ELEMENTS OF BOOK-KEEPING II Edited

NATIONAL OPEN UNIVERSITY OF NIGERIA
DEPARTMENT OF FINANCIAL STUDIES

Course Guide
COURSE TITLE; ELEMENTS OF BOOK-KEEPING II
COURSE CODE; ACC 102
Course Developer/Writer: Dr. (Mrs) Ofe I. Inua
Department of Financial Studies
Faculty of Management Sciences
National Open University of Nigeria
Course Editor: Prof. ThankGod O. Imo
Department of Accounting
Rivers State University, Port-Harcourt
Head of Department: Dr. (Mrs) Ofe I. Inua
Course Coordinator: Anthony I. Ehiagwina
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CONTENT
Introduction
Course Aim
Course Objectives
Study Units
Assignments
Tutor Marked Assignment
Final Examination and Grading
Summary
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INTRODUCTION
What you have in your hand is the course guide for ACC 102 (Elements of Bookkeeping II). The
purpose of the course guide is to relate to you the basic structure of the course material you are
expected to study as a B.Sc. Entrepreneurship Student in National Open University of Nigeria.
Like the name ‘course guide’ implies, it is to guide you on what to expect from the course
material and at the end of studying the course material.
COURSE CONTENT
The course content consists basically of the methods of recording accounting data: manual and
mechanical; the final account of a sole trader which consists of the statement of profit or loss
account, statement of financial position and end of year adjustments; accounting treatment of
control accounts; bank reconciliation statement; cost accounting with emphasis on elementary
break-even analysis.
COURSE AIM
The aim of the course is to introduce you to basic principles of accounting and to understand
how financial documents are posted into accounting record in order to determine the profit or
loss of an organisation and the financial position of the organization. It also includes practical
treatment of accounting transactions conducted through the bank and how errors associated with
the trial balance are treated. This course will also introduce the break-even analysis using the
formula or the mathematical and graph methods.
COURSE OBJECTIVES
At the end of studying the course material, among other objectives, you should be able to:
1. Distinguish between book keeping and accounting;

2. Explain the methods of preparing accounting data using manual accounting system and
computerized accounting system;
3. Explain key accounting concepts and the building blocks of accounting
4. Explain the meaning of the key terms and concepts in the accounting equation.
5. List the books of prime entry and state what each is used for.
6. Describe common methods of valuing inventory and inventory costing
7. Identify the errors affecting the trial balance as well as those not affecting the trial
balance
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8. Prepare a statement of profit or loss and a statement of Financial position Explain and
prepare the different types of control accounts
9. Prepare an adjusted cash book and bank reconciliation statement
10. Calculate the Breakeven point using formula or the mathematical method and graph
COURSE MATERIAL
The course material package is composed of:
The Course Guide
The Study Units
Self-Assessment Exercises
Tutor Marked Assignment
References/Further Reading
THE STUDY UNITS
The study units are as listed below:
Unit 1 Basic Accounting

Unit 2 Methods of recording data: manual and mechanical
Unit 3 Accounting concepts
Unit 4 The accounting equation and its components
Unit 5 Basic documentation and prime books
Unit 6 Prime books, general journals and the ledgers
Unit 7 Inventory valuation
Unit 8 Trial balance
Unit 9 Final accounts of a sole trader 1: Statement of profit or loss
Unit 10 Final accounts of a sole trader 1: Statement of Financial position
Unit 11 End of year adjustments in final accounts
Unit 12 Accounting treatment of control accounts
Unit 13 Bank reconciliations
Unit 14 Cost accounting
Unit 15 Elementary Break-even analysis
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ASSIGNMENTS
Each unit of the course has a self assessment exercise. You will be expected to attempt them as
this will enable you understand the content of the unit.
TUTOR MARKED ASSIGNMENT
The Tutor Marked Assignments (TMAs) at the end of each unit are designed to test your
understanding and application of the concepts learned. Besides the preparatory TMAs in the
course material to test what has been learnt, it is important that you know that at the end of the
course, you must have done your examinable TMAs as they fall due, which are marked
electronically. They make up to 30 percent of the total score for the course.
SUMMARY
It is important you know that this course material consists of both academic and professional
materials. This provides you the opportunity of obtaining a BSc. degree in Entrepreneurship and
preparation for your professional examinations. Therefore, it is very important that you commit
adequate effort to the study of the course material for maximum benefit.
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UNIT 1: BASIC ACCOUNTING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Historical development of Accounting
3.2 Regulatory Framework
3.3 Book keeping and Accounting

3.4 Scope of Accounting
3.4.1 Financial Accounting
3.4.2 Cost Accounting
3.4.3 Management Accounting
3.4.4 Auditing
3.4.5 Government Accounting
3.4.6 Accounting for Taxation
3.5 The Need for Accounting Information
3.6 Qualities of Good Accounting Information
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading
1.0 INTRODUCTION
Accounting is concerned basically with accountability. The underlying purpose of accounting is

to provide financial information about an economic entity. The information is provided,
periodically, to shareholders and others connected with the organization to enable them decide
the extent to which they want to continue to associate with the organization.
2.0 OBJECTIVES
After studying this unit, you should be able to:
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- Explain the historical development of accounting
- Distinguish between bookkeeping and accounting
- State the qualities of a good accounting information system
3.0 MAIN CONTENT
3.1 The Historical Development of Accounting
Rudimentary form of accounting started with bookkeeping by Lucia Pacioli, an Italian monk. In
his book titled “Summa de Arithmetical, Geometrica, proportioni et proportionalita,” published
in 1494 on Arithmetic, Geometry and Proportion, he devoted a chapter to expound the principles
of the double entry system. It became necessary for managers to report to the owners of their
business activities during the period under review. Such report mainly includes the following:
 How the financial resources of the business have been invested during the period,
 The profit earned or loss incurred during the period, and
 The assets, liabilities and the owner’s equity at the end of the period under review.
After this initial development, a lot of changes have been witnessed in accounting. These
changes were informed by sophistication and complexity of businesses, industrial and political
environments which placed more responsibilities on management of business to disclose more
information to owners and other interested parties.
3.2 Regulatory Framework
Due to the increasing changes in the economic and political environment, statutory and other
regulations have been put in place to ensure the reliability, relevance and comprehensiveness of
financial information, and to narrow areas of differences.
The main statutory document for the regulation of business in Nigeria is the Companies and
Allied Matters Act 1990 (as amended in 2004). The company laws are enforceable in the court of
law.
Other legislations relate directly to specific industry such as:

 Banks and Other Financial Institutions Act of 1991 (BOFIA 1991)
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 Insurance Act 2003
Other regulations consist of the following accounting standards:

 Statements of Accounting Standards (SAS) issued by Nigerian Accounting Standards
Board (NASB) now Financial Reporting Council (FRC) from time to time
 International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) issued by IASB from time to time.
SELF ASSESSMENT EXERCISE
Briefly explain the regulatory framework of accounting in Nigeria
3.3 Book keeping and Accounting
Bookkeeping is the recording phase of accounting. It is the classification and recording of
business transactions in the books of account. The recording of the transactions is a routine task,
therefore it tends to be repetitive. Accounting on the other hand includes not only the keeping of
accounting records, but also the design of efficient accounting systems, the interpretation of
accounts and the development of forecast. The processes involved in bookkeeping are as follows:
(a) The classification of business transactions using source documents;
(b) Recording of classified transactions in appropriate subsidiary books or books of prime entry;
(c) Posting of entries from subsidiary books to the ledger; and
(d) Extraction of the Trial Balance .

3.4 Scope of Accounting
The starting point in the study of accounting is financial accounting; others are cost accounting,
management accounting, auditing, government accounting, and tax management.
3.4.1 Financial Accounting
Financial accounting involves an accounting process that starts with bookkeeping and ends with
the preparation and interpretation of financial statements. The components of financial
statements are the statement of financial position (the balance sheet), the statement of financial
performance (the income statement) and the cash flow statement.
3.4.2 Cost Accounting
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Cost accounting is the procedure for accumulating data to provide information for managerial
action. Cost accumulation is the collection of cost data in some organized ways by means of an
accounting system.
3.4.3 Management Accounting
Management accounting provides information to management of a business to help them take
better decision and to improve upon the efficiency and effectiveness of existing operations
(Drudry, 2004). It is concerned with providing accounting information to management for the
purpose of planning, decision making and control.
3.4.4 Auditing
Only complete and reliable financial statements can be of any use to the creditors, investors,
government agents and other interested parties. To guarantee these, the accounts must be audited
by an independent person called an Auditor. Auditing is the independent examination of the
books of accounts and records of the company
3.4.5 Government Accounting
Government accounting is the process of recognizing and reflecting in the appropriate books of
accounts and records government generated revenue and disbursed expenditure in such a way as
to extract with ease relevant financial information vital for appropriate decision making from
time to time, and in compliance with the laws regulating government finances.
3.4.6 Accounting for Taxation
The accounting profits generated in the financial statements provide the basis for determining the
taxable profits of a company. The taxable profits are different from the accounting profits
because certain expenses and income are allowable for accounting purpose but disallowable for
tax purpose. A good understanding of the knowledge of these taxable incomes and expenses and
non-taxable incomes and expenses would help a business in its tax management.
3.5 The Need for Accounting Information
The need for accounting information can be summarized as follows:
 It provides information useful for making economic decisions.
 It provides information to users for predicting, comparing and evaluating the earnings
power and financial strength of a business.
 It is used to judge the ability of management to utilize the entity’s resources effectively in
achieving the goal of the entity.
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 It provides information to creditors for predicting and evaluating the cash flows of the
entity.
 It provides management with detailed accounting data for use in planning and controlling
the daily operations of the business.
 It provides information to government for determining the tax payable on the profit
and/or other incomes of an individual or company and for formulating fiscal policies.
 It forms the basis of reporting on the activities of an enterprise as they affect the society.
 It serves as the basic instruments by which investors decide the securities in which to
invest.
3.6 Qualities of good accounting information
Accounting information should possess the following qualities before users can rely on it:
(a) Relevance: The accounting information must include enough facts to satisfy the need of the
user. For instance management accounting information should be relevant to the decision to be
taken with it. Financial accounting information should disclose enough information to satisfy the
various users.
(b) Reliability: The source of information must be verifiable and one source of evidence must
corroborate the other.
(c) Comparability: There should be no change in the basis for the preparation of the accounting
information from period to period so that it will be easy to compare the result of operations over
some accounting periods.
(d) Timeliness: Accounting information must be made available early enough for its use. For
instance management requires certain information on daily basis or weekly basis for effective
running of the business; if it comes late it would be useless. Annual reports and accounts must be
published not long after the year end.
(e) Objectivity: There must be no bias, window dressing or subjective judgments in the
presentation of accounting information. Objectivity includes ability to trace transactions to
documentary evidence and complying with required regulations in its presentation.
(f) Comprehensiveness: Accounting information must contain just enough details for good
understanding. The detail must neither be too little nor too much.
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4.0 CONCLUSION
Accounting as a discipline has been undergoing series of development. These increasing changes
are due to the economic and political environment, statutory and other regulations have been put
in place to ensure the reliability, relevance and comprehensiveness of financial information, and
to narrow areas of differences.
5.0 SUMMARY
In this study, we examined the historical development of accounting, its relevant framework and
the need for accounting information.
6.0 TUTOR-MARKED ASSIGNMENT

1. State four qualities of good accounting information
2. Differentiate between Bookkeeping and Accounting
3. Explain the scope of accounting
4. What are the qualities of good accounting information?
5. Differentiate between the computerized accounting system and the manual
accounting system
6. Identify the building blocks of accounting and explain each one
6.0 REFERENCES/FURTHER READING
Aguolu, O. (2010). Financial Accounting. A Practical Approach. Institute for
Development Studies, Enugu, Nigeria
Anao A.R. (2002). Introduction to Financial Accounting. Longman Nigeria Limited,
Ikeja, Lagos
ICAN Study Pack (2006). Fundamentals of Financial Accounting. VIPublishing
Limited, Lagos, Nigeria
Professional Accounting Tutors Limited (2007). Accounting Standards. Vol. 111, Lagos, Nigeria
Igben, R.O. (2000). Financial Accounting Made Simple. ROI Publishers, Lagos, Nigeria
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Accounting Technicians Scheme West Africa (ATSWA). Basic Accounting
Processes and Systems.
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UNIT 2: METHODS OF RECORDING ACCOUNTING DATA: MANUAL AND
COMPUTERIZED
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Manual Accounting System
3.2 Computerized Accounting System
4.0 Conclusion
5.0 Summary
7.0 References/Further Readings
1.0 INTRODUCTION
The computer information age of the 21st century led to the use of computerized accounting
system by different organizations. This is a departure from the manual system. However, most of
the accounting source documents in Nigeria such as invoice, receipt are prepared manually by
small businesses except few organizations whose accounting system is fully computerized to the
extent of generating computer based invoices and receipts. This unit focuses of how accounting
data are recorded using both manual and mechanical methods
2.0 OBJECTIVES
At the end of this unit, you should be able to:

i. Explain manual accounting system.
ii. Discuss computerized/mechanical accounting system.
iii. Know the procedure for preparing accounting data using manual method
ii. Understand how accounting data can be prepared mechanically.
3.0 MAIN CONTENT
3.1 Manual Accounting System
The manual accounting system refers to the keeping of accounting record by hand written of
relevant posting in the books of accounts. It means that electronic device such as computer is not
used in posting.
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The computerised information systems enable some companies to use different accounting
software for the financial records, but some organisation still prefer the manual system for one
reason or the other.
Some of the advantages of manual system over the computerised system are:
i. A manual system is cheaper to install in terms of cost when compared with a

computerized system of maintaining financial records.
ii. Cost of acquiring computer, accounting software and training of account personnel in a
computerised accounting system are not required for manual system.
iii. A manual system may be more secure because the possibility of computer crash and virus
do not affect it.
Some of the disadvantages of manual system are:
i. It is highly prone to more mistakes and errors because humans factor do all the
calculation without electronic assistant which a computer can generate with ease.
ii. The manual system takes longer time, efforts and paper to post.
iii. The security of the manual system is threatening because it is prone to destruction by
flood and fire deface without any back-up.
iv. Auditing of manual accounting system is cumbersome because documents have to be

checked and identified one after the other.
v. More space is required to keep manual accounting record because they are always
voluminous.
vi. It takes more time to effect changes and correct mistakes in a manual system because it
may require redoing a posting from the subsidiary books to the ledger.
3.2 Mechanical Accounting System
The word ‘mechanical’ means the use or adoption of electronic device in the posting and
preparation of accounting records. This is achieved through the use of computer with relevant
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software as appropriate for each business. Computerised or mechanical accounting system makes
the recording, processing and reporting of accounting data easier than the manual system.
The recording of accounting data in a computerised accounting system is different from the
manual system of accounts. The recordings in mechanical accounting system are not the same
for all accounting software, but there are common processes and procedures that are applicable
to accounting software.
i. Accounting data are entered from the source documents to the computer through the key
board and other input devices.
ii. The entry requires the classification of account or chart of account through the creation of
‘account code’ for each transaction head.
iii. It will be necessary in most computerised accounting system to specify the account to be
debited and those to be credited while imputing accounting data.
iv. Information to prepare and generate the final accounts is in the data base from where the
software automatically extracts the reports and accounts based on the user’s
specification which can be modified.
3.2.1 Chart of Account
This is a set of numbers and codes that define each account head and also differentiate between
classes of accounts e.g. The serial code for receipt differs from expenses
Account Types
Account types define how the account will be grouped in reports and financial statements. They
also control what happens during financial year-end.
Typical Chart of Account
Code Account Description Account Type

10000 SALES Income
10001 DONATION Income
10002 INTEREST ON DEPOSIT Income
80001 PURCHASES Cost of Sales
80002 CARRIAGE INWARDS Cost of Sales
20001 PRINTING AND STATIONERY Expenses
20002 TELEPHONE Expenses
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20003 POSTAGE Expenses
20004 RENT Expenses
20005 SALARIES AND WAGES Expenses
20008 ADVERTISEMENT Expenses
30000 FURNITURE AND FITTINGS Non-Current Assets
30001 OFFICE EQUIPMENT Non-Current Assets
40000 RENT ADVANCE Current Assets
40001 MAIN CASH Cash
40002 DEBTORS Account Receivable
50000 CAPITAL Equity
50001 RETAINED EARNINGS Equity-Retained Earnings
60000 LOAN – DC BANK PLC Non-Current Liabilities
60001 LOAN – GF MORTGAGE BANK Non-Current Liabilities
70000 LOAN – COOPERATIVE Current Liabilities
70001 CREDITORS Accounts Payable
Some advantages of computerised accounting system are:
i. The use of computer is an efficient way of keeping and recording accounting transactions
because entry of data is faster than in manual system.
ii. With the use of computer for accounting records, it becomes easy to generate different
reports and financial statement within a short period.
iii. It helps to communicate with customers and supplier better and faster because of email
facility available in some accounting software,
iv. Accounting data and other information in accounting software are secure and safe
because they can be back-up in different locations and folders such as internet, cloud,
e-mail attachment and external drive.
v. The risk or loss of data is reduced to the barest minimum
vi. It helps to avoid the problem of duplication of same records which are found in manual
system
vii. Quick and fast decision can be made by managers with timely report that are available in
a computerised accounting system. This help in strategy formulation and realignment
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viii. Up to date accounting records are made possible because accounting software update
records automatically after they are posted.
Computerised accounting system has the following demerits
i. Computerised accounting system is prone to risk of computer virus and hard disk crash.
ii. Some software require the service of external consultants who have to be paid
consultancy fee on annual basis in some cases
iii. The existence of computer hackers and identity theft are major challenge of computerised
accounting system especially for those with internet and cloud back-up.
iv. Irregular power supply and other electrical faults can damage computer and other
accessories used for computerised accounting system.
v. There is no limit to the effect of a single mistake in data entry. A mistake in data entry
has negative effect on different reports, records and statements.
1. Define manual accounting system?
2. State the disadvantages of computerised accounting system?
4.0 CONCLUSION
Accounting data can be recorded, posted and processed manually and mechanically depending
on what the business owner’s desire. The manual system is hand written while the mechanical
method uses computer system in data recording and processing. It is important for business
organization to examine the merits and demerits of each system before deciding on the system of
accounting record to use.
5.0 SUMMARY
In this unit we discussed manual accounting system and mechanical accounting system. It shed
light on the advantages and the disadvantages of each system while a typical chart of account
used in a computerized accounting system was given.
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1: What are the merits of manual accounting system?

2: What do you understand by computerized accounting system?
3: What are the disadvantages of manual accounting system?
4: Prepare a typical chart of account for a trading organization.
7.0 REFERENCES/FURTHER READINGS
Accounting Technicians Scheme West Africa (2009). Basic Accounting Processes and System
Part 1, Study Pack ABINA Publishers
Oluyombo, Onafowokan. (2014) Fundamentals of Finance, Money and Banking. Magboro:

Kings & Queen Associates
Oluyombo, Onafowokan (2016) Financial Accounting with Ease (3rd Edition). Magboro:
Oluyombo, O. (2017). Introduction to Financial Accounting I :SMS 203. Abuja: NOUN
Vitez, O. (2015) Role of accounting in the modern business environment. Retrieved from:
http://smallbusiness.chron.com/role-accounting-modern -business-environment-
4010.html
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UNIT 3: ACCOUNTING CONCEPTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Key Accounting Concepts
3.2 Other Concepts
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
An appreciation of the conceptual and theoretical foundations of financial accounting is

fundamental to the preparation, understanding and interpretation of financial statements. The
conceptual and theoretical foundations can be described as a set of rules, principles, postulates,
conventions and methods. This unit explains the nature of the underlying concepts of accounting.
Some of the concepts are referred to specifically in the International Accounting Standard
Committee’s (IASC’s) Framework for the Preparation and Presentation of Financial Statements
(the Framework) (IASC, 1989 quoted in Thomas and Ward, 2012).
2.0 OBJECTIVES
 Define accounting concept;
 Explain the key accounting concepts;
 Describe the other accounting concept.
3.0 MAIN CONTENT

3.1 Key Accounting Concepts
Accounting concepts can be defined as broad basic assumptions that underlie the periodic
financial statements of business enterprises. Two concepts have been specifically in the
Framework and they are the going concern and the accruals concepts.
3.1.1 Going Concern Concept

The going concern concept is the assumption that an entity will continue in operational existence
for the foreseeable future. Any user when looking at an entity’s financial statements has the
right to assume that the company is not going to liquidate or curtail materially the scale of its
operations. Users should be able to look at the financial implications of prior activity as captured
in the financial statements and use this as an indication of future activity.
The implication of the going concern assumption is that assets are valued at their historical cost
(or fair value), not their scrap value. If there is reason to believe that the entity will not be able
to continue in business, then the going concern principle no longer holds and the assets should be
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valued on a cessation basis; that is, at their net realizable value. For example a N10,000
machine, which can easily generate output for the next 10 years, would be recognized in the
statement of financial position at cost price less depreciation, if the company is a going concern.
However, if the company decides to go into voluntary liquidation, then this machine is not going
to produce revenue for the next 10 years, hence should be written down to the value expected to
be received on its sale (its net realizable value). This may be zero.
Self Assessment Exercise

Explain the nature of the going concern concept and its implications for the preparation of
financial statements.
3.1.2 Accruals Concept

According to the Framework and IAS 1, to meet their objectives, financial statements should be
prepared on the accruals basis of accounting.
The accruals concept is concerned with allocating expenses and income to the periods to which
they relate (when the expenses were used by the entity, or when the income was earned, as
distinctly different to when cash is paid out for expenses and when cash is received from a sale).
The Framework states that the transactions should be ‘recorded in the accounting records and
reported in the financial statements in the periods to which they relate’. In most instances this
refers to the accounting period in which the goods or services physically pass from the seller to
the buyer.
The accruals concept also assumes that costs should be recognized when they occur, and not
when money is paid: that is, goods and services are deemed to have been purchased on the date
they are received and services consumed, for which no invoice has been received at the end of an
accounting year (e.g. electricity, gas, telephone), are treated as a cost for that year. The amount
due is treated as a liability. These are referred to as accrual expenses. In contrast, services paid
for in advance (e.g. rent, insurance, road tax, local government taxes) that have not been received
at the end of an accounting year are treated as a cost of the following accounting year, and thus
carried forward as an asset at the end of the current year. These are referred to as prepaid
expenses or prepayments.
Self Assessment Exercise

Explain the accrual concept and its implications for the preparation of financial statements.
3.2 Other Concepts

The fundamental concepts (going concern and accruals) are discussed above. There are a
number of other concepts that are implicit in the preparation of financial statements and are so
engrained in the process of accounting. To be comprehensive, a short explanation of each is
given in this section.
3.2.1 Matching Concept

The matching concept/principle refers to the assumption that in the measurement of profit, costs
should be set against the revenue that they generate at the time when they arise. A classic
example of the application of the matching principle is inventory. Where goods are bought in
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one accounting year but sold in the next, their cost is carried forward as inventory at the end of
the year and set against the proceeds of sale in the accounting year in which it occurs.
3.2.2 Entity Concept

The entity concept, otherwise known as the accounting entity or the business entity concept. In
simple terms this concept allows the user to look at a reporting entity’s financial statements and
to know that these represent the performance and financial position of the business unit and do
not include any assets, liabilities, income or expenditure that are not related to the business.
Therefore, when a sole trader uses the business cheque book to buy a car for personal use, this
car will not form part of the business’s assets; it will be treated as the owner withdrawing equity
capital. This is called a ‘drawing’.
3.2.3 Materiality Concept

The materiality concept affects every transaction and every set of financial statements. This
concept affects two main areas: presentation and application of accounting standards. In respect
of the first, this concept assumes that only material items should be disclosed in financial
statements. This is important for achieving the objective of financial statements as attention
being afforded to immaterial items can mislead the user. The user should be able to look at a set
of financial statements and focus on the important figures, not see a mass of information, much
of which is of no use for economic decision-making. For example, it is irrelevant to disclose a
yearly spend on stationery of N100 and a yearly spend on coffee of N75, if the company has a
turnover of N10 million and total expenditure of N8 million. The immaterial items need to be
grouped together, or grouped into categories that are material. For example, the stationery and
coffee could be combined into administration expenses that might have a total of N2.5 million.
3.2.4 Time Period Concept

Another concept, the time period concept, otherwise known as the time interval concept, refers to
the practice of dividing the life of an entity into discrete periods for the purpose of preparing
financial statements. The norm, as required by company law, is one year. Therefore, a user has
the right to assume that the figures shown in a set of financial statements refer to a one-year
period. When the period is different to one year, the financial statements need to make it clear
that this is the case. Indeed, company law limits the ability of companies to change their
accounting year-end date. Entities can of course elect to report for different time periods;
however, to comply with law and the tax authorities they will also need to prepare financial
statements every 12 months.
3.2.5 Historical Cost Concept/Fair Value

The historical cost concept allows a user to assume that all the transactions in an entity’s
financial statements reflect the actual cost price billed, or revenue charged, for items. In
addition, it allows the reader to see the history of the management team’s investment decision-
making from the statement of financial position. This concept is becoming less relevant now as
it is widely believed that historical cost information does not support financial statements in their
aim of producing information that is useful for economic decision-making. In particular the
impact of inflation means that many of items recorded at historic cost, do not reflect current
value. Measuring items at fair value is deemed to provide more relevant information. Fair value
is defined by the International Accounting Standards Board (IASB) as the amount for which an
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asset could be exchanged, or a liability settled, between knowledgeable, willing parties in arm’s
length transaction.
3.2.6 Money Measurement Concept

The money measurement concept allows the user to assume that the performance and financial
position of a reporting entity will be expressed in monetary amounts (usually in the currency of
the country where the business is registered).
3.2.7 Duality Concept

The duality concept, otherwise known as the dual aspect concept or double entry, assumes that
every transaction has two aspects. Every transaction affects two accounts in a set of financial
statements in such a manner as to keep the accounting equation in balance (i.e. assets will always
equal liabilities plus owners’ capital).
3.2.8 Prudence Concept

The prudence concept, as the name implies, assumes that the financial statements have been
prepared on a prudent basis. This allows the user to have confidence that no profits are included
that are not earned and, if not yet received, are reasonably certain to be received. The user can
also be confident that expenses are complete and are not understated, that assets are not
overstated and liabilities are complete and are not understated. At one time this concept was
deemed to be fundamental to the objective of financial statements (i.e. to provide relevant
information to a wide range of users for economic decision-making). However, it was abused by
some companies. When companies did well they tended to overstate expenses (by creating
provisions for expenditure) and understate revenue. Then, in years when performance was not
strong, the companies reversed the adjustments – reducing the provisions and the expenses in the
year and increasing revenue. The result was that users could not quite work out how the
company really performed. For this reason prudence was downgraded and provisions and
manipulations that were based on the prudence concept are no longer allowed.
These transactions did not follow the spirit of this concept. They manipulated it for earnings
management purposes. Earning management is where the preparers of financial statements use
accounting adjustments to alter the reported performance of the reporting entity. They usually
try to smooth profits, that is, to show steady profits. The concept still is applicable; however, it
cannot be used as a defence for earnings management or earnings manipulation.
3.2.9 Substance Over Form Concept

This concept assumes that when accounting for transactions the preparer should look at the
economic substance of a transaction, not its legal form. This was a reactive concept/standard
that was introduced to try to stop the accounting practices that had emerged of creating
complicated legal transactions which, because of their legal form, allowed transactions to be
omitted from the financial statements. In particular, debts/ liabilities were arranged in such a
manner as to enable them to be left off the statement of financial position. This would make the
company look stronger, healthier and in general masked the real debt commitment that the entity
had, from the users. This is no longer allowed. Regardless of the legal contract underlying a
transaction, the preparer of the financial statements has to determine whether the transaction
22
creates an asset or a liability as defined by the Framework. If the transaction does, then the
preparer has to account for it as such.
3.2.10 Consistency Concept
The consistency concept allows the user to look at a set of financial statements over a number of
years for an entity and to assume that the same methods, policies and estimation techniques have
been used from year to year. This allows the user to compare the performance of the entity over
time. Financial information should allow users to determine trends in the performance of an
entity over time. If accounting policies, techniques and methods used were allowed to vary from
year to year, this would make comparisons meaningless. Similarly, users should be able to look
at the financial statements of several entities within the same industry and make informed
comparisons in the performance and financial standing of each entity; relative to each other. If
consistent accounting policies and practices are not adopted, this process would be very difficult.
Consistency is one of the qualities that financial information should have, as detailed in the
Framework.
3.2.11 Separate Determination Concept

This concept allows the user to look at the assets, liabilities, income and expenditure and to know
that the reported figure is the total value for each of these elements. The entity should have a
separate record of every asset held. The asset category in the financial statement should not be
just a big bath that includes a whole host of untraceable past transactions. This concept also does
not allow a company to net one element against another. This is important as netting can mislead
users.
For example, if a company were able to net its debt against some assets so that less debt is shown
in the statement of financial position, then the user would be unable to make a proper assessment
of the entity’s ability to pay back the debt as the user would assume the repayments required to
clear it were less than they actually were.
4.0 CONCLUSION
The IASB’s conceptual/theoretical Framework of accounting may be described as essentially
being a set of accounting principles. These are said to comprise the objective of financial
statements, the underlying assumptions of accounting (the concepts), the qualitative
characteristics of financial information, the elements of financial statements, recognition in
financial statements, measurement in financial statements and concepts of capital maintenance.
5.0 SUMMARY
In this unit, we have explained the nature of the going concern concept, the accruals concept, the
matching concept, the entity concept, the materiality concept, the time period concept, the cost
concept, the money measurement concept, the prudence concept, the duality concept, the
substance over form concept, the consistency concept and the separate determination concept,
including their implications for the preparation of financial statements;

In a paragraph each, explain the materiality, time period, historical cost, money measurement,
duality, prudence, substance over form, consistency and the separate determination concept.
23
Inua, O.I. (2014). Introduction to Accounting. Abuja: NOUN
Thomas, A. and Ward, A.M. (2012). Introduction to Financial Accounting. Berkshire: McGraw-
Hill Education.
Wood, F. and Sangster, A. (2008). Business Accounting. Edinburgh Gate: Pearson Education
Limited.
Weygandt, J, Kimmel, P, Kieso, D 2012 Accounting PRINCIPLES 10TH Edition,John Wiley
and Sons
24
UNIT 4: THE ACCOUNTING EQUATION AND ITS COMPONENTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Accounting Entity
3.2 The statement of financial Position as an Accounting Equation
3.3 The accounting period and profit reporting
3.5 Revenue expenditure versus capital expenditure
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
1.0 INTRODUCTION
In this unit we shall be considering the components of the accounting equation and how each
component is affected when a transaction takes place.
2.0 OBJECTIVES
After reading this chapter you should be able to do the following:
 Explain the meaning of the key terms and concepts in the accounting equation.
 Explain the relevance of the accounting entity concept in financial accounting.
 Explain the nature of assets, liabilities and capital.
 Distinguish between revenue expenditure and capital expenditure, including their effects
on the statement of financial position.
3.0 MAIN CONTENT

3.1 The Accounting Entity
The entity concept was introduced in the previous unit. Accounting for a reporting entity focuses
on setting up a means of recording all accounting information in relation to that entity, as distinct
from information that does not relate to the entity. The reporting entity may be, for example, a
particular company, club or business partnership. We are used to hearing that a financial report
relates to a specific organization, but now the organization is called an 'entity'. The use of the
word 'entity' emphasizes the properties of being separate and discrete. Greater precision is
demanded by accounting in deciding what is, and is not, part of the entity. Boundaries are
created to separate out the accounting entity. Realizing that these boundaries are necessary, even
though they may be artificial, is the key to the entity concept. It becomes possible to accept that a
business may be separate from its sole proprietor.
Example: A trainee accountant is starting to prepare the financial statements for a sole
proprietor who has a retail shop as his business. The following items appear in the
list of cheques written by the businessman. The trainee accountant has been asked
25
to state whether or not the items of expenditure below should be included in the
financial statements of the retail shop.
1. Cheque paying the shop's rates.

2. Cheque paying the sole proprietor's house rates.
3. Cheque paying for new cash till.
4. Cheque paying for a new washing machine for the proprietor's wife's birthday.
5. Cheque for stationery (90 per cent is for the shop, 10 per cent is for his kids).
6. Cheque purchasing overalls for himself for cleaning the shop.
7. Cheque paying for a new outfit, which he can wear to work.
Required:
Complete a table detailing whether the items should enter the accounting system of the reporting
entity or not.
Yes No
1. Shop rates √
2. House rates √
3. Till √
4. Watching machine √
5. Stationery √ (90%) √ (100%)
6. Overalls √
7. New outfit √
In sum, an accounting entity can be a legal entity, part of a legal entity, a combination of several
legal entities, part of another accounting entity, or a combination of accounting entities.
The accounting/reporting entity concept is also sometimes referred to as the 'business entity' or
simply the 'entity concept'.
3.2 The Statement of Financial Position as an Accounting Equation

An accounting entity may also be viewed as a set of assets and liabilities. Perhaps the most
familiar form this takes is the statement of financial position. As an equation this would appear
as follows:
Proprietor's ownership interest in the business = Net resources of the business

The ownership interest or claims are called owner's equity or owner's capital. The net resources
are analyzed into assets and liabilities.
3.2.1 An asset can be defined as a tangible or intangible resource that is owned or controlled
by an accounting entity, and which is expected to generate future economic benefits. Examples
of assets include land and buildings, motor vehicles, plant and machinery, tools, office furniture,
fixtures and fittings, office equipment, goods for resale (known as inventory), amounts owed to
the accounting entity by its customers (i.e. trade receivables), money in a bank account, and cash
in hand.
26
The use of the word 'net' to describe the resources possessed by the business recognizes that
there are some amounts set against or to be deducted from the assets. There are two major types
of such deduction: liabilities and provisions.
3.2.2 A liability can be defined as a legal obligation to transfer assets or provide services to
another entity that arises from some past transaction or event. Liabilities represent claims by
outsiders (compared to the owners, whose claims are equity or capital) and may include such
items as loans made to the business and amounts owed for goods supplied (i.e. trade payables).
3.2.3 Provisions are amounts provided to allow for liabilities that are anticipated but not yet
quantified precisely, or for reductions in asset values. Examples are bad debts and depreciation.
Given that liabilities can be regarded as being negative in relation to assets, the accounting
equation can now be stated in the form:
Assets - Liabilities = Owners' capital
Or alternatively:
Assets = Owners' capital + Liabilities
This equation is based on what is sometimes referred to as the 'duality' or 'dual aspect concept’.
This concept purports that every transaction has two aspects: one represented by an asset and the
other a liability, or two changes in either the assets or the liabilities. For example, the purchase of
an asset on credit will increase the assets and the liabilities by the same amount. The purchase of
a vehicle for cash will increase the value of the vehicle asset but decrease the amount of the cash
asset. These two aspects of each transaction are also reflected in the duality of double-entry
bookkeeping.
The accounting equation is a fundamental equation and is a valuable basis from which to begin
understanding the whole process of accounting. It sets out the financial position of the owners at
any point in time, although in practice a complete and detailed statement of financial position
may only be produced periodically, such as monthly or yearly. For now we will examine
accounting simply in terms of statements of financial position. Let us trace how this approach
reflects the setting-up of a plumbing business (see Example 1).
ILLUSTRATION
KEHINDE decided to start his business by opening a bank account for business transactions and
depositing N200, 000 into it on 1 July 20X2: This transaction involves a flow of value from
KEHINDE to his business and will affect two parts of the accounting equation: owner's capital
and assets. Owner's capital will increase by N200, 000 as the business is now 'indebted to
KEHINDE for the N200, 000 that he provided-to the business and cash at the business bank will
have increased by N200, 000. There are several ways of presenting this. In practice companies
usually adopt a vertical approach, placing capital vertically below net assets in the form:
27
KEHINDE (Plumber)
Statement of financial position as at 1 July 20X2
N
Assets
Cash at bank 200,000
Equity
Owner's capital 200,000
However, a side-by-side or horizontal presentation may illustrate more clearly the accounting
equation format.
KEHINDE (Plumber)
Assets N Equity N
Cash at bank 200,000 Owner's capital 200,000
Following on from the example, if on 2 July 20X2 KEHINDE draws out N80,000cash and
spends it all on purchasing tools, then cash at bank will be decreased by N80,000 and a new
asset, tools, is introduced on the statement of financial position with a balance of N80,000.
KEHINDE (Plumber)
Assets N Equity and liabilities N

Tools 80,000 Owner's capital 200,000
Cash at bank 120,000 ___
200,000 200,000
In this case one asset is increased by exactly the same amount as another is decreased (N80,000),
so that the accounting equation, assets equals capital plus liabilities, continues to balance.
Following on from the example, on 3 July KEHINDE buys a range of plumbing accessories for
N30,000 from the local storekeeper, but arranges to pay in the next few days. The arrangement is
described as 'on credit: The credit transaction with the storekeeper becomes a trade payable since
he is now owes a debt of N30,000. There is no problem in maintaining the balance of the
equation when including the effects of this transaction in the business statement of financial
28
position, since the new liability of N30,000 owed to the store exactly complements the N30,000
increase in assets represented by the inventory of accessories:
KEHINDE (Plumber)
Assets N Equity and liabilities N

Tools 80,000 Owner's capital 200,000
Inventory 30,000 Liabilities
Cash at bank 120,000 Trade payable 30,000
230,000 230,000
As mentioned, the horizontal approach adopted to portray the outcome of the last three
transactions reflects the accounting equation (assets = liabilities + equity). However, in practice
this is rarely utilized; therefore, the vertical approach is used throughout the remainder of this
course material.
KEHINDE (Plumber)
N
Assets
Tools 80,000
Inventory 30,000
Cash at bank 90,000
200,000
Equity and liabilities
Owner's capital 200,000 200,000
3.3 The Accounting Period and Profit Reporting
The accounting period concept (sometimes called periodicity concept) is a means of dividing up
the life of an accounting entity into discrete periods for the purpose of reporting performance for
a period of time (in a statement of profit and loss) and showing its financial position at a point in
time (in a statement of financial position). The period of time is usually one year and is often
referred to as the accounting year, financial year or reporting period. Each accounting year of an
entity's life normally ends on the anniversary of its formation, and therefore does not necessarily
coincide with the calendar year. It could thus end on any day of the calendar year, but for
convenience the accounting year is nearly always taken to be the end of a calendar month, and
sometimes adjusted to the end of the calendar year or to the end of a particular month (e.g. for
tax reasons). Some companies report on their financial position half-yearly or even quarterly.
Thus, the accounting period can be less than one year.
29
3.4 Revenue Expenditure versus Capital Expenditure
The word 'capital' is associated with items that appear in the statement of financial position (e.g.
owners' capital), whereas the word 'revenue' encapsulates items that appear in the statement of
profit and loss (comprehensive income). Expenditure of the type that is to be matched against the
period's revenue and is used up in the period is called revenue expenditure. Revenue expenditure
will have no value at the end of the period to which it relates. Revenue expenditure is
distinguished from capital expenditure - that which represents amounts which it is appropriate to
carry forward as part of the next year's opening statement of financial position. Capital
expenditure is carried forward because it will be used over a number of periods and contributes
to several periods' revenues.
ILLUSTRATION
A trainee accountant who has been given the task of listing items of expenditure as being either
capital or revenue expenditure approaches you for advice. She specifically wants to know
whether the following expenditures (which relate to a builder's yard) should be classed as capital
or revenue items:
1. rates charge for the year;

2. a new delivery van;
3. rent for the building;
4. sand that is not yet sold;
5. stationery;
6. telephone bills for the year;
7. a new telephone;
8. a new fence surrounding the yard (this is expected to reduce theft);
9. wages;
10. electricity bills;
11. timber in the yard that is not yet sold.
Required:
Complete a table detailing whether the items are capital or revenue in nature.
Solution
30
Capital Revenue
1. Rates √
2. Delivery van (motor vehicle) √
3. Rent √
4. Sand (inventory) √
5. Stationery √
6. Telephone bill √
7. New telephone (office equipment) √
8. Fence (fixtures and fittings) √
9. Wages √
10. Electricity √
11. Timber (inventory) √
Capital expenditure typically includes the cost of purchasing a non-current asset (including the
costs of getting the non-current asset operational at the begining) and the cost of improvements
to a non- current asset that lead to increased revenue, or sustained revenue. Expenditure on tools,
which represent the long-term equipment of the business, is capital expenditure and is carried
forward from statement of financial position to statement of financial position. Rental
expenditure on a building used during the year is revenue expenditure - what it provides is used
up in the period. The purchase of the building, however, would be capital expenditure, as it is
entirely appropriate to represent ownership being carried forward from period to period.
A trainee accountant who has been given the task of analysing items of expenditure in respect of
the motor vehicles of the business in the year approaches you for advice. She specifically wants
to know whether the following expenditures should be classed as capital or revenue items:
 repair of a lorry (the lorry is already included in the opening statement of financial
position):
 purchase of a new truck;
 motor tax on the truck and lorry;
 cost of removing seats in the truck to create more room for transporting goods for the
business;
 new tyres for the lorry;
 advertising painted on the side of both the lorry and the truck.
Required:
Complete a table detailing whether the items are capital or revenue in nature.
4.0 CONCLUSION
The accounting equation : Asset = Owner’s equity + Liability is an explanation of the principle
of double entry.
5.0 SUMMARY
In this unit we have discussed the accounting entity, the statement of financial position as an
31
accounting equation, the accounting period and profit reporting, the difference between revenue
expenditure and capital expenditure
1. Explain the relevance of the entity concept in accounting.

2. Define and distinguish between the following:
a. assets and liabilities;
b. capital and revenue expenditure.
3. State the accounting equation and explain its components.
Hill Education.
Limited.
32
UNIT 5 : BASIC DOCUMENTATION AND PRIME BOOKS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main content
3.1 Basic Documentation for Cash and Credit Transactions
3.2 Source documents
3.3 Prime books
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
No two businesses are exactly the same and the same can be said of the accounting systems used
by firms. Most firms have their own particular ways of doing things. Some use manual record-
keeping, others use off- the-shelf accounting software packages such as Grace, while others
create their own accounting systems. However, there is a certain degree of similarity in keeping
accounting records that is prevalent among the great majority of firms. This unit focuses on
providing background information on the typical documentation and books of account that are
used by most firms.
2.0 OBJECTIVES
 Distinguish between cash transactions and credit transactions.
 Describe the nature of trade discount and cash discount.
 Give examples of source documents
 Explain the purpose of books of prime entry.
 List the books of prime entry and state what each is used to record.
3.0 MAIN CONTENT

3.1 Basic Documentation for Cash and Credit Transactions
In accounting, a cash transaction is one in which goods or services are paid for in cash or by
cheque when they are received or delivered. A credit transaction is one where payment is made
or received some time after delivery . This should not be confused with hire purchase or credit
card transactions. Credit transactions are extremely common in many industries.
Credit transactions often involve trade discount.
3.1.1 Trade discount: This is a discount given by one trader to another. It is usually expressed
as a percentage reduction of the recommended retail price of the goods, and is deducted in
arriving at the amount the buyer is charged for the goods.
A large number of businesses also allow their customers cash discounts.
33
3.1.2 Cash discount: This is a reduction in the amount that the customer has to pay, provided
payment is made within a given period stipulated by the seller at the time of sale (e.g. 5 per cent
if paid within one week).
A cash transaction is recorded in the books of account from the receipt received if paid in cash,
or from the cheque book stub if paid by cheque.
SELF-ASSESSMENT EXERCISE
Explain the difference between a cash transaction and a credit transaction.
3.2 Source documents

This is where original transaction information is to be found. Examples of source documents
include the invoice, debit note, credit note, cheque and receipt.
3.2.1 The Invoice
The purpose of the invoice, which is sent by the seller, is primarily to inform the buyer how
much is owed for the goods supplied. It is not demand for payment.
The information shown on an invoice typically consists of the following items:
 the name and address of the seller;

 the name and address of the buyer;
 the invoice and delivery note number of the seller (usually the same);
 the date of the invoice;
 the address to which the goods were delivered;
 the buyer's order number;
 the quantity of goods supplied;
 details/description of the goods supplied;
The buyer checks the invoice against the order and the delivery note (or more usually with a
goods received note prepared by the receiving department). If correct, the invoice is then entered
in the buyer's books. Similarly, a copy of the invoice would have been entered in the seller's
books.
3.2.2 The debit note
A debit note is sent by the seller if the buyer has been undercharged on the invoice. It has
basically the same layout and information as the invoice except that instead of details of the
goods, it shows details of the undercharge. It is recorded in the books of the seller and buyer in
the same way as an invoice.
3.2.3 The credit note
A credit note may be sent by the seller for a number of reasons. These include:
 The buyer has returned goods because they were not ordered, or they were the wrong
type, quantity or quality, or are defective.
 The seller has overcharged the buyer on the invoice. This may be due to an error in the
unit price or calculations.
A credit note has basically the same layout and information as an invoice, except that instead of
the details of the goods, it will show the reason why it has been issued.
34
A credit note will be recorded in the books of the seller and buyer in a similar way as the invoice,
except that the entries are the reverse. This document is called a credit note because it informs
the buyer that the account in the books of the seller is being credited. Conversely, a debit note
informs the buyer that the account in the seller's books is being debited.
3.2.4 The Cheque
This is the most common form of payment in business because of its convenience and safety.
Most cheques are crossed and therefore have to be paid into a bank account. This makes it
possible to trace the cheque if it is stolen and fraudulently passed on to someone else. A crossed
cheque may be paid into anyone's bank account if the payee endorses (i.e. signs) the back of the
cheque. However, if the words 'account payee only' are written between the crossings it must be
paid into the account of the person named on the cheque.
The information that must be shown on a cheque consists of the following items:
 the date;
 the signature of the drawer (i.e. payer);
 the name of the drawee (i.e. the bank at which the drawer has the account);
 the name of the payee (i.e. who is to receive the money);
 the words 'Pay ..’. or 'Order the sum of ..;
 the amount of money in figures and in words.
The bank account number of the drawer, and the cheque and bank number are also shown on pre-
printed cheques. Since there is only one copy of a cheque, it is essential to write on the cheque
stub to whom the cheque was paid (i.e. the payee), the amount and what the payment was for.
Without this information the books of account cannot be prepared..
3.2.5 The receipt
The law requires the seller to give the buyer a receipt for goods or services that have been paid
for in cash. However, there is no legal requirement to do so in the case of payments by cheque.
A receipt must contain the following information:
 the name of the payer;

 the signature of the recipient;
 the amount of money in figures and in words;
 the date.
A receipt is only recorded in the books of account when it relates to cash receipts and payments.
Give examples of source documents
3.3 Prime books

The main book of account in which all transactions are recorded is called the ledger (otherwise
known as the general ledger, or the nominal ledger). However, before a transaction is recorded in
the ledger, it must first be entered in a book of prime entry. These books are designed to show
more detail relating to each transaction than appears in the ledger. They also facilitate making
entries in the ledger, in that transactions of the same type can be posted periodically in total
35
rather than one at a time. A business may make use of up to nine books of prime entry, which
consist of the following:
3.3.1 The sales day book: records the sale on credit of goods bought specifically for resale. It
is written up from copies of sales invoices and debit notes retained by the seller. The amount
entered in the sales day book is after deducting trade discount (but before deducting cash
discount).
3.3.2 The purchases day book: in which is recorded the purchase on credit of goods for
resale. It is written up from the invoices and debit notes received from suppliers. The
amount entered in the purchases day book is after deducting trade discount (but before
deducting cash discount).
3.3.3 The sales returns day book: in which is recorded the goods sold on credit that are
returned by customers. It is written up from copies of credit notes retained by the seller.
3.3.4 The purchases returns day book: in which is recorded the goods purchased on credit
that are returned to suppliers. It is written up from the credit notes received from
suppliers.
3.3.5 The petty cash book: in which is recorded cash received and cash paid. This is written
up from receipts or petty cash vouchers where employees are reimbursed expenses.
3.3.6 The cash book: in which are recorded cheques received (and cash paid into the bank)
and payments made by cheque (and cash withdrawn from the bank). This is written up
from the bank paying-in book stub and cheque book stubs.
3.3.7 The Journal: in which are recorded any transactions that are not included in any of the
other books of prime entry. At one time all entries passed through the journal, but now it
is primarily used to record the purchase and sale of non-current assets on credit, the
correction of errors, opening entries in a new set of books and any remaining transfers.
Non-current assets are items not bought specifically for resale, such as land and
buildings, machinery or vehicles. The journal is written up from copies of invoices and
adjustments requested by the accountant.
Source documents Books of prime entry

Sales invoices Sales day
(copy) book
Purchase invoices Purchase day

(received) book
Sales credit notes Sales returns day

(copy) book
36
Purchase credit Purchase returns
notes (received) day book
The Ledger
Receipts and petty Pretty cash book

cash vouchers
Cheque book stub
Cash book
Paying-in book
stub
Invoices for non- The Journal

current assets
Commonly used books of account and related source documents

Source: Thomas and Ward (2012)
4.0 CONCLUSION
In accounting a distinction is made between cash and credit transactions. A cash transaction is
one where goods or services are paid for in cash or by cheque when they are received or
delivered. A credit transaction is one where payment is made or received some time after
delivery. Credit transactions often involve trade discounts and cash discounts.
receipts and payments are entered in a book of prime entry known as the 'petty cash book'
Cheque receipts and payments are entered in the 'cash book:
Credit transactions involve a number of different documents, but those which are recorded in the
books of account comprise invoices, debit notes and credit notes. These arise in connection with
both purchases and sales, and are entered in a set of books of prime entry commonly known as
'day books'.
5.0 SUMMARY
In this unit we have discussed the accounting cycle making reference to the source documents,
books of prime entry and the journal
6.0 TUTOR MARKED EXERCISE

1. You have just received a debit note for N10,000.
a. What is a debit note?
b. How should the N10,000 be accounted for?
2. List the four books of prime entry that are used to record inventory movements.
3. What do you have to do to a cheque to make it safe when sending it to a supplier using
the postal system?
37
Hill Education.
Limited.
38
UNIT 6 : PRIME BOOKS, GENERAL LEDGERS AND THE JOURNAL
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Prime Books
3.2 Ledgers
3.3 The Journal
4.0 Conclusion
5.0 Summary
7.0 references/Further Readings
1.0 INTRODUCTION
Before a transaction is recorded in the general ledger, it must first be entered in a book of prime
entry. These are intended to facilitate the posting of the general ledger, in that transactions of the
same type are entered in the same book of prime entry, which is periodically posted to the
general ledger in total (rather than one transaction at a time). These initial entries in the prime
books do not form part of the double-entry bookkeeping.
There are several books of prime entry. This unit examines only those that are used to record
credit transactions. These consist of: (1) the sales day book; (2) the purchases day book; (3) the
sales returns day book; (4) the purchases returns day book; and (5) the journal. These prime
books have been defined in unit 3. So, we shall be considering some illustrations.
2.0 OBJECTIVES
 Describe the transactions and documents that are recorded in each of the prime books and
the journal.
 Enter credit transactions in the appropriate day books or journal and post these to the
relevant ledger accounts.
ILLUSTRATION 1
Big Dazzle is an electrical goods wholesaler. The transactions during June 20X3, which are all
on credit, were as follows:
1 June Bought on credit from Power Ltd various bulbs with a retail price of N1,000,000
and received 20 per cent trade discount
4 June Sold goods on credit to Wire Reserves Ltd for N500,000 and allowed them 10 per
cent trade discount on this amount
39
8 June Sent Wire Reserves Ltd a credit note for goods returned that had a retail value of
N300,000
10 June Sold goods on credit to Wiggle Ltd for N600,000 after deducting 40 per cent trade
discount
12 June Purchased goods with a retail value of N1,000,000 from Switch Ltd who allowed
30 percent trade discount.
15June Purchases on credit from Cables Ltd goods costing N550,000.
16 June Sent Wiggle Ltd a credit note' for goods returned that had a retail value of
N100,000.
18 June Switch Ltd sent us a credit note for N300,000·in respect of goods returned
19 June Received a credit note for goods returned to Power Ltd that had a retail value of
N250,000
25 June Sold goods to Grease Retails Ltd on credit for N250,000
27 June Sent Grease Retails Ltd a credit note for N50,000 to rectify an overcharge on their
invoice
28 June Sold goods on credit to Wire Reserves Ltd at a price of N569,000.
29 June Purchased on credit a motor van from Bobo Ltd that cost N800,000.
30 June Sold on credit to Eko Trading Co. some fixtures and fittings no longer required in
the shop for 350,000. (Prior. to this the business owned fixtures costing
N1,000,000.)
Required
Make the necessary entries in the books of prime entry and general ledger.
Solution
Before starting to undertake double entry, the first step is to summarize the transactions in the
day books. The first part of this solution deals with the transactions that do not impact on the
journal.
3.1 Prime Books
Sales day book

Date Name of credit Our invoice Folio Amount
customer number
20X3 N’000
4 June Wire Reserves 100446 F34 450
10 June Wiggle Ltd 100447 F8 600
25 June Grease Retails Ltd 100448 F45 250
28 June Wire Reserves 100449 F15 560
1,860
Sales returns day book

Date Name of credit Our credit Folio Amount
40
customer note number
20X3 N’000
8 June Wire Reserves CRN06 F34 270
16 June Wiggle Ltd CRN07 F8 60
27 June Gross Retails CRN08 F45 50
380
Purchases day book

Date Name of credit Our ref no for Folio Amount
customer supplier’s
invoice
20X3 N’000
1 June Power Ltd Inv460 T23 800
12 June Switch Ltd 1000672 T5 700
15 June Cables Ltd S0056932 T10 550
2,550
Purchase returns sales book

Date Name of credit Our ref no for Folio Amount
suppliers supplier’s credit note
20X3 N’000
18 June Power Ltd C00569 T5 300
19 June Switch Ltd SC452 T23 200
500
3.2 Ledgers
The next step is to take the day books and to use them to enter the information into the main
double-entry bookkeeping system (the general ledger, sales ledger and purchase ledger). These
ledger accounts are shown in T account format.
The first two day books to be closed off and posted are those involving customers (sales day
book and the sales return day book). Note the normal double-entry rules in respect of recording
the flow of value are being applied.
General ledger entries
Sales account
20X3 Details N’000 20X3 Details N’000
30 June Total per sales day book 1,860
Sales returns account
41
30 June Total per sales returns day book 380
Sales ledger entries

Wire Reserves Ltd
4 June Sales 450 8 June Returns 270
28 June Sales 560
Wiggle Ltd
Grease Retails Ltd

Next, the two day books involving suppliers (purchases day book and the purchases return day
book) are closed and posted.
Purchase account
30June Total purchases day book 2,050
Purchase returns account

30 June Total per purchases 500
returns day book
Purchase ledger entries

19 June Returns 200 1 June Purchases 800
Light Ltd
18 June Returns 300 12 June Purchases 700
Purchase account
15 June Purchases 550
3.3 The Journal
The entries required to post the motor van on credit and the sale of fixtures and fittings are first
recorded in the journal before they enter the general ledger bookkeeping system as follows:
42
Date Details (account in which Folio Debit Credit
Amountamount
the ledger entry is to be made)
N’000 N’000
20X3
29 June Motor vehicles Dr 800
To Bobo Ltd Cr 800
Being purchase on credit of motor van reg no LAG 123
29 June AABC123.
Eko Trading Co Dr 350
To fixtures and fittings Cr 350
Being sale on credit of shop fittings.
Second, the journal is taken and its entries are posted to the individual ledger accounts in the
general ledger as follows:

Motor vehicles account
29 June Bobo Ltd 800
Bobo Ltd account (sundry payable)

29 June Motor vehicles 800
Fixtures and fittings account

1 June Balance b/d 1,000 30 June Eko Trading Co 350
_____ 30 June Balance c/d 650
1,000 1,000
1 July Balance b/d 650
Eko Trading Co account (sundry receivable)

30 June Fixtures and fittings 350
Notes
1. The fixtures and fittings that were sold must obviously have already been owned by the
business. Their cost is therefore included in the balance brought down on the debit side of
the fixtures and fittings account along with the cost of other fixtures and fittings owned at
that date.
43
2. The Eko Trading Co. is referred to as a sundry receivable and Bobo Ltd as a sundry
payable.
Where possible, approach a local business or a family member who works in the administration
function of a business and ask them about the books of account of the business. Ask them to
explain the transactions that they record in each type of book. Different names to those used in
this chapter may exist, however, they will typically perform the same function.
4.0 CONCLUSION
Before a transaction is recorded in the ledger, it must first be entered in a book of prime entry.
These are intended to facilitate the posting of the general ledger, in that transactions of the same
type are entered in the same book of prime entry, the totals of which are periodically posted to
the general ledger rather than one transaction at a time.
Credit transactions not relating to goods for resale (or services), such as the purchase and sale of
non- current assets, are recorded in another book of prime entry known as the 'journal. This is
also used to record transactions that are not appropriate to any other book of prime entry, and
various accounting adjustments that are not the subject of a transaction such as the correction of
errors. The format of the journal includes a details column and two money columns labelled
'debit' and 'credit: The narrative in the details column and amounts in the money columns
indicate the entries that will be made in the ledger in respect of a given transaction or item.
5.0 SUMMARY
In this unit we have considered how credit transactions pass through the prime books before postings are made to the ledgers using
the double entry bookkeeping rules. We also considered the use of the journals for transactions that do not involve the use of prime
books
6.0 TUTOR MARKED ASSIGNMENT
1. B. Jeje is in business as a builders' merchant. The following credit transactions took place
during April 20X3:
1 Apr Bought goods on credit from Bibi Ltd for N725,000

2 Apr Sold goods on credit to Pool Ltd for N410,000
4 Apr Bought goods costing N315,000 from Board Ltd on credit
7 Apr Sold goods on credit to Bunch Ltd for N870,000
11 Apr Bought goods costing N250,000 from Grace Ltd on credit
15 Apr Sold goods to Lemon Ltd for N630,000 on credit
17 Apr Bought goods on credit from Bibi Ltd for N290,000
44
19 Apr Received a credit note for N120,000 from Bibi Ltd
22 Apr Sent Pool Ltd a credit note for N220,000
24 Apr Board Ltd sent us a credit note for N75,000 in respect of goods returned
27 Apr Sent Bunch Ltd a credit note for N360,000
28 Apr Bought a delivery truck on credit from Coscharis motors for N5,000,000.
Required:
You are required to make the necessary entries in the books of prime entry and the general
ledger.
Hill Education.
Limited.
UNIT 7: INVENTORY VALUATION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
45
3.1 Inventory and Simple Inventory Valuation
3.2 Meaning and Nature of Inventory
3.3 Methods of Inventory valuation
3.4 Inventory and Its Effects on Profit and Financial Position
3.5 Illustrative Examples
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Merchandising organisations have goods they sell in order to generate revenue and ultimately
profit. It is naturally inappropriate for these entities to wait for customers to demand their
products before the order for inventory, otherwise, the attendant delays will lead to potential loss
of customers arising from customers’ dissatisfaction. In order to avoid this negative eventuality,
entities usually hold inventory as a buffer prior to when customers demand for them. However,
the need to place a value on the unsold inventories at the end of the year and the cost of those
46
sold in order to know the portion of the relevant cost to charge against revenue and the one to
carry forward as an asset in the financial positionis usually not that simple. This Unit therefore
examines the nature of inventory, the methods of valuing inventory and the effects of inventory
valueson profit and asset.
2.0 OBJECTIVES
After studying this Unit, the student should be able to:
 define what inventory is and identify when assets can be regarded as inventories;
 explain the nature of periodic inventory model or system;
 identify and compute the common methods of valuing inventory;
 describe the effects of inventory on the profit or loss and financial position.
3.0 MAIN CONTENT
3.1 Inventory and Simple Inventory Valuation
3.2 Meaning and Nature of Inventory
Inventories are generally referred to as the unsold portion of goods held for resale. What
constitutes inventories depends on the nature of the business of an entity. Purchases give rise to
inventories when the goods purchased are not fully sold in the period. However, non-current
47
assets such as motor vehicle, plant and equipment, land and building, for example, might equally
be regarded as purchases and ultimately inventories by firms that deal on buying and selling
them. For example, estate developer will regard buildings acquired for the purpose of resale as
purchases and ultimately inventories if not sold in the particular accounting period. Students
should not be confused about this. What constitutes a non-current asset to a firm depends on
what it does with that asset. This is also true of purchases as what constitutes purchases is a
function of the nature of the business of an entity or simply what the entity does with the
particular assets. There are three basic types of inventories namely, raw materials, work-in-
progress (or semi-finished goods) and finished goods. Whereas a manufacturing firm will
obviously have these three types of inventories, a merchandising firm (i.e., a firm that buys and
sells) which does not engage in manufacturing will only have finished goods inventories.
A major concern to entities in respect of inventory involves the value to be placed on the
inventory at the end of the accounting year or at such time when a physical count of inventory is
taken, which will also have implications for the amount to be allocated to cost of sales in that
period. For the purpose of inventory valuation, a periodic or perpetual/continuous inventory
valuation could be applied. We shall discuss periodic inventory in this Unit and defer perpetual
inventory model to Unit 13. A periodic inventory valuation occurs where an entity takes
inventory count and determines the value at the end of the accounting year as a basis for
preparing the financial statement. The entity using periodic inventory model will be unable to
determine the value of its closing inventory and cost of sales until stock-taking is done at the end
of the financial year or at such time when inventory count is undertaken.
3.3 Methods of Inventory valuation
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Generally, inventories are valued at lower of cost and net realisable or fair value. However, the
value/cost is only ascertained after applying a particular method of valuation. It is worth
mentioning here that different valuation methods yield different values of inventory and
ultimately cost of sales. An entity’s accounting policy (see Unit 15) determines the method the
entity would adopt for valuing its inventory. The common methods of valuing inventory are:
First In First Out (FIFO), Last In First Out (LIFO), Average (simple and weighted) and standard
cost. We shall now discuss them in turn.
3.3.1 First In First Out (FIFO)
The underlying assumption of this method of valuing inventory is that earlier purchases of goods
for resale are considered sold prior to subsequent purchases. This means that if an entity has
three batches of purchases in a period: A = 300 units (at N10 each), B = 500 (at N11) and C =
600 (at N15), what would be the value of closing inventory and cost of sales if 1,000 units were
sold in the period.
Units of closing inventory = Total units purchased less units sold
Inventory = 1,400 – 1,000 = 400.
The order of sales following the FIFO assumption would be: Batch A, followed by Batch B and
then Batch C. So the closing inventory of 400 units would come from Batch C. The value of the
closing stock would then be N6,000 (i.e., 400 units x N15). By implication, cost of sales would
be determined as follows:
(300 x N10) + (500 x N11) + (200 x N15)
N3,000 + N5,500 + N3,000 = N11,500.
49
3.3.2 Last In First Out (LIFO)
The assumption is that the last batches of goods are considered to be sold first prior to earlier
purchases. This means that later batches are assumed to be sold before earlier ones. Using our
FIFO data above, LIFO will produce the following values of closing inventory and cost of sales:
Closing inventory = (300 x N10) + (100 x N11)
N3,000 + N1,100 = N4,100
Cost of sales = (600 x N15) + (400 x N11)
N9,000 + N4,400 = N13,400
3.3.3 Simple Average Method (SAM)
This applies a simple average of the unit costs/prices to the goods sold to determine the cost of
goods sold and average of the unit costs to the units of closing inventory to get the value of
closing inventory. If we use our example above, the values of closing inventory and cost of sales
would be as follows:
First, we compute the average price, which is the aggregate of the prices of the three batches
divided by 3.
Average price =
= N12
Closing inventory = 400 x N12 = N4,800
50
Cost of sales = 1,000 x N12 = N12,000
Because the average computation ignores the units purchased that would eventually absorb the
average price as inventory and cost of sales, the total of the computed cost of sales and inventory
is not equal to the total cost of purchasing the three batches. We learnt from FIFO and LIFO
examples above that the total cost of purchases (inventory and cost of sales) is N17,500 but the
simple average produced a different result because of the averaging of the prices independent of
the corresponding units purchased.
3.3.4Weighted Average Method (WAM)
Unlike the simple average method that ignores the units of goods purchased in determining the
average cost, this method uses the weighting of the unit prices of all the batches purchased
before dividing by the total units purchased. The average cost then becomes the unit cost for
computing both the values of cost of sales and closing inventory. Using our example above, the
value of inventory and cost of sales would be as follows:
Weighted average =
= = N12.50
Therefore, the value of closing inventory and cost of sales are:
Closing inventory = 400 units x N12.50 = N5,000
Cost of sales = 1,000 units x N12.50 = N12,500
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3.3.5 Standard cost
This method uses a predetermined rate set by the entity’s management for the purpose of
calculating the cost of sales and inventory. While this method is easy and convenient to apply, it
does not utilise actual cost used in purchasing the batches of goods. However, the entity does not
set the standard cost per unit arbitrarily but probably based on experience and other prevailing
circumstances. Following our previous example, if we assume that the management sets a
standard cost of N13.50/unit, the closing inventory and cost of sales would respectively be:
N5,400 (400 units x N13.50) and N13,500 (1,000 units x N13.50).
3.4 Inventory and Its Effect on Profit and Financial Position
The value of inventory will equally affect the reported profit and the value of current asset. The
higher the value placed on the closing inventory, the higher the profit of the period would be.
Remember that closing inventory is deducted from the cost of goods available for sale to get the
cost of sales, which is invariably similar to adding it to sales. Closing inventory also affects the
value of current assets: the higher the closing inventory the higher the value of current assets.
Nevertheless, after valuing inventory using any of the inventory valuation methods and the entity
compares that value with a potential market value the inventory would sell for, the lower of the
cost-based value and net realisable value would be used as the value of closing inventory for the
purpose of computing profit in the statement of comprehensive income and current asset in the
statement of financial position. After making this comparison, the estimated loss in value is
charged as an expense to the profit or loss for the year.
3.5 Illustrative Examples
52
Example 1
From the information below relating to five business entities, determine the (i) basis of valuing
the inventory (cost or net realisable value) at the end of the year (ii) value of closing inventory
that would appear in their financial statements, and (iii) amount to be written off to profit or loss
as inventory loss and how this will be treated in the ledger account.
Entities Inventory at Inventory at

Cost NRV
N N
Chip-Chip Enterprises 561,000 673,400
Omede Shop 675,000 526,700
Akin Carpet 988,000 1,060,000
Adamu Merchandising 350,000 344,100
Bisi Toiletries 674,300 550,000
Example 2
Adesuwa Toy Shop orders and sells toys at Ikoyi High Street in Lagos. On 1st January, the Shop
had 800 units of toys which were purchased at N100 each. During the year, Adesuwa Toy Shop
made four batches of purchases of toys as follows:
Batches Units Unit price Total cost
53
N N
February 1,000 105 105,000
May 1,200 110 132,000
September 1,300 120 156,000
November 1,600 122 195,200
The Shop sold 4,700 units during the year.
Required:
(a) Compute the quantity of closing inventory
(b) Compute the cost of sales and closing inventory using the following methods: (i) FIFO
(ii) LIFO (iii) SAM, and (iv) WAM
(c) Determine the value of closing inventory if the net realisable value of inventory held at
the end of the year is: (i) N95 (ii) N112
SOLUTION
Solution to Example 1
The important thing the student should note here is that inventory is recognised in the financial
statements at lower of cost and net realisable value. If the cost is less than the NRV, the value to
be recognised in the financial statements will be cost; if NRV is less than the cost, then the NRV
54
will be the recognisable value of inventory in the financial statements. However, when the cost is
greater than the NRV (i.e., NRV less than cost), a potential loss occurs and that loss has to be
charged to the profit or loss for the year.
Entities Inventory Inventory Basis of Closing Inventory

at Cost at NRV inventory loss
valuation
N N N N
(A) (B) (A - B)
Chip-Chip Enterprises 561,000 673,400 Cost 561,000 Nil
Omede Shop 675,000 526,700 NRV 526,700 148,300
Akin Carpet 988,000 1,060,000 Cost 988,000 Nil
Adamu Merchandising 350,000 344,100 NRV 344,100 5,900
Bisi Toiletries 674,300 550,000 NRV 550,000 124,300
The treatment of the losses in the ledger accounts are as follows:
Generally, the accounting entries for the inventory loss in value are: Dr Profit or loss and Cr
Inventory.
Omede Shop
Inventory A/c
N N
Profit or Loss 148,300
55
Bal. b/f675,000 Bal. c/f 526,700
675,000 675,000
Bal. b/f 526,700
Adamu Merchandising
Inventory A/c
N N
Bal. b/f350,000 Bal. c/f 344,100
350,000 350,000
Bal.b/f 344,100
Bisi Toiletries
Inventory A/c
N N
Bal. b/f674,300 Bal. c/f 550,000
674,300 674,300
Bal. b/f 550,000
Solution to Example 2
56
(a)
Computation of quantity of closing inventory
Batches
Opening 800
February 1,000
May 1,200
September 1,300
December 1,600
Goods available for sale 5,900
Less: Goods sold (4,700)
Units of closing inventory 1,200
(a) i
FIFO
Computation of Cost of sales
Batches Units Units sold Unit price Cost of sales

Purchased from batch
N N
Opening 800 800 100 80,000
57
February 1,000 1,000 105 105,000
May 1,200 1,200 110 132,000
September 1,300 1,300 120 156,000
November 1,600 400 122 48,800
TOTAL 4,700 521,800
Computation of Cost of Closing Inventory (FIFO)
Since the first batches are deemed to be sold first, it means that the closing inventory of 1,200
units will come from the November batch.
Value of closing inventory = 1,200 x N122 = N146,400
*NB: If you were to compute the cost of goods available for sale, that would simply be the
value of the closing inventory plus the cost of sales and this will give us N668,200.
58
(b)ii
LIFO
Computation of Cost of sales
Batches Units Units sold Unit price Cost of sales

Purchased from batch
N N
Opening 800 0 100 0
February 1,000 600 105 63,000
May 1,200 1,200 110 132,000
September 1,300 1,300 120 156,000
November 1,600 1,600 122 195,200
TOTAL 4,700 546,200
Computation of Cost of Closing Inventory (LIFO)
Since the first batches are deemed to be sold last, it means that the closing inventory of 1,200
units will come from the opening and February batches.
Value of closing inventory = Opening batch 800 units x N100 = N80,000
February batch 400 units x N105 = N42,000
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Closing inventory cost N122,000
60
(b)iii
Simple Average Method (SAM)
Computation of Cost of sales and Closing Inventory
Batches Unit price

N
Opening 100
February 105
May 110
September 120
November 122
TOTAL 557
Average Cost = , where the number of batches is 5 (i.e, Opening, February,
May, September, November)
= = N111.40
Value of closing inventory = 1,200 x N111.40 = N133,680
61
(b) iv
(Periodic) Weighted Average Method (WAM)
Computation of Cost of sales and Closing Inventory
Batches Units Unit price Weighted

purchased cost
N
N
Opening 800 100 80,000
February 1,000 105 105,000
May 1,200 110 132,000
September 1,300 120 156,000
November 1,600 122 195,200
TOTAL 5,900 668,200
Weighted Average Cost =
= = N113.25 (approximated/rounded to 2 decimal places)
Value of closing inventory = 1,200 x N113.25 = N135,900
(c)
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Determination of value of closing inventory @ N95 NRV
Method of Cost NRV @ Inventory

Valuation Value
Units of N95/unit
Inventory N
FIFO 1,200 146,400 114,000 114,000
LIFO 1,200 122,000 114,000 114,000
SAM 1,200 133,680 114,000 114,000
WAW 1,200 135,900 114,000 114,000
Determination of value of closing inventory @ N112 NRV
Method of Cost NRV @ Inventory

Valuation Value
Units of N112/unit
Inventory N
FIFO 1,200 146,400 134,400 134,400
LIFO 1,200 122,000 134,400 122,000
SAM 1,200 133,680 134,400 133,680
WAW 1,200 135,900 134,400 134,400
4.0 CONCLUSION
63
We have examined inventory and its valuation and how it affects the cost of sales and reported
profit.
5.0 SUMMARY
In this Unit we studied the nature of inventory and the different inventory valuation methods
such as FIFO, LIFO, SAM, WAM, and standard cost. Moreover, this Unit equally looked at how
inventory valuation methods affect the cost of sales and profit as well as the carrying value of
closing inventory in the statement of financial position.
1. Explain what you understand by periodic inventory system.
2. What is the rationale for applying the notion of lower of cost or net realisable value?
What accounting concept do you think underpins this rule?
3. The following data for the month of January relate to the records of Mimido Enterprises
which deals on ‘I love mummy’ branded baby nappies. On 1st January, the shop had 800
units of nappies which were purchased at N10 each:
Dates Units Units Purchase Sales

Sold price/unit price/unit
Purchased
N N
Jan. 3 1,000 10.50
Jan. 5 1,200 25
64
Jan. 10 500 11
Jan. 12 800 12
Jan. 15 1,600 29
Jan. 20 1,000 12.75
Jan. 25 600 30
Jan. 29 400 12.45
Required:
a. Compute the cost of sales and closing inventory following the periodic inventory
model assumption: (i) FIFO (ii) LIFO (iii) SAM, and (iv) WAM
b. If the firm’s pre-determined unit price of valuing inventory is N12.65, compute the
cost of sales and closing inventory for the month.
4. The following costs and net realisable valueswere drawn from the books of Apo Paints
Merchants which deals on five product lines of paints:
Product Line Inventory at Inventory at

Cost NRV
N N
Chiplex 800,000 873,400
Delux 675,000 582,700
Dumaplux 988,000 982,000
65
Sweetex 380,000 404,100
Lunaplex 645,300 650,000
Required:
(i) Identify the basis of valuing the inventory of each product line for the period
(Hints: state whether it is cost or net realisable value)
(ii) Determine the value of closing inventory of each of the product lines asit would
appear in the financial statements and the total inventory value that would appear
in the financial statements.
(iii) Determine the amount to be written off to profit or loss as inventory loss and how
this will be treated in the ledger account.
Hindmarch, A. and Simpson, M. (1991): Financial Accounting: an introduction, London:
Macmillan
Hodge, R. (2008). Accounting: a foundation, London: Cengage Learning
Wood, F. & Sangster, A. (2012) Frank Wood’s business accounting 1, Harlow, England:
Pearson Education Limited
66
UNIT 8: TRIAL BALANCE
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Trial Balance
3.2 Uses of Trial Balance

3.3 Purpose of a trial balance
3.4 Format of a Trial Balance
3.5 Correction of Errors
3.6 Types of Errors
3.7 Suspense Account
4.0 Conclusion
5.0 Summary
67
1.0 INTRODUCTION
The trial balance helps to ascertain the arithmetical accuracy of all the postings made. In this
unit, we will be looking at the uses of the trial balance, errors affecting the trial balance and
errors that does not affect the trial balance.
2.0 OBJECTIVES
After studying this unit, you should be able to;
- explain the uses of trial balance
- describe the purpose of trial balance
- determine the errors affecting the trial balance
- identify errors not affecting the trial balance
3.0 MAIN CONTENT
3.1 Definition of Trial Balance
A trial balance is a list of ledger account balances within a ledger, at a particular instance. If we
balance all the ledger accounts at a particular instance and then prepare a statement of balances
we get the "Trial Balance".
3.2 Uses of Trial Balance

The first step in the preparation of the final accounts is the compilation of a Trial Balance, with a
view to:
(a) Proving the arithmetical accuracy of the postings, and
(b) Providing in one statement a concise summary of the items, which are to be included in the
comprehensive Income statement and the Statement of financial position. Debit balances
recorded in the trial balance normally represent either assets, or losses and expenses. The assets
are entered in the Statement of financial position, while losses and expenses are debited to the
68
Income statement. Likewise, the credit balances represent liabilities, provisions, reserves, or
revenues and gains. The liabilities are entered in the statement of financial position as deductions
from assets of the firm, while income and gains are credited to the Income statement.
3.3 Purpose of a trial balance
A trial balance is prepared to check the mathematical/arithmetic accuracy of postings. This is the
only (main) purpose of the "Trial Balance". Since it is anyhow prepared for a purpose, it is put to
some other uses like for the preparation of final accounts.
3.4 Format of a Trial Balance
The most common format in which we find a trial balance is as below.
Trial Balance of MYZ _____ as on _____
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Debit Credit
Particulars L/F Amount Amount
(in Naira) (in Naira)
Account Head 1 —
– –
Account Head 2 —
– –
Account Head 3 —
– –
—
Total Xxxx Xxxx
Illustration 1
On 1 April 2012, K. Obinna sets up a business with a capital of N150,000, made up of Plant and
Machinery N100,000, Furniture and Fittings N20,000 and the rest in cash which he banked,
except N2,500. The following transactions were recorded during the month:
April 2 Bought goods for resale on credit from R. Samson, valued N5,650
April 5 Paid rates N1,500, electricity GHC350, all by cheque
April 9 Bought materials for use in making up goods for resale, by cheque N12,500
April 15 Sold in cash N 4,800, Sold on credit to K. Michael N1,500.
April 17 Paid for postage N550 cash, travelling expenses N420 cash, and
bought goods for resale, N 27,500 on credit from R. Jones.
April 28 Sent invoice to B. Morison for goods sold to him on credit N5,000.
Receives invoice from D. Mowe for goods supplied by him for resale N4,500.
You are required to:
Open necessary accounts, record the transactions and extract a Trial Balance on 30 April 2012.
70
1. What is a Trial balance?
3.5 Correction of Errors
Due to the imperfection of human beings, it is inevitable that errors made in recording
transactions would exist in the accounting records. Errors cannot be eliminated completely; they
can only be reduced to the barest minimum by, among other measures, engaging the services of
well trained personnel to maintain accounting records.
3.6 Types of Errors
Errors are of two kinds:
- Those that do not affect the trial balance

- Those that affect the trial balance
3.6.1 Errors not affecting the Trial balance
Despite the existence of these errors, the trial balance still balances i.e. the debit and credit sides
are the same. These errors are not easily identifiable.
3.6.1.1 Error of Original Entry `
This error occurs when a transaction is recorded with the wrong amount at the beginning of the
recording process i.e errors that are made when the source document is being raised or when the
source document is being posted to the appropriate subsidiary book.
3.6.1.2 Error of Omission
This is an error involving failure to post a transaction into the accounts i.e. no debit entry, no
credit entry.
3.6.1.3 Error of Principle
This is an error whereby a transaction is posted to the wrong class of accounts. For example, the
cost of an office air-conditioner may be wrongly debited to office expense account (an account
71
belonging to the class of nominal accounts) instead of the office equipment account (an account
belonging to the class of real accounts).
3.6.1.4 Error of Commission
This is an error involving the posting of a transaction of the correct class of accounts but the
wrong account within that class. This could also happen where a correct figure is recorded in the
correct side of a wrong person’s account. This type of error takes place where the bookkeeper is
not used to the names of customers that are common in the locality.
3.6.1.5 Error of complete reversal of entry
This is an error involving the complete reversal of the normal double-entry for a transaction. For
example, the payment by cheque for stationery may be wrongly debited to bank account and
credited to stationery account. The trial balance will still balance because the debit and credit
sides have been affected with the same amount.
3.6.1.6 Compensating Errors
This is a situation in which errors cancel each other out. For example, the erroneous adding up of
the debit side of cash book by, say N20,000 would be cancelled out if, later taken from sales day
book and credited to sales account is understated by N20,000.
3.6.2 Errors affecting Trial Balance
These are errors the existence of which would cause the Trial balance not to agree. They consist
of the following:
3.6.2.1 Casting Error
This is an error involving wrong addition of figures.
3.6.2.2 Error of partial reversal of entry
This is an error involving reversal of one leg of the double-entry for a transaction.
72
3.6.2.3 Omission or misstatement of account balance
This is the omission or misstatement of account(s)’ balances while drawing up a Trial balance.
3.6.2.4 Posting only one side of a transaction
This is an error whereby one aspect of the double-entry for a transaction is posted without
posting the corresponding opposite entry.
3.7 Suspense Account
When a trial balance does not balance and there is no time or it is inconvenient to immediately
locate and correct the errors because the final accounts are urgently required, the Trial balance
can be made to balance by inserting the balance figure and describing it as Suspense account.
4.0 CONCLUSION
The trial balance contains the list of balances from the ledger and it provides the platform for the
preparation of the final accounts.
5.0 SUMMARY
In this unit, we looked at the meaning of trial balance, the uses of trial balance and the errors that
affect and do not affect the trial balance.
1. List and explain the errors that affect the trial balance
2. State the uses of Trial Balance
3. What are the errors that do not affect the trial balance?
4. Define the suspense account.
Anao A.R. (2002). Introduction to Financial Accounting. Longman Nigeria Limited,
Ikeja, Lagos
73
Aguolu, O. (2010). Financial Accounting. A Practical Approach. Institute for
Development Studies, Enugu, Nigeria
ICAN Study Pack (2006). Fundamentals of Financial Accounting. VIPublishing
Limited, Lagos, Nigeria
Igben, R.O. (2000). Financial Accounting Made Simple. ROI Publishers, Lagos, Nigeria
Accounting Technicians Scheme West Africa (ATSWA). Basic Accounting Processes
and Systems.
Professional Accounting Tutors Limited (2007). Accounting Standards. Vol. 111, Lagos, Nigeria
74
UNIT 9: FINAL ACCOUNTS OF A SOLE TRADER 1: STATEMENT
OF PROFIT OR LOSS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Statement of Profit or Loss
3.2 Definition of Technical Terms
3.3 Preparation of Statement of Profit or Loss
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The preparations of accounting records from the subsidiary books of accounts, to the ledger and
the extraction of trial balance are the processes involved in the preparation of final accounts. The
final accounts are the end points of books of accounts which are used to determine the income,
profit, loss, assets and liabilities of a business concern. The final accounts of a sole trader consist
of statement of profit or loss and statement of financial position. However, the statement of profit
or loss for traders who deals in the buying and selling of goods are discussed in this unit while
their statement of financial position is considered in the next unit.
2.0 OBJECTIVES

i Define final accounts
ii. Understand the components of final accounts
iii. Prepare statement of profit or loss for a sole trader
iv. Discuss the importance of final accounts
3.0 MAIN CONTENT
3.1 STATEMENT OF PROFIT OR LOSS
75
The final accounts represent the presentation of financial information for a particular period or
year to the users of financial report. The final accounts of a sole trader basically consist of
statement of profit or loss and statement of financial position. Our focus in this study unit is the
statement of profit or loss without end of year adjustment.
The preparation of statement of profit or loss will enable the business owner to ascertain the
profit or loss from the business for a particular period, month or year. Statement of profit or loss
is technically divided into two sections to show the gross profit or loss and the net profit or loss
for a particular period.
3.2 DEFINITION OF TECHNICAL TERMS
Let us look at some basic words that will come up regularly under the final accounts of a sole
trader in this unit and the next two units namely units 18 and 19.
3.2.1 Sales
Sales represent total of all credit and cash sales made to a third party. This excludes good taken
by the owner for personal use and sales of non-current assets.
3.2.2 Returns Inwards
They are goods previously sold to customers but were later returned either in whole or in part
probably as a result of:
i. Wrong specification, model, colour etc.
ii. Deficiency
iii. Disagreement between the buyer and seller that can be traced to either pricing, discount,
payment terms etc.
iv. Shortage in quantity, weight and other measuring discrepancies.
v. Government policy.
The total amount of returns inwards will be deducted from sales value.
3.2.3 Opening Stocks
These are the value of stock of goods meant for sale that are available with the business at the
beginning of the accounting year or period.
3.2.4 Purchases
Purchases represent total value of goods that are bought for cash and on credit for resale. This
does not include the purchases of non-current assets.
76
3.2.5 Carriage Inward
This represents the cost of transporting goods meant for resale into the organisation. Carriage
inward is added to purchases because it is an additional cost incurred as goods are bough for
resale by the business which enables the goods to get to where buyers can come for them.
3.2.6 Returns Outwards
These are goods previously bought for resale but later returned to the supplier due to one reason
or the other such as late delivery and wrong specification. The total value of returns outwards
should be deducted from the purchases of the same accounting period.
3.2.7 Closing Stocks
The closing stocks represent the value of stock of goods that are meant for sale which a business
has at the end of the accounting year or a stated period or date.
3.2.8 Cost of Goods Sold
This is the cost price of goods sold for a particular period and it can be derived in a simple way
by adding the purchases to opening stock then deducting the closing stock. There could be other
things that will form part of the cost of goods sold like purchase return, carriage inward, goods
withdrawn by the owner, etc., depending on the question. Cost of goods sold is also referred to as
cost of sales.
3.2.9 Gross Profit
This is the profit realised on trading activities alone without other expenses incurred in the
business. It is derived by deducting cost of goods sold from the sales value.
3.2.10 Other Income
They are revenues that are generated outside the sales of goods or services that the firm regularly
deals with. It includes bank interest, rent received, discount received etc.
3.2.11 Expenses
These are cost of goods (other than those related to goods to be sold) and services consumed or
used during the period covered by the account, and such goods and services are meant for the
77
business. These expenses include: transport, rent and rates, electricity, depreciation, salaries etc.,
and they are charged against the profit in the statement of profit or loss.
3.2.12 Carriage Outwards
This represents the cost of transporting goods meant for resale to the buyer. Carriage outwards
are expenses that relate to sales and they are included among the other running cost of an
enterprise to determine the net profit.
3.2.13 Net Profit
Net profit is the profit derived after all expenses and cost of sales have been deducted from the
net income including sales of goods and other income. Where all expenses are higher than the
income, it will be a net loss.
3.3 PREPARATION OF STATEMENT OF PROFIT OR LOSS

When preparing the statement of profit or loss, it should be done in a way to reveal the income
generated, cost of sales, gross profit, other income, expenses and the net profit. A typical
statement of profit or loss is presented below as a guide.
3.3.1 Format of Statement of Profit or Loss
Statement of profit or loss

For the year ended 31st December 20XX
N N
Sales XXXX
Less returns inwards (XXX)
Net sales XXXX
Opening stock XXXX

Add purchases XXXXX
Add carriage inwards XXX
XXXXX
Less returns outwards XXX
Less closing stock XXXX
Cost of gods sold XXX
Gross profit XXXX
78
Other income:
Discount received XXX
Commission received XXX
Dividend received XXX
Fixed deposit interest XXX
XXXXX
Expenses:
Lighting and heating XXX
Discount allowed XX
Office rent XXX
Advertising XX
Travelling expenses XXX
Rates XXX
Fire insurance XXX
Postages XX
Office salaries XXX
Repairs XXX
Carriage outwards XXX
Depreciation XXX
Bank charges XXX
Stationery XX
General expenses XXX XXXX
Net profit XXXX
Example 1: From the trial balance below, prepare statement of profit or loss of Treasure Gold
Ventures for the year ended December 31, 2015.
N N
Capital 24,800
Furniture 24,000
Stock at start 12,480
Purchases 37,600
Returns outwards 4,600
Transport expenses 4,500
Discount received 300
Returns inwards 1,700
Travelling expenses 2,000
Carriage inward 1,500
Carriage outward 2,500
79
Salaries 3,200
Debtors 12,260
Creditors 14,520
Cash in hand 1,200
Drawings 5,000
Sales 64,000
Discount allowed 280 ______
108,220 108,220
The stock at close is N7,400
SUGGESTED SOLUTION TO EXAMPLE 1
Treasure Gold Ventures

Statement of Profit or Loss
For the year ended December 31, 2015
N N N
Sales 64,000
Less returns inwards 1,700
62,300
Opening stock 12,480
Add purchases 37,600
Add carriage inwards 1,500
39,100
Less returns outwards 4,600 34,500
46,980
Less closing stock 7,400
Cost of goods sold 39,580
Gross profit 22,720
Add discount received 300
23,020
Transport 4,500
Traveling 2,000
Carriage outwards 2,500
Salaries 3,200
Discount allowed 280
12,480
80
Net profit for the year 10,540
Note carefully the treatment of closing stock which is normally written outside of the trial
balance. Closing stock is deducted from the addition of opening stock and purchases in the
statement of profit or loss.
Example 2: The trial balance below is drawn from the books of Greater Grace Concepts for the
year ended 30thJune 2016.
DR. CR.
N N
Capital account 17,000
Drawing account 8,400
Purchases 38,000
Sales 60,000
Discounts 2,400 1,900
Office rent 1,080
Travelling expenses 960
Warehouse rent 1,320
Fire insurance 180
Insurance on purchases 240
Office salaries 5,520
Carriage inwards 160
Carriage outwards 140
Furniture & fittings 3,600
Opening stock 4,000
Trade debtors 17,400
Sundry creditors 15,020
Cash at bank 10,224
Cash in hand 110
Bank charges 36
General expenses 150 ______
93,920 93,920
Note the following:
i. Closing stock was N4,800
ii. You are to prepare statement of profit or loss for the year.
81
Greater Grace Concepts
For the year ended 30th June 2016
N N
Sales 60,000
Opening stock 4,000

Purchases 38,000
42,160
Purchases insurance 240
Cost of gods sold 38,920
Gross profit 21,080
Other income
Discount received 1,900
22,980
Discount allowed 2,400

Office rent 1,080
Fire insurance 180
Bank charges 36
General expenses 150 10,466
Net profit 12,514
4.0 CONCLUSION
The final accounts represent the presentation of financial information for a particular period or
year to the users of financial report. The final accounts of a sole trader consist of statement of
profit or loss and statement of financial position.The preparation of statement of profit or loss for
sole traders enables the business owner to ascertain the profit or loss from the business for a
particular period, month or year. Statement of profit or loss is technically divided into two
sections to show the gross profit or loss and the net profit or loss for a particular period.
82
1. Differentiate between a statement of profit or loss and a trial balance.
2. The following Trial Balance was extracted from the books of Promise Global
Investments on 31st December, 2013
N N
Premises 150,000
Motor Vans 27,810
Capital 1st January, 2013 483,720
Advertising 3,810
Postage 4,140
Purchases 2,054,550
Electricity 2,730
Salaries 85,110
Tenement Rate 3,030
Telephone 1,020
Furniture 33,120
Sales 2,204,940
Returns 1,680 11,760
Bad Debts 780
Insurance 5,760
Commission received 52,500
Debtors 146,460
Creditors 252,150
Cash in hand 10,560
Bank 113,760
Stock 1st Jan. 2013 360,750 ____
3,005,070 3,005,070
Additional information is as follows:

i. The stock at 31st December2013 was N323,610
ii. Prepare the statement of profit or loss for the year.
5.0 SUMMARY
This study unit was used to define final accounts, explain the components of final accounts,
define technical terms relating to statement of profit or loss such as opening stocks, purchases,
carriage inward, returns outwards, closing stocks, cost of goods sold, gross profit, other income,
expenses, carriage outwards and net profit. Statement of profit or loss for sole trader was also
prepared in this unit.
83
Question 1: The trial balance of Adekanmbi, a sole proprietor for the year ended 31/12/2015
was as follows:
DR CR
N N
Stock 1/1/2015 7,500
Cash 10,200
Capital 1/1/2015 199,750
Drawings 1,300
Bank 85,000
Land and Building 90,000
Furniture 1,500
Rent 500
Rates 350
Debtors/Creditors 5,600 15,000
Electricity 300
Cleaning 50
Carriage on purchases 150
Carriage on sales 210
Motor Vehicles 45,000
Purchases 40,500
Returns Outwards 1,200
Returns Inwards 400
Sales 85,000
Interest received 970
Stationery 1,000
Salaries 12,000
Insurance 360
301,920 301,920
Closing stock, 31/12/2015 N5,300. Prepare for Adekanmbi, statement of profit or loss for the
year ended 31/12/2015.
Question 2: T. Addo’sbusiness affairs on 1st December 2015 stood as follows:

N
Cash in Hand 440
Cash at Bank 2,440
Stock 3,500
Furniture and Fittings 1,200
84
You are required to:
(a) Enter the above, by means of the journal, into his ledgers, and post thereto the following
transactions which took place during the month of December 2015. (Use a two column cash
book for cash transactions)
N
Dec. 2 Bought goods from V. Bojon & Sons on credit 1,200
Dec. 3 Paid insurance premium in cash 150
Dec. 5 Paid V. Bojon by cheque the amount due
Dec. 8 Bought goods – gave a cheque for 840
Dec. 12 Sold goods to Badu &Co. on credit 1,560
Dec. 17 Sold goods to L. Aliyi on credit 2,000
Dec. 22 Sold goods to Badu &Co. on credit 730
Dec. 27 Received a cheque from Badu & Co. 1,290
Dec. 28 Paid salaries by cheque 450
Dec. 31 Drew cheque for personal use 500
(b) Extract a Trial Balance

(c) Prepare a statement of profit or loss for the month ended 31stDecember 2015, Stock on hand
was valued at N3,200
Part 1, Study Pack. Lagos: Abina Publishers
Garbutt, D. (1984), Carter’s Advanced Accounts “7th Edition”. London: Pitman Publishing
Limited
Igben, R. O. (2014), Financial Accounting Made Simple. Lagos: ROI Publishers
Jat, R.B. and Jugu, G.Y. (2008). Modern Financial Accounting: Theory and Practice. Jos:
Ehindero (Nig.) Limited
Olanrewaju, Oluseyi (2012) IFRS PAL – Handy Approach. Lagos: Dimkem Publications
Limited.
Oluyombo, O. (2017) Introduction to Financial Accounting I: SMS 203. Abuja: NOUN.
Oluyombo, Onafowokan (2016) Financial Accounting With Ease (3rd Edition). Magboro:
85
Soyode, A. (1980), Financial Accounting: Principles and Practice. Uk: Graham Burn.
The Institute of Chartered Accountants of Nigeria, (2006). Fundamentals of Financial
Accounting. Foundation Study Pack. Lagos: Vikas Publishing Limited
86
UNIT 10: FINAL ACCOUNTS OF A SOLE TRADER 2: STATEMENT OF
FINANCIAL POSITION
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Statement of Financial Position
3.2 Components of Statement of Financial Position
3.3 Preparation of Statement of Financial Position
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The statement of financial position is part of the final accounts which are prepared from the
subsidiary books of accounts, to the ledger and the extraction of trial balance to the statement of
profit or loss. The final accounts are the end points of books of accounts which are used to
determine the income, profit, loss, assets and liabilities of a business concern. The statement of
financial position for sole traders who deal in the buying and selling of goods are discussed in
this unit.
2.0 OBJECTIVES

i Define statement of financial position
ii. Explain the components of statement of financial position
iii. Understand the technical terms in statement of financial position
iv. Prepare statement of financial position for a sole trader
iv. Know the difference between statement of profit or loss and statement of
financial position.
3.0 MAIN CONTENT
3.1 STATEMENT OF FINANCIAL POSITION
87
Statement of financial position is a statement (not an account) that contains the list of assets and
liabilities with owner’s capital at the end of a particular period, month or year, and arranged in an
orderly manner. Like the trial balance, it is expected that both assets and liabilities figure in a
statement of financial position should be equal in total.
3.2 COMPONENTS OF FINANCIAL POSITION
Let us look at the components of financial position which are terms that are unique in
accounting.
3.2.1 Assets
These are valuables, claims, possessions and properties belonging to the business. Assets are
normally arranged in order of liquidity in the statement of financial position. There are different
types of assets, namely:
3.2.1.1 Non-current assets
These are company’s tangible assets that are expected to be used in, and for the organisation for
many years e.g. furniture, fittings, land, building, equipment, motor vehicle, etc.
3.2.1.2 Current assets
This class of assets are those whose value fluctuate during the year depending on the level of
business activities e.g. debtors, stock, bank balance, cash in hand, prepayments etc.
3.2.1.3 Intangible assets
These are assets that add value to the organisation but they cannot be seen by their nature e.g.
goodwill, copyrights, patent rights, trade mark etc.
3.2.1.4 Fictitious assets
These are expenditure incurred to cover a long period of time as a result of which some portions
are capitalised or deferred pending the time it is written off against the profit (in statement of
profit or loss) for subsequent years e.g. preliminary expenses, research and development
expenses, discount on shares etc.
88
3.2.1.5 Investments
These are ownership interests a company has in another organisation. It could be in shares or
debentures. This investment may be quoted (marketable) or unquoted, and it can be of short term
or long term in nature.
3.2.2 Liabilities
These are financial obligations the business has in favour of outsiders. They are amount owed to
individuals and/or organisations. Liabilities can be grouped into:
3.2.2.1 Non-current liabilities
These are financial obligations against the company that are not due for repayment within one
year e.g. bank loan, mortgage loan, deferred tax etc.
3.2.2.2 Current liabilities
They are debts that are due for payment within one year and do change regularly from one period
to another within one accounting year e.g. creditors, accruals, bank overdraft etc.
3.2.3 Capital or owner’s equity
This is the initial investment of the business owner in the company. It represents the value of
money, properties and other resources brought in by the owner to start the business and other
additions after the commencement of the business.
As business progresses, profits not taken out of the business are added into capitalwhile drawings
reduce owner’s interest in the business. Usually, capital is equivalent to total assets minus total
liabilities. CAPITAL = Total assets – Total liabilities.
3.3 PREPARATION OF STATEMENT OF FINANCIAL POSITION
3.3.1 Format of Statement of Financial Position
ABC Business Ventures

Statement of financial position
As at 31st December 2014
N N
89
ASSETS
Non-current assets
Land XXXX
Less depreciation XX XXXX
Furniture XXXX
Motor vehicle XXXX
Plant and machinery XXXX
Office equipment XXXX
XXXX
Current assets
Debtors XXXX
Stock XXXX
Payment in advance XXXX
Cash at bank XXXX
Cash in hand XXXX XXXX
Total Assets XXXXX
EQUITY AND LIABILITIES
Equity
Capital XXXX
Add net profit XXXX
XXXX
Less drawings XXXX
Owner’s equity XXXX
Current liabilities
Creditors XXXX
Bank overdraft XXXX
Accrued expenses XXXX XXXX
Total equity and liabilities XXXXX
90
Example 1: From the balances below, prepare statement of financial position for ABC
Businessas at December 31, 2015.
N
Furniture 24,000
Stock at start 12,480
Capital 24,800
Debtors 12,260
Creditors 14,520
Cash in hand 1,200
Drawings 5,000
Closing stock 7,400
Net profit 10,540
ABC Business
Statement of Financial Position
As at December 31, 2015
N N
Non-current asset
Furniture 24,000
Current assets
Stock 7,400
Debtors 12,260
Cash 1,200 20,860
Total Assets 44,860
Equity and Liability
Equity
Capital 24,800
91
Add net profit 10,540
35,340
Less drawings 5,000
Owner’s equity 30,340
Current liability
Creditors 14,520
Total equity and liability 44,860
Example 2 The trial balance below is drawn from the books of Palace Ventures for the year
ended 30thJune 2016.
DR. CR.
N N
Cash at bank 10,200
Cash in hand 110
Opening stock 4,412
Net profit ___ 12,702
44,722 44,722
Note the following as at June 30th.

i. Prepaid expenses N12
ii. Closing stock was N4,800
iii. Accrued expenses N400
iv. Depreciation on furniture is 10%
You are to prepare statement of financial position for the year.
Palace Venture
As at 30thJune 2016
N N
92
Assets
Non-current asset
Less depreciation 360
3,240
Current assets
Debtors 18,000
Stock 5,160
Prepaid expenses 12
Cash at bank 10,200
Cash in hand 110 33,482
Total Assets 36,722
Equity and Liabilities
Equity
Capital 17,000
Net profit 12,702
29,702
Less drawings 8,400
Owner’s equity 21,302
Current liabilities
Creditors 15,020
Accrued expenses 400 15,420
Total equity and liabilities 36,722
1. Differentiate between a statement of financial position and a statement of profit or

loss.
2. The trial balance of Umaru Blessing, a sole proprietor for the year ended 31/12/2015 was
as follows:
DR CR
N N
Stock 1/1/2015 7,500
Cash 10,200
Capital 1/1/2015 199,750
93
Drawings 1,300
Bank 85,000
Land and Building 90,000
Furniture 1,500
Rent 500
Rates 350
Debtors/Creditors 5,600 15,000
Electricity 300
Cleaning 50
Carriage on purchases 150
Carriage on sales 210
Motor Vehicles 45,000
Purchases 40,500
Returns Outwards 1,200
Returns Inwards 400
Sales 85,000
Interest received 970
Stationery 1,000
Salaries 12,000
Insurance 360
301,920 301,920
Closing stock, 31/12/2015 N5,300. Prepare the business statement of profit or loss and statement
of financial position.
4.0 CONCLUSION
The statement of financial position is part of the final accounts and it serves as the end points of
books of accounts for sole traders. The statement of financial position consists of the assets and
liabilities of the business, and owner’s equity or capital. The asset is divided into non-current
assets, current assets, intangible assets, fictitious assets, and investments while the liabilities
consists of non-current liabilities and current liabilities.
5.0 SUMMARY
The statement of financial position was defined while the components of the financial position
namely non-current assets, current assets, intangible assets, fictitious assets, investments non-
current liabilities, current liabilities and owner’s equity or capital were explained in this unit.
Relevant examples were used to prepare typical statement of financial position.
94
Question 1: List and explain six components of statement of financial position.
Question 2: What are the similarities between a trial balance and a statement of financial
position?
Question 3: The following trial balance was extracted from the books of Olowolayemo Omooba
on 31st December, 2013
N N
Premises 150,000
Motor Vans 27,810
Capital 1st January, 2013 483,720
Advertising 3,810
Postage 4,140
Purchases 2,054,550
Electricity 2,730
Salaries 85,110
Tenement Rate 3,030
Telephone 1,020
Furniture 33,120
Sales 2,204,940
Returns 1,680 11,760
Bad Debts 780
Insurance 5,760
Commission received 52,500
Debtors 146,460
Creditors 252,150
Cash in hand 10,560
Bank 113,760
Stock 1st Jan. 2013 360,750
3,005,070 3,005,070
Additional information is as follows:

i. The stock at 31st December 2013 was N323,610
ii. Depreciation is as follows:
Premises at 5 per cent
Motor vans at 10% per annum
Furniture at 10% per annum
95
Prepare statement of profit or loss for the year ended 31st December 2013, and statement of
financial position as at that date.
Limited
Limited.
Oluyombo, O. (2017). Introduction to Financial Accounting I: SMS 203. Abuja: NOUN.

96
UNIT 11: END OF YEAR ADJUSTMENTS IN FINAL ACCOUNTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Accruals
3.2 Prepayments
3.3 Provisions
3.4 Reserves
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
A business is a legal entity whose operations and financial transactions are continuous in nature
from one year to another. As a result, there are financial transactions in business organisations
that cannot be fully completed within a year and more importantly at the end of the accounting
year. Furthermore, the accounting year of organisations vary from one company to another; as a
result some transactions will not fall within the same accounting year for two or more
companies. Events like this lead to adjustments in the final accounts at the end of the accounting
period.
Business involves the giving and taking of credits, while all expenditure and income for a
particular year may not be fully paid and received as at the year end. However, those incomes
due but not yet received and expenses due for settlement but not yet paid as at the year-end
should be brought into the final accounts to show a true and fair position of the company through
proper adjustment. This unit focuses on end of year adjustments which include prepayments,
accruals, reserves and provisions.
2.0 OBJECTIVES

i. Explain entries on accruals
ii. Discuss entries for prepayments
97
iii. Understand the concept of bad debts
iv. Explain the entries for provisions
v. Recognise and treat increase and decrease in provisions
vi. Explain reserves
vii. Prepare final accounts with end of year adjustments
3.0 MAIN CONTENT
3.1 Accruals
These are services and goods that have been consumed or enjoyed during the year but which
payment has not been made either in full on in part at the end of that financial year. e.g.
Government water uGrace of N15,000 for December 2015, but bill was received in January
2016. It means that the amount was owed as at December 31, 2015 and form part of the accruals
to be adjusted for in the final accounts. Accrual can also be called owing or due. Any amount
owing on expenses is added to that expense in the statement of profit or loss and reflected under
current liabilities in the statement of financial position. Accruals are necessary in order to
allocate all expenses relating to an accounting period to that period.
Example 1: Big Success Limited paid the following expenses by cash amongst others during the
accounting year ended 31st December 2015.
Office rent N72,080
Office salaries N45,800
A further examination of the company’s records shows that:

i. Office salaries of N4,000 was due as at 31st December 2015..
iv. Office rent of N32,600 owed has not been paid by 31st December 2015.
You are required to show how the accruals will be treated in the final accounts.
Method 1: This entails the preparation of an account for items affected by the accruals. Accrued
expenses are credit balance in the ledger as depicted in the account below. With this method, the
total of expenses paid and those owed will be posted to the statement of profit or loss and
statement of financial position.
Office rent account

Cash 72,080
98
Balance c/d 32,600 Statement of profit or loss 104,680
104,680 104,680
Balance b/d 32,600
Office salaries account

Cash 45,800
Balance c/d 4,000 Statement of profit or loss 49,800
49,800 49,800
Balance b/d 4,000
Big Success Limited

Statement of Profit or Loss (Extract)
N
Office rent 104,680
Big Success Limited

Statement of Financial Position (Extract)
Current liabilities:
Office rent due 32,600
Office salaries owed 4,000
Method 2: This method does not require the preparation of an account for items affected by the
accruals. The amount paid and the accrual will be posted to the statement of profit or loss
separately while the accrued expenses will be reflected in the statement of financial position
under the current liabilities.
Big Success Limited

N
Office rent 72,080
Add accrual 32,600 104,680

Add owing 4,000 49,800
99
Big Success Limited
Current liabilities
Office rent due 32,600
Office salaries owed 4,000
3.2 Prepayments
These are goods and services that have been paid for, but the benefit is yet to be enjoyed or
consumed either in full or in part. A good example is payment of rent in advance. Prepayment or
payment in advance or amount prepaid is deducted from the total payment in respect of the
expense in statement of profit or loss and the prepayment is recorded under current assets in the
statement of financial position. Prepayment is to enable the organisation not to understate the
profits for the accounting period in which the prepayment occurs.
Example 2:No Loss Enterprises paid the following expenses by cheque during the accounting
year ended 31st December 2014.
Office rent N156,650
Water rate N50,000
The information below was provided as at 31st December 2014

i. Three months office rent of N26,650 for January to March 2015 are included in the
N156,650 paid.
iv. N5,000 was paid in advance to the water board as water rate.
You are required to show how the above transactions will be treated in the final accounts.
Method 1: This entails the preparation of accounts for items affected by the prepayments.
Office rent account

Bank 156,650 Statement of profit or loss 130,000
Balance c/d 26,650
156,650 156,650
Balance b/d 26,650
Water rate account
100
Bank 50,000 Statement of profit or loss 45,000
Balance c/d 5,000
50,000 50,000
Balance b/d 5,000
No Loss Enterprises
N
Office rent 130,000
Water rate 45,000
No Loss Enterprises
Current assets:
Office rent prepaid 26,500
Water rate in advance 4,000
Method 2: This method does not require the preparation of an account for items affected by the
prepayments.
No Loss Enterprises
N N
Office rent 156,650
Less prepayment 26,500 130,000
Water rate 50,000

Less payment in advance 5,000 50,000
No Loss Enterprises
Current assets:
Office rent prepaid 26,500
Water rate in advance 4,000
3.3 Provisions
101
Provisions are important because most business transactions are done on credit. As long as
organisations relate with their suppliers and customers on credit basis, bad debts and other
provisions are inevitable.
3.3.1 Bad Debts
Bad debts are debts that have gone bad and there are no chances of the debt being recovered.
Bad debts could be as a result of death of the debtor, bankruptcy of a debtor, mental illness of a
debtor, lack of good credit control procedures, disagreement as to amount due between the
debtor and the creditor and closure or permanent negative disruption of the debtors business.
Bad debt is an expense to be charged against the profit for the year it occurred. This is done by
debiting the bad debt account and credit the debtors account to reduce the value of the debtors
after the bad debt. It is the net debtors figure after adjusting for bad debts that will reflect in the
statement of financial position.
Example 3:Goodness Limited decided to write off N4,000 and N3,000 as bad debts for two
customers namely Lola and Doyin respectively for year 2014. The balances on these account for
year 2013 are Lola N48,400 and Doyin N11,500.
Show the journal, ledgers, statement of profit or loss and statement of financial position to record
the above.
Journal
Dr. Cr.
Bad debts 4,000
Debtors - Lolade 4,000
Being debt written off a debtor account
Bad debts 3,000

Debtors – Doyin 3,000
102
Being bad debt on a debtor account
Statement of profit or loss 7,000

Bad debts 7,000
Being bad debts for the year written off
Ledgers
Bad debts Account

Debtors – Lolade 4,000
Debtors – Doyin 3,000 Statement of profit or loss 7,000
7,0007,000
Debtors Account – Lolade

Bal b/d 48,400 Bad debt 4,000
Bal c/d 44,400
48,400 48,400
Bal b/d 44,400
Debtors Account – Doyin

Bal b/d 11,500 Bad debt 3,000
Bal c/d 8,500
11,50011,500
Bal b/d 8,500

Expenses: N
Bad debts 7,000

Current assets: N
Debtors 59,900
Less bad debts 7,000 52,900
3.3.2 Provision for Bad or Doubtful Debts
Doubtful debts are those debts which in the opinion of management of an organisation may not
be fully recovered. The provision for such debt is largely subjective.It is an estimation of debts of
which their probability of recovery is below hundred percent. To avoid sudden bad debts,
103
business organisations have devised a way of guarding against this by creating provision for bad
or doubtful debt in their records for debts that they are not sure of being able to collect.
Provision for doubtful or bad debts will be charged on the debtors after the deduction of the bad
debts for the period or after the bad debts have been written off.
Example 4:A company provide 5% as provision for bad debts. As at year 2015, the debtors
balance was N60,000 and bad debt to be written off was N6,000. What is the doubtful debt
provision for the year?

N
Debtors 60,000
Less bad debt (6,000)
54,000
Provision for doubtful debt is N54,000 x 5% = N2,700
The accounting entry for provision for doubtful debt is a function of the time the provision
occurs. It can take two forms namely, the first year and subsequent years.
Where the provision is for the first year, the amount will be charged against the profit by:
Debiting - Statement of profit or loss
Crediting - Provision for doubtful debts account
The provision will be deducted from the debtors after deducting bad debts in the statement of
financial position.
Example 5:Oluwaseyi Investment decided to provide 7% as provision for bad debt on his
debtors figure of N88,200. Show this in form of a journal, ledger and statement of financial
position extract.
Journal
Dr. Cr.
Provision for bad debt account 6,174
Being 7% provision for bad debt on debtors
104
Ledgers
Provision for bad debt account

Expenses
Provision for bad debt 6,174
Oluwaseyi Investment
Statement of Financial Position (extract)
Current asset: N
Debtors 88,200
Less provision for bad debt 6,174
82,026
Where the provision is for subsequent years, it can either be an increase over what was provided
for in previous year (which is an expenses) or a decrease over previous year provision (which is
an income). Increase can occur if the closing provision is higher than the opening provision for
doubtful debts.
Example 6: The bad debt provision for a company in 2014 and 2015 are N2,000 and N2,800
respectively. Show the above entries using ledgers and statement of profit or loss as at 2015.
Provision for bad debt Account

Bal b/d 2,000
Bal c/d 2,800 Statement of profit or loss 800
2,800 2,800
Bal b/d 2,800

Expenses
Provision for bad debt - increase 800
Decrease in provision can occur if the closing provision is lower than the opening provision for
doubtful debts. This could be a result of improved payment habits of the customers and/or
reduction in credits granted to customers.
105
Example 7: Provision for doubtful debts of a company was N1,550 and N1,300 for year 2010
and 2011 respectively. By means of ledger and statement of profit or loss, show how this will
appear in the books.
Provision for Doubtful Debts Account

Statement of profit or loss 250 Bal b/d 1,550
Bal c/d 1,300
1,5501,550
Bal b/d 1,300

Other income:
Provision for doubtful debts - decrease 250
3.4 Reserves
These are amounts set aside out of profit earned by a company and constitute part of
shareholders fund. Reserves may be voluntarily created by the directors or statutorily created.
We have revenue, capital and general reserves. Reserves are posted to the statement of changes
in equity and statement of financial position as appropriate for limited liability company.
3.4.1 Revenue Reserve
This type of reserve is distributed to the shareholder and other capital providers in form of
debenture interest, retained profit etc.
3.4.2 Capital Reserves
They are non-distributable reserves that are retained to comply with certain laws or for
accounting requirement. e.g. capital redemption reserve fund, share premium, revaluation reserve
etc.
3.4.3 General Reserves
They are reserves not set aside for a specific purpose.
106
Example 8:The trial balance below is drawn from the books of Palace Ventures for the year
ended 31st March 2016.
DR. CR.
N N
Purchases 38,000
Sales 60,000
Discounts 2,400 1,900
Office rent 1,080
Fire insurance 180
Insurance on purchases 240
Wages 720
Opening stock 4,000
Cash at bank 10,224
Cash in hand 110
Bank charges 36
General expenses 150
93,920 93,920
Note the following:
i. Office salaries of N40 due as at 31st March 2016.
ii. Closing stock was N4,800
iii. Sales of N600 made on credit during the period were omitted in the record keeping process
iv. Office rent of N360 owed has not been paid by 31st March 2016
v. Bank charges of N12 were not entered in the books
vi. You are to prepare statement of profit or loss and statement of financial position for the
year.
Palace Ventures
107
For the year ended 31st March 2016
N N
Sales 60,000
Omitted sales 600
Total sales 60,600
Opening stock 4,000

Purchases 38,000
42,160
Wages 720
Purchases insurance 240
Cost of gods sold 39,640
Gross profit 20,960
Other income
22,860
Office rent 1,080
Add accrual 360 1,440
Fire insurance 180
Add owing 40 4,840
Bank charges 36
Add omission 12 48
General expenses 150 10,158
Net profit 12,702
1. (a) Define bad debts.

(b) What is the objective of making provision for bad debt?
108
2. Babafidau Bim is the owner of Babafem Enterprises. The trading concerns sells on credit
to a sizeable number of the well-known customers. The company has been experiencing bad
debts and commenced providing for suchdebts from the last financial year (1989). On 1st
January, 1990 the provision for bad debts was N2,570. During the year N680 of these debts
actually proved uncollectible and the sum of N1,409 proved collectable. The sum of N315 debts
that became bad were not provided for. At the end of the year a new provision of N3,498 is
required.
Show the treatment of provision for bad debts and bad debts in the ledger and statement of profit
or loss.
4.0 CONCLUSION
End of year adjustments in the final accounts are necessary to show the true and fair position of
the financial statements. As such, the end of the year adjustment in the statement of profit or loss
and the statement of financial position include how entries are passed in both statements for
accruals, prepayments, bad debts, reserves and provisions for doubtful debts - including the
recognition and treatment of increase and decrease in provisions.
5.0 SUMMARY
This unit has discussed in details the end of year adjustments in final accounts. It specifically
examined bad debts, provisions for doubtful debts, reserve, prepayments and accruals with
relevant discussion and question, and how they are treated in the statement of profit or loss and
the statement of financial position.
Question 1: Madam Florence provide the following information
Year Debtors Bad debts

2000 120,000 -
2001 155,000 14,000
2002 62,500 2,500
The debtors’ figures are before bad debts, while provision for bad debts is estimated at 10
percent for each year. Prepare the following:
(a) Bad debt account.
(b) Provision for bad debts account
(c) Statement of profit or loss
109
(d) Statement of financial position extract for the three years.
Question 2: The following were extracted from the books of Orelope and Co. on 31st
December 2003.
N
Debtors – without any adjustment 58,500
Provision for bad debts 5,460
Bad debts 1,560
The company’s provide for 10% as doubtful debts.

You are required to prepare
(a) Provision for doubtful debts account.
(b) Statement of profit or loss.
(c) Statement of financial position.
Question 3: Emaka is a sole trader, who has no knowledge of accounting. However, some of his
business transactions are recorded in a personal diary. Financial records as at 1st January 2015
are as follows:
N
Rent owing to landlord 500
Stock 31,000
Amount owing by Emaka to suppliers 11,500
Debtors 7,500
Capital 47,100
Non-current assets 30,000
Bank 3,100
Depreciation to date 12,500
During the year, an analysis of his bank statement revealed:

Cheques drawn:
To suppliers 48,650
Rent 3,500
Other expenses 10,250
Drawings 11,000
Electric oven 13,000
Lodgement:
From customers 75,900
Amount inherited 5,500
110
A further look at his diary showed that before banking the cash and cheques received from
customers, N5,000 was paid out for purchases and N1,000 for personal drawings. Rent is N5,000
a year.
As at 31st December 2015 the following figures were computed.

Debtors N11,500
Stock N39,000
Creditors N19,750
Depreciation is at 15% on the reducing balance method.
Required:
(a) Statement of profit or loss for the year ended 31st December 2015.
(b) Statement of financial position as at that date.
Show all workings
Limited
Limited.
Oluyombo, O. (2017) Introduction to Financial Accounting I: SMS 203. Abuja: NOUN.
111
UNIT 12: ACCOUNTING TREATMENT OF CONTROL ACCOUNTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Control Account System
3.2 Merits of Control Account
3.3 Working of Control Account
3.4 Debtors Control Account:
3.5 Creditors Control Account
3.6 Debtor’s Statement of Account
3.7 Creditor’s Statement of Account
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
As businesses keep growing, the number of accounts kept will be on the increase and this will of
necessity require more personnel to work on the preparation of such accounts. When the various
accounts are prepared, there will be need to harmonise these accounts into one at a particular
period to check the arithmetical accuracy of what has been posted to individual accounts. The
process of harmonising all individual accounts in the same class will give rise to a control
account which serves as the total or summary of what happens within that period for those
accounts in the same class.
2.0 OBJECTIVES

i. Define Control Account
ii. Explain Types of Control Accounts
iii. Discuss Merits of Control Accounts
iv. Prepare Debtors Control Account:
v. Prepare Creditors Control Account
vi. Prepare Debtor’s Statement of Account
vii. Prepare Creditor’s Statement of Account
3.0 MAIN CONTENT
112
3.1 Control Account System
Control account is a summary of customers or suppliers ledger in total. The balance on the
control account under normal circumstance must equal the addition of individual customers or
suppliers account at a particular date or period.Another name for control accounts is total
account, because the account is maintained on total basis.
Due to mistakes and errors in the completion of the control account and/or individual customers
or suppliers account, the control account may not agree with the addition of all the individual
customers or suppliers balances, and this will lead to reconciliation. It should be noted that any
entry on the debit side of an account will also be on the debit side of the control for such an
account, likewise the credit side.
There are two major types of control accounts namely

i. Sales ledger control or Debtors control account
ii. Purchases ledger control or Creditors control account
3.2 Merits of Control Account
The following are the merits of control accounts

i. It allows homogeneous accounts to be grouped together.
ii. Useful in detecting fraud and errors relating to debtors and creditors.
iii. It can be used to detect missing figure.
iv. Allows for quick preparation of draft annual account.
v. It also helps to localise errors in a trial balance because such errors can be easily traced to
a set of account(s).
3.3 Working of Control Account
With simple illustration about customers, readers will grasp the working of control account
systems.
Assuming there is a company with over two thousand customers located all over Nigeria and
neighbouring countries. A separate account will be maintained or kept for these customers
individually where their transactions with the company are recorded. At the end of the month,
the account will be closed for the month to know what each customer owes.
The control account to be prepared will only record the total of each transaction as it affects all
the customers for the month and the balance on the control account should be equal to the sum of
the balance on the individual customers account.
113
3.4 Debtors Control Account
Any transactions that will increase the customers’ indebtedness to the organisation are debited to
the debtors control account while those that will reduce the debts are credited to the same
account. At the end of the period, the sales ledger control account or debtors control account will
have a debit balance to show how much is due from all the credit customers. Debtors control
account is not used for cash customers. The format for debtors control account is as prepared
below.
3.4.1 Format of Debtors Control Account
Sales Ledger Control Account

Bal. b/d xx Receipts from customers xx
Credit sales xx Discount allowed xx
Dishonoured cheque xx Returns inward xx
Bills receivable dishonoured xx Bad debts xx
Cash refund to debtors xx Creditor control contra xx
Interest charge to customer xx
Bad debt written off recovered xx Bal. c/d xx
xxx xxx
Bal. b/d xx
3.5 Creditors Control Account

The transactions that will increase the financial obligation to the supplier will be credited to the
creditors control account. Same account will be debited with those transactions that will reduce
the obligation like discount received, returns outwards and payments to creditors.
3.4.1 Format of Creditors Control Account
Purchases Ledger Control Account

Cash paid xx Bal. b/d xx
Returns outward xx Credit purchases xx
Discount received xx Dishonoured cheque xx
Cheque paid xx Bills payable dishonoured xx
Debtors control contra xx Interest charge by supplier xx
Bal c/d xx ___
xxx xxx
Bal. b/d xx
114
Example 1: Ascertain by means of control accounts, the amount of ‘purchases’ and ‘sales’ for
the year ended 31st, December 2015
Total for the year:

N
Returns outwards 95
Cash payment to creditors for good supplied 5,625
Returns inwards 205
Cash received from debtors for sales 8,892
Bills receivable 1,200
Bills payable 1,702
Bad debts 253
Amount due from debtors set off by contra
against amount due to him for supplies 340
At January 1, 2015
Sundry creditors for goods supplied 1,226
Sundry debtors for sales 2,130
At 31st December 2015
Sundry creditors for goods supplied 1,339
Sundry debtors for sales 2,860
Debtors Control Account

Bal. b/d 2,130 Returns inwards 205
Credit sales (bal figure) 12,166 Cash from debtors 8,892
Bad debts 253
Set-off 340
_____ Bal. c/d 2,860
14,296 14,296
Bal. b/d 2,860
115
Creditors Control Account
Returns outwards 95 Bal. b/d 1, 226
Payment to creditors 5, 625 Credit purchase(bal figure) 8, 402
Bills payable 1, 702
Set-off 340
Bal. c/d 1, 339
9, 628 9, 628
Bal. b/d 1, 339
The credit sales and credit purchases are balancing figures.
Example 2: The following balances were extracted from the books of Top Performers
International Limited as at 31st December 2015.
N
Opening balance: Debtors 4,000
Creditors 3,300
Purchases: on credit 16,500
in cash 7,400
Sales: on credit 25,500
for cash 10,200
Payment to creditors 15,000
Receipt from debtors 23,600
Cash discount allowed 540
Cash discount received 400
Trade discount allowed 12,000
Returns inwards 760
Returns outwards 215
Contra settlements 500
Bad debts written off 85
Provision for bad debts 120
Bills receivable 600
Cheques dishonoured 45
Bills payable 1, 020
You are required to prepare:
i. Sales Ledger Control Account:
ii. Purchases Ledger Control Account
116
Top Performers International Limited

As at 31st December, 2015
Bal. b/d 4,000 Receipt from debtors 23,600
Sales on credit 25,500 Discount allowed 540
Cheque dishonoured 45 Returns inwards 760
Contra settlement 500
Bad debt written off 85
Bills receivable 600
_____ Balance c/d 3,460
29,545 29,545
Bal. b/d 3,460
Top Performers International Limited

Payment to creditors 15,000 Bal. b/d 3,300
Discount received 400 Purchases on credit 16,500
Contra Settlement 500
Bills payable 1,020
Bal. c/d 2,665 _____
19, 800 19,800
Bal. b/d 2,665
Trade discount is given at the point of sales and the amount is deducted before arriving at the
sales figure to be recorded in the books of account. Hence it is not posted in the control account.
Example 3:Sani Dongo Ventures maintains self-balancing ledgers. From the details given below
you are required to prepare the control accounts for purchases and sales ledgers for the year
ended 31st, December 2015
N
Purchases 153,270
Bad debts written off 2,200
Bills payable accepted 21,700
Bills receivable drawn 50,200
117
Interest charged to customers 70
Purchases returns 890
Payment to creditors 125,380
Receipts from debtors 143,080
Bills receivable dishonoured 5,750
Discount receivable 3,270
Sales returns 3,010
Cash refund to debtors 750
Cheques from debtors returned unpaid 250
Sales and Purchases ledger contra 10,170
Bills receivable discounted 47,850
Bills payable retired for non-payment 1,500
Sales 200,510
Bad debts recovered (included in cash from debtors) 80
Creditors ledger balance at 31st December, 2015 50,860
Debtors ledger balance at 31st December, 2015 68,180
Purchases ledger control balance at 1st January, 2015 57,500
Sales ledger control balance at 1st January, 2015 74,710
Sani Dongo Ventures

Bills payable 21,700 Bal. b/d 57,500
Purchases returns 890 Purchases 153,270
Payment 125,380 Bills repayable retired 1,500
Discount receivable 3,270
Sales ledger contra 10,170
Bal. c/d 50,860
212,270 212,270
Bal. b/d 50,860
Sani Dongo Ventures

Bal. b/d 74,710 Bad debts 2,200
118
Dishonoured bills 5,750 Bills receivable 50,200
Cash refund 750 Receipts 143,080
Returned cheques 250 Discount allowed 5,280
Sales 200,510 Sales returns 3,010
Bad debt recovered 80 Purchases ledger contra 10,170
Interest charge 70 _ Bal. c/d 68,180
282,120 282,120
Bal. b/d 68,180
Bills receivable discounted has nothing to do with the control account because the company can
as well wait till the bill is matured for payment instead of discounting it.
3.6 Debtor’s Statement of Account
It is a statement sent periodically, usually once a month by a seller to his customers, showing the
position of their accounts up to a certain date. It shows the particulars of invoices, debit notes
and credit notes originated from the seller to the buyer during a given period.It also includes
payments made and how much the customer owes. At times, the age of the debt may be revealed
in the statement. The statement is kept by the buyer for reference and settlement purpose.
A debtor’s statement can also be regarded as a memorandum statement showing the details of
unpaid invoices for each debtor, which is supposed to agree with the total amount outstanding
against the customer in the general ledger. It is also expected to give some information about the
customer and analyse the amount outstanding at the end of the month according to their age.
Example 4: You have been engaged as Account Officer of Efiong Enterprises. Your immediate
assignment is the preparation of monthly Statements of Account. From the following
information, you are required to prepare the statement of account of B. Dabir, a supplier.
Type of Date Number Particulars Amount

Document 2016 N
Invoice Jan. 2 024 Goods Supplied 4,820
Debit Note Jan. 4 018 Goods Returned 360
Receipt Jan. 5 A2845 10,820
Debit Note Jan. 21 021 Goods Returned 2,132
119
Receipt Jan. 29 A3451 15,584
Additional information:
i The last statement sent to B. Dabir showed that Efiong Enterprises owed him N7,215 at 1st
Jan. 2016
ii A cheque for N3,500 in favour of B. Dabir dated January 30, 2016 has just been dispatched.
Efiong Enterprises
To:
B. Dabir No. A807
Address ………………….. Date……………….
……………………………..
Statement of Accounts
Date Particulars Ref: Debit Credit Balance
Jan.
2016 N N N
1 Balance b/f 7,215 (cr)
2 Goods Invoice 024 4,820 12,035 (cr)
3 Goods Invoice 027 8,240 20,2759 (cr)
4 Returns Invoice 018 360 19,915 (cr)
5. Receipt No A2845 10,820 9,095 (cr)
6. Goods – Invoice 058 6,452 15,547 (cr)
12. Goods – Invoice 086 5,462 21,009 (cr)
18 Goods - Invoice 098 6,325 27, 334 (cr)
21 Returns D/Note 021 2,132 25, 202 (cr)
28 Goods – Invoice 0123 3,256 28,458 (cr)
29 Receipt No A3451 15,584 12,874 (cr)
30 Cheque No 3,500 9,374 (cr)
Prepared by ……………… Approved by ……………

Date ………………………. Date ……………………..
3.7 Creditor’s Statement of Account
120
It is a statement sent periodically usually once a month by a buyer to his suppliers, showing the
position of their accounts up to a certain date. The statement gives particulars of invoices, debit
notes and credit notes received from the supplier during a given period. Details of payments
made to the supplier and how much is outstanding to the supplier are also shown. The creditor’s
statement is very useful for reconciliation purposes.
Example 5: Mr. Favour is a supplier to whom we owed a balance of N4,075 on March 1, 2012
March 2. We paid the outstanding balance by cheque, less N204 discount
March 13. Mr. Favour supplied goods value at N8,500
March 17. He supplied more goods valued at N1,650
March 18. We returned goods to Mr. Favour valued at N575
March 19. He gave an allowance on goods that needed repackaging because of damage in
transit N840
March 27 He supplied goods valued N13,250 and also charged insurance on goods in
transit N 50
You are required to

i Prepare creditors statement of account of Mr. Favour as at 31 March 2012.
ii Post the above transactions from the month into his ledger account.
Creditor’s Statement
Mr. Favour
Statement of Account
Date: March 31, 2012 Account No:
Date Description Ref Debit Credit Balance

N N N
Mar. 1 Balance b/f 4,075
Mar. 2 Bank Cheq No 3,871 204
Mar. 2 Discount 204 0
Mar. 13 Invoice Inv. No 8,500 8,500
Mar. 17 Invoice 1,650 10,150
Mar. 18 Debit note – returns 575 9,575
Mar. 19 Debit not – allowance 840 8,735
Mar. 27 Invoice 13,250 21,985
Mar. 27 Insurance of goods in transit 150 22,135
121
Prepared by ………………………. Checked by …………………………..
Mr. Favour Account

Date Particulars Amount Date Particulars Amount
Mar. 2 Bank 3,871 Mar.1 Bal. b/d 4,075
2 Discount received 204 13 Purchases 8,500
18 Purchases return 575 17 Purchases 1,650
19 Purchase returns 27 Purchases 13,250
(Allowance) 840
31 Bal. c/d 22,135 ______
27,625 27,625
1 Bal. b/d 22,135
1. On January 1, 2011 the Sales Ledger balance of Ola was N2,400 debit while the bought
Ledger balance was N970 credit. The following transactions took place in the month of January
2011.
N
Credit sales 35,180
Bad debts 845
Dishonoured cheques 1,250
Credit purchases 18,060
Cash received from debtors 15,600
Cash paid to creditors 11,400
Cheques from debtors 7,500
Bills payable 2,150
Debit balance in bought ledger transferred to
sales ledger 260
Discount allowed but subsequently disallowed 150
Discount received but subsequently withdrawn 145
Prepare:
a. Total Debtors Account
122
b. Total Creditors Account
2. The net total balances extracted from Tipper’s purchase ledger on 31st March 2007
amounted to N12,560, which did not agree with the balance on the purchase ledger control
account. The audit revealed the following errors and, when the appropriate adjustments had been
made for these, the books balanced.
1. A debit balance of N40 in the purchase ledger had been listed as a credit balance.
2. Hector had been debited for goods returned to him, £90, and no other entry had been made.
3. The purchase day book had been overcast by N100
4. Credit balances on the purchase ledger amounting to N480 and debit balances amounting to
N24 had been omitted from the list of balances.
5. A payment of N8 to Tiger for a cash purchase of goods had been recorded inthepetty cash
book and posted to his account in the purchase ledger, no other entry having been made.
6. The transfer of N120 from Harrow’s account in the sales ledger to the credit of his account in
the purchase ledger had not been entered in the control account.

(a) A statement reconciling the original net balances extracted from the purchase ledger with the
corrected balance on purchase ledger control account, and
(b) The purchase ledger control account showing the balance before the correction of the errors
and the necessary adjustments thereon.
3. The following balances have been extracted from the books of Jola Ade a sole trader for
the year ended 31st December, 2011.
N
Sales ledger balance, 1/1/11 4,936
Purchases ledger balance, 1/1/11 3,676
Sales 49,916
Cheques and Cash received from customers 46,490
Bad debts written off 99
Purchases 42,257
Returns outwards 1,098
Cheques paid to suppliers 38,765
Cash paid twice in error to a supplier now refunded 188
Interest charged to a customer in respect of an
overdue account 50
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You are required to prepare the Sales Ledger and Purchases Ledger Control Accounts for the
year ended 31st December, 2011.
4. From the following particulars which relate to the month of January 1998, prepare a Sales
Ledger Control Account:
N
Sales 1,200,000
Returns Inward 12,500
Cash received from customers 1,152,000
Bad debt written off 50,000
Interest charged on overdue accounts 2,000
Balance 1st January 514,100
(b) The balance in this control account does not agree with the schedule of debtors extracted
from the personal ledgers which amounted to N407,400.00 An investigation revealed the
following:
i. The sales day book had been overcast by N10,000.00 on one occasion and
N5,000.00 on another.
ii. Discount of N1,000.00 shown in the sales ledger has been omitted from the Cash Book
iii. Balance totalling N8,800.00 have been left off the list of debtors as at 31st January
iv. The credit side of one ledger account is N5,000.00 too much.
v. Bad debt of N12,200.00 has been written off in sales ledger but no entry has been made in the
General ledger.
vi. N22,400.00 in the Purchases Ledger has been set off against a contra account in the Sales
Ledger but this is not recorded in both Control Account.
vii.Discount allowed of N600.00 entered in the cash book has not been carried to the customer’s
account.
viii. An item of N9, 300.00 in the Sales Day Book has been posted as N39, 000.00 in the
customer’s account.
Show the adjustments necessary for:
(a) The balance in the Sales Ledger Control Account
(b) The Schedule of Debtors
4.0 CONCLUSION
Control account is a summary of customers or suppliers ledger in total. The balance on the
control account under normal circumstance must equal the addition of individual customers or
suppliers account at a particular date or period. Some of the merits of control accounts are: it
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saves time, it helps to prevent fraud, it allows homogeneous accounts to be grouped together and
it can be used to detect missing figure.
5.0 SUMMARY
This unit focused on control accounts, and it was used to define control accounts, explain types
of control accounts, discussedthe merits of control accounts. In addition, debtors control account,
creditors control account, debtor’s statement of account and creditor’s statement of account were
prepared.
Question 1: The following balances were extracted from the books of Usen Stores on 31st
December, 2006.
N
Cash payment to creditors for goods supplied 11,250
Returns inwards 410
Cash received from debtors for sales 17,784
Bills payable 3,404
Bad debts 506
Balance of creditors for goods supplied as at 1/1/2006 2,678
Balance of debtors for sales as at 1/1/2006 4,260
Balance of creditors for goods supplied as at 31/12/2006 2,678
Balance of debtors for sales as at 31/12/2006 5,720
You are required to determine by Control Accounts, the amount of

(a) Purchases as at 31st December 2006
(b) Sales as at that date
Question 2:The net total balances extracted from Starling’s purchase ledger on 31st March 2014
amounted to N5,676, which did not agree with the balance on the purchase ledger control
account. The audit revealed the following errors and, when the appropriate adjustments had been
made for these, the books balanced.
1. An item of N20, purchase from A. Brown. had been posted from the purchase day book to
the credit of B. Brown’s account.
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2. On 31st January 2014, Charles had been debited for good returned to him, N84, and no other
entry had been made.
3. Credit balances on the purchase ledger amounting to N562 and debit balances amounting to
N12 had been omitted from the list of balances.
4. Returns of N60 allowed by Austin had been correctly recorded and posted in Starling’s
books. This item was later disallowed, entered in the sales return book, and credited to
Austin’s account in the sales ledger.
5. The transfer of N90 from the debit of Cook’s account in the sales ledger to the credit of his
account in the purchase ledger had not been entered in the journal.
6. The purchase day book had been undercast byN100
7. A payment to Brook of N3 for a cash purchase of goods had been recorded in the cash book
and posted to his account in the purchase ledger, no other entry having been made.
You are required to set out:

(a) Journal entries, where necessary, to correct these errors, and
(b) The purchase ledger control account showing the balance before the correction of the errors
and the necessary adjustments thereon.
Question 3: The following transactions relate to a sales ledger for the year ended 31st December
2015
N
Balance on sales ledger control 1 January 2015 8,952
Sales as per positing summaries 74,753
Receipts from debtors 69,471
Discounts allowed 1,817
The clerk in charge had prepared from the ledger cards a list of balances outstanding on 31st
December 2015 amounting to N9,663 but this did not agree with the balance of the sales ledger
control account. There were no credit balances on the ledger cards.
Investigation of the differences revealed:
i. The bank statement showed credit transfers of N198 which had been completely overlooked
ii. Journal entries correctly posted to the ledger cards had been overlooked whenpositing control
account: debts settled by set off against creditors’ account N2,896, bad debts N640.
iii. When listing the debtors balances three ledger cards with debit balances of £191 had been
incorrectly filed and consequently had not been included in the list of balances.
iv. The machine operator when posting a ledger card had incorrectly picked up an old
balance of N213.50 as N13.50 and had failed to check her total balance.
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v. N1,173 entered in the cash book as a receipt from J. Spruce had not been posted as no account
under that name could be traced. Later it was discovered that it was in payment for a car which
had been used by the sales department and sold to him second-hand.
Required:
(a) Prepare the sales ledger control account for the year ended 31st December 2015 taking into
account the above adjustments.
(b) Reconcile the clerk’s balance of N9,663 with the corrected balance on the sales ledger
account.
(c) Explain the benefits that accrue from operating control accounts.
Limited
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UNIT 13: BANK RECONCILIATIONS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Bank Reconciliation Statement
3.2 Merits of Bank Reconciliation Statement
3.3 Preparation of Bank Reconciliation Statement
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Two column cash book was considered in unit 10 which shows how both cash and bank accounts
of an organisation are treated in the account. The bank column records the transactions carried
out in the company’s bank account. However, the balance of the bank column in the cash book
may not be the same with the bank statement provided by the bank to the company. This unit
examines how the bank column of the cash book and the bank statement balances can be
reconciled including the factors responsible for differences in both balances that necessitate the
preparation of bank reconciliation statement.
2.0 OBJECTIVES
i Define and explain bank reconciliation statement
ii. Understand why cheques are dishonoured by the banks.
iii. Prepare adjusted cash book
iv. prepare a Bank reconciliation statement
3.0 MAIN CONTENT
3.1 BANK RECONCILIATION STATEMENT
Bank reconciliation is the process of making the balance on the bank column of a cash book to
agree with the balance on the bank statement received from the bank. Put differently, bank
reconciliation statement is a report prepared to show the process of agreeing entries in the bank
statement with those in the cash book with a view to arriving at a reconciled balance.
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The reconciliation becomes necessary as a result of differences between the cash book prepared
by an account holder and the bank statement prepared by the bank. These differences are
corrected using adjusted cash book and bank reconciliation statement.
Most of the time, the differences do not occur deliberately, but could be as a result of:
i. Errors – These are mistake either by the bank and/or the customer.
ii. Timing differences – These are due to unpresented cheques and uncredited lodgements.
iii. Entries not brought to the notice of the company by the bank e.g. bank charges, interests,
transfers, commission on turnover etc.
3.1.1 Unpresented cheques
These are cheques which have been issued for payment by a bank account holder but have not
been presented for payment at the bank as at the date the bank prepared the bank
statement.Unpresented cheques will appear on the credit side of the cash book but will not be
seen on the debit column of the bank statement.
3.1.2 Uncredited lodgements
These are cheques deposited into the bank, but which have not been credited to the customer’s
account by the bank as at the date of preparing the bank statement. This delay may be due to the
cheque being banked other than at the customer’s branch of the bank or delay in cheque clearing
system which may take up to three working days for local cheques to clear or even more for up-
country cheques.
3.1.3 Direct transfers or Standing orders
These are payments made directly by the bank as a result of previous instructions given by the
customer to the bank. They include an order to pay annual insurance premium, professional
membership subscription etc.
3.1.4 Others
These include bank charges, account maintenance fee, interest on loan and overdraft account,
dishonoured cheque etc. not brought to the notice of the account holder by the bank except
through the bank statement.
3.1.5 Reasons for Dishonoured Cheques
A cheque may be dishonoured for the following reasons:
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i. If the cheque is not dated.
ii. If the amount in words does not correspond to the amount written in figure
on the cheque.
iii. If the balance on the drawer’s account is not sufficient to accommodate the amount
to be drawn with the cheque.
iv. Cheque mutilations (i.e. unsigned alteration).
v. Stale cheques: The date on the cheque is more than six months beforeit is presented
to the bank for payment.
vi. Irregular signature from the issuer
vii. Unsigned cheques.
viii. Cheque post-dated: Presenting cheque at the bank before the date written on it.
ix. Notice of death of customer received by the bank.
3.2 MERITS OF BANK RECONCILIATION STATEMENT
i. It aids the bank customer to monitor unpresented cheques, uncredited lodgements etc.
ii. It assists in detecting errors that might have occurred in the cash book or in the bank
statement.
iii. It is useful in detecting fraud either from the bank or office
iv. Where the bank reconciliation statement is prepared regularly, it helps to prevent fraud.
3.3 PREPARATION OF BANK RECONCILIATION STATEMENT
i. Ensure that both cash book and bank statement are prepared up to the same date
ii. Check off items in the cash book against the bank statement
iii. Update the cash book by preparing adjusted cash book which will be credited with
bank charges, commission on turnover, interest on overdraft and loans, dishonoured
cheques, direct transfers, standing orders etc. Debit the adjusted cash book with direct
payment to the bank like dividend received, interest on deposit account etc.
iv. Check for errors which occur in the cash book and bank statement for corrections, and
correct cash book errors. But include bank errors in the reconciliation statement for
notification to the bank.
v. Prepare the bank reconciliation statement using any of these two formats.
3.3.1 Format of Bank Reconciliation Statement Starting with Cash Book Balance
Big Life Ventures

Bank Reconciliation Statement
As at 31st December 2015
N
130
Balance as per adjusted cash book xx
Add unpresented cheques xx
xx
Less uncredited lodgements/cheques (x)
xx
Add or deduct bank error(s) x
Balance as per bank statement xx
3.3.2 Format of Bank Reconciliation Statement Starting with Bank Statement Balance
Unlimited Grace& Company

As at 30th April 2016
N
Balance as per bank statement xx
Add uncredited cheques/lodgements xx
xx
Less unpresented cheques (x)
xx
Add or less bank error(s) x
Balance as per cash book xx
Where the balance from the bank statement or adjusted cash book is an overdraft, it does not
change the formats above. Overdraft should be indicated in bracket to show that it is a negative
balance.
A bank reconciliation statement will only contain those entries that are necessary for the bank to
make correction in future bank statements. Adjusted cash book should take care of all necessary
entries to be made by the company.
Example 1:Joy Investment Company has the following transactions in its cash book and bank
statement for July 2015.
Cash Book
Lodgement into bank Payment ordered
Chq. 6789 14,000 Chq. 123456 4,000
Chq. 4591 12,000 Chq. 123457 6,000
Chq. 4826 9,500 Chq. 123458 7,500
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Chq. 4725 19,000 Chq. 123459 12,500
Chq. 4228 9,000 Chq. 123460 8,000
Cash 66,000 Chq. 123461 1,500
______ Bal. c/d 90,000
129,500 129,500
Bal. b/d 90,000
Bank Statement
Debit Credit Balance
Chq. 123459 12,500 (12,500)
Chq. 123458 7,500 (20,000)
Chq. 4826 9,500 (10,500)
Chq. 6789 14,000 3,500
Chq. 123460 8,000 (4,500)
Chq. 4826 contra 9,500 (14,000)
ICAN- Standing order 250 (14,250)
Account maintenance fee 500 (14,750)
Commission 1,750 (16,500)
Chq. 4228 9,000 (7,500)
Chq. 123457 6,000 (13,500)
Cash 66,000 52,500
You are required to

1. Prepare an adjusted cash book
2. Reconcile the adjusted cash book balance with bank statement.
Adapted from Institute of Chartered Accountants of Nigeria
Joy Investment Company

Adjusted Cash Book
Bal. b/d 90,000 ICAN – Standing order 250

Account maintenance fee 500
Commission 1,750
Bal. c/d 87,500
90,000 90,000
Bal. b/d 87,500
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Joy Investment Company
As at 31st July 2015
N N
Balance as per bank statement 52,500
Add uncredited lodgements:
Chq. 4591 12,000
Chq. 4826 9,500
Chq. 4725 19,000 40,500
93,000
Less unpresented cheques:
Chq. 123456 4,000
Chq. 123461 1,500 5,500
Balance as per cash book 87,500
Example 2: Okoro’s cash book showed a debit balance of N3,344 on 31st January, 2016. His
bank statement for January, 2016 however showed a credit balance of N3,424. On investigation
it was discovered that.
i. The opening balance on the cash book for the month had been wrongly brought down as
N1,505 instead ofN1,550.
ii. Payment for rent N250 had been debited in the cash book
iii. A customer had paid N600 direct into the bank
iv. The bank had paid, on a standing order, N300 to an insurance company
v. A cheque for N870 deposited in the bank on 25th January, was not credited until 3rd
February, 2016.
vi. Cheques paid to suppliers totalling N1,875, had not been presented for payment.
vii. Cost of cheque book and other charges by bank totalling N90 had not been entered in the
Cash Book.
viii. The bank had paid a cheque of N680 in error from Okoro’s Account.

a. Adjusted Cash Book
b. Bank Reconciliation Statement as at 31st January, 2016.
Mr. Okoro
Adjusted Cash Book
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Balance. b/d 3,344 Rent 500
Opening Bal. difference 45 Standing order 300
Direct payment 600 Bank charges 90
____ Bal. c/d 3,099
3,989 3,989
Bal. b/d 3,099
Mr. Okoro
As at 31st January 2016
N
Balance as per bank statement 3,424
Add uncredited cheque 870
4,294
Less unpresented cheque 1,875
2,419
Add Bank error 680
Balance as per cash book 3,099
The adjusted cash book was credited with rent of N500 because the account ought to have been
credited initially with N250, but was debited, hence the need to credit the cash book with N500
to correct the error and also reflect N250 in rent account after the error.
1. T. Emeka maintains a business bank account with Second Bank Nigeria Limited. The
bank statement received for the month of March 1999 showed a balance of N14,265 to his credit
while according to his Cash Book; he should have N13,380. Subsequent investigation revealed
the following:
(a) Two cheques A000111 for N3,400 and X222419 for N6,000 deposited to the bank on 28th
March, 1999 were not credited by the bank until 2nd April, 1999.
(b) A cheque for N6,500 issued to Jango Ltd. had not been presented for payment.
(c) A cheque for N3,000 received from a customer in full settlement of a debt of N3,300 had
been entered in the Cash Book at the full value of the debt.
(d) Dividend of N650 from PZ Ltd. had been paid direct to the bank.
(e) The bank deducted a total of N125 as its charges.
(f) The bank had credited a cheque of N3,560 of V. Amaka in error to T. Emeka Account.

(i) Adjusted Cash Book; and
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(ii) A Bank Reconciliation Statement for the month of March, 1999.
2. Define the bank reconciliation statement.
3. On 31st July 2016 the bank statement of Ene Nyong showed a credit balance of
N140,163. The Cash Book has a debit balance of N55,750 as at 31st July 2016. Cheques drawn
prior to 31st July 2016 but not presented until after that date:-
N
Abe Auto Works 2,920
Early Childhood School 80,117
UCT Stores 574
Abu Momoh 13,232
Cheques paid into the bank on 31st July 2016 but not credited until 4thAugust 2016 N11,619.
Bank charges and interest to 31st July 2016 not entered in the Cash Book N811.
Required:
Prepare the Bank Reconciliation Statement
4. Discuss the process of preparing bank reconciliation statement.
4.0 CONCLUSION
Usually the balance of the bank column in the cash book may not be the same with the bank
statement provided by the bank to the company. When this occurs, the two balances from the
bank column of the cash book and the bank statement can be agreed by preparing a bank
reconciliation statement.
5.0 SUMMARY
The importance to agree bank column of the cash book with the bank statement balance and the
reasons for differences between the cash book and bank statement balances were considered in
this unit. Adjusted cash book and bank reconciliation statement were also prepared.
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Question 1: Below is an extract of the Bank Statement of Messrs. Jackson & Co for April,
1987.
Date Details Dr. Cr. Balance

N N N
1/4/87 Balance 176,000Cr
4/4/87 Dasco Engineering 40,000 216,000Cr
5/4/87 Adebayo Builders 60,000 276,000Cr
7/4/87 Bisi Motors Cheque 011201 32,000 244,000Cr
9/4/87 Jide Foods Cheque 011202 57,000 187,000Cr
13/4/87 Okin Oloja & Co. Cheque 011204 32,800 154,200Cr
14/4/87 Bank Charges 7,280 146,920Cr
15/4/87 Interest on Fixed Deposit 4,000 150,920Cr
16/4/87 Tolu Adeolu & Co. Cheque 011205 8,000 142,920Cr
30/4/87 Kingsway Stores Cheque 011206 19,200 123,720Cr
You are given the following additional information:

(a) Cheque No 011203 issued in favour of Tayo Ajao and Associates for N24,800 was
presented to the Bank on 2nd May, 1987.
(b) Advice in respect of Bank charges was received by Messrs. Jackson & Co. on 6th May,
1987.
(c) Cheque issued in favour of Jide Foods is for supplies to the Directors.

i. The Cash Book of Messrs. Jackson & Co. for April, 1987 and
ii. A Bank Reconciliation Statement as at 30th April, 1987.
Question 2: On 30th June 2016, Olisa’s cash book showed that he had an overdraft of N12,000
on his current account at the bank. On checking the cash book with the bank statement you find
the following.
(a) Cheque drawn amounting to N20,000 had been entered in the cash book but had not been
presented.
(b)Cheques received amounting toN16,000 had been entered in the cash book but had not been
credited to the bank.
(c) On instructions from Olisa, the bank had transferred interest of N2,400 from his deposit
account to his current account, recording the transfer on 5th July 2016. This amount had
however, been credited in the cash book as on 30th June 2016.
(d) Bank charges of N1,400, shown in the bank statement had not been entered in the cash book.
(e) The payment side of the cash book had been under cast byN400;
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(f) Dividends amounting to N8,000 had been paid direct to the bank, and not entered in the cash
book.
(g) A cheque of N2,000, drawn on deposit account had been shown in the cash book as drawn on
current account.
(h) A cheque issued to Jolayemi for N1,000 was replaced when out of date. It
was entered again in the cash book, no other entry being made. Both
cheques were included in the total of unpresented cheque shown above.
You are required to indicate the appropriate adjustment in the cash book, and prepare a statement
reconciling the amended balance with that shown in the bank statement.
Limited

Accounting. Foundation Study Pack. Lagos: Vikas Publishing Limited.
137
UNIT 14: COST ACCOUNTING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Cost Accounting Information
3.2 Cost Accounting - Definition
3.3 Usefulness of Cost Accounting
3.4 Conceptual clarification of cost
3.5 Cost Build-up
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The unit introduces you to the concept of cost accounting, its definition, the range of information
that could be supplied by the system, usefulness of accounting information and cost build-up.
2.0 OBJECTIVES
At the end of this you unit, you should be able to:
(i) define cost accounting;

(ii) itemize the range of information that could be supplied by the cost accounting system;
(iii) explain the various concepts associated with cost
(iv) describe the build up of cost
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3.0 MAIN CONTENT
3.1 Cost Accounting Information

The cost accounting system of any organization is the foundation of the internal financial
information system. Management needs a variety of information to plan, to control and to make
decisions. Information regarding the financial aspects of performance is provided by the cost
accounting system. The table below shows the examples of cost accounting information and
their uses.
Information provided by Cost

S/N Accounting System Possible Uses by Management
1. Cost per unit of production or service or As a factor in pricing decisions, production
for a process. planning and cost control.
2. Cost of running a section, department or Organisational planning cost control.
factory.
3. Wage costs for a unit of production or Production planning, decisions on alternative
per period of production. methods, wages cost control.
4. Scrap/Rectification costs. Material cost control, production planning.
5. Cost behaviour with varying levels of Profit planning, make or buy decisions, cost
activity. control.
3.2 Cost Accounting – Definition
Cost accounting (traditionally termed ‘costing’) may be defined as:
“Gathering of cost information and its attachment to cost objects, the establishment of
budgets, standard costs and actual costs of operations, processes, activities or products;
and the analysis of variances, profitability or the social use of funds”.
An important part of the managerial task is to ensure that operations, departments, processes and
costs are under control and that the organization and its constituent parts are working efficiently
towards agreed objectives. Although there are numerous other control systems within a typical
organization, for example, Production Control, Quality Control, and Inventory Control, the Cost
Accounting system is the key financial control system and monitors the results of all activities
and all other control systems. The detailed analysis and location of all expenditure, the
calculation of job and product costs, the analysis of losses and scrap, the monitoring of labour
and departmental efficiency and the other outputs of the Cost Accounting system provide a
sound basis of information for financial control.
Decision making is concerned with making a choice between alternatives and frequently an
important factor in making that choice is the financial implications of the various alternatives.
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Correctly presented cost information can be of great value to management in decision making
and accordingly material on short and long term decision making shall be included later in this
unit.
The analysis and recording of past costs and activities is but one element of cost accounting.
Management is also concerned to know what costs will be in the future so that appropriate plans
and decisions can be made in good time. Also, having some standard or target against which to
compare actual costs greatly assists the control function.
Pricing decisions are complex and many interacting factors need to be considered including: the
type of market in which the firm operates, the degree of competition, demand and the elasticity
of demand, the cost structure of the product and firm, the state of the economy and numerous
other factors. Pricing is not simply a cost based decision although past costs and expected future
costs are factors to be considered in pricing decisions.
3.3 Usefulness of Cost Accounting
It cannot be emphasised too strongly that if the information produced by the cost accounting
system is not useful for managerial decision making, for control or for planning, then it has no
value and should not be prepared. To ensure its usefulness, the following questions should be
considered:
(a) Is the cost accounting system appropriate to the organization the way services are
provided or goods manufactured?
(b) Do the reports, statements and analyses produced by the cost accounting system contain
the relevant information for the intended purpose?
(c) Are the reports and statements produced at appropriate intervals and early enough to be
effective?
(d) Are they addressed to the person responsible for planning/decision making/control?
(e) Is the information produced in a relevant form and to a sufficient degree of accuracy for
the intended purpose?
It follows from the above that every cost accounting system will, in certain respects, be unique,
because it must be designed to suit the particular organization, products and processes and
personalities involved.

1. Describe the information provided by cost accounting system
2. Explain the usefulness of cost accounting
3.4 Conceptual clarification of cost
3.4.1 Cost may be defined as:
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Cost as a noun – The amount of cash or cash equivalent or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction (IAS
16).
The word ‘cost’ may also be used as a verb, in which case, it can be defined thus:
To ascertain the cost of a specified thing or activity. The word cost can rarely stand
alone and should be qualified as to its nature and limitations.
It will be clear from a study of these definitions that they relate to past costs which are the basis
of cost ascertainment. At the simplest level, cost includes two components, quantity used and
price, i.e.
cost = quantity used x price
3.4.2 Cost Object
A cost object is any item, process or activity for which a separate measurement of cost is
required.
Examples include: the cost of manufacturing a component or product, the cost of operating a
department, the cost of dealing with an enquiry at a call centre, the cost of an operation at a
hospital or indeed the cost of running the whole hospital. When an individual unit cost is
required it is normal to refer to cost units.
3.4.3 Cost Units
Costs are always related to some object or function or service. For example, the cost of a car, a
haircut, a ton of coal etc. Such units are known as cost units and can be formally defined as:
A unit of product or service in relation to which costs are ascertained.
The cost unit to be used in any given situation is that which is most relevant to the purpose of the
cost ascertainment exercise. This means that in any one organization numerous cost units may
be used for particular parts of the organization or for differing purposes. For example, in a
factory manufacturing typewriters the following cost units might be used for different purposes
in the cost accounting system.
Cost Unit Used

A typewriter production cost ascertainment
Kilowatt-hours electricity cost ascertainment
Computer minutes of operation computer running cost ascertainment
Tonne-miles transport cost ascertainment
Canteen meals catering cost ascertainment
141
Cost units may be units of production, e.g. tones of cement, typewriters, gallons of beer, or units
of service, e.g. consulting hours, number of invoices processed, patient nights, kilowatt-hours
etc.
They may be identical units as in the above examples, or they may be dissimilar as in a jobbing
engineering factory where the cost unit will be the job or batch, each of which will be costed
individually.
3.4.4 Direct Costs
Costs may be classified in numerous ways, but a fundamental and important method of
classification is into direct and indirect costs.
Direct costs (comprising direct material costs, direct wages cost and direct expenses) are those
costs which can be directly identified with a job, batch, product or service. Typical examples
are:
Direct materials The raw materials used in a product, bought in parts and
assemblies incorporated into the finished products.
Direct wages or Direct labour cost The remuneration paid to production workers for work
directly related to production, the salaries directly
attributable to a saleable service (audit clerks’ salaries for
example).
Direct expenses Expenses incurred specifically for a particular product, job,

batch or service; royalties paid per unit for a copyright
design, plant or tool hire charges for a particular job or
batch.
It follow therefore that direct costs do not have to be spread between various categories because
the whole cost can be attributed directly to a production unit or saleable service.
The total of direct costs is known as prime cost, i.e.:
direct material + direct labour + direct expenses = prime cost

Invariably when direct costs are mentioned, the costing of production cost units is involved.
Technically, this need not be so, but unless the context of the question clearly points to some
other conclusion, any reference to direct costs should be taken to refer to product costs units.
3.4.5 Indirect Costs
All material, labour and expense costs which cannot be identified s direct costs are termed
indirect costs. The three elements of indirect costs: indirect materials, indirect labour and indirect
expenses are collectively known as overheads. Typical examples of indirect costs in the
production area are the following:
142
INDIRECT MATERIALS: Lubricating oil, stationery, consumable materials, maintenance
materials, spare parts for machinery, etc.
INDIRECT LABOUR: Factory supervision, maintenance wages, storemen’s wages, etc.
INDIRECT EXPENSES: Rent and rates for the factory, plant insurance, etc.
INDIRECT MATERIAL + INDIRECT LABOUR + INDIRECT EXPENSES = OVERHEADS
Note:
In practice, overheads are usually separated in categories such as Production Overheads,
Administration Overheads, Selling Overheads. The above are examples of Production
Overheads.
It must be emphasised that the choice of cost object determines what can be classified as a direct
or indirect cost. For example, in a manufacturing firm, the cost object may be to find the cost of
running the Inspection Department; in which case the salaries of the inspectors would be a direct
cost. However, if the cost object was to find a unit component cost then the inspector’s salaries
would be an indirect cost because they cannot be directly identified with an individual
component. The more costs that can be classified as direct; the more accurate will be the cost
assignment.
3.5 Cost Build-up
Having defined direct and indirect costs, the framework of cost build-up can be shown thus:
DIRECT MATERIAL INDIRECT MATERIAL

+ +
DIRECT LABOUR INDIRECT LABOUR
+ +
DIRECT EXPENSE INDIRECT EXPENSE
PRIME COST + OVERHEADS = TOTAL COSTS
4.0 CONCLUSION
Cost and financial information is not the only information required for management decision-
making, but it is usually an important if not a crucial factor. Decision-making is concerned with
the future and with future costs and revenues. Cost accounting, which is based on historical data,
can nevertheless provide some guide to future costs and is frequently a critical part of the
information upon which a decision is made. The word cost is rarely used on its own. It is
invariably qualified in some way, e.g. Prime Cost, Factory Cost, Indirect Cost, etc.
5.0 SUMMARY
143
In this unit, we have learnt that: Cost accounting is concerned with the ascertainment and control
of costs; The purpose of cost accounting is to provide detailed information for control, planning
and decision-making; To be of use, cost accounting information must be appropriate, relevant,
timely, well presented and sufficiently accurate for the purpose intended. Also, in this unit we
have treated various concepts such as: cost object; direct cost; indirect cost, etc.
1. Define cost accounting with reference to its scope and uses

2. Differentiate between Direct and Indirect cost
Adeniji, A.A. (2013) An Insight Into: Management Accounting. Lagos: Value Analysis
Publishers
Lucey, T. (2009). Costing. Hampshire: CENGAGE Learning
144
UNIT 15: ELEMENTARY BREAK-EVEN ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Break-even point
3.2 Break-even analysis
3.3 Simple Break-Even Point Application

3.4 C-V-P Analysis Assumptions
3.5 Restrictions Of B-E-P
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Break-Even analysis can be used to give answers to business questions such as “what is the
minimum level of sales that can be made wherein a company will not experience loss” or “by
how much can sales be reduced and the company still continues to be profitable”. Break-even
analysis is the analysis of the level of sales at which a company (or a project) would make
zero profit. As its name implies, this approach determines the sales needed to break-even.
2.0 OBJECTIVES
i. Explain break-even analysis
ii. Calculate the break-even point for any product using formulars
iii. Present the break-even point in a diagram
iv. Mention the major assumptions behind the C-V-P analysis
145
v. Describe restrictions surrounding the break-even point analysis
3.0 MAIN CONTENT
3.1 BREAK-EVEN POINT
Break-Even point (B.E.P.) is determined as the point where total income from sales is equal
to total expenses (both fixed and variable). In other words, any point under this point
indicates that the company is operating at a loss. If all the company’s expenses were variable,
break-even analysis would not be relevant. But, in practice, total costs can be significantly
affected by long-term investments that produce fixed costs. Therefore, a company–in its
effort to produce gains for its shareholders has to estimate the level of goods (or services)
sold that covers both fixed and variable costs.
3.2 BREAK-EVEN ANALYSIS
Break-even analysis is based on categorizing production costs between those which are
variable (costs that change when the production output changes) and those that are fixed
(costs not directly related to the volume of production). The distinction between fixed costs
(for example administrative costs, rent, overheads, and depreciation) and variable costs (for
example production wages raw materials, sellers’ commissions) can easily be made, even
though in some cases, such as plant maintenance, costs of utilities and insurance associated
with the factory and production manager’s wages, need special treatment. Total variable and
fixed costs are compared with the sales and revenue in order to determine the level of sales
volume, sales value or production at which the business makes neither a profit nor a loss.
Explain in details the break-even analysis with reference to the break-even point.
3.3 SIMPLE BREAK-EVEN POINT APPLICATION
B.E.P is explained in the following example, the case of Eleganza Ltd. This company
produces and sells quality pens.
Fixed costs = N400,000
Cost per pen = N12
Selling price per pen = N20
The following table shows the outcome for different quantities of pens sold (Diagram1):
Number of Pens Sold (Q) 20,000 50,000 80,000
146
Total Sales (S) N400,000 N1,000,000 N1,600,000
Variable Costs (VC) N240,000 N600,000 N960,000
Contribution Margin (C.M.) N160,000 N400,000 N640,000
Fixed Costs (FC) N400,000 N400,000 N400,000
Profit/(Loss) (N240,000) 0 N240,000
Diagram 1: Different quantities of pens sold
The break-even point can easily be calculated. Since the sales price is N20 per pen and the
variable cost is N12 per pen, the difference per item is N8. This difference is called the
contribution margin per unit because it is the amount that each additional pen contributes to
profit, in other words, each pen sold offers N8 in order to cover the fixed expenses. In our
examples, fixed cost incurred by the firm is N400,000 regardless of the number of sales. As
each pen contributes N8, sales must reach the following level to offset the above costs
(Diagram 2):
2000000 Total Sales
1600000- B.E.P } Profit Area

Total Costs
Euros 1200000-
} VC
800000-
FC
400000-
0 20000 40000 60000 80000 100000

Diagram 2: Break-Even Point Graph
Unit Sales (pens)
Fixed Costs = Fixed Costs = N400,000 =50000pens (B.E.P)
SP- VC (u) Contribution Margin N8
Thus, 50,000 pens is the B.E.P required for an accounting profit.
Break-even analysis is a useful tool because it helps managers to estimate the outcome of
their plans. This analysis calculates the sales figure at which the company (or a single
project) breaks even. Therefore, a company uses it during the preparation of annual budget or
147
in cases of new product development. The B.E.P formula can be also used in the case of new
product development. The various formulas relevant for BEP analysis are shown below:
1. Break-even point (in units) = Fixed cost

Contribution margin/unit
2. Break-even point (N sales) = Fixed cost x Selling price/unit

Contribution/unit
3. Contribution/unit = Selling price/unit – Cost price/unit
4. Number of units for target profit = Fixed cost + Target profit
Contribution/unit
5. Sales value for target profit = Number of unit for target profit x Selling price/unit
The B.E.P formula can be also used in the case where a company wants to specify the exact
volume of sold items required to produce a certain level of profit. This is depicted in
ILLUSTRATION 2.
ILLUSTRATION 2
Honey PLC produces bottles of honey with a Selling price of N1,000 and a variable cost of
N600. Fixed cost is N6,000,000 per annum. Calculate:
i. Number of units to break-even
ii. Sales at break-even point
iii. The number of units to be sold to achieve a profit of N2,000,000
iv. The sales value for target profit of N2,000,000
SOLUTION
Contribution/unit = N1,000-N600
= N400
i. BEP (units) = N6,000,000 = 15,000 bottles of honey
N400
ii. BEP (N sales) = N6,000,000 x N1000 = N15,000,000

N400
iii. Number of units for target profit = N6,000,000 + N2,000,000 = 20,000 bottles
N400
iv. Sales for target profit = 20,000 bottles of honey x N1,000 = N20,000,000
From Illustration 2 it is clear that BEP is not only concerned with the level of activity that
produces neither profit or loss but also considers the behavior of costs and profits at other levels
which is of much greater significance. As a result of this consideration, the B-E-P is alternatively
referred to as cost-volume-profit analysis or C-V-P analysis
148
3.4 C-V-P Analysis Assumptions
a) All costs can be resolved into fixed and variable elements
b) Fixed costs will remain constant and variable costs vary proportionately with activity
c) Over the activity range being considered, costs and revenues behave in a linear fashion
d) The only factor affecting costs and revenues is volume
e) Technology, production methods and efficiency remain unchanged
f) Particularly for graphical methods, the analysis relates to one product only or to a
constant product mix
g) There are no stock level changes or that stocks are valued at marginal or variable cost
only.
3.5 RESTRICTIONS OF B-E-P
Beside its useful applications, break-even analysis is subject to some restrictions.
1. In every single estimation of the break-even level, we use a certain value to the “selling
price”. Therefore, if we want to find out the level that produces profits under different
selling prices, many calculations and diagrams are required.
2. A second drawback has to do with the variable “total costs”, since in practice these costs
are difficult to calculate due to the fact that there are many things that can go wrong and
mistakes that can occur in production.
3. Another effect that is not algebraically measured is that changes in costs may alter
products’ quality. Also, the break-even point is not easily estimated in the ‘real world’,
because there is no in mathematical calculation that allows for the “competitive
environment”. This refers to the fact that the competition may cause prices to drop or
increase according to demand.
4.0 CONCLUSION
The Break-even analysis, or more descriptively, cost-volume-profit analysis studies the

relationship between costs, volume, sales and profit. The main purpose of this analysis is to have
some idea of how much to sell, before a profit will be made. Break-even analysis is extremely
important before starting a new business or to early stage business because it gives answers to
crucial questions such as how sensitive is the profit of the business to decreases or increases in
costs.
149
5.0 SUMMARY
In this unit, we have discussed the meaning of Break-even analysis and shown how to make use
of formular and graph to calculate the Break-even point. The cost-volume-profit analysis is also
described as more encompassing than the B-E-P in studying the behavior of costs and profit at
varying level of activity. This unit also discussed the assumptions behind C-V-P analysis and
restrictions of B-E-P.
1. What are the major assumptions behind C-V-P analysis?
2. A company makes a single product with a selling price of N40 and a variable cost of
N24. Fixed cost is N240,000 per annum. Calculate the following and present in a graph:
a. Number of units to break even
b. Sales at break-even point
c. What is the number of sales that is needed to achieve a profit of N80,000
d. What is the level of sales that will achieve a profit of N80,000
Lucey, T. (2002) Costing. London: BookPower/ELST
Tsorakidis, N., Papadoulos, S. Zerres, M. & Zerres. Break-Even Analysis. Retrieved from
www.bookboon.com
150

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NATIONAL OPEN UNIVERSITY OF NIGERIA

DEPARTMENT OF FINANCIAL STUDIES

COURSE TITLE; ELEMENTS OF BOOK-KEEPING II

COURSE CODE; ACC 102

Course Developer/Writer: Dr. (Mrs) Ofe I. Inua

Department of Financial Studies

Faculty of Management Sciences

National Open University of Nigeria

Course Editor: Prof. ThankGod O. Imo

Rivers State University, Port-Harcourt

Head of Department: Dr. (Mrs) Ofe I. Inua

National Open University of Nigeria

Course Coordinator: Anthony I. Ehiagwina

Tutor Marked Assignment

Final Examination and Grading

1. Distinguish between book keeping and accounting;

The course material package is composed of:

The Course Guide

The Study Units

Tutor Marked Assignment

THE STUDY UNITS

The study units are as listed below:

Unit 1 Basic Accounting

TUTOR MARKED ASSIGNMENT

3.0 Main Content

3.1 The Historical development of Accounting

3.2 Regulatory Framework

3.3 Book keeping and Accounting

6.0 Tutor-Marked Assignment

7.0 References/Further Reading

Accounting is concerned basically with accountability. The underlying purpose of accounting is

After studying this unit, you should be able to:

- Distinguish between bookkeeping and accounting

- State the qualities of a good accounting information system

3.0 MAIN CONTENT

3.1 The Historical Development of Accounting

 The profit earned or loss incurred during the period, and

3.2 Regulatory Framework

Other legislations relate directly to specific industry such as:

Other regulations consist of the following accounting standards:

(c) Posting of entries from subsidiary books to the ledger; and

(d) Extraction of the Trial Balance .

6.0 TUTOR-MARKED ASSIGNMENT

Development Studies, Enugu, Nigeria

Anao A.R. (2002). Introduction to Financial Accounting. Longman Nigeria Limited,

ICAN Study Pack (2006). Fundamentals of Financial Accounting. VIPublishing

Limited, Lagos, Nigeria

Processes and Systems.

At the end of this unit, you should be able to:

3.0 MAIN CONTENT

3.1 Manual Accounting System

i. A manual system is cheaper to install in terms of cost when compared with a

Some of the disadvantages of manual system are:

iv. Auditing of manual accounting system is cumbersome because documents have to be

3.2 Mechanical Accounting System

3.2.1 Chart of Account

Typical Chart of Account

Code Account Description Account Type

Some advantages of computerised accounting system are: