ADMN 002: FINANCIAL ACCOUNTING II

DIPLOMA IN ACCOUNTING

JUSTICE ASANTE AND GABRIEL KORANKYE

DEPARTMENT OF ACCOUNTNG
UNIVERSITY OF GHANA BUSINESS SCHOOL
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 Introduction

This course introduces you to the preparation of different financial statements of organizations.

The financial statement of an organization provides information about an entity’s financial

performance and financial position. The information from financial statements are used by users

in making economic decisions. The end-product of the accounting information system is the

generation of financial reports which contains the financial statement. A complete set of financial

statements comprises; a statement of financial position, the income statement, statement of cash

flow, statement of changes in equity and notes to the accounts.

This course focuses on the preparation of the income statement and the statement of financial

position for different forms of business organizations.

The Income Statement

The performance of a business organization is measured by its profitability. Every business

owner would want to have information on the profit or loss incurred by the business. Such

information is useful to measure the performance of management, plan, obtain loans, calculate

amount of taxes and determine the returns of the owners’ investments relative to other

businesses.

The income statement is made up of two sections; the trading account and the profit and loss

account. The trading account section of the income statement determines the gross profit while

the overall net profit from the business operation is determined in the profit and loss section.

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Elements of the Income Statement

The income statement is constructed with two elements;

a. Income (revenue or gains)

b. Expenses (or losses)

Income (revenue or gains)

Income refers to increases in economic benefits which can occur through inflows or increases in

assets or decreases in liabilities that result in increase in equity other than those relating to

contributions from equity participants. Income can be classified as either revenue or gain. It is

termed as revenue when it is derived by delivering or producing goods, rendering services, or

other activities that constitute the entity’s ongoing major or central operations (example is sales).

It is referred to as a gain when it is derived from the peripheral or incidental transactions of an

entity (example is discount received).

Expenses (or losses)

Expenses are decreases in economic benefits which can occur through outflows or depletions of

assets or incurrence of liabilities that result in decreases in equity other than those relating to

distributions to shareholders. Expenses result from the main operations of the business while

losses arise from peripheral activities.

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The Statement of Financial Position

The statement of financial position shows the resources of the organization at a point in time. It

is a positional statement that represents the assets, liabilities and equity of a business at a given

time. It is also called the balance sheet. It comprises of a list of balances arranged according to

whether they are assets, liabilities or equity. Recall the accounting equation? The statement of

financial position is constructed based on the principle of the accounting equation; the total value

of assets must equate the sum of the values of liabilities and equity (Assets = Liabilities +

Equity). It gives a snapshot of the financial position of the organization at a point in time.

Elements of the Statement of Financial Position

The Statement of Financial Position is constructed with three elements;

a. Assets

b. Liabilities

c. Equity

Assets

Assets are resources controlled by an entity as a result of past transactions or events from which

future economic benefits are expected to flow to the entity. Assets can be classified as either

non-current or current assets. Non-current assets are assets from which future economic benefits

are expected to flow to the entity in more than a year after the reporting period. They are

acquired for continuing use within the business with a view to earning income or making profit

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from its use other than for resale. Examples are Land & building, plant and machinery, motor

vehicles, fixtures and fittings, goodwill. Current assets are assets from which future economic

benefits are expected to flow to the entity in not more than a year after the reporting period. They

are acquired with the intention to convert them into cash within one year. Examples are

inventories, trade receivables, accounts receivables, prepayments, bank, and cash.

Liabilities

Liabilities are present obligations of an entity arising from past transactions or events, the

settlement of which is expected to result in an outflow from the entity by way of transfer of

assets or provision of services to other entities in the future. Liabilities can be classified as either

non-current or current. Non-current liabilities are obligations or liabilities that are required to be

settled in more than a year after the reporting period. Examples are Long-term loan, debentures,

and bonds (issued). Current liabilities are obligations or liabilities that is required to be settled in

not more than a year after the reporting period. Examples are trade payables, accounts payable,

accruals, bank overdraft, and short-term loans.

