UGBS 205
Fundermental of Accounting
ASANTE WISHES
YOU WELL
Godfred and Rita, UGBS
Slide 1
UGBS 205
Fundamentals of Accounting
Methods
Week 1 – Introduction to Accounting
College of Humanities
Business School
2017/2018
Overview
• The economic history of an organization is essential for
decision making. Accounting provides the means for
recording/writing the economic history which has facilitated
the dealings between business enterprises. Thus, it has been
described as the common language of businesses. This
session seeks to introduce students to the nature and purpose
of accounting.
Godfred and Rita, UGBS
Slide 3
Learning Objectives
• At the end of this session, you should be able to
– Define and explain the meaning and purpose of accounting
– Understand the accounting process
– Identify the sub-fields of accounting and the kind of
accounting information they provide.
– Explain the types of business organizations and identify
their characteristics
– Identify the users of accounting information and explain
their informational needs
– Explain the kinds of financial statements and their
purpose(s)
Godfred and Rita, UGBS
Slide 4
Reading List
• Read Chapter 1 of Recommended Text –
– Chapter 1 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapter 1 of Wood, F. & Sangster, A. (2008). Frank Wood’s Business
Accounting 1. Volume 1. Pearson Education.
• Other Financial Accounting text books available to students
Godfred and Rita, UGBS
Slide 5
What is Accounting?
Identification
Communication
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It is a process of
identifying, measuring and
communicating financial
information about an
entity to permit informed
judgements and decisions
by users of the
information.
6
Measurement
The Purpose of Accounting
To provide useful
financial
information about
economic entities
to decision makers
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Bookkeeping and Accounting
• Bookkeeping is the process of recording daily
transactions in a consistent way. It comprises of;
• Recording transactions
• Posting
• Producing invoice
• Maintaining ledgers
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Accounting Process
•
•
•
•
•
Sales Journal
Purchases journal
Returns Journal
Cashbook
General Journal
• Sales ledger
• Purchases ledger
• General ledger
JOURNALS
LEDGERS
FINANCIAL
STATEMENTS
TRIAL
BALANCE
• Income statements
• Balance Sheets
• Cash flow Statements
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•Balance off accounts
•Adjusted Trial
Balance
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Subfields of Accounting
Financial Accounting
• The field of accounting that serves external decision makers
and is concerned with the preparation of financial statements.
Management Accounting
• Provision of information to people within the organization for
decision making
Cost Accounting
• Deals with the collection and allocation and control of cost of
production or service
Taxation
• Proper accounting for the incomes and expenditures of taxable
entities
Auditing
• Giving independent assurance as to the true and fair view of
financial reports.
Public Sector Accounting
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• Identification of sources and uses of resources for government
entities
10
Business Organizations
Profit Motive
Activities
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A business is an
organization in which
basic resources (inputs)
are assembled and
processed to provide
goods or services
(outputs) to customers.
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Ownership
Types of Business – Profit Motive
Profit Oriented Organizations
• Businesses set up with the sole aim of making profits.
Governmental Organizations
• Public sector entities set up to provide public goods and
services.
Non-Governmental Organizations
• Organizations set up to achieve other objectives in society and
not for profit
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Types of Business - Activities
Manufacturing Business
• Change basic inputs into goods that are sold to customers.
Merchandising Business
• Purchase goods from other businesses and sell to customers
(either wholesaling or retailing).
Service Business
• Provide services rather than goods to customers.
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Types of Business - Ownership
Sole Proprietorship
Partnership
Company
• Owned by a single
individual.
• Least regulated –
registration at the
Registrar General
Department
• Formed by 2 or
more individuals.
• Operate with
partnership
agreements (formal
or informal).
• Regulated by the
Private Incorporated
Partnership Act (Act
152) of 1962
• Partners could be
dormant or active
partners.
• Owned by one or
more persons
(shareholders).
• Regulated by
Companies Code
and other statutes.
• Formation requires
at least 2 directors.
• Public or private
• Limited (by shares or
guarantee) or
unlimited
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Characteristics of Sole Proprietor
Easy Formation
Quick Decision
Making
Difficulty in
ownership
transfer
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Less Expensive to
Operate
All profits and
losses
Sole
Proprietorship
Unlimited
Liabilities
Limited Source
of Funds
Lacks
Perpetual
Succession
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Characteristics of Partnership
Pooling of Skills and
Resources
Possible
disagreement
between partners
Difficulty in
ownership transfer
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Severally and jointly
liable
Share Profits and
losses
Unlimited Liabilities
Partnership
Lacks Perpetual
Succession
Limited Source of
Funds
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Characteristics of Companies
Legal separate
entity
Separation of
ownership and
Management
Share
(dividends) /reinvest profits
Delayed
Decision Making
Companies
Limited Liabilities
Ease in ownership
transfer
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Perpetual
Succession
Wide access to
raising funds
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Why Businesses Need Accounting
Information
Sole Proprietorship
• tax collecting purposes.
• lending purposes.
• Business valuation purposes.
Partnership
• Fairness in sharing of partnership profits.
• Tax purposes
• Lending / financing purposes
• The purpose of admitting other partners into the partnership.
Companies
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Users of Accounting Information
Internal Users
External Users
Direct Interest – For
example: owners,
creditors,
customers
For example:
Management,
employees.
Indirect interest –
For example:
government, public,
trade unions.
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Informational Needs of Users
Shareholders
/ Investors
• Investment Decisions
• Assess the future profitability and risk of the
company; cash generating abilities of the
company; the stewardship of management
Management
• Operating and strategic decisions such as Financing the
entity; Investing resources of entity; Managing employees
etc.
Employees
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• The stability and profitability of the company
• The ability of the company to provide remuneration,
working conditions, retirement benefits , pensions and
job security
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Informational Needs of Users
Creditors /
Lenders
Government /
Regulatory
Agencies
Suppliers
Customers
Godfred and Rita, UGBS
• Assess the company’s ability to pay periodic interest and
principal amount; risk of default and its consequences;
future prospects for investing and lending decisions;
company’s need for additional financing.
• Exercise of their supervisory functions.
• Reveal trends in the economy
• Check and determines entities’ tax liabilities
• Determine creditworthiness of companies and in
establishing credit terms
• Evaluate staying power of their suppliers and supplier
relationships, price, product details and conditions of sale
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Financial Statements
Income Statement
Notes to the
Accounts
A statement prepared
to provide information
on the financial
performance, financial
position and the cash
flows of a business
entity
Statement of
Changes in Equity
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Statement of
Financial
Position(Balance
Sheet)
Cash Flow
Statement
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Financial Statements
Statement of Financial Position
• Shows the financial position of an entity at a point in time.
• It is a position statement.
• It summarizes the assets, liabilities and owners equity of an entity at a
particular point in time
Income Statement
• Shows the financial performance of an entity over a period of time.
• It is a periodic statement.
• It summarizes the revenue (income) and (expenses) expenditure of an entity over
time.
Cash Flow Statement
• Shows the actual cash inflows and outflows of an entity at a point in time.
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Financial Statements
Statement of Changes in Equity
• Shows the change in owners equity over an accounting period
• Net profit or loss during the period attributable to shareholders
• Increase or decrease in share capital reserves
• Dividend payments to shareholders
• Gains and losses recognized directly in equity etc…
Notes to the Accounts
• Notes provide supplemental information about the financial condition of a
company.
• Three types . . .
