now valued for
N45,000 and his personal motor van bought for N250,000 in 20X5 which his mechanic
mandated to sell for N200,000 has not been able to sell because buyers insisted for N150,000.
Okon prefered and decided to use it to run the business at this value.
5/4/20X9 Open a bank account for the business known as Okon Enterprises
and paid N30,000 collected from his friend, loan to be repaid in August
31st 2009 at15 % interest per annum.
6/4/20X9 Bought goods as follows for resale
From Bolu & Sons N6,000 on credit
From Uzor & Co N7,000 on credit
From Dantutu Enterprises N8,000 paid cash N5,000 and cheque N3,000
From Toronto N1,800 on credit.

10/4/20X9 Sold goods as follows: -
Yaro & Co for N9,000 on credit
Tanko Ayuba for N5,500 on credit
Ekpenyong & Co for N4,000 received cash for full payment
Ibe & Sons N3,000 on credit
Momodu & Sons N6,000 on credit
14/4/20X9 Received cheque of N2,700 from Tanko Ayuba.
15/4/20X9 Pay Uzor & Co N6,300 cheque for full settlement of the account
15/4/20X9 Pay Bolu & Sons N3,700 cash and returned goods of N1,200 to
Bolu & Sons
17/4/20X9 Received from Yaro & Co N8,200 cheque for full settlement of
account as agreed
18/4/20X9 Collected N3,700 from the representative of Momodu &

Sons in cash with a letter from the court declaring Momodu & Sons as a
bankrupt business.
19/4/20X9 Tanko Ayuba returned goods worth N600.
20/4/20X9 Received further cash of N700 from Momodu & Sons liquidator.
22/4/20X9 Paid the following expenses
Advertisement by cash N600
Carriage on goods from suppliers N520 by cash
25/4/20X9 Paid carriage on goods to customers by cheque N1,720
26/4/20X9 Paid salary of workers by cheque N13,200
27/4/20X9 Took for personal consumption stock of goods costing N1,200
Withdrew for personal use from the business bank account N2,600
28/4/20X9 Okon’s son was given N5,500 for his school expenses from office
cash.
28/4/20X9 Dantutu enterprises returned to Okon enterprise cheque of 6th April
for irregular signature
29/4/20X9 Cheque received from Tanko Ayuba was dishonoured.
30/4/20X9 Withdraw N5,000 from Bank for office use.
30/4/20X9 Unsold stock was valued at N10,300 and rent for the month of April, 20X9
was not yet paid amounting to N1,500.
You are required to:
(a) Prepare necessary ledger accounts to record the above transactions for the month of
April 20X9.
(b) Balance the ledger accounts as at 30th April, 20X9.
(c) Prepare a trial balance as at 30th April, 20X9.

STUDY SESSION 4 RECORDING OF BUSINESS TRANSACTIONS
INTRODUCTION
Understanding and identifying business transactions can only be done after one gets a clear
picture of the concept called “Business Entity”. One may ask what is a business entity?
There are various definitions of a business entity, but the Nigerian Accounting Standards
Board (NSAB), defines it as “every economic unit, regardless of its legal form of existence, is
treated as a separate entity (in accounting) from parties having proprietary or economic
interest in it”. It should be noted that all transactions of a business entity are recorded in the
books of accounts. For accounting purposes, once a business has been established, it is
bound to transact business with other parties; these transactions must be recorded in the
books of account. The focus of this session is on the types of books of account and how to
make entries therein.
4.1 describe business entity and types of business transactions
4.2 outline various types of books of accounts
4.3 make entries of business transactions in the books of accounts
4.1 Business entity and types of business transactions
4.1.1 Types of Business Entity
You should know that that there are different forms of business entity. Our discussion will be
limited to four main types namely:
1. Sole Proprietorship: This is a business that is owned entirely by one individual.
The business, once registered, is separate and distinct from its owners. Their
source of funding is from the investment of the owners or by means of loans. It
transacts business and makes records of such transactions.
2. Partnership: This is a business that is established and owned by two or more
individuals in accordance with a contractual arrangement amongst them. Their
source of funding is similar to that of sole proprietorship except the initial
investment is from the partners (more than one) involved. They also use loans to
finance the business. They transact business and make records of such
transactions.
3. Companies: These are separate legal entities where ownership is divided into
shares or stocks. Companies are run on funds raised by selling shares to public or
private investors. Those running the company may or may not have invested in the
company. Liabilities to its creditors are limited to the value of shares of stock at
the time of liquidation. This type of organisation transacts business in large
volumes and their record making is compulsory and more complex than the other
entities mentioned above.
4. Non-Profit Organisations: These are businesses being run for the purpose of
providing social services. Their source of fund is through subscriptions and grants.
Examples of such organisations include businesses such as Government
organizations, Non-Government organisations (NGOs), Hospitals, etc.
All businesses organisations must maintain financial records and prepare reports of their
financial transactions.
4 .1.2 Business Transactions
What is a business transaction? It is the occurrence of a business event between two or more
persons which must be recorded in the books of accounts. It is also any event that causes a
change in the assets, liabilities or owner‟s capital (investment) of a business. These
transactions cannot be identified or recorded except by using the system called accounting.
Accounting is defined as the language used in the process of identifying, measuring and
communicating economic information by recording, sorting and summarizing data resulting
from business transactions and events. It is also known as book-keeping which is a system
primarily concerned with the design of the system of records, the preparation of reports based
on the recorded information and the interpretation of the reports.
Types of Business Transactions
Business transactions can be classified into four categories, namely:
1. Sales on credit: When sales is made on credit, this involves the creation of an asset -
the „debtor‟ and giving out of an asset in the form of stock (i.e., the article sold).
The recording required is

N N
DR Debtor xx
CR Stock xx
.
2. Purchases on credit: When purchases are made on credit, this involves the creation
of a liability - the „creditor‟, and the creation of an asset in the form of stock (i.e.,
the article bought) this is known as a Claim Exchange Transaction, which occurs
when only claim accounts are engaged and impacted. for example:
Goods worth N100,000 were purchased from XYZ Co. on credit.
DR Purchases (claim on income) N100,000
CR Accounts Payable (Liability) N100,000.
3. Receipts of Cash: This is known as an Asset Exchange Transaction which occurs
when two Assets accounts are engaged in a transaction. For example:
Sundry Debtors paid cash of N20,000 for the goods bought on credit.
DR Cash (Asset) N20,000
CR Sundry Debtor (Asset) N20,000.
4. Payments of Cash: This is an Asset Use Transaction which occurs when both asset
accounts and claim accounts are decreased. If
Accrued Salaries of N30,000 cash were paid to staff on 30th November,2010.
DR Salaries Payable (claim-liability) N30,000
CR Cash (Asset) N30,000.
The four types of transactions listed above are recorded in special journals generally used for
each. These journals are usually referred to as cashbooks for receipts and payments of cash.
Sales Day Book is for credit sales and Purchases Day Book is for credit purchases. The total
or totals accumulated in the special journals are posted at the end of each month to the
appropriate accounts ledger such as Cash, Sales, Purchases, Sundry Debtors, Sundry Payable
and other accounts. Special journals offer the advantage of reducing the amount of posting
work by permitting the posting of totals representing many individual transactions. They also
strengthen internal control by providing for a subdivision of duties.
Before recording of business transactions an enterprise must decide on the following:

1. Accounting Method: The medium through which the foregoing fundamental accounting
concepts are applied to financial transactions and to the preparation of financial
statements. It is also the method adopted in recognizing, measuring and valuing an item
of revenue, expense, gain, loss or any asset or liability. The existence of more than one
recognized accounting method can be rationalized, because accounting practices have
evolved in response to the variety and complexity of types of enterprises and business
transactions. There are two distinctive accounting methods that have been recognised for
the recording of business transactions. These are :(a) ACCRUAL BASIS OF
ACCOUNTING — which requires that revenue be recognized when it is realized and that
expenses are also recognized when incurred. This approach makes possible the matching
of revenue and related costs to arrive at net income. (b) CASH BASIS OF
ACCOUNTING— here, revenue is recognised only when cash is received; expenses are
recognized only when paid in cash. The cash basis of accounting is not in conformity with
Generally Accepted Accounting Principle (GAAP) because it violates the Matching
Concept. However, there is a modified cash basis method that is acceptable for income
tax purposes by individuals, professional firms and service types of businesses, but not by
companies with inventories.
2. Accounting Policies: These are those bases, rules, principles (concepts), conventions and
procedures adopted in preparing and presenting financial statements. Judgment is
required in the choice of the accounting policies which are appropriate to the
circumstances of an enterprise and are best suited to present the “true and fair view” of its
results and financial position.
Recording of Business Transactions

As stated earlier, business transactions have been defined as any economic event that causes a
change in the assets, liabilities, or owner‟s equity of a business. Accounting is defined as
the language used in the process of identifying, measuring, and communicating economic
information by recording, sorting and summarizing data resulting from business transactions
and events. From this definition, one can easily see that Accounting is the system by which
business transactions are recorded. For business transactions to be recorded the following
procedures must be followed:
1. There must be source documents such as cheques, receipts, invoices, quotations,
pro-forma invoices and delivery notes. These documents are important as they are
the first record of a transaction. Source documents usually show the date, money
value, and the nature of the transaction. Serial numbers are used for each type of
business paper to prevent the unknowing omission of a document.
2. All business transactions are recorded according to accounting principles
regardless of whether a business uses a manual or electronic data processing
system.
3. All transactions must be recorded using the accounting rule known as double-
entry book-keeping. This rule states that each and every transaction must be
recorded at least twice. Under this system of recording we have debits and
credits. Double entry translates into the situation where for every debit there must
be a corresponding credit. The double-entry system of recording is universally
accepted worldwide because of the built in controls it provides against many types
of errors and possible fraud.
4. There must be a normal accounting period of one year (12 months) which can
begin either in January or any other month in the year as long as the period is for
one full year. This period is known as the accounting cycle which is the series of
accounting procedures repeated in the same order each period. They include the
maintenance of journals, ledgers and preparation of the financial statements.
5. The information contained in source documents are entered first in the relevant
journal and then posted to accounts in the ledger. Journals are chronological
records in which transactions are expressed in terms of debits and credits to the
accounts they affect.
6. All transactions when recorded are divided into two groups which are (a) nominal
accounts that includes all revenue and expense accounts. The nominal accounts
are closed at the end of each period as they are accounts used for the processing of
the income statement that shows net income or loss for a given period. The
second group is (b) real accounts which consist of all balance sheet accounts:
assets, liabilities, and capital accounts. Real accounts remain open when the
books are closed at the end of the period and their balances at the end of the
period are used as opening balances for the new period.
7. Sundry Debtors and Sundry Payables are controlling ledger accounts used to
summarize the numerous individual customers/creditors accounts which are
maintained in a subsidiary ledger. It is necessary that schedules of the accounts in
the subsidiary ledgers are prepared and to determine that they agree in total with
the related controlling accounts.
8. All other transactions are recorded in the general journal and the number and
design of journals vary with the size and nature of operation of the business.
9. Adjusting entries are entered in the general journal at the end of the period as a
means of bringing the accounts up to date and making a precise cut off of revenue
and expenses between the old and new accounting periods. They may be
classified into five major groups: (a) apportionment of recorded costs, (b)
apportionment of recorded revenue, (c) accrual of unrecorded expenses, (d)
accrual of unrecorded revenue and (e) valuation of receivables.
10. After closing entries of revenue and expenses their balances are transferred to the
Income Summary Account. The income summary account is closed by
transferring its balance to Retained Earnings account in the balance sheet. The
balance in the Income Summary account is either net income or net loss for the
period.
11. Reversing Entries are the exact opposite of the adjusting entries and are used from
the first date of the new accounting period to bring balances of the accruals of the
old period into the new period. They are commonly made for those adjusting
entries: (a) accrue expenses requiring cash payment at a later date, (b) accrue
revenue for which cash collections are expected later, (c) transfer of the unearned
portion of recorded revenue to a liability account or (d) transfer of unexpired costs
from expense accounts to asset accounts.
12. A trial balance is a listing of all accounts in the ledger and their balances at the
end of the period. It proves that the books are in balance and provides a basis for
preparing financial statements. It is also necessary to prepare a schedule of the
accounts in subsidiary ledgers and determine that they agree in total with the
related control accounts.
13. A work sheet is a columnar sheet on which ledger balances at the end of the
period are listed, adjusted and classified in the general format of financial
statement. The finished work sheet is the source for preparing formal financial
statements and also for the adjusting and closing entries to be entered in the
general journal and posted to the ledger.
14. For a merchandising/trading business, a work sheet often contains six pairs of
debit and credit columns. They are for the (a) trial balance, (b) adjustments, (c)
adjusted trial balance, (d) income summary (e) retained earnings and (f) balance
sheet.
15. For a manufacturing business, an additional pair of columns is inserted in the
work sheet in order to classify separately the costs of manufacturing operations
and to establish an amount to the cost of goods manufactured.
16. Among the limitations of accounting as a means of communicating economic
information is the inability to measure in terms of money some important factors,
such as human resources or the social cost of air and water pollution caused by
manufacturing operations.
MAJOR BUSINESS TRANSACTIONS THAT AFFECT ITEMS IN FINANCIAL

STATEMENTS SUCH AS ASSETS, LIABILITIES, CAPITAL, RETAINED
EARNINGS, REVENUE, NET INCOME/NET LOSS:
The number of accounts maintained by a particular business is affected by the nature of its
operation, its volume of business and the extent to which details are needed for taxing
authorities, managerial decisions and credit purposes. One particular company may have
separate accounts for Executive Salaries, Office Salaries and Sales Salaries, while another
may find it satisfactory to record all types of salaries in a single salary expense account.
In so far as possible, the order of the accounts in the ledger should agree with the order of the
items in the balance sheet and the income statement. The accounts are numbered to permit
indexing and also for use as posting references in the journal.
Although accounts in the ledger may be numbered consecutively, yet a flexible system of
indexing is preferable. In the chart of accounts listed below each account number has two
digits. The first digit indicates the major division of the ledger in which the account is
placed. The second digit indicates the position of the account within its division. A
numbering system of this type has the advantage of permitting the later insertion of new
accounts in their proper sequence, without disturbing the other account numbers. For a large
company with a number of departments or branches, it is not unusual for each account
number to have four or more digits.
BALANCE SHEET ACCOUNTS: INCOME STATEMENT ACCOUNTS:
1. Assets 4. Revenue
11 Cash 41 Sales or Services
12 Sundry Debtors
5. Expenses
14 Stationaries 51 Salary Expense
15 Prepaid Rent 52 Stationaries Expense
18 Printing Equipment 53 Rent Expense
54 Depreciation Expense
55 Miscellaneous Expense
2. Liabilities
21 Accounts Payable
22 Salaries Payable
23 Accumulated Depreciation
3. Capital
31 Owner‟s Investment
32 Owner‟s expenses Account
33 Expense and Revenue Summary
4.2 Books of Accounts
If you visit the accounts department of any organization, you will observe that they use
certain books in which they record the day to day transactions. These books are called books
of accounts. The books are subdivided into two, namely:
 Books of original entry
 The Ledger
Books of original entry include: Purchases Day Book, Sales Day Book, Return Inward Book,
Return Outward Book, Cash Book and General Journal. All the six books are also called
Journals.
4.2.1 Books of original entry
 Purchases day book is a book used to record daily credit purchases.
 Sales day book is a book used to record daily credit sales.
 Returns inward book is used to record goods returned from sales for which the
goods have not been replaced or the amount paid has not been refunded.
 Returns outward book is used to record goods returned from purchases made for
which the goods have not been replaced or the amount paid has not been refunded.
 Cash Book is used to record receipt and payment of cash. Cash book is also a ledger
account because it has a dual capacity.
 General Journal accommodates all other transactions that cannot reasonably be
recorded in all other books of original entry
4.2.2 Source Documents
Invoice Invoices are printed booklets. They are issued to customers with details of goods
purchased in quantity, price and discount received.
Receipt : Receipts are in booklet forms with numbers. They are used to acknowledge receipt
of cash or cheque paid by customers.
Payment Voucher: Payment voucher records payment made to customers. It is prepared in

duplicates or triplicates. It shows the name of the company from which it emanates, the date,
the name of payee, amount paid, columns for payee‟s signature and internal auditor‟s
signature.
Debit Note: Debit notes are issued to customers whose accounts have been debited on
account of goods sold to them on account.
Credit Notes: Credit notes are issued to customers whose accounts are credited on account of
goods purchased and returned.
Cheque Book: This is issued by the banks to their customers who operate current accounts. It
is meant for withdrawal of money from their accounts and for payments.
Pay-In-Slips: This is issued by the banks to their customers for making payments into their
accounts.
4.3 Making entries of business transactions in the books of account
4.3.1 Making entries in Purchases Day Book/ Purchases Journal
In this session, you will learn how to prepare purchases day book/journal and purchases
return journal. You will take each transaction to the ledger account and the trial balance. You
know from above that Purchases day book otherwise known as Bought day book or bought
journal, records credit purchases. It is one of the sources from which the accounts are
prepared. Entries are written from invoices received from suppliers. Total credit purchases
are posted to the debit side of purchases account in the ledger. The individual purchases are
credited to individual creditors account in the ledger. Credit purchases of assets like motor
vehicles, office machines and equipment. are recorded in other journals depending on the
means of payment adopted for each asset.
4.3.2 Procedures of recording:

 Check invoices against purchase orders and goods received note and accurately
enter the figures in the purchase Day book.
 Record the date, invoice date, supplier‟s name credit and payment terms and the
amount of the purchase as credit.
 At the end of the day, post the amount of purchase to the supplier‟s account in the
ledger.
 Monthly, post the total amount of purchase to the debit side of purchases account
and credit side of accounts payable.
Amount due to creditors are credited to control account/account payable. Creditors often
encourage prompt payment of debts by giving cash discounts. Debtors save on the cost of
their purchase by paying on time to enjoy cash discounts.
Illustration 4.1
The following transactions extracted from the books of Tope‟s purchases Day Book for the
month of June 2011
June 6 Bought of UAC PLC
20 Cases of soap at N1, 000 per case
June 12 Bought of Flour Mill Plc
10 bags of flour at N800 per bag
Invoice is subjected to 10% trade discount.
Required: Enter these transactions in the necessary books of accounts
Solution to illustration 4.1
TOPE
Purchase Day Book/Journal

Date Particulars Fo Details Total
2011 UAC PLC N N
June 6 20 cases of soap at N1000 per case 20,000 20,000
Flour Mills Plc
June 12 10 bags of Flour at N800 a bag 8,000
Less 10% trade discount 800 7,200
_____
Purchases A/C (to be debited to purchases 27,200

ledger)
TOPE
ACCOUNT PAYABLE (Creditors) SUBSIDIARY LEDGER
Particulars Fo Date Particulars Fo
Date Amount Amount

N
N
2011 UAC Account
June 6 Purchases 20,000
Flour Mills A/C

June 12 Purchases
Purchases A/c 7,200
Sundries 27,200 27,200
TOPE
TRIAL BALANCE (Extract)
Name of Account DR CR
UAC 20,000
Flour Mills 7,200
Purchases 27,200
27,500 27,500
4.3.3 Making entries in Sales Day Book/ Sales Journal
You have learnt about Purchases Journal in this session, you now will learn about Sales
Journal and Sales Returns Journal. You will also take each transaction to the ledger and trial
balance. This journal records credit sales of goods only. Entries are made from invoices
issued to customers. Total sales are posted to the credit side of sales account in the ledger
while sales amount are debited to the individual accounts in the ledger.
Credit sales of goods are recorded in the sales journal. Amount due from debtors are debited
to the control account/accounts receivable. Some businesses give customers cash discount if
the customers pay their bills within a stipulated time after the sales. Customer‟s returns
reduce sales revenue and are recorded in sales returns journal. Postings are made to the
accounts receivable/ control account in the general ledger and the individuals account in the
ledger.
4.3.4 Procedure:
1. Enter the invoice number, date of sale, customer‟s name and sale amount.
2. Post daily, the amount of sales to the customer‟s account in the ledger.
3. Post monthly, the total amount of sales to the debit side of account receivable and
credit side of sales account.
4. Each month total the amount of sales on account, post it to the general ledger
(Account receivable account) as a debit and to the sales account as a credit.
Illustration: 4.2
Write up the sales Day book/journal for Tope from the following particulars in the month of
May 2011.
May 3 Sold to Sola
20 pairs of shoes at N450 per pair
20 pairs of slippers at N200 per pair.
Invoice is subject to 20% trade discount
May 11 Sold to Memuna
12 cartons of sardine at N1, 000 per carton
6 cotton shirts at N500 each
May 12 Sold assorted goods to Umo N2, 400
Less 10% trade discount.
TOPE
SALES DAY BOOK / JOURNALS
2011 N N
May 3 SOLA
20 pairs of shoes at N450 per pair 9,000
20 pairs of slippers at N200 per pair 4,000
13,000
Less 20% trade discount 2,600 10,400
May 11 MEMUNA
12 cartons of sardine at N1,000 per carton 12,000
6 cotton shirts at N300 each 1,800 13,800
May 12 UMO
Assorted goods sold N2,400 2,400
Less 10% trade discount 240 2,160
Sales Account to be credited in the sales ledger 26,360
LEDGER ACCOUNTS
Date Particulars Fo Amount Date Particulars Fo Amount
N N
2011 Sola’s Account
May 3 Sales 10.400

May 11 Memuna’s
Account
13,800
Sales
May 12 Umo’s Account
Sales 2,160
SALES ACCOUNTS
Particulars Folio Amount Date Particulars Folio Amount
Date N N
2011
May 31 Sundries 26,360 May 31 Sola 10,400
Memuna 13,800
Umo 2,160
26,360 26,360
TOPE
Balance b/d 26,360
TRIAL BALANCE 31 MAY 2011
N
N
Sola 10,400
Memuna 3,800
Umo 2,160
Sales 26,360
26,360 26,360
ITQ
Abdulahi, a community trader has the following sales transactions in May 2010:
On June 2 sold kola sweets, etc. amounting to N2,000 on account to Edith
On June 3 sold suya, bread and tea to Muhammed amounting to N3,000 on account
Required: Prepare Sales Day book, make necessary entries in the customer‟s account in
receivable ledger account.
ITQA
ABDULAHI
SALES DAY BOOK
2010
May 2 Edith
Goods 1200
May3 Muhammed
Goods 3000
4200
ABDULAHI
ACCOUNT RECEIVABLE SUBSIDIARY LEDGER
Date Particular Fo Amount Date Particular F Amount
2011 Edith account
May2 Sales 1200
Muhammed a/c
May3 Sales 3000
Sales Account
Date Particular Fo Amount Date Particulars Fo Amount
2011 May 2 Edith 2,000
May Sundries 5,000 May 3 Muhammed 3,000

31
5,000 5,000
May 31 Bal b/d 5,000
4.3.5 Return Outward Journal
This journal records purchases returned on account of damage, fault and insufficiency to the
supplier. Entries are made from the credit notes received from the supplier. Total amount of
returned items including trade discount received are credited to the return outwards account
in the ledger. The returned items amount is debited to the personal account of the supplier in
the ledger.
Illustration 4.3
Enter the following transactions in the return outwards journal of Tope for the month of June
2011
June 8 Returned to UAC PLC

2 cases of soap at N1,000 a case as damaged
“ 14 Received credit notes from Flour Mills Plc for 4 bags of flour at N800 each returned.
“ 20 Nigerian Breweries sent a credit note for one carton of beer at N600 broken in transit.
TOPE
RETURN/OUTWARDS BOOK / JOURNAL
2011 N N
June 8 UAC PLC
Returned 2 cases of soap at N1,000 per case as damaged
Flour Mills Plc 2,000
June 14 RECEIVED a credit note from Flour Mills for 4 bags of flour at
N800 each
Less 10% trade discount

3,200
NIGERIAN BREWERIES PLC
320 2,880
Sent a credit note for 1 cartoon of beer at N600 each broken in
transit
June 20
600 600
Return outward account (to be credited in the ledger)
5,480
LEDGER ACCOUNT
Particulars Fo Amount Date Particula Fo Amount

rs N
N
UAC Account
Flour Mills a/c
Nigeria Breweries Plc a/c

600
June 20 Purchases
Return Outwards a/c
June 30 Sundries 5,480
TOPE
TRIAL BALANCE 31 MAY 2011
N
N
UAC 2,000
Flour Mills 2,880
Nigerian Breweries Plc 1,600
Return Outwards 5,480
5,480 5,480
ITQ
Mr. Yoriyori has just started his business and made some purchases out of which he returned
some of the goods because they were defective. He is confused as to where to make
necessary entries. Advise Mr Yoriyori.
ITQA
Mr. Yoriyori is advised to make the necessary entries in the Purchases book for the purchase
of the goods while the aspect of the return should be entered in the Returns Outward book.
4.3.6 Returns Inward Book
This journal records all goods returned by customers for the reason of damages, faulty or
wrong items. Entries are made from credit notes issued to customers. Total amount of
returned items are debited to the Return Inwards Account in the ledger. The amounts of
individual items returned are credited to the personal account of customers. If trade discount
is given, the returns are subject to the same rate of trade discount allowed.
Illustration 4.5
Enter the following transactions in the return inwards book/journal of Tope for the month of
February 2xxx.
Feb 13 Sent credit notes to Monisola for one wall clock at N400 damaged in transit.
Feb 15 forwarded a credit note to Adegboyega for two radio sets at N350 each.
TOPE
RETURN INWARDSBOOK / JOURNAL
2xxx N N
Monisola
Feb 13 One wall clock at N400 broken in transit 400
Feb 15 Adegboyega
2 National Radio at N350 each 700
______________
Return Inward Account (to be debited in Return Inward Account)
1,100
_____________
LEDGER ACCOUNTS
Particulars Fo Amount Date Particulars Fo Amount

Date
N N
2011
Monisola’s A/C
Feb 13 Return Inwards 400
Adegboyega’s A/C
Feb 15 Return Inwards 700
Feb 28 Returns Inward A/C
Sundries 1,100
TOPE
TRIAL BALANCE AS AT 28TH FEBRUARY 2xxx
N
N
Monisola 400
Adegboyega 700
Return Inwards Account 1,100
1,100 1,100
4.3.7 THE GENERAL JOURNAL

The General Journal otherwise known as Principal Journal or Journal Proper is a book of
original entry kept for any business transaction which has not got a proper place of record
that is, it cannot be recorded in any of the special Journals already discussed. It is a
subsidiary book opened for recording unclassified transactions. It takes care of many
repetitive business transactions. It is also known as a two-column journal because it contains
two-entry columns for (debit and credit) entering an account. We term recording of business
transactions in a journal proper as journalizing.
Before preparing general journal entry, it is very necessary to analyze each transaction to
know which accounts are affected and the amount by which they are affected. The
accounting principle of double entry system is applicable to each transaction as two or more
accounts are affected by each transaction.
The total amount of the debit side for every transaction is equal to the amount of the credit
side. When two journal entries are involved in a transaction; the first journal entry may be
cash receipt while the second entry may be for partial payment of cash and note payable for
the balance. This second entry is called compound journal entry.
4.3.8 FEATURES OF GENERAL JOURNAL

a. The date of the transaction
b. The name of the accounts to be debited and credited in the column for particulars e.g.
Sales account, motor van account, etc.
c. The amount to be debited in the account
d. The amount to be credited in the account.
e. The name of account to be debited on the first line with the abbreviation Dr. of every
entry with the amount to be credited on the line below it.
f. Indent the amount of credit entry.
g. Complete each journal entry with a narration giving reasons for the entry.
h. The folio column gives the name in abbreviation of the account in the ledger.
4.3.9 USES OF GENERAL JOURNAL

a. For recording opening and closing entries
b. For adjustment items in relation to provision and depreciation.
c. For transfers from one ledger account to another
d. For the purchase and sale of fixed assets on credit
e. For purchases of a new business.
f. For correction of errors
Illustration 4.6
On 1st May 2xxx Pauline purchased a generator for N50,000 and paid N32,000 cash. Note
payable was issued for the payment of the balance. Prepare a general journal to record the
transaction.

Date Particulars Fo Debit Credit
N N
2xxx
May 1 Generator Dr 50,000
Cash 32,000
Note payable 18,000

Being purchase of generator
For cash and note payable
Illustration 4.7
Elesho established an interior-decorating outfit. The following business transactions were

made during the month of August 2xxx
August 1 Introduced N20,000 into the business
August 1 Purchased an office equipment on credit for N10,000
August 3 Purchased stationery on account for N15,000 paid N7,500 cash and issued
notes payable for the balance
August 5 Prepaid N2,800 cash for insurance policy on a motorcycle
August 10 Purchased office supplies on account for a total of N1,500
August 15 Completed interior decoration job for a client and received N3,000 cash.
August 18 Received for services to be rendered in November a sum of N8,000
August 20 Purchased furniture on account for N2,300
You are required to prepare General Journal for these transactions.
ELESHO
General Journal
Date Particulars Fo DR CR
2xxx Cash Dr 20,000
Elesho 20,000
Being capital introduced into the business
Aug. 1 Office Equipment Dr 10,000
Accounts payable 10,000
Being purchase of equipment on account
Aug. 3 Stationery Dr 15,000
Cash 7,500
Notes payable 7,500
Being purchase of stationery for cash and

note payable
Prepaid insurance Dr
Aug. 5 2,800
Cash
2,800
Being purchase of insurance policy on
motor cycle
Office supplies Dr
Aug. 10 Accounts payable 1,500
Being purchase of office supplies on credit 1,500

Cash Dr
Service fees
Aug. 15 3,000
Being earned revenue for completing a
3,000
decorating assignment.
Cash Dr
Unearned service fees

Aug. 18 8,000
Being an advance payment for services to
be rendered in November 8,000
Fixtures & fitting Dr
Accounts payable
Aug. 20 Being purchase of fixture & fitting on 2,300

account
2,300
4.3.10 RECORDING OPENING ENTRIES
On starting a business, it is usual to ascertain the capital, which the proprietor is introducing
into the business. Where the proprietor introduces cash alone the entry in the general journal
is to debit cash and credit capital account with the amount of money introduced into the
business. If the proprietor has other assets and liabilities, record these items first in the
general journal debiting the assets and crediting the liabilities. The balance will be the
capital.
Illustration 4.8
Jolaade‟s book on 1st January 2xxx is as follows:
Prepare the opening journal entries.
Cash at hand 1,500
Cash at bank 2,000
Stock 5,000
Land & buildings 7,600
Fixtures & fittings 4,400
Motor vehicles 3,000
Faruk 1,900
Samson 5,000
Creditors:
Jimoh 10,000
Duncan 4,700

Date Particulars Fo DR CR
2xxx
Jan 1 Cash at hand 1,500
Cash at bank 2,000
Stock 5,000
Land & buildings 7,600
Fixtures & fittings 4,400
Motor vehicles 3,000
Debtors:
Faruk 1,900
Samson 5,000
Creditors:
Jimoh
Duncan 10,000
Capital 4,700
15,700
Being assets, liabilities and capital at this

date 30,400 30,400
The Ledger Accounts of the above opening entries are as follows:
2xxx
Bank Cash
2,000 1,500
Jan. 1 Balance
Stock Account
5,000
Land & Building

7,600
Jan. 1 Balance
Fixtures & Fittings
4,400
Motor Vehicles
Jan. 1 Balance 3,000
Jimoh’s Account
Duncan’s Account
Balance Capital Account
Jan. 1
Balance Jan. 1 Balance 10,000
Jan. 1
In today‟s accounting system, closing entries are not journalized. The ledger balances are
transferred to the trial balance to prove the accuracy of the accounts. The balances
transferred for the preparation of the final account is to show the true financial position of the
business.
SUMMARY
In this module you have learnt that:
1. Books of original entry are necessary and important for recording daily business
transactions.
2. General journal is one of the original books of accounts, used to record
unclassified and miscellaneous items which cannot be recorded in any of the
special journals.
3. How to journalize opening entries and prepare ledger accounts there from.
SELF-ASSEMENT QUESTIONS:
Part A
1. Prepare the books of Mojere & Sons from the following details for the month of
March and extract a trial balance as at 31st March 2006:
March 1 Started business with N8,000 in the bank
“ 2 Bought goods on credit from the following persons: K. Hayford N760 Miller
N270,
Bukola N560
“ 5 Cash sales N870
“ 6 Paid wages in cash N140
“ 7 Sold goods on credit to H. Elijah N350, Leke N420, Jacob N720
“ 9 Bought goods for cash N460
“ 10 Bought goods on credit from M. Miller N570, Bukola N980
“ 12 Paid wages in cash N140
“ 13 Sold goods on credit to Leke N320, Jacob N230

“ 15 Bought goods by cheque from Betha Ltd N500
“ 17 Paid M. Miller by cheque N840
“ 18 Returned goods to Bukola N200
“ 21 Paid Betha Ltd a cheque for N500
“ 24 Jacob paid up His account by cheque N950
“ 27 Returned goods to K.Hayford N240
“ 30 J.Elesusu lent N600 by cash
“ 31 Bought a motor van by cheque N4, 000
Part B
Fill in the blanks in the following statements and answer questions 8 and 9.
1. The concept that the affairs of a business should be accounted for separately from the
affairs of the owner or owners of the business is called the _____________
____________ concept.
2. The accounting concept concerned with the question of whether a given item or event is
sufficiently important to be set forth separately in the financial statements is
called_____________________.
3. A business which recognizes _______________________ when it is realised and
recognizes ______________________________when they are incurred is said to be
following the _____________________________ basis of accounting.
4. The valuation of inventories at the lower-of-cost or market value is an example of the
accounting concept of _______________________________.

5. At the end of the month, the total of the sales Journal is posted as a
___________________ to the ____________________ account and as a
____________________ to the ____________________ account.
6. To maintain satisfactory internal control and assure that a missing document is not
unknowingly omitted, source documents such as cheques and invoices should be
identified by use of _________________________________.
7. When a company receives payment in advance for goods or services, the transaction is
recorded by a debit to cash and a credit to a ______________________ account or a
_____________________________account.
8. How will the following transactions be posted in the journal?
Operations of a service enterprise for a particular month are summarized as follows:
Service sales on account N60,000; for cash N30,000
Expenses incurred: on account N40,000; for cash N25,000.
9. What is Double-entry bookkeeping?