Equity

The equity at the start of a business establishment is owners’ contribution to the business in the

form of assets, cash or other forms of contribution. Through the operations of the business, the

equity can increase or decrease. It increases by way of profits or additional contribution by the

owners and decreases by way of losses and distribution to the owners. Thus the equity of an on-

going business is the residual interest in assets of the business after deducting all liabilities. It

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represents the internal claim against the resources of the business or the obligation owed to the

owners of the entity. The equity interest in a business could be represented by the stated capital,

income surplus/retained earnings, capital surplus and any other reserves.

Applying the time Interval or Periodicity Concept and the Accrual (Matching) Concept

These concepts have been discussed in your first course during the first semester. It is about the

time period for which financial statements are prepared and ensuring that incomes earned are

matched against expenses incurred in the same period. Financial statements are usually prepared

for one accounting year. Thus, in preparing the various financial statements, we will consider the

transactions that are within the period concerned. In addition, income earned in the period will be

matched against the expenses that are incurred in the same period for the determination of profit

or loss for the specified period.

The rest of this module is organized in nine (9) sections. Section 1 provides students with

information on the preparation of the final accounts of a trading organization. This is followed by

departmental accounting in section 2. Section 3 and 4 presents the financial statements of a

partnership business while section 5 and 6 introduces students to the formation of companies and

accounting for the issue of equity capital. Section 7 explains the two approaches to the

determination of profit or loss for organisations that do not keep proper books of accounts. The

final accounts of non-profit making organisations are discussed in section 8. Finally, the

techniques that can be employed to correct accounting errors in the books of an organisation is

explained in section 9.

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 SECTION 1: FINANCIAL STATEMENTS FOR A TRADING

ORGANISATION

Introduction

This section introduces you to the basic financial statements of a sole trader which depict the

performance and financial position of an organisation. You will be introduced to the preparation

of the income statement and the statement of financial position of a trading organization.

Objectives

At the end of this section, you should be able to;

• Construct the trading section of the income statement

• Construct the profit and loss section of the income statement

• Prepare a statement of financial position for a trading organization

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The Income Statement of a Trading Organization

As discussed in the introductory section, the income statement is used to determine the profit and

loss made by a business. It is made up of two sections;

– Trading account

– Profit and loss account

The Trading Account

This is the first part of the income statement. The trading account focuses on the profit from the

core activity of the business before the operating expenses are considered. Thus, it is prepared to

ascertain the gross profit or loss. The gross profit or loss is the difference between the value of

sales and cost of goods sold (direct cost). Mathematically, it can be represented as;

Gross profit/loss = Net Sales – Direct Cost (Cost of Goods Sold)

Net sales is derived as the difference between gross sales and any returns from sales;

Net Sales = Sales – Return inwards

Cost of goods sold is derived as;

Opening inventory + [Purchase + Carriage inwards – Returns outwards + other purchase

costs] – Closing inventory

For a typical trading organisation, the trading account of the income statement will look like this;

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 GH¢ GH¢

Sales XXXXX

Less: Returns inwards (XXX)

Net sales (A) XXXXX

Cost of Goods Sold (B):

Opening inventory XXXX

Add: Purchases XXXX

Carriage inwards XXX

Less: Returns outwards (XXX)

Goods Available XXXX

Less Closing Stock (XXX)

COGS (B) (XXXXX)

Gross Profit (A – B) XXXXX

The Profit and Loss Account

The profit and loss account is prepared to determine the net profit or loss for the period. The

elements in the profit and loss account comprise the gross profit, other revenue/income and the

expenses incurred by the organisation over the period. The net profit or loss is derived by

deducting operating expenses from the total income of the business. It is expressed

mathematically as;

Net Profit/Loss = Total Income (Gross Profit/loss + Other Income) – Indirect cost (Expenses)

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Other income other than sales for a business may include discount received, rent income,

commissions received and profit on the sale of non-current asset.

The expenses of an organisation can be grouped into three main classes; general and

administrative expenses, selling and distribution expenses, and finance expenses.

