1
Principles of
Accounts
CSEC
Ms Fergusson
2
ST. MARY’S COLLEGE CSEC REVISION NOTES TABLE OF CONTENTS PAGE INTRODUCTION TO ACCOUNTING 3 ACCOUNTING CONCEPTS AND CONVENTIONS 4 INTRODUCTION TO THE BALANCE SHEET 5 SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET 9 ACCOUNTING CYCLE 10 JOURNALS 12 LEDGERS 17 TRIAL BALANCE 22 CORRECTION OF ERRORS 23 ADJUSTING ENTRIES 24 FINAL A/CS OF SOLE TRADERS 28 CONTROL SYSTEMS 30 BANK RECONCILIATION STATEMENT 32 CONTROL A/CS 35 SUSPENSE A/CS & CORRECTION OF ERRORS 38 FINAL A/C FORMATS 43 RATIO ANALYSIS 63 INTRODUCTION TO ACCOUNTING
The Purpose of Accounting :

Definition of accounting
o Accounting is the process of classifying, summarizing, recording, interpreting and communicating
financial information.







Identifying: Establishing the essential characteristics or features of.
Classifying and summarizing: sorting out data in a useful order.
o To Classify - to arrange or place items into categories or groups.
o To Summarize – To create a short description that gives the main facts in a condensed form.
Measuring: placing a value; assigning numbers; determining the size
Recording: make an official note of in writing, printing, or such.
Interpreting: explain the meaning of something in clear, understandable terms.
Communicating / Reporting: Presenting data to stakeholders like internal management and external users.
The purpose of accounting
o The purpose of accounting is to provide information about financial situation of an organization, so that
informed decisions can be made.

Difference between accounting and bookkeeping
o
o
Definition of Bookkeeping – Bookkeeping is the recording of the accounting of a business.

Bookkeeping consists of entering transactions into the journals, making adjustments, maintaining precise and
accurate records, and preparing reports that keep management up to date on the financial condition of their
company.

Bookkeeping is, therefore, a part of accounting, the part concerned with recording information and
preparing accounts. Accounting involves interpreting the information recorded by the bookkeeper, and
preparing reports in a way that management can use for decision making.
Accountants are responsible for the design and management of the financial systems that bookkeepers use.



They prepare monthly financial statements and tax returns at year end.
Accountants may also prepare budgets for management and loan proposals for bankers;
They may also perform cost analysis for the company’s products or services.
Users of Accounting :

The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities
Internal Users
o
o
o
Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources
Management: - need to know profitability & liquidity of business - decision-making
Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.
External Users
o
o
o
Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment
The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans
Suppliers – credit sales
The Types of Business Organizations :

The various forms of business organizations are:





Sole Trader: 1 owner
Partnership: 2 – 20 owners / partners
Limited Liability Companies
o Private Limited Companies: 2 – 50 owners / shareholders
o Public Limited Companies: 7 – unlimited owners / shareholders
Cooperative Societies (purpose is furthering the economic welfare of its members): open membership
Non-Profit Organizations
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4
Accounting Concepts and Conventions
Accounting Concepts and Conventions are the accounting rules that are followed when recording
transactions in the books.
ACCOUNTING CONVENTIONS
These are the rules that standardize the
accounting methods used to assure that
similar items are dealt with in similar ways.
ACCOUNTING CONCEPTS
The rules that state how transactions are to be recorded.
The Cost Concept
The Money Measurement Concept
states that assets are valued and shown in the
accounts at their cost price (the amount asset is
purchased for).
states that only transactions that can be measured
in monetary terms should be recorded in the books.
The Going Concern Concept
states that the business is assumed to be in
operation in the foreseeable future.
The Business Entity Concept
states that the items recorded in the business’
books are transactions that affect the business
(business transactions).
The owner (s)’ private transactions are kept
separate from business transactions.
The Realization Concept
(Revenue Recognition Concept)
states that revenue is realized/recognized/earned
and recorded as revenue when the goods or
services are passed to the customers and a liability
is incurred.
It is NOT based on when cash has been received.
The Accrual Concept
(Matching Concept)
states that the expenses incurred or used up in an
accounting period must be matched to the revenues
earned in that period, and therefore, recorded in the
accounting period incurred.
The Dual Aspect Concept
states that there are two aspects of accounting, and
both aspects are always equal to each other.
Assets must always equal Capital plus Liabilities
(Accounting Equation).
“Double entry” is the method of recording the
transactions for the dual aspect concept.
Materiality
states that only relevant information, which has the
ability to influence decisions, is reported. Small
amounts are not considered material and may either
not be reported, or do not have to follow accounting
concepts.
Prudence / Conservatism
Consistency
states that, in times of uncertainty, the figure that
understates profit should be reported, rather than
the figure that overstates profit.
Expenses should be overstated rather than
understated, and revenue should be understated
rather than overstated.
states that the same method should be used for the
accounting treatment of similar items, and the same
method should be used from year to year. If the
method is changed, the change should be
disclosed.
INTRODUCTION TO THE BALANCE SHEET
The Five classes/categories of Accounts :

ALICE: Assets, Liabilities, Income, Capital, and Expenses.
A – Assets
L – Liabilities
I – income / Revenues
C – Capital / Owner’s Equity
E – Expenses
•
Assets
Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business. Simply, they are a company’s resources i.e. things the
company owns.
•
Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They are
the debts of the business i.e. amounts the business owes.
•
Income
Income / revenues are amounts earned during the accounting period from the daily operations of the
business. Simply, they are what the business earns for providing goods and services.
•
Capital / Owner’s Equity
Capital is the economic resources that were contributed by the owner(s) of the business to the
business, either to start the business or to continue its operations.
•
Expenses
Expenses are the costs incurred by a business in its daily operations in earning income. In other words,
they are the cost of assets used by the business to generate revenues.
A company’s financial position
The financial position of a company is measured by:
1. Assets (what it owns)
2. Liabilities (what it owes to others)
3. Capital / Owner’s Equity
N.B. Every business transaction will have an effect on a company’s financial position.
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6
INTRODUCTION TO THE BALANCE SHEET
The Balance Sheet and its major components :

Definition of Balance Sheet
•
•

The Balance sheet is a financial statement that is produced in order to show the financial position of
the enterprise shows
It is produced in order to show the assets of a business in relation to its liabilities and capital at a
particular point in time.
The major components of the Balance Sheet
The financial position of a company is measured by:
1. Assets (what it owns)
2. Liabilities (what it owes to others)
3. Capital / Owner’s Equity
Assets, Liabilities and Capital are, therefore, Balance Sheet accounts
•
Assets
 Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business.
 There are two types of assets:
•
o
Fixed Assets: assets used to carry on the business and generate profit.
They are not purchased for resale but intended to be retained permanently for the purpose of
carrying on the business
e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.
o
Current Assets: assets consisting of cash and other assets that would be consumed or easily
converted into cash within one year.
Liabilities
 Liabilities are economic resources borrowed by a business from a person or organization. They
are the debts of the business (the money owed by the business).
 There are two types of liabilities:
•
o
Long Term Liabilities: These are any debts or obligations owed by the business that are
due more than one year from the current date e.g. Mortgages, Bank Loans etc.
o
Current Liabilities: These are any debts or obligations owed by the business that are due
within one year from the current date e.g. Creditors (suppliers, short term loans), bank
overdrafts etc.
Capital / Owner’s Equity
 Capital is the economic resources that were contributed by the owner(s) of the business to the
business, either to start the business or to continue its operations.
 Capital is considered a special kind of liability. It is a loan by the owner to the business and is,
therefore, money owed by the business to the owner.
N.B. For accounting purposes, a business is regarded as being a separate entity from its
owner(s).
(the business entity concept)
7
INTRODUCTION TO THE BALANCE SHEET
The Accounting Equation :
The Accounting Equation (also called the balance sheet equation.)
•
•
•
The Accounting Equation is the basic equation of double entry accounting that reflects the relationship
between a company's assets, liabilities, and equity.
It shows how assets were financed: either by borrowing money from someone (liability) or by paying your
own money (ownership equity).
It is expressed as:
Assets = Liabilities + Capital
The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.
Additional Information
The Expanded Accounting Equation :
o
The expanded accounting equation includes two components of Closing Capital: Revenue and Expenses

Revenue – Expenses = the business’ Profit or Loss


If Revenues > Expenses, there is a Profit
If Revenues < Expenses, there is a loss

The owner of the business also has the option to withdraw capital from the business for personal use: Drawings