Answers:
Part A
PURCHASES DAY BOOK
2006 N N
K. Hayford
Mar 2 Bought goods 760 760
M. MILLER
Mar 2 Bought goods 270
„ 10 Bought goods 570 540
Bukola
Mar 2 Bought goods 560
“ 10 Bought goods 980 1,540
Total purchases for the month 2,840

SALES DAY BOOK
N N
H.Elijah
Mar 7 Sold goods 350
Leke
“ 13 Sold goods 320 740
Jacob
“ 13 Sold goods 230 950
Total sales for the month 2,040
Return outwards journal
Mar 18 Bukola
Goods 200
Mar 27 K.Hayford
Goods 240
Total return outwards for the month 440
CASH BOOK
Date Particulars Fo Bank Cash Date Particulars Fo Bank Cash

2005 2005
Mar 1 Capital 8000 Mar 6 Wages 140
Mar 5 Sales 870 “ 9 Purchases 460
Mar 24 Jacob 950 “ 12 Wages 140
Mar 30 Elesusu 600 “ 17 M.Miller 840
“ 21 Betha Ltd 500
“ 31 Purchases{ Motor van} 4,000

LEGDER

“ 31 Balance c/d 3,610 730
N N
8,950 1,470 8,950 1,470
2005 2005
Balances b/d 3,610 730
Capital Account
Mar 31 Bank 8,000
Bank Account
April 1
Mar 31 Balance 3,610
Cash Account
Mar 31 Balance 730
Wages Account
Mar 6 Cash 140
“ 12 Cash 140 Mar 31 Balance c/d
280 280
Balance b/d 280 280
K. Hayford Account
Mar 27 Returns outwards 240 Mar2 Goods 760
Balance c/d 520
760 760
Balance b/d 520
Jacob Account
Mar 17 Goods 720 Mar 24 Bank 950
“ 13 Goods 230
950 950
Bukola Account
Mar 16 Return outwards 200 Mar 2 Purchase 560
Balance c/d 1,340 “ 10 Purchase 980
1,540 1,540
Balance b/d 1,340
M.Miller Account
Mar 17 Bank 840 Mar 2 Purchases 270
Mar 10 Purchases 570
840 840
Purchases Account
Mar 2 K.Hayford 520 Balance c/d 3,600
“ 2 M.Miller 270
“ 2 T.Bukola 560
“ 9 Cash Purchases 460
“ 10 M.Miller 570
“ 10 T.Bukola 980
3,600 3,600
Balance c/d 3,600
Sales Account
Balance c/d 2,910
Mar 5 Cash sales 870
“ 7 Elijah 350
“ 7 Leke 420
“ 7 Jacob 720
“ 13 Leke 320
“ 13 Jacob 230
2,910 2,910
Balance b/d 2,910
Returns outwards
Mar 15 Balance c/d 440 Mar 18 Returned goods to Bukola 200
“ 27 Returned goods to K.Hayford 240
440 440
Balance b/d 440
Betha
Mar 15 Betha 500
Elesusu Loan Account
Mar30 Cash 600
Balance c/d 600
Motor vanAcount
Mar31 Bank 4,000
TRIAL BALANCE
Dr (N} Cr (N)
Capital 8,000
Elesus Loan Account 600
T. Bukola 1,340
K. Hayford 520
Sales Account 2,910
Return outwards account 440
Purchase account
Bank account 3,610
Cash account 730
Wages account 280
Leke account 740
Betha account 500
Motor van account 4,000
H. Elijah account 350

2. The balances of accounts of Manpower commercial enterprises on November 30,
2xxx were as follows
Manpower Commercial Enterprises
Trial Balance
November 30, 2xxx
Cash 100, 000
Account receivable 2, 000
Office supplies 6, 000
Office equipment 120, 000
Office Building 90, 000
Accounts payable 18, 000
Capital 300, 000
Prepare a trial Balance.
Answer:
3. J. Aiyelabowo is an entrepreneur with the following assets and liabilities on 31th Dec.
2011 when he sold the business to S.Morayo for N80,000
Assets Liabilities
Cash 4,000 bank overdraft 6,000
Stock 7,500 creditors 8,500

Debtors 10,600
Fixtures 26,000
Premises 30,000
Terms of sale were:
Stock to be valued at N8,000
Fixtures at N20,000. It was agreed that Aiyelabowo should pay off the overdraft and return
the cash of N4,000. Aiyelabowo paid the purchase price by cheque. Show the journal
entry to record the transactions in the book of Aiyelabowo.
Answer:
J. Aiyelabowo
Journal
31st Dec 2011
N N
Stock 18,000
Debtors 10,600
Fixtures 20,000
Premises 30,000
Good will 19,900
Creditors 8,500
Aiyelabowo ______ 80,000
88,500 88,500
Being payment by cheque for
the purchase of a business
5. Mnique Couture
sold clothes to the following customers on account in the month of March 2009.
March 5 Sold to Aina Joseph
1 frock at N20,000
1 Boubou at N22,000
March 15 sold to Mariam Sadiq
1 frock N10,000
1 frock N83,000
1 Boubou at N100,000
March 20 sold to Josephine Okeke
1 frock at N70,000
Less 10% discount
Prepare the sales day Book, the ledger and the trial balance as at 31st March 2009.
Answer:
MONIQUE COUTURE
SALES DAY BOOK
2009 Aina Joseph N N
Mar. 5 1 frock 20,000
1Boubou 22,000 42,000
Mariam Sadiq
Mar. 15 1 frock 83,000
1frock 10,000
1Boubou 100,000 193,000

Josephine Okeke
Mar. 20 1 frock 70,000
Less 10% discount 7,000 63,000
Transfer to sales a/c 298,000
LEDGER ACCOUNTS
2009 Aina Joseph a/c
Mar. 5 Clothes 42,000 Mar. 5 Aina Joseph 42,000
Mariam Sadiq a/c Mar. 15 Mariam Sadiq 193,000
Mar. Clothes 193,000 Mar. 20 Josephine Okeke 63,000

15
Joseph Okeke a/c
Clothes 63,000
Mar.
Sales a/c
20
Sundries 298,000 298,000
Bal b/d 298,000

Mar.
31
STUDY SESSION 5 RECORDING OF BUSINESS TRANSACTIONS
Introduction
In a business organization, the function of receiving and paying out money (either in the form
of cash or cheques) requires a considerable number of entries. In study session 4, we learnt
about subsidiary books, that is, books into which transactions are recorded on a daily basis
from the source documents and from which posting/entries are made directly to the ledger.
The cash book is one of the subsidiary books but because of its importance and the volume of
entries in it, it is always treated separately. The focus of this study session is cash book. We
would discuss various types of cash books and learn how to prepare and balance a cash book.
5.1 explain the meaning of cash book

5.2 describe the importance and relevance of cash book in processing of accounting
information
5.3 explain how to prepare a cash book
5.4 explain how to prepare a petty cash book
5.1 Meaning of Cash Book
A cash book is a subsidiary book used for a detailed recording of cash transactions. It records
all receipts of money and all payments of money on a daily basis. In line with the double-
entry system of accounting, the cash book has two sides, namely the debit side and the credit
side. The debit side is used to record money collected daily, hence it is called the receipt
side. The credit side is used to record all payments of money on a daily basis; hence it is
called the payment side. It is important to note that only the transactions that involve money
(i.e. cash transactions) should be recorded in the cash book before they are posted into the
proper accounts in the ledger.
A cash book serves two purposes only and these are:
i. It serves as a book because it records the original entries of cash transactions.

ii. It serves as a ledger because it has a debit and a credit side to record cash transactions
in detail which can be balanced at the end of the period.
5.1.2 Structure of a Cash book
The cash Book is structured in a way that it contains the following:
i. Two sides equally divided as to ‘Debit Side’ and ‘Credit Side’

ii. Each side must have column for date, name/description/particulars.
iii. A reference column called ‘Folio’
iv. Amount Column
5.2 TYPES OF CASH BOOKS:
There are different types of cash book. The difference arose from its use and the details it
contains. Let us look at the different forms of cash books.
5.2.1 Single column cash book

A cash book is said to be single column cash book because it contains only one column for
the amount. The cash book is used for the recording of business transactions that are made in
cash and cheques transactions cannot be recorded therein. It can also be called Cash Account
or single column cash book.
A format of single cash book is depicted below:
One-column cash book
SINGLE COLUMN CASH BOOK
Date Particulars Folio Amount Date Particulars Folio Amount
N N
5.2.2 Two column cash book
This cash book is so-called because it has two columns for amounts, one each for bank and
cash transactions. The two columns on the debit side are for recording the receipt of money
while the two columns on the credit is for recording payment of money. The bank column on
the debit side records cheques received and cash paid into the bank while the bank column on
the credit side records payments by cheques. The cash column on the debit side records cash
received while the cash column on the credit side records cash paid. When the double entry
for a transaction appears on both sides of the cash book, this is called a contra entry. Contra
entries in the cash book are, made when cash is deposited into the bank account out of cash in
hand or when cash is withdrawn from the bank account for office use.
A format of two column cash book is depicted below:
Fig. 5.1: Example of a Two-column cash book
5.2.3 Three column cash book

A three column cash book is one that has a third column (in addition to the two columns for
bank and cash) for recording the cash discounts allowed to debtors and cash discounts
received from creditors. A cash discount is the amount allowed of (i.e. deducted from) debts
to encourage settlement of debts within a specified period of time. In a typical trading
organization, cash discounts are fairly common and require large number of entries. If these
are posted directly to the discount allowed account (when cash discounts are allowed to
debtors) or discount received account (when cash discount are received from creditors) both
accounts will end up containing too many entries. The discount column on the left-hand side
of the cash book is for discounts allowed to debtors while the discount column on the right-
hand side records discounts received from creditors. For example, when a customer is
allowed a cash discount, this is listed in the discount allowed column while the personal
account of the customer is credited. At the end of the period, the total of the discount
allowed column is transferred to the debit side of discount allowed account in the ledger.
When cash discount is received from a creditor, this is listed in the discount received column
while the creditor’s personal account is debited. At the end of the period, the total of
discount received column is transferred to the credit side of the discount received account in
the ledger. It is important to note that discounts columns are memoranda as they are not part
of the double-entry system of accounting.
Shown below is the format of a typical three-column cash book:
Fig. 5.2
Illustration 5.1 on Single entry
Adedugbagbe is a coconut trader at Badagry, he has the following cash transactions for the
month of January 2010.
N
Jan 2 Started business with capital 10,000
“ 5 Purchased goods for cash 3,440
“ 7 Bought stationery for cash 600
“ 9 Sold goods for cash 840
“ 10 Cash sales 2,800
“ 11 Purchased goods for cash 2,400
“ 12 Cash Purchases 2,900
“ 20 Received cash from Olutoni 620
“ 25 Cash sales 500
“ 30 Wages paid 1,000
Required: Prepare Adedugbagbe’s cash book using single column..
Adedugbagbe
CASH BOOK
Particulars Fo Amount Date Particulars Fo Amount
Date
N N
2xxx
Jan 2 Capital 10,000 Jan 5 Purchases 1,720
Jan 9 Sales 840 Jan 7 Stationery 6,300
Jan 10 Sales 2,800 Jan 11 Purchases 2,400
Jan 20 Olutom 620 Jan 15 Purchases 2,900
Jan 25 Sales 500 Jan 30 Wages 1,000
Balance c/d 420
14,760 14,760
5.3 PETTY CASH BOOK / JOURNAL
Feb 1 Balance b/d 420
Petty cash book is one of the books of original entry. It records miscellaneous and routine
expenses in the office such as postages, transport fares, newspaper and telephone calls. It is
just like the cash book in the sense that it is an account and a ledger. The cost of small items
is recorded in the petty cash book then in the cash and finally in the ledger as an account.
5.3.1 Petty Cash Analytical/Columnar Book.
When a petty cashier receives money for petty expenses in the office, he debits the petty cash
book with the amount. When he pays out any amount he credits the petty cash book with the
amount. To save time and for the general ledger not to be clustered with miscellaneous and
repetitive items of expenses, every amount paid by the cashier is entered under
analytical/analysis of payment showing the items for which payments were made. These
groups’ headings are termed column or analytical petty cash book. The number of columns
and headings depends on the nature and extent of business transactions. The end column is
for items which cannot be classified into groups but come under miscellaneous.
Imprest System
Procedure:
1. The petty cashier is given a fixed amount of money to spend at the beginning of the
period for petty disbursements which are debited to the petty cash book
2. At the end of the period the petty cashier renders an account to show the amount spent
and the balance in hand. The exact amount spent is paid to him by the chief cashier to
add to the balance with him to make up for the same amount to start the new period of
weekly, bi-monthly or monthly disbursements.
If a petty cashier is given N1,000 at the start of the period for petty cash disbursements and
he spends N800 the balance is N200. The cashier will reimburse the petty cashier with N800
to restore the imprest of N1,000 for the next period.
Illustration 5.
Kingsley keeps a petty cash book on imprest system and restores the float weekly to
N2,000. Enter the following transactions in a columnar petty cash book. Open the necessary
ledger accounts. N
April 1 Gave to the petty cashier as Imprest amount 2,000
April 2 Bought postage stamps 250
April 3 Bought Stationery 300
Paid Jumoke 100
April 4 Paid transport fare 150
April 5 Bought Stationery 200
April 6 Bought Petrol 800
April 7 Paid John 150

PETTY CASH BOOK
Analysis of Payment
Date Particulars Fo Amount Date Particulars Total Petrol Postages Transport Stationery Personal Accounts
or Miscellaneous
N N N N N
N
2xxx 2xxx
April 1 Bank 2,000 April 2 Postage 250 250
April 8 Bank 1,950 April 3 Stationery 300 300
April 3 Jumoke 100 100
April 4 Transport fare 150 150
April 5 Stationery 200 200
April 6 Petrol 800 800
April 7 John 150 150
Total 1,950
_______ Balance c/d 2,050 _____ _____ _____ _____ ____
3,950 3,950 800 250 150 500 250
Bal. c/d. 2,000
Analytical Cash Book - Is a cash book with analysis columns with appropriate headings
maintained on either sides of the cash book for proper analysis of the sums received or paid.
The major advantage of using analytical cash book is that receipts and payments of the same
kind can be accumulated in the appropriate column before posting the total to the appropriate
ledger account.
An Analytical cash book is shown as follows:
Fig. 5.3: Layout of an Analytical Cash Book

Cash Book
RECEIPTS PAYMENTS
Trade Trade
Date Particulars Disc. Cash Bank Debtors Sales Contra Date Particulars Disc. Cash Bank Debtors Electricity Sales Contra
NGN NGN NGN NGN NGN NGN NGN NGN NGN NGN NGN NGN NGN
(a) Analytical Petty Cash Book—Where there is a large number of small cash payments in
the operation of a business, such transactions may be taken out of the main cash book to a
separate cash book known as petty cash book. The use of a petty cash book has the
following advantages—(a) the handling and receiving of small cash payments could be
delegated to a junior staff known as the petty cashier. This saves the main cashier from
routine work and (b) Since the petty cash book is maintained on analytical basis, this
ensures that small payments are not posted to the ledger one by one as would be the case
if they were recorded in a non-analytical main cash book. In the petty cash book, an
analysis column is maintained for each expense heading. The total of—rather than the
individual amounts in each column is transferred to the debit of the appropriate ledger
account at the end of the period thereby saving the ledger from too many details.
The petty cash book is maintained on an imprest basis. The imprest system is one in which
small cash payments are accounted for by giving the petty cashier an amount known as petty
cash float or imprest out of which the petty cashier makes disbursements, each
disbursements being supported with duly authorized approval petty cash voucher (PCV)
signed by the recipient.
A petty cash book is shown as follows:

Fig. 5.4: Example of a Petty Cash Book
Summary to Study session 5
All transactions that increase the amount of cash are recorded in a subsidiary book known as
cash book. Cash may be received from a variety of sources, such as investments in the
business by the owners, receipts from cash sales, collections from customers to whom sales
have been made on account (sundry debtors) and collections of principal and interest on debts
owed by sundry debtors. The cash book is also used for the recording of payments to
suppliers, creditors, payments of expenses, salaries and other items for the smooth running of
the business. Any charges made by the bank for operating the account by the business, are
recorded therein so that the cash book shows a true and up to date picture of the funds
available to the business. For this reason, a cash book is often kept even where a business
keeps its accounting records on a computer.
Since accounting is the system by which businesses record their transactions, the use of cash
books can be seen as the ledger account for all transactions with the bank. The receipt cash
book usually has a debit balance while the bank will have a credit balance. The payment cash
book usually has a credit balance while in the bank it is a debit balance. The cash book is
considered as a book of primary entry as transactions are recorded for the first time in the
cash book. In addition to the receipt and payment cash books there is the petty cash book.
The petty cash book is where daily cash transactions based upon the imprest system are
recorded.
Self Assessment Questions
(1.) Define cash book and explain the types of cash books.
(2.) What is a contra entry?
(3.) What’s the difference between a cash book and an analytical cash book?
(4.) What are the purposes of a cash book?
STUDY SESSION 6 BANK RECONCILIATION STATEMENT
Introduction
Bank reconciliation is an exercise performed by organizations and individuals that maintain

accounts with banks. It is performed when there are differences between the balance in their
cash book and the bank statement. In this study session, we shall look at the way in which a
business deals with any differences between the balance of the bank account in the cash book
and the closing balance of the bank account shown in the bank statement for the same period.
These differences are explained by preparing a bank reconciliation statement.
This process is important because it enables the business to update its cash book and also
helps to prove the accuracy of the bookkeeping of the business and the bank.
6.1 justify the need for Bank Reconciliation
6.2 discuss the causes of Bank reconciliation.
6.3 describe the preparation of Bank Reconciliation.
6.1 The need for Bank Reconciliation
When an organization maintains an account in a bank, the organization will maintain a book
called “Cash book’. Cash book was discussed in detail in study session 5. The organization
will record all the transactions between it and the bank in the cash book. On the other hand,
the bank will issue a document (bank statement) to the customer stating all the transactions
that occurred during a given period, usually one month. The document issued by the banks is
called ‘Bank Statement’ and is usually issued on a monthly basis. There may be differences
between the customer’s Cash book and the Statement issued by the bank for one reason or the
other. It therefore becomes necessary for the customer to find out the causes of the
differences. What the customer does is to prepare a bank reconciliation statement. The
statement is prepared to:
i. ascertain the correctness or otherwise of the bank balance as

at a particular date;
ii. keep the customer informed of the transactions that took
place in his bank account; and
iii. prevent fraud.
6.1.2 Factors affecting the preparation of a reliable Bank Reconciliation Statement
Two factors that affect the preparation of a reliable Bank reconciliation statement are: an
accurate Cash Book and the Bank Statement.
An Accurate Cash Book
Most organizations keep a record of their cash and bank transactions in a cash book. The cash
book contains a record of both the cash account and the bank account and shows the balance
in each account at the end of a period. Once the cash book has been balanced, it is usual to
check the details with the records of the firm’s bank transactions as recorded by the bank. To
enable this check to be made, the company will need to ensure that the cash book is
completely up-to-date and a recent bank statement has been obtained from the bank.
Often, when a comparison is made between the bank balances as shown in the firm’s cash
book with that shown on the bank statement, the two balances will be different. It is for this
reason that a bank reconciliation statement is prepared to reconcile the two balances. The
reconciliation may identify errors that may have been made in either the firm’s cash book or
in the bank’s records. Any corrections can then be made.
6.1.3 The Bank Statement

A bank statement is a copy of a bank account as shown by the bank records. Bank statements
are sent out to customers on a regular basis, for example every month. This enables the
customer to check their funds in the bank (or borrowing on overdraft) regularly and to update
their own records of transactions that have occurred. It could be, for example, that the bank
has not previously notified them of a certain deduction from the account, for example, bank
charges.
What do you think that the preparation of Bank reconciliation seeks to achieve?
Preparation of the Bank reconciliation will achieve the following:
i. ascertain the correctness or otherwise of the bank balance as at a

particular date.
ii. keep the customer informed of the transactions that took
place in his account with the Bank.
iii. prevent fraud.
6.2 Causes of Differences between Cash Book and Bank Balance
Differences between the cash book and the bank statement can arise from:
• Timing of the recording of the transactions
• Errors made by the business, or by the bank

We will explain each of these in turn.
6.2.1 Timing Differences – items recorded in the cash book
When a business compares the balance according to its cash book with the balance as
shown by the bank statement there is often a difference. This difference can be caused
by the timing of payments. For example:
• A cashier may send cheques out to suppliers, some of whom may pay in the
cheque at the bank immediately while others may keep the cheque for several
days before paying it in. When this happens the cashier would have recorded
all the payments in the cash book. However, the bank records will only show
the cheques that have actually been taken to the bank by the suppliers and
deducted from the business bank account.
These cheques are known as unpresented cheques.
• With another type of timing difference – known as outstanding lodgements –

the firm's cashier records a receipt in the cash book as he or she prepares the
bank paying-in slip. However, the receipt may not be recorded by the bank on
the bank statement for a day or so, particularly if it is paid in late in the day
(when the bank will put it into the next day's work), or if it is paid in at a bank
branch other than the one at which the account is maintained.
6.2.2 Direct credit
Another timing difference may also occur when the bank has received a direct
payment from a customer of the business. In this instance, the bank would have
recorded the receipt in the business’s account at the bank but the cashier would be
unaware of the payment and will not, therefore, have recorded the receipt in the cash
book. This type of payment includes:
– standing order and direct credit, i.e., incoming payments received into the
account, e.g. payments from debtors (customers) when the company has not
been notified of the payment.
– interest and refunds credited by the bank to her customers.
6.2.3 Payments out
Another reason why the balance of the cash book and the balance of the bank
statement may not agree is because the bank may have deducted items from the
customer’s account, but the customer may not be aware of the deduction until the
bank statement arrives. Examples of these deductions include:
– standing order and direct debit payments which the customer did not know
about
– bank charges for running the account
– interest charged for overdrawn balances
– unpaid cheques deducted by the bank – i.e. stopped and 'bounced' Cheques
6.2.4 Differences caused by errors
Sometimes the difference between the two balances may be accounted for by an error
on the part of the bank or an error in the cash book of the business. It is for this
reason that bank reconciliation is carried out frequently so that errors may be
identified and rectified as soon as possible.
It is good business practice to prepare a bank reconciliation statement each time a

bank statement is received. The reconciliation statement should be prepared as
quickly as possible so that any queries – either with the bank statement or in the
firm’s cash book -- can be resolved. Many firms will specify to their accounting staff
the timescales for preparing bank reconciliation statements.
The bank can deduct certain amount of money from a customer’s account without
his knowledge, you are required to give 3 examples of when the Bank can make
deductions from customers account without his knowledge.
Examples of deductions that banks can make without the knowledge of the
customer include:
– bank charges for running the account
– interest charged for overdrawn balances
– unpaid cheques deducted by the bank – i.e. stopped and 'bounced'

Cheques
– standing order and
- direct debit
6.3 Preparing Bank Reconciliation Statements
6.3.1 Steps for Preparing Bank Reconciliation Statements
When a bank statement has been received, reconciliation of the two balances is
carried out following the steps listed below:
Step 1 The cashier will tick off the items that appear in both the cash book and the
bank statement.
Step 2 The unticked items on the bank statement are entered into the bank
columns of the cash book to bring it up to date.
Step 3 The bank columns of the cash book are now balanced to compute the
revised figure.
Step 4 The remaining unticked items from the cash book will be the timing
differences.
Step 5 The timing differences are used to prepare the bank reconciliation
statement.
Bank Reconciliation Format
6.3.2 Starting with Cash Book Balance.
Thompson Enterprises
Bank Reconciliation Statement as at……….
N N
Balance as per Cash Book xx
Add unpresented cheques:
1. xx
2. xx
xxx
Add Dividend received xx
Add Credit transfer xx xxx
xxx
Less uncredited cheques
X xx
Y xx
xxx
cheque wrongly debited xx

Balance as per Bank Statement xxx
6.3.3 Starting with Bank Balance:
Thompson Enterprises
Bank Reconciliation statement as at……….
N N
Balance as per Bank Statement xx
Add uncredited cheques:
A xx
B xx
C xx
xx
Add Cheque wrongly debited x xxx
xxx
Less unpresented cheques
X xx
Y xx
Z xx xx
Balance as per adjusted cash book xxx
Illustration 1
Adetunji Okechukwu works as a cashier for Babalakin & Co., a firm of Solicitors. His
responsibilities include entering and maintaining the firm’s cash book and preparing a bank
reconciliation statement at the end of the month.
The firm’s cash book for July 2011 which Adetunji Okechukwu has just finished entering and
balancing for the month end is shown below (Note: for the sake of clarity, the cash and
discount columns have been omitted.) A copy of the firm’s bank statement from the Star
Bank Limited dated 31 July 2011 has just been received and is shown below. The numerical
difference between the two accounts is:
Bank statement N903.00 minus cash book N641.70 = N261.30
This is the difference which Adetunji Okechukwu will have to ‘reconcile’.
Adetunji Okechukwu now follows the five steps outlined before.
Step 1 – tick off the items in both cash book and bank statement
Adetunji Okechukwu ticks off the items that appear in both the cash book and the bank
statement
Babalakin & Co – Cash Book
RECEIPTS PAYMENTS
Date Details Bank Date Details Bank
2011 N 2004 N
1 July Balance b/d 756.20 2 July Table 004450 50.00

Kershaw Ltd
3 July 220.00 2 July Broad & Co 004451 130.00
Morris & Son
15 July 330.00 2 July Gee & Co 004452 10.00
Pott Bros
31 July 63.00 8 July Minter Ltd 004453 27.50
14 July Liver port City Council 89.00

(DD)
14 July 49.00
F D Jewell 004454
15 July 250.00
Kirk Ltd 004455
26 July 122.00
Bond Insurance (SO)
_______ 31 July 641.70
1,369.20 Balance c/d 1,369.20
31 July 641.70
STATEMENT OF ACCOUNT
Star Bank PLC
23, Market Street,

Lagos
Account Babalakin & Co
Account Number 79014456
Sheet 17
Date 31 July 2011
Date Details Debit Credit Balance
2011 N N N
01 July Balance 756.20 Cr
04 July Cheques 220.00 976.20 Cr
09 July 004450 50.00 926.20 Cr
14 July 004452 10.00 916.20 Cr
16 July Liverport City Council (DD) 89.00 827.20 Cr
19 July Cheques 330.00 1,157.20 Cr
24 July 004455 250.00 907.20 Cr
26 July Bond Insurance (SO) 122.00 785.20 Cr

30 July 004454 49.00 736.20 Cr
31 July Bank charges 12.95 723.25 Cr
31 July Ricardo Limited (transfer) 179.75 903.00 Cr
Step 2 – update the cash book from the bank statement
The unticked items on the bank statement indicate items that have gone through the bank
account but have not yet been entered in Babalakin & Co’s cash book. These are:
Receipt 31 July Credit transfer Ricardo Limited N179.75
Payment 31 July Bank Charges N 12.95
Adetunji Okechukwu will now need to enter these items in the cash book to bring it up to
date (see next page).
Step 3 – balance the cash book bank columns to produce an updated balance
Adetunji Okechukwu now balances the bank columns of the cash book again, as shown on
the next page.
Babalakin & Co – Revised Cash Book (extract)
RECEIPTS PAYMENTS
2011 N 2011 N
31 July Balance b/d 641.70
1,369.20 1,369.20
31 July Balance c/d 641.70 31 July Bank Charges 12.95
31 July Ricardo Limited (BGC) 179.75 31 July Balance c/d 808.50
821.45 821.45
1 Aug Balance b/d 808.50
The balance of the bank column now stands at N808.50. This still differs from the bank
statement balance of N903.00.
The numerical difference between the two is:
Bank statement N903.00 minus cash book N808.50 = N94.50
This remaining difference is dealt with in the bank reconciliation statement.
Step 4 – identify the remaining unticked items from the cash book
There are some items that remain unticked in the cash book. These are:
Receipt 31 July Potts Bros N63.00
Payments 2 July Broad & Co (cheque no. 004451) N130.00
8 July Minter Ltd (cheque no. 004453) N27.50
These items should appear in next month’s bank statement and are timing differences. These
are the items which will be required in the preparation of the bank reconciliation statement,
which is Carol’s next step.
Step 5 – preparation of the bank reconciliation statement

The completed statement is shown on the next page. The stages followed in its completion
are as follows:
1. enter the cash book balance

The balance figure to use, as ‘per the cash book’, is the revised cash book
balance after entering the items that appeared on the bank statement which had not
previously been entered, i.e., N808.50
2. add unpresented cheques

The unpresented cheques are the cheques that Hurst & Co had issued, but which have
not yet been deducted from the firm’s bank account, probably because they have not
yet been paid in by the suppliers. They are:
Broad & Co (cheque no. 004451) N130.00
Minter Ltd (cheque no. 004453) N27.50
Total N157.50
The unpresented cheques totalling N157.50 are added to the cash book balance in the
bank reconciliation statement, bringing the revised cash book balance to N966.00.
They are added back to the cash book balance so that both the cash book and the bank
account contain the same items.
3. deduct outstanding bank lodgement

A ‘bank lodgement’ represents money, i.e., cheques and or cash, that has been
received by a business, entered into the cash book and paid into the bank. In this case,
however, the deposit has been made too late to appear on the firm’s bank statement,
and so forms part of the difference, as an ‘outstanding’ lodgement.
Here, the bank lodgement of N63.00 is deducted in the bank reconciliation statement
from the sub-total of 966.00, i.e., N966.00 – N63.00 = N903.00.
4. completing the reconciliation

Now that all the outstanding items have been added or deducted, the recalculated
balance on the bank reconciliation statement should be the same as the final bank
statement balance. A comparison of the two show that they are:
Babalakin & CO
Bank Reconciliation Statement as at 31 July 2011

N N
Balance at bank as per Cash Book 808.50
Add: unpresented cheques
Broad & Co 130.00
Minter Ltd 27.50

157.50
966.00
Less: outstanding lodgement 63.00
Balance at bank as per bank statement 903.00
6.3.4 Dealing with Overdrafts
Positive bank balances
So far, we have dealt with bank reconciliation statements where the bank balance has
been positive – i.e., there has been money in the bank account. We have also dealt
with cash books which have shown that there is money in the bank.
A positive bank balance has been indicated:
• in the cash book – a debit (left-hand) brought down balance
• by a bank statement where the balance is followed by ‘CR’ – which to the

bank and the customer means that there is money in the account (remember
that the ‘credit’ column on the bank statement is used for payments into the
account)
Negative bank balances

Businesses sometimes have overdrafts at the bank. Overdrafts are where the bank
account becomes negative and the business in effect borrows from the bank. This is
shown:
• in the cash book as a credit (right-hand) brought down balance
• on the bank statement where the balance is followed by ‘DR’ (or sometimes
by ‘OD’) – which to the bank and the customer means that there is an
overdraft.
6.3.5 Reconciliation Statements and Overdrafts
If you want to show an overdraft on a bank reconciliation statement, you should treat it as a
negative figure by placing it in brackets. As far as the calculation is concerned, it is simply a
matter of using the minus key on the calculator. If in the earlier illustration, Hurst & Co had
started the month with an overdraft of N808.50 (a credit balance in the cash book), you would
key the following into the calculator
- N 808.50
+ N 157.50
- N 63
= produces a total of (N714.00)
Now look at how the bank reconciliation statement is set out below:
Babalakin & CO
Bank Reconciliation Statement as at 31 July 2011
N N
Balance at bank as per Cash Book (808.50)
Add: unpresented cheques
Broad & Co 130.00
Minter Ltd 27.50

157.50
an overdraft shown in brackets (651.00)
Less: outstanding lodgement 63.00
Balance at bank as per bank statement (714.00)
Fig. 6.1: A bank reconciliation statement starting and ending with an overdraft
6.3.6 Advantages of Preparing Bank Reconciliation Statement
The following are some of the advantages that can accrue to a business by preparing bank
reconciliation statement:
 It will serve as a means of communication between the business and the banker when
copy of the statement is made available to the banker.
 During the preparation of the statement errors can be detected and corrected.
 The awareness that a reconciliation statement will be prepared at constant interval will
make the book-keeper to be more cautious in performing his work.
 From constant preparation of the statement fraud can be minimized or prevented and if
already committed can be discovered.
 The items to appear in the final accounts are updated when preparing the statement.

State the 5 required steps to prepare bank reconciliation.

The following steps are necessary for the preparation of bank reconciliation
 Tick off the items that appear in both the cash book and the bank
statement.
 The unticked items on the bank statement are entered into the bank
columns of the cash book to bring it up to date.
 The bank columns of the cash book are now balanced to compute the
revised figure.
 The remaining unticked items from the cash book will be the timing
differences.
 The timing differences are used to prepare the bank reconciliation
statement.
Summary for Study Session 6

In study session 6, you have learnt that:
 Bank reconciliation is prepared by both individual and corporate organizations that
maintain account with a bank.
 The Bank reconciliation statement is prepared by comparing the information in the
bank statement with those in the cash book.
 The objective of bank reconciliation is to ascertain the accuracy of the balance in the
account and prevention of fraud.
 Steps and how to prepare bank reconciliation
Self Assessment Questions for Study Session 6
1. You are a trainee accountant for Fern Limited, a small printing company. One of your
tasks is to enter transactions in the company’s cash book, check the entries on receipt
of the bank statement, update the cash book and make any amendments as necessary.
You are then asked to prepare a bank reconciliation statement at the end of the month.
The company’s cash book (showing the bank money columns only) and the bank
statement are shown below.
You are to:

• Prepare a revised cash book
• Calculate the balance as per the bank statement and check your total against
the bank statement for accuracy.
Fern Ltd – Cash Book
CASH BOOK
RECEIPTS PAYMENTS
200x N 200x N
1 Aug Balance b/d 1,946 2 Aug DD Bell Insurance 75
1 Aug I Watts & Co 249 2 Aug Harvey & Co 200100 206
5 Aug B Rogers (transfer) 188 4 Aug Durose Ltd 200101 315
8 Aug E Shaw 150 7 Aug Motts Garage 200102 211
10 Aug J Moore Ltd 440 9 Aug SO Rock Finance 120
18 Aug Simms Ltd 65 13 Aug Hill Bros 200103 22
27 Aug Martin Black 520 20 Aug Ashleys Ltd 200104 137
30 Aug Davies Partners 82 27 Aug DD Rates 270
31 Aug Balance b/d 2,284
3,640 3,640
31 Aug Balance c/d 2,284

ALBION BANK STATEMENT
12 Market Street, Lagos
Account Fern Limited Account no. 78300582
Date31 August 200x Statement No. 16
200x
1 Aug Balance 1,946 CR
2 Aug Cheques 249 2,195 CR
4 Aug Bell Insurace (DD) 75 2,120 CR
4 Aug 200101 315 1,805 CR
5 Aug B Rogers (transfer) 188 1,993 CR
9 Aug 200102 211 1,932 CR
12 Aug Rock Fiannce (SO) 120 2,252CR
27 Aug DD Rates 270 2,047 CR
30 Aug Torr Bros (transfer) 92 2,139 CR
31 Aug Bank Charges 55 2,084 CR
31 Aug City Finance (SO) 1,000 1,084 CR
2. You are employed by Brooklyn Ltd as their cashier. Your main responsibility is to
maintain the company’s cash book and prepare a bank reconciliation statement at the
end of each month. The cash book (showing the bank money columns only) is set out
below together with a copy of the bank statement for February 200x.
You are to:
• Prepare a revised cash book.
• Calculate the balance as per the bank statement and check your total against the bank
statement
for accuracy.
Brooklyn Ltd – Cash Book
CASH BOOK
RECEIPTS PAYMENTS
200x N 200x N
1 Feb Balance b/d 1,425 1 Feb Barton Bros 400460 98
1 Feb Worrall & Co 157 1 Feb SO Road Car Co 50
4 Feb Brindle’s (transfer) 243 3 Feb R Jackson Ltd 400461 540
8 Feb Robinson Ltd 91 9 Feb Spencer Partners 400462 42
13 Feb Moore & Cox (transfer) 75 10 Feb Avery Computer 400463 490
Riley & Co
20 Feb 420 16 Feb DD Ajax Insurance 300
Howard Ltd
28 Feb 94 23 Feb Shanklin Garage 400464 110
27 Feb Petty Cash 400465 50
28 Feb White & Co 400466 120

Balance c/d 705
Balance b/d 2,505 2,505
28 Feb 705
REGENCY BANK STATEMENT
10 The Parade, Cheltenham G12 6YG
Account Brooklyn Limited Account no. 29842943
Date 28 February 200x Statement No. 35
200x
1 Feb Balance 1,425 CR
2 Feb Cheques 157 1,582 CR
2 Feb Road Car Co (SO) 50 1,532 CR
4 Feb 400460 98 1,434 CR
6 Feb Brindle’s (transfer) 243 1,677 CR
12 Feb Ajax Insurance (DD) 300 1,468 CR
14 Feb Moore & Cox (transfer) 75 1,543 CR
14 Feb 400463 490 1,053 CR

26 Feb Rates (DD) 103 1,370 CR
26 Feb 400463 50 1,320 CR
27 Feb D Stead (transfer) 220 1,540 CR
28 Feb Bank Charges 38 1,502 CR

STUDY SESSION 7 FIXED ASSETS AND DEPRECIATION ACCOUNTING
Introduction
The term fixed assets are used in accounting to describe assets of greater permanency, i.e.,
assets of long life but do not last forever, acquired by a business for production rather than
for resale to customers. Examples are land and building, plant and machinery, equipment,
motor vehicles, furniture and fittings. Fixed assets give future service benefits for the
business or organisation. For example, buildings give future housing services for the
company’s operations. Vehicles give transportation services and equipment like computers
render future data processing services. Generally, fixed assets are used for future production
of goods or services for resale to customers. Fixed assets that are not intended for future use
to produce goods or services, should not be included in the fixed assets category. Equipment
for resale, land held as an investment should be excluded and termed as long term
investment. The service benefits of fixed assets can be used for over two or more accounting
periods. The cost of the assets is allocated to the accounting period that benefited from their
use. As the assets are being used to produce goods and services their cost of wear and tear is
transferred to depreciation account to match it with the income from the sale of the goods and
services. Here, matching concept of accounting comes to play or is applied. The focus of this
study session is on fixed assets and their treatment in accounting.
7.1 describe fixed assets;

7.2 explain how the cost of different fixed assets is determined;
7.3 explain the nature of depreciation; and
7.4 calculate depreciation using different methods of depreciation.
7.1 Meaning of Fixed Assets
Fixed Assets are tangible assets used in a company’s operation that have a useful life of more
than one accounting period. Fixed Assets include, among others, plant and equipment, land
and building, furniture and fittings. For an asset to qualify for classification as a fixed asset,
it must possess the following features:
i. it must be used in operation or production;

ii. it must have a useful life of more than one accounting period.
1. (a) What is depreciation