The profit and loss account of the income statement for a typical trading organisation may look

like this;

GH¢ GH¢
Gross profit XXXXX
Add: Discount received XXX
Rent income XXX
Commission received XXX
Total income (A) XXXXX
Less Expenses:
General and Administrative Expenses XXXX
Selling and Distribution Expenses XXXX
Financial Charges/Expenses XXXX
Total Expenses (B) (XXXXX)
Net Profit/Loss (A – B) XXXXXX
In preparing the profit and loss account, some of the expenses may not be paid in full at the end

of the year while others may cover future accounting periods. However, following the accrual

and matching concept, only the expenses incurred for the period must be included in the

determination of profit or loss.

Making Adjustments for Accruals and Prepayments

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Benefits consumed by the business but for which payments are yet to be made are termed as

accrued expenses. Expenses accrued for a period should be added to the expenses paid for that

same period to determine expenses incurred in the income statement. To get the amount of

expense incurred, the amount owing at the end of the year must be added to any amount already

paid. For example, telephone expense paid for 2015 is GH¢10,000 with an outstanding amount

of GH¢2,000 at the end of the year. To find the amount of telephone expense incurred for the

year;

Telephone Expense incurred

GH¢

Amount paid 10,000

Add: Amount outstanding/owing 2,000

Amount to Income Statement 12,000

NB: Any amount outstanding/owing by the business at the end of the year is a liability and will

be shown in the statement of financial position.

Expenses that the business has made payment for but which the benefits are yet to be consumed

is termed as prepaid expenses. Expenses that have been prepaid should be deducted from the

total expenses paid for that same period to determine expenses incurred in the income statement.

To get the amount of expense incurred the amount prepaid at the end of the year must be

deducted from any amount already paid. For example salary paid for 2015 is GH¢25,000 which

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includes an amount of GH¢6,000 which is paid in advance at the end of the year. To find the

amount of salary expense incurred for the year;

Salary Expense incurred

GH¢

Amount paid 25,000

Less: Amount prepaid (6,000)

Amount to Income Statement 19,000

NB: Any amount prepaid by the business at the end of the year is an asset and will be shown in

the statement of financial position.

Now let us look at a typical income statement for a trading organisation.

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 AGYA APPIAH Enterprise

Income Statement for the year ended 31st December 2015

GH¢ GH¢
Sales XXXXX
Less: Returns inwards (XXX)
Net sales (A) XXXXX
Cost of Goods Sold (B):
Opening inventory XXXX
Add: Purchases XXXX
Carriage inwards XXX
Less: Returns outwards (XXX)
Goods Available XXXX
Less Closing Stock (XXX)
COGS (B) (XXXXX)
Gross profit (A – B) XXXXX
Add: Discount received XXX
Rent income XXX
Commission received XXX
Total income (C) XXXXX
Less Expenses:
General and Administrative Expenses XXXX
Selling and Distribution Expenses XXXX
Financial Charges/Expenses XXXX
Total Expenses (D) (XXXXX)
Net Profit/Loss (C – D) XXXXXX

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Illustration 1

The following is the trial balance of DEECOLOLO as at 30th September, 2015

DR CR
GH¢’ 000 GH¢’ 000
Capital 67,000
Property Plant and Equipment 28,100
Motor vehicle 7,800
Buildings at cost 40,000
Purchases 182,750
Sales 266,800
Inventory in trade 1st Oct. 2014 21,500
5% loan from XYZ Ltd 20,000
Bank Overdraft 500
Intangible Assets (Goodwill) 16,000
Bad debt 940
Provision for doubtful debt 280
Rent received 500
Account Receivables 27,120
Account Payables 18,620
Delivery expenses 1,544
General expenses 8,660
Bank balance 4,016
Utilities 9,500
Wages and salaries 24,850
Rates and insurance 920

Additional information

i. Closing inventory is valued at GH¢15,200

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Required: Prepare the income statement for DEECOLOLO for the year ending 30th September

2015

Suggested Solution

In the Books of DEECOLOLO

Income Statement for the Year Ended 30th September 2015

GH¢ GH¢
Sales 266,800
Less Cost of Sales
Opening inventory 21,500
Add: Purchases 182,750
Goods available for sale 204,250
less Closing inventory (15,200)
Cost of Goods Sold (189,050)
Gross Profit 77,750
Add: Rent Received 500
Total Income 78,250

Less Expenses:
Delivery Expenses 1,544
General Expenses 8,660
Utilities 9,500
Wages and Salary 24,850
Rates and Insurance 920
Bad debt 940
(46,414)
Net Profit 31,836

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Illustration 2

The following is the trial balance of PEECOLO Enterprise as at 30th September, 2015.

DR CR

GH¢’ 000 GH¢’ 000

Capital 66,860

Motor vehicle (cost 9,600) 5,760

Buildings at cost 40,000

Purchases and Sales 182,750 236,800

Inventory in trade 30th sept. 2014 21,500

5% loan from XYZ Ltd 10,000

Overdraft 500

Goodwill 6,000

Bad debt 940

Provision for doubtful debt 280

Rent received 500

Trade receivables and payables 27,120 18,620

Delivery expenses 1,544

General expenses 8,660

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Bank balance 4,016

Utilities 9,500

Wages and salaries 24,850

Rates and insurance 920

Additional notes:

i. Inventory in trade on 30th September, 2015 is 23,100,000

ii. Wages and salaries outstanding at 30th September, 2015 is 400,000

iii. Rates and insurance paid in advance is 124,000

iv. Provision is to be made for depreciation of motor vehicle at the rate of 20% per

annum on cost and buildings at the rate of 10% on cost.

You are required to prepare the income statement for the enterprise for the year ended

September, 2015.

Suggested Solution

In the Books of PEECOLO

Income Statement for the Year Ended 30th September 2015
GH¢'000 GH¢'000
Sales 236,800
Less Cost of Sales:
Opening inventory 21,500
Add: Purchases 182,750
Goods available for sale 204,250
less: Closing inventory (23,100)
Cost of Goods Sold (181,150)
Gross Profit 55,650
Add: Rent Received 500
56,150

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Less Expenses:
Delivery Expenses 1,544
General Expenses 8,660
Utilities 9,500
Wages and Salary (24,850 + 400) 25,250
rate and Insurance (920-124) 796
Bad debt 940
Depreciation:
Building (0.1*40000) 4,000
Motor Vehicle (0.2*9600) 1,920
(52,610)
Net Profit 3,540

The Statement of Financial Position for a Trading Organization

As discussed in the introductory section, the statement of financial position shows the resources

of the organization at a point in time. It is a positional statement that presents the assets,

liabilities and equity of a business at a given time. The statement of financial position is list of

balances arranged according to whether they are assets, liabilities or equity. The statement of

financial position is constructed based on the principle of the accounting equation; the total value

of assets must equal the same of the values of liabilities and equity (Assets = Liabilities +

Equity). Thus, the presentation of the statement of financial position may follow the accounting

equation.

A typical statement of financial position may look like this;

Statement of Financial Position as at 31st December, 2015

Cost Acc. Depn. Net Book Value

Non-Current Assets GH¢ GH¢ GH¢
Buildings xxxxx xxxx Xxxxx

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 Furniture and fittings xxxxx xxxx Xxxxx
xxxxx xxxx Xxxxx
Current Assets
Inventory xxxx
Trade Receivables xxxx
Prepayments xxxx
Bank xxxx
Cash xxxx
Xxxx
Total Assets XXXXX
Current Liabilities
Trade Payables Xxxx
Bank overdraft xxxx
Accrued expenses xxxx
Short term loan xxxx
xxxx
Non-Current Liabilities
Long-term loan xxxx
Debenture xxxx
xxxx
Total Liabilities XXXXX

Equity
Stated capital xxxxx
Add: Net Profit xxxxx
xxxxx
Less: Drawings (xxxxx)
Owner’s Equity XXXXX
XXXXXX

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Illustration 1

The following is the trial balance of PEECOLO as at 30th September, 2015.