• Description of accounting rules and policies adopted and applied.
• Presentation of additional detail about an item on the financial statements.
• Provision of additional information about an item not on the financial
statements.
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End of Session Questions
• Distinguish between the following
– Cost Accounting and Management Accounting
– Bookkeeping and Accounting
• What are the information needs of the following
accounting information users:
– Financial Analysts
– Auditors
– Public
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UGBS 205
Fundamentals of Accounting
Methods
Week 2 – Accounting concepts, principles, bases and
standards
College of Humanities
Business School
2017/2018
Overview
• The different users of financial information and their
information needs make it necessary that a common
framework for the preparation and presentation of
information in the financial statement be adopted. This is
important because the different users of financial information
have different interests. This session seeks to introduce
students to the general concepts, principles, bases and
standards underlying the preparation of financial statements.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 27
Learning Objectives
• At the end of this session, you should be able to
– Explain the conceptual framework of accounting
– Identify the elements in the International Accounting
Standard Board’s (IASB’s) conceptual framework of
accounting
– State and explain the qualitative characteristics of
accounting information
– Explain accounting standards and their importance
– Explain and apply the fundamental concepts and principles
of accounting
– Explain the different bases of accounting
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 28
Reading List
• Read Chapter 10 of Recommended Text –
– Chapters 2 & 3 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapter 10 of Wood, F. & Sangster, A. (2008). Frank Wood’s Business
Accounting 1. Volume 1. Pearson Education.
• Other Financial Accounting text books available to students
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 29
Conceptual Framework
Framework for
setting accounting
standards
No repetition of
Fundamental
principles
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Statement of principles
which provide generally
accepted guidance for the
development of new
reporting practices and for
challenging and evaluating
the existing practices
Basis for
resolving
disputes
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Elements of the IASB’s Framework
Users of
Accounting
Information
Measurement
Informational
needs of
Users
IASB’s
Framework
Kinds of Financial
Statements
Recognition
Bekoe, Asare, Donkor and Appiagyei, UGBS
Characteristics of
Financial
Statements
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Qualitative Characteristics of
Accounting Information
• Complete
• Faithful
representation
• Neutrality
• Prudence
• Influence user’s
decisions
• Predictive value
• Confirmatory value
• Timeliness
RELEVANCE
COMPARABILITY
• Similarities and differences
can be discerned and
evaluated
• Consistency
• Disclosure of accounting
policies
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RELIABILITY
UNDERSTANDA
BILITY
• Explain complex
matters
32
Generally Accepted Accounting
Principles (GAAP)
GAAP
The term used to describe how financial
statements are prepared in a given
environment
It changes with time in accordance with
changes in business environment
Sources of GAAP
Regulatory
framework
Bekoe, Asare, Donkor and Appiagyei, UGBS
Statutes
Accounting
Standards
Best Practices
33
Accounting Concepts and Principles
Accounting Concepts
• Broad assumptions, which underlie the preparation of periodic
financial accounts of business enterprises.
Accounting Principles
• General decision rules derived from the objectives and the
theoretical concepts of accounting that govern the development
of accounting techniques
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Accounting Techniques and Bases
Accounting Techniques
• Specific rules derived from accounting principles that account for
specific transactions and events faced by the entity. E.g.
provision for depreciation
Accounting Bases
• These are particular methods which have evolved and developed
for expressing or applying the concepts of the recording of
financial transactions e.g. depreciation methods
Bekoe, Asare, Donkor and Appiagyei, UGBS
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Accounting Policies and Standards
Accounting Policies
• The specific accounting principles and methods of applying
those principles judged by business entities to be most
appropriate to their company’s circumstances and
adopted in the preparation and presentation of their
financial statements.
Accounting Standards
• Provide guidelines relating to the accounting treatment as
well as reporting of important accounting items with a
view to standardize the diverse accounting procedures or
policies
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APPLICABLE ACCOUNTING STANDARDS
Ghana
International
Financial
Reporting
Standards (IFRS)
International
Public Sector
Accounting
Standards (IPSAS)
Others
US GAAP
Australian
Accounting
Standards
International
Standards on
Auditing
Bekoe, Asare, Donkor and Appiagyei, UGBS
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Fundamental Accounting Concepts
Going
Concern
Concept
Accrual
(Matching)
Concept
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• A business will continue in operational existence for the
foreseeable future, and that there is no intension to
put the company into liquidation or to cease its
operations.
• Assets of the business should not be valued at their
realizable/saleable value.
• The effects of transactions and events should be
recognised when they occur and recorded in the
accounting books and reported in the financial
statements in the period in which they relate.
• Basis for preparation of financial statements
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Accounting Concepts
Business Entity
Concept
A business is distinct
and separate from its
owners.
Capital provided by the
owner is reckoned as
liability of the firm.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Money Measurement
Concept
Financial accounting
should record only
transactions which can be
measured in monetary
terms.
Money does not have a
constant value through
time.
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Accounting Concepts
Prudence
(Conservatism) Concept
Historical Cost Concept
Where alternative procedures,
or alternative valuations, are
possible, the one selected
should be the one which gives
the most cautious presentation
of the business’s financial
position or results.
Assets and expenses
should be shown at
acquisition cost and not
current market value (i.e.
their actual cost to the
business)
Do not anticipate for profit but
to make provision for all
possible losses.
Objectivity and
Verifiability.
Bekoe, Asare, Donkor and Appiagyei, UGBS
40
Accounting Concepts
Consistency
Concept
Periodicity (Time
Interval) Concept
It requires that there is
consistency of accounting
treatment of like terms
within each accounting
period and from one period
to the next.
Financial statements should
be prepared and produced at
regular intervals.
Similar items should be
accorded similar
accounting treatments
Ensure effective internal
decision making.
Bekoe, Asare, Donkor and Appiagyei, UGBS
An entity’s life is divided into
time periods.
41
Accounting Concepts
Materiality
Concept
Only material items are
recorded and presented
on financial statements.
Requires full disclosure of
all important / significant
/ material information or
events
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Substance Over
Form Concept
The economic substance of a
transaction should be
reflected in the accounts ,
rather than simply the legal
form
Under pins accounting for
leasing, hire purchase etc.
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Accounting Concepts
Duality Concept
Every transaction has
two effects or aspects.
The basis of the double
entry system of book
keeping.
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Bases of Accounting
Cash
Bases
Revenues are
recognized
when cash is
received and
expenses are
recognized
when cash is
paid.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Accrual
Bases
Revenues and
expenses are
recognized on
an economic
basis
regardless of
the actual
cash flow.
44
UGBS 205
Fundamentals of Accounting
Methods
Week 3 – Recognition and Measurement of Elements
of Financial Statements
College of Humanities
Business School
2017/2018
Overview
• This session presents the various elements of financial
statements and how they are recognized and measured. It
further examines how the elements in financial statements
relate to each other.
Godfred and Rita, UGBS
Slide 46
Learning Objectives
• At the end of this session, you should be able to
–
–
–
–
Identify the components of financial statements
Discuss the elements of financial statements
Explain the accounting equation
Determine the effects of transactions on the accounting
equation
– Explain the concept of double entry in accounting
Godfred and Rita, UGBS
Slide 47
Reading List
• Read Chapter 1 and 10 of Recommended Text –
– Chapters 4 & 6 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapters 1 and 10 Wood, F. & Sangster, A. (2008). Frank Wood’s
Business Accounting 1. Volume 1. Pearson Education.