2. (b) List two features that make an asset to qualify for depreciation
Answer:
Depreciation has been defined as the reduction in the value of fixed assets owing to
wear and tear. It is also the apportionment of cost of asset net of estimated scrap
value over its estimated useful life.
For an asset to qualify for depreciation, it must possess the following features:
i. it must be used in operation or production;

ii. it must have a useful life extending over one accounting period.
7.2 Determination of the Cost of Fixed Assets

The cost of fixed assets should include all necessary costs to acquire and get them ready for
use. The purchase may be either in cash or on credit. When fixed assets are acquired or there
is an addition to the value of the assets, the addition is a capital expenditure and should be
added to the original cost of the asset. The cost of the fixed assets should include legal fees,
carriage inwards, insurance, installation expenses or any other cost that will make the assets
function properly.
Illustration 7.1
The purchase price of a Mixer Machine is N50,000 less 5% discount, legal fees of 5%,
carriage inwards N1,600 installation expenses N1,200, insurance N1,000. What is the cost of
the Mixer Machine that will be posted to Machine account?
Solution to Illustration 7.1
The cost of the machinery to be debited to machinery account is as follows.
Cost price of the machinery 50, 000
Less 5% cash discount 2, 500
Net cash price 47, 500
Legal fees 2, 375
Carriage inwards 1, 600
Installation 1, 200
Insurance 1, 000
Total Cost 53, 675

If payment is delayed, the cash discount of N2,500 is forfeited. The cost of a second hand
asset should include cost price plus expenses for repairs, new parts and other necessary things
to get the asset ready for use. Avoid including expenses which do not enhance the usefulness
of the asset from the purchase price e.g., repair to damaged parts during installation. These
are expenses account and not asset account.
When a company constructs a building, the cost should include:
 all direct cost for construction

 general overhead for power, supervision during construction, depreciation of
machinery used for construction.
 architectural fees
 engineering fees
 building permit
 interest on loaned money for construction
 cost of land – it should include purchase price, agents commission, survey
fees, title search, demolition of existing building on the land less the sale of
salvaged materials.
Outline 5 elements of cost that should form part of the cost of an asset that will be
depreciated.
The elements of cost that should form part of the cost of an asset are :
 Original cost of the Asset

 Carriage Inward (Transportation cost)
 Legal fees
 Installation fees
 Agency fees.
7.3 Depreciation
You know from this session that fixed assets offer benefits that a business use over the life of
the assets to produce goods and services. All fixed assets have limited useful lives except
land. Their benefits are used up by the end of their useful lives through wear and tear in the
course of production or use. Therefore, there is a fall in the cost of the assets every year
which is termed depreciation. The difference between the amount received on disposal of an
asset if deducted from the cost of the asset is depreciation. From the foregoing, depreciation
can be defined as the fall or decrease in the economic service potential of an asset as a result
of wear, tear, usage, obsolescence and inadequacy.
7.3.1 Benefits of Depreciation
Some benefits of depreciation are:
i. The assets are shown at reduced value in the balance sheet.

ii. The profit and loss account is debited with the portion of fixed asset which are used
for earning the income.
iii. It reduces the profit earned hence the amount can be retained in the business for
replacement of the asset.
iv. It enables the financial statements to give a true and fair view of the account of the
organization.
7.3.2 Factors to be considered in the determination of Depreciation.
The relevant factors for the determination of depreciation are:
i. The original cost of the fixed asset.

ii. The estimated period of time it will be in use, i.e., useful life.
iii. The approximate value of the asset at the end of its working life, i.e., residual value.
iv. The organisation’s depreciation policy.
Illustration 7.2
If the cost of a fixed asset was N20, 000 and was sold after five years for N5, 000, the amount
of depreciation is N20, 000 – N5,000 = N15,000. Depreciation, as part of cost of production,
is used in arriving at the profit for the accounting period.
Note
Calculation of depreciation as in illustration 7.2 above may not be totally correct. It is

true that what we have is a reduction in value but we must note that the reduction may
be due to other factors and more importantly the calculation was not based on any
premise or standard, hence this will take us to methods of calculating depreciation
7.3.3 Depreciation Method
There are various depreciation methods. In this session, we shall discuss the four frequently
used method of calculating depreciation. The four methods are:
i. Straight Line Method.

ii. Reducing or Diminishing Balance Method.
iii. Sum of the Year’s Digit Method.
iv. Revaluation Method.
a. Straight Line Method
The straight line depreciation method allocates an equal proportion of the cost of an asset to
each accounting period in the estimated useful life of the asset. The amount of depreciation
for each accounting period is determined by deducting the estimated or scrap value from the
cost of the asset and dividing by the number of years of the estimated useful life.
Illustration 7.3
A machine costs N56,000 with a residual value of N 6,000 and a useful life of five years.
You are required to calculate the depreciation for each year using the straight line method.
The annual depreciation charge is calculated as follows:
Cost – Residual value = N56,000 – N6,000 = N50,000 = N10, 000
Years of useful life 5 5
Cost of depreciable asset 56, 000.00
Less estimated residual value 6, 000.00
Total amount of depreciable value 50, 000.00
Estimated useful life 5 years
Depreciated amount each year = 50, 000.00
= N10, 000
This means that N10,000 will be charged annually as depreciation for the next five years.
The straight line method is widely used by many companies for the reason that it produces equal
charges as depreciation expense over the life of the asset.
Illustration 7.4
On 1st Jan.2007, a manufacturer bought a production plant for N33,000. He estimated that at the end
of 3 years, it will have a scrap value of N3,000. Assuming that he closes his books on 31st December
every year, you are required to calculate the depreciation using straight line method and show the
entries in the books of accounts of the manufacturer.
Original Cost – Residual Value
No. of useful years
= N33,000 – N3,000)
= N10, 000 per year
JOURNAL
N N
2009 Depreciation a/c Dr. 10,000
Dec. 31 Machine a/c 10,000
Being depreciation written off
Dec. 31 Profit and Loss a/c Dr. 10,000
Depreciation a/c 10,000
Being depreciation for the year transferred

GENERAL LEDGER
Production Plant Account
Date Particulars Fo Amount Date Particular Fo Amount
N N
2007 2009
Jan. 1 Cash 33,000 Dec. 31 Depreciation 10,000
______ Dec. 31 Balance c/d 23,000
33,000 33,000
2007 2007
Jan. 1 Balance b/d 23,000 Dec. 31 Depreciation 10,000
______ Dec. 31 Balance c/d 13,000
23,000 23,000
2008 2008
Jan. 1 Balance b/d b/d 13,000 Dec. 31 Depreciation 10,000
______ Dec. 31 Balance c/d 3,000
13,000 13,000
2009
Jan. 1 Balance b/d 3,000
Depreciation Account
N N
2007 2007
Dec 31 Machinery 10,000 Dec 31 Profit & loss a/c 10, 000
2007 2007
Dec 31 Machinery 10, 000 Dec 31 Profit & loss a/c 10, 000
2008 2008
Dec 31 Machinery 10, 000 Dec 31 Profit & loss a/c 10, 000
Profit & Loss Account
For the year ended 20xx
Depreciation N
Machine 10,000
Use the same method of Profit and loss account for year 2007 and 2008:
Balance Sheet
As at 31st Dec. 20xx
Cost Acc. Dep. N.B.V.
Fixed assets N N N
Machine 33,000 10,000 23,000
Balance Sheet
As at 31st Dec. 2007
Fixed assets N N N
Machine 33,000 20,000 13,000
Balance Sheet
As at 31st Dec. 2008
Fixed assets N N N
Machine 33,000 30,000 3,000
ii Diminishing/Reducing Balance Method

This method is often called accelerated depreciation method because it results in decreasing
depreciation charge over the useful life of the assets and there is no scrap value. Depreciation
is determined by a fixed rate percent written off the book value of the asset every year. The
depreciation becomes smaller as the book value declines because the highest amount of the
depreciation is provided for in the early years when the assets contribute significantly
towards the success of the organization.
Illustration 7.5
Machinery bought on Jan. 2006 for N30,000 was depreciated every year at the rate of 20% by
diminishing balance method. You are required to calculate the depreciation using
diminishing method, and make necessary entries for the first 3 years.
Machinery Account
N N
2006 2006
Jan. 6 Cash 30,000 Dec. 31 Depreciation 10%
of N33,000 3,000
Dec 31 Balance c/d 27,000
30,000 30,000
N N
2007 2007
Jan. 1 Balance b/d 27,000 Dec. 31 Depreciation 10%
of N27,000 2,700
27,000 27,000
N N
2008 2008
Jan. 1 Balance b/d 24,300 Dec. 31 Depreciation 10%
of N24,000 2,430
24,300 24,300
Balance b/d 21,870
Depreciation Account
N N
2006 2006
Dec.31 Machinery 30,000 Dec. 31 Profit & Loss 3,000
2007 2007
Dec.31 Machinery 2,700 Dec 31 Profit & Loss 2,700
2008 2008
Dec.31 Machinery 2,430 Dec.31 Profit & Loss 2,430
Note that the profit and loss account for each year is then charged accordingly and the value
of the asset on the balance sheet for each year is reduced.
iii. Sum-of-the years’ digits Method

It is also known as Accelerated Depreciation Method. In this method all the useful years of
the asset are termed digits. The digits are added together. The sum of the digit is used to
divide the depreciable cost of the asset. The result is that the first year has the highest
depreciation while lesser amounts are changed in later years.
Illustration 7.6
Assume that the sum-of-the-years’ digits method is used to depreciate a machine costing
N66,000 with a residual value of N6,000. The estimated useful life is five years. Calculate
and show the depreciation charged against profit at the end of each year and the Balance
Sheet Value of the machine for each of the five years.
Year Cost less residual Value Fraction Annual Depreciation
N N
1 60,000 x 5 20,000
15
2 60,000 x 4 16,000
15
3 60,000 x 3 12,000
15
4 60,000 x 2 8,000
15
5 60,000 x 1 4,000
15
Balance Sheet Value of the Machine
As at the end of each of the 5 years.
Year Cost Accumulated Depreciation NBV
N N
1 60,000 20,000 46,000
2 60,000 36,000 30,000
3 60,000 48,000 18,000
4 60,000 56,000 10,000
5 60,000 60,000 6,000
iv. Revaluation Method

This method is used for valuation of an asset at the beginning and at the end of the year to
determine its appreciable and depreciable value. The difference between the present value of
an asset and its value at the beginning of the trading years is the cost of depreciation.
Revaluation method is used for such asset as copyrights, loose tools and patents trademarks.
These assets do not depreciate according to a definite pattern and they are frequently
replaced. In using this method the cost of assets are calculated by adding opening stock of
assets to purchases during the year and subtracting the closing stock at the end of the period.
Illustration 7.7
A company’s loose tools account was valued at N11,500 on Jan. 2009; the stock of loose
tools was valued at N11,350. Prepare the loose tools account using revaluation method of
depreciation.
Opening stock Jan. 1, 2009 11,500
Add purchases during the year 2,700
14,200
Less closing stock 11,350
Depreciation 2,850
Loose Tools Account
Particulars Fo Amount Date Particular Fo Amount

Date
N N
2009 2009
Jan. 1 Balance 11,500 Dec. 31 Depreciation 2,850
Dec.31 Cash 2,700 Dec 31 Balance (stock)c/d 11,350
14,200 14,200
2010
Jan. 1 Balance (Stock) b/d 11,350
The amount of depreciation is transferred to the debit side of Profit and Loss Account and
shown in the Balance Sheet as a deduction from the historical cost of the fixed asset.
1. What are the commonest methods of calculating depreciation?

2. Explain straight line method of depreciation with illustrations.
(1)The commonest methods of calculating depreciation are:
a. Straight line method

b. Reducing balance method
(2) In straight line method, if the life of the asset is given the depreciation is
calculated as follows:
Depreciation per annum = cost of asset – Scrap value
Life (in years)
Example: asset cost N200,000. Its scrap value is N20,000 at the end of 5years. What
is the depreciation value?
Depreciation per annum = N200,000 – N20,000
= N180,000 = N36,000
Note: when scrap value is not given, it is nil.
Appreciation of assets
In this session you will learn that not only do fixed assets depreciate, but also some fixed
assets do appreciate. Some assets depreciate in value while some assets like Land and
Building appreciates in value. When an asset appreciates in value: Debit the asset account in
the appreciation cost and Credit Capital reserve that is profit on revaluation with same
amount. Revaluation method may be used to show appreciation in value as below:
Illustration 7.8
On 1st. February 2009, a piece of land bought for N100,000 showed a current value of
N150,000. Prepare the necessary ledger entries.
LAND ACCOUNT
Date
N N
2009 2009
Feb. 1 Cash 100,000
Feb. 1 Profit on revaluation 50,000
2010 150,000
Profit on Revaluation Account

Date
N N
2010
Feb. 1 Land 50,000
v. Disposal of Fixed Assets

When a business disposes of a fixed asset on account of wear and tear, obsolescence, etc.,
they are scrapped, sold out or traded in on a new scale. The residual value of an asset is an
estimate. The asset may be sold at a price which differs from its book value on disposal. The
disposal of a fixed asset whether wholly or partially depreciated will make a profit or a loss
on realisation. A sales price above the book value is a gain while a sales price below the
book value is a loss. When calculating the gain or loss on the sale of an asset, a Realization
Account is prepared to show the book entry. If the depreciation was credited to the asset
account, the amount realized on sales will also be credited to asset account. Any profit made
on the proceeds is debited to the Asset Account and credited to the Profit and Loss account.
Any losses made are credited to the Asset Account and debited to the Profit and Loss
account.
Illustration 7.9
An equipment was bought on Jan 2007 for N40,000. A straight line depreciation method was
used at 20% per year. On Dec. 2009 the equipment was sold for N18,000. Prepare the
necessary ledger accounts.
Equipment Account
Year Particulars Fo Amount Date Particular F Amount

o
N N
2007 Cash 40,000 2007 Depreciation 8,000
2008 Depreciation 8,000
2009 Profit on realization 2,000 2009 Depreciation 8,000
2009 Cash (Realization) 18,000
42,000 42,000
For the year ended 31st. Dec. 2009
N
Profit on Realization -
Sale of Equipment 2, 000
If the equipment was sold for N14,000 at the end of 2009. It indicates a loss. The account is
prepared as follows:
Equipment Account
Year Particulars Fo Amount Date Particular Fo Amount
N N
2007 Cash 40,000 2007 Depreciation 8,000
2009 Cash (Realization) 14,500
2009 Loss on Realization 1,500
40,000 40,000
For the year ended 31st Dec. 2009
Loss on realization 1,500

On the other hand, if provision for Depreciation account has been credited, an account for
sale of Asset must be opened. The original amount of the asset is transferred to the debit of
this account while the asset account is credited.
Debit Provision for Depreciation Account with the aggregate depreciation. Credit the sales of
Asset Account with the same amount. Transfer the balance of the sale of Asset Account to
Profit and Loss Account either as a loss or a gain on realization.
Illustration 7.10
On 1st. Jan. 2009 the Machinery account of Olorunloju Ltd was N150,000. The Provision for
Depreciation (Machinery) Account was N85,000. On Feb. 4, 2009, one of the machines with
an original cost of N30,000 with an accumulated provision for Depreciation of N22,000 was
sold for N10,000. Show the relevant ledger accounts for this transaction.
Machinery Account

Date
N N
2009 2009
Jan. 1 Cash 150,000 Jan. 8 Sale of Asset A/c
Realization 30,000
Jan. 8 Balance c/d 120,000
150,000 150,000
Provision For Depreciation (Machinery) Account.
N N
2009 2009
Jan. 8 Realization a/c 22,000 Jan. 1 Balance b/d 85,000
85,000 85,000
Sale of Asset (Realization Account)
N N
2009 2009
Jan. 8 Machinery a/c 30,000 Jan. 8 Provision for
Dep. (machinery) 22,000
Jan. 8 Profit on realization 2,000 Jan. 8 Cash proceeds 10,000
32,000 32,000
The profit on realization account
(N2,000) is to be transferred to the credit side of Profit and Loss Account.
Summary to Study Session7
In study session 7, you have learnt that:
 Fixed assets are assets of greater permanence, i.e., assets of long life but do not last
forever. They are acquired for production rather than for resale to customer by
business concern.
 Fixed assets are subjected to depreciation, i.e., wear and tear of the assets.
 The purpose of depreciating the assets is to allocate cost to the services of the assets
which were used during the trading period.
 The depreciation cost is charged against the profit of the year and the balance sheet is
appropriately adjusted to show the true book value of the fixed asset
 Depreciation is calculated by straight line method, diminishing/reducing balance
method, sum-of-the-years’ digits method and revaluation method.
 Fixed assets could be disposed of by sale, either at a profit or loss.
Self-Assessment Questions to Study Session 7
Answer questions 1 and 2 using the following information.
A machine was bought for N100,000 and depreciation is to be charged at 20% on diminishing
balance method.
1. Depreciation charged for the second year is

a. N20,000 b. N16,000 c. N12,000 d.N10,240
2. The net book value of the asset at the end of the third year is
a. N100,000 b. N80,000 c. N64,000 d. N57,000
Use the following data to answer questions 3 and 4.
Cost of Asset 100,000
Depreciation 80,000
Cash realised in disposal of asset 30,000
3. The net book value at the time of sales is:
a. N100,000 b. N50,000 c. N30,000 d. N20,000
4. The profit on sale of the asset is
a. N50,000 b. N30,000 c. N20,000 d. N10,000
Use the data below to answer questions 5 and 6.
A motor vehicle was bought for N16,000. It was estimated to have a useful life span of 4
years with a scrap value of N2,000.
5. What is the net book value of the motor vehicle at the end of the third year using the
straight line method?
a. N9, 000 b. N5, 500 c. N3, 500 d. N2, 000.
6. Using the straight line method, what is the amount of depreciation charged per
annum?
a.N9, 000 b.N5, 500 c.N4, 000 d.N3, 500
7. If the vehicle is sold for N6,000 at the end of third year, what is the profit or loss on
sale?
a. N1000 profit b. N500 profit c. N500 Loss d. N1000 Loss
A motor van costs N60,000 at 1st January 2004 its depreciation was at 8% using the fixed
instalment method.
8. What was the accumulated depreciation as at Dec. 31st, 2005?
a. N9,600 b. N9,216 c. N4,800 d. N4,416
9. What was the net book value of the motor van as at Dec 31st, 2005?
a. N55,584 b. N55,200 c. N50,784 d. N50,400
10. Which of the following causes depreciation of assets?
I Wear and Tear
II Obsolesce and Passage of time
III Fluctuation in Prices
a. I, II, III
b. I and III only
c. I and II only
d. II and III only
Answer to multiple choice:
1. b 2. b 3. d 4. d 5. c 6. d 7. b 8. c 9. b 10. c
11. Chimela Ltd. Purchased an equipment for N40,000 on Jan 1, 2012 with an estimated
life of 5 years and scrap value of N5,000. Using the straight line method, prepare depreciation
schedule.
Cost – Scrap value = annual depreciation charge
Useful life (years)
= N40,000 – N5,000 = N35,000 = N7,000
5 5
Straight Line Method
Year Depreciation Accumulated Depreciation Book Value at the end of the

at the end of Year N year
N
N
1. 7,000 7,000 33,000
2. 7,000 14,000 26,000
3. 7,000 21,000 19,000
4. 7,000 28,000 12,000
5. 7,000 35,000 5,000

12. The loose tools of Anigbede Ltd stood at N10,600 on 1st January 2011. During the
year, additional tools amounting to N3,400 were bought. On December 31, 2011, the loose
tools were valued at N13,500. Give the accounting entries necessary to record this
information in the books of the firm.
Answer:
Preliminary calculation: N
Stock at start 10,600
additions 3,400
14,000
Less stock at end 13,500
Depreciation 500
Loose Tools Account
Date N Date N
2011 2011
Jan 1 Bal 10,600 Dec 31 Depreciation 500
Dec 31 Cash 3,400 Dec 31 Balance (stock) 13,500
14,000 14,000
Jan 1 Bal b/d 13,500

STUDY SESSION 8 CONTROL ACCOUNTS AND CORRECTION OF ERRORS
Introduction
In Study Session 3, we discussed and prepared the trial balance defined as the addition of all
the debit and credit balances in the ledger to prove the arithmetical accuracy of the entries in
the ledgers. The accounts may not be correct though every debit entry in the ledger may have
its corresponding credit entry and vice-versa (i.e. double entry system). This means that there
are errors affecting and not affecting the total of the trial balance.
Unbalanced trial balance can be very frustrating in an examination or classroom setting. This
is usually due to one or more errors in the accounts. In a business, many ledgers are opened
for a large number of customers. Under such a situation, there may be errors. For this reason,
the trial balance may not be ideal for checking the accuracy of the account.
When such errors are discovered, necessary corrections should be made in the books.
Correction of errors is a very important area of accounts. Therefore errors must be reduced to
the barest minimum and promptly located and corrected through individual ledger accounts
by means of control account. We only need to check for errors in the ledgers where control
accounts do not balance. The final account showing the true financial position of a company
account will be very difficult to prepare if errors are not located and rectified. If an error is
located in a journal entry before being posted to the ledger or any other book, it should be
corrected by crossings. Cross out the wrong figures with single line. Enter the correct amount
above the crossed figures; error in the ledger accounts are located the same way. Do not
erase errors. There are revealed and unrevealed errors in the trial balance. Unrevealed errors
are the errors that do not affect the trial balance while the revealed errors affect the trial
balance. For revealed and unrevealed errors, a journal entry is usually prepared to give
reasons as to the cause of the errors and how they can be rectified. Some errors are
discovered when trial balance is being posted. Others are discovered during audit, through
complaint from customers whichever way, correction is usually made through the general
journal.
We need to check for errors in the ledgers where control accounts do not balance. Control
accounts are summaries of account to which the total of individual personal accounts are
posted. the total of all debits into personal ledger accounts are debited while the total of all
credit postings are credited. The major control accounts are Purchases control account and
Sales control account. They are also known as Creditor Control Account and Debtors Control
Account.
8.1 describe control account;

8.2 explain the uses and advantages of control accounts;
8.3 explain and prepare purchases ledger and sales ledger control accounts;
8.4 explain errors and its correction; and
8.5 explain and prepare suspense account.
8.1 What is Control Account?
Control account is a memorandum account into which are transferred in totals, the various
amounts of the transactions which have been debited or credited in details to individual
ledger account. A control account in respect of a ledger therefore operates as a control
account for the ledger and provides a check on the accuracy of specified ledgers.
We have discussed various ledgers in study session 4. In this study session we shall be
looking at three types of ledgers:
 The purchases ledger: This is for creditors account.

 The sales ledger: This is for debtors account.
 The General ledger: This is for all accounts.
The purchases ledger

This is the ledger in which all purchases are posted. It is also called Purchases ledger Account
or Creditors ledger. One ledger will be opened in the general ledger as control for creditors.
This ledger is referred to as Purchases ledger Control Account.
The sales ledger
This is the ledger in which all Sales are posted. It is also called Sales ledger Account or
Debtors ledger. One ledger will be opened in the general ledger as control for Debtor. This
ledger is referred to as Debtors ledger Control Account.
The General Ledger
The General Ledger is the main ledger while purchases and sales ledgers are subsidiary to the
General Ledger. A General ledger contains the summary of all accounts; e.g., Assets,
Liabilities, Capital, Creditors and Debtors used for the preparation of trial balance and final
accounts. Purchases and Sales ledger control accounts summarize individual accounts. They
are called subsidiary ledgers. The individual account shows business transactions in detail.
The subsidiary ledgers of purchases and sales ledgers can be created from General ledger and
have a total account of creditors and debtors. Purchases ledger control account or total
creditors control account summarises and controls accounts containing creditors account.
Sales ledger control accounts or total debtors control account summarises the account of
debtors. The general journal is simplified by the use of subsidiary ledgers for businesses
selling and buying on credit and finds it necessary to maintain separate account for each
customer. A special account receivable ledger and account payable ledger cancels out
multiple/repetitive entries in the general ledger.
8.2 Uses and Advantages Of Control Account
A Control Account has the following uses and advantages:
1. To verify the arithmetical accuracy of the accounts in the ledger.
2. The control account makes the location of errors easy in the personal accounts.
3. Debtors and Creditors account balances can be extracted for the preparation of the
final accounts because it performs the same functions as the trial balance.
4. It helps to monitor and check accounts clerks who may be engaging in fraudulent acts
in the sense that the accountant will always ask for balances of individual accounts for
comparison with the control accounts in the General Ledger.
5. It encourages division of labour among book-keepers keeping the books of original

entry. Each subsidiary ledger may be handled by a different person, one person may
handle the general ledger while the other handles the subsidiary ledger.
6. It reduces the size of the General ledger, have up-to-date records of debtors and
creditors. It helps to obtain efficient recordings of transactions.
8.2.1 Contra Accounts
It occurs when a person buys and sells to a company. There will be two accounts in his
name. The two accounts should be adjusted from time to time by transferring the smaller
balance in one ledger account to the bigger balance for final settlement of accounts. It means
that the amount owing creditors is used to offset the debit being owed in the Sales ledger.
Such transfer should be shown in the control accounts and items affecting the personal
account must affect the control accounts. It also shows the entries in the purchases and sales
ledger control accounts.
8.3 Purchases and Sales Ledger Control Account
8.3.1 Purchases Ledger Control Account
Having explained what control account is, the type of ledgers contained in control account
and the uses and advantages of control account, you will now learn about purchases and sales
ledger control accounts and their preparation in the books of accounts. The Purchases Ledger
Control Account records creditors of business transactions. It is a total creditor’s account,
which controls the purchases ledger. It should show an equal balance to the total of all the
balances of creditors’ personal accounts in the ledgers.
On its credit side we have the following:
a. Opening credit balance
b. Total credit purchases.
On the debit side we have the following:
a. Opening debit balance
b. Cash payment to the creditors
c. Return outwards
d. Discount Received.
e. Bills payable.
Purchases Ledger Control Account Format
PURCHASES LEDGER CONTROL ACCOUNT
Cheque to Creditor xx Bal b/f xx
Cash to Supplier xx Purchases (Credit) xx
Discount Received xx Cash refunds xx
Bills Payable xx Discounts withdrawn xx

Credit Note Received xx
Returns Outwards xx
Contra entry/set off xx
Bal. c/d xx
xxx xx
Balance b/f xx
Illustration8.1
The Purchase ledger of a particular business organisation transaction is as follows:
Balance as at May 1 2,000
Credit purchases 5,000
Return outwards 500
Discount allowed 200
Cash payment to creditors 5,000
Prepare the Purchase Ledger Control Account for the month of May 2010 as it will appear in
the General Ledger.
General Ledger
Purchases Ledger Control (Total) Account
Ledger Control TOTAL Amount

Date Particulars Amount Date Particulars N
May 31 Return Outward 500 May 1 Balance b/f 2,000
May 31 Cash 5,000 May 31 Purchase 5,000
May 31 Discount Received 200
May 31 Balance c/d 1,300
7,000 7,000
June 1 Balance b/d 1,300
Note: That the total N1,300 must be equal to the total of individual balances in the purchases
ledger.
ITQ for learning outcomes 8.3
On January 5, 2012 Emeka purchased goods worth N5,000 from May

Ltd. Jan. 10 purchases were made up of goods with N2,000 from May
Ltd. Prepare the account payable in the subsidiary ledger of May Ltd.
ITQA for learning outcomes 8.3
Purchases Journal
Date Particulars Detail Total
2012
Emeka
Jan 5 Goods 5000
“ 10 Goods 2000
7000
May Ltd
Account Payable Subsidiary Ledger
Date Particular Fo Amount Date Particular Fo Amount
Jan 5 Goods 5000
“ 10 “ 2000
7000
8.3.2 The Sales Ledger Control Account {Total Debtors Account}
This records total debtors of business transactions. It summarizes and controls the ledger
containing the account of debtors in the sales ledger. It contains on the debit side the total of:
{a} Opening debit balances brought forward.
{b} Total sales during the period.
{c} Any interest charges.
{d} Cash and cheque payment to debtors.
{e} Dishonoured cheques and bills
The credit side consists of the total of:
{a} Opening credit balances.
{b} Cash and cheque received from debtors.
{c} Return inwards.

{d} Bad debts.
{e} Discount allowed.
{f} Bills received/payable.
{g} Contra settlement.
Creditors Ledger Control Account Format
CREDITORS LEDGER CONTROL ACCOUNT
Balance b/f xx Cash received from debtors xx
Sale (Credit) xx Cheque from Customers xx
Interest Charges xx Discounts allowed xx
Dishonoured bill xx Bills receivable xx
Carriage outwards xx Allowances xx
Discounts disallowed xx Bad debts xx
Debit note issued xx Returns Inwards xx
Payment to debtors for claims xx Credit Note issued xx
Service Charges xx Contra Settlement / entry xx
xxx Bal. c/d xx
Balance b/d xx xxx
Illustration 8.2
The sales ledger of Mosun contains the following figures; Prepare the sales ledger control
account for the month of July 2xxx as it will appear in the general ledger.
Balances as at July 1 12,500
Sales for the month 22,300
Cash payment from debtors 25,000
Return inwards 1,200
Bad debts 250
GENERAL LEDGER
Sales Ledger Control Account {Total Debtors Account}.
2xxx N 2xxx N
July 1 Balance b/f 12,500 January 31 Cash 12,500
July 31 Sales 22,300 January 31 Returns 1,200
January 31 Discount allowed 600
January 31 Bad debts 250
January 31 Balances c/d 7,750

34,800
34,800
Aug. 1 Balance b/d
7,750
This balance of N7,750 should be equal to all the debit balances in all the debtors’ personal
account in the sales ledger otherwise; there is an error in any of the ledgers.
Illustration 8.3
Parapo maintains General ledger, Purchases ledger, (Creditors ledger) and Sales ledger
(Debtors ledger). A total account is kept in the General ledger for individual ledgers. The
following business transactions were extracted during the month of March 2010.
Trade Creditors Olayemi UAC PLC
Balance b/f N1, 500 N2, 500
Trade Debtors Omoyeni Simpson
Balance b/f N1, 000 N1, 200
Business Transactions in the Purchases ledger
Olayemi UAC
N N
Purchases 8,000 10,000
Returns 1,000 1,500
Cash payment 5,000 7,000

Discount received 200
Total Purchases 18,000
Total Returns 2,500
Total Cash Payment 1,200
Total Discount Received 200
Business Transactions in the Sales Ledger
Omoyeni Simpson
N N
Sales 10,000 12,000
Interest 200 10,000
Cash Receipts 9,000 500
Total Sales 22,000
Interest 200
Cash Receipts 19,000
Required:
a. Prepare personal accounts in the purchases and sales ledger

b. Prepare the control account in the ledger.
c. Prepare the TRIAL balance.
d. Prepare purchases ledger control account.
e. Prepare sales ledger control account.

OLAYEMI
Purchases Ledger (Creditors Ledger)
2010 N 2010 N
Mar. 31 Return Inwards 1,000 Mar. 31 Balance b/f 1,500
“ 31 Cash 5,000 “ 31 Purchases 8,000
“ 31 Discount Received 200
“ 31 Balance c/d 3,300
9,500 9,500
April 1 Balance b/d 3,300
UAC PLC
2010 N 2010 N
Mar. 31 Purchases Return 1,500 Mar. 31 Balance b/f 2,500
“ 31 Cash Payment 7,000 Purchases 10,000
“ 31 Balance c/d 4,000
12,500 12,500

GENERAL LEDGER CONTROL ACCOUNT
2xxx N 2xxx N
Mar. 31 Balance b/f 4,000 Mar. 31 Purchases Return 2,500
Mar. 31 Purchases 18,000 Cash 12,000

Discount received
200
Balance c/d
Mar.31 7,300
22,000 22,000
TRIAL BALANCE ON PURCHASES LEDGER
DR CR
N N
General Ledger Control Account 7,300
OLAYEMI - 3,300
UAC PLC - 4,000
7,300 7,300
OMOYENI
SALES LEDGER (Debtor’s Ledger)
2xxx N 2xxx N
Mar. 31 Balance b/f 1,000 Mar. 31 Cash 9,000
Mar. 31 Sales 10,000 Mar. 31 Balance c/d 2,200
Mar. 31 Interest 200
11,200
April 1 Balance b/d 2,200 11,200
SIMPSON
SALES LEDGER (Debtor’s Ledger)
2xxx N 2xxx N
Mar. 31 Balance b/d 1,200 Mar. 31 Cash 10,000
Mar. 31 Sales 12,000 Mar. 31 Discount allowed 500
Mar. 31 Balance c/d 2,700
13,200 13,200

GENERAL LEDGER CONTROL ACCOUNT
2xxx N 2xxx N
Mar. 31 Cash 19,000 Mar. 31 Balance b/f 2,200
Mar. 31 Discount allowed 500 Mar. 31 Sales 22,000

Interest
April 1 Balance c/d 4,900 Mar. 31 200
24,400 24,400
Balance b/d
7,300 April 1 4,900
TRIAL BALANCE IN SALES LEDGER
DR CR
Omoyeni 2,200 -
Simpson 4,900 -
General Ledger Control Account 7,100 7,100
PURCHASES LEDGER CONTROL ACCOUNT

2xxx N 2xxx N
Mar. 31 Purchase returned 2,500 Mar. 31 Balance b/f 4,000
Mar. 31 Cash 12,000 Purchases 18,000
Mar. 31 Discount Received 200
Mar. 31 Bal. c/d 7,300
22,000 22,000
Balance b/d
April 1 7,300
SALES LEDGER CONTROL ACCOUNT
2xxx N 2xxx Cash N
Mar. 31 Balance b/f 2,200 Mar. 31 Discount allowed 19,000
Mar. 31 Sales 22,000 500

Balance c/d
Mar. 31 Interest 200 4,900
24,400 24,400
Note that:
1. These Control accounts: purchases, and sales ledger control accounts; should be
the reverse of the debit and credit sides in the purchases and sales ledgers.
2. Control Accounts contain totals instead of individual accounts.
3. The figure of the balance b/d is used for the Trial Balance and Balance Sheet.
4. Control accounts make individual ledgers self-balancing.
5. Control accounts are not part of the double entry; they are prepared to test the
accuracy of the accounts.
8.4 Errors and its Correction
When an account has been prepared and balanced, the trial balance will be extracted. The
trial balance may or may not balance. If it balances, it is not an assurance that the account
does not contain error. It can contain errors that will not be revealed by a trial balance
(discussed below). If it does not balance, then it is clear that the accounts contain some errors
which must be located.
8.4.1 Procedures to locate Errors
When a trial balance total does not balance, try to locate the errors as follows:
1. Check the balances of the ledger accounts.

2. Re-add the debit and credit sides of the trial balance.
3. Check the recordings and additions in the books of original entry and the ledger.
4. Divide the difference between the debit and credit sides of the trial balance by 2.
Look through the accounts to see if the amount is written in the wrong side of an
account. If the difference is 20 look for 10 in the wrong column of the trial
balance or the wrong side of an account. The discrepancy will show up.
5. Divide the difference by 9. If it is 36 and divisible by 9. Look for the amount in

the trial balance. It may be due to an error of transposition in the copying of
the ledger balances.
If the difference is 36. It is divisible by 9 with a quotient of 4. The quotient 4

indicates that there is a difference of 4 between the digits that have been
transposed. Post the difference in the trial balance to the suspense account pending
the time the error is located.
8.4.2 Unrevealed Errors in the Trial Balance:

The following errors will not be revealed by a trial balance
 Errors of omission
 Errors of commission
 Errors of principle
 Errors of original entry
 Compensating errors.
These errors are discussed below:
1. Errors of Omission: This error occurs when entries for a business transaction is
omitted from the books.
Illustration 8.4
On 2nd March, goods sold to Morakinyo for N2,000 was entirely omitted from any of the
books.
Solutions to Illustration 8.4
This transaction is not recorded in any of the books of original entry hence it has no effect on
the trial Balance. The two sides of the trial balance will agree. When the error is detected,
correction has to be made by means of general journal to show the true financial position of
the business.
The correcting general journal entry will be:
JOURNAL
Date Accounts title and narration DR CR
2xxx N N
March 2 Morakinyo Dr. 2,000
Sales Account CR 2,000
Being correction of omission of sales invoice

no. ……. from sales journal
2. Errors of Commission:
This error is made up of entries of business transactions in the wrong account of the
same class.
Illustration 8.5
On 25th June 2xxx, a purchase of goods worth N10,000 from C. Alase was entered in O.
Alase Ltd account.
This error is unrevealed by the Trial Balance, i.e., the Trial Balance is not affected in the
sense that the credit entry remains the same. O. Alase’s account is credited instead of C.
Alase’s Ltd account.
The general journal for correction is as follows:
JOURNAL
2xxx N N
June O. Alase Ltd. Dr. 10,000

25
C. Alase 10,000
Being purchase invoice No…….. entered in error in the account of

O. Alase Ltd.
3.2 Errors of Principles
This error involves entry of business transactions in the wrong class of account by debiting
real account instead of nominal account and vice-versa.
Illustration 8.6
On 30th Oct. 2xxx, a motor van purchased for N150,000 is entered in repair of motor Van
account. The repair of motor van account is debited instead of motor van account.
This error does not affect the trial balance because the account is correctly credited but in a
wrong account.
The general journal entry for correction will be.