DR CR

GH¢’ 000 GH¢’ 000

Capital 66,860

Motor vehicle (cost 9,600) 5,760

Buildings at cost 40,000

Purchases and sales 182,750 236,800

Inventory in trade 30th sept. 2014 21,500

5% loan from XYZ Ltd 10,000

Overdraft 500

Goodwill 6,000

Bad debt 940

Provision for doubtful debt 280

Rent received 500

Trade receivables and payables 27,120 18,620

Delivery expenses 1,544

General expenses 8,660

Bank balance 4,016

Utilities 9,500

Wages and salaries 24,850

Rates and insurance 920

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Additional notes:

i. Inventory in trade on 30th September, 2015 is 23,100,000

ii. Wages and salaries outstanding at 30th September, 2015 is 400,000

iii. Rates and insurance paid in advance is 124,000

iv. Provision is to be made for depreciation of motor vehicle at the rate of 20% per

annum on cost and buildings at the rate of 10% on cost.

You are required to prepare the statement of financial position for the enterprise as at 30th

September 2015.

Suggested Solution

In the Books of PEECOLO

Statement of Financial Position as at 30th September, 2015
Non-Current Assets Cost Depn. NBV
GH¢'000 GH¢'000 GH¢'000
Goodwill 6,000 6,000
Building 40,000 4,000 36,000
Motor Vehicle 9,600 5,760 3,840
55,600 9,760 45,840

Current Assets

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Closing inventory 23,100
Trade receivables (27,120-280) 26,840
Bank 4,016
Rate and Insurance prepaid 124
54,080
Total Assets 99,920

Current Liabilities
Trade payables 18,620
Wages and Salary Owing 400
Overdraft 500
19,520
Long term Liability 10,000
Total liabilities 29,520

Capital 66,860
Add Net Profit 3,540
70,400
99,920

SECTION 2: DEPARTMENTAL ACCOUNT

Introduction

Departmental account is another form of final account. It is usually a suitable system of

accounting for a trading organization that operates sectional stores with each store selling a

particular line of goods. The basic aim of preparing departmental accounts is to determine the

contribution of each department towards the profit of the business. It is usually the case that each

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department may have a manager. Thus to assess the effectiveness of each manager, the

departmental accounts can provide useful information.

For an organization to prepare departmental accounts;

There must be clearly defined departments

It should be possible to allocate cost to each department, and

The must be a basis of apportioning cost.

Objectives

At the end of this section, you should be able to;

• Identify the purpose of keeping departmental records

• Allocate direct expenses and apportion common (indirect) expenses associated with

departments

• Prepare departmental income statements (trading, profit and loss account)

Departmentalization

A departmental organization is a business organization with separate sections that deals in

different products with each section selling a particular product line. Such organizations will

require that separate accounts are kept and prepared for each department. Thus, the account that

is prepared for the individual departments within the organization is known as departmental

account.

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Departmental accounting is thus, a method of accounting, which is designed to ascertain the

trading and operational results of each department of a departmental business organization. It

provides accounting information that is analysed by department, so that each department of the

organization can be treated as a separate unit.

Purpose of preparing departmental accounts

Departmental accounts are prepared to;

• Determine the performance of each department in terms of their contribution to overall

profit

• Assess the operational cost of each department

• Measure the performance of managers and staff of each department and reward them for

their efficiency

• Provide information to support management decisions such as the shutdown of a

particular department

Although a department may be operating at a loss, management may consider to still operate that

department if there is sufficient information to suggest that the department’s existence is critical

for the survival of the other departments. The department may be selling its products at a price

that is not profitable in order to attract new customers or to sell additional products from other

departments to these customers. Such products are known as loss leaders. In such a situation,

management may decide to operate the department even though it is making losses.

Methods and Techniques of Departmental Accounts

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In keeping departmental records may decide to either keep separate set of books for each

department or keep a single set of books for all the departments in a columnar form. Keeping

separate set of books for each department could be quite expensive. We will focus on the usual

presentation of departmental accounts in a columnar form.

Preparing the Departmental Accounts

In preparing the departmental income statement, columns are set out for each department with an

additional column to record the total for all the departments. The sales for each department is

usually known. However, while some expenses may be exclusive to some departments, others

could be common and may require apportionment.

Expenses arising solely from the existence of a department is allocated to that particular

department. These are expenses that which would not be incurred if the department is closed

down. Thus it can be allocated directly to the department. Example salary paid to foreman in

production department, may be charged directly to the production department.

Expenses that are not traceable to a department or which would still be incurred even if the

department is closed down, would have to be apportioned to the various departments on a logical

basis. Example rent of the shop can be apportioned according to the floor area occupied by each

department.

Basis of Apportioning Common Expenses

When an expense is not traceable to a particular department and ought to be shared among

departments, there must be a basis in sharing common costs and expenses among the

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departments that benefited from the expense. Some examples of expenses and their basis is

provided as follows;

Expenses Basis of Apportionment

Salesmen salary, salesmen Commission, Selling Sales of each department

expenses, Discount allowed, Advertisement, Bad debts,

Carriage outward, Provision for doubtful debts,

Showroom rent etc.

Carriage inward Purchases of each department

Rents and rates, Insurance on Floor area of each department

building, air conditioning expenses, Repairs and

maintenance of building

Canteen expenses, Labour welfare Number of employees of each

expenses, Medical expenses department

Depreciation of assets, repair and maintenance of assets, Asset value of each department

Insurance on asset

Lighting Light points, Number of lights

Power Horse Power

Presentation of Departmental Income Statement

As stated earlier, the departmental income statement is set out in columns for each department

with an additional column to record the total for all the departments. A typical departmental

income statement will look like this;

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 DEPT A DEPT B DEPT C TOTAL

¢m ¢m ¢m ¢m

Sales Xxxxx Xxxxx xxxxx xxxxx

Less sales returns (xxx) (xxx) (xxx) (xxx)

Net sales Xxxxx xxxxx xxxxx Xxxxx

Less Cost of Goods Sold:

Opening inventory Xxx xxx xxx xxxx

Purchases Xxx xxx xxx xxxx

Goods available for sale Xxx xxx xxx xxxx

Less closing inventory (xxx) (xxx) (xxx) (xxxx)

B Xxxx xxxx xxxx xxxx

Gross profit C = (A - B) Xxxx xxxx xxxx xxxx

Other income Xx xx xx xxx

Total income Xxxx Xxxx xxxx xxxx

Expenses:

Rent Xxx xxx xxx xxx

Wages and salaries Xxx xxx xxx xxxx

Total expenses Xxxx xxxx xxxx xxxx

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 E

Net Profit F = (D - Xxxx xxxx xxxx xxxx

E)

Inter-Departmental Transfers

Purchases made for one department may be sold to another department. This is done when a

department needs goods that are in inventory at another department. In such situations, the value

of the goods (cost) should be deducted from the purchases of the original purchasing department,

and added to the figure of purchases for the receiving department. Such transfers are expected to

be made at cost not at selling price.

Preparation of the Statement of Financial Position

The departmental organization usually prepare a general statement of financial position for the

entire organization. It should be noted that the departmental accounts are prepared primarily to

determine the profitability of each department. Thus the statement of financial position does not

usually show assets and liabilities split between different departments. The usual statement of

financial position showing the assets, liabilities and equity for the entire organization will be

prepared for the departmental organization. The presentation is the same as illustrated in section

1 of this course.

Illustration 1

Sakora Stores has three departments:

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 Jewellery Hairdressing Clothing

GH¢ GH¢ GH¢

Inventory of goods or materials at 1/01/14 20,000 15,000 30,000

Purchases 110,000 30,000 150,000

Inventory of goods or materials at 31/12/14 30,000 25,000 40,000

Sales and work done 180,000 90,000 270,000

Wages of assistants in each department 28,000 50,000 60,000

The following expenses cannot be traced to any particular product:

GH¢

Rent 8,200

Administration expenses 48,000

Air conditioning expenses 6,000

General expenses 2,400

It is decided to apportion the cost of rent together with air conditioning and lighting in

accordance with the floor space occupied by each department. These were taken up in the ratios

of one-fifth, half and three-tenths respectively. Administration expenses and general expenses

are to be split in the ratio of sales and work done.

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Required: Prepare the departmental income statement of Sakora Stores for the year ended

31/12/2014.

Suggested Solution

In the books of Sakora Stores

Departmental Income Statement for the year ended 31/12/2014

Jewellery Hairdressing Clothing TOTAL

GH¢ GH¢ GH¢ GH¢ GH¢ GH¢ GH¢

Sales 180 90 270 540

less: Cost of Sales

Opening inventory 20 15 30 65

Add: Purchases 110 30 150 290

Goods Available for sale 130 45 180 355

Less Closing inventory 30 100 25 20 40 140 260

Gross Profit 80 70 130 280

Less expenses

Wages 28 50 60 138

Rent 1.64 4.1 2.46 8.2

Air conditioning Expenses 1.2 3 1.8 6

Administration Expenses 16 8 24 48

General Expenses 0.8 47.64 0.4 65.5 1.2 89.46 202.6

Net Profit 32.36 4.5 40.54 77.4

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All amounts are in GH¢’000

Illustration 2

Peee Ltd. owns a shop that has two departments: Shoes and Footware (A), and Perfume and

Cosmetics (B). For the year ended 31/03/2014, the following balances were extracted from his

books of accounts.

DR GH¢ CR GH¢

Sales: Department A 60,000

Department B 40,000

Inventory at 1/04/2013: Department A 1,000

Department B 800

Purchases: Department A 47,200

Department B 32,800

Salaries: Department A 4,000

Department B 3,000

Wages for shoe packers 600

Rates 420

Insurance of buildings 200

Lighting and heating 480

Repairs of premises 100

i. Inventory at 31/03/2014, were valued at: Department A: 1,200, Department B: 600

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 ii. All common expense incurred by departments A and B should be apportioned in the

ratio 4:1 respectively.

Required: Prepare the departmental income statement for Peee Ltd. for the year ending

31/03/2014.

Suggested Solution

In the Books of Peee Ltd.

Departmental Income Statement for the Year Ended 31/03/2014
Department A Department B TOTAL
GH¢ GH¢ GH¢ GH¢ GH¢
Sales 60,000 40,000 100,000
less: Cost of Sales
Opening inventory 1,000 800 1,800
Add: Purchases 47,200 32,800 80,000
Goods Available for sale 48,200 33,600 81,800
Less: Closing inventory (1,200) (600) (1,800)
Gross Profit 47,000 33,000 80,000
Less Expenses:
Wages 480 120 600
Rate 336 84 420
Insurance 160 40 200
Lighting and heating 384 96 480
Repairs of premises 80 20 100
(1,440) (360) (1,800)
Net Profit 45,560 32,640 78,200

SECTION 3: INTRODUCTION TO PARTNERSHIP ACCOUNTS

Introduction

For a number of reasons, it may be advantageous for two or more individuals to come together to

do business with the aim of making profit for a long-term commitment. Such an arrangement is

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known as a partnership. The people who own a partnership are known as partners. The partners

do not have to be based or work in the same place, though they do in most cases. However, they

maintain one set of accounting records and share profits and losses. Partnership accounts are

prepared to determine the financial performance and position of the partnership business. The

laws of Ghana prescribe that a partnership should have a minimum of two partners and a

maximum of twenty although professional firms such as accountants or solicitors may not have a

maximum number.

Objectives

At the end of this section, you should be able to;

• Define a partnership

• Explain the nature of partnership business

• Describe the main features of partnership agreement and the rules governing partnerships

in Ghana.

• Distinguish between a partnership and other forms of business ownerships

Definition of a Partnership

The Incorporated Private