The expanded accounting equation is, therefore:
Assets = Liabilities + Capital + Revenues – Expenses – Drawings
o
o
o
Revenues increase Capital / Owner’s Equity
Expenses decrease Capital / Owner’s Equity
Drawings decrease Capital / Owner’s Equity
The Simple Balance Sheet :
o
An elaborate form of the Accounting equation is presented in a Balance Sheet, which lists all assets, liabilities, and
equity, as well as totals to ensure that it balances.
The Format of a simple Balance Sheet (Horizontal)
Balance Sheet as at
$
Assets
X
$
Capital
X
Liabilities
X
XX
XX
Balance Sheet as at
$
$
Fixed Assets
X
Capital
X
Current Assets
X
Long Term Liabilities
X
Current Liabilities
X
XX
XX
8
INTRODUCTION TO THE BALANCE SHEET
The Balance Sheet – Arrangement of Assets and Liabilities
The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in
the balance sheet is called 'Marshalling of assets and liabilities'. There are two systems of arrangement of assets and liabilities
in the balance sheet:
(a) Order of Liquidity.
(b) Order of Permanence.
The Balance Sheet – Order of Permanence:
PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life.
ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e.
land first, then buildings, then equipment etc).
Balance Sheet as at
$
$
Fixed Assets
X
Capital
X
Current Assets
X
Long Term Liabilities
X
Current Liabilities
X
XX
XX
The Balance Sheet – Order of Liquidity:
LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss
ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current
assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…).
Balance Sheet as at
$
$
Current Assets
X
Current Liabilities
X
Fixed Assets
X
Long Term Liabilities
X
Capital
X
XX
XX
N.B. The most permanent assets are the least liquid.
Assets and Liabilities in Order of Permanence and Liquidity :
FIXED ASSETS
CURRENT ASSETS
Order of
Permanence
Order of
Liquidity
Order of
Permanence
Order of
Liquidity
Land
Buildings
Machinery
Equipment
Motor
Vehicles
Motor
Vehicles
Equipment
Machinery
Buildings
Land
Land
Buildings
Machinery
Equipment
Motor
Vehicles
Motor
Vehicles
Equipment
Machinery
Buildings
Land
LONG TERM LIAB.
Order of
Permanence
Mortgage
Bank Loan
due in over
a year
Order of
Liquidity
Bank
Loan due
in over a
year
Mortgage
CURRENT LIAB.
Order of
Permanence
Order of
Liquidity
Creditors
Bank
Overdraft
Bank
Overdraft
Creditors
9
VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER
Owner’s Name
Balance Sheet as at _________
$
$
$
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Fixtures & Fittings
Motor Vehicles
X
X
X
X
X
CURRENT ASSETS:
Stock
Debtors
Bank *
Cash
Total Current Assets
LESS: CURRENT LIABILITIES
Bank Loan (1yr or less)
Creditors
Bank overdraft *
Total Current Liabilities
X
X
X
X
X
X
X
X
(X)
WORKING CAPITAL
X
XX
FINANCED BY:
CAPITAL:
Opening Capital
Add: Net Profit OR Less: Net Loss
Less: Drawings
Closing Capital
X
X OR (X)
X
(X)
X
LONG-TERM LIABILITIES
Mortgage
Bank Loan (more than 1 year)
Total Long Term Liabilities
X
X
X
XX
10
Principles of
Accounts
ACCOUNTING CYCLE
Ms Fergusson
11
Accounting Cycle
The accounting cycle is a series of steps for recording each transaction in the accounting
process, which are repeated every accounting period.
NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the
cycle is done at the end of a period.
Categories and Types of Accounts
Categories of Accounts
Types of Accounts
A
Assets
Personal Accounts – Debtors and Creditors
L
Liabilities
Real Accounts – Assets & Liabilities I
Income / revenue
Nominal Accounts – Revenue and Expenses
C
Capital
E
Expenses
12
Journals (Books of Original Entry)
Transaction Journal ALL CASH / CHEQUE TRANSACTIONS
Capital: investment by owner
Cash Book
Receipt from Loans and repayment of Loans
Cash Book Purchase / Sale of Fixed Assets for cash or cheque
Cash Book Purchase of Stock with cash or cheque (Cash Purchases)
Cash Book Sale of Stock for cash or cheque (Cash Sales)
Cash Book Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc.
Cash Book Payment of creditors (suppliers) the amount owed to them
Cash Book Receipt of income/revenue e.g. interest received, rent received, etc.
Cash Book Receipt of cash/cheque from debtors (customers) the amount owed by them
Cash Book Drawings: money withdrawn from business for personal use
Cash Book Discounts Received and Discounts Allowed
Cash Book CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS
Purchase of Stock on credit (Credit Purchases)
Sale of Stock on credit (Credit Sales)
Sales Returns / Returns Inwards
Purchases Returns / Returns Outwards
Purchase / Sale of Fixed Assets on credit
Purchases Journal
Sales Journal Ret. Inwards Journal Ret. Outwards Journal General Journal TRANSACTIONS ENTERED IN THE GENERAL JOURNAL
Transactions that are entered in the cash book are also entered in the GJ
Capital: investment by owner
General Journal
Purchase / Sale of Fixed Assets for cash or cheque
General Journal Payment of expenses e.g. rent, salaries, insurance, and...
- Discounts Allowed
- Carriage Inwards and Outwards
Receipt of income/revenue e.g. interest received, rent received, and...
- Discounts Received
General Journal General Journal
General Journal General Journal General Journal Payment of creditors (suppliers) the amount owed to them
General Journal Drawings: money withdrawn from business for personal use
General Journal Non Cash Transactions are entered in the GJ
Adjusting Entries
- Provision for Depreciation
- Bad Debts written off
- Provision for Bad Debts
- Prepayments and Accruals
General Journal
General Journal
General Journal
General Journal
OTHER ENTRIES OF THE BUSINESS
Opening Entries (list of opening balances of assets, liabilities and capital a/cs)
General Journal Correction of Errors
General Journal Closing Entries (list of closing balances of assets, liabilities and capital a/cs)
General Journal 13
Name of the Business
Sales Journal
Date
Year
dt
dt
dt
End of mth
Details
Invoice #
Debtor e.g. John Smith
Debtor e.g. Jane Doe Debtor Transfer to Sales account
Folio
Amount $
SL #
SL SL GL
X
X
X
XX
Folio
Amount $
PL #
PL PL GL
X
X
X
XX
Folio
Amount $
SL #
SL GL
X
X
XX
Folio
Amount $
PL #
PL GL
X
X
XX
Purchases Journal
Date
Year
dt
dt
dt
End of mth
Details
Invoice #
Creditor e.g. Will Browne
Creditor e.g. Alice Williams Creditor Transfer to Purchases account
Returns Inwards Journal
Date
Year
dt
dt
End of mth
Details
Invoice #
Debtor e.g. John Smith
Debtor e.g. Jane Doe Transfer to Returns inwards account
Returns Outwards Journal
Date
Year
dt
dt
End of mth
Details
Invoice #
Creditor e.g. Will Browne
Creditor e.g. Alice Williams Transfer to Returns outwards account
Cash Book
Date
Details
Year
dt
dt dt dt dt dt
*dt
*dt Balance b/d
Capital
Sales
Debtor
Interest received
Loan
Bank
Cash
Folio
GL
GL
SL
GL
GL
GL
GL
Discount
Allowed
Cash
Bank
Date
Details
$
$
X
$
X
X
Year
dt
dt dt dt *dt *dt
dt dt
Purchases
Motor Vehicle
Creditor
Drawings
Cash
Bank
Interest on Loan
Balance c/d
X
X
X
X
X
X
dt
Balance b/d
X
XX
X
X
XX
X
Folio
Discount
Received
Cash
Bank
$
$
$
X
X
X
GL
GL
PL
GL
GL
GL
GL
X
X
X
X
X
X
XX
X
XX
X
The Journal
Date
Year
dt
Details
Account debited e.g. Motor Vehicle
Account credited e.g. Bank Account Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
Folio
GL
GL
DR
$
X
CR
$
X
14
TheJournal
The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts)
At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets,
liabilities and capital called an opening journal entry. Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit
balance, so these are credited in opening journal entry. Capital is credited. It is based on accounting equation The balances can be taken from the balance sheet of previous year. To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side. The Journal
Date
Year
dt
Details
Folio
Land and Buildings
Plant and machinery
Motor Vehicles
Stock (Inventory)
Debtors
Bank
Cash
Mortgage
Bank Loan
Creditors
Accrued Expenses
Provision for Depreciation: Motor Vehicles
To record assets, liabilities and capital of business at beginning of period
DR
$
X
X
X
X
X
X
X
CR
$
XX
XX
Folio
DR
CR
$
GL
GL
$
X
GL
GL
GL
GL
GL
GL
GL
GL
GL
GL
GL
GL
X
X
X
X
X
Correction of errors, Adjusting entries, etc.
The Journal
Date
Year
dt
Details
Account debited e.g. Motor Vehicle
Account credited e.g. Bank Account Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
X
15
Petty Cash Book
Receipts
Folio
$
X
Date
Details
2011
CB
Total
Motor
Expenses
Travel
Expenses
Postage
Cleaning
Sundry
Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
X
Jan 10
Motor Exp.
X
Jan 14
R. King
X
Jan 19
Travel Exp.
X
Jan 25
Sundry exp.
X
Jan 26
Cleaning
X
X
Jan 31
X
Balance c/d
CB
Ledger
Folio
Ledger
Accounts
$
X
X
PL
X
X
X
X
X
X
X
X
X
X
X
X
X
Feb 1
Balance b/d
X
Feb 1
Cash
Petty Cash Book
Receipts
Motor
Expenses
Travel
Expenses
Postage
Cleaning
Sundry
Expenses
$
$
$
$
$
$
Date
CB
Jan 3
Cash
Jan 7
Postage
X
Jan 10
Motor Exp.
X
Jan 14
R. King
X
Jan 19
Travel Exp.
X
Jan 25
Sundry exp.
X
Jan 26
Cleaning
X
$
X
Details
Total
Folio
2011
X
X
CB
Jan 31
Cash
Jan 31
Balance c/d
XX
X
X
XX
Feb 1
Balance b/d
Ledger
Folio
Ledger
Accounts
$
X
X
PL
X
X
X
X
X
X
X
X
X
X
16
Petty Cash Book
Receipts
Folio
$
300
Date
Details
2011
CB
Total
Motor
Expenses
Travel
Expenses
Postage
Cleaning
Sundry
Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
5
Jan 10
Motor Exp.
20
Jan 14
R. King
30
Jan 19
Travel Exp.
15
Jan 25
Sundry exp.
12
Jan 26
Cleaning
14
96
Jan 31
Balance c/d
300
Ledger
Accounts
$
5
20
PL
30
15
12
14
20
15
5
14
12
30
204
300
204
96
Ledger
Folio
CB
Feb 1
Balance b/d
Feb 1
Cash
Petty Cash Book
Receipts
Motor
Expenses
Travel
Expenses
Postage
Cleaning
Sundry
Expenses
$
$
$
$
$
$
Date
CB
Jan 3
Cash
Jan 7
Postage
5
Jan 10
Motor Exp.
20
Jan 14
R. King
30
Jan 19
Travel Exp.
15
Jan 25
Sundry exp.
12
Jan 26
Cleaning
14
$
300
Details
Total
Folio
2011
96
96
396
300
Jan 31
Cash
Jan 31
Balance c/d
CB
300
396
Feb 1
Balance b/d
Ledger
Folio
Ledger
Accounts
$
5
20
PL
30
15
12
14
20
15
5
14
12
30
17
Ledgers (Double entry – T accounts)
A T-ACCOUNT is an individual record of business transactions that result in increases and decreases in
the specific asset, liability, or capital item.
An account consists of three parts:
- The Title/Name of the account
- The left side (known as debit / Dr)
- The right side (known as credit / Cr)
Name of account e.g. Capital
Date
•
•
Details
Folio
Dr$
Date
Details
Folio
Cr$
Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits.
Debit and credit, therefore, indicate on which side of a T account numbers will be recorded.
For some types of accounts debit means an increase in the account balance, while for others debit
means a decrease in the account balance, as seen below:
Category of Account
Entry to Increase
Entry to Decrease
Debit
Credit
Credit Credit Debit
Credit
Debit Debit Debit Credit
Assets
Liabilities
Income / revenue
Capital
Expenses
LEDGERS are books of final entry containing the T-accounts of the business in which transactions are
posted in the form of debit and credits.
Ledgers T-­Accounts Sales Ledger
Debtor a/cs (personal accounts) e.g. John Smith
Purchases Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams
General Ledger
Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc.
Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received
Account Ledger Debtor a/cs (personal accounts) e.g. John Smith
Sales Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams
Purchases Ledger
Sales , Purchases, Returns Inwards, Returns Outwards a/cs
General Ledger Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc.
General Ledger Cash and Bank separate a/cs
General Ledger Liability a/cs e.g. Mortgage
General Ledger Capital a/c and Drawings a/c
General Ledger Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc
General Ledger DOUBLE ENTRY requires that for each transaction, the amount entered into the accounting records is
entered in at least two different accounts, with one account being debited and the other credited. All debit
amounts equal all credit amounts provided the double-entry accounting was properly followed.
18
Ledgers (Double entry – T accounts)
Name of the Business
Sales Ledger
Debtor a/c e.g John Smith
Date
Year
dt
Details
Sales
Folio
Dr$
SJ
X
Date
Year
dt
dt
dt
Details
Returns Inwards
Cash/Bank
Discounts Allowed
Folio
Cr$
RIJ
CB
CB
X
X
X
Folio
Cr$
RIJ
CB
CB
X
X
X
Folio
Cr$
RIJ
CB
CB
X
X
X
Folio
Cr$
Debtor a/c e.g Jane Doe
Date
Year
dt
Details
Sales
Folio
Dr$
SJ
X
Date
Year
dt
dt
dt
Details
Returns Inwards
Cash/Bank
Discounts Allowed
Debtor a/c
Date
Year
dt
Details
Sales
Folio
Dr$
SJ
X
Date
Year
dt
dt
dt
Details
Returns Inwards
Cash/Bank
Discounts Allowed
Name of the Business
Purchases Ledger
Creditor a/c e.g Will Brown
Date
Year
dt
dt
dt
Details
Returns Outwards
Cash/Bank
Discounts Received
Folio
Dr$
ROJ
CB
CB
X
X
X
Date
Year
dt
Details
Purchases
PJ
Creditor a/c e.g Alice Williams
Date
Year
dt
dt
dt
Details
Returns Outwards
Cash/Bank
Discounts Received
Folio
Dr$
ROJ
CB
CB
X
X
X
Date
Year
dt
Details
Purchases
Folio
Cr$
PJ
Creditor a/c
Date
Year
dt
dt
dt
Details
Returns Outwards
Cash/Bank
Discounts Received
Folio
Dr$
ROJ
CB
CB
X
X
X
Date
Year
dt
Details
Purchases
Folio
PJ
Cr$
19
Name of the Business
General Ledger
Sales a/c
Date
Details
Folio
Dr$
Date
Year
dt
dt
Details
Folio
Cr$
CB
X
SJ
X
Details
Folio
Cr$
Details
Folio
Cr$
Details
Folio
Cr$
Total Return Outwards
for the month
ROJ
X
Details
Folio
Cr$
Details
Folio
Cr$
CB
X
Folio
Cr$
CB
X
Details
Folio
Cr$
Details
Folio
Cr$
CB
X
Cash / Bank
Total credit Sales for
the month
Purchases a/c
Date
Year
dt
dt
Details
Folio
Dr$
Cash/Bank
Total credit Purchases
for the month
CB
X
PJ
X
Date
Returns Inwards a/c
Date
Year
dt
Details
Total Return Inwards
for the month
Folio
Dr$
RIJ
X
Date
Returns Outwards a/c
Date
Details
Folio
Dr$
Date
Year
dt
Motor Vehicles a/c
Date
Year
dt
Details
Bank
Folio
Dr$
CB
X
Folio
Dr$
Date
Capital a/c
Date
Details
Date
Year
dt
Bank
Bank Loan a/c
Date
Details
Folio
Dr$
Date
Year
dt
Details
Bank
Rent a/c
Date
Year
dt
Details
Cash / Bank
Folio
Dr$
CB
X
Date
Commissions received a/c
Date
Details
Folio
Dr$
Date
Year
dt
Cash / Bank
20
Balancing off Personal and Real accounts
An account balance is the difference between the debit and credit amounts.
Bank account
Date
2010
March 1
March 13
March 25
Details
Balance b/d
Sales
Loan
Folio
Dr$
CB
GJ
12 500
2 000
1 000
Date
2010
March 14
March 20
March 27
March 28
Details
Purchases
Equipment
Drawings
Rent
Folio
CB
GJ
GJ
GJ
Cr$
1 300
1 000
200
2 000
Simple steps:
1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below:
Bank account
Date
2010
March 1
March 13
March 25
Details
Balance b/d
Sales
Loan
Folio
Dr$
CB
GJ
12 500
2 000
1 000
Date
2010
March 14
March 20
March 27
March 28
Details
Purchases
Equipment
Drawings
Rent
Folio
CB
GJ
GJ
GJ
Cr$
1 300
1 000
200
2 000
2. Total the side with the larger amount and enter the amount in both total boxes, as seen below:
Bank account
Date
2010
March 1
March 13
March 25
Details
Balance b/d
Sales
Loan
Folio
Dr$
CB
GJ
12 500
2 000
1 000
Date
2010
March 14
March 20
March 27
March 28
Details
Purchases
Equipment
Drawings
Rent
Folio
CB
GJ
GJ
GJ
15 500
Cr$
1 300
1 000
200
2 000
15 500
3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the
difference between the debit and credit amounts (account balance), as seen below:
4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the
account balance.
Bank account
Date
2010
March 1
March 13
March 25
Details
Balance b/d
Sales
Loan
Folio
Dr$
CB
GJ
12 500
2 000
1 000
15 500
April 1
Balance b/d
Date
2010
March 14
March 20
March 27
March 28
March 31
Details
Purchases
Equipment
Drawings
Rent
Balance c/d
Folio
Cr$
CB
GJ
GJ
GJ
1 300
1 000
200
2 000
10 000
15 500
10 000
5. Account balances are entered in the Balance Sheet to show the financial position of the business.
21
Closing off Nominal accounts
Nominal accounts are temporary accounts, which are closed off at the end of a period.
The steps are the same as Real and Personal accounts, except that Nominal a/c balances are NOT
carried forward to following period but are transferred to the Trading a/c or the Profit & Loss a/c as
follows:
Nominal account
Transfer to:
Sales
Purchases
Returns Inwards / Outwards
Expenses
Revenue
Trading a/c
Trading a/c
Trading a/c Profit & Loss a/c Profit & Loss a/c
Name of Business
The Journal
Date
2010
March 31
March 31
March 31
March 31
Details
Folio
Sales
Trading a/c
DR
$
X
CR
$
X
Trading a/c
Purchases a/c
X
Profit and Loss a/c
Expense a/c e.g. Rent
X
Revenue a/c e.g. Commissions Received
Profit and Loss a/c
X
X
X
X
Sales a/c
Date
2010
Details
Folio
March 31 Transfer to Trading a/c
GJ
Dr$
Date
2010
March 13
March 31
24 000
Details
Bank
Total Credit Sales for
the month of March
Folio
Cr$
CB
2 000
SJ
22 000
24 000
24 000
Purchases a/c
Date
2010
March 14
March 31
Details
Folio
Dr$
Bank
Total Credit Purchases
for the month of March
CB
1 300
PJ
22 000
Date
2010
Details
Folio
Cr$
March 31
Transfer to Trading a/c
GJ
24 000
24 000
24 000
Expense a/c e.g. Rent a/c
Date
2010
March 14
March 25
Details
Folio
Bank
Cash
CB
CB
Dr$
300
600
900
Date
2010
Details
Folio
March 31
Transfer to P&L a/c
GJ
Cr$
900
900
Revenue a/c e.g. Commissions Received
Date
2010
March 31
Details
Folio
Transfer to P&L a/c
GJ
Dr$
1 000
1 000
Date
2010
March 13
Details
Bank
Folio
CB
Cr$
1 000
1 000
22
Trial Balance
The Trial Balance is a list of all the debit and credit account balances for a period.
Type of Account
Balance in Trial Balance
Personal and Real accounts
Nominal accounts
Balance c/d
Transfer to Trading or P&L a/c
The account balances for a period are entered in the Trial Balance as follows:
Category of Account
Account Balances
Assets
Liabilities
Income / revenue
Capital
Expenses
Debit
Credit
Credit Credit Debit
Trial Balance as at ___________________
Dr
$
Asset accounts
Liability accounts
Income accounts
Capital account
Expense accounts
Cr
$
X
X
X
X
X
XX
XX
Trial Balance as at ___________________
Dr
Cr
$
$
Cash
Bank *
Stock (Opening Stock)
Bank Loan
Debtors
Creditors
Sales
Purchases
Returns Inwards
Returns Outwards
Rent
Carriage Inwards
Carriage Outwards
Commissions received
Wages and Salaries
Interest Received
Discounts Allowed
Discounts Received
Interest on Loan
Motor Vehicles
Equipment
Bank Overdraft *
Capital
Drawings
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
XX
XX
All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
23
Correction of Errors
Types of errors
There are two main classifications:
Errors NOT affecting / revealed by the Trial Balance
1.
2.
Errors of Commission (correct amount, wrong personal account)
Errors of Principle (correct amount, wrong type / category of account)
3.
Errors of Original entry (incorrect amount entered in the journal / book of original entry)
4.
5.
Errors of Omission (no entry made in the books for transaction)
Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
6.
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
Errors affecting / revealed by the Trial Balance
Errors of transposition in half of the double entry (resulting in overstatement or understatement of amts).
Errors caused by entries on the wrong side of one half of the double entry.
Errors caused by the omission of one half of the double entry.
Errors of calculation (miscalculation of the account balances)
Errors made in the Trial Balance.
•
•
•
•
•
Suspense Account (Errors affecting / revealed by the Trial Balance)
A temporary account called a suspense account has to be opened in the general ledger with the difference to make
the Trial Balance totals agree with each other. It is opened with a balance, on the side of the a/c that the Trial
Balance is less, as seen below: General Ledger
Suspense account
Date
Details
Dr$
Difference in trial balance
(DR side of TB less)