2xxx N N
Oct. 30 Motor Van Account Dr. 150,000
Repair of Motor Van 150,000
Being correction of an amount debited to

nominal account instead of fixed asset
account
4. Errors of Original Entry
This unrevealed error of original entry in the trial balance occurs when an incorrect entry of
business transaction is made in the book of prime entry and also posted to the ledger.
Illustration 8.7
Sales of N2,750 made to Samson was recorded as N2,650 on 5th April 2xxx.
There is an error in the recording of the transaction in the book of original entry. The amount
of N2,750 was recorded as N2, 650. So there is an under cast of N100. The general journal
entry will be:

2xxx N N
April 5 Samson Dr. 100 100
Sales Account
Being correction of an error of sales under

cast by N100.
5. Compensating Errors
It is an error of an incorrect entry of business transaction on the debit side compensating

coincidentally by an incorrect entry of an equal amount in the credit side.
Illustration 8.8
On 31st Dec. 2xxx, a purchase of N330 was overstated in the debit side of the trial balance.
Coincidentally a creditor, Nisaru overstated his account by N330.
The two sides of the trial balance have been increased by an equal amount of N330. These
errors are not revealed in the trial balance.
The general journal entries for correction will be as follows:
2xxx N N
Nisaru’s account Dr. 330
Dec. 31st Purchase Account 330
Being correction of overstatement of N330 in

purchase which compensated for each other.
8.4.3 Revealed Errors in the Trial Balance

Some errors do cause the total of trial balance unbalanced. The errors which cause the
disagreement should be traced and corrected. Typical of these errors are:
i. Errors of summation that is, errors in addition of the trial balance.

ii. Errors in the listing of ledger balance in the trial balance.
iii. Listing of the ledger balance in the wrong column of the trial balance.
iv. Arithmetical mistakes when adding ledger balances.
v. Incorrectly copying an amount when journalizing or posting business transactions.
8.5 Suspense Account
It is an account in which business transaction is posted temporarily, pending the time the
correct account for the transaction is known or found out. Only errors affecting the trial
balance are posted to the suspense account. The suspense account can be a debit or credit
balance. It depends on the greater side of the trial balance.
When the error in the trial balance is discovered, it must be rectified. To do so, a journal
entry is prepared to correct the account and the suspense account. The correction can be
affected in two ways:
(a) If only one side of the Trial Balance entry requires correction in the suspense account
for failing to balance, it does not require double entries for correction.
Illustration 8.9
In Mr. Aina’s trial balance for the year 31st Dec. 2xxx, the credit side is greater than the debit
side. The credit side exceeding the debit side by N2,000.00. Therefore N2,000.00 will be
debited to the suspense account as follows:
Mr Aina’s Account
2xxx N 2xxx N
31st Dec. Difference in books 2,000.00 Dec. 31 Cash 2,000
(b) Errors needing double entry correction, one entry is made in the account where the
error occurred while the other is entered in the suspense account.
Mr. Michael’s trial balance drawn up on 31st Dec. 2xxx did not agree. The total of debit side
= N50, 000 and the total of credit side = N48, 000.
To correct the trial balance, the suspense account will appear in the trial balance as follows:
TRIAL BALANCE
DR CR
N N
Total of debit side 50,000
Total of credit side 48,000
Suspense a/c 2,000
(Difference in books) 50,000 50,000

Illustration 8.10
The following errors were discovered in the trial balance:
1. A rent of N5,000 paid by a tenant was posted to the cash book. The double entry
was incomplete.
2. If debtors account for N2,000 was written off as bad debt. The entry made in the
personal account only showed the suspense account after the correction of the
errors.
Note that suspense account is temporary, pending the discovery of errors.
JOURNAL
PARTICULARS DR CR
Suspense a/c Dr 5,000
Rent received account 5,000
Being rent received but not completely recorded
Bad debt Dr 2,000
Suspense account 2,000
Being bad debt written off

SUSPENSE ACCOUNT
N N
2xxx 2xxx
March 1 Rent Received 5,000 Feb. 28 Difference in books 3,000
Mar. 1 Bad debts. 2,000
5,000 5,000
Here the double entry is completed:
Rent received is credited with N5,000
Bad debts is debited with N2,000
Summary to study session 8
In study session 8, you have learned that:
 Control accounts are extracted from sales, purchases daybooks, Return Inwards
and Outwards accounts and cashbook discounts.
 Totals are posted to the control accounts.
 Control accounts are not part of the double entry. They are prepared to test the
arithmetical accuracy of the ledger accounts.
 Control accounts are prepared to make individual ledgers self-balancing.
 Trial balance proves the arithmetical accuracy of the ledger accounts.
 Errors located before posting to the ledgers and in the ledgers must be corrected
by crossing out the wrong figures with single lines and entering the correct
amount above the figures. Such errors must not be erased.
 There are errors that do not affect the trial balance i.e. (un-revealed errors) and the
errors that do affect trial balance (revealed errors).
 The un-revealed errors and how to locate and correct them are by means of
general journal.
 The revealed errors and how to correct them is by preparing general journal.
Self-Assessment Questions to study session 8
1. Tolani & Sons maintain control in respect of its personal ledgers. From the following
information given below, prepare the account as they would appear in the general
ledger as at June 2XXX.
Sale ledger – debit 1/1/2xxx 13,000

Credit 1/1/2xxx 7,500
Purchase ledger credit 1/1/2xxx 10,000
Debit 8,210
Sales journal
22,625
Purchases journal 15,427
Returns inwards 720
Returns outwards 560

Cash received from customer
17,528 Cash paid to customer
9,299 Discount received
720
Bad debt written off 196

2. From the following information prepare
a} the purchases ledger control account
b} the sales ledger control account for the year 2xxx
Purchases 19,000
Sales 40,000
Total creditors as at 1/1/2xxx 7,000
Total debtors as at 1/1/2xxx 6,000
Discount received 200
Return outwards 30
Return inwards 300
Bills receivable 1,500
Cash paid 16,000
Cash received 35,000
Bad debts written off 500
Answer:
Purchases Ledger Control Account
N N
Jan1 Cash 16,000 Jan 1 Bal b/f 7,000
Discount received 200 Purchases 19,000
Return outwards 30
Bal c/d 9,770

______
26,000
Bal b/d
26,000
9,770
Sales Ledger Control Account
Date Particulars Fo Date Particulars Fo Amount

Amount
N
N
Jan 1 Bal b/f 6,000 Jan 1 Cash received 35,000
Sales 40,000 Disallowed 400
Return inward 1500
Bad debt 500
Bills receivable 1500
Bal c/d 7100

_____
46,000
46,000
Jan 31 Bal b/d
7,100
3. Funso Ltd maintains purchases ledger, which is supported by control ledger
accounts. From the following particulars prepare the purchases ledger control
account to show the balance at the end of July 2xxx.
July 1 Balance 7,500
31 Purchases 10,500
31 Returns outwards 350
31 Cash paid to suppliers 8,000
31 Discount received 150
Answer:
Funso Ltd
Purchases Ledger Control Account
Date Particular Fo Amount Date Particular Fo Amount
20xx N 20xx N
July 31 Return outwards 300 July 31 Bal b/f 7,500
July 31 Cash 8,000 Purchases 10,500
July 31 Discount 150

received
July 31 9,500
Bal c/d
18,000 18,000
Aug. 1 Bal b/d 9,500
Sales ledger
N N
2011 Bal b/f 2,500 Return inwards 250
April 1 Sales for the 10,000 Cash 5000

month
Bal b/d 7,250
12,500
12,500
April 31 7,250
Bal b/d
4. Say which type of error has occurred in each of the following and correct the errors by
means of a journal:
a. Purchase of goods with N90 from A. Ajayi cannot be found in the books.
b. Sale of N1, 000 to G. Dantata was entered in the books as N1,000.00.
c. Sales account is over-stated by N400 and the wages account was over stated by the
same amount.
d. Purchase of goods worth N6, 000 from J. Ade was entered in error in B Ade’s
account.
e. Sale of motor van worth N5, 000 is entered in sales account.
Answer:
On extracting a trail balance, a book-keeper found that there was a difference of N1,800.
This was posted to the credit, subsequently the following errors were discovered:
a. The purchases Day Book was overcosted by N400

b. John Eko returned goods with 2,000 it was recorded in his personal account but with
no corresponding entry in the return inwards account
c. Equipment sold for N3,000 had been credited to sales account.
d. N1,200 worth of goods sold to Gana was credited to his account.
e. Rent of 2,600 received was totally omitted from the trial balance.
Journal Entries
N N
a) Suspense a/c Dr. 4000

Purchase a/c 4,000
b) Return Inward Account Dr 2000

Suspense account 2000
c) Sales account Dr 1200

Equipment account 3000
d) Gana Dr 1200
Suspense account 1200
e) Suspense account Dr 2600

Rent Received account 2600
Bal c/d 400
6600 6600
Suspense Account
Difference in Books 400
5. Oyeyemi’s ledger balances were as follows at the end of the year 31st Dec. 2xxx.
Capital N10,000 sales N25,200 purchases N20,500, furniture N1,200, rent N4,000, wages
N5,800, stationery N500 carriage outwards N1,300, drawings N3,000, Carriage inwards
N1,000. The two sides of the cash book totals are N2,200 and N2,700 respectively.
Oyeyemi’s Trial Balance appeared like this:
N N
Capital 10,000
Sales 25,000
Purchases 20,500
Furniture 1,200
Rent 4,000
Wages 5,800
Stationery 500
Carriage inwards 1,000
Carriage outwards 1,500
Drawings 3,000
Cash 507
41,507 31,500
There are five errors located. Explain the errors, produce the correct trial balance.
Answer:
Oyeyemi corrected Trial balance
N N
Capital 10,000
Sales 25,200
Purchases 20,500
Furniture 1,200
Rent 4,000
Wages 5,800
Stationery 500
Carriage outwards 500
Drawings 3,000
Cash 507
36,007 36,500
a. The purchase and sales had been wrongly posted to the wrong side of the Trial
Balance.
b. The carriage outwards had been wrongly posted to the debit side of the
account it should be credited. It was entered as N1,300 instead of N1,500.
c. The carriage inwards is an expense. it should be on the debit side of the trial
balance.
d. There was an error of N7 calculating of the cash book.
6. After preparing the final accounts of Mojolaiya Ltd., the following errors were
discovered. Correct the errors by means of journal entries:
a. The sales day book has an overcast of N5, 000.

b. A standing order of N2, 500 for insurance policy was neither entered in the
cash book nor posted to the ledger.
c. A credit note for N1, 500 received from Jackson had been credited to his
account.
d. The provision for doubtful debt was increased by N500
e. There was a loss on the sale of a vehicle for N21, 000. Its written down
value was N22, 000.
Answer:
GENERAL JOURNAL
MOJOLAIYA LTD.
N N
a. Profit and Loss a/c Dr 5,000

Suspense a/c
5,000
Being correction for overcast invoice
No_____ of sales day book
b. Insurance premium a/c Dr 5000

Bank
2,500
Being payment for monthly standing order
c. Jackson account Dr 2,500

Suspense a/c
1,500
Being correction of error for posting credit
note received as a credit
d. Profit and Loss account Dr 500

Provision for doubtful debt 500
Being an increase in provision for doubtful
debt at the end of the year

e. Profit and Loss account Dr 1,000
Cash 21,000
Motor van a/c

22,000
Being loss in the sales of motor van.
Multiple choice
7. Control accounts are:
a. two-ledger accounts
b. one-ledger accounts
c. three-ledger accounts
d. five-ledger accounts
e. ten-ledger accounts
8. Sales ledger Control is:
a. accounts for debtors
b. accounts for creditors
c. accounts for salaries
d. accounts for electricity
e. accounts for returns.
9. In purchases, ledger control account purchases are:
a. debited
b. carried down
c. omitted from the account
d. used as opening balance
e. credited
10. Control accounts
a. cannot locate errors

b. locate errors, make fraud difficult end and aid management control
c. encourage embezzlement
d. balances are equal to total purchases.
e. Are all of the above.
11. You are required to prepare a sales ledger control account from the following for the
month of April.
Sales balance 2,500
Total credit sales for the month 10,000
Return Inwards 250
Cash received from customers in the month 5,000
Sales ledger balance:
a. N2,000
b. N6,250
c. N7,250
d. N5,250
e. N5,750
12. The following are on Debtors ledger in control account except
a. cash sales
b. credit sales
c. dishonoured cheques
d. cash received from customers

e. bills receivable
13. Location and correction of errors is a very important aspect of accounting balance:
a. It affects the balance sheet only.
b. It gives full information as to the cause of the errors and how they can be
remedied.
c. If errors are not discovered, final account will be difficult to prepare.
d. If not discovered, it affects the Profit and loss account only
e. If not discovered, it shows incompetence on the part of the accountant.
14. All except one does not affect the agreement of the trial balance totals.
a. Errors of Omission
b. Errors of Commission
c. Errors of Principle
d. Errors of Double entry.
e. Compensating errors.
15. Errors of Omission is:
a. entries of transactions is a wrong account of the same class

b. an error in which entries for a transaction has been entirely omitted from the
books.
c. entries of transactions in the wrong class of account.
d. an incorrectly made entry in a book of prime.
e. entry and the incorrect amount posted to the ledger.
16. A suspense account is used to
a. record sales
b. correct errors
c. agree the trial balance
d. record purchases
e. record credit transactions
17. the suspense account is….
a. Temporary account
b. an account where trial balance can be credited
c. an account where difference discovered in a trial balance is kept until it is

corrected
d. an account which takes care of the mistakes of a business
e. none of the above.
Answer:
7.a 8.a 9.a 10.d 11.c 12.e 13.b 14.d 15.b 16.c 17.b
STUDY SESSION 9 ACCOUNTING FOR ADJUSTMENTS
Introduction
The basic function of book-keeping and accounts is to make accurate records of financial
transactions that will show a true and fair view of the state of affairs of the business as at a
given period. In study session 10, you will learn about the preparation of a simple final
account. You will know that for the accounts to present a true and fair view, the necessary
adjustments must be made in the final accounts. This is because there may be many expenses
and incomes relating to the current year which are still to be brought into the books of
accounts. Then, there may be certain items recorded in the current year’s books which
actually relate to the previous year or the next year. Unless such items are duly adjusted in
the books of accounts, the final accounts will not reveal the true and fair view of the state of
affairs of the business. In this study session, you will learn about all items which require
adjustments and study how such adjustments are made in books of account and how they are
incorporated in the final accounts.
9.1 explain why adjustment entries are necessary at the time of preparing the final
accounts;
9.2 describe the items in respect of which adjustments are usually made;
9.3 explain the necessary adjustment entries; and
9.4 prepare and discuss final accounts with adjustments.
9.1 NEED FOR ADJUSTMENT
You know that the financial reporting requires the summarization of business operations for a
specific accounting period. It is quite possible that certain transactions recorded in the current
year’s books may partly relate to the previous year or to the following year. It is also possible
that certain expenditure incurred during the current year has not yet been paid and so not
recorded. Similarly, there may be certain incomes earned during the current year which have
not been recorded because they have not yet been received. If such items are not adjusted or
brought into the current year’s books of account, the summary presented in the form of final
accounts will not reveal the true picture. Let us take the example of an amount of N600 paid
on September 1, 2007 towards insurance premium. You know any general insurance usually
covers a period of twelve months. Suppose the accounting year ends on December 31, 2007 it
would mean that part of the amount of insurance premium paid on September 1, 2007
pertains to the next accounting year, i.e., 2008. Therefore, while preparing the final accounts
of 2007, the expenditure on insurance premium that should be debited to the Profit and Loss
Account is N200 (N600 paid – N400 pertaining to 2008). The remaining amount of N400
will be carried forward and charged to the profit and Loss Account of 2008. Take another
example. The wages of workers for the month of December, 2009 were paid on January 7,
2010. This means the Wages Account of 2009 does not include the wages for the month of
December 2009. Such unpaid wages termed as ‘Wages outstanding’ have to be brought into
the books and debited to the Trading Account along with the wages already paid. Similarly,
adjustment may also become necessary in respect of certain incomes received into the books
and debited to the outstanding as at the end of the accounting year. Apart from these, there
are certain items which cannot be recorded on a day-to-day basis such as depreciation and
interest on capital. They are generally adjusted at the time of preparing the final accounts.
All items which need alteration or which are to be brought into books at the time of preparing
final accounts are called ‘adjustment’. The purpose of making various adjustments is to
ensure that the final accounts reveal the true financial position of the business. Therefore,
when you are to prepare the final accounts of any business, you are provided with a Trial
Balance and some additional information in respect of the adjustments to be made.
What is the purpose of making adjustment when preparing final accounts?
The purpose of making various adjustments is to ensure that the final accounts
reveal the true financial position of the business.
9.2 Adjustable Items in the Final Accounts
There are several items which need adjustment at the time of preparing the final accounts.
Some of the important and common adjustments are listed below:
i. Closing Stock
ii. Outstanding or Accrued Expenses
iii. Prepaid or Unexpired Expenses
iv. Outstanding or Accrued Incomes
v. Incomes Received in Advance (Unearned Income)
vi. Interest
vii. Bad Debts written-off
viii. Provision for Bad Debts
ix. Provision for Discount on Debtors
x. Provision for Discount on Creditors
xi. Drawing of Goods by the Proprietor
Let us now discuss the nature of each item of adjustment and its treatment in the final
accounts. In this connection you must remember that the general principle of double entry has
to be fully followed. Hence, for bringing any item into the books of accounts or adjusting the
amount of any expenses or income, you have to ensure that the amount debited is to one
account and credited to another; and while showing it in the final accounts the item should
appear at two places, one representing the debit and the other representing the credit,
otherwise the Balance Sheet will not tally. Usually, each adjustment will first appear in the
Trading and Profit and Loss Account and then in the Balance Sheet.

Outline 5 adjustable items that you know
Five Adjustable items are:
a. Closing Stock
b. Outstanding or Accrued Expenses
c. Prepaid or Unexpired Expenses
d. Outstanding or Accrued Incomes
e. Incomes Received in Advance (Unearned Income)
9.3 Explanation and Application of adjustable entries
9.3.1 Closing stock
You know that all goods purchased or produced during the year are not completely sold out
by the end of the year. Some goods remain unsold as at the end of the year which are called
‘Closing Stock’. The Closing Stock does not usually appear in the Trial Balance. It is mostly
given in the form of additional information. Since Gross Profit/Gross Loss cannot be worked
out without accounting for the closing stock it is brought into books by means of the
following adjustment entry.
Closing Stock A/c Dr.
Trading A/c Cr
The closing stock is treated in the final accounts as follows:
i) On the credit side of Trading Account: shown as a separate item, and

ii) On the assets side of the Balance Sheet: shown as a separate item under Current Assets
9.3.2 Adjusted Purchases and Closing Stock:
Sometimes the closing stock may be given in the Trial Balance itself. This would mean that
both the opening and the closing stocks have been adjusted in the purchases. In such a
situation, the opening stock will not appear in the Trial Balance which will show only the
figures of adjusted purchases and the closing stock. The adjusted purchases are in fact the
cost of goods sold. They have been worked out by adding the opening stock to purchases and
subtracting the closing stock therefrom. Hence, the adjusted Purchases are shown on the debit
side of the Trading Account. In such a situation there is no need to show closing stock in the
Trading Account as it already stands adjusted in purchases. It will be shown only on the asset
side of the Balance Sheet.
9.3.3 Outstanding Expenses
Outstanding expenses are those expenses which have been incurred during the current
accounting year but have not been paid till the end of the year. They are also called ‘expenses
accrued’. The common examples of such expenses are the salaries, wages and rent for the last
month of the accounting paid in the first month of the next year. Since they remained unpaid
as at the end of accounting year, no entry might have been passed in the books of accounts.
So, they must be taken into account while preparing the Trading and Profit and Loss Account
otherwise it will not reveal the correct amount of profit or loss. The following adjustment
entry is passed in respect of outstanding expenses.
Concerned Expenses A/c Dr
Outstanding Expenses Cr
The outstanding expenses will be treated in final accounts as follows:

i) Added to the concerned expenses in the Trading and Profit and Loss Account,
and
ii) Shown on the liabilities side of the Balance Sheet as a separate item under
Current Liabilities.
9.3.4 Prepaid Expenses
Sometimes, the benefit of some expenses will be available not only in the current
accounting year but also during the next year. That portion expense the benefit of
which is yet to be received is called ‘prepaid’ expense’. It is also called ‘unexpired
expense’. Example of such expenses are unexpired insurance and interest paid in
advance. in such situations it is necessary to find out the unexpired portion and adjust
it in the concerned expense. The following adjustment entry is passed in respect of
the prepaid expenses:
Prepaid Expenses A/c Dr
Expenses A/c Cr
The prepaid expenses will be treated in final accounts as follows:
i) Subtracted from the concerned expense in the Trading and Profit and Loss
Account; and
ii) Shown on the assets side of the Balance Sheet as a separate item under Current
Assets.
9.3.5 Accrued Income
Accrued Incomes are those which have been earned during the current accounting
year but have not been received till the end of the year. They are also called
‘outstanding incomes’ or incomes earned but not yet received’. Examples of such
incomes are commission receivable, incomes on investments due but not yet received.
The following adjustment entry is passed in respect of accrued income.
Accrued Income A/c Dr.
Income A/c Cr.

The Accrued income is treated in final accounts as follows:
i) Added to the concerned income in the Profit and Loss Account and
ii) Show on the asset side of the Balance Sheet as a separate item under Current
Assets.
9.3.6 Income Received in Advance
Any income which belongs to the next accounting year but has been received during
the current accounting year is called ‘income received in advance’ or ‘unearned
income’. It is the income in respect of which the service is yet to be provided.
Examples of such incomes are rent received in advance and interest received in
advance. in such a situation, the unearned portion of the income will have to be
adjusted while preparing the final accounts. The following adjusting entry is passed in
respect of the unearned income.
Concerned Income A/c Dr.
Income Receivable in Advance A/c Cr.
The unearned income is treated in final accounts as follows:
i) Deducted from the concerned income in the Profit and Loss Account, and
ii) Shown on the liabilities side of the Balance Sheet as a separate item under
Current Liabilities
Let us use an illustration and see how adjustments are made in the final accounts in respects
of outstanding expenses, prepaid expenses, outstanding incomes and incomes received in
advance.
Illustration 9.1
Show how the following items will appear in the Profit and Loss Account and the Balance
Sheet.
The Trial Balance showed the following balances as on December 31, 2007:
Salaries 10,000
Wages (non-factory) 20,000
Rent Received 6,600
Commission Received 2,000
Interest on Investments 6,000
Additional Information
i) Salaries amounting to N20,000 are outstanding.

ii) Wages include N500 paid in advance
iii) Interest on investment include N1,200 for the months of January, February and March,
2008.
iv) Rent for the month of December amounting to N600 is not yet received.
Gross profit for the year is N40,000 and other expenses amounted to N10,000.
Profit and Loss Account
For the year ended December 31, 2007
Particulars Amount Particulars Amount
Salaries 10,000 N N
Add outstanding 2,000 12,000 Gross Profit b/d 40,000
Wages 20,000
Less Prepaid 1,500 18,500 Rent Received 6,600
Other Expenses 10,000 Add outstanding 600 7,200
Net Profit 13,500 Commission Received 2000

(transferred to capital A/c)
54,000 Less Received in Advance 1,200
4,800
54,000
Partial Balance Sheet
as at December 31, 2007
Liabilities Amount Assets Amount
Current Liabilities N Current Assets : N
Salaries outstanding 2,000 Wages Prepaid 1,500
Interest received in Advance 1,200 Rent Outstanding 600
9.3.7 Depreciation
Depreciation means decrease in the value of fixed assets due to their usage and the passage of
time. You know the fixed assets are used for the purpose of earning revenue. Therefore, the
fall in their value should be considered as an expense or loss incurred in realizing such
revenue and should be charged to the Profit and Loss Account. Depreciation is not
recognized on day-to-day basis. It is brought into the books only at the end of the accounting
period by passing the following journal entry.
Depreciation Expense A/c Dr.
Accumulated Depreciation A/c Cr.
Depreciation is treated in final accounts as follows:
i) On the debit side of the Profit and Loss Account: shown as a separate item giving
details of depreciation on each fixed asset for the period, and
ii) Deducted from the concerned asset in the Balance Sheet.
Sometime depreciation is given in the Trial Balance itself. This is possible only if the entry in
respect of depreciation has already been passed in the books of accounts. In such a situation,
depreciation will be shown in the Profit and Loss account only. It need not be adjusted in the
fixed assets in the Balance Sheet because the fixed assets already stand reduced by the
amount of depreciation.
Depreciation is generally calculated at the given rate for the period for which the asset has
been used in the accounting year. Thus, if an asset is purchased during the current year the
depreciation should be calculated from the date of acquisition till the end of the year. If the
date on which the additions were made is not given you should calculate depreciation on
additions also for the full year. In the case of old assets, depreciation is calculated on the
opening balance. Look at Illustration 9.2 and study how depreciation is treated at the time of
preparing the final account.
Illustration 9.2
The following are the balances of assets as at January 1, 2007:
Plant and machinery 120,000
Furniture 18,000
A new machinery costing N30,000 was acquired on July 1, 2007. Depreciation is to be

provided on plant and machinery at 10% and on furniture at 5% per annum. Show how
depreciation will be shown in the final accounts.
Calculation of Depreciation N N
On Furniture at 5% on N18,000 900
On Plant and Machinery:

10% on N120,000 for one year 12,000
10% on N30,000 for six months 1,500 13,500
14,400
Treatment in Final Accounts
Partial Profit and Loss Account
For the year ended December 31, 2007.
Depreciation Expenses: N N
Plant and Machinery 13,500
Furniture 900 14,400
Partial Balance Sheet
As on December 31, 2007
Liabilities Amount Asset Amount
Fixed Assets:
Add New Machinery 30,000
150,000
Less Accumulated
Depreciation A/C 13,500 136,500

Furniture 18,000
Less Accumulated
Depreciation A/C 900
17,100
9.3.8 Interest on Loan from Unrelated Entity
If the firm has taken some loan, it has to pay interest thereon. Hence, when we notice a loan
Account in the Trial Balance, we must find out whether the full amount of interest due on
loan has been paid or not. The rate of interest and the date on which the loan was taken is
usually given. If, however, the date on which the loan was taken is not given, it means that it
is an old loan and full year’s interest has to be provided. In any case, you should calculate the
exact amount of interest due and find out from the Trial Balance whether the same has been
paid or not. Generally, you will find that the interest has been paid but it is less than what is
due. In such a situation, the difference is regarded as outstanding interest and the same must
be adjusted at the time of preparing the final accounts. Suppose there is an item of 10% loan
(taken on April 1, 2007) of N20,000 appearing in the Trial Balance. Assuming the accounting
year ends on December 31, the total interest on loan will work out as N1,500 (at 10% on
N20,000 for nine months). On going through the Trial Balance you find that the interest paid
is N1,000 only. It means N500 (N1,500; N1,000) is the outstanding interest. This must be
shown in final accounts accordingly, i.e. N1,500 (N1,000 – N500 outstanding) as interest on
loan on the debit side of the Profit and Loss Account and N500 as outstanding interest under
current liabilities in the Balance Sheet.
It is possible that the adjustments given outside the Trial Balance already include this item.
But, if they do not even then you have to account for it. This is called an implied adjustment.
9.3.9 Bad Debts Written-Off

Sometimes, a debtor may fail to pay his debt either partially or completely. The
amount of debt which cannot be recovered from the debtor is called Bad Debts and it
will be a loss to the business. The following journal entry is passed when a debt
becomes bad.
Bad debts Written-Off A/c Dr.
Debtor’s A/c Cr.
The effect of this entry will be (i) debtor’s personal account stands, closed, and (ii) a
new account called ‘Bad Debts Written-Off Account’ is opened in the books.
The total amount of bad debts written-off during the year appears as a separate item in
the Trial Balance and the sundry debtors appear at the reduced amount. The bad debts
like any other expense or loss are charged to the Profit and Loss Account.
9.3.10 Bad Debts given outside the Trial Balance:
Sometimes, the bad debts to be written off may be stated outside the Trial Balance as
an adjustment item. It means that such bad debts have not yet been written off. In
other words, the entry for such bad debts has not been passed. It is necessary to record
such bad debts at the time of preparing the final accounts. This is done by passing the
following adjustment entry:
Bad Debts Written-Off Account Dr.
Sundry Debtors Cr.
Such additional bad debts usually called ‘further bad debts’ are treated in final
accounts as follows:
i) On the debit side of Profit and Loss Account: shown as addition to bad debts.
ii) On the assets side of the Balance Sheet: shown as deduction from Sundry
Debtors.
It is important to remember the difference between the treatment of bad debts given
inside the Trial Balance and the bad debts given outside the Trial Balance. The bad
debts given inside the Trial Balance and also those given outside the Trial Balance
will be shown in the Profit and Loss Account. But only other bad debts will be
deducted from Sundry Debtors in the Balance Sheet which are given outside the Trial
Balance.
9.3.11 Provision for Bad Debts
In any business where goods are sold on credit, bad debts usually occur. When it is
certain that a debt will not be recovered, the amount is written off as bad debt (see
9.3.9). But, it is also likely that some of the remaining debts may not be recovered in
full. From experience we know that certain percentage of amounts due from debtors
may not be recovered. This will be a loss to the business. You have learnt that
according to conservatism concept’ all possible losses must be provided for. Hence, it
is a common practice to make a suitable provision for doubtful debts at the time of
preparing the final accounts. Otherwise, the Profit and Loss Account will not reveal
the correct amount of profit or loss and the Balance Sheet will not show the true
position of sundry debtors. The Provision for doubtful debts is usually calculated as a
certain percentage of the total amount due from sundry debtors after writing off all
known bad debts.
Such a provision is made by debiting the amount of doubtful debts to the Profit and
Loss Account. Thus, the journal entry for creating such provision will be as follows:
Profit and Loss A/c Dr.

To Provision for Doubtful Debts A/c Cr.
You will notice that when a debt is irrecoverable it is written off by crediting it to the
personal account of the respective customer. But, when a debt is doubtful of recovery,
the personal account of the customer will not be credited as the recovery is still
possible. Hence, the creation of provision for doubtful debts does not affect the
balance of debtors personal accounts. However, while showing sundry debtors in the
Balance Sheet the amount of such provision is subtracted therefrom.
When provision for doubtful debts already exists in the books, the provision created
for doubtful debts at the end of a particular year will be carried forward to the next
year and it will be used for meeting the loss due to doubtful debts incurred during the
next year. The provision for doubtful debts brought forward from the previous year is
called ‘opening provision’ or ‘old provision’. When such provision already exists, the
loss due to doubtful debts during the current year will be adjusted against the same,
and while making provision for doubtful debts required at the end of the current year
called ‘new provision’ the balance of old provision should also be taken into account.
Let us take an example and understand how these adjustments are done. Suppose old
provision on January 1, 2010 was N1,000 and it is desired to take the provision for
doubtful debts balance to N1.500. The provision for doubtful debts is calculated
below:
Existing Provision for Bad Debts 1,000
Provision required at the end of the year 1,500
Increase in provision now required 500

The above aspect will be shown on the debit side of the Profit and Loss Account as
follows:
For the Year Ended………….
N N
Increase in provision for doubtful debts 500
If however, the total of new provision for doubtful debts required is less than the old
provision, the details will be shown on the credit side of the Profit and Loss Account
as follows:
For the Year Ended ……..
N N
Decrease in provision for doubtful debts XX
In this connection you should note the following points.
1. If some bad debts are given in adjustments (further bad debts) they should
also be taken into account.
2. The new provision should be calculated on sundry debtors after adjusting
the amount of further bad debts. The following are the journal entries
required when the provision for bad debts exists in the books:
Look at illustration 4 and see how bad debts and provision for bad debts are recorded
in the Final Accounts.
Illustration 9.3
An extract from a Trader’s Trial Balance on December 31, 2011 is given below:
Name of the Account Dr. Cr.
N N
Sundry Debtors Dr 64,000
Bad Debts Dr 4,000
Provision of Bad Debts 7,000
Adjustments: Write off further bad debts N2,000 and create a provision for doubtful
debts at 5% on debtors. Pass the necessary journal and show Bad Debts and Provision
for Bad Debts Accounts. Also show their treatment in the final Accounts.
Journal
2011 N N
Dec. 31 Bad Debts A/c Dr 2,000
Sundry Debtors 2,000
(Being bad debts written off)

Dec. 31 Provision for Doubtful debt Dr 3,900
Profit and Loss A/c 3,900
(Being decrease in Provision required for

doubtful debts)
Bad Debts Account
2011 N 2011 N
Dec. 31 Balance b/d 4,000 Dec. 31 Profit and Loss

A/c
Dec. 31 Sundry Debtors 2,000 6,000
--------
6,000 6,000
==== ====
Provision for Doubtful Debts Account
2011 N 2011 N
Dec. 31 Balance c/d 3,100 Jan. 31 Balance b/d 7,000
Dec. 31 P & L A/c 3,900 Dec. 31
-------- 7,000
7,000
====
2008

Note: The new provision for bad debts has been calculated at 5% on N62,000 (sundry
debtors N64,000 – further bad debts N2,000)
For the year ended December 31, 2011
N N
Bad Debts 4,000 Provision for Doubtful 3,900

Debts (decrease)
Add further Bad Debts 2,000
-------
6,000
Partial Balance Sheet as at December 31, 2011
N N
Current Assets:
Less Further Bad Debts 2,000
--------
62,000
Less Provision Bad Debts 3,100 58,900

9.3.12 Provision for Discount on Debtors
You know cash discount is allowed to debtors as an incentive for prompt payment. When the
discount is allowed it is recorded through the Cash Book and posted, to the credit side of the
concerned debtor’s personal accounts. But, in the case of debts outstanding at the end of the
current year, discounts will be allowed in the next year if the debtors make prompt payments.
So, as in the case of anticipated loss on account of doubtful debts, a provision must be made
for the discount likely to be allowed to the debtors in the next year, such a provision is known
as the ‘Provision for Discount on Debtors’ it is also calculated as a percentage of the net
sundry debtors (remaining after subtracting further bad debts and provision for doubtful
debts). For example, if Sundry Debtors amount to N40,000 and the firm wants to create a
provision for doubtful debts at 5% and a provision for discount at 2% on the debtors they will
be calculated as follows:
i) The provision for doubtful debts will be calculated at 5% on N40,000.

It will amount to N2,000.
ii) The Provision for discount at 2% will be calculated on the debtors after
subtracting the provision for doubtful debts, i.e., on N38,000 (N40,000 –
N2,000). It will amount to N760
Note that when both provision for doubtful debts and provision for discount on
debtors are to be calculated, the provision for doubtful debts is calculated first and
then provision for discount is worked out on debtors after subtracting the provision
for doubtful debts. The adjustment entry for provision for discount on debtors is as
follows:
Provision for Discount Cr.
(Being the Provision made for discount on debtors)
The Provision for discount on debtors will be shown in the final accounts as follows:
i) On the debit side of Profit and Loss Account: shown as a separate item, and
ii) On the assets side of Balance Sheet: shown as a deduction from Sundry
Debtors.
The balance of the provision of Discount on Debtors Account will be carried forward
to the next year and the discount allowed if any, in the next year it will be set off
against the provision for itself. The method of dealing with discount allowed and
provision for discount on debtors in the next year is similar to the method followed in
case of bad debts and provision for doubtful debts.
9.3.13 Provision for Discount on Creditors
When prompt payment is received we allow cash discount to debtors. Similarly, we receive
discount from the creditors when prompt payments are made by us. So the expected gain on
account of discount receivable from creditors in the next year should also be taken at the time
of preparing the final accounts. Such a provision is called ‘Provision for Discount on
Creditors’.
It is calculated as a percentage on Sundry Creditors. The creation of such a provision,

however, goes against the Conservatism Concept. Hence, it is usually avoided in practice.
But you should learn how it is treated in final accounts if such a provision is required.
The adjustment entry for provision for discount on creditors is passed as follows:
Provision for Discount on Creditors A/c Dr.
Profit and Loss Account Cr.
(Being the Provision made for discount on creditors)
The provision for discount on creditors will appear in the final accounts as follows:
i) On the credit side of Profit and Loss Account: shown as a separate item, and
ii) On the liabilities side of the Balance Sheet: shown as a deduction from Sundry
Creditors.
The balance of the Provision for Discount on Creditors Account will also be carried forward
to the next year and the discount received, if any, will be adjusted against the provision itself.
9.3.14 Drawing of Goods by the Proprietor
When the proprietor takes away some goods from the business of his/her personal use it is
recorded in books of account by passing the following journal entry (refer to Study Session
2).
Drawings Account Dr.
Stock Account Cr.
So, if you find that it has not been recorded in the books of accounts, you have to make the
necessary adjustment in the final accounts. The treatment in final accounts will be as follows:
i) On the Debit side of the Trading Account: Deduct it from Goods Available for
sale.
ii) On the Liabilities side of the Balance Sheet: Add it to Drawing and deduct
from capital.
ITQ
State the journal entries you will raise when provision for doubtful debts exists in
the books of accounts.
ITQA
The following are the journal entries that I will raise when the provision
for bad debts exists in the books
a) For writing off further bad debts given outside the Trial Balance:
Bad Debts Written-off A/c Dr.
Sundry Debtors Cr.
b) For transferring the total bad debts to the Profit and Loss Account:

Bad Debts A/c Cr.
c) For entering the provision for doubtful debts in the Profit and Loss
Account
Profit and Loss Account A/c Dr.
Provision for Doubtful Debts A/c Cr.
9.4 Preparation of Final Accounts with Adjustments
You know there are various items which require adjustment at the time of preparing the final
accounts. You have learnt how each adjustment is recorded in books through a journal entry
and how it is reflected in the final accounts. However, while preparing the final accounts with
adjustments you should remember that there is no need to pass the journal entries for any
adjustment unless you are specifically asked to do so. All adjustments must be shown
directly in the final account.
Summary to Study Session 9
In this Study 9, you have learnt that:
 At the time of preparing the final accounts a number of items need adjustments.
 It is because certain expenses may relate to two or more accounting years. Or certain
expenses incurred during the current year may still remain to be paid.
 Unless such adjustments are made, the final accounts will not reveal the true picture.
 Such items are usually given outside the Trial Balance and are shown at two places in the
final accounts so as to complete the double entry.
 Adjustment entries can be passed in the journal for each item of adjustment. But,
normally they are directly adjusted in the final accounts.
 Any item of adjustment which appears in the Trial Balance is shown only at one place in
the final accounts.
Self-Assessment Questions
1. Fill in the blanks
i) Every adjustment has a ______ effect.
ii) Closing stock is shown on the _____ side of the Balance Sheet.
iii) Prepaid expenses are also called ____ expenses.
iv) Income received in advance is _____ for the business.
v) __ is a decrease in the value of fixed asset due to wear and tear.
vi) Interest on Drawings is ___ from the capital in the Balance Sheet.
2. State whether the following statements are True or False.
i) Every adjustment affects either Trading and Profit and Loss Account or the
Balance Sheet.
ii) Outstanding expenses is first added to the relevant expenses account and then
shown on the liabilities side of the Balance Sheet.
iii) Interest on loan to a business is an income for the business.

iv) Depreciation is deducted from the relevant fixed asset in the Balance Sheet
and debited to Profit and Loss Account.
v) Proprietor is always entitled to interest on the capital investment (in
partnership).
3. Why do you create a provision for doubtful debts?
……………………………………………………………..
……………………………………………………………..
..……………………………………………………………
4. Why is provision for discount on creditors is regarded against the Conservatism

Concept?
……………………………………………………………..
……………………………………………………………..
..……………………………………………………………
1). Why do some adjustments become necessary at the time of preparing the final
accounts? Name any 2 adjustments and explain how they are shown in the
final accounts.
2). Give journal entries for the following adjustments
i) Interest received in advance N600
ii) Interest on drawings N1,200
iii) Provision for discount on creditors N200

iv) Loss of goods by theft N8,500
v) Drawings of goods by the proprietor N750
3. The following information is extracted from the books of a businessman:
Debtors as on 31.12.1987 N25,000
Bad debts during 1987 N1,000
Provision for Doubtful Debts is to be maintained at 5% debtors. A Provision for discount in

debtors is also at 2%. You are required to calculate the amounts to be set aside in respect of
provision for doubtful debts and provision for discount on debtors respectively.
4. The proprietor withdrew the following amounts during the year ended December 31,
2007.
Feb. 28 4,000
May 1 6,000
Nov. 31 5,000
Dec. 1 1,000
Calculate interest on drawings if the rate is 6% per annum
5 From the following Trial Balance of Puritan & Sons as on June 30, 2008, prepare
Trading and Profit and Loss Account and the Balance Sheet
Trial Balance
Name of the Account Debit Credit
N N
Capital 100,000
Drawings 5000
Purchases less Returns 200,000
Sale less Returns 500,000
Inventory (beginning) 50,000
Carriage Inwards 3,000
Salaries 25,000
Freight 2,000
Trade expenses 20,000
Rent
Packing charges 2,000
Land & Buildings 200,000
Plant & Machinery 25,000
Furniture 50,000
Bad Debts 5,000
Debtors 75,000
Creditors 80,000
Cash in Hand & at bank 5,000
Bills Receivable 3,000
Loan 200,000
900,000 900,000
Additional information
i) Inventory (ending) N30,000.
ii) Depreciation is to be provided as follows

Land & Building @ 5% p.a
Plant & Machinery @ 4% p.a
Furniture @ 10% p.a
iii) Debtors are bad to the extent of N5,000
iv) Salaries are outstanding to the extent of N5000
v) Wages are prepaid to the extent of N2,000

vi) Rent received in advance N3,000
STUDY SESSION 10 FINAL ACCOUNTS
Introduction
In study session 2 you learnt about the accounting concepts which guide the preparation of
final accounts. You know that the final accounts are primarily prepared for ascertaining the
operational result and the financial position of the business. In this study session, you will
learn about the basic framework of final accounts including their presentation in vertical
form.
10.1 Explain the purpose of preparing final accounts

10.2 Prepare a Trial Balance from a given list of balances
10.3 Explain and Prepare Trading and Profit and Loss Account
10.4 Prepare Balance Sheet
10.5 Explain Final Accounts in either ‘T’ or two sided and ‘Vertical, format.
10.1 Purpose of preparing Final Account
You will remember that accounting was defined as the art of recording, classifying, and
summarizing in a significant manner and in terms of money, transactions, and events which
are, in part at least, of a financial character and interpreting the result thereof. You will also
note that recording, analyzing and summarizing financial transactions will not allow the
owners know whether the business is doing well or not. Other users of financial information
will not be able to make use of accounting information without the preparation of final
accounts. The purpose of preparing final accounts is to produce financial information in such
a way that it will be useful to all users of financial information.
Final Accounts consists of:
(i) Trading Account
(ii) Profit and Loss Account, and

(iii) Balance Sheet.
The Trading account shows the Gross Profit, that is, the profit made before deducting the
related administrative expenses. The Profit and Loss Account reveals the profit earned or
loss incurred (operational result) during the accounting year and the Balance Sheet indicates
the financial position of the business as at the end of the year. We will discuss in detail the
preparation of each of the foregoing.
10.2 Explanation and Preparation of Trial Balance
Final Accounts are prepared with the help of a Trial Balance which shows all the ledger
balances as at the end of an accounting period. Generally, when you are asked to prepare final
accounts you are given a well prepared Trial Balance and you have no difficulty in
identifying the items of incomes, expenses, assets, and liabilities. However, sometimes you
may not be given a proper Trial Balance. You may simply be asked to prepare the final
accounts from the list of closing balances extracted from the books of some firms. In such a
situation, it will be helpful if you first prepare the Trial Balance and then the final accounts.
Hence it is important that you should know how to prepare the Trial Balance from a given list
of balances.
Normally when a Trial Balance is to be prepared, you have full details of ledger accounts
with you. You can easily ascertain whether a particular account has a debit balance or a credit
balance, and prepare the Trial Balance without any difficulty. The problem arises when you
are given a list of balances but it is not indicated whether the account has a debit balance or a
credit balance. Under such a situation you will have to determine the nature of each balance
before you can prepare the Trial Balance. In this exercise a good knowledge of rules of debit
and credit will help you. For example, you know that in case of nominal accounts all
expenses and losses are debited and all income and gains are credited. Similarly, you know
the rules for real and personal accounts according to which the account of assets like cash,
machinery and debtors will show debit balances while accounts like capital and creditors will
show credit balances. For convenience however, a few guidelines should help you. They are:
a) All accounts of expenses (including purchases) and losses will be debit balances.
b) All accounts of income (including sales) and gains will be credit balances.
c) All accounts of assets will be debit balances.
d) All accounts of liabilities will be credit balances.
e) Capital Account will normally be a credit balance.
f) Drawing Account will be a debit balance.
However, the problem may arise with regard to some items like rent, discount, commission
and interest as they can be expenses as well as incomes. In such cases, the nature of the
balance is usually indicated by mentioning (Dr.) or (Cr.) against each item, or the word
‘received’ or ‘paid’ is written after each item. This helps you to treat the item correctly. But,
if there is only one item for which no such indication is given you can proceed with the
preparation of Trial Balance and work out the totals of both the columns. You will find that
the total of one column will be less than the other. This means that the unidentified balance
pertains to the column which is short. For example, there is an item of commission of N300
appearing in the list of balances and it is not indicated whether it is paid or received. When
you prepare the Trial Balance you will find that the debit total is short by N300. This would
mean that the Commission Account has a debit balance. Now if you show it as such in the
Trial Balance, it will tally.
Let us use an illustration to demonstrate the preparation of Trial Balance from a list of
balances.
Illustration 10.1
The following figures were extracted from the books of OLUOROGBO & SONS as at 31st
December, 2005. You are required to prepare the Trial Balance as at 31st December, 2005.
Opening Stock 80,000
Purchases 820,000
Sales 858,000
Purchases Returns 2,500
Sales Returns 5,000
Carriage Outwards 5,000
Bank Overdraft 42,000
Cash 8,000
Capital 255,500
Sundry Creditors 75,000
Loans 82,750
Investments 20,000
Accrued Income 1,200
Machinery 95,000
Drawings 20,000
Wages (Non-factory) 14,600
Salaries 22,000
Outstanding Expenses 2,000
Prepaid Expenses 1,500
Postage 1,800
Discount Received 750
Discount Allowed 2,000
Bad Debts 1,500
Interest 7,000
Interest Received 600
Provision for Bad debts 3,500
Furniture & Fixture 15,000

Trial Balance of OLUOROGBO & SONS as at December 31, 2005
Particulars Dr. Cr.
Balances Balances
N N
Purchases 820,000
Sales 858,000
Sales Returns 5,000
Cash 8,000
Capital 255,500
Sundry Creditors 75,000
Loans 82,750
Investments 20,000
Accrued Income 1200
Machinery 95,000
Drawings 20,000
Salaries 22,000
Outstanding Expenses 2,000
Prepaid Expenses 1,500
Postage 1,800
Bad Debts 1,500
Interest 7,000
Interest Received 600
Provision for Bad debts 3,500
Furniture & Fixture 15,000
Total 1,322,600 1,322,600
In Illustration 10.1 the Trial Balance has tallied, i.e., the total of debit balances column is
equal to the total of credit balances column. This would mean that each balance has been
entered in the appropriate amount column of the Trial Balance. This is not always true. It is
quite possible that even when the Trial Balance has tallied, some balances may not have been
entered in the correct columns. We can demonstrate the situation when both sides of the table
tallies and yet it contains errors for some items. Look at illustration 10.2 you will find that
the Trial Balance tallied (the totals of both Dr. balances and Cr. Balances is the same, i.e.,
N91,650 but there are a number of items which have been shown in the wrong column. For
example, bank overdraft which should have been shown in the Cr. Balances column has been
included in the Dr. balances column and furniture which should have appeared in Dr.
balances column has been shown in the Cr. Balances column. So, the Trial Balance has been
rewritten and all items shown correctly. Such situation arises on account of the compensating
effect of the errors which is very rare. You will recall that errors and their corrections were
treated in Study Session 8.
Illustration 10. 2
An inexperienced Accountant provides you with the following Trial Balance. As a qualified
DLI student who has passed ACC.210, you are required to study the trial balance and prepare
the correct version.
Solution A to illustration 10.2
Trial Balance on March 30, 1987
Particulars Dr. Cr.
Balances Balances
N N
Stock (opening) 10,500
Buildings 31,500
Bills Payable 1,800
Capital 45,000
Furniture 12,000
Discount Allowed 90
Sales 39,000
Loan from Suresh 2,400
Carriage Inwards 270
Purchases 24,000
Salaries 3,300
INVESTMENTS 3,000

Returns Inwards 900
Returns Outwards 300
Insurance Premium 360
Interest on Loan 30
Advertisement 1,200
Drawings 1,500
_______
Total 91,650 91,650
=================================================================
===
Solution B to Illustration 10.2
Trial Balance on March 30, 1987
Particulars Dr. Cr.
Balances Balances
N N
Stock (opening) 10,500
Buildings 31,500
Bills Payable 1,800
Capital 45,000
Furniture 12,000
Discount Allowed 90
Sales 39,000
Loan from Suresh 2,400

Carriage Inwards 270
Purchases 24,000
Salaries 3,300
INVESTMENTS 3,000
Returns Inwards 900
Returns Outwards 300
Insurance Premium 360
Interest on Loan 30
Advertisement 1,200
Drawings 1,500
_______
Total 91,650 91,650
10.3 Explanation and Preparation of Trading and Profit and loss Account
You know the Profit and Loss Account is prepared for ascertaining the profit or loss of the
business. This is worked out in two stages. In the first stage we work out the gross profit or
gross loss and in the second stage, the net profit or net loss. Hence, the profit and Loss
Account is divided into two sections. The first section is called Trading Account. It reveals
the gross profit or gross loss. The second section is called Profit and Loss Account which
shows the net profit or net loss.
10.3.1 Trading Account

The Trading Account is prepared for ascertaining the gross profit or gross loss. The gross
profit is defined as the excess of sales revenue over cost of goods sold. This can be presented
in the form of an equation as follows.
Gross Profit = Net Sales – Cost of Goods Sold
Where i) Net Sales = Total Sales – Sales Returns
ii) Cost of Goods Sold = Opening Stock + Net Purchases
+ Direct Expenses – Closing Stock
You know the terms ‘Opening Stock’ and Closing Stock’ refer to the value of unsold goods
as at the beginning of the year and at the end of the year respectively. Such stock may also
include the semi-finished goods and raw materials. In order to arrive at the cost of goods sold,
the opening stock is added to the net purchases while the closing stock is deducted. The term
‘Direct Expenses’ refer to those expenses which are incurred on the goods purchased till they
are brought to the place of business for sale. These include expenses such as freight,
insurance, import duty, dock dues, clearing charges, carriage, cartage and expenses of loading
and unloading. The administrative expenses and wages (non-factory), selling and distribution
expenses and interest paid are termed as indirect expenses and, therefore, are excluded from
the cost of goods sold.
Let us use illustration 10.3 and 10.4 to demonstrate the calculation of goods sold and gross
profit respectively.
Look at illustration 10.3 and 10.4 and study how the Cost of Goods Sold and the Gross Profit
are computed.
Illustration 10.3
The following figures were extracted from the books of OKECHUKWU ASSOCIATES.
Calculate the Cost of Goods Sold.
Stock as on 1.1.2001 100,000
Purchases for 2001 1,500,000
Custom duty 80,000
Freight 15,000
Stock as on 31.12.2001 170,000
Okechukwu And Associates.
Calculation of Cost of Goods Sold
N N
Add Net Purchases:
Purchases 1,500,000
Less Purchases Returns 40,000
1,460,000
Custom duty 80,000
Freight 15,000
1,675,000
Less Closing Stock 170,000
Cost of Goods Sold 1,505,000
Illustration 10.4
On January 1, 2011 Okechukwu & Associates had stock of goods valued at N20,000. During
the year the following transactions took place. You are required to prepare the Gross Profit.
Sales 500,000
Purchases 300,000
Freight Inwards 5,000
Sales Returns 10,000
Clearing Charge 22,000
The closing stock of goods on December 31, 2011 is N40, 000.
Okechukwu & Associates
Trading Account
N N
Sales 500,000
Less Sales Returns 10,000
Net Sales 490,000

Less Cost of Goods Sold:
Purchases 300,000
320,000
Less Purchases Returns 5,000
315,000
Add Carriage Inwards 3,000
Freight Inwards 5,000
Clearing Charge 22,000
345,000
Less Closing Stock 40,000 305,000
Gross Profit 185,000
10.3.1. TRADING ACCOUNT FORMAT
The Equation for Gross Profit is also known as Trading Equation. This equation forms the
basis of preparing the Trading Account. The Trading Account, like any other account in the
ledger, has two sides – debit and credit. The opening stock, purchases (less returns) and all
direct expenses are shown (less returns) and the closing stock on the credit side. The gross
profit appears as the last item on the debit side which, in fact is the excess of the total of
credit side over the total of debit side. If, however, the total of the debit side exceeds the total
of the credit side, it will be treated as gross loss. This is shown as the last item on the debit
side of the Trading Account. The gross profit/gross loss thus worked out is transferred to the
Profit and Loss Account. Look at the Figure 10.1 for a Trading Account format.
Figure 10.1
Trading Account format
Trading Account of ……-……………………

Dr. Cr.
Opening Stock Sale ….

Purchases ….
…. Less Sales Returns ….
Less Purchases Returns ….
….
Closing Stock ….
Direct Expenses
e.g., freight (specify

individually)
individual ….
Gross Profit
(Transferred
to profit and Loss
Account ….
…. ….
Illustration 10.5
Let us use the data given in illustration 10.4 to prepare the Trading Account.
Trading Account of Okechukwu
For the year ending December 31, 2001
Dr. Cr.
N N N N
Opening Stock 20,000 Sale 500,000
Purchases 300,000 Less Returns 10,000
490,000
Less Purchases 5,000
295,000
Carriage Inwards 3,000 Closing Stock 40,000
Freight 5,000
Clearing Charges 22,000
(Transferred to
P/L/AC) ________ _________
N530, 000 N530,000
NOTE: the following Important Points for the preparation of Trading Account:
 Purchases: This item refers to the goods purchased for resale and includes both cash
and credit purchases. The purchases of assets which are meant for permanent use in
business such as machinery and furniture are not included in the purchases. The
amount column. If the proprietor has taken away some goods from the business it
must be deducted from the total purchases and only the net amount is shown in the
amount column. If the proprietor has taken away some goods from the business for
his personal use, the same should also be deducted from the total purchases.
 Sales: It includes both cash and credit sales of goods and refers to the net amount of
sales (after deducting sales returns - returns inwards). Sales of old furniture, car and
machinery are not included in the sales. Similarly, sales of old newspapers are also
excluded from sales. Such items are shown as miscellaneous income in the Profit and
Loss Account.
 Wages: In some cases wages are usually treated as a direct expense and so shown in
the Trading Account. The difficulty arises when wages are clubbed with salaries (an
indirect expense) and the Trial Balance includes a single amount for ‘Wages and
Salaries’. In such a situation, the amount may be shown in the Trading Account. It is
based on the assumption that the item includes the salaries of the supervisory staff in
the factory itself, but, if the item in the Trial Balance reads ‘Salaries and Wages’ it
will be taken to the Profit and Loss Account on the assumption that the item includes
wages of the office staff only. It should be noted that wages paid in connection with
the purchases of fixed assets or the construction of building should not be charged to
Trading Account. They are to be included in the cost of the concerned fixed asset.
There is another important aspect in relation to wages which must be clarified. If a
Manufacturing Account is prepared the wages paid to the factory labour is debited to
Manufacturing Account. This you will learn later in this module. To sum it up, in
merchandising concerns, wages and salaries are to be treated as an operating expense.
In the case of manufacturing concerns only wages and salaries of factory labour are
treated as part of cost of Goods Manufactured.
 Freight, Carriage and Cartage: When paid in connection with purchases of goods,
they are shown in the Trading Account. Such freight and carriage are also termed as
‘Freight Inwards’ and ‘carriage Inwards’ respectively. ‘Freight Outwards’ and
Carriage Outwards’ relate to sales and, therefore, taken to the debit of Profit and Loss
Account.
 Royalties: Royalties refer to the payments made for the use of copyright or a patent.
The amount of royalty is generally based on the quantity produced. It is, therefore,
treated as a direct expense and charged to Trading Account. However, if it is
calculated on the basis of quantity sold as in case of books, it is shown in the Profit
and Loss Account. Royalties are also paid to the government for extraction of
minerals such as coal, diamond and gold. These are charged to the Profit and Loss
Account of the mining companies. You will learn about the accounting of such
royalties later under a separate course.
10.3.2 Profit and loss Account
After ascertaining the gross profit by preparing the Trading Account, the businessman
proceeds to prepare the Profit and Loss Account in order to work out the net profit/net loss.
You know the net profit is the excess of gross profit and other incomes over the indirect
expenses and losses. So while preparing the Profit and Loss Account we show gross profit
and other incomes such as rent received, discount received, commission received and interest
and dividends on the credit side, and all indirect expenses and losses on the debit side.
Indirect expenses include all administrative, selling and distribution expenses such as
salaries, non-factory wages, rent and taxes, postage and stationery, insurance, depreciation,
interest paid, office lighting, advertising and packing carriage outwards while losses refer to
items like loss by fire and loss by theft. The difference between the two sides of the Profit
and Loss Account represents either the net profit or net loss. If the total of the credit side is
higher than the total of the debit side, the difference is called net profit and if the debit side
total exceeds the credit side total, the difference is called net loss. The net profit/net loss
belongs to the proprietor and it is therefore transferred to his Capital Account. Figure10.2.
shows various expenses, losses and incomes. which usually appear in the Profit and Loss
Account.
Figure 10.2
Profit and Loss Account of ………………
for the period ending……………………
Dr. Cr.
N N
Gross Loss, if any, xx Gross Profit
(transferred from xx (transferred from

trading Account) xx Trading Account
Salaries xx Interest Received
Rent, Rates and taxes xx Discount Received
Postage on Telegrams xx Rent Received
Printing and Stationery xx Commission Received
Legal Expenses xx Dividend Received
Insurance xx Other Incomes and Gains
Office Lighting xx Net Loss
Bad Debts xx (transferred to
Depreciation xx capital Account
Advertising xx
Traveling Expenses xx
Carriage Outwards xx
Trade Expenses xx
Discount Allowed xx
Interest Paid xx
Repairs and Renewals
Loss by Fire xx
Loss by Theft xx
Other Expenses and xx
Loans, if any
(transferred to
capital Account)
___________________________________________________________________________
__
Note:
1. The heading for the Profit and Loss Account, as in the case of the Trading Account,
indicates the name of the business or proprietor and the period for which the Account
is being prepared.
2. In addition to the items shown in the above form, there are certain items such as
depreciation, bad debts, provision for doubtful debts and interest on capital, which
appear in the Profit and Loss Account as a result of the adjustment entries. We have
discussed them in Module 10.
NOTE the following Important Points for the preparation of Profit and loss Account:
1. Rent, Rates and Taxes: These are charges levied by the municipal bodies on the
house property. It is a common item of indirect expenses debited to the Profit and
Loss Account.
2. Insurance: General assets are insured to cover the risk of loss, say, by fire. Premium
paid to the insurance company should be treated as a business expense. When assets
such as factory building, factory machinery, are insured, the insurance premiums
should be debited to Trading Account. If, on the other hand, the premium is paid for
insurance of assets in the office building and office furniture, it should be charged to
Profit and Loss Account.
3. Bad Debts: Bad debts denote the amount which could not be recovered from the
debtors to whom the goods were sold on credit. It is a loss and so debited to the Profit
and Loss Account. We have discussed the treatment of Bad Debts in Session 10.
4. Depreciation: Depreciation means decrease in the value of fixed assets due to normal
wear and tear. You know that every asset such as machinery, furniture and vehicle.
depreciates in value on account of its constant use. Such reduction in their value is a
loss to the business and so charged to the Profit and Loss Account. If, however, a
Manufacturing Account is also prepared, depreciation of factory related fixed assets is
charged to the Manufacturing Account, while depreciation on office building, office
furniture and office equipment, is charged to the Profit and Loss Account.
5. Trade Expenses: This item represents various small expenses incurred in the
business. They are also called General Expenses, Sundry Expenses or Miscellaneous
Expenses.
6. Packing: The cost of packing materials such as polythene bags and wrapping
materials, etc. for delivery is a distribution expense and, hence, charged to Profit and
Loss Account. Where packing is essential to make the products fit for sale in the
market as in the case of cigarettes, biscuits, medicines and oil. it is called ‘packaging’
and such expenditure is charged to the Trading Account.
7. Samples: Generally, samples of goods are distributed free of charge to increase sales.
The cost of such samples should be treated as a selling expense and so debited to
Profit and Loss Account.
8. Income Tax: It is the tax payable by a person on his income. In the case of a sole
trading concern, the tax paid by the proprietor on the profits of the business is treated
as a personal expense. Hence, it should be added to drawings or directly deducted
from capital.
Let us use illustration 10.6 to demonstrate the preparation of Profit and Loss Account.
Illustration 10.5b
The following balances extracted from the books of Jagbajantis & Group for the year ended
2010. You have been invited to prepare the profit and loss account.
Salaries 20,000
Rent and Rates 5,000
Stationery 1,000
Postage 500
Insurance 2,000
Repairs 1,500
Depreciation 5,000
Advertisement 5,000
Discount (Dr.) 500
Commission of
Salesmen 5,000
Bad Debts 2,000
Loss by Fire 2,000
Interest on
Investment 2,500
Profit on sales of Investment 2,000
SOLUTION TO ILLUSTRATION 10.5b
Profit and Loss Account of JAGBAJANTIS & GROUPS

N N
Salaries 20,000 Gross Profit 185,000
Rent and Rates 5,000 (transferred from Trading A/c)
Stationery 1,000
Postage 500 Interest on Investment 2,500
Insurance 2,000 Profit on
Repairs 1,500 Sales of Investment 2,000
Depreciation 5,000
Advertisement 5,000
Discount 500
Commission to
Salesmen 5,000
Bad Debts 2,000
Loss by Fire 2,000
Net Profit
(transferred to
capital Account 140,000
189,500 189,500
In practice, the Trading Account and the Profit and Loss Account are combined into one
account called ‘Trading, Profit and Loss Account’. This account is divided into two parts.
The first part shows the Gross Profit and the second part shows the Net profit.
Look at Illustration 10. 6 and see how the combined Trading and Profit and Loss Account
could be prepared from a given data.
Illustration 10.6
From the following figures prepare Trading and Profit and Loss Account of LAZARUS &
Co. for the year 2010.
Stock on January 1, 2010 40,000
Purchases 98,000
Commission Received 650
Rent, Rates and Taxes 8,600
Salaries & Wages of non-factory labour 12,000
Sales 162,100
Returns Inwards 2,400
Returns Outwards 3,000
Sundry Expenses 2,500
Bank Charges 50
Carriage on Purchases 2,000
Discount Allowed 530
Carriage on Sales 1,700
Lighting and Heating 2200
Postage 300
Income from Investments 1,000
Commission Paid 550
Interest paid on bank loan 500

The Stock on December 31, 2010 was valued at N26,000.
Trading, Profit and Loss Account of Lazarus & Co.
For the year December 31, 2010.
Dr. Cr.
N N
Opening Stock 40,000 Sales 162,000
Purchases 98,000 5,000 Less Returns 2,400 150,700
Less Returns 3,000 1,000
95,000 Closing Stock 26,000
Carriage on Purchase 2,000
Gross profit c/d 48,700
185,700 185,700
Rent, Rates and Tax
Salaries & Wages 8,000 Gross Profit b/d 48,700
Sundry Expenses 12,000 Commission Received 650
2,500 Discount Received 750

Discount Allowed 50 Income from Investments 500
Carriage on Sales 1,700
Postage 300
Commission Paid 1,000
Interest paid on Bank loan 550
Lighting & Heating 2,200
21,170
Net Profit
50,600 50,600
10.3.3 Closing Entries
You learnt in Module 2 that all nominal accounts which represent items of expenses and
incomes are closed at the end of the accounting year by transfer to either the Trading Account
or the Profit and Loss Account. The Journal entries passed for such transfer are called closing
entries. You also know that accounts relating to expenses and loss always show debit
balances while those representing incomes show credit balances. In order to close an
account which shows a debit balance and is to be transferred to the Trading Account, we
credit the account concerned with an amount equal to its balance and debit the Trading
Account. For example, the Carriage Inwards Account shows a debit balance of N6,000 the
closing entry for this will be as follows:
Dr. Cr
N N
Trading A/c 6,000
Carriage Inwards A/c 6,000
Similarly, an account which shows a credit balance will be closed by debiting it with an
amount equal to the balance and crediting the Trading Account or Profit and loss Account, as
the case may be. The closing entries are passed in the Journal Proper and it is necessary to
pass such entries for preparing the Trading and Profit and Loss Account. The entries required
for the items which are to be transferred to the Trading Account are as follows:
Figure 10.3
JOURNAL
DR CR
1. Trading Account X
Stock Account (Opening X

Purchases Account
X
Sales Returns Account
X
Direct Expenses Accounts
X
(to be credited individually)
2. Sales Account
X
Purchases Returns
Account X
Stock Account (closing X

Trading Account) X
3. Trading Account
Profit and Loss Account X X

(For gross profit)
When the accounts are closed to the Trading Account and the gross profit or gross loss is
determined, the Trading Account stands closed. The entries required for items to be
transferred to the Profit and Loss Account are as follows:
Figure 10.4
JOURNAL
DR CR
1. Profit and Loss Account X
Expenses /Losses Account X

2. Incomes/Gains Account
(to be debited individual X

Profit and Loss Account )
X
3. Profit and Loss Account
Capital Account
X X
(for Net Profit)
Let us pass the journal for the closing entries for the items given in illustration 10.6
JOURNAL
DATE PARTICULARS L.F. Dr. Cr.
S/N AMOUNT AMOUNT
1987 N N
Dec.31 Trading A/C 142,400
Opening Stock A/C 40,000
1 Purchases A/C 98,000
Sales A/C 2,400
Carriage Inwards A/C 2,000
(Being Closing Entry)
2 Dec.31 Sales A/C 162,100
Purchases Returns A/C 3,000

Closing Stock A/C 26,000
Trading A/C 191,100
3 Dec.31 Trading A/c 48,700
Profit and Loss A/C 48,700
(Being transfer of gross

profit)
4 Dec.31 Profit and Loss A/C 29,430
Rent, Rates and Taxes A/C 8,600
Salaries & Wages A/C 12,000
Sundry Expenses A/C 2,500
Bank Charges A/C 50
Discount Allowed A/C 530
Carriage Outwards A/C 1,700
Postage A/C 300
Commission A/C 1,000
Interest paid A/C 550
Light & Heating A/C 2,200
5 Dec. 31 Commission Received A/C 650
Discount Received A/C 750
Income from Investment A/C 1,500
Profit & Loss A/C 2,900
6 Dec. 31 Profit and Loss A/C 21,700
Capital A/C 21,700
(Being transfer to net profit)

10.4 Preparation of Balance sheet
After ascertaining the net profit or net loss by preparing the Trading and Profit and Loss
Account, the final step in preparing final accounts is the preparation of the Balance Sheet.
The purpose of the Balance Sheet is to ascertain the financial position of a business, i.e. , to
know what the business owes and what it owns on a certain date. Hence it shows all assets
and liabilities of the business as at the end of the accounting year.
You know that final accounts are prepared from the Trial Balance. All items of expense and
income appearing in the Trial Balance are transferred to the trading and Profit and Loss
Account. The remaining items which represent the balances of personal and real accounts are
shown in the Balance Sheet. The accounts showing debit balances represent assets and those
showing credit balances represent liabilities. See the format of a Balance Sheet in figure
10.4.
Figure 10.5
Balance Sheet of ----------------------- as at --------------------------------------------
Liabilities & Equity Amount Assets Amount
N N
Current Liabilities Current Assets
Bank Overdraft ……… Cash in hand

………
Bills Payable …….. Bills Receivable

………
Sundry Creditors ……. Cash at Bank

………
Sundry Debtors
………..
Closing Stock
………..
Long-Term Liabilities Investments

………..
Loan …………. Fixed Assets

…………
Mortgages …………. Vehicles

…………
Furniture
…………
Capital Plant & Machinery

……….
Balance ……….. Land and Buildings

………..
Add Net Profit ………. .Goodwill

…………
_______
Less Drawing ………..
____________
_________
____________
_________
You should know that the Balance Sheet is prepared to ascertain the financial position at a
particular point of time and not for a period. Hence the heading of the Balance Sheet will
always read ‘Balance Sheet as at……………’ (Usually last date of the accounting year).
The total of assets should always be equal to the total of liabilities and capital or equity. If
however, they do not tally, it would mean that errors have been committed while preparing
the final accounts. You must recheck the treatment of all items including the arithmetical
aspect, and make the corrections, where necessary, so that the Balance Sheet tallies.
Assets: The term ‘assets’ denote the economic resource (property) of the business and
includes all current and fixed assets. You know current assets are those assets which are
likely to be realized or used up within a period of one year or during the operating cycle and
include cash, stock, debtors, bills receivable, and short-term investments. Fixed assets, on the
other hand, are those assets which are acquired for use in the business over a long period.
They may be tangible like machinery and furniture, or intangible like goodwill and patents.
The assets also include certain prepaid expenses and losses which have not been written off
in full. Examples of such prepaid expenses are: formation expenses, expenses incurred on
issue of shares and debentures and unwritten off amount of expenditure on advertising. These
are shown as the last item under ‘Assets’ in the Balance Sheet. It is preferable that losses
which have not been written off in full be classified with capital account as a deduction.
Liabilities: The term ‘liabilities denote all claims against the assets of the business whether
those of the outsiders (creditors) or those of the partners in a business. The outsider’s claims
may be sub-divided into (i) Current liabilities, and (ii) long-term liabilities. These are shown
separately in the balance Sheet (see Figure 11.4) . The current liabilities are those obligations
which are likely to be met within one year (or during the normal operating cycle). The long-
term liabilities refer to items like loans, and mortgages which are to be repaid over a long
period. The owner’s interest is shown as capital after adjusting it with the amount of net
profit and drawings during the year.
Let us use an illustration to demonstrate the preparation of Balance Sheet from given list of
balances.
Illustration 10.7
From the following balances extracted from the books of Deepak Brothers, prepare Balance
Sheet as at 31st December, 1900.
Capital 1,200,000 Bills Payable 40,000
Net Profit 1987 600,000 Debtors 250,000
Land & Building 700,000 Bills Receivable 50,000
Loan 160,000
Plant & Machinery (after dep) 400,000 Cash in Hand 60,000
Furniture (after Dep) 50,000 Loose Tools 60,000
Investments 350,000 Goodwill 100,000
Creditors 200,000
Trade Marks 25,000 Closing Stock 185,000
DEEPAK BROTHERS
BALANCE SHEET AS AT DECEMBER 31, 1900
LIABILITIES AMOUNT ASSETS AMOUNT
N N
Current Liabilities. Current Assets
Bank Overdraft 20,000 Cash in Hand 60,000

Bills Payable 40,000 Bills Receivable 50,000
Sundry Creditor 200,000 Stock in Hand 185,000
Investments 350,000
Long term Liabilities: Fixed Assets
Loose Tools 50,000
Furniture 50,000
Loan 160,000 Plant and Machinery 400,000
Land & Building 700,000
Capital: Trade Marks 25,000
Balance as at Goodwill 100,000
Jan.1.1900 1,200,000
Add Net Profit 600,000 1,800,000
2,220,000 2,220,000
Now look at illustration 10.8. It shows how the Trading Account and Profit and Loss
Account and Balance Sheet are prepared from a given Trial Balance.
Illustration 10.8
From the following Trial Balance of Trial Balance of Tanko & Sons, prepared Trading and
Profit and Loss Account for the year ended December 31, 2010 and a Balance Sheet as at that
date
Trial Balance
DR CR
BALANCES BALANCES
N N
Capital 500,000
Sales 1,000,000
Purchases 500,000
Inventory as on 1/1/2010 60,000
Land and Buildings 400,000
Furniture 100,000
Wages(Non factory) 50,000

Cartage 5,000
Salaries 40,000
Loan 260,000
Debtors 150,000
Creditors 85,000
Acceptances 10,000
General Expenses 20,000
Investments 50,000
Cash In Hand 50,000
Depr on Plant & Machinery 50,000
Interest on Investment 5,000
Interest on Bank Overdraft 500
Goodwill 60,000
Bad Debt 5,000 ________
1,885,000 1,885,000
Note: The inventory on 31st December 31, 2010 was valued at N100,000.
TANKO & SONS
Trading and Profit and Loss Account for the year ended December 31, 2010
PARTICULARS AMOUNT PARTICULARS AMOUNT
N N N N
Opening Inventory 60,000 Sales 1,000,000
Purchases 500,000 Less Returns 25,000
Less Returns 15,000 975,000
485,000 Closing Inventory 100,000
Cartage 5,000
Gross Profit c/d 515,000
1,075,000 1,075,000
Carriage 5,000 Gross Profit b/d 515,000
Salaries 40,000 Interest on Investment 5,000

Discount 4,500
Bad Debts 5,000
Depreciation 50,000
Net Profit(Transferred to Capital) 335,000
520,000 520,000
TANKO & SONS
BALANCE SHEET AS AT 31ST DECEMBER, 2010.

LIABILITIES & EQUITY N ASSETS N
Current Liabilities.
Goodwill 60,000
Capital 500,000
Add Net Profit 335,000 Plant & Machinery 250,000
835,000
Furniture 100,000
Loan 260,000 Inventory (Closing) 100,000

Debtors
150,000
Creditors 85,000 Bills Receivables 40,000
Acceptances 10,000 Cash in Hand 50,000
Bank Overdraft 10,000 Investment 50,000
1,200,000 1,200,000
10.5 Vertical Presentation of Final Account
The Trading, Profit and Loss Account and the Balance Sheet have so far been presented as a
two-sided statement, but, in practice, it is not necessary to present the final accounts in this
form. Nowadays many firms present them in a simpler and more intelligible form which is
called a ‘narrative style’ or ‘vertical presentation’. According to this style, the Trading and
Profit and Loss Account as well as the Balance Sheet are shown in the form of vertical
statements. This form of presentation is adopted by many companies for publication of their
final accounts. It helps the users of financial statements to appreciate the significance of
different items without any difficulty. They can easily interpret the data and judge the
profitability and the financial position of the company.
Look at figure 10.6 and study how various items are shown in the Trading and Profit and
Loss Account and the Balance Sheet in vertical form.
Figure 10.6
Trading and Profit and Loss Account of …………………………for the year

ended……………
Sales
………………
Opening Stock ………………..
Add Purchases …………………
Add Direct Expenses …………………
…………………
Less Closing Stock (…………………)
-------------
Gross Profit ……………..
Add Other Income ----------------
Less Indirect Expenses:
Salaries -------------------- -----------------

---
Rent --------------------
Sundry Expenses -------------------
Insurance --------------------
-------------------
----
XXXX
BALANCE SHEET OF ……………. AS AT ------------------------
Fixed Assets:
Land and Building ----------------------
Furniture and Fixture -----------------------
Motor Vehicle -----------------------
-------------
---
Current Assets:
Stock in Hand ------------------
Debtors --------------------
Cash at Bank --------------------
Cash in Hand --------------------
---------------------
Less Current Liabilities
Creditors ---------------
Bills Payable ---------------

(------------------)
Working Capital ---------------------- ----------------
----
Total
XXXXX
Financed by:
Capital :
Balance as on 1/1/------ -------------
Add Net Profit for the year -------------
-------------
Less Drawing (------------)
XXXXX
Let us look at illustration 10.9 and study how Trading and Profit and Loss Account and the
Balance Sheet have been prepared for vertical presentation.
Illustration 10.9
From the information given in illustration 10.8, prepare Trading and Profit and Loss Account
and the Balance Sheet.
Solution:
TANKO & SONS
Trading, Profit and Loss Account for the year ended December 31st, 2010
N N
Sales Less Returns (N1,000,000-N25,000) 975,000
Add Purchases (N500,000- N15,000) 485,000
Add Carriage Inwards 10,000
Add Cartage 5,000
560,000
Less Closing Stock (100,000)
460,000
Add Other Interest on Investment 5,000
520,000
Less Indirect Expenses:
Carriage 5,000
Salaries 40,000
Discount 4,500
Bad debt 5,000
Interest on bank o/d 500
Depreciation 50,000
Wages (non-factory) 50,000 185,000
335,000
TANKO & SONS
BALANCE SHEET AS AT 31stDECEMBER, 2010
Fixed Assets:
Goodwill 60,000
Land and Building 400,000
Furniture 100,000
Motor Vehicle 50,000
Investments 860,000
Current Assets:
Stock in Hand 100,000

Debtors 150,000
Cash in Hand 50,000
340,000
Less Current Liabilities
Creditors 85,000
Acceptances 10,000

(105,000)
Working Capital 235,000
ASSETS EMPLOYED
1,095,000
Financed by:
Capital :
Balance as at 1/1/ 1987 500,000
Add Net Profit for the year 335,000
835,000
260,000
Long Term Loans
1,095,000
(1) Mention against each item whether it will generally show a debit balance or a credit
balance.
Item Nature of Balance
Debit or Credit
i) Sales Returns …………………………
ii) Carriage Inwards ………………………….
iii) Carriage Outwards ………………………….
iv) Capital ………………………….
v) Loss by Fire …………………………
vi) Drawings …………………………
vii) Returns Outwards …………………………
ix) Bills Receivable …………………………
x) Goodwill …………………………
xi) Rent Paid …………………………
xii) Commission Received in Advance …….…………………..
(2) What is Balance Sheet?
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
------------------------
(3) Why do firms use vertical form of presenting the final accounts?
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
------------------------
(4) Complete the following sentences choosing one of the two alternatives given within
the
brackets.
i) Assets represent……….balances of personal and real accounts (debit/credit)

ii) All liabilities which become due within one year are classified as……… ….
Liabilities (long-term/current)
iii) Unwritten off amount of a deferred expenditure is shown on the ………..side of
the Balance Sheet (asset/liabilities).
iv) Loose Tools are classified as………………………assts. (fixed/current)
v) Mortgages are classified as ……………… liabilities. ( current/long-term)
Illustration 9.4
From the following Trial Balance of Mustapha & Sons, prepare the Trading and Profit and
Loss Account for the year ended December 31, 2009 and a Balance Sheet as at that date.
Trial Balance
Name of the Account Dr. Cr.
N N
Capital 500,000
Sales 1,000,000
Purchases 500,000
Purchase Returns 15,000
Inventory as on 1.1.2007 60,000
Land & Buildings 400,000
Furniture 100,000
Provision for Doubtful Debts 7,000
Cartage 5,000
Salaries 40,000
Loan 260,000
Debtors 150,000
Creditors 70,000
Rent 8,000
Acceptances 10,000
Rent & Rates 10,000

Investments 50,000
Cash in hand 50,000
Discount 4,500
Bad Debts 5,000
Goodwill 60,000
Total 1,885,000 1,885,000
1. The value of inventory on December 31, 2009 was N100,000.

2. Depreciation is to be provided on: Land & Building @ 5% p.a. Furniture @
10% p.a. Plant and Machinery N50,000.
3. Provision for Doubtful Debts is to be maintained @ 5% on debtors.
4. Wages are outstanding to the extent of N4,000 and Salaries to the extent of
N3,000.
5. Rent and Rates are prepaid to the extent of 1/4th of the amount paid.
6. Interest on Investment outstanding is N1,000.
7. Rent to the extent of N2,000 has been received in advance.
Mustapha & Sons
Trading & Profit and Loss Account
For the Year Ended December 31, 2009
Dr. Amount Cr. Amount

N
N
Inventory as on 1.1.2009 60,000
Purchases 500,000 Sales 1,000,000
Less Purchase Return 15,000 485,000 Less Sales Return 25,000 975,000
Carriage Inwards 10,000 Inventory as on 31.12.2009 100,000
Carriage 5,000 ________
Gross Profit c/d 515,000 1,075,000
1,075,000
Wages (non-factory)
Carriage Outwards Gross Profit b/d 515,000
Salaries 40,000 Rent 8,000
Add Outstanding 3,000 43,000 Less Received
In advance 2,000 6,000
Rent & Rates 10,000 Interest on Investment 5,000
Less Prepaid 2,500 7,500 Add Outstanding 1,000 6,000
Discount Allowed
Bad Debts written off 5,000
Increase in Provision for doubtful
debts 500
Depreciation on
Plant & Machinery
Interest on Overdraft
Depreciation on
Land & Building 20,000 30,000
10,000
Net Profit (transferred to _307,000
Capital A/c) 527,000 ________
527,000
Note: For neater work, adjustment should NOT be shown on the face of the income
statement, but as working notes attached to the statement.
Mustapha & Sons
Balance Sheet as at December 31, 2009
Dr. Amount Cr. Amount
N N
Capital
Balance 500,000 Fixed Assets
Add Net Profit 307,000 807,000
Goodwill 60,000
Long Term Liabilities
Loan 260,000 Land & Building 400,000
Less Depreciation 20,000 380,000
Current Liabilities 70,000
Creditors Plant & Machinery 300,000
Acceptances 10,000
Bank Overdraft 10,000 Furniture 100,000
Wages Outstanding 4,000 Less Depreciation 10,000 90,000
Salaries Outstanding 3,000
Rent Receivable in Advance 2,000 Investments
Current Assets
Cash in Hand
Debtors 150,000 50,000
Less: Prov.For Bad debts 7,500
Stock 40,000
Prepaid Rent & Rates 100,000
Interest on Investment Receivable 2,500
1,000
1,166,000 1,166,000
====== ======
Illustration 10.11
From the following balances extracted from the book of Karigo Ltd., prepare a Trading and
Profit and Loss Account for the year ended December 31, 2011 and a Balance Sheet as on the
date.
Trial Balance
Name of the Account Debit Balance Credit Balance
N N
Capital 200,000
Sales 500,000
Sale Returns 10,000
Purchases 200,000
Stock on 1.1. 2007 40,000
Furniture 25,000
Provision for Bad Debts 5,000
Salaries 25,000
Debtors 82,000
Creditors 100,000
Bad Debts 3,000
Bills Payable 30,000
Investments 50,000
Cash in Hand 5,000
Cash at bank 15,000
Depreciation on Land & Building 20,000__ _______
(expense) 845,000 845,000
1. The inventory on 3/.12/2011 has been valued at N80,000. The inventory of the value
of N2,000 was destroyed by fire on 1/12/2011 and a claim of N15,000 was admitted
by the insurance company.
2. Depreciation is to be provided on Plant & Machinery and furniture at 10% per annum.
(The adjustment is already on the trial balance).
3. Debtors are bad to the extent of N2,000. Provision for bad debts is to be made at 5%
on debtors and a provision for discount on debtors at 2%.
4. Wages are outstanding to the extent of N5,000.
5. Salaries are prepaid to the extent of N2,000.
6. Create a provision for discount on creditors at the rate of 10%.
7. Create a provision for repairs to the extent of N4,000.
Karigo Ltd.
Trading & Profit and Loss Account
For the Year Ended December 31, 2011
Particular Amount Particular Amount
N N
Opening Stock 40,000 Sales 500,000
Purchases 200,000 Less Sales Returns 10,000 490,000
Less Purchase Return 10,000 190,000
Closing Stock 80,000
Gross Profit c/d 360,000
Extraordinary Item
Estimated Insurance
_______ Claim Income _20,000
590,000 590,000
Salaries 25,000 Gross Profit b/d
Less Prepaid 2,000 23,000 Provision for Discount
Wages (non-factory) 30,000 On Creditors 1,000
Bad Debts 3,000
Add Further Bad Debts 2,000
Add New Provision 4,500
9,000
Less Old Provision 5,000
Depreciation on Land & Building 20,000
Loss By Fire (net) 20,000
Depreciation on Plant & 5,000

Machinery
10,000
Depreciation on Furniture
5,0000
Provision for Repairs
1,520
Net Profit (transferred to
___4,000 _______
Balance Sheet)
361,000 361,000
Dr. Cr.
*Note: There is a net loss of N5, 000 on insurance settlement.
Karigo Ltd
Balance Sheet As At December 31, 2011
Dr. Cr.
Amount Amount
N N
Capital 200,000 Land & Building 200,000
Add Net Profit 238,480 438,480
Creditors 100,000 Less Depreciation 10,000 90,000
Less Provision
For Discount 1,000 99,000 Furniture 50,000
Bills Payable 30,000
Wages Outstanding 5,000 Investments 50,000
Provision for Repairs 4,000 Cash in Hand 5,000
Cash at Bank 15,000
Stock 80,000
Debtors 82,000
Less Further Bad 2,000 142,500

Debts
80,000
Less Provision for

4,000
Bad Debts
76,000
Less Provision for

1,520 74,480
Discount
15,000
Insurance Claim
2,000
Prepaid Salaries
_______ _______
576,480 576,480
Note:
1. Depreciation on Land & Building is given in the Trial Balance. Hence, it is shown in
the Profit and Loss Account only.
2. Provision for Bad Debts has been calculated at 5% on debtors after subtracting further
bad debts.
3. Provision for Discount on Debtors has been calculated at 2% on debtors after

subtracting further bad debts as well as provision for bad debts.
4. Loss by fire has been charged to Profit and Loss Account after taking into
consideration the claim from insurance company.
Study Session 11 MANUFACTURING ACCOUNT
Introduction
Organisations that are involved in converting raw material into finished or semi- finished
goods through the process of manufacturing do prepare a ‘Manufacturing Account’. In case
of trading concerns you learnt in Study Session 10 that they prepare „Trading Account’.
You also learnt that the purpose of preparing Trading Account is to ascertain the Cost of
Goods sold and the Gross Profit. A manufacturing concern, on the other hand, prepares an
account called Manufacturing Account with the sole objective to ascertain the Cost of Goods
Produced. The cost of goods produced is then transferred to the Trading Account for
ascertaining the cost of goods sold and the gross profit.
11.1 describe what a manufacturing account is all about;

11.2 identify the relevant cost heads and subheads;
11.3 describe and be able to prepare a Manufacturing Account; and
11.4 describe and learn how to incorporate Manufacturing Account into the final accounts
of an organisation.
ITQ for learning Outcome 11.1
Describe the term Manufacturing Account.
ITQA for learning Outcome 11.1
Manufacturing Account is the account prepared by an organisation that is involved

in the process of manufacturing certain product. The main purpose of preparing a
manufacturing account is to ascertain profit or loss in production.
11.2 Relevant Manufacturing Cost
A manufacturing concern purchases raw materials from the market and converts them into
finished goods for sale. The accountant should be able to identify the relevant cost to be
included in the manufacturing account. The cost of goods produced includes two major costs:
(i) cost of raw materials consumed, and (ii) cost of conversion. These costs are explained
below.
Cost of Raw Materials Consumed: This represents the cost of raw materials used in the
course of manufacturing which can be worked out by adjusting the opening and closing
stocks of raw materials in the purchases of raw materials. For example, in respect of a firm
with an opening stock of raw material N70,000, purchased raw materials worth N650, 000
during 2009, and on December 31, 2009 (closing stock) N90,000. The cost of raw materials
consumed during 2009 will be worked out as follows:
Opening Stock of Raw Materials 70,000
Add Purchases of Raw Materials 650,000
720,000
Less Closing Stock of Raw Materials 90,000
Cost of Raw Materials Consumed 630,000
The direct expenses incurred on the purchases of raw materials such as freight, import duty
and dock dues can be included in the cost of raw materials consumed, but the usual practice is
to show them separately on the debit side of the Manufacturing Account.
Cost of Conversions: This includes all expenses incurred in the factory such as wages paid
to factory labour, salaries of factory supervisory staff, factory rent and rates, power, fuel,
repairs to plant and machinery and depreciation on plant and machinery. All these expenses
are debited to the Manufacturing Account.
Figure 11.1: FORMAT OF MANUFACTURING ACCOUNT
Manufacturing Account of……………………………..
For the period ended……………………………………
N N
Work in progress at the beginning X Sales of scrap X
Raw materials consumed: Work in progress at the end X
Opening stock of raw materials X Cost of Goods Produced (transferred to Trading XX

Account)
Add Purchases of raw materials X
Raw materials available XX
Less Closing stock of raw mat. X XX
Add Carriage inward X
Freight, import duty, dock, etc. X
Manufacturing wages X
Motive power X
Coal, Gas & water Oil and Grease X

Factory Lighting & Heating X
Factory Insurance X
Repairs to Factory Building X
Repairs to plant & Machinery X
Depreciation on Factory Building X
Depreciation on Plant & Machinery X
XXX
XXX
What constitutes Conversion Cost?
Conversion Cost includes all expenses incurred in the factory such as wages paid to
factory labour, salaries of factory supervisory staff, factory rent and rates, power, fuel,
repairs to plant and machinery, depreciation on plant and machinery.
11.3 Preparation of a Manufacturing Account
11.3.1 Important Points to Note
Scrap: The term “scrap” is used for wasted materials coming out of the manufacturing
process. Cutting of cloth in ready-made garments factory and metal cuttings in engineering
factories are some examples of scraps. Any amount realized from the sale of scrap must be
adjusted in the cost of goods purchased. Hence, it is credited to the Manufacturing
Accounting.
Work-In-Progress: It is quite likely that at the end of the year, there may be certain goods
which are still in the process of manufacturing. Such goods are called “semi-finished goods”
or „work-in-progress‟. There will always be some work-in-progress at the beginning as well
as at the end of goods produced. Hence, the opening work-in-progress is shown on its credit
side.
Stock of Finished Goods: Besides the stock of raw materials and semi-finished goods every
firm will have the stock of finished goods. This is to be adjusted in the cost of goods sold and
not in the cost of goods produced. Hence, it is not shown in the Manufacturing Account. As
you learnt earlier, it will be shown in the Trading Account. Look at illustration 11.1 and see
how Manufacturing Account is to be prepared.
Illustration 11.1
Prepare a Manufacturing Account from the following data which were extracted from the
books of Accounts of DAN-BABA MANUFACTURING COMPANY. The particulars relate
to the year ended 31st December, 2010.
Purchases of Raw Materials 100,000
Stock on 1/1/2010:
Raw Materials 10,000
Work-in-Progress 5,000
Finished Goods 25,000
Factory Wages 15,000
Factory Rent 5,000
Fuel & Power 2,000
Repairs of Plant 2,000
Depreciation on Plant 5,000
Sale of Scrap 500
Stock on 31/12/2010:
Raw Materials 20,000
Work-In-Progress 7,500
Finished Goods 30,000
DAN-BABA MANUFACTURING COMPANY
Manufacturing Accounting for the Year Ended December, 2010
Work in progress at the beginning 5,000 Sale of scrap 500
Raw materials consumed: Work in progress at the end 7,500
Opening Stock 10,000 Cost of Goods Produced (transferred to

Trading Account)
Add: Raw materials purchased 100,000 117,000
Raw materials available 110,000
Less: Closing stock 20,000
90,000
Factory wages 15,000
Factory rent 5,000
Fuel and power 2,000
Repairs of plant 2,000
Depreciation of plant 5,000 30,000
125,000 125,000
You will observe that the stock of finished goods has both been shown in the Manufacturing
Account. As stated earlier, it is to be taken to the Trading Account. Now, suppose the sales
for the year 2010 were N160, 000 the Trading Account will appear as follows:
DAN-BABA MANUFACTURING COMPANY
Trading Account for the year ending December 31, 2010
N N
Opening Stock of finished goods 25,000 Sales 160,000

Cost of goods produced (transferred from Closing stock of finished goods 30,000
manufacturing account)
117,000
Gross profit (transferred to Profit and Loss

Account) 48,000
190,000 190,000
You have learnt that a manufacturing concern has to prepare a Manufacturing Account before
preparing the Trading and Profit and Loss Account. Though considered desirable yet many
firms do not do so because it is not compulsory. You will also generally be asked to prepare
only the Trading Account without preparing the Manufacturing Account. In such a situation
you will show all items of Manufacturing Account in the Trading Account itself. In order
words, cost of raw materials consumed, expenses on purchases of Raw Materials, all
manufacturing expenses, the opening and closing work-in-progress and sale of scrap will also
be shown in the Trading Account. However, as per common practice, the items like
depreciation and repairs to plant and machinery and factory building will be shown in the
Profit and Loss Account and not in the Trading Account.
What is Scrap and how is it treated in Accounts?
The term “scrap” is used for wasted materials coming out of the manufacturing
process. The scrap will be sold and any amount realized from the sales of scrap
must be adjusted in the cost of goods purchased. Hence, it is credited to the
Manufacturing Account
In this Study Session, you have learnt that:
At the end of the accounting year the businessman prepares the final accounts with the help
of a Trial Balance. The final accounts consist of (i) Profit and loss Account and (ii) Balance
Sheet. The Profit and Loss Account is prepared for ascertaining the net profit/loss of the
business during the year and the Balance Sheet is prepared for ascertaining its financial
position as at the end of the year.
The profit and Loss Account is divided into two sections. The first section called Trading
Account reveals the gross profit or gross loss and the second section called Profit and Loss
Account shows the net profit or net loss. Gross profit is defined as the excess of sales revenue
over the cost of goods sold which also includes the direct expenses and losses. In practice, we
usually prepare a combined Trading and Profit and Loss Account. It is also necessary to pass
closing entries for transferring all expenses and incomes to the Trading and Profit and Loss
Account.
The Balance Sheet shows all assets and liabilities of the business. The assets represent the
debit balance of the real and personal accounts plus the unwritten off amounts of deferred
revenue expenses. The liabilities, on the other hand, represent the credit balances of real and
personal accounts including capital. The total assets should always be equal to the total
liabilities.
The manufacturing concerns may also prepare a Manufacturing Account for ascertaining the
cost of goods produced, which is then transferred to the Trading Account for ascertaining the
cost of goods sold and the gross profit. This, however, is not compulsory. Most
manufacturing concerns prepare the Trading Account directly by showing all expenses
incurred in the factory (including cost of raw materials consumed) in the Trading Account
itself.
KEY WORDS IN A MANUFACTURING ACCOUNT
Closing Stock: Goods remaining unsold at the end of the accounting year.
Cost of Conversion: expenses incurred in the factory (for processing raw materials into
finished goods).
Cost of Goods Sold: Difference between the cost of goods available for sale and the cost of
goods in stock.
Cost of Production: It is the cost of goods produced which includes cost of raw materials
consumed and all manufacturing expenses.
Current Assets: Assets which are likely to be realized within a period of one year or during
the operating cycle. They are also called floating assets.
Current Liabilities: Liabilities which are likely to be paid within one year or during the
operating cycle. They are also called short-term liabilities.
Direct Expenses: Expenses incurred on the goods purchased till they are brought to the place
of business.
Fictitious Assets: Expenses and losses not yet written off and shown as assets in the Balance
Sheet.
Fixed Assets: Assets acquired for use in the business for a long period. They are also called
non-current assets.
Gross Profit: Excess of sales revenue over the cost of goods sold.
Indirect Expenses: All expenses other than direct expenses. These include expenses incurred
in connection with general administration, financial matters and selling and distribution of
goods.
Intangible Assets: Assets in the form of rights which cannot be seen or touched such as
goodwill and patents.
Net Profit: Excess of gross profit and other incomes over the indirect expenses and losses in
the business.
Non-Current Liabilities: Liabilities payable after a long time. They are also called long-
term liabilities.
Owner’s Capital: Interest of owners in the assets of the business. It is also called owner‟s
equity and is equal to excess of assets over outside liabilities. (i.e. A-L = E)
Opening Stock: Stock of goods at the beginning of the accounting year.
Scrap: Waste material which arises in the course of manufacture.
Tangible Assets: Assets which have physical form and can be seen and touched such as
building and machinery.
Work-in-Progress: Goods in respect of which some work still remains to be done. They are
also called semi-finished goods.
Distinguish between each of the following:

1) Cost of Goods Sold and Cost of goods Manufactured
2) Gross Profit and Net Profit
3) Direct Expenses and Indirect Expenses
4) Find out the Cost of Goods Sold from the following figures extracted from the books
of Allied Ltd for the year 2005.
N
Stock (1/1/2005) 50,000
Purchases 1,000,000
Sales 1,500,000
Stock (31/1/2005) 70,000
Direct Expenses 60,000
Indirect Expenses 100,000

Solution to Self-Assessment Question on Study Session 11
(1) Cost of Goods Sold is the difference between the cost of goods available for sale
and the cost of goods in stock while Cost of goods manufactured is the cost of goods
produced which includes cost of raw materials consumed and all manufacturing
expenses.
(2) Gross Profit is the excess of sales revenue over the cost of goods sold while Net
Profit is the excess of gross profit and other incomes over the indirect expenses and
losses in the business.
(3) Direct Expenses is the expenses incurred on the goods purchased till they are
brought to the place of business while Indirect Expenses are all the expenses other
than direct expenses. These include expenses incurred in connection with general
administration, financial matters and selling and distribution of goods.
(1) Calculation of Cost of Goods Sold

N N
Add Purchases 1,000,000
Less Purchases Returns 50,000 950,000
1,000,000
Less Closing Stock 70,000
Cost of Goods Sold 930,000

STUDY SESSION 12 INTRODUCTION TO PARTNERSHIP ACCOUNTS
Introduction
A business that is owned by one person is known as a Sole Proprietorship. The sole trader
takes all the profits and losses from the business. When a business is owned by more than one
person and is for the purpose of making profit, it is called partnership business. In this
session, you will be introduced to the general background of the operation and preparation of
partnership accounting.
12.1 discuss the nature of a partnership business.

12.2 explain the laws that govern partnership businesses in Nigeria
12.3 explain the main features of a partnership agreement
12.4 explain the duties of Partners
12.5 prepare partners’ capital and current accounts
12.6 prepare the final accounts of a partnership
12.1 Nature of Partnership Business

A partnership is an arrangement where two or more people who agree to carry on a business
for the purpose of making profit without going through the process of incorporation. The
membership of a partnership business in Nigeria is limited to 20 by the provisions of the
Partnership Act 1890 of England. The exceptions to this limitation of maximum membership
of 20 are the cases of professional practice, e.g., accounting, law, estate management and
engineering.
12.1.1 The need for Partnership.
There are various reasons why people may come together to jointly own a business enterprise
by way of partnership.
(a) the capital needed to run a business may be more than that which can be supplied
by one person;
(b) the business may require experience or expertise that one person may not be able
to supply;
(c) people may want to share management and business risk; and
(d) members of the same family may wish to join hands to do business together.
12.1.2 Types of Partners
Partners that form partnership business can be classified as follows:
(a) General partner

(b) Dormant or sleeping partner
(c) Limited partners
General Partner: A general partner is one who is actively involved in the running of the
business and who has unlimited liability. Unlimited liability means that where the assets of
the partnership business are not enough to pay its indebtedness to its creditors in the event of
liquidation, then, the general partners will pay the balance from their private resources.
Dormant or Sleeping Partner: A dormant or sleeping partner is one who does not take
active part in the management (i.e., running) of the business. Like a general partner,
however, he is liable to the full extent of the indebtedness of the business.
Limited Partner: A limited partner is one whose liability is limited only to the full extent of
the capital invested in the business. A limited partner may not take active part in the
management of the business. All the partners cannot be limited, so there must be at least one
partner with an unlimited liability.

(a) Define the term Partnership.
(b) Mention two types of Partnership.
(a) Partnership can be defined as an arrangement where two or more people

agree to carry on a business for the purpose of making profit without going
through the process of incorporation.
(b) (i) General Partner
(ii) Sleeping Partner
12.2 Partnership Laws
The matters relating to partnership business are governed in Nigeria by the following
enactments.
(1) Partnership Act 1890 (The English law adopted is a statute of general application in
the Northern part of Nigeria (i.e., former Northern region). The 1890 Act is also
applicable in states of the South-South and South-East of Nigeria (i.e. former Eastern
region).
(2) Partnership law 1959 which is applicable in the South-West of Nigeria (i.e., former
Western region)
(3) Partnership Law 1973 which is applicable in Lagos State.
(4) Partnership Law 1976 which is applicable in Edo and Delta States (i.e., former Bendel
State)
(5) Companies and Allied Matters Act 1990 in the areas of membership limitation and
registration of business names
12.3 The Partnership Agreement
Although it is not compulsory that there should be written agreement to govern the operation
of partnership business, it is usual to have agreement in writing instead of oral agreement. A
written agreement will reduce areas of confusion and disputes as to what was agreed upon
and what was not agreed.
A well drawn-up partnership agreement should contain the following:
(a) the nature of business to be carried on by the firm;
(b) the initial capital contribution of each partner;
(c) the duties and powers of partners;
(d) the type and number of partners;
(e) the rate of interest on loans from partners;
(f) the rate of interest on loans to partners;
(g) the rate of interest on drawings by partners;
(h) the salaries to be paid to partners;
(i) the basis of sharing profits and losses;
(j) how the value of goodwill should be determined upon the retirement or death of a
partner;
(k) provision for dissolution of the partnership; and
(l) modalities of resolving disputes, e.g., through arbitration.
In the absence of any written agreement between the partners, section 24 of the partnership
Act 1890 provides that the following rules will be applicable:
(a) profits and losses are to be shared equally;

(b) the firm must indemnify every partner in respect of payment made and personal
liabilities incurred by him in the normal course of business;
(c) no interest is payable on capital;
(d) partners are entitled to interest at the rate of 5% on loans given to the firm;
(e) no remuneration by way of salaries is payable to partners;
(f) business matters may be decided by a majority vote; and
(g) partnership books must be kept at the principal place of business and partners must
have free access to them.
12.4 DUTIES OF PARTNERS
The partners have a general duty to act in accordance with the terms of partnership agreement
or partnership law where there is no agreement. The following specific duties are imposed on
partners by the partnership Act 1890:
(a) To act with utmost good faith in relations with other partners
(b) To render true and accurate accounts.
(c) Give full information on all matters that they know are affecting the partnership.
(d) To pay over to the partnership any benefit derived by any member from any
transaction concerning the partnership, or from any use of partnership property,
name or business connection.
(e) A partner must not make secret profit.
(f) A partner must refrain from competing with the firm.
Partners are expected to perform certain duties in the partnership business,

mention three of these duties that you know.
Three important duties of partners are:

(a) To act with utmost good faith in relations with other partners
(b) To render true and accurate accounts.
(c) Give full information on all matters that they know are affecting the
partnership
12.5 ACCOUNTS OF PARTNERSHIP
It is necessary that the partners keep accurate records of accounts for the partnership
business. This will enable partners to know whether they are making profit or loss. You will
see that the account will show the amount contributed by each partner and share of their
profit. The accounts necessary in any partnership business include the following:
 Capital Account of the Partners

 Current or Fluctuating Accounts of the Partners
 Appropriation account
 Trading, Profit and loss account of the partnership business
 The balance sheet for the Partnership business
The preparation of each of the above mentioned statements will be discussed below:
12.5.1 CAPITAL ACCOUNT OF THE PARTNERS
Capital account is the account in which the contribution of each partner towards the
commencement and operation of the partnership business is credited. Each partner is
expected to have a capital account. Capital account can be operated as fixed or as fluctuating.
Fixed Capital Account: Capital account is said to be fixed when the account will only
contain the amount of money contributed by the partner as capital. The amount in this
account will remain fixed as far as the partnership exists.
Current or Fluctuating Capital Accounts: Current or fluctuating Capital account is the

account in which the contribution of each partner towards the commencement and operation
of the partnership business are credited. Also credited to this account are other entitlements
that may arise from the partnership business such as salaries, interest on capital or loans, and
share of profit. The current account would also be debited with any amount drawn for
personal use by the partners, interest on such drawings and share of business loss where the
partnership sustains any loss.
Let us use an illustration to demonstrate the operation of capital account.
Illustration 12.1
Ajanaku and Jagunlabi were in partnership about 5 years ago. Ajanaku contributed N30,000
and Jagunlabi contributed N15,000 as capital. They share profit and loss in the ratio 2:1.
During the year that ended 31st December 2009, the firm made a profit of N35,000. Ajanaku
is entitled to salary of N1,000 per month. Jagunlabi borrowed N3,000 from the firm on 1st
January, 2009. It is the policy of the company to charge interest of 5% on loan granted.
Ajanaku drew N5,000 for personal use.
You are required to prepare the capital account of the partner in form of (a) Fixed and (b)
Fluctuating.
Solution
(a) Fixed Capital Account Method
DR Ajanaku - Capital Account CR
1/1/2009 BAL b/d 30,000
DR Jagunlabi– Capital Account CR
N N
1/1/ 2009 Bal b/d 15,000
DR Ajanaku– Current Account CR
N N
31-12-09 P & L
31-12-09 P & L Appropriation: Appropriation:
31-12-09 Cash drawings 5000 Salary 12,000
Share of profit 15,433
Balance c/d 22433
27433 27,433
DR Jagunlabi– Current Account CR
31-12-09 P & L N N
Cash Drawing 3000 Appropriation
31-12-09 P & L Appropriation: Share of profit 7,177
31-12-09 Interest on drawings 150
31-12-09 Bal. C/D 4,567
7717 7,717
(b) Fluctuating Capital Accounts Method
DR Ajanaku - Capital Account CR
N N
1/1/2009 Bal b/d 30,000
Cash Drawing 5,000
31-12-09 P & L
Salary 12,000
Share of Profit 15,433
Bal. c/d 52,433

57,433 57,433
DR Jagunlabi– Capital Account CR
N N
1/1/ 2009 Bal b/d 15,000
31-12-09 Cash drawings 3,000 31-12-09 P & L
31-12-09 Interest on drawings 1,500 Share of Profit 7,717

bal. c/d 19,567 22,717
22,717
12.5.3 TRADING, PROFIT AND LOSS ACCOUNT AND APPROPRIATION

ACCOUNT
Trading, Profit and Loss Account is the account prepared in a partnership business for the
purpose of the determination of profit earned or losses incurred by the business during a
financial year. All income received are credited to the account while all expenses are debited
to the account.
Appropriation Account on the other hand, is an extension of the profit and loss account. It is
the account in which the profit or loss of the firm are shared between the partners.
The net profit for the year is calculated in the profit and loss account and transferred to the
appropriation account. The appropriation account is credited with interest on drawings and
debited with interest on capital and partners salaries.
Let us use an illustration to demonstrate the operation of capital account.
ILLUSTRATION 12.2
X, Y, and Z are in partnership. They have agreed to share profits in the ratio 2:2:1. Interest
on capital payable is N1,000 for X, N1,000 for Y and N500 for Z. Z is to receive a salary of
N50,000 per annum. The net profit of the partnership for the year 2003 was N292,500.
Show the partnership appropriation account for the year ended 31st December 2003.
Solution
XYZ Partnership
Appropriation Account for the year ended 31 – 12 – 2003

N N N
Interest on capital: Net profit 292,500
X 1000
Y 1000
Z 500 2,500
Salary Z 50,000
Share of profit
X (2/5) 96,000
Y (2/5) 96,000
Z (1/5) 48,000 240,000
292,500 292,500
Note:
The profit shared in the profit sharing ratio is N292,500 – (N2,500 + N50,000) =
N240,000.
ILLUSTRATION 12.3
Olu and Ayo are in partnership sharing profits and losses in the ratio of 3:2 to Olu and Ayo
respectively. They are entitled to 10% per annum interest on capital. The capital contributed
by Olu is N200,000 while Ayo contributed N600,000. Ayo is to have a salary of N50, 000.
Interest is to be charged on drawings at the rate of 5% per annum. Olu and Ayo withdrew
N20, 000 and N30, 000 respectively during the year. The net profit for the year 2004 was
N500, 000. Show the appropriation account for the year ended 31st December 2004.
Solution
Olu and Ayo Partnership
Appropriation Account for the year ended 31-12-2004
N N
Salary Ayo 50,000 Net profit b/d 500,000
Interest on capital Interest on Drawings:
Olu 20,000 Olu 1,000
Ayo 60,000 80,000 Ayo 1,500 2,500
Share of Profit
Olu (3/5) 223,500
Ayo (2/5) 149,000 392,500
502,500 502,500
Let us look at comprehensive illustration
Illustration 12.4
John and Wilson are in partnership. The trial balance extracted from the partnership books
on 31-12-2005 is as follows:
Trial Balance
DR CR
N N
Premises 6,000,000
Carriage 100,000
Bad debts 50,000
Purchases and sales 16,000,000 28,000,000
Returns 80,000 60,000
Salaries 1,400,000
Rates 400,000
Insurance 140,000
Cash at Bank 700,000
Stock 1-1-05 3,500,000
Fixtures & fittings 4,500,000
Wages 2,600,000
Capital:
John 6,000,000
Wilson 6,000,000
Current accounts:
John 100,000
Wilson 160,000
Drawings:
John 800,000
Wilson 900,000
Debtors & creditors 8,000,000 5,000,000
Provision for bad debts 260,000
Discounts 100,000
Office expenses 110,000
Total 45,480,000 45,480,000
Additional Information:
1. Stock 31-12-05 N2, 500,000
2. N60,000 of the carriage is for carriage inward
3. Depreciation of fixtures and fittings is at 10% per annum
4 Interest on partners’ capitals is at 5% per annum
5 Partnership salary to John is N500,000
6. Wages outstanding for payment is N400,000
7. Residue of profit to be divided equally
8. Provision for bad debts to be made equal to 10% of debtors
Required: Prepare the Trading, Profit and Loss Account and the partner’s current accounts
for the year ended 31-12-2005 and a balance sheet as at that date.
Solution
John and Wilson
Trading, Profit and Loss Account for the year ended 31-12-2005
N N N
Sales 28,000,000
Less returns inward 80,000
27,920,000
Less cost of goods sold:
Opening stock 3,500,000
Add purchases 16,000,000
Add carriage inward 60,000
16,060,000
Less returns outward 60,000
16,000,000
Add wages 3,000,000 19,000,000
22,500,000
Less opening stock 2,800,000 19,700,000
Gross profit 8,220,000
Less expenses:
Carriage outward 40,000
Bad debts 50,000
Salaries 1,400,000
Rates 400,000
Insurance 140,000
Discount allowed 100,000
Office expenses 110,000
Depreciation 450,000
Provision for bad debts 540,000 3,230,000
Net profit 4,990,000

Appropriation :
Salaries-John 500,000
Interest on capital:
John 300,000
Wilson 300,000
Share of profit
John 1,945,000
Wilson 1,945,000 (4,990,000)
PARTNERS CURRENT ACCOUNTS
DR CR
John Wilson John Wilson
N N N N
31-12-05 Bal b/d 200,000 31-12-05 Bal b/d - 160,000
“ Drawings 800,000 900,000 “ Salaries 500,000
“ Bal c/d 1,845,000 1,505,000 “ interest on capital 300,000 300,000
“ Share of profit 1,945,000 1,945,000
2,745,000 2,405,000
2,745,000 2,405,000
1-1-06 Bal b/d 1,845,000 1,505,000
JOHN AND WILSON
Balance sheet as at 31 – 12 – 05
Fixed Assets
N N N
Premises 6,000,000
Fixtures & fittings 4,500,000
Less depreciation 450,000 4,050,000
10,050,000
Current Assets
Stock 2,800,000
Debtors 8,000,000
Less provision for doubtful debts 800,000 7,200,000 10,700,000
20,750,000
Capital Accounts
John 6,000,000
Wilson 6,000,000 12,000,000
Currents Accounts
John 1,845,000
Wilson 1,505,000 3,350,000

15,350,000
Current Liabilities
Creditors 5,000,000
Wages 400,000 5,400,000
20,750,000
 Partnership is a business enterprise that is formed between two or more people with a
view to making profit subject to a maximum of 20 members.
 The provisions of partnership agreement govern the relationship of partners but in
absence of partnership agreement, the provisions of partnership law will be applicable.
 Partners capital accounts can be fixed or fluctuating depending on the policy adopted,
where the capital account is fixed, a current account must be prepared to take care of
appropriations.
(1) Explain the following terms in relation to partnership enterprise.
(a) Partnership agreement

(b) General partner
(c) Sleeping partner
(2) (a) State eight of the items which a good partnership agreement should contain.

1 (a) Partnership agreement is any document that contains rules and regulations
that will regulate the operations and activities of a partnership business.
Partnership agreement can also be made orally
(b) General Partner
A general partner is one who is actively involved in the running of the business and
who has unlimited liability.
C ) Sleeping Partner
A Sleeping partner is one who does not take active part in the management (i.e.,
running) of the business.
2 Partnership Agreement must contain the following, among other things:
(i) The nature of business to be carried on by the firm.
(ii) The initial capital contribution of each partner.
(iii) The duties and powers of partners.
(iv) The type and number of partners.
(v) The rate of interest on loans from partners.
(vi) The salary to be paid to any partner.
(vii) The rate of interest on loans to partners.
(viii) The rate of interest on drawings by partners.

STUDY SESSION 13 INCOMPLETE RECORDS
Introduction
Conventionally, accounting entries are expected to be prepared based on double entry
principle. Sometimes, this aspect is ignored, may be because of ignorance or some other
reasons. In this session, we shall examine incomplete records and how final accounts can be
prepared from incomplete records.
13.1 define of incomplete record

13.2 list three causes of incomplete
13.3 prepare accounting statements from incomplete records.
13.1 Meaning of Incomplete Records

An incomplete record means the state of affairs which exists when an organisation is not
keeping the required record of financial transactions. This means that the organisation is
lacking some or the entire prime accounting information from which the normal books of a
business are written up and final accounts prepared. Generally speaking, incomplete record
is a situation where the conventional and acceptable double entry principle is not observed.
Akeju ( ) identified the methods of recording which could lead to incomplete record as:
i. Single Entry: This involves having either debit or credit entries for
transactions instead of both debit and credit entries. In most businesses with single
entry records the only record maintained is the record of cash movement (cash in and
out) that is receipt and payment records.
ii. Partial Entries: This involves having both credit and debit entries for few
transactions instead of credit and debit entries for all transactions. This implies
entries treatment while the remaining transactions are not recorded at all.
iii. No Entry: This involves a situation where neither debit nor credit entries are
maintained for any transaction in the business organization. The source
documents available to the business organization are those maintained in files.
These plus whatever could be remembered by the owner of the business will
form the accounting records existing in the business organization.
You can see from the above identified mode of entries that Single, Partial and No Entry
mode did not follow normal mode of double entry, hence accurate accounting information
cannot be prepared from the available records because there is no complete records of
account.
This method is referred to as Incomplete Method because the Accounting records kept are not
complete.

What, in your opinion, is the implication for an organization to keep its accounting
records using Incomplete mode?

The implication of using Incomplete system of record keeping is that
accurate accounting information cannot be prepared from the available
records because there are no complete records of account.
13.2 Causes of Incomplete Records
The following circumstances may cause incomplete records.
 The Accounting officer may be inexperienced and ignorant in maintaining double

entry system of book-keeping.
 The transaction of the business may not be voluminous enough to engage the services
of capable hands to maintain proper accounting record.
 The owner of the business may not even recognise the need for keeping accounting
record.
 The business might have just commenced operation and keeping of proper accounting
record has not been commenced.
 The method or approach of recording adopted.
 Unanticipated disaster may destroy the accounting records.

List three causes of Incompete records.

Three causes of Incomplete records are:
(i) The Accounting officer may be inexperienced and ignorant in maintaining

double entry system of book-keeping.
(ii) The transaction of the business may not be voluminous enough to
engage the services of capable hands to maintain proper
accounting record.
(iii)The owner of the business may not even recognise the need for
keeping accounting record.
13.3 Step by step guide for preparing Accounting records from Incomplete Record
The following steps are usually adopted:
 Preparing an opening Statement of Affairs;

 Preparing the main control accounts;
 Preparing the Bank Account;
 Calculating gross profit;

 Drafting the Profit and Loss Account; and
 Drafting the Balance Sheet.
It is also important to ensure that you have a sound knowledge of the double entry required
for transactions involving sales (both for cash and on credit), purchases (again, both for cash
and on credit), as well as cash transactions for expenses and other cash received (usually
capital introduced). Solving incomplete records problems is a matter of working through each
of these steps. If you use standard workings for each, and insert the figures which are given in
the question, the problem becomes one of finding the missing figures. Let us consider each of
the steps and the relevant workings.
13.3.1 Opening Statement of Affairs

When a Balance Sheet has to be prepared using estimated values, we refer to it as a Statement
of Affairs. The first step is to set out the main headings which are used in a Balance Sheet.
We can then use the available information to obtain the relevant values. The main headings
which are needed are:
Fixed Assets N : K
Current Assets
Stock
Debtors
Cash and Bank
Current Liabilities
Creditors
Bank overdraft
Loans
Capital
Usually there will be one value missing: Capital
As capital is the balancing figure. Once you have the value for other components, the
capital figure can be calculated using the following equation:
Fixed assets + current assets – current liabilities = capital
13.3.2 Control Accounts

Control accounts are needed for:
debtors
creditors
cash
The Cash Account can be constructed as follows:
The opening balance for cash will be obtained from the Statement of Affairs. This will be
increased by the debit entry for cash received, and reduced by the credit entries for amounts
lodged to the bank and amounts paid as cash expenses and drawings.
Formats for the three control accounts are as shown below.
13.3.3 Format
Debtors Control Account
Opening balance b/d xxxxx Cash recd from debtors xxxxx
Sales xxxxx Discount allowed xxxxx
xxxxx xxxxx
Balance b/d xxxxx
Creditors Control Account
Payments to suppliers xxxxx Opening balance b/d xxxxx
Discount received xxxxx Purchases xxxxx
xxxxx xxxxx
Closing balance b/d xxxxx Balance c/d xxxxx
Cash Account
Opening balance b/d xxxxx Lodgements xxxxx
Cash received xxxxx Cash expenses xxxxx
Drawings xxxxx Closing balance c/d xxxxx
xxxxx xxxxx
Balance b/d xxxxx
13.3.4 Bank Account

The opening balance for the Bank Account will also be obtained from the Statement of
Affairs. You need to take care however as the balance may be either a debit (cash at bank) or
a credit (overdraft). The value of cash lodged will be a debit entry, and the value of cheques
issued will be a credit entry. The closing balance will be the balancing figure. Once again
make sure you take care over whether the balance is cash on hand or an overdraft. The layout
for the bank account is shown below.
Format
Bank Account
Opening balance b/d
(if cash at bank) xxxxx Opening balance (if o/drawn) xxxxx
Lodgements xxxxx Cheques issued xxxxx
Closing balance c/d Closing balance c/d (if cash at
(if overdrawn) xxxxx bank) xxxxx
xxxxx xxxxx
Balance b/d (if cash Balance b/d (if overdrawn) xxxxx
at bank) xxxxx
13.3.5 Gross profit
Gross profit is calculated by deducting cost of sales from the value of sales.
Margin
If margin is to be used, the value of sales will already have been calculated as the total of
credit sales (derived from the Debtors Control Account) and cash sales (derived from the
Cash Account). The gross profit is found by applying the % margin to the value of sales.
For example, if sales totals N80,000 and the margin is 20%, the gross profit will be N80,000
x 20% = N16,000.
The opening value of stock will be taken from the Statement of Affairs. The value of
purchases will be the total of credit purchases (derived from the Creditors Control Account)
and cash purchases (derived from the Cash Account). Closing stock will be the balancing
figure in the calculation:
Sales – cost of sales = gross profit
Cost of sales = opening stock + purchases – closing stock
13.3.6 Profit and Loss Account

When constructing the Profit and Loss Account, there are two main points to remember. The
first is that expenses must include both cash expenses and expenses paid by cheque. The
second is that depreciation must be included — but remember to include any assets acquired
during the year!
13.3.7 Balance Sheet

Preparing the Balance Sheet should be relatively straightforward.
Fixed assets
= value from the statement of affairs

+ new assets
– depreciation for period
Current assets
Stock = Closing stock as calculated in cost of sales
Debtors = Closing balance on the Debtors Control Account
Cash = Closing balance on the Cash Account
Bank = Closing balance on the Bank Account (if cash on hand)
Current Liabilities
Creditors = Closing balance on the Creditors Control Account

Bank = Closing balance on the Bank Account (if overdrawn)
Capital
Balancing figure which can be confirmed as:
Opening balance from the Statement of Affairs

+ profit from the Profit and Loss Account
– drawings
+ capital introduced
Illustration 1
Frank owns a small wholesaling business. He does not use the double entry bookkeeping
system. He has asked you to prepare his income statement and balance sheet for the latest
year and he has presented you with the following information for the year ended 30 June
2008:
Cash book summary N000
Balance at start of year 18
Receipts from customers 878
Payments to suppliers (620)
Drawings (37)
Electricity (190)
Insurance (25)
Balance at end of year 24
N000
Debtors as at 30 June 2008 99
Creditors as at 30 June 2008 58
Stock as at 30 June 2008 132
The opening position is summed up in Frank’s balance sheet as at the end of last year.
Balance sheet as at 30 June 2007
N000 N 000
Premises 210
Van 14
224
Stock 124
Debtors 101
Bank 18
243
467
Capital 379
Creditors 88
467
Premises should be depreciated by 2% and the van by 20%.
Round all figures off to the nearest N000.
There are two important figures that are not stated directly in the question:
 Total sales
 Total purchases
Deriving these requires a simple trick (and a little faith in Frank).
We start by putting all the information that we have into T accounts for debtors and creditors:
Debtors Creditors
Bal b/d 101 Bank 878 Bank 620 Bal b/d 88
Sales ? Bal c/d 99 Bal c/d 58 Purchases ?
You can see in the above account that we know all the figures except the sales and purchase
figures, so we can enter the figure for sales and purchases by using the ―balancing figures‖
that make up the accounts – we assume that the balancing figures are the figures for sales and
purchases respectively.
Debtors Creditors
Bal b/d 101 Bank 878 Bank 620 Bal b/d 88
Sales 876 Bal c/d 99 Bal c/d 58 Purchases 590
977 977 678 678
We can now put together a set of figures, making various assumptions as we go along. For
example, there were no accruals or prepayments at the start of the year and there is nothing
mentioned about those at the end. Presumably all expenses are the same as their related cash
payments for the year.
Frank Business
Income statement for the year ended 30 June 2008
N000 N000
Sales 876
Opening stock 124
Purchases 590
Closing stock (132)
Cost of sales 582
Gross profit 294
Electricity 190
Insurance 25
Depreciation - premises 4
Depreciation - van 3
222
Net profit 72
Frank
Balance sheet as at 30 June 20X8
N000 N000
Premises 206
Van 11
217
Stock 132
Debtors 99
Bank 24
255
472
Capital Opening balance 379
Net profit 72
Drawings (37)
414
Creditors 58
472
Are these numbers correct?
In the real world, the biggest problem is that any error in the cash book analysis or the
opening or closing balances on debtors and creditors would lead to an incorrect figure in the
income statement. It is quite possible that Frank hates paying tax and it would be quite easy
for him to mislead us into filing an incorrect profit figure on his behalf.
The only way round this is to take as many precautions as possible. For example, the cash
book should agree with the bank statement using a bank reconciliation. Also, Frank must be a
trusted client, otherwise it would be rather reckless to act on his behalf.
Illustration 2
John Risdon is a self employed motor engineer. He maintains a cash book to record his
business receipts and payments. The following is a summary of the cash book for year ended
31 December 20x0:
Cash Book
N N
Balance b/d 1,500 Drawings 14,100
Cash received from Materials 17,300

work done 39,300
Van running expenses 4,100
Wages, trainee 5,100

Sale of own car 4,000
Admin 250
Tools and consumables 600
General expenses 350

44,800
Balance c/d 3,000
44,800
Assets and liabilities as at 31 December 19X9 and 20X0 were:
19x9 20x0
N N
Motor van 7,500 5,000
Stock materials 1,350 1,450
Debtors for work done 3,400 3,750
Creditors for supplies 1,250 1,450
Van insurance pre-paid 160 170
The motor vehicle had been purchased second hand on 1 January 19x9 for N10,000 and is
subject to depreciation at 25% per annum, straight line, (that is, it is being written off over
four years, its expected useful economic life).
This information can be used to produce statements for the year ended 31 December 20x0.
Opening capital can be arrived at by using the ―accounting equation‖ or through preparation
of statement of affairs.
N
Assets:
Motor van 7,500
Stock 1,350
Debtors 3,400 (see cash book summary)
Cash at bank 1,500
Pre-payments 160
13,910
Less creditors 1,250
Capital N12,660
Work done during the year:
N
Cash received during the year 39,300
Less owed at start of the year 3,400
35,900
Add owed at end of the year 3,750
N39,650
This can also be shown in the form of a control account:
Sales Ledger Control

20x0 2000 Receipts from
N debtors (cash book) 39,300
Balance c/d 3,750
Balance b/d 3,400
2000 Work done 43,050
39,650
43,050
2001 Balance b/d

3,750
Likewise the purchases and motor van running costs (where, because opening and closing
creditors and debtors, the insurance pre-payment; and the actual amounts paid are all known,
the charge for the year can be calculated).
Purchase Ledger Control

N N
2000 Payments to creditors for 2000 Balance b/d 1,250

materials 17,300
2000 Purchases 17,500
2001 Balance b/d 1,450
18,750
18,750
2001 Balance b/d 1,450
Motor Van Running Costs

N N
2000 Balance b/d (pre-payment) 160 2000 Charge for year 4,090
2000 Payments 4,100
Balance c/d 170
4,260
4,260
2001 Balance b/d 170
Notes for Preparation of the Final Accounts

NB: The difference between the opening and closing motor van valuation (N7,500 – N5,000
= N2,500, is the depreciation charge for the year, i.e.: (N10,000 x 25% per annum).
The proceeds from the sale of the personal motor vehicle, which were paid into the business
bank account, represent capital introduced. Other costs are shown in the summary cash book
extract.
We can now draft the final accounts for the year ended 31 December 20x0.
Trading and Profit and Loss Account of J Risdon for the Year Ended 31 December
20x0
N N
Work done 39,650
Opening stock of materials 1,350
Add purchases 17,500
18,850
Less closing stock of materials 1,450
Cost of materials used 17,400
Gross Profit 22,250
Wages 5,100
Motor vehicle running costs 4,090
Administration 250
Tools and consumables 600
General expenses 350
Depreciation motor van 2,500
12,890
Net profit for year N9,360
Balance Sheet as at 31 December 20x0
Cost Depreciation NetBookValue
N N N
Fixed assets:
Motor van 10,000 5,000 5,000
Current assets:
Stock 1,450
Debtors 3,750
Cash at bank 3,000
Pre-payment 170
8,370
Less:
Current liabilities:
Creditors 1,450
Net current assets 6,920
Total assets less current liabilities 11,920
Financed by:
Opening capital 12,660
Add capital introduced 4,000
16,660
Add profit for year 9,360
26,020
Less drawings 14,100
11,920
Your classmate has just phoned you to inform you that he wants to prepare
financial statements from incomplete records. You are required to state the steps
that he should take to prepare the accounts.
The following are the steps that one should take to prepare accounts from an
incomplete records.
 preparing an opening Statement of Affairs;

 preparing the main control accounts;
 preparing the Bank Account;
 calculating gross profit;
 drafting the Profit and Loss Account; and
 drafting the Balance Sheet.
In this Study Session, you have learnt:
(1) that incomplete records means any situation where we have Single, Partial entries
and No entry in the books of account;
(2) the causes of incomplete entry; and
(3) the steps to take to prepare accurate financial information from Incomplete
records.
Self-Assessment Questions for Study Session 13
1. Helen Idris operates a restaurant on Cash basis. All cash received are banked
after deducting the following expenses.
Staff wages 20,000
Cash purchases 5,000
Sundry expenses 1,000
Drawing (Weekly) 300

The following is the Bank Account
Bank Account
N N
Bal b/d (1/1/90) 20,000 Rent 5,000
Restaurant takings 260,000 Rates 4,000
Investment Income 20,000 Electricity 2,200
Advertisement 500
New Equipment 2,000
Insurance 4,000
Repairs 500
Cash paid to creditors 200,000
Deposit on private house 7,500
Income tax for Idris 2,000
Balance c/d 69,300
300,000 300,000
a. The balances extracted from the books are as follows:

1/1/9x 30/1/9x
Accrued electricity 300 400
Trade creditors 15,000 20,000
Rate prepaid 1,000 1,500
Stock 4,000 3,000
b. Equipment at cost on 1/1/9x was N6000 depreciation is to be provided at
10% per annum.
c. Helen Idris occupies an apartment in the restaurant which attract a rent of
N1,200.
You are required to prepare
i. Trading Profit and Loss Account for the year ended 31st Dec., 199x and
ii. Balance sheet as at that date.
2. Mr. Ekpeyong is a petty trader dealing in electronic gadgets. He has not been
keeping his books of accounts but has been taking notes of his transactions.
The following information is made available for the year ended 31st December,
2001.
Sales 200,000
Cash banked 130,000
Cheques Issued to creditors 105,000
Cash purchases 30,000
Wages and salaries paid by cash 4,000
Rent paid by cash 2,000
Transportation paid by cash 5,400
Telephone charges paid by cash 800
Additional information:
a. The assets and liabilities at the beginning and end of the period are
estimated as follow:
1/1/9x 30/1/9x
N N
Stock 20,000 40,000
Bank balance 10,000 20,000
Cash balance 2,000 12,000

Trade debtors 7,000 10,000
b. All differences in reconciliation of takings, banking, disbursements and

balances in hand and at bank are to be regarded as Mr. Ekpeyong’s
personal drawings.
You are required to prepare:
i. Opening statement of affairs as at 1st January, 2001;
ii. Trading, Profit and Loss Account for the year ended 31sy December,
2001; and
iii. Balance Sheet as at that date.
STUDY SESSION 14 ACCOUNTING FOR NON-PROFIT ORGANISATION
Introduction
We have critically studied the accounting system of organizations that are engaged in profit
oriented activities. There are organizations that are not involved or established for making
profits. These organizations are clubs, societies, churches, educational institutions and
hospitals. They are basically charitable institutions which function without any profit
motive. They are usually termed as non-trading organizations. Such organizations also have
to keep accounting records of their receipts and payments and match their expenses with
incomes. This is a legal requirement and at the same time it helps to control their expenditure.
Of course, because of the nature of their activities, the accounting system followed by them is
slightly different. In this Session, you will learn about the accounting records of such non-
trading organizations and study how they prepare their final accounts.
Learning Outcomes
When you have studied this module, you should be able to:
14.1 discuss peculiar items that feature in Non-Profit Organizations.

14.2 identify the records kept by Nonprofit organizations.
14.3 explain how to prepare the Receipt and Payment Accounts of a Non
Profit Organization.
14.4 prepare the Income and Expenditure Accounts of a Non

Profit Organization.
14.5 prepare the Balance Sheet Accounts of a Non Profit

Organization.
14.1 Peculiar Items that you will see in Accounting Record of Non Profit
Organisations
In order to prepare the financial records or accurate accounts for a non-profit organization,
you should acquaint yourself with the following items that always feature in a non-profit
organization.
(a) Subscriptions
Subscriptions can be described as the sum of money that you pay regularly or annually, to a
charity, or as a member of a club or to receive a service. In the case of trading organizations
the subscription refers to the annual charges paid for trade journals or for the membership of
some organizations and so are treated as expenditure but the case of non-trading
organizations subscriptions paid by their members are a source of income. They are shown as
a receipt in the Receipts & Payments Account and then as an income in the Income &
Expenditure Account.
(b) Donations
The charitable institutions often receive voluntary contributions from various sources. They
are termed ‘donations’ and are a source of income for the organisation. All donations are
recorded on the receipt side of the Receipt & Payments. However, whether they will be
shown as income in Income & Expenditure Account or not depends upon whether the amount
is received for a specific purpose or is in the nature of a general donation. If it is received for
a specific purpose like construction of a building or giving prizes to sportsmen, it will not be
shown in the Income & Expenditure Account. It is taken to the Balance Sheet and shown as
an addition to the building fund or prizes fund, as the case may be. If, however, it is a general
donation of recurring nature and the amount received is small, it may be recorded as income
in the Income & Expenditure Account but, if the amount received is large and is of a non-
recurring nature, it may be capitalized and added directly to the Capital Fund (General Fund)
on the Balance Sheet. The size and nature of the institution will help you to decide whether
the amount of general donation is small or big. In most of the cases the treatment may be
clearly indicated to guide the type of treatment required.
(c) Entrance Fees

It is a common practice in clubs and societies to charge entrance fee (admission fees) from
new members at the time of their admission. It is usually treated as income and shown as
such in the Income & Expenditure Account but some clubs charge exorbitant amounts as
entrance fees to limit the admission of new members. In such a situation, it is argued that the
entrance fees is in the nature of a premium charged from new members towards the capital
cost incurred on the establishment of the club by the old members and , therefore, it should be
capitalized. However, this argument is not applicable to educational institutions and hospitals
which charge admission fees from the students or patients. Hence, in the absence of any
specific instructions in a question, the entrance fees should be treated as a routine income and
shown on the credit side of the Income & Expenditure Account. In case it is to be capitalized,
it should be added straight to the Capital Fund as shown in the Balance Sheet.
(d) Life membership Fees
Certain institutions also provide for life membership and charge heavy fees from persons who
opt for it. The amount of subscription received from them is termed ‘Life Membership Fees’
and it is treated as a capital receipt. In other words, the life membership fees is not shown in
the Income & Expenditure Account. It is directly added to the Capital Fund as shown in the
Balance Sheet.
(e) Legacies
Legacies denote the amount (or property) received as per the ‘will’ of the deceased donor.
This type of donation is not a recurring phenomenon. It happens once in a while and the
amount received is generally large. Hence the practice is to capitalize it and show it straight
in the Balance Sheet. However, the small amount of legacies received from time to time may
be shown in the Income & Expenditure Account of the relevant period.
(f) Special Funds
The institutions often create special funds for special purposes such as ‘Prizes Fund’ and
‘Sports Fund’. Any income received on account of special fund investments should be added
to the fund concerned. Similarly, any expenses incurred on such specific purpose should also
be deducted from the special fund. These transactions are not shown in the Income &
Expenditure Account. For example, a club may maintain a special fund for meeting expenses
on sports activities. In such a situation, the interest income on sports should be added to the
sports fund and all expenses on sports should be deducted therefrom. The same thing is
applicable to endowments created for the specific purposes. But endowment may also
represent a general fund. In that case the Income from Endowment Fund is treated as normal
income and credited to the Income & Expenditure Account.
(a) Sale of old Newspapers

The sale of old newspapers is of a recurring nature and is credited to the Income and
(b) Sports Materials Used

In case of sports club, the expenditure on sports materials is a common item but, you know,
the materials purchased in an accounting year may not be fully consumed. Some materials
may still be in stock. Hence, to ascertain the exact amount of expenditure chargeable to the
Income and Expenditure Account of the year, you have to work out the amount of materials
consumed by adjusting the opening and closing balances of such materials in their purchases.
For example, Arsenal, a sports club based in Lagos, had an opening stock of sports materials
amounting to N12,000 on January 1, 2005. It purchased sports materials for N18, 000 during
the year and had a stock of materials worth N13,000 on December 31, 2005. This means that
the club consumed sports materials amounting to N17, 000 during the year, worked out as
follows:
Sports Materials Consumed during 2005
Opening Stock (1/1/2005) 12,000
Add purchases during the year 18,000
30,000
Less closing stock (31/12/2005) 13,000
17,000
The amount charged to the Income and Expenditure Account for 2005 on account of sports
material will be N17,000. It is also possible that the club receives certain amount by selling
the used sports materials like bats and balls. This will be an income to the club and should be
credited to the Income and Expenditure Account. You must remember that such income
arises out of the consumed materials themselves. Similar treatment may be adopted for
ascertaining the amount of stationery and printing materials consumed by such organizations
or tinned provisions consumed in the restaurant.
(c) Honorarium
The institution often takes the help of outsiders (who are not employees of the institution) for
some work of the organization. For example, inviting academicians for special lectures, or
some artists to give performance. The amount paid to them for such services is termed
‘Honorarium’ which is shown as an expense in the Income and Expenditure Account. The
remuneration paid to the Secretary or the Treasurer may also be termed ‘honorarium’ because
they are not the employees of the organization.
Explain the following terms and their treatment in the accounts of a Non-Profit
Organisation.
(i) Legacies
(ii) Special Funds

(i) Legacy denotes the amount (or property) received as per the ‘will’ of the
deceased donor. This type of donation is not a recurring phenomenon. It happens
once in a while and the amount received is generally large. Hence the practice is to
capitalize it and the value is shown in the Balance Sheet. However, the small
amount of legacies received from time to time may be shown in the Income &
(ii) Special Funds
Non-Profit Organisations often create special funds for special purposes. For
example, they can create special fund account for ‘Prizes Fund’, ‘Sports Fund’, etc.
Any incomes received on account of special fund investments should be added to the
fund concerned. Similarly, any expenses incurred on such specific purpose should
also be deducted from the special fund.
14. 2 The Records of Nonprofit organizations
The non-trading organizations like clubs and societies. differ from the trading organizations
in several respects. They normally do not indulge in buying and selling of goods and
accepting or receiving bills of exchange. The major sources of their income usually are
subscriptions from members and donations while most of their transactions are cash
transactions. Hence, they need not maintain as many books of account as the trading
organizations do. The main objective of keeping records in such organizations is to meet the
statutory requirement and exercise control over the utilization of funds. Consequently, they
maintain a Cash Book to record all receipts and payments (or separate Cash Receipts Journal
and Cash Payments Journal to provide necessary details) and other books like Members
Register, Minutes Book and Fixed Asset Register. You are fully conversant with Cash Book.
Let us have a brief idea about the other books of Account.
a) Members Register: Most charitable institutions are organized as societies which are
registered with the Registrar of Societies. They are required to keep full record of their
subscribers (called members). Hence, they maintain a Member Register which shows
their names, addresses and date of admission.
b) Minutes Books: Societies function on the basis of decisions taken by the general body of
members and their managing committee. They have to keep separate minutes books for
recording the proceedings of the meeting of the general body and that of the managing
committee. A minutes book is a permanent record of the decisions taken from time to
time.
c) Fixed Assets Register: Every society possesses fixed assets like furniture and office
equipment, etc. They have to keep complete record of these items in a register called
‘Fixed Asset Register’. Similarly, they also keep a supplies register of consumable items
like stationery and sports materials. which, in addition to the details of purchases, will
also show their consumption and balances.
Non-trading organizations also maintain a ledger containing the accounts of all incomes,
expenses, assets and liabilities. This facilitates the preparation of final accounts at the end of
the accounting year.
State three books that a Non-Profit Organisation should maintain.
A Non-Profit Organisation should keep the following books, among others:
(1) Members’ Register

(2) Minutes Book
(3) Fixed Assets Register
14.3 Final Account of Non-Trading Organisation
The final accounts of a trading organization include a Profit and Loss Account and a Balance
Sheet. However, in the case of non-trading organizations they include:
(i) Receipts and Payment Account;

(ii) Income and Expenditure Account; and
(iii) Balance Sheet.
Let us discuss the preparation of Receipts and Payment Account in details here. Other
aspects will be discussed below.
14.3.1. Receipts and payments Accounts
You will notice that a non-trading organization has to prepare Receipts and Payments
Account and the Income and Expenditure Account (it is similar to Profit and Loss Account)
and the Balance Sheet. You also know in study session 10 that the Profit and Loss Account
and the Balance Sheet are usually prepared for profit making organisations with the aid of a
Trial Balance. However, in the case of non-trading organization, the practice is to prepare the
Income and Expenditure Account and the Balance Sheet straight from the Receipts and
Payments Account and the additional information. As a result, the Receipts and Payments
accounts are very important for non-trading organizations and should be prepared very
carefully. It does not mean, however, that non-trading organizations should not prepare trial
balance at all. In fact, if the organizations have used the double entry system, they must
prepare a trial balance for checking the arithmetic accuracy of postings into ledger accounts.
This would also help the preparation of Receipts and Payments Account.
The final accounts of non-trading organizations can be prepared from incomplete records
discussed in study session 13 (from there you have the idea of Receipts & Payments). While
preparing the final accounts from incomplete records (study session 13) you had some idea of
the Receipts and Payments Account. So, you know that it is simply a summary of cash and
bank transactions for the year. It gives full information about all receipts and payments under
different heads and is prepared with the help of the Cash Book. The Cash Book contains a
record of all receipts and payments in chronological order but the Receipts and Payment
Account will simply show the total amount received or paid under each head. For example, a
club receives subscriptions from its members on different dates in a year. These are recorded
in the Cash Book separately on those dates but in Receipts and Payments Account, the total
amount of subscription received during the year will simply show the total amount for
salaries paid during the year on credit side. You will recall that the opening balance in
Receipts and Payments Account represents the cash and bank balances at the beginning of the
year whereas the difference between the total of the two sides reflects the closing cash and
bank balances.
Let us look at an illustration that shows how Receipt and Payment Account is prepared.
Illustration 14.1
The following information was extracted from the books of Area Boys Club, Ajegunle for the
year ended 31st December, 2008.
N
Balances on 1-1-2008 1,800
Cash in hand 19,200
Cash at Bank 118,200
Subscriptions
2007 - 7,200
2008 - 110,100
2009 - 900
Restaurant and Bar Payment 300,000
Restaurant and Bar sales 360,000
Lighting and Heating 13,800
Secretary’s Honorarium 11,100
Life Membership Subscription 9,000
Furniture Purchased 9,000
Wages 102,000
Balances on 31-12-2008
Cash in hand 1,500
Cash at bank 13,500
You are required to prepare the Receipts and Payments Accounts for the club for the year
ended 31st Dec. 2008.
Solution to illustration 14.1:
AREA BOYS CLUB OF AJEGUNLE
Receipts and Payments Account
Receipts Amount Payments Amounts
N N
Balance b/d Restaurant and Bar Payments
Cash in hand 1,800 Wages 300,000
Cash at bank 19,200 21,000 Lighting and Heating 102,000
Secretary’s Honoraries 13,800
Annual subscriptions General Expenses 11,100
2007 7200 Furniture (purchase) 60,450
2008 11,0100 Balance c/d 9,000
2009 900 118,200 Cash in hand 1500
Cash at Bank 13500
15,000
Restaurant and Bar sales 360,000
Life Membership 9,000

subscriptions
511,350 511,350
14.3.2 Summarized features of Receipts and Payments Account
The main features of Receipts and Payments Account can be summarized as follows:
i) It is a real account.
ii) It is a summary of Cash Book.
iii) All receipts are shown on the debit side and all payments on the credit side.
iv) No distinction is made whether the payments has been made in cash or by cheque.
In other words, cash and bank items are merged except in the case of opening and
closing balances.
Outline the main features of Receipt and Payment Account.
The main features of Receipts and Payments Account can be summarized as

follows:
i) It is a real account.
ii) It is a summary of Cash Book.
iii) All receipts are shown on the debit side and all payments on the credit
side.
iv) No distinction is made whether the payments has been made in cash or by
cheques
14.4: Preparation of Income and Expenditure Account
The Income and Expenditure Account serves the same purpose for a non-trading organization
as the Profit and Loss Account for a trading organization. It is also prepared exactly in the
same manner as the Profit and Loss Account, i.e., all incomes are shown on the credit side
and all expenses and losses on the debit side. However, in case of non-trading organizations
the excess of income over expenses and losses is not termed ‘profit.’ It is called ‘Excess of
Income over Expenditure’ or ‘Surplus’. Similarly, the excess of expenses and losses over
income is termed ‘Excess of Expenditure over Income’ or ‘Deficiency’.
As stated earlier, the income and Expenditure Account is prepared with the help of Receipts
and Payments Account and the additional information available. You are aware that the
Income and Expenditure Account will show incomes and expenses only for the period to
which it relates and that too on accrual basis. Hence, while taking figures from Receipts and
Payments Account you will have to make the necessary adjustments. For example, if the
amount of subscriptions received during 2008 includes N200 relating to 2009, it should be
deducted for purposes of computing the income from subscriptions. Similarly, if certain
amounts of subscriptions relating to 2008 are still to be received (outstanding) it would not
appear in the Receipts and Payments Account. This is because it has been included in the
income from subscriptions for 2008 and so added thereto. Another precaution you have to
take relates to the distinction between capital and revenue items. In the Income and
Expenditure Account you are to include only the revenue items, the capital items will be
ignored. In addition, you will have to provide the necessary amount of depreciation on all
fixed assets and make provisions for doubtful debts. These items do not appear in the
Receipts and Payments Account.
14.4.1 Steps for preparing the Income and Expenditure Account
The following are steps for preparing the Income and Expenditure Account:
i. Go through their receipts side for ascertaining all items of incomes and the payment side
for all items of expenses and losses.
ii. Ignore opening and closing balances.
iii. Ignore capital receipts and capital payments.
iv. Ignore receipts and payments relating to the preceding and the following years. If,
however, a receipt or a payment includes any amount which relates to the preceding or
the following year, the same should be deducted.
v. Add the outstanding amounts to the respective items of incomes and expenses.
vi. Provide for depreciation and doubtful debts, if required.
vii. If any fixed asset has been sold during the year, compute the amount of profit or loss on
such a sale and show the same in the Income and Expenditure Account. Note that the sale
of old sports material is not to be regarded as sale of a fixed asset. The total amount
received from such sale is an income.
Illustration 14.2
Use the information given in illustration 14.1 to prepare the Income and Expenditure Account
for a Non-Profit Organisation.
Area Boy’s Club of Ajegunle
Income and Expenditure Account for the Year ending December 31, 2008
Dr. Cr.
Expenditure Amount Income Amount
N N
Restaurant and Bar Expenses 300,000 Subscription 110,100
Wages 102,000 Restaurant and Bar Sales 360,000
Lighting and Heating 13,800 Interest on Investments 3,150
Secretary’s Honorarium 11,100 Excess of Expenditure
General Expenses 60,450 over Income 14,100
487,350 487,350
Comment:
You will observe that in addition to opening and closing balances, the following items of
receipts and payments have been ignored.
i) Annual Subscription for 2007

ii) Annual Subscription for 2009
iii) Life Membership Subscription (it is regarded as capital receipt)
iv) Purchase of Furniture
Now let us consider another illustration which deals with more items.
Illustration 14.3
The Receipts and Payments Account given below was prepared by the DLI Students’
Association. You are required to use the Receipt & Payment to prepare the Income &
Expenditure Account for the year ended 31st Dec. 2008.
DLI students’ Association Akoka
Receipts and Payments Account for the year ending December 31, 2008.
Dr Cr
Receipt N Payments N
Balance b/d 10,000 Salaries paid 62,000
Cash at hand 50,000 Additions to Library 135,000
Cash in bank 52,000 Typewriter purchased 13,000
Entrance fees 11,100 Repairs 5,000
Subscriptions: General Expenses 60,450
2007 3,000 Electric fittings in Union’s office 90,000
2008 130,000 Printing and stationery 19,000
2009 10,000 170,000 Miscellaneous expenses 3,000
Sale of students Newsletter 1,300 Balance c/d
Rent of Library Hall 20,800 Cash in hand 4,000
Proceeds from Entertainment Cash at bank 65,000
of students & lecturers 60,000

Special Subscriptions
for union’s president’s party 32,000
396,000 396,000
DLI Student’s Association, Akoka
Income Amount Expenditure Amount
N N
Salaries 62,000 Entrance fees 52,000
Repairs 5,000 Subscriptions 130,000
Printing and Stationery 19,000 Sale of old Newspapers 1,200
Miscellaneous Expenses 3,000 Rent of library hall 20,800
Excess of Income Proceeds from entertainment 60,000
over Expenditure 175,000
264,000 264,000
Please note that:
1) Addition to library, payments for electric fittings and typewriter are capital
expenditure, and so not included.
2) A special subscription for Union’s Presidential party is a fund raised for specific
purpose, hence excluded. If, however, the party had been held and there was some
surplus or deficiency the same could be included.

Distinguish between the treatment of sales of fixed asset and Old Sport Material in
the Accounts of Non-Profit Organisation
If any fixed asset is sold during the year in a Non-Profit Organisation, its treatment
is to compute the amount of profit or loss on such a sale and show the same in the
Income and Expenditure Account, whereas the sale of old sports material is not to
be regarded as sale of a fixed asset. The total amount received from such sale is an
income.
14.5 Preparation of Balance Sheet for Non-Profit Organisation
The Balance sheet of a non-trading organization is prepared in the same manner as that of the
other organizations. It shows all assets and liabilities as at the end of the year in the usual
way. However, the excess of assets over liabilities in their case is termed ‘Capital Fund’ or
‘General Fund and not ‘Capital’ as in the case of the trading organization. The capital fund
actually comprises the excess of income over expenditure and other incomes like life-
membership fees, and entrance fees. which have been capitalized from time to time.
Effectively, it constitutes the capital of the institution. Sometimes you may also have to
prepare the Balance Sheet at the beginning. This requires mainly ascertaining the opening
balance of Capital Fund.
14.5.1 Preparation of Income and Expenditure Account and Balance Sheet together
You have learnt that the Income and Expenditure Account and the Balance Sheet are usually
prepared with the help of a Receipt and Payment Account and some additional information.
You have also learnt about the treatment of various items of Income and Expenditure which
are peculiar to non-trading organizations. Let us use a comprehensive illustration to
demonstrate the preparation of complete final account of a non-profit organization. The
illustration will help you to review the preparation of Income and Expenditure Account and
Balance Sheet from the Receipts and Payments Account and additional information which
you studied in Study Session 13.
Illustration 14.4
The Receipts and Payments Account below, together with the additional information, was
extracted from the books of NDIGBO Social Club of Okija. You are required to prepare the
final accounts of the club for the year ended December 31, 2010.
Receipts and Payments Account for the year ending December 31, 2010
Dr Cr
Receipt N Payments N
Balance b/d 14,000 Tournament expenses 2,200
Donations for building 16,000 Furniture purchased 4,000
General Donations 400 Curtains 1,600
Legacies 12,000 Crockery 800
Sale of Old furniture Sport materials 2,400
(book value N160) 150 Salaries 2,600
Endowment Fund 20,000 Honorarium 5,200
Sale of Newspapers 800 Charities 16,000
Sale of old sports materials 160 Advertisement 500
Advertisement in the year 3,800 Rent and taxes 2,800

book
2,400 Advance for construction of
Proceeds of Concerns building
10,000
Entertainment Expenses
2,900
Subscriptions: Payment to creditors of last
year
2009 1,200
800
2010 28,000 Electric installation expenses 6,000
2011 1,600 Library books 1,600
30,800 Newspapers 2,600
Postages 1,400
Tournament Fund 3,000 Bar purchases & expenses 3,200
7% Investment purchase on
July, 2010
20,000
Balance c/d
16,910
103,510 103,510
Additional Information:
i) Balance on December 31,2010 N
Sports materials 200
Bar stock 240
Postage 40
Furniture 3,160
ii) Subscription outstanding on December 31, 2010 were N1,400 and salaries outstanding
on the same date were N1,000.
iii) Salaries paid included N160 for 2010 and N20 for 2010
iv) Investment included investments out of building donations N16,000
v) Furniture is to be depreciated by 10%.
NDIGBO Social Club of Okija
Dr Cr
N N
Loss of sale of furniture 10 General donations 400
Salaries 2,600 Sale of old Newspapers 800
Add Sal outstanding Sale of sport material 160
For 2008 100 Advert in the year book 3,800
2,700 Concert proceeds 2,400
Less Sal outstanding Subscriptions 28,000
For 2009 160 Add O/S Sub
Less Sal prepaid for 2011 40 2,500 for 2010 1,400 29,400
Honorarium 5,200 Interest on investment (7%

for 6 months on N4,000)
Charities 16,000 140
Excess of Expenditure over
Depreciation on furniture 700 Income
Advertisement 500 2,650
Rent and taxes 2,800
Entertainment expenses 2,900
Newspapers 2,600
Postage 1,400
Less stock 40 1,360
Bar purchases 3,200
Less bar stock 240 2,960
Sports material 2,400
Less stock 31.12.2008 200 2,200
39,750 39,750
Balance Sheet as at year ended December 31, 2010

Dr Cr
Liabilities N Assets N
Capital fund 17,400 Cash 16,910
Less Excess of 2,650 Furniture 7,160
Expenditure over income 14,750 Less sale 160
Endowment fund 20,000 7,000

Less depreciation 700
Bulding fund 16,000
Add Interest on 6,300

Crockery
Investment from 800
Curtains
building fund 560 16,560 1,600
Advance for construction of
Legacies 12,000 Building
Tournament fund 3,000 Electric Installations 10,000
Less Tournament Library Books 6,000
Expenses 2,200 Investments 1,600
800 Stock of sports materials 20,000
Subscription received in advance 1,600 Bar stock 200
Postage 240
Salaries outstanding 100 Subscription outstanding 40
Salaries paid in advance 1,400
Investment outstanding 20
advance (560 + 140)
700
65,810 65,810
Working Notes:
Balance Sheet as at year ended December 31, 2007
Dr Cr
Liabilities N Assets N
Capital fund Cash in hand 14,000
(balancing figure) 17,400 Subscription Outstanding 1,200
Creditors 800 Furniture 3,160
Salary Outstanding 160
18,360 18,360
Note: 1. Donation for building being donation for specific purpose has been credited to
Building fund and shown as such on the balance sheet.
2. Investment of N20,000 include N16,000 out of the Building fund. Hence, N650
of the income from investment (7% on N16,000 for 6 months) has been added to
the Building fund and the balance (N140) has been credited to Income and
3. The total amount of income from investments (N700) is outstanding and has
been shown on the balance sheet.
4. Legacies and endowment fund have been capitalized.
In Study Session 14, you learnt that:
(1) The non-trading concerns are societies, clubs, educational institution and hospitals.
(2) they also maintain a proper record of their financial transactions.
(3) The accounting records of the non-trading organizations are based on the same
principles as those applicable to trading organizations.
(4) The final accounts of non-trading organizations consist of (i) Receipts and Payments
(ii) Income and Expenditure Account and (iii) Balance Sheet.
(5) The Receipts and Payments is simply a summary of all cash transactions relating to the
accounting.
(6) The Income and Expenditure Account is like Profit and Loss Account in a profit
oriented organization. It is prepared for ascertaining the surplus (excess of income over
expenditure) or deficiency (excess of expenditure over income).
(7) The Balance Sheet is prepared in the usual manner which shows the assets and
liabilities of the organization including the Capital Fund.
Self- Assessment Questions for Study Session 14
1. State whether the following sentences are True or False
i) The non-trading organization mainly refers to welfare organizations

which function without profit.
ii) The major sources of income for non-trading organizations are

subscriptions and donations.
iii) The main objective of keeping accounts for non-trading organization is

to find out its profit or loss.
iv) Most transactions in case of non-trading organizations are cash
transactions.
v) Members Register is required for keeping full record of donations
received.
vi) Minutes Book records the timing of staff’s arrival and departure.
2. Fill in the blanks.
i) In Receipts & Payments Account, the payment are recorded on the

……… side.
ii) The closing debit balance in Receipts & Payments Account indicates
the ………balance at the end.
iii) Income & Expenditure Account is prepared on ……….. basis

iv) A credit balance of Income & Expenditure Account denotes excess of
………… over ……….
v) The Income & Expenditure Account is usually prepared with the help
of ………Account and some additional information.
vi) The opening balance sheet is prepared when the opening balance of
………..is not given.
3 Select the most appropriate alternative
a) Subscription received in advance are shown on the
i) credit side of the Income and Expenditure Account.
ii) liabilities side of the Balance Sheet.
iii) assets side of the Balance Sheet.
b) Subscription due but not yet received are shown
i) on the liabilities side of the Balance Sheet.
ii) on the assets side of the Balance Sheet.
iii) on the credit side of the Income and Expenditure Account.
c) For a non-trading organization honorarium is
i) income.
ii) an asset.
iii) an expense.
d) Entrance fees, unless otherwise stated, is treated as
i) a capital receipt.
ii) a revenue income.

iii) a liability.
e) Income from special fund investment is
i) added to the special fund.
ii) credited to Income and Expenditure Account.
iii) added to capital fund directly.
1 (i) True (ii) True (iii) False (iv) True (v) True (vi) False
2 (i) Credit Side(ii) Cash Balance (iii) Cash Basis (iv) Income Over Expenditure
(v) Receipt and Payment (vi) Statement of Affairs
3 (a) Liability Side (b) Asset Side (c) Expenses (d) Revenue (e) Credited to
Income and Expenditure Account
STUDY SESSION 15 INTRODUCTION TO COMPANY ACCOUNTS
Introduction
Generally speaking, business can be classified into three groups viz:
1. Sole Trader
2. Partnership
3. Company
Conceptually, all businesses are treated as being distinct from the owners, (entity concept)
but in law the sole trader and partnership types of businesses are treated as the same as the
owners. It follows, therefore, that in case of the insolvency of these businesses (sole trader &
partnership) the owners are fully liable for the debt of their businesses to the extent of their
personal properties except in the case of Limited partners. In this Study Session, we shall
discuss theoretical framework of company formation and issue of shares.
Learning Outcomes
15.1 state the meaning of a Company

15.2 describe the types of companies and the relevant sections of the law that guides their
operation
15.3 describe the types of shares and methods of issuing the shares
15.4 describe the different types of share capitals
15.5 explain the different types of share prices
15.6 explain the procedure for issuing shares and their accounting entries.
15.1 Meaning of Company
A company can be described as coming together of two or more persons through the pooling
together of their resources in terms of capital for the purpose of doing business together. The
Law recognizes this association and regulates their activities. The law provides that any
association called company with limited liability is separate from the owners of the business
and that their liabilities are limited to the amount yet to be paid in respect of their shares (if
any).
The law that governs the activities of the companies in Nigeria is called Companies and
Allied Matters Act 1990 (CAMA, 1990).
15.2 Types of Companies and the appropriate laws
Private companies and Public companies are the two major types of companies. These major
types together with the relevant sections of the laws are discussed below.
15.2.1 Private Company (SEC. 22 CAMA, 1990)
In addition to the fact that the Memorandum of Association must state that it is a private
company, the following are its features:
Membership: Minimum shareholders – two, and fifty as the maximum (excluding the
employees of the company.
- Its shares cannot be transferred.
- Cannot invite members of the public to subscribe to its shares

or debenture.
- Its name must end with the Word “Ltd”
- Its minimum authorized share capital is N10,000.
15.2.2 Public companies (sec. 24 CAMD 90)
Any company having the following peculiarities is called a public company.
- Minimum of two members but no maximum.

- Minimum authorized share capital N500,000
- Can invite members of the public to subscribe to its shares and debenture.
- No restriction on transfer of shares.
- Its name must end with the word “Plc”.
What are the features of a Private Company?
The features of a Private Company are that
 The Company‟s shares cannot be transferred.

 The company cannot invite members of the public to subscribe to its shares
or debenture.
 The name of the company must end with the Word “Ltd”
15.3 Types of Shares and the methods of issues
There are various types of shares but our discussion will be limited to Preference and
Ordinary shares.
15.3.1 Preference Shares
These shares are entitled to a fixed rate of dividend which can be paid before any other
classes of shares. This means that they have a preferential right. They do not usually have any
voting right in the company’s general meeting, but S. 122 CAMD 1990 allows any Company
Limited by shares to issue preference shares subject of provisions of S.158.
Preference shares could be cumulative, participating or redeemable (see details in Module 8)
15.3.2 Ordinary Shares
These belong to the true owners of the company because they bear all the risks involved in
owning the company. Literally, they own all the profits left in the business after all prior
interests have been satisfied.
15.3.3 Methods of Issuing Ordinary Shares
15.3.4 Offers for Sale by Tender
It is often very difficult for the issuing house to decide upon the right price at which shares
should be offered to the general public. If the issue price is too low then the issue will be
oversubscribed and not only will the company lose out in so far as it will receive less than it
should have done, but it has to bear increased admission costs resulting thereof. If the issue
price is too high, the issue will be under subscribed and confidence in the issuing house and
in the company will be reduced. One way of trying to ensure that the issue price reflects the
value of the shares as perceived by the market is to make an offer for sale by tender. Under
this method, a minimum price will be fixed and subscribers will be invited to tender for
shares at price equal to or above the minimum price. The shares will be allotted at the highest
price at which they will all be taken up. This is known as the striking price.
15.3.5 Placing
When it is unlikely that an offer for sale will be fully subscribed, the Stock Exchange may
allow a limited number of shares to be sold after which all the shares of the company if
previously unquoted will then be marketable. A placing is an arrangement where the shares
are not offered to the general public but are placed i.e., offered and sold privately to a number
of institutions, such as pension funds, and insurance companies. The placing will be made on
behalf of the company by an issuing house (Merchant Bank) or stock brokers. The Stock
Exchange will still require that the shares of the company must have a ready market for both
buyers and sellers so that if an unquoted company uses a placing to obtain a quotation, some
of the shares must be made available to stock jobbers.
15.3.6 Offers for Sale
In an offer for sale, the company issues all of the securities to an issuing house which in turn
publishes a prospectus inviting the public to purchase from it at a slightly higher price. This
method is more common than offer for subscription and there is no risk for the company.
This enables the issuing house to assign its right to membership by signing forms of
enunciation in favour of purchases.
15.3.7 Offers for Subscription
The company makes direct offer to the public by publishing a prospectus inviting
applications for subscription. The company will have to bear the risk if issue becomes
unsuccessful, and will have to arrange to have it underwritten. The issuing houses that are
assisting the company will probably only appear in the prospectus as an underwriter or an
agent.
15.3.8 By Rights Issue
Where a company has been in existence for some time, it may want to increase its share
capital by giving the present owners the right to purchase the shares at favourable prices.
Those who do not want to own further shares can sell their rights.
15.3.9 Reasons for Issuing Shares
Shares are issued for the purpose of obtaining capital for the operation of the business. Shares
may be issued by a new company as part of the post-incorporation floating proceedings or by
an existing company increasing its issued share capital.
(1) Shares are normally issued by different companies. You are required to justify
the issue of shares.
Outline 4 Methods of issuing shares.
(1) Shares are issued for the purpose of obtaining capital for the operation of the
business. Shares may be issued by a new company as part of the post-incorporation
floating proceedings or by an existing company increasing its issued share capital.
(2) 4 Methods of issuing shares are :
(i) Offers for Sale by Tender
(ii) Offers for Subscription
(iii) Placing
(iv) Right issues
15.4 Types of Share Capital
The total shares issued as discussed above put together are referred to as Capital. There are
different types of capital. The different types of capital will be discussed in this segment of
the study session.
15.4.1 Authorized Share or Nominal Share Capital
This is the amount the company has obtained permission to issue in its memorandum and
articles of association. Stamp duty is paid on the whole amount and the amount
cannot be increased unless a special resolution to that effect has been passed.
15.4.2 Issued Share Capital – This is the nominal value of the shares that have been allotted
to members.
15.4.3 Called Up Capital – This is the proportion of the issued capital that the directors
have actually called up. What this means is that the directors have given notice to
share holders to pay up the fraction of the issued price required at that moment.
15.4.4 Paid Up Capital – This is a fraction of the called-up capital for which actual cash has
been received. The consideration is usually but not necessarily in cash.
15.5 Share Prices
Shares can be offered for sales at various prices just like any other goods. The prices at which
share could be offered include:
1. Nominal value i.e. at par.

2. Premium
3. Discount
These prices are discussed below.
15.5.1 Shares Issued At Par
All shares have nominal values. These are the values which the companies have stated in
their articles of association, based on their power to denominate their shares. Thus in their
authorized share capital, the values of the shares are given as such, e.g. shares of N1 each or
N2 each.
When shares are issued at par, in order to record the issue of shares, it is necessary to open
books to show: Allotment of shares, Calls made on shares and Transfer of shares.
15.5.2 Shares Issued At A Premium

This means issuing a shares for a price more than its par value. CAMA stipulates that where a
company issues share at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount of the value of the premium on those shares shall be transferred to an
account to be called “the share premium account”. The balance on the share premium account
can be applied as follows:
i. to pay up unissued shares for distribution to members as bonus shares;
ii. to write off the preliminary expenses of forming the company;
iii. to write off expenses of issuing shares and debentures;
iv. to write off commissions paid and discounts allowed on shares and debenture; and
v. to provide the premium payable on redemption of redeemable debenture and under

limited circumstances of redeemable shares.
Explain the term „Issue at Par‟
When shares are issued, they are issued at a price. When shares are issued at the
price stated in the Memorandum and Articles of Association, it is said to be issued at
par. Thus, the authorized share is the norminal value and when it is issued at the
exact price, it is said to be “Issued at Par.”
Illustration 15. 1
On January 1, 1990, BEN PLC with a registered share capital of 50,000 ordinary shares of
N1 each, of which 30,000 shares had already been issued and fully paid, decided to offer, for
public subscription, the remaining 20,000 shares at premium of 20k per share. This was to be
paid as follows:
30k per share on application
40k per share on allotment (including premium)
30k per share – 10th March
20k per share – 10th May
You are required to make necessary in the books of accounts.
Solution to illustration 15. 1
Premium on shares
Jan. 25 Application &
Allotment 4,000
Application & Allotment
N N
Jan 25 Cash 120 Jan. 25 Cash 6,120
25 Ordinary share capital 10,000 Feb. 10 Cash 8,000

25 Premium on shares 4,000
14,120
14,120
First call
N N
Mar.10 Ordinary share
Capital 6,000 Mar. 10 Cash 6,000
Second and final call
N N
Mar.10 Ordinary share 4,000 Mar. 10 Cash 4,000
Balance Sheet as at May 31 19-- (Extract)
N N
Authorized & Issued Capital
50,000 Ordinary shares of Asset 30,000
each fully paid 50,000 Bank 24,000
Capital Reserve:
Premium on shares 4,000
54,000 54,000
15.5.3 Shares Issued At a Discount
The Company Decree stipulates that it shall be lawful for a company to issue shares at
discount i.e., a price lower than the par value provided that:
i) the issue of the shares at a discount is authorized by resolution passed in
a general meeting of the company; and thereafter is sanctioned by the law court;
ii) the resolution specified the maximum rate of discount at which the
shares are to be issued;

iii) not less than one year has at the date of issue elapsed since the date on which the
company was entitled to commence business; and
iv) the shares to be issued at a discount are issued within one month
after the date on which the issue is sanctioned by the court or within
such extended time as the court may allow.
Illustration15. 2
Limited Liability Company with a registered capital of 30,000 Ordinary shares of N1 each,
20,000 of which had already been issued and fully paid, decides to issue the balance at a
discount of 10% payable to 20k per share on application, 40k per share on allotment and the
balance on first call.
Show the necessary accounts.

JOURNAL
N N
Application & Allotment Dr. 6,000 6,000
Ordinary share capital
20k per share on application
40k per share on allotment of 10,000 shares
made this date
First & Final call Dr. 3,000 4,000
Discount on Ordinary shares Dr. 1,000
Call of 30k per share on 10,000 shares with
10% discount made this date
N N
Balance c/d 30,000 Balance 20,000
Application & Allotment 24,000
First and final call 3,000
Discount on Ordinary shares 1,000
30,000 30,000
Balance b/d 30,000

Application & Allotment
First call
N N
Ordinary share capital 3,000

Cash 3,000
N N
Ordinary share capital 6,000 Cash 2,000
Cash 4,000
6,000 6,000
Discount on ordinary shares
N
Ordinary share capital 1,000
The discount on shares is a loss to the company; a loss sustained in raising capital and
therefore a capital loss. This loss is often shown as a debit balance on the right hand side of
the Balance sheet under Fictitious Assets until written off, and is often written off to the
Profit and Loss Appropriation Account over a number of years or set against a Share
Premium Account if any.
15.6 Accounting entries for Issue of Shares and Payable by Installment
When shares are issued, the purchase price may be payable in full on application or in
a series of installments named in sequence as follow:
a. Application.
b. Allotment.
c. First call.
d. 2nd call etc.
The premium payable if any is usually included with the allotment monies. The amount and
time interval between installments is governed by the company’s articles of association or
where these are silent on those points by Company Act.
15.6.1 Accounting entries on issue of shares by installments
a. On request for application
Dr share application account
Cr share capital amount

b. Receipts of application monies
Dr bank
Cr share application account
c. Rejection of application monies
Dr share application account
Cr bank
d. Retention or surplus application monies
Dr share allotment account
Cr share capital
e. Allotment of shares
Dr share allotment account
Cr share capital
Cr share premium (if applicable)
f. Further calls
Dr 1st call etc
Cr share capital
g. Call monies received
Dr bank
Cr call account.
If shares are oversubscribed the excess applications may be returned with letters of regret or
the shares allotted may be scaled down pro-rata and the surplus application monies held over
on account of allotment or a combination of these methods may be used.
Illustration 15.3
A company OMOT PLC made an issue of 100,000 Ordinary shares of N2.00 each at par
payable as follows
On Application 25k
On Allotment 25k
On first call N1.00
On second call 50k
Journalize the issue, assuming the precise number of 100,000 shares was applied for and all
payments made on due dates.
The only requirement at this point is that some money should have been received when the
application for the shares was made. When the shares have been allotted, a further sum is
paid, and later, when two call amounts will be paid.
The journal entries including cash would be as follows:
N N
Cash Dr. 25,000 25,000
To Application & Allotment A/C
The amounts are derived as follows:
100,000 shares at 25k = N2,500

Application & Allotment A/C Dr 5,000
To share capital 5,000
Found as 100,000 × 50k = N50,000 which is the sum of the amount due on application and
allotment. Note, as was explained before, the share capital a/c does not come in until the
allotments have been made.
Cash Dr 2,500
To Application &Allotment a/c 2,500
being amount received on 100,000 ordinary
shares at 25k per share.
First call A/C Dr 100,000
To share capital 100,000
Cash Dr 100,000
To First call a/c 100,000
Second and Final call a/c Dr 50,000
To share capital a/c 50,000
Cash Dr 50,000
To Second and Final call a/c 50,000

Note that the last call is described as the “Final” call. Thus if four are made the last one
would be “Fourth and Final call” and if three, “Third and Final call”.
15.6.2 Call-in-Advance:
Some shareholders prefer to pay their installment before they have been called. This is
referred to as call in Advance. Bank is debited and a call in Advance is credited. This account
is debited when the call is made and the appropriate account credited.
15.6.3 Call-in-Arrears:
Conversely, some shareholders may find it difficult to pay their calls when due. This is
termed as call in Arrears.
The ledger accounts to record the issue are as follows:
Cash Account
N N
Application & Allotment 25,000 Balance C/d 200,000
Application & Allotment 25,000
First Call 100,000
Second & Final call 50,000
200,000 200,000
Application & Allotment Account
N N
Share capital 50,000 Cash 25,000

Cash 25,000
50,000 50,000
Application & Allotment Account
N N
Ordinary share capital 40,000 Bank 48,000
Call-in-Advance 8,000 Call in Ad. 8,000
Share premium 60,000 Forfeited shares 240
Bank (Premium) 59,640
Share premium 360
148,000 148,000
First call Account
N N
Ordinary Share 60,000
Bank 59,040
Fortified shares 600
Fortified share 360
60,000
60,000
Call in Advance
N N
Application & Allotment 8,000 Application & Allotment 8,000
8,000 8,000
Second call Account
N N
Fortified shares 600
60,000 60,000
Share premium Account
N N
Application & Allotment 360 Application & Allotment 60,000

Balance c/d 59,640
60,000 60,000
15.6.4 Forfeiture and Reissue of shares.
After due formalities have been observed, the directors may declare ands forfeit any shares in
which the call are in arrears. These shares may subsequently be re-issued at any price
provided that, in combination with the payment already made, the total receipts on these
shares do not fall below par value.
DR share capital a/c with full amount
CR forfeited shares a/c called up on share
DR forfeited shares a/c with amount of
CR calls a/c unpaid calls
Illustration 15. 4
CARS AND CARS PLC has an authorized capital of 2,600,000 ordinary shares of N9.00 per
share of which 2,000,000 shares have been issued at par and fully paid. In order to finance an
expansion programme, CARS & CARS PLC issued the remainder of its shares capital at
price of N2.00 per share payable as follows:
Application 0.25
Allotment (including premium) 1.25
1st call 0.30
Final call 0.20

Applications were received for 900,000 shares of these, 200,000 were rejected and the money
repaid to the applicants. The remainders were allotted pro-rata on a 6 for 7 basis and the
surplus application money was carried forward to allotment account. The calls were duly
made and the sum received except the holder of 2000 shares paid then final call along with
the 1st call add a holder of 4000 shares failed to pay alter calls.
After the formalities had been concluded, these shares were declared as forfeit but were
subsequently re-issued to another applicant in payment of N0.75 per shares.
Required
1. Post the relevant accounts in CARS AND CARS ledger to record the above
transactions.
2. Show an extent of entries which would appear in the Balance sheet.
Application Accounts
N N
Allotment 25,000 Bank 225,000
Ordinary share 150,000
Sundry member 50,000
225,000 225,000
Allotment Accounts
N N
Ordinary share 150,000 Application 25,000
Share premium 600,000 Bank 725,000
750,000 750,000
Sundry member
N N
Bank 50,000 Application 50,000
50,000 50,000
1st call
N N
Ordinary share 180,000 Bank 178,000
Call in arrear 1,200
180,000 180,000
Call in Advance
N N
Final call 400 Bank 400
400 400
Final Call
N N
Ordinary shares 120,000 Call in Advance 400
Bank 118,800
Call in Arrear 800
120,000 120,000
Forfeiture Account
N N
Call in Arrear 2,000 Ordinary shares 4,000
Profit & Loss A/c 2,000

4,000 4,000
Profit and loss in Re-issue
N N
Re-issued shares 1,000 Forfeited shares 2,000
Share premium 1,000
2,000 2,000
Share premium Account
N N
Bal c/d 601,000 Allotment 600,000
P& L on Re-issue 1,000
601,000 601,000
Ordinary Shares Account
N N
Forfeited shares 4,000 Bal b/d 2,00,000
Bal c/d 2,600,000 Application 150,000

Allotment 150,000
1st call 180,000
Final call 120,000
Share Re-issue 4,000
2,604,000 2, 604,000
Bank Account
N N
Application 225,000 Sundry member 50,000
Allotment 725,000 Bal c/d 1,201,000
1st call 178,800
Call in Advance 400
Final call 118,800
Share Re-issue 3,000
1,251,000 1,251,000
Balance sheet (Extract)
N N
Authorized share Current Asset
2,600,000 at N 1 2,600,000 Bank 1,201,000
Issued share
2,600,000 at N1 2,600,000
Share premium 601,000
15.6. 5 Bonus issues
Companies sometimes capitalize part of their reserve by making a bonus issue to their
existing shareholders. Share premium account may be utilized for this purpose. The
accounting entries are that the reserve(s) concerned are debited and Bonus Dividend Account
is credited. This latter account is then debited and ordinary share capital is credited.
15.6.6 Right issues
This is the issue of shares to the existing shareholders in proportion of their holding at a price
less than market value.
The accounting entry is the same with shares offered for public sale.
Debit cash/ Bank A/c
Credit ordinary share A/c with Nominal value
Credit share premium A/c with premium
 A company means the pooling together of different people’s resources for the purpose of
business, that such association is regulated by law and that the relevant law in Nigeria is
Company and Allied Matters Act, 1990;
 there are two major types of Company namely: Public and Private Company;
 there are various types of shares and various methods of issuing shares were discussed;
and
 a company prepares accounts for the Issue of Shares and methods of Payment by
Installments.
Self-Assessment Questions for Study Session 15
1. Akoka Plc. Invites applications for 200,000 ordinary shares of N1.00 each payable:
Application 13K
Allotment 37k
1st Call 25k
2nd & Final call 25k
All shares were fully subscribed except an applicant who did not pay the allotment money for
200 shares. The shares were forfeited prior to the first call money becoming due. After the
calls have been made, the forfeited shares were re-issued at par.
Prepare the relevant ledger accounts to record the above transactions and a balance sheet
immediately after the transaction.
2. Elders Plc invited applications for 200,000 shares of N1 each at a premium of 30k per
share as follows:
On application on 1st November, 1998, 20k on allotment on 10th November, 1998, 50k
including the premium. First and second calls of 30k each were respectively made on 20th and
25th November, 1998.
Application was received for 240,000 shares. Allotment was made of 200,000 shares pro-rata
to all applications and the balance of the applications money was credited towards the amount
payable on allotment
One application who has been allotted 1,200 shares did not pay allotment or the first call and
the directors decided to forfeit the shares and re-issue all of them at 45k each after the first
call.
Other shareholders who had been allotted 2,000 shares did not pay either of the two calls and
the directors then forfeited the shares. Of these shares 1,200 of it was reissued as fully paid at
price of 90k per share after the final call.
You are required to show the necessary accounts to read the above transactions. Show the
abridged balance sheet after the completion of the above.
REFERENCES
Agyeman, E.D. and Brindley A.W. (1978). The Basis of Accounting London: McGraw-Hill
Book Company Ltd. 93 -101.
Akeju, J. B. (2003). Financial Accounting, Vol. 1, JBA Associate Ltd, Lagos, Nigeria
Akinbuli. S. F. (2009). Financial Accounting: Principles and Application, Lawal MUsco
Com.Press, Lagos, Nigeria.
Brown, J. L. and Howard, L. R. (1984). Managerial Accounting and Finance, 4th ed.
Macdonald and Evans Ltd, Plymouth.
Frank Wood and Sangster, A. (2002). Business Accounting, 9th ed. Vol. 1 Pearson Education
Ltd, London.
Frank Wood and Sangster, A. (2002). Business Accounting, 9th ed. Vol. 2 Pearson Education
Ltd, London.
Igben, Robert O. (2009). Financial Accounting Made Simple, (3ed), 2009, 10-20
Joel L. Lerner, James A. Cashin (1999). “Principles of Accounting New York”: McGraw –
Hill Companies Inc. 335 -340.
Omolehinwa Eddy O. (2000). “Foundation of Accounting Lagos”, Pinmark Nigeria Limited.

pp 115 -122.
Odunsi et al (1989). Bookkeeping and Accounting, Lagos, Nelson Publishers Ltd. 8-40, 85-
95.
Marshal (1997). Mastering Bookkeeping, London, How To Books Ltd. 99 - 103.
Sholola, Bams (2010). Facts of Basic Accounting Manual. (3ed) 25-32

Acc 210 - Principles of Accounting - pdf-1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acc 210 - Principles of Accounting - pdf-1

Uploaded by

Copyright:

Available Formats

STUDY SESSION 1 INTRODUCTION TO ACCOUNTING

Learning Outcomes for Study Session 1

When you have studied this session, you should be able to :

1.1 explain the history and the development of Accounting

1.2 define Accounting and Book-keeping

1.3 outline the branches of Accounting

1.4 explain the importance of Accounting in any economy.

1.1 History and the Development of Accounting

ITQ for 1.1

(ITQA for 1.1)

1.2 Definition of Accounting and Book-keeping

1.2 .1 What is Book-keeping?

Book keeping is an aspect of accounting as arithmetic is part of mathematics, so the main

1.2.2 What is Accounting?

ITQA for 1.2 learning outcome 1.2

1.3 Branches of Accounting

Accounting can be classified in various ways. This includes accounting as an information

Let us briefly look at the first three classifications:

 ACCOUNTING AS AN INFORMATION PROCESSING SYSTEM

ITQA for 1.3

Accounting can be classified as Public Accounting, Private Accounting, Government

1.4 Importance of Accounting in an Economy

ITQ for 1.4

Enumerate four reasons why accounting is considered to be very important in an

ITQA for 1.4

Accounting is considered to be very important in any economy based on the following

 It is a tool for decision making process.

1.5 Users of Accounting Information

The following are users of financial information:

ITQ for 1.5

ITQA for 1.5

1.6 Purpose of Preparing Financial Statements

Financial statements are prepared to:

State five reasons why financial accounting is prepared.

ITQA for 1.6

Financial accounting statements are prepared to:

In study session 1, you have learnt:

Self- Assessment Questions for Study Session 1

You are required to state whether this statement is TRUE or FALSE:

1) Define the term „Book-keeping‟.

Learning Outcomes for Study Session 2

2.2 describe various bases of accounting;

2.4 evaluate correctly whether an expenditure/receipt is of a capital or revenue nature.

2.1.1 Lists of Concepts

(a) Going Concern Concept

(b) Accounting Period (Periodicity) Concept

(c) Matching Concept

(c) Conservatism (or Prudence) Concept

(d) Consistency Concept

(e) Full Disclosure Concept

(f) Materiality Concept

Let us discuss each of the concepts in detail.

ITQ for study session 2 learning outcome 2.1

(2) What is the implication of applying or not applying Consistency Concept?

ITQA for study session 2 learning outcome 2.1

(ii) Going Concern Concept.

Businesses operate with the intention of continuing indefinitely or at least for a

2.2 Bases of Accounting

2.3 Capital and Revenue

2.3.1 Distinction between Capital and Revenue Expenditure

2.4 Treatment of various expenditure

2.4.1 Deferred Revenue Expenditure: Sometimes, certain expenditure which is normally

a) Expenditure incurred on advertising campaign to introduce a new product in the