• Other Financial Accounting text books available to students
Godfred and Rita, UGBS
Slide 48
Classes of Financial Statements
• Do you recall the components of
financial statements prepared by
business organizations?
Godfred and Rita, UGBS
Slide 49
Classes of Financial Statements
Financial statements can be classified
into;
–General Purpose Financial Statements
• Information to wide range of users
–Special Purpose Financial Statements
• Information to a particular user or group
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Elements of Financial Statements
•
•
•
•
•
Income
Expenses
Assets
Liabilities and
Equity
– Are the elements of the financial statements
– Hence they are the building blocks used in
constructing financial statements
Godfred and Rita, UGBS
Slide 51
Elements of Financial Statements
Directly related to
performance
• Income
• Expenses
Directly related to
financial position
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• Assets
• Liabilities
• Equity
Assets
Economic resources
Probable future
economic benefits
obtained or controlled
by a particular entity as
a result of past
transactions or events
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53
Classification of Assets
Current
Assets
• Assets from which future economic benefits are
expected to flow to the entity in not more than a year
after the reporting period
• The intention to turn them into cash within one year
• Examples; inventories/stock, trade receivables/debtors,
accounts receivables/prepayments, bank, cash etc…
NonCurrent
Assets
• Assets from which future economic benefits are
expected to flow to the entity in more than a year after
the reporting period
• Acquired for continuing use within the business with a
view to earning income or making profit from its use
• Not acquired for resale
• Examples; Land & building, plant & machinery, motor
vehicles, fixtures and fittings, goodwill
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Liabilities
Present obligations
Probable future sacrifices of
economic benefits arising
from present obligations to
transfer assets or provide
services to other entities in
the future as a result of past
transactions or events
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Classification of Liabilities
Current
liability
• Liability that is required to be settled in not
more than a year after the reporting period
• Examples; Trade payables/creditors, accounts
payable/accruals, bank overdraft, short-term
loans etc…
Noncurrent
liability
• Liability that is required to be settled in more
than a year after the reporting period
• Examples; Long-term loan, debentures, bonds
(issued)
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Equity or Net assets
Stated Capital
(Share Capital)
Owners contribution to the
business in the form of
assets, cash or other forms
of contribution.
The residual interest in
assets of the business after
deducting all its liabilities.
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Income
Occur in the
form of
Increases in
economic
benefits which
result in increase
in equity
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• Increase in assets
• Reduction in
liabilities
Classification of Income
Revenue
Gains
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• From delivering or producing goods,
rendering services, or other
activities that constitute the entity’s
ongoing major or central operations
• From peripheral or incidental
transactions of an entity
59
Expenses
Occur in the form of
• Outflows or depletions of
assets
• Incurrences of liabilities
Expenses are
decreases in
economic benefits
that result in
decreases in equity
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Expenses and Losses
• Expenses and Losses lead to decrease in
economic benefits that result in decreases in
equity.
• However;
– Expenses arise in the course of ordinary
activities of a business
– Losses arise from peripheral activities
• recognition criteria
• Bases of measurements
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Recognition and Measurement
of Elements in Financial Statements
Godfred and Rita, UGBS
Slide 62
Recognition
What is meant by “recognition”?
The process of including in the financial
statement an item that meets the
definition of an element of financial
statement and the fundamental
recognition criteria
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63
Fundamental Recognition Criteria
• For an element to be recognized in the
financial statement, it must meet the
fundamental recognition criteria;
– Definition
– Measurability
– Relevance
– Reliability
Godfred and Rita, UGBS
Slide 64
Fundamental Recognition Criteria
• Definitions
– The item meets the definition of an element of financial
statements.
• Measurability
– The item has a relevant attribute measurable with sufficient
reliability
• Relevance
– The information about it is capable of making a difference in
user decisions
• Reliability
– The information about it is representationally faithful,
verifiable, and neutral
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65
Recognition of Elements
• Asset
– Probable that future economic benefits will flow to the
enterprise
– Item has cost or value that can be measured reliably
• Liability
– Probable outflow of resources embodying economic
benefits from the settlement of obligation
– Amount to be settled can be measured reliably
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Recognition of Elements
• Income
– When increase in future economic benefits related to an
increase in an asset or a decrease of a liability has arisen
and can be measured reliably
• Expense
– When decrease in future economic benefits related to a
decrease in an asset or an increase of a liability has arisen
and can be measured reliably
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Measurement
What does “measurement” mean?
Putting monetary amount on an element
of financial statement
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Bases of measurement
Historical Cost
• Based on acquisition cost or the original cost
of the item
Current
(Replacement)
value
•Based on the cost that will be incurred in
acquiring a similar item on the market in its
current state
Net Realizable
(Settlement)
Value
•Based on the net amount that would be
realized in the event of disposing off the item
Present
(Discounted)
Value
Godfred and Rita, UGBS
•Based on the discounted future cash flows
associated with the usage of the item.
69
DOUBLE ENTRY AND ACCOUNTING
EQUATION
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Accounting Equation
• Financial accounting is based upon a simple idea
known as Accounting Equation
Claims over
the
resources of
the business
Resources of
a business
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Accounting Equation
Assets
Godfred and Rita, UGBS
Liabilities
72
Accounting Equation
Equity
(Owner’s
Equity)
Assets
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Accounting Equation
Assets
Godfred and Rita, UGBS
Equity
(Owner’s
Equity)
74
Liabilities
Effects of Transactions on Accounting
Equation
Identify the items
involved in the
transactions
Determine whether the
item is an asset, a
liability or capital
(owner’s equity)
Determine whether the
item has increased or
decreased as a result of
the transaction
Explain the effect of the
transaction on the
accounting equation
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75
CHANGES IN COMPONENTS OF
ACCOUNTING EQUATION
ASSETS
Causes of
Changes
LIABILITIES
EQUITY
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Double Entry Principle
• All transactions affect two items.
• Accounting shows the effect of the transactions on the
two items by:
a debit entry (left of a/c)
a credit entry (right of a/c)
• Each transaction must have a debit and corresponding
credit entry
A Debit Entry
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A Credit Entry
Double Entry Principles Summarized
Accounts
To record
Entry in account
Asset
Increase
Decrease
Debit
Credit
Expense
Increase
Decrease
Debit
Credit
Liability
Increase
Decrease
Credit
Debit
Equity
Increase
Decrease
Credit
Debit
Revenue
Increase
Decrease
Credit
Debit
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End of Session Questions
• What are the elements of financial statements?
• Show how each of the following transactions can
affect the accounting equation (Statement of
Financial Position)
– Purchased goods on credit GH¢250,000 from Adwoa
– Paid rent expenses for last month with cheque GH¢250
– Sold goods costing GH¢50,000 on credit GH¢ 90,000 to
Anas
– Returned goods GH¢25,000 to Adwoa a trade payable
Godfred and Rita, UGBS
Slide 79
UGBS 205
Fundamentals of Accounting
Methods
Week 4– Recognition and Measurement of Elements of
Financial Statements
College of Humanities
Business School
2017/2018
Overview
• The accounting process begins with the recording of
transactions. However, transactions are first recorded
chronological in details in the books of original entry (journal).
This session introduce students to the first stage of recording
transactions in the books of original entry, which precedes the
double entry.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 81
Learning Objectives
• At the end of this session, you should be able to
– Identify the books of accounting and explain their nature
and purpose
– Identify the kind of transactions to be recorded in each
type of journal
– Record transactions in the books of original entry
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 82
Reading List
• Read Chapter 11, 13 to 18 of Recommended Text –
– Chapters 5 & 7 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapters 11, 13, 14, 15, 16, 17, 18, and 20 of Wood, F. & Sangster, A.
(2008). Frank Wood’s Business Accounting 1. Volume 1. Pearson
Education.
• Other Financial Accounting text books available to students
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 83
Introduction
• Accounting information are recorded first in the
prime books / books of original entry / journals.
• They are then posted to the ledgers (subsidiary
and general ledger)
• The main books of accounting are:
– Journals
– Ledgers
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Books of Original Entry/Journal
• A book which records chronologically
(i.e. in order of date) and in detail the
various transactions of a trader or a
business.
• It is also known as Day Book because it
contains the account of every day's
transactions.
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Characteristics of a Journal
• It is the first successful step of recording
and precedes the double entry system. A
transaction is recorded first of all in the
journal.
• A transaction is recorded on the same day it
takes place.
• Transactions are recorded chronologically.
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Advantages of a Journal
• Each transaction is recorded as soon as it takes place. So
possibility of any transaction being omitted from the books
of account is minimized.
• Since the transactions are kept and recorded in journal
chronologically with narration, it can be easily ascertained
when and why a transaction has taken place.
• As a result ledger is kept tidy and brief.
• Journal shows the complete story of a transaction in one
entry.
• Any mistake in ledger can be easily detected with the help
of journal.
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Types of Journals (Books of Original Entry)
 Sales day book – for credit sales
 Purchases day book – for credit purchases
 Returns inwards day book – for returns inwards
 Returns outwards day book – for returns
outwards
 Cash book – for receipts and payments of cash
and cheques
 General journal – for all other items and unusual
transactions.
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Source Documents for Transactions
 Sales (Credit & Cash)
 Invoices, Receipts
 Purchases (Credit & Cash)
 Invoice, Receipts
 Returns
 Debit note, Credit Note
 Bank Transactions
 Cheques, bank statements
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Format of Sales/Purchases/Returns Journal
Name of Journal
Date
Bekoe, Asare, Donkor and Appiagyei, UGBS
Detail
Ref
90
LF
Amt
Uses of General Journal
• Opening Entries
– When a businessman wants to open the book for a new
year, it is necessary to journalize the various assets and
liabilities before the new accounts are opened in the
ledger.
• Closing Entries
– When the books are balanced at the close of the
accounting period with a view to prepare final accounts it
is necessary that balance of all the income and expenses
accounts must be transferred to trading and profit and loss
account.
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Uses of General Journal
• Rare Transactions Entries
– In business it may happen sometimes that transactions are usually
rare e.g. the purchase or sale of non-current assets, writing off bad
debts.
• Correction of Errors
– When an error is detected in the books, the same is rectified through
an entry in the journal proper
• Adjusting Entries
– Modification of the accounts at the end of an accounting period is
called adjustments.
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Uses of General Journal
• Transactions with no special journal
such as:
– Distribution of goods as free sample.
– Distribution of goods as charity.
– Goods destroyed by fire.
– Goods stolen by employees.
– Exchange of one asset for another asset etc.
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Format of General Journal
General Journal
Date
Detail
LF
Name of the account to be debited
Name of the account to be credited
The narrative
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Dr
Cr
Cash Book
• A book of original entry in which transactions
relating only to cash receipts and payments are
recorded in detail.
• When cash is received, it is entered on the debit
or left hand side of the book.
• When cash is paid out, it’s recorded on the credit
or right hand side of the cash book.
• The cash book, though cash journal it also
represents the cash account of the ledger .
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Cash Book
• Single column cash book:
– Records only cash receipts and payments. It has only one
money column on each of the debit and credit sides of the cash
book.
• Two column cash book:
– Consists of two separate columns on the debit side as well as
credit side for recording cash and discount.
– The discount column on the debit side of the cash book will
record discounts allowed and that on the credit side discounts
received.
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Cash Book
• Three column cash book:
– One in which there are three columns on each side
- debit and credit side. One is used to record cash
transactions, the second is used to record bank
transactions and third is used to record discount
received and paid.
– One main advantage of a three column cash book is
that it is very helpful to businessmen, since it
reveals the cash and bank deposits at a glance
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Format of Cash Book
Single Column Cash Book
Date
Detail
LF
Cash
Date
Detail
LF
Cash
Two (Double) Column Cash Book
Date
Detail
LF
Bank
Cash
Date
Detail
LF
Bank
Cash
Three (Treble) Column Cash Book
Date
Det.
LF
Bekoe, Asare, Donkor and Appiagyei, UGBS
Disc Bank Cash Date
98
Det.
LF
Disc. Bank Cash
Petty Cash Book
• It is a book in which petty cash (the sum
of money kept in hand) expenditures are
recorded.
• A petty cash book is generally maintained
on a columnar basis - a separate column
being allotted for each type of
expenditure.
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Petty Cash Book
• Imprest system
– Under this system a fixed sum of money is given to the
petty cashier to cover the petty expenses for the month.
– At the end of a month the petty cashier submits his
statement of petty expenses to the chief cashier for
reimbursement (of the same amount spent).
– Thus, the imprest for the next month the same as it was at
the beginning of the current month.
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Petty Cash Book
• Advantages of Imprest System
– It acts as a healthy check on the petty
cashier.
– Petty cash book remains up to date.
– It prevents unnecessary accumulation of
cash in hand and
– Thus the chances of defalcation of cash are
minimized.
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Format of Petty Cash Book
Analysis of Expenses
Receipt
Date
Details
Bekoe, Asare, Donkor and Appiagyei, UGBS
Ref
Total
Postage
102
Stationery
T&T
Fuel
Sundry
Books of Accounting for Businesses
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103
End of Session Questions
• Outline the books of original entry used in
recording transactions
• Identify four uses of the general journal
• Explain the imprest system used in the petty
cash book.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 104
UGBS 205
Fundamentals of Accounting
Methods
Session 5 – Recording transactions in the
books of account (Part Two)
College of Humanities
Business School
2017/2018
Overview
• After accounting data are recorded in the books of original
entry, they are processed (classified and summarized) for the
preparation of financial statements which is the output of the
accounting information system. This session introduce
students to the process of posting transactions to the various
ledgers following the double entry and extraction from the
trial balance.
Godfred and Rita, UGBS
Slide 106
Learning Objectives
• At the end of this session, you should be able to
– Identify and post transactions into their respective
accounts in the ledgers
– Identify and explain the types of ledger accounts
– Balance and close off ledger accounts at any point in time
– Extract and prepare an unadjusted trial balance
Godfred and Rita, UGBS
Slide 107
Reading List
• Read Recommended Text –
– Chapter 8 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapters 2, 5 and 6 of Wood & Sangster (2008)
• Other Financial Accounting text books available to students
Godfred and Rita, UGBS
Slide 108
Ledgers
• It is a book which contains a condensed and
classified record of all the pecuniary transactions of
the business generally brought, transferred or posted
from the books of original entry.
• Also called the king of all books of accounts because
all entries from the journals must be posted to the
various accounts in the ledger.
Godfred and Rita, UGBS
109
Features of a Ledger
• It has two identical sides - left hand side (debit side)
and right hand side (credit side).
• The difference of the total of the two sides represent
balance on the ledger account. If the total of the two
sides are equal there will be no balance.
• Usually balance is drawn at the end of year and
recorded on the deficit side to make the two sides
equal. This balance is known as closing balance.
• The closing balance of the current year will be the
opening balance of the next year.
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110
Advantages of a Ledger
• It is the ledger through which successful application of
double entry system of bookkeeping is ensured.
• Complete and reliable information is available in respect of
each and every account.
• It is possible to ascertain the amount of income and
expenditure under each head and the overall result at the
year end through trading and profit and loss account.
• It is, therefore, possible to ascertain the value of different
assets and liabilities and the true financial position at the
year end through balance sheet.
• The possibility of errors and defalcations is remote.
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111
Types of Ledgers
 A ledger contains details of assets,
liabilities, capital, income and expenditure.
 Subsidiary ledgers
 Sales Ledger – for personal accounts of customers
 Purchases ledger – for personal accounts of suppliers
 Main ledger (General ledger) – for all other
double entry accounts.
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An Account
• It is an explanation, a record, a summary or a
history of similar or particular transactions or
events.
• Is a standardized format that organizations use to
accumulate the monetary effect of transactions on
each financial statement item.
• It is a tool for summarizing transaction effects for
each account, determining balances, and drawing
inferences about a companies activities.
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113
Types of Accounts
Godfred and Rita, UGBS
114
Format of an Account
Dr
Date
Name of Account
Detail
Godfred and Rita, UGBS
Folio
Amount
Date
115
Cr
Detail
Folio
Amount
Posting Credit Sales
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116
Posting Credit Purchases
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117
Posting Returns
Godfred and Rita, UGBS
118
Balancing-off Accounts
• At the end of the period, the totals of the debit side of
an account should be equal to the totals of the credit
side (duality concept).
• To balance off accounts means to put in a balancing
figure (striking a balance) in an account.
• The balancing figure should begin the next period as
either an asset or a liability.
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119
How to Balance-off Accounts
• Cast (sum up) both the debit and credit entries of the
account and note them.
• Whichever is larger becomes the totals of both sides of
the account.
• Determine the difference between the sums noted
(this is the balancing figure).
• Insert the balancing figure at the side with the smallest
sum so that both sides are equal (this is the balance
c/d or c/f ).
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120
How to Balance-off Accounts
• Transfer the balancing figure to the opposite side
of the account where balance c/d is, below the
totals. (this is balance b/d or b/f).
• The balance c/d should have the date of the last
day of the period and the balance b/d should
have the date of day beginning the period.
• The side of the account where the balance b/d is
determines the name of the account balance.
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Trial Balance
• Trial balance is the list of all credit and debit balances
on the various accounts at a particular point in time
(usually shown in debit and credit columns).
• The sum of the debit side of the and that of the credit
side of the trial balance should agree.
• It is used to test the accuracy of double entry book
keeping.
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122
Trial Balance
• It helps in identifying and detecting book
keeping errors.
– Whether each debit had a corresponding credit entry
– Whether debit and credit entries have correctly been
cast
– Whether account balances have been correctly
calculated and recorded
• It is used to prepare financial statements as it
links ledger accounts and financial statements.
Godfred and Rita, UGBS
123
End of Session Questions
• What are the advantages of having
different journals in a business?
• What is the difference between trade
discount and cash discount?
• Explain the difference between journals
and ledgers.
Godfred and Rita, UGBS
124
UGBS 205
Fundamentals of Accounting
Methods
Week 7– Control Accounts
College of Humanities
Business School
2017/2018
Overview
• In a manual accounting system, there are bound to be errors
in the recording and posting of transactions to the various
ledgers. Controls are therefore set up to minimize errors in
the accounting information systems. This session examines a
type of accounting control used to check the arithmetical
accuracy of the double entry records in the ledger.
Godfred and Rita, UGBS
Slide 126
Learning Objectives
• At the end of this session, you should be able to
– Explain Control Accounts
– Understand the purpose of control accounts
– Identify and prepare the Sales Ledger/Debtors Ledger
Control Accounts and Purchases Ledger/Creditors Ledger
Control Accounts
Godfred and Rita, UGBS
Slide 127
Reading List
• Read Recommended Text –
– Chapter 16 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapters 31 of Wood & Sangster (2008
• Other Financial Accounting text books available to students
Godfred and Rita, UGBS
Slide 128
Meaning of Control Accounts
• Control account refers to an account that picks the summary of all
transactions posted into the individual accounts in a given ledger.
• An A/c in the general ledger to control individual A/Cs in a
subsidiary Ledger
• Used to check the accuracy of the entries in the individual accounts
•
Examples of control accounts could include:– The sales ledger control account, which summarizes the individual customer
accounts
– The purchases ledger control account, which summarizes the individual
supplier accounts
• It is built with the totals of all transactions that have individually
been posted into the various accounts.
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129
Purposes/Functions of Control
Accounts
• Locate errors;
– Control A/c balance must be the same as the totals of
balances on individual A/c’s in relevant subsidiary ledger
• Provide a summary of the total of debtors and
creditors
• Cross-check to avoid fraud
• Facilitates quick decision making
• Facilitates the preparation of trial balance and final
accounts
Godfred and Rita, UGBS
130
Kinds of Ledgers & Control Accounts
• General Ledger
• Subsidiary Ledgers;
–Sales Ledger or Debtors Ledger
–Purchase Ledger or Creditors Ledger
Godfred and Rita, UGBS
131
Kinds of Ledgers & Control Accounts
Control A/Cs:
Receivables/Sales Ledger Control A/C –
Used to keep track of all transactions with credit
customers or debtors
Payables/Purchases Ledger Control A/C –
Used to keep track of all transactions with
credit suppliers or creditors
Godfred and Rita, UGBS
132
Sales Ledger Control Account
Sales Ledger Control Account
Balance b/d
xxx Balance b/d
Sales (credit)
xxx Sales returns
Cash/Bank refunds
xxx Cash/Bank
Bank (Dishon’d cheques) xxx Discounts allowed
Interest on overdue bals xxx Balance set offs
Bad debts recovered
xxx Bad debts written off
Bills receivables dishon’d xxx Bills receivables
Balance c/d
xx Balance c/d
xxx
Balance b/d
xxx Balance b/d
Godfred and Rita, UGBS
133
xx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xx
Sources of information for Debtors
Control Account
•
•
Item
Opening debtors
•
•
•
Credit sales
•
•
•
Returns inwards
Cash and cheques received
•
•
•
•
Bad debts written off
•
•
Discount allowed
Closing debtors
Godfred and Rita, UGBS
•
•
134
Source
Debtors schedule or list from the
previous period
Totals on sales daybook or sales
journal for the current period
Returns inwards journal totals
Cashbook total for receipts from
debtors on the receipts side.
General journal entries to that
effect
Cashbook debit side
Debtors schedule or list from the
end of the period
Purchases Ledger Control Account
Purchases Ledger Control Account
Balance b/d
xxx Balance b/d
xxx
Purchases returns
xxx Purchases (credit)
xxx
Cash/Bank
xxx Cash/cheque refunds
xxx
Discounts received
xxx Interest on overdue bals. xxx
Bills payables
xxx Bills payables dishon’d. xxx
Balance set offs
xxx
Balance c/d
xxx Balance c/d
xxx
xxx
xxx
Balance b/d
xxx Balance b/d
xxx
Godfred and Rita, UGBS
135
Sources of information for Creditors Control Account
• Item
• Opening creditors
• Credit purchases
• Returns outwards
• Cash and cheques paid to
creditors
• Discount received
• Closing creditors
Godfred and Rita, UGBS
• Source
• creditors schedule or list from
the previous period
• Totals on Purchases daybook
or purchases journal for the
current period
• Returns outwards journal
totals
• Cashbook total for payments
to creditors on the
payment/credit side.
• Cashbook credit side
• creditors schedule or list from
the end of the period
136
UGBS 205
Fundamentals of Accounting
Methods
Week 8– Bank Reconciliation Statement
College of Humanities
Business School
2017/2018
Overview
• This session seeks to discuss the information value of
obtaining a reliable bank balance. Thus, students will go
through the process of reconciling the bank balance in the
cash book, which is unreliable, with the bank statement
balance.
Godfred and Rita, UGBS
Slide 138
Learning Objectives
• At the end of this session, you will be able to
– To explain the need for Bank reconciliation statement
– To explain the relevance of proper documentation for
reconciliation purposes
– To identify the causes of the differences between the
balances on cash book and bank statements
– To identify the main reasons why banks dishonour cheques
– Reconcile cash book balances with bank statement
balances
Godfred and Rita, UGBS
Slide 139
Reading List
• Read Recommended Text – :
- Chapter 11 of Marfo-Yiadom, Asante & Tackie (2015)
- Chapters 30 of Wood & Sangster(2008)
• Other Financial Accounting text books available to students
Godfred and Rita, UGBS
Slide 140
Introduction
• Businesses keep records of both cash and cheque
transaction in a cash book.
• Nature of cash book
– The debit side of the cash book is used for recording
receipts
– The credit side is used for recording payments
Godfred and Rita, UGBS
141
Introduction
• When amounts are paid into the business bank
account, the bank also credits the business account and
the cash book is debited.
• Similarly, when cheques are drawn, the bank debits the
business current account with the amount as soon as
they are presented and honored and the cash book is
credited.
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142
Introduction
• What appears on the debit side of the cash book appears
on the credit side of the current account in the bank’s
books, and vice versa.
• It follows therefore that all things being equal the two
books should have the same balance. But rarely will the
cash book balance agree with the balance shown on the
bank statement.
• Because of this possible discrepancy, there is the need to
reconcile the two records (cash book and bank statement
balance).
Godfred and Rita, UGBS
143
Causes of differences/discrepancies
• The causes of the differences between the two
records are;
– Informational differences
• Differences arising from information available to bankers but
not the entity
– Timing Differences
• Differences arising from the different times of recording by
the entity’s cashier and the bankers
Godfred and Rita, UGBS
Slide 144
Causes of differences/discrepancies
• Timing differences
– Unpresented cheques
– Cheques issued out by the entity but yet to be presented to
the bankers or presented to the bankers but yet to clear
– Uncredited cheques
– Cheques received and deposited by the entity but yet to be
credited by the bank
– Bank errors;
– wrong credits; errors by the bank that increases an entities
balance
– wrong debits; errors by the bank that decreases an entities
balance
Godfred and Rita, UGBS
145
Causes of differences
• Informational differences
– Standing order
– Direct debit
– Credit transfers
– Bank charges
– Dishonoured cheques etc…
Godfred and Rita, UGBS
146
Reasons for dishonouring cheques
•
•
•
•
•
•
•
Stale cheques
Insufficient funds
Insufficient mandate
Amount in words different from amount in figures
Post dated cheques
No signature of account holder
Signature differs from bank specimen
Godfred and Rita, UGBS
147
The need for a reconciliation statement
• A BRS is a statement that is prepared to bring into
agreement the difference between the cash book
balance and the bank statement balance.
• Who prepares this statement?
Godfred and Rita, UGBS
148
The Reconciliation Process
– Adjust the cash book with the informational
difference:
• Bring down the balance of the original cash book
into the adjusted cash book
• Enter on the credit side of the cash book all items
not previously entered but appeared on the debits
of the bank statement e.g. bank charges
• Enter on the debit side of the cash book items that
appeared on the credit side of the bank statement
but not previously entered in the cash book
Godfred and Rita, UGBS
149
The Reconciliation Process
• Prepare the BRS using the timing differences:
– Information entered in the cash book not yet recorded by
the bank on the bank statement namely; unpresented
cheques and uncredited cheques
– Common errors by the bank (wrong debit and wrong
credit)
Godfred and Rita, UGBS
150
Format of BRS
Bank Reconciliation Statement as at 30-09-2014
Gh¢ Gh¢
****
****
**** ****
****
****
**** (****)
****
Balance as per adjusted cash book
Add Unpresented cheques
wrong credit
Less Uncredited cheques
wrong debit
Balance as per bank statement
Godfred and Rita, UGBS
151
End of Session Questions
• Is bank reconciliation necessary for businesses?
Explain
• What are the main causes of discrepancies between
the cash book balance and the bank statement
balance
• Identify any four reasons for the dishonor of cheques
by banks
Godfred and Rita, UGBS
Slide 152
UGBS 205
Fundamentals of Accounting
Methods
Week 9– Capital Expenditure and Revenue Expenditure
College of Humanities
Business School
2017/2018
Overview
• This session presents the difference(s) between capital
expenditure and revenue expenditure and make appropriate
entries in the ledgers and financial statement. The difference
between capital and revenue receipts is also highlighted
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 154
Learning Objectives
• At the end of the session, you should be able to
– Explain the difference between capital receipts and
revenue receipts
– Explain the difference between capital expenditure and
revenue expenditure
– Determine the relevant financial statements for recording
capital receipts, revenue receipts, capital expenditure and
revenue expenditure
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 155
Reading List
• Read Recommended Text –
-Chapter 12 of Marfo-Yiadom, Asante & Tackie (2015)
-Chapters 24, 26 and 27 of Wood & Sangster (2008)
- International Accounting Standards (IAS) 16: Property,
plant and equipment
• Other Financial Accounting text books available to students
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 156
Capital Income/Receipts
This refers to proceeds or monies received from;
• The owner of a business as additional investments in
the business
• The sale of non-current assets
• The acquisition of a loan for business operations
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157
Revenue Income/Receipts
This refers to receipt or income that is earned;
• Normally in the course of business operations which
may be from
– the main operations of the organisation, or
– from other sources
– Examples can be sales, rent income and other commissions
received.
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158
Capital Expenditure
• The expenditure is incurred to acquire, manufacture
or improve assets for the purpose of earning income
over time in an organisation.
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159
Features of Capital Expenditure
The expenditure is made
 To acquire assets referred to as non-current assets.
 To construct non-current assets, e.g. wages or salaries of
workers to construct an organisation’s building.
 To put a new non-current assets in a usable position, e.g.
legal charges on the purchase of land and building, cost
on registering and acquiring a number plate for a new
vehicle, transport expense on new machinery bought
and any expense to put the new machinery in usable
position.
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160
Features of Capital Expenditure

To increase the revenue earning capacity of an asset or
business organisation.
 To acquire an asset, that gives benefits over many years
in the business organisation, e.g. goodwill paid for in a
purchased business organisation.
 For an asset, though revenue in nature, yet provide
benefits for many years, e.g. extended or heavy
advertising programme within a year, and preliminary
or business formation expenses.
 To pay off any loan initially acquired for the operations
of the business.
 Most of these assets acquired are referred to as noncurrent assets
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161
Revenue Expenditure
This is the expenditure which is incurred
for the purpose of maintaining the noncurrent asset and the earning capacity of
the business organisation.
Bekoe, Asare, Donkor and Appiagyei, UGBS
162
Features of Revenue Expenditure
The expenditure is incurred;
 normally in the course of the business operations
 constantly in the course of business operations
 and consumed totally in the period it is incurred.
 The full benefit of the expenditure is normally
consumed totally in the period in which it is incurred.
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163
Relevant Financial Statements
• Capital income/receipt that is received as additional
investments by the owner of the business is credited to
the capital account.
• Others in the form of income from the sale of noncurrent assets can be;
– credited to the income statement where such amount is not
material;
– otherwise such amount is credited to capital surplus or
reserve.
Bekoe, Asare, Donkor and Appiagyei, UGBS
164
Relevant Financial Statements
• Revenue Income is shown as income in the trading
income statement for the year when they are earned.
• The income which is received but not earned for that
particular year is treated as a current liability in the
statement of financial position.
• On the other hand the income which is earned but
not received is an asset and is shown in the
statement of financial position as a current asset.
Bekoe, Asare, Donkor and Appiagyei, UGBS
165
Relevant Financial Statements
• Capital Expenditure is shown in the statement of
financial position mainly as non-current asset. As and
when a portion of such expenditure is used, it is
treated as revenue expenditure, specifically
depreciation and written off in the income statement.
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166
Relevant Financial Statements
• Revenue Expenditure is shown in the income statement
as expense consumed in the year.
• Such expenditure acquired or paid for but not consumed
within the year is treated as prepayment or prepaid
expense and shown in the statement of financial
position as current asset.
• On the other hand the expenditure consumed but not
paid for is shown as accrued expense or expense payable
and shown in the statement of financial position as
current liability.
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167
End of Session Questions
• Distinguish between capital receipts and revenue
receipts
• Distinguish between capital expenditure and revenue
expenditure
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Slide 168
UGBS 205
Fundamentals of Accounting
Methods
Week 10 – Depreciation of Tangible Non-Current Assets
College of Humanities
Business School
2017/2018
Overview
• Non-current assets span more than one accounting year. It is
thus important to spread the cost over the years for which an
organization benefit from the use of the asset. This session
introduces the student to the methods in accounting for the
use of tangible non-current assets.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 170
Learning Objectives
• At the end of this session, you should be able to
– Determine the value of tangible non-current assets
– Identify methods of depreciating tangible non-current
assets
– Learn how to calculate depreciation using the two most
widely used methods
– Learn to make entries for depreciation in books of
accounts
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 171
Reading List
• Read Recommended Text –
- Chapter 12 of Marfo-Yiadom, Asante & Tackie
- Chapters 24, 26 and 27 of Wood & Sangster;
- IAS 16: Property, plant and equipment
• Other Financial Accounting text books available to students
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Slide 172
Accounting for Non-current Assets
• Non-current asset – This is that asset acquired to be
used in the organisation for a period more than
(normally) one year.
• Such expenditure is referred to as capital expenditure;
that type of expenditure to acquire an asset of a
permanent nature; in contrast to revenue expenditure;
the expenditure to acquire asset that is consumed
within one year, or that exists for only one year.
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173
Accounting for Non-current Assets
• Capital expenditure is made for such assets once a while,
not very often; on the other hand, revenue expenditure
items are acquired very often, at least year after year; for
example annual rent, insurance or advertising expenses.
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174
Value of non-current assets
• Initial value of any non-current asset is the cost of
the asset, which comprise of;
– the purchase price of the asset
– Carriage inwards on the asset
– any additional/related expenditure incurred to put the
asset in its usable state.
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175
The Concept of Depreciation
Depreciation Defined;
It is the systematic allocation of the depreciable
amount of an asset over its useful life (IAS 16).
May be explained as the measure of wearing out,
consumption or other reduction in the useful
economic life of a non-current asset whether arising
from use, efflux of time or obsolescence through
technological or market changes.
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176
Causes of Depreciation
•
•
•
•
The level of usage
The passage of time
Technological obsolescence
Market Obsolescence
 Any portion of non-current assets that is determined
as having been used or consumed becomes expense.
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Procedure to Determine & Charge
Depreciation
 Determine cost of asset (purchase price/valuation)
 Determine estimated useful life
 Determine estimated residual value of asset
 Depreciation rate can be determined from these
variables
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178
Methods for Charging Depreciation
 Different methods are applied based on the type of
asset and usage, or based on the different assumptions
that are made:
2 Common Methods:
 Straight line method
 Reducing balance or diminishing balance method
Other methods; Sum of years’ digits, revaluation method,
machine hour method, depletion unit method
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179
Straight line method
• This method is based on the assumption that the asset
is used equally over its useful life.
• Under this method, the annual depreciation charge is
an equal sum.
It is calculated as:
Depreciations
Bekoe, Asare, Donkor and Appiagyei, UGBS
= Cost – Residual value
Estimated life
180
Illustration
Cost of Motor Vehicle
Estimated life
Residual value
Annual Depreciation
Bekoe, Asare, Donkor and Appiagyei, UGBS
= GH¢500,000
= 5yrs
= GH¢50,000
= GH¢500,000 - GH¢50,000
5
= 450,000
5
= GH¢90,000
181
Reducing balance method
• Reason
– Greater benefit is to be obtained from the early years of
using an asset
– Appropriate to use the reducing balance method which
charges more in the earlier years.
– Helps even out the total amount charged as expense for
the use of the asset each year.
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182
Reducing balance method
• Annual Depreciation = Net Book Value x Depreciation Rate
• = (Cost – Accumulated Depreciation) x Depreciation Rate
Example:Cost of Motor Vehicle = GH¢500,000
Depreciation rate is 20% p.a.
Year
Depreciation
Year 1
20% * 500,000 = 100,000
Year 2
20% * (500,000-100,000) = 80,000
Year 3
20% * (500,000-180,000) = 64,000
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183
Accounting Entries
Purchase of Non-current Asset by cash
DR Asset A/c
CR Cash/Bank
With the cost of the asset
When Depreciation is Charged for the year
DR Depreciation Expense A/c
CR Provision for Depreciation A/c
(Accumulated Depreciation A/c)
With the depreciation charge for the period
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184
Accounting Entries
At the end of the year;
– Close off Depreciation Expense a/c to Income Statement
– Balance on provision for depreciation a/c remains as
closing balance (Bal. c/d);
to determine the net book value (NBV) at year end;
cost – provision for depreciation (accumulated
depreciation)
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185
Disposal of Non-current Assets
Determine profit or loss on disposal
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186
UGBS 205
Fundamentals of Accounting
Methods
Week 11– Adjustments for Financial Statements
College of Humanities
Business School
2017/2018
Overview
• A business entity is required to adjust for the accruals,
prepayments, bad and doubtful debts at the end of the
accounting period. This session discusses these various end of
year adjustments before the preparation of financial
statements.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 188
Learning Objectives
• At the end of this session, you should be able to
–
–
–
–
Distinguish between bad and doubtful debts
Learn how to provide for doubtful debts
Pass entries to record bad and doubtful debts
Make adjustments for prepaid and accrued
expenses/revenue
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 189
Reading List
• Read Recommended Text –
-Chapter 14 of Marfo-Yiadom, Asante & Tackie
-Chapters 25 & 28 of Wood & Sangster;
-IAS 18: Revenue
• Other Financial Accounting text books available to students
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 190
Concept of Trade Debt Valuation
• Control account refers to an account that picks the
summary of all Trade Debts that arise from the sale
of goods or service on credit.
• The reason for the valuation of trade debt is to avoid
possible loss in the future from trade debts that
resulted from past sale (Matching Concept)
• Quality of trade debts is assessed through the ageing
process (how long the debt has been in the books)
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191
Concept of Trade Debt Valuation
• As trade debts age and circumstances make it
impossible to recover, it is prudent to write-off the
debt (bad debts)
• As trade debts increases, collection of some debts
may become uncertain. As a result, it is prudent to
provide for the possibility of a loss from the debt
(provision for doubtful debts)
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Slide 192
Bad Debts
These are debts that are not collectible hence it is
considered as a loss to the organisation.
Bookkeeping procedure:
DR Bad Debt A/C
xxx
CR Trade Receivables A/C
xxx
At the end of the year, the bad debt a/c is closed to the
income statement as:
DR Income statement
xxx
CR Bad debt A/C
xxx
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 193
Doubtful Debts
• These are debts whose collection cannot be certain.
• This debt is not seen as a loss however some profit
(provision) can be set aside against the probability
that such debt may be a loss in the future.
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Slide 194
Types of Provision for Doubtful Debts
• In providing for doubtful debts, the provision could
be specific or general.
• Specific provision: This is where a provision is made
for a specific debt. E.g. Ama’s A/C
• General provision: This is where provision can be
made not for a specific debt but for the remaining
total debt after deducting the specific debt.
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Slide 195
Calculating for the Provision
• The rate is given and calculated on either:
• The outstanding total receivables, or
• On total credit sales
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Slide 196
Bookkeeping Procedure for Doubtful
Debts Provision
• Either for general or specific provision:
DR Income Statement
xxx
CR Provision for Doubtful Debt
xxx
NB: for the first time a provision is being made in the
books for doubtful debts
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Slide 197
Bookkeeping Procedure for Doubtful
Debts Provision
• When a provision has already been made in the
previous accounting period;
– Compare the current computed provision to the previous
provision;
– Where there is an increase in the provision (current higher
than previous)
• the amount of increase is charged to the income statement
(i.e. DR Income statement)
– Where there is a decrease in the provision (current lower
than previous)
• the amount of decrease is credited to the income statement
(i.e. CR Income statement) as a gain
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 198
Bookkeeping Procedure for Doubtful
Debts Provision
• In all cases the current provision for the year is
used to reduce the value of trade receivables
in the statement of financial position
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 199
Recovery of Bad Debt
• A debt that has been written off in the past can be
recovered, when later the trade receivable takes the
action to pay the debt.
• The accounting treatment depends on whether the
organisation intends to do business again with the
trade receivable.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 200
Accounting Treatment of Bad debt
Recovery
If business relations is to be re-established, the account of the
trade receivable is reopened
DR Trade Receivables A/C
CR Bad Debt Recovered A/C
To reinstate the account
xxx
DR Bank/Cash A/C
CR Trade Receivable A/C
With money received
xxx
At the end of the period:
DR Bad debt Recovered
CR Income Statement
With the recovered amount
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xxx
xxx
xxx
xxx
Slide 201
Accounting Treatment of Bad debt
Recovery
If business relations is not to be Re-established, the
account of the trade receivable is not reinstated.
DR Bank/Cash
CR Bad Debt Recovered
With the amount received
At the end of the period:
DR Bad Debt Recovered
CR Income Statement
With recovered amount
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xxx
xxx
xxx
xxx
Slide 202
Adjustments for Prepayments and Accruals
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Slide 203
Prepayments and Accruals
• Expenses and revenues are not always paid or
received on time.
• Cash paid and received in a year should not be
entered directly into the profit and loss
account of that year.
• Adjustment should be made.
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Slide 204
Prepayments and Accruals
• Prepaid expenses
– those to be used in the following period but have been paid for in
advance.
• Accrued expenses
– those which have been used up in the current year, but have not yet
been paid for.
• Prepaid income
– those to be earned in the following period but have been received
in advance.
• Accrued income
– those which have been earned in the current period but have not
yet been received.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 205
Expense Example
• Two companies paying rent to a landlord in Accra. The
rent is GHC3,000 a year.
• Company A pays GHC 2,500 in the year
• Company B pays GHC 3,100 in the year
• How much rent should be charged to the income
statement for the year in each company?
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 21
Income Example
• The company rents its building to two other entities at
GHC 2,000 a year.
• Company X pays GHC 1,700 in the year
• Company Y pays GHC 2,500 in the year
• How much is recognized in the income statement as rent
income for the year?
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 22
Expenses for the period
= Cash paid – Accruals in last year +
Accruals in this year + Prepayments in last
year – Prepayment in this year
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 23
Income for the period
• = Receipt – Accruals in last year + Accruals in
this year + Prepayments in last year –
Prepayments in this year
• Consider other adjustments
• Goods drawings by the owner
• Use of business assets by the owner
• Owners’ private expense charged against the business
expenses
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 24
UGBS 205
Fundamentals of Accounting
Methods
Week 12 – PREPARATION OF FINANCIAL STATEMENTS
College of Humanities
Business School
2017/2018
Overview
• Information in financial statements is the output of the
accounting information system; recording transactions
(inputs), classifying, summarizing and analyzing (processing),
financial statement (output). This session introduce students
to how the final output after recording and processing
transactions will be presented to users of financial
information.
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 211
Learning Objectives
• At the end of this session, you should be able to
– Prepare a basic income statement of an entity
– Prepare a basic statement of financial position of an entity
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 212
Reading List
• Read Recommended Text –
-Chapter 15 of Marfo-Yiadom, Asante & Tackie
-Part 2 and Chapters 9 & 39 of Wood & Sangster;
-IAS 1: Presentation of Financial Statements; and
-IAS 7: Statement of Cash Flows
• Other Financial Accounting text books available to students
Bekoe, Asare, Donkor and Appiagyei, UGBS
Slide 213
The Income Statement
• Do you recall the purpose of income statement?
• Profit oriented businesses aim at making profits
• The income statements provides information on
the performance of businesses by determining the
amounts of profit or loss made for a period
• The income statement is made up of two sections;
– Trading account
– Profit and loss account
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Slide 214
Slide 6
The Income Statement
• The trading account is prepared to derive
gross profit/loss
– Gross profit/loss = Net Sales – Direct Cost (Cost
of Goods Sold)
– Net Sales = Sales – Return inwards
– Cost of goods sold =
Opening stock + [Purchase + Carriage inwards –
Returns outwards + other purchase costs] –
Closing stock
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Slide 215
The Income Statement
• The Profit and Loss Account is prepared to
derive Net profit/loss
– Net Profit/Loss = Gross Profit/loss – Indirect
cost (Expenses)
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Slide 216
Typical Income Statement
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Slide 9
Slide 217
The Statement of Financial Position
• Do you recall the purpose of the statement of
financial position?
• The statement of financial position is a list of
balances according to whether they are assets,
equity or liabilities (Accounting equation)
• It shows the financial position of businesses at
a specific point in time
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Slide 218
Typical Statement of Financial Position
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Slide 11
Slide 219
Typical Statement of Financial Position
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Slide 12
Slide 220