Date
X
Details
Cr$
Difference in trial balance
(CR side of TB less)
X
A credit balance in the Suspense account is a Current Liability in the Balance Sheet.
A debit balance in the suspense account is a Current Asset in the Balance Sheet.
N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to
the ledger accounts affected by the error, including the suspense account.
The Statement of Corrected Net Profit
Name of business
st
Statement of corrected Net Profit for the year ended 31 March 2007
$
Net Profit per accounts
Add: Expenses amount overstated
Income / Revenue amount understated / omitted
$
X
X
X
X
Less: Income / Revenue amount overstated
Expenses amount understated / omitted
X
X
(X)
Corrected Net Profit for the year
XX
24
Adjusting Entries
Adjusting entries are entries made at the end of an accounting period to allocate revenue and expenses to
the period in which they belong, as required by the Matching / Accruals Concept.
Expenses to be transferred to the Profit and Loss account is the expenses incurred in the period, whether
they have been paid or not.
Revenue to be transferred to the Profit and Loss account is the revenue earned in the period, whether it has
been received or not.
TYPES OF ADJUSTING ENTRIES:
1.
2.
3.
4.
Accruals – Accrued Expenses and Accrued Revenue
Prepayments – Prepaid Expenses and Prepaid Revenue
Provision for Depreciation
Bad Debts and Provision for Bad Debts
Accruals and Prepayments
1.
Accruals and Prepayments adjust revenue and expense amounts in the Trial Balance as follows:
Notes to accounts
EXPENSES
Trial balance
Expense Transferred to P&L a/c
=
Expense paid
+ Accrued Expense
Expense Transferred to P&L a/c
=
Expense paid
- Prepaid Expense
REVENUE
Profit and Loss Amount
Revenue Transferred to P&L a/c
=
Revenue received
+ Accrued Expense
Revenue Transferred to P&L a/c
=
Revenue received
- Prepaid Expense
ADD ACCRUALS
LESS PREPAYMENTS
2.
Accruals and Prepayments are included in the Balance Sheet as follows:
CURRENT ASSETS
CURRENT LIABILITIES
Prepaid Expenses
Accrued Expenses
Accrued Revenue
Prepaid Revenue
Bad Debts
Profit and Loss a/c
Expense (amount written off)
Provision for Bad Debts
Profit and Loss a/c
Increase in Provision for Bad Debts (Expense)
Decrease in Provision for Bad Debts (Revenue)
Balance Sheet
Total Provision for Bad Debts (Current Assets: Debtors less Provision)
Depreciation
Profit and Loss a/c
Annual Depreciation (Expense)
Balance Sheet
Accumulated Depreciation (Fixed Assets less Depreciation)
25
A djusting Entries: Journal entries
ACCRUALS AND PREPAYMENTS
Expenses (Rent, Salaries, Insurance, etc.)
The Journal
Date
Year
dt
End of yr
End of yr
End of yr
Details
Folio
DR
$
X
Expense a/c
Cash / Bank a/c
To record payment of expense during the year
GL
CB
Expense a/c
Accrued Expense a/c
To record expense incurred but still owing at the end of period
GL
GL
X
Prepaid Expense a/c
Expense a/c
To record expense not incurred but paid in advance
GL
GL
X
Profit & Loss a/c
Expense a/c
To close off Expense a/c and transfer to Profit & Loss a/c
CR
$
X
X
X
X
GL
X
Revenue (Interest received, commissions received, rent received, etc.)
The Journal
Date
Year
dt
End of yr
End of yr
End of yr
Details
Folio
DR
$
X
Cash / Bank a/c
Revenue a/c
To record revenue received during the year
CB
GL
Accrued Revenue a/c
Revenue a/c
To record revenue earned but still owing at the end of period
GL
GL
X
Revenue a/c
Prepaid Revenue a/c
To record revenue not earned but received in advance
GL
GL
X
Revenue a/c
Profit & Loss a/c
To close off Revenue a/c and transfer to Profit & Loss a/c
GL
X
CR
$
X
X
X
X
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC.
The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the
Balance sheet as Current assets or Current liabilities.
26
A djusting Entries: Journal entries
Bad Debts and Provision for Bad Debts
The Journal
Date
Year
dt
End of yr
End of yr
End of yr
End of yr
Details
Folio
Bad Debts a/c
Debtors a/c
To write off Bad debts and reduce Debtor amount
Profit & Loss a/c
Bad Debts a/c
To close off Bad Debts a/c and transfer to Profit & Loss a/c
Profit & Loss a/c
Provision for Bad Debts a/c
To create a Provision for Bad debts a/c and transfer to P& L a/c
as an expense.
Profit & Loss a/c
Provision for Bad Debts a/c
To transfer an increase in Provision for Bad debts to P& L a/c
as an expense.
Provision for Bad Debts a/c
Profit and Loss a/c
To transfer a decrease in Provision for Bad debts to P& L a/c
as revenue.
GL
SL
DR
$
X
CR
$
X
X
GL
X
X
GL
X
X
GL
X
X
GL
X
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off.
At the end of the period, the amount of Bad Debts is transferred to the P & L account like all expenses.
Bad Debts is NOT recorded in the Balance Sheet.
Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet.
It, therefore, has a credit balance.
Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated
as expenses in the P&L a/c while decreases are revenue in the P&L a/c.
Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.
Depreciation
The Journal
Date
Year
End of yr
Details
Profit & Loss a/c
Provision for Depreciation a/c
To transfer annual depreciation to P& L a/c as an expense.
Folio
GL
DR
$
X
CR
$
X
NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the
Balance Sheet. It, therefore, has a credit balance.
Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense.
Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset
to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.
27
A djusting Entries: Ledger entries
Accruals and Prepayments
Expense a/c e.g. Rent a/c
Date
Details
Folio
Dr$
CB
X
X
Year
Opening
dt
Prepaid Expense b/d
Cash / Bank
Closing
Accrued Expense c/d
X
Prepaid Expense b/d
XX
X
Opening
Date
Year
Opening
Details
Folio
Cr$
GJ
X
X
End of yr
Accrued Expense b/d
Transfer to P & L a/c
Closing
Prepaid Expense c/d
X
Accrued Expense b/d
XX
X
Opening
Revenue a/c e.g. Commissions Received a/c
Date
Year
Opening
Details
Folio
Dr$
Date
X
X
Year
Opening
dt
Prepaid Revenue b/d
Cash / Bank
Closing
Accrued Revenue c/d
X
Accrued Revenue b/d
XX
X
End of yr
Accrued Revenue b/d
Transfer to P & L a/c
Closing
Prepaid Revenue c/d
X
Prepaid Revenue b/d
XX
X
Opening
GJ
Opening
Details
Folio
Cr$
CB
X
X
Bad Debts
Bad Debts a/c
Date
Details
Folio
Dr$
Year
Dt
Date
Details
Folio
Cr$
Year
Debtor
X
End of yr
Transfer to P & L a/c
(expense)
X
XX
XX
Provision for Bad Debts
Provision for Bad Debts a/c
Date
Details
Folio
Dr$
Date
X
End of yr
P & L a/c
Beginning
Year
End of yr
Details
Folio
Cr$
Year
Balance c/d
End of yr
Balance c/d
End of yr
P & L a/c
End of yr
Balance c/d
(revenue)
(expense)
X
XX
End of yr
Balance b/d
P & L a/c (expense)
X
Beginning
Balance b/d
Beginning
Balance b/d
X
X
X
XX
X
X
XX
XX
X
Depreciation
Provision for Depreciation
Date
Details
Folio
Dr$
Date
X
End of yr
P & L a/c
Beginning
X
X
XX
X
Year
End of yr
Details
Folio
Cr$
Year
Balance c/d
(expense)
End of yr
Balance c/d
X
XX
End of yr
Balance b/d
P & L a/c
End of yr
Balance c/d
X
Beginning
Balance b/d
X
28
Final A ccounts: Income Statement
Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$
$
Sales
Less: Sales Returns
Net Sales
LESS: COST OF GOODS SOLD:
Opening Stock
Purchases
Less: Purchases Returns
Add: Carriage In
Net Purchases
Cost of Goods Available for sale
Less: Closing Stock
X
X
X
(X)
X
X
X
X
(X)
Cost of Goods Sold
(X)
GROSS PROFIT (or GROSS LOSS)
**Add: Rent Received
Interest received
Discount received
Decrease in Provision for bad debts
$
X
(X)
X or (X)
X
X
X
X
X
**Less: Expenses
Wages/salaries
Utilities
Increase in provision for bad debts
Depreciation
Bad debts expense
Carriage Outwards
Discount allowed
X
X
X
X
X
X
X
Total expenses
NET PROFIT (or NET LOSS)
(X)
X or (X)
**These are a few examples, however the list can be exhaustive in reality
NB. This is an Income Statement for a sole trader.
For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out
the net profit amongst the owners and calculate profit retained in business.
For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c
For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit
and Loss a/c.
29
Final A ccounts: Balance Sheet
Owner’s Name
Balance Sheet as at _________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Fixtures & Fittings
Motor Vehicles
COST $
X
X
X
X
X
ACC DEP. $
(X)
(X)
(X)
(X)
(X)
NBV $
X
X
X
X
X
CURRENT ASSETS:
Stock
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Revenues owing
Bank
Cash
Total Current Assets
X
X
(X)
X
X
X
X
X
X
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues
Bank overdraft
Total Current Liabilities
WORKING CAPITAL
X
X
X
X
(X)
X
XX
FINANCED BY:
Opening Capital
Add: Net Profit OR Less: Net Loss
Less: Drawings
Closing Capital
X
X OR (X)
X
(X)
X
LONG-TERM LIABILITIES
Mortgage
Bank Loan
X
X
X
XX
NB. This is a Classified Balance Sheet for a sole trader.
For other types of businesses there may be other items like proposed dividends, current a/c
(partnership) etc.
30
Principles of
Accounts
CONTROL SYSTEMS
Ms Fergusson
31
St. Mary’s College
Principles of Accounts
Control Systems
Control Systems are the procedures designed and established to check, record, regulate, supervise,
and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be
accurate, by reducing the incidence of unintentional errors and intentional irregularities.
The need for Control Systems in Accounting.
-
Control systems are needed to protect the organization’s assets and ensure the preparation of
reliable and timely financial statements.
THE THREE COMMON CONTROL SYSTEMS ARE:
1. Bank Reconciliation Statements
2. Control Accounts
3. Suspense Accounts
Bank Reconciliation Statement
A Bank Reconciliation Statement is a statement prepared to reconcile the difference between the
balances in the bank column of the cash book and the bank statement on any given date.
Control Accounts
Control Accounts are general ledger accounts whose balances reflects the total of balances of related
subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the
most commonly used control accounts, and their balances serve as a crosscheck (control) of the
accuracy of the associated subsidiary records (personal accounts).
Suspense Accounts
A suspense account is an account in the general ledger in which amounts are temporarily recorded
until the correct entry could be determined.
When the proper account / amount is determined, the amount will be moved from the suspense acc.
Suspense accounts are used when accounting for errors to ‘balance” the trial balances until the
bookkeeper finds the errors and finishes recording the transactions.
32
St. Mary’s College Lesson Notes
Bank Reconciliation Statement :
SET INDUCTION: The Cash Book and the Bank Statement
BANK ACCOUNT
BUSINESS
Cash Book
BANK
The business records all the bank account’s
cheque and cash transactions in the Cash Book.
Bank Statement
The bank records all the bank account’s cheque
and cash transactions in a Bank Statement, which
is sent to the business periodically.
The Cash Book:
•
•
The Cash Book is the business’ record of the business’ bank account.
It consists of information regarding the bank account’s cash and cheque receipts and payments and the
balance at the end of the period, as prepared by the business.
The Bank Statement
•
•
•
The Bank Statement is the bank’s record of the business’ bank account.
It is a summary that consists of information regarding the bank account’s cash and cheque receipts and
payments and the balance at the end of the period, as prepared by the bank.
A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.
Main accounting difference between the Cash Book and the Bank Statement:
Receipts / Deposits
Payments / Withdrawals
CASH BOOK – business’ record
DR
CR
BANK STATEMENT – bank’s record
CR
DR
St. Mary’s College Lesson Notes
33
Differences / Discrepancies
between the Cash Book balance and the Bank Statement balance at the end of a specific period.
•
•
There are usually timing differences between when the transaction information is recorded / entered in
the banks systems and when it is recorded in the business’ cash book.
Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account
balance and the bank statement account balance at the end of the specific period.
Reasons for the differences between the Cash Book balance and the Bank Statement balance:
 Entries recorded in the Bank Statement but not in the Cash Book
•
Direct Deposits
- Dividends received
- Credit transfers – receipts from debtors made into the bank account directly through the bank.
•
Standing Orders and Direct Payments
- These are payments made by the bank from the bank account on behalf of the business
- E.g. Insurance payments
•
Bank Charges (service charges on the bank account taken directly from the account by the bank)
•
Interest Received (interest on the bank account deposited directly into the account by the bank)
•
Dishonoured / Returned cheques
- bounced cheques that were deposited and have been returned to the bank as dishonored.
- The business was not notified as yet because it takes a few days (timing difference)
 Entries recorded in the Cash Book but not in the Bank Statement
These occur because of a time lag between the recording of the receipt or payment in the cash book and the
recording in the bank:
•
Unpresented / Outstanding Cheques
- These are cheques issued by the business as payment to persons / businesses that have not been
presented to the bank for payment yet.
NB The payee has 6 months to present / “cash” a cheque.
- The business has it recorded in the cash book as a payment made but the bank has not because
they have not “cashed” the cheque as yet.
•
Unrecorded deposits
- These are mainly cheque deposits to be made in the bank account that have been recorded in the
cash book but not by the bank as they have not received the deposits as yet.
- The business records the cheques as having been received / deposited on one day, while the bank
records the deposit on another day when the cheques are brought in from the business.
 Errors in the Cash Book and in the Bank Statement
The most common types of errors are the overstatements and the understatements of receipts and payments
due to errors in the amounts and receipts being entered as payments and vice versa.
34
St. Mary’s College Lesson Notes
Bank Reconciliation :
It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that
both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash book against those shown
on a bank statement:
• to locate the reasons for the discrepancies,
• adjust cash book with those items which must be included and
• clarify and support any remaining difference between adjusted cash book balance and bank statement balance.
The Steps of Bank Reconciliation:
1. Compare the Bank Statement and the Bank column of the Cash Book. Check for:
-
Entries made in the Bank Statement but not the Cash Book.
Entries made in the Cash Book but not the Bank Statement.
Incorrect amounts.
Entries made on the incorrect side of the Cash Book.
2. Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB.
-
Start with the Cash Book balance at the end of the period / month in question.
Enter all the items that appear in the Bank Statement but not the Cash Book e.g. Bank Charges, Int. Rec…
Correct any errors made in the Cash Book.
Balance / Close off the Revised cash Book.
Revised Cash Book (Bank Column)
Date
Details
Dr$
Balance b/d
Interest received
Credit Transfer (debtor personal a/c)
Other Receipts not entered in CB
Receipts understated
Payments overstated
X
X
X
X
X
X
Date
Details
Cr$
Bank Charges
Standing Order e.g. Insurance
Dishonoured chqs (debtor personal a/c)
Other Payments not entered in CB
Receipts overstated
Payments understated
Balance c/d
XX
Balance b/d
X
X
X
X
X
X
X
XX
X
3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in
the Bank Statement. There are two methods:
- Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.
Bank Reconciliation Statement
Revised Cash Book Balance
Add: Unpresented cheques
Less: Unrecorded deposits
Bank Statement Balance
$
X
X
X
(X)
XX
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.
Bank Reconciliation Statement
Bank Statement Balance
Add: Unrecorded deposits
Less: Unpresented cheques
Revised Cash Book Balance
- For both methods, correct errors by adding or subtracting amounts.
$
X
X
X
(X)
XX
35
St. Mary’s College
Principles of Accounts
Control Accounts
A control account is a summary account in the general ledger that shows the totals of transaction amounts
entered in a subsidiary ledger such as sales or purchases ledger during the month.
Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to
control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and
creditors quickly when a trial balance is being prepared.
Control accounts are an important system of control on the reliability of ledger accounts. They indicate that
errors may have occurred in the ledgers they control.
Ledger
Accounts
Control Account
Sales Ledger
debtors’ personal accounts
Sales Ledger Control Account
(totals of items in the sales ledger)
Purchases Ledger
creditors’ personal accounts
Purchases Ledger Control Account
(totals of items in the purchases ledger)
The purpose of Control Accounts
The reasons for having control accounts are as follows:
1. To check on the accuracy
They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and
purchase ledger.
It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make.
- Figures might get transposed while some entries might be omitted altogether, so that an invoice or a
payment transaction does not appear in a personal account as it should.
It is possible to identify the fact that errors have been made by comparing:
• The total balance on the debtors account with the total of individual balances on the personal
accounts in the sales ledger.
• The total balance on the creditors account with the total of individual balances on the personal
accounts in the purchase ledger.
2. To locate errors
By using the control account, a comparison with the individual balances in the sales or purchase ledger
can be made for every week or day of the month, and the error found much more quickly than if
accounts did not exist.
3. To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet.
A single balance on a control account is obviously simpler and quicker than many individual balances in
the sales or purchase ledger.
This means also that the number of accounts in the double entry bookkeeping system can be kept down
to a manageable size.
36
St. Mary’s College
Principles of Accounts
CONTROL ACCOUNTS
Ledger
Accounts
Control Account
Sales Ledger
debtors’ personal accounts
Sales Ledger Control Account
(totals of items in the sales ledger)
Purchases Ledger
creditors’ personal accounts
Purchases Ledger Control Account
(totals of items in the purchases ledger)
The Sales Ledger Control Account
The sales ledger control account is also known as the Debtors Control Account and the Total Debtors
Account. It comprises the totals of all accounts of a similar nature related to debtors.
All items that appear in a debtor’s account are also recorded in the debtors control account.
The total of each type of transaction related to debtors is entered on the relevant side of the control account.
Items / types of transactions related to debtors include:
•
•
•
•
•
•
•
•
Total opening balances of all debtors for the period
Total credit sales for the period
Total sales returns for the period
Total cash received and cheques received from debtors for the period.
Total Discounts Allowed for the period
Total Bad Debts written off for the period
Dishonoured / Returned cheques from debtors for the period
Total closing balances of all debtors for the period
The Purchases Ledger Control Account
The purchases ledger control account is also known as the Creditors Control Account and the Total Creditors
Account. It comprises the totals of all accounts of a similar nature related to creditors.
All items that appear in a creditor’s account are also recorded in the Creditors Control Account.
The total of each type of transaction related to creditors is entered on the relevant side of the control account.
Items / Types of transactions related to creditors include:
•
•
•
•
•
•
Total Opening balances of all creditors for the period
Total Credit Purchases for the period
Total Purchases Returns for the period
Cash payments and cheque payments to creditors for the period
Total Discounts received for the period
Total closing balances of all creditors for the period
Contra entries (appear in both Control Accounts)
A contra entry is an item that offsets, cancels or partially reduces another item.
There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate
accounts are kept to record the relevant transactions.
Instead of making a payment by cheque for the full amount owed to him as a creditor, his accounts can be
settled by “setting off” the amount owed to him by the company and the amount owed by him to the company.
A contra entry which is recorded in the personal accounts in the Sales and Purchases Ledger needs to be
reflected in both Control accounts to ensure that they balance with the sum of the balances in the ledger
accounts. The amount that is set off in the accounts would be the smaller amount.
37
CONTROL ACCOUNTS - FORMAT
Items
Opening and Closing Balances:
Source
Notes
Sales Ledger Control Account
Sales Ledger
A credit balance may be caused by
overpayment or return of goods already paid
for by debtor. Credit balances must NOT be
deducted from debit balances, but shown
separately on the credit side of the control
account.
Purchases Ledger Control Account
Purchases Ledger
A debit balance may be caused by
overpayment or return of goods already paid
for to creditor. Debit balances must NOT be
deducted from credit balances, but shown
separately on the debit side of the control
account.
Credit Sales
Credit Purchases
Sales Journal
Purchases Journal
Discounts Allowed / Discounts Received
Cash Book
Sales Returns
Purchases returns
Sales Returns Journal
Purchases Returns Journal
Cash / Cheque received and paid
Cash Book
Bad Debts written off
General Journal
Refunds from suppliers / to customers
Dishonoured cheques
Cash Book
Cash Book
Contra Entries
General Journal
A Contra Entry in a control account is when
the smaller amount is offset against the
larger amount.
The Sales Ledger Control Account
Date Details
Dr$ Date
Cr$
Balance b/d
(total debtors’ debit bals from previous period)
X
Balance b/d (if any)
(total debtors’ credit bals from previous period)
X
Credit Sales
X
Sales Returns
X
Refunds to debtors/customers
Dishonoured cheques
X
X
Cash/Cheques received from debtors
Discount allowed
X
X
Interest on overdue accounts
Bad Debts written off
X
X
Balance c/d (if any)
Contra Entries / set offs
Balance c/d
X
Balance b/d
X
Balance b/d (if any)
The Purchases Ledger Control Account
Date Details
Dr$ Date
Cr$
Balance b/d (if any)
(total creditors’ debit bals from previous period)
X
Balance b/d
(total creditors’ credit bals from previous period)
X
Purchases Returns
X
Credit purchases
X
Cash/Cheques paid to creditors/suppliers
Discount received
X
X
Refunds from suppliers/creditors
X
X
Contra Entries / set offs
X
Balance c/d (if any)
Balance c/d
X
Balance b/d (if any)
X
Balance b/d
St. Mary’s College
Principles of Accounts
Suspense accounts and Correction of Errors
TYPES OF ERRORS
There are two main classifications of errors:
1. Errors that affect the Trial Balance (errors revealed by the Trial Balance)
2. Errors that DO NOT affect the Trial balance (errors not revealed by the Trial Balance)
Errors that affect the Trial balance
Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These include:
• Errors of transposition in half of the double entry (resulting in overstatement or understatement of amounts).
• Errors caused by entries on the wrong side of one half of the double entry.
• Errors caused by the omission of one half of the double entry.
• Errors of calculation (miscalculation of the account balances)
• Errors made in the Trial Balance.
Examples:
A cash payment of $450 is entered in the Cash Book as $540.
This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB.
(A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit.
This would result in the Trial balance Debit balance being more by $2000!!!!!
Errors that do not affect the Trial Balance
• Errors of Commission (correct amount, wrong personal account)
•
•
•
•
•
Errors of Principle (correct amount, wrong type / category of account)
Errors of Original entry (incorrect amount entered in the journal / book of original entry)
Errors of Omission (no entry made in the books for transaction)
Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
Examples:
Errors of Commission (correct amount, wrong personal account)
e.g. Goods sold to M. Smith on credit is entered in N. Smith’s account in error.
Errors of Principle (correct amount, wrong type / category of account)
e.g. Motor expenses ( expense) were entered in the Motor vehicles’ account (asset) in error.
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error.
As a result, the incorrect amount of $457 was posted to the ledger accounts: T. Tall and Purchases.
Errors of Omission (no entry made in the books for transaction)
e.g. Rent received of $1200 was never entered in the cash book, and therefore the accounts.
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger accounts as
$300 (DR: J. Bond CR: Sales).
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent
N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the
ledger accounts affected by the error.
38
St. Mary’s College
Principles of Accounts
Errors that do NOT affect the Trial Balance
There are certain errors that are not revealed by the Trial Balance, as the debit and credit totals are not
affected by the error so they are equal. These errors are:

•
•
•
•
•
•
Errors of Commission (correct amount, wrong personal account)
Errors of Principle (correct amount, wrong type / category of account)
Errors of Original entry (incorrect amount entered in the journal / book of original entry)
Errors of Omission (no entry made in the books for transaction)
Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
Errors of Complete reversal of entries (correct amts entered in the wrong sides (DR/CR) of each a/c

When these errors are discovered, correcting the errors require double entry journal entries which will
be posted to the accounts affected by errors.
Correction of Errors NOT affecting the Trial Balance
Errors of Commission (correct amount, wrong personal account)
Correcting the error requires journal entries to be posted to:
•
•
The account incorrectly posted to - DR if the account was credited / CR if the account was debited
The correct account – post to the correct account
Errors of Principle (correct amount, wrong type / category of account)
Correcting the error requires journal entries to be posted to:
•
•
The account incorrectly posted to - DR if the account was credited / CR if the account was debited
The correct account – post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
1.
2.
3.
Identify whether the correct incorrect amount entered was overstated or understated.
Calculate the amount by which the entry was understated or overstated i.e. the difference.
Prepare the journal entry to correct the error:
If the amount was understated:
DR: the account debited
CR: the account credited
With the difference calculated to increase the amount to the correct amount
If the amount was overstated:
DR: the account credited
CR: the account debited
With the difference calculated to decrease the amount to the correct amount
Errors of Omission (no entry made in the books for transaction)
Correcting the error requires journal entries to be posted to the relevant accounts in the double entry.
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
Correcting these errors require the same steps as correcting Errors of Original entry.
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
The journal entry to correct the error:
DR: the account credited
CR: the account debited
With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)
NB. There must be a double entry to correct the errors.
39
40
St. Mary’s College
Principles of Accounts
Errors that affect the Trial Balance

When the Trial Balance totals are not equal, the errors affecting the Trial Balance may not
immediately be found and corrected.

A temporary account called a suspense account has to be opened in the general ledger with the
difference to make the Trial Balance totals agree with each other.

A suspense account should only be opened when all attempts to find the error(s) have been
unsuccessful and the final accounts are needed urgently.
Suspense Account
A Suspense account is a temporary ‘holding’ account in the General ledger that is opened to place the
difference in the trial balance to make it balance when the causes of the difference cannot immediately be
found and corrected.
How to open a Suspense Account
A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less.
The Suspense Account will, therefore, have a credit balance when the credit total in the Trial Balance is less
and a debit balance when the debit total is less.
General Ledger
Suspense account
Date
Details
Difference in trial balance
(DR side of TB less)
Date
Details
Dr$
X
Date
Details
Cr$
Details
Cr$
Suspense account
Dr$
Date
Difference in trial balance
(CR side of TB less)
X
Example:
S. James
st
Trial Balance as at 31 December 2009
DR
$
100 000
Totals (sum of all balances)
CR
$
99 960
Suspense a/c
40
100 000
100 000
Suspense account
Date
Details
Dr$
Date
31 Dec
Details
Difference in Trial Balance
The Suspense Account and the Balance Sheet
 A credit balance in the Suspense account is a Current Liability in the Balance Sheet.
 A debit balance in the suspense account is a Current Asset in the Balance Sheet.
Cr$
40
St. Mary’s College
Principles of Accounts
Correction of Errors and the Suspense Account
When the errors are discovered after a Suspense a/c has been opened, the errors have to be
corrected by moving the amount from the suspense account to the proper account.

Correcting the errors require double entry journal entries which will be posted to:
1. The Suspense account
2. The other account(s) affected by the error
N.B. To correct the error, there MUST be an entry in the suspense account to cancel the amount entered.
Examples:
A Creditor for $95 was posted as $68 in the personal a/c.
The credit side would have been less by $27 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR: Creditor’s personal a/c $27
Discounts Received $70 had been posted to the Purchases ledger but NOT to the Discounts Received.
The credit side would have been less by $90 so the Suspense account would have been credited.
The journal entry to correct the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70
Rent expense of $200 was recorded twice on the same side of the cash account, but entered correctly in
the Rent expense a/c
The credit side would have been more (debit side less) by $200 so the Suspense account would have been
debited. The journal entry to correct the error is: DR: Cash a/c $200 CR: Suspense a/c $200
A cheque for $225 received from Jays Co had been posted to the debit side of their account.
As the entry was made on the wrong side of the account, the credit side would have been less (debit side more)
by $248, so the Suspense account would have been credited with $450.
The journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450
Some errors do not affect the double entry and would, therefore, be corrected with a single entry in
the Suspense account. These errors include:
- account balance entered incorrectly in the Trial Balance e.g. $248 entered as $284
- account balance placed on the wrong side in the Trial balance (double the amount)

Examples:
The total of the Sales a/c of $1500 had been omitted from the Trial Balance.
The credit side of the TB would have been less by $1500 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error: DR: Suspense a/c $1500
The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200.
The debit side of the TB would have been less by $200 so the Suspense account would have been debited.
The journal entry to correct the error: CR: Suspense a/c $200
Discount received of $67 was entered as $76 in the Trial Balance.
The credit side of the TB would have been more (debit side less) by $9 so the Suspense account would have
been debited. The journal entry to correct the error: CR: Suspense a/c $200
The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance.
As the entry was made on the wrong side of the account, the credit side would have been less by $3000 so the
Suspense account would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500
N.B. THE BALANCE IN THE SUSPENSE ACCOUNT MAY BE CAUSED BY MORE THAN ONE ERROR
•
•
Enter each journal entry to correct the error separately.
Post each entry to the Suspense account and close off.
41
42
St. Mary’s College
Principles of Accounts
The Statement of Corrected Net Profit


Errors affect the calculation of the Net Profit if the errors affect any of the components of the
Trading and Profit and Loss account.
•
Income and Net Profit have a direct relationship:
- When an error results in Income being overstated, Net profit is also overstated.
- When an error results in Income being understated, net profit is also understated.
•
Expenses and Net Profit have an inverse relationship:
- When an error results in Expenses being overstated, net profit is understated.
- When an error results in Expenses being understated, net profit is overstated.
To correct Net Profit, amounts resulting in Net profit being understated have to be added, and
amounts resulting in Net Profit being overstated have to be lessened. This is done using a
“Statement of Corrected Net Profit”.
Name of business
st
Statement of corrected Net Profit for the year ended 31 March 2007
$
$
X
Net Profit per accounts
Add: Expenses amount overstated
Income / Revenue amount understated / omitted
X
X
X
Less: Income / Revenue amount overstated
Expenses amount understated / omitted
X
X
(X)
Corrected Net Profit for the year
XX
Example:
•
th
On January 17 2010, an error was found where an invoice of $100 had been credited to the
supplier’s a/c but had not been debited to the purchases account.
If Purchases was understated, then Net Profit was overstated and has to be corrected as follows:
st
Statement of Corrected Net profit for the year ended 31 December 2009
Net Profit per accounts
Less: Purchases undercast
Corrected Net Profit for the year
$
$
2 120
(100)
2020
43
Principles of
Accounts
FINAL ACCOUNTS
Ms Fergusson
44
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER
Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$
$
Sales
Less: Sales Returns
Net Sales
LESS: COST OF GOODS SOLD:
Opening Stock
Purchases
Add: Carriage Inwards
Less: Purchases Returns
Net Purchases
Cost of Goods Available for sale
Less: Closing Stock
Cost of Goods Sold
GROSS PROFIT (or GROSS LOSS)
**Add: REVENUE
Interest received
Rent Received
Discount received
Decrease in Provision for bad debts
X
X
X
X
(X)
X
X
(X)
(X)
X or (X)
X
X
X
X
X
X
Total Revenue
**Less: EXPENSES
Wages/salaries
Utilities
Increase in provision for bad debts
Depreciation
Bad debts expense
Carriage Outwards
Discount allowed
Total expenses
NET PROFIT (or NET LOSS)
$
X
(X)
X
X
X
X
X
X
X
X
(X)
X or (X)
**These are a few examples, however the list can be exhaustive in reality
45
VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER
Owner’s Name
Balance Sheet as at _________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Fixtures & Fittings
Motor Vehicles
CURRENT ASSETS:
Stock
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Revenues owing
Bank *
Cash
Total Current Assets
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues
Bank overdraft *
Total Current Liabilities
WORKING CAPITAL
FINANCED BY:
Opening Capital
Add: Net Profit OR Less: Net Loss
Less: Drawings
Closing Capital
LONG-TERM LIABILITIES
Mortgage
Bank Loan
Total Long Term Liabilities
COST $
X
X
X
X
X
ACC DEP. $
(X)
(X)
(X)
(X)
(X)
NBV $
X
X
X
X
X
X
X
(X)
X
X
X
X
X
X
X
X
X
X
(X)
X
XX
X
X OR (X)
X
(X)
X
X
X
X
XX
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP
Partnership
Trading & Profit & Loss Appropriation A/c for the _______ ended ________
$
$
Sales
Less: Sales Returns
Net Sales
LESS: COST OF GOODS SOLD:
Opening Stock
Purchases
Add: Carriage In
Less: Purchases Returns
Net Purchases
Cost of Goods Available for sale
Less: Closing Stock
Cost of Goods Sold
GROSS PROFIT (or GROSS LOSS)
$
X
(X)
X
X
X
X
X
(X)
X
X
(X)
(X)
X / (X)
Add: Revenue
Rent Received; Discount Rec. etc
Decrease in Provision for bad debts
X
X
Less: Expenses
Carriage Outwards; Discount allowed etc.
Wages/salaries etc
Increase in Provision for Bad Debts
Depreciation
X
X
X
X
X
(X)
NET PROFIT (or NET LOSS)
Add: Interest on drawings
Partner 1
Partner 2
X / (X)
X
X
X
Less: Interest on Capital
Partner 1
Partner 2
Salary: Partner 1
X
X
X
X
(X)
XX
Share in Profits:
Partner 1
Partner 2
X
X
XX
* The last section (starting from Net Profit) is called the Approriation A/C
46
47
TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS
Interest on Capital is based on number of months the capital was in use.
Capital in use: Date of capital investment to Year end
e.g. Capital $5000 on June 1 to Dec 31 (year end) = 7 months
Interest on capital (10%):
Partner 1: ($5000 x 10%) x 7/12mths
Interest on Drawings is based on number of months the drawings was in use.
Drawings in use: Date of drawings to Year end
e.g. Drawings $300 on April 1 to Dec 31 (year end) = 9 months
Interest on drawings (5%):
Partner 1: ($300 x 5%) x 9/12mths
PROFIT SHARING
Profits or Losses may be shared according to a stated Profit Sharing ration or in
proportion to Partners’ Capital (Partnership Deed). If it is not stated how to share profits,
share equally according to the Partnership Act.
THE PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS
(Columnar Format)
Partnership Co.
Capital Account
Date
Details
2010
Dec 31
Balance c/d
Partner 1
Partner 2
Date
$
$
2010
Jan 1
Feb 1
X
X
XX
XX
2011
Jan 1
Details
Balance b/d
Bank
Balance b/d
Partner 1
Partner 2
S
X
X
$
X
XX
XX
X
X
Partner 1
Partner 2
S
X
$
X
X
X
X
X
X
XX
XX
X
X
Current Account
Date
2010
Dec 31
Dec 31
Details
Drawings
Partner 1
Partner 2
Date
$
X
$
X
2010
Jan 1
Dec 31
P&L Appropriation:
Interest on drawings
X
X
Details
Balance b/d
P&L Appropriation:
Interest on Capital
Salary
Share of profits
Dec 31
Balance c/d
X
X
XX
XX
2011
Jan 1
Balance b/d
48
VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP
Partnership
Balance Sheet as at _________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Motor Vehicles
COST $
ACC DEP. $
NBV $
X
X
X
X
(X)
(X)
(X)
(X)
X
X
X
X
CURRENT ASSETS:
Stock
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Accrued revenue
Bank
Cash
X
X
(X)
X
X
X
X
X
Total Current Assets
X
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues
Bank overdraft
Total Current Liabilities
X
X
X
X
(X)
WORKING CAPITAL
X
XX
FINANCED BY:
CAPITAL ACCOUNTS
Partner 1
Partner 2
X
X
X
CURRENT ACCOUNTS
Partner 1
Partner 2
X
X
X
LONG-TERM LIABILITIES
Mortgage
X
XX
FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS
Partnership
Balance Sheet as at _________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Motor Vehicles
COST $
ACC DEP. $
NBV $
X
X
X
X
(X)
(X)
(X)
(X)
X
X
X
X
CURRENT ASSETS:
Stock
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Accrued revenue
Bank
Cash
X
X
(X)
X
X
X
X
X
Total Current Assets
X
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues
Bank overdraft
Total Current Liabilities
X
X
X
X
(X)
WORKING CAPITAL
X
XX
FINANCED BY:
CAPITAL ACCOUNTS
Opening Capital
Capital introduced
Partner 1
X
X
X
Partner 2
X
X
X
X
X
X
X
X
(X)
(X)
X
X
X
X
(X)
(X)
X
X
CURRENT ACCOUNTS
Opening balance
Add: Interest on Capital
Salary
Share in Profits
Less: Drawings
Interest on drawings
LONG-TERM LIABILITIES
Mortgage
X
XX
49
50
FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS)
When forming a partnership by merging two sole traders, an opening journal is prepared
as follows:
•
State partnership name
•
Draw Journal with DR and CR columns, as seen below
•
List the assets and liabilities of the new partnership.
-
Combine / Add each asset and liability of the sole traders forming the
partnership
-
* Bank and Bank overdrafts are combined into one net figure which is
EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability)
-
*The Capital of EACH partner (former sole traders) must be stated separately.
The Capital of each partner is calculated using C = A-L, using the individual
sole trader figures.
•
Narrative for formation of partnership
•
DR and CR Totals must balance (Accounting equation)
Partnership
The Journal
Date
Details
DR
CR
$
$
Buildings
X
Fixtures and Fittings
X
Motor Vehicles
X
Stock
X
Debtors
X
Bank *
X*
Cash
X
Mortgage
X
Bank Loan
X
Creditors
X
Bank Overdraft *
X*
*Capital: Partner 1
X
Partner 2
X
To record assets and liabilities at formation of partnership
XX
XX
51
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS
Non Profit Organizations include:
•
•
•
•
•
•
•
Associations
Clubs
Societies
Unions
Charities
Universities
Churches
Non-profit making organizations belong to their members. Members pay subcriptions.
The Cash book is called the Receipts and Payments Account and the Trading and Profit and Loss
Account is called the Income and Expenditure Account.
Differences in accounting terms / procedures
PROFIT MAKING FIRMS
NON PROFIT ORGANIZATIONS
Cash Book
Receipts and Payments a/c
Trading a/c for buying and selling of goods for profit
Trading a/c for fundraising activities only
e.g. Bar Trading a/c
Profit & Loss a/c
Income and Expenditure a/c
Net Profit
Surplus of income over expenditure (Surplus)
Net Loss
Excess of expenditure over income (Deficit)
Capital a/c
Accumulated Fund
Balance Sheet
Balance Sheet
_________________________________________________________________________________________
FORMAT FOR RECEIPTS AND PAYMENTS A/C
Non Profit Organization
Receipts and Payments Account for the period ended ________________________
Receipts
Balance b/f
Bar Sales
Subscriptions
Donations Received
Other Receipts e.g.
Rent Received
Gate Receipts
Raffles and other competitions
Interest Received on bank a/c
Sale of old equipment
$
X
X
X
X
X
X
X
X
XX
Balance b/f
X
Payments
Bar Purchases
General Expenses
Other Payments e.g.
Insurance
Purchase of refreshments
Purchases of Prizes
Purchase of new equipment
Rent of hall for Annual Dinner
Maintenance
Balance c/f
$
X
X
X
X
X
X
X
X
X
XX
52
THE SUBSCRIPTION ACCOUNT OF NON PROFIT ORGANIZATONS
Non Profit Organizations receive subscriptions from its members.
The Subscription Account is a revenue account (credit balance).
The Subscription account must account for any Accruals and Prepayments, like all revenue accounts,
as follows:
Non Profit Organization
Subscription a/c
Date
Year
Dt @ start
Year end
Details
Accrual b/d
Income & Expenditure**
Prepayment c/d
Dr$
X
X
X
Date
Year
Dt @ start
Year end
Details
Cr$
Prepayment b/d
Bank (Receipts)
Accrual c/d
XX
X
X
X
XX
**The amount for “Income & Expenditure” is entered in the Income & Expenditure account for
Subscriptions in the Income section.
___________________________________________________________________________________
LIFE MEMBERSHIP
Many clubs and societies have life membership schemes where members can pay a relatively large
amount at the beginning and then never pay any more membership fees.
The payment of a life membership fee should be spread over the estimated / expected membership period.
An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the
remainder would be entered in the Balance Sheet as a long-term liability.
Example:
A member paid $20 000 life membership at age 20 and expected to be a member until 40 years old.
Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be
$20 000 / 20 years which is $1 000.
In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability.
In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability.
…
53
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS
The Trading a/c is prepared to calculate whether the non profit organization made a profit or a loss on its
fundraising activities e.g. bar, disco, dances, etc.
The Income & Expenditure shows whether the accumulated fund (capital) has increased or decreased
over the period.
Non Profit Organization
Bar Trading a/c for the period ended ____________________________
$
Bar Sales
Less: Cost of Goods Sold
Opening Stock
Add: Purchases
Less: Closing Stock
$
X
X
X
X
(X)
(X)
Gross Profit
X
Less: Barman’s Salary
(X)
Profit / Loss transferred to Income & Expenditure a/c*
XX
Income & Expenditure a/c for the period ended ____________________________
$
$
Income
Profit from bar*
Subscriptions**
Donations received
Rent received
Interest Received
Receipts from Raffles etc.
Any other income for period…
Expenditure
Loss from bar*
Wages
General Expenses
Donations
Depreciation of Equipment
Depreciation of Furniture & Fittings
Any other payments in period
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
(X)
Surplus of income over expenditure **
XX
**If Expenditure exceeds Income, the difference is Excess of expenditure over income
N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments.
Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.
54
FORMAT FOR THE BALANCE SHEET OF NON PROFIT ORGANIZATONS
Non Profit Organization
Balance Sheet as at ________________
FIXED ASSETS:
Club Premises
Furniture & Fittings
Sports Equipment
COST $
ACC DEP. $
NBV $
X
X
X
(X)
(X)
X
X
X
X
(X)
X
CURRENT ASSETS:
Bar Stock
Prepaid Expenses
Accrued Revenues e.g. Accrued Subscriptions *
Bank
Cash
X
X
X
X
X
Total Current Assets
X
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues e.g. Advanced Subscriptions *
Total Current Liabilities
X
X
X
(X)
WORKING CAPITAL
X
XX
FINANCED BY:
ACCUMULATED FUND
X
Accumulated Fund @ start of period (Opening Balance)
Add: Surplus of income over expenditure
Less: Excess of expenditure over income
OR
X OR
(X)
Accumulated Fund @ end of period (Closing Balance)
X
LONG-TERM LIABILITIES
Mortgage
Life Membership Fee**
Total Long Term Liabilities
X
X
X
XX
55
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Name of the Business
Income and Expenditure Account for the year ended ___________________________________
$
Income
Membership dues
Interest and Dividends
Other
$
$
X
X
X
X
Expenditure
Telephone
Stationary & Office Supplies
Traveling
Repairs and Maintenance
Motor Vehicle expense
Bank Charges
Interest on members deposits
Interest on Loans
Application: Subscriptions and dues
Annual General Meeting (AGM) expenses
Auditors’ fees/remuneration
Provision for Depreciation
X
X
X
X
X
X
X
X
X
X
X
X
(X)
X
X
X
Surplus/Deficit for the year
Add: Undistributed surplus at the beginning of year b/f
Less: Appropriations
Transfer to reserves:
Statutory reserve
Special reserve
Honoraria
Proposed dividend
X
X
X
X
X
(X)
Undistributed surplus c/f to next year
XX
Note:
•
•
•
•
Statutory Reserves – by law / statute a minimum percentage of net income should be transferred
to this reserve.
Special Reserve – a reserve for any specific named purpose e.g. Investment reserve; Building
reserve
Honoraria – voluntary payments to members of the committee of management as appreciation for
services performed.
Proposed Dividends – dividends fixed at the AGM.
56
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Name of Business
Balance Sheet as at _________________________________________
Employment of Capital
Fixed Assets
Premises
Equipment
Motor Vehicles
$
Cost
X
X
X
X
Current Assets
Stock
Receivables: Membership dues
Prepayments
Bank
Cash
Less: Current Liabilities
Honoraria Owing
Proposed Dividends *
$
Accumulated
Depreciation
-(X)
(X)
X
$
Net Book
Value
X
X
X
X
X
X
X
X
X
X
X
X
(X)
Working Capital
Net Assets
X
XX
Capital Employed
Share Capital
Reserves:
Statutory reserve
Special reserve
Undistributed surplus income
X
X
X
X
X
XX
Note:
A Cooperative Society’s primary source of capital is from its members.
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY
Limited Liability Company
Trading & Profit & Loss Appropriation A/c for the _______ ended ________
$
$
$
Sales
X
Less: Sales Returns
(X)
Net Sales
X
LESS: COST OF GOODS SOLD:
Opening Stock
Purchases
Less: Purchases Returns
Add: Carriage In
Net Purchases
Cost of Goods Available for sale
Less: Closing Stock
Cost of Goods Sold
GROSS PROFIT (or GROSS LOSS)
X
X
(X)
X
X
X
X
(X)
(X)
X / (X)
Add: Revenue
Rent Received; Discount Rec. etc
Decrease in Provision for bad debts
Total revenue
X
X
Less: Expenses
Carriage Outwards
Utilities ; Wages/salaries etc
Discount allowed
Increase in provision for bad debts
Bad debts expense
Depreciation
*Directors’ Remuneration
*Debenture Interest
Total expenses
X
X
X
X
X
X
X
X
X
(X)
NET PROFIT (or NET LOSS)
X / (X)
Add Retained Earnings b/f
X
X
Less: Appropriations
Transfer to General reserves
Proposed dividends:
Preference share dividends
Ordinary Share Dividends
X
X
X
Retained Earnings for the year
* The last section (starting from Net Profit) is called the Approriation A/C
(X)
X
57
58
VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY
Limited Liability Company
Balance Sheet as at _________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
Motor Vehicles
COST $
ACC DEP. $
NBV $
X
X
X
X
(X)
(X)
(X)
(X)
X
X
X
X
CURRENT ASSETS:
Stock
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Accrued revenue
Bank
Cash
Total Current Assets
X
X
(X)
X
X
X
X
X
X
LESS: CURRENT LIABILITIES
Creditors
*Debenture Interest Payable
Accrued expenses
Advanced revenues
*Proposed Dividends:
Ordinary
Preference
Bank overdraft
Total Current Liabilities
WORKING CAPITAL
X
X
X
X
X
X
X
(X)
X
XX
FINANCED BY:
Authorized Share Capital
Ordinary Shares @ $ par value
% Preference Shares @ $ par value
Issued Share capital
Ordinary Shares @ $ par value
% Preference Shares @ $ par value
X
X
X
X
X
X
Reserves
General Reserves
Retained Earnings
X
X
X
X
LONG-TERM LIABILITIES
Mortgage
* % Debentures
X
X
X
XX
59
FORMAT OF THE MANUFACTURING ACCOUNT
Manufacturing Business
Manufacturing Account for the _______ ended ________
$
$
Opening Stock of Raw Materials
Add: Purchases of Raw Materials
Carriage Inwards (Raw Materials)
Less: Closing Stock of Raw Materials
$
X
X
X
X
(X)
Cost of Raw Materials consumed (Direct Materials)
X
Direct Labour
Direct expenses
X
X
PRIME COST
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers)
General Factory expenses / Indirect expenses
Fuel and Power
Factory rent; Factory Insurance…
Depreciation of Plant and machinery
Lubricants
X
X
X
X
X
X
X
X
X
X
X
(X)
PRODUCTION COST
Add: Opening Work-in-Progress
Less: Closing Work-in-Progress
PRODUCTION COST OF GOODS COMPLETED C/D*
X
Trading and Profit and Loss Account for the ________ended ________
$
$
Sales
Less: Sales Returns (Finished Goods)
NET SALES
Less: Cost of Goods Sold
Opening Stock of Finished Goods
Add: Purchases of Finished Goods (if any)
Less: Purchases Returns of Finished Goods (if any)
X
X
X
Net Purchases
*Add: Production cost of goods completed b/d*
.
X
X
X
(X)
Less: Closing Stock of Finished goods
(X)
X
GROSS PROFIT
Less: Administrative Expenses
Administrative Staff pay
Rent; Insurance; Depreciation etc
$
X
X
X
X
X
X
Less: Selling and Distribution
Sales Staff pay
Commission on sales; Carriage Outwards, etc
X
X
X
Financial Charges
Bank Charges
Discounts Allowed
X
X
X
NET PROFIT
(X)
X
60
MANUFACTURING ACCOUNT (INCLUDING COST OF PACKAGING)
The Cost of Production may include the cost of the packaging of the finished goods e.g. boxes, bottles,
cases etc. This Cost has to be included in the Manufacturing Account in addition to the cost of Raw Materials.
This can be done after Cost of Raw Materials Consumed is calculated, or in columnar format as seen below:
Manufacturing Business
Manufacturing Account for the _______ ended ________
Opening Stock
Add: Purchases
Carriage Inwards
Less: Closing Stock of Raw Materials
Cost of Direct Materials & Boxes consumed
Direct Labour
Direct expenses
$
Raw
Materials
$
Packaging
e.g Boxes
X
X
X
X
(X)
X
X
X
X
(X)
X
X
$
Total
XX
X
X
X
PRIME COST
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers)
General Factory expenses / Indirect expenses
Fuel and Power
Factory rent; Factory Insurance…
Depreciation of Plant and machinery
Lubricants
X
X
X
X
X
X
X
PRODUCTION COST
Add: Opening Work-in-Progress
Less: Closing Work-in-Progress
PRODUCTION COST OF GOODS COMPLETED C/D*
X
X
X
(X)
X
* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even
though it appears to be under the “Boxes” Column.
61
The following format is the long way of including the Cost of Packaging in the Manufacturing Account. The
Packaging cost is calculated after the “Cost of Raw Materials consumed” as follows:
Manufacturing Business
Manufacturing Account for the _______ ended ________
$
$
Opening Stock of Raw Materials
Add: Purchases of Raw Materials
Carriage Inwards (Raw Materials)
Less: Closing Stock of Raw Materials
Cost of Raw Materials consumed (Direct Materials)
Opening Stock of Packaging e.g. Boxes
Add: Purchases of Boxes
Carriage Inwards (Boxes)
Less: Closing Stock of Boxes
$
X
X
X
X
(X)
X
X
X
X
X
(X)
X
Cost of Direct Materials and Boxes consumed
Direct Labour
Direct expenses
XX
X
X
PRIME COST
X
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers)
General Factory expenses / Indirect expenses
Fuel and Power
Factory rent; Factory Insurance…
Depreciation of Plant and machinery
Lubricants
X
X
X
X
X
X
X
PRODUCTION COST
Add: Opening Work-in-Progress
Less: Closing Work-in-Progress
PRODUCTION COST OF GOODS COMPLETED C/D*
X
X
X
(X)
X
62
FORMAT OF THE BALANCE SHEET OF A MANUFACTURING BUSINESS
The Current Asset Section is the only section that differs in the Balance Sheet for a
Manufacturing Account as Stock is now divided into THREE types:
1. Raw Materials
2. Work-in-Progress
3. Finished Goods
Manufacturing business
Balance Sheet as at ________________
FIXED ASSETS:
Land & Buildings
Plant & Machinery
COST $
ACC DEP. $
NBV $
X
X
(X)
(X)
X
X
X
(X)
X
CURRENT ASSETS:
Stock*
Raw materials
Work in progress
Finished Goods
X
X
X
X
Debtors
Less: provision for bad debts
Net debtors
Prepaid expenses
Revenues owing
Bank *
Cash
Total Current Assets
X
(X)
X
X
X
X
X
X
LESS: CURRENT LIABILITIES
Creditors
Accrued expenses
Advanced revenues
Bank overdraft *
Total Current Liabilities
WORKING CAPITAL
X
X
X
X
(X)
X
XX
FINANCED BY:
Opening Capital
Add: Net Profit OR Less: Net Loss
Less: Drawings
Closing Capital
X
X OR (X)
X
(X)
X
LONG-TERM LIABILITIES
Mortgage
Bank Loan
Total Long Term Liabilities
X
X
X
XX
63
Principles of
Accounts
RATIO ANALYSIS
Ms Fergusson
64
St. Mary’s College Lesson Notes
Accounting Ratios:
A ratio that expresses the relationship between one accounting result and another, intended to provide a useful comparisons.
Liquidity Ratios: assesses the business’ ability to cover its short-term debt as they become due.
Example:
Current Assets
Current Liabilities
Quick Ratio =
Example:
Current Assets - Stock
Current Liabilities
Debtors
Sales
=
2.5 Current assets cover 1 Current liability
Also known as “Acid Test Ratio”
Ratio expressed as the number of times
quick assets can cover the current liabilities
in the accounting period.
= $12 500 - $2 500 =
$5 000
2:1
$3 600 x 12mths = 1.35 months
$32 000
Debtors
Creditors
2 Quick Assets cover 1 C. Liability
Expressed as the average no. of
months debtors take to pay
business amounts owed.
Debtors take 1.35 months on average to
pay business amounts owed.
Creditors / Acc. Payable x 12mths
Annual Purchases
Creditors = $2400 x 12mths = 1.04 months
Purchases
$27 700
Debtor: Creditor Ratio =
Example:
2.5:1
Debtors / Acc. Receivable x 12mths
Annual Sales
Creditor: Purchases Ratio =
Example:
= $12 500 =
$5 000
Current Assets - Stock .
Current Liabilities
Debtor: Sales Ratio =
Example:
Also known as “Working Capital Ratio”
Ratio expressed as the number of times
current assets can cover the current liabilities
in the accounting period.
Current Assets .
Current Liabilities
Current Ratio =
Debtor .
Creditor
= $3 600 =
$2 400
1.5:1
Expressed as the average no. of
months the business takes to
pay creditors / suppliers
amounts owed.
The business takes 1.04 months on
average to pay creditors amounts owed.
Measures the relationship between how much credit is
granted by the business to customers and how much credit
is received from suppliers.
…for every $1.50 owed by a debtor, the business owes $1 to a
creditor.
65
St. Mary’s College Lesson Notes
Profitability Ratios: assesses the business’ overall efficiency and performance during a specific period.
Gross Profit
Net Sales
Gross Profit as a Percentage of Sales =
Example: Gross Profit x 100 =
Net Sales
$12 900
$32 000
x 100 = 40.3%
Net Profit
Net Sales
Net Profit as a Percentage of Sales =
Example: Net Profit x 100 = $7 200 x 100 = 22.5%
Net Sales
$32 000
Net Profit as a Percentage of Capital Employed =
(Return on Capital Employed)
Expressed as a %
x 100
x 100
Amount of Sales that result in
Gross Profit
The business made a Gross profit of $0.40
for every $1 of Sales.
Expressed as a %
Amt of Sales that business keeps as
profits after cost of sales & expenses
The business made a profit of $0.22 for every $1
of Sales after deducting all costs & expenses.
Net Profit
x 100
Capital Employed
Expressed as a
%
This ratio measures the amount of returns a business receives from resources made available to them
from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are
included in capital employed as well.
There are different Formulas for Capital Employed. Most popular for CSEC:
Capital Employed = Opening Capital + Closing Capital
2
Example:
Net Profit
x 100 = $7 200
Capital Employed
$21 600
Rate of Turnover or Stock turnover =
Rate of Turnover or Stock turnover =
x 100 = 33.3%
Cost of Goods Sold .
Average Stock
Average Stock
The business earned $0.33 for every $1
of Capital Employed.
Expressed as the no. of times per
annum stock is sold or turned over.
x 12mths / 365dys
Cost of Goods Sold
Expressed as the average
no. of months or days the
stock is sold or turned over.
Average Stock = Opening Stock + Closing Stock
2
Example1: $19 100
$2 300
= 8.3 times
Example2: $2 300
$19 100
x 12mths = 1.45 months
66
Accounting Ratios and Incomplete Records:
MARK UP AND MARGIN (PROFIT EXPRESSED AS A % OF PRICE)
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE
FORMULAS:
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
Mark up (%) =
X 100
Gross Profit
Cost Price /
Cost of Goods Sold
NB: Sales = Cost of Goods Sold + Mark up Profit
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE
Margin (%) =
X 100
Gross Profit
Selling Price /
Sales
NB: Cost of Goods Sold = Sales – Margin Profit
USING MARK UP AND MARGIN IN INCOMPLETE RECORDS
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can be calculated as follows:
Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($)
Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up)
Example:
Cost of Goods Sold = $5000
Mark up = 20%
Solution:
Gross Profit = 20% x $5000 = $1000
Therefore, Sales = $5000 + $1000 = $6000
MARGIN: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
NB: If Margin % is given and Sales Revenue, Gross Profit and Cost of Goods Sold can be calculated as follows:
Gross Profit ($) = Margin (%) x Sales ($)
Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin)
Example:
Sales = $6400
Margin = 25%
Solution:
Gross Profit = 25% x $6400 = $1600
Therefore, Cost of Goods Sold = $6400 + $1600 = $4800
RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary)
MARGIN =
Mark-up numerator
.
(fraction)
Mark-up numerator + Mark-up denominator
MARK UP =
(fraction)
Margin numerator
.
Margin numerator - Margin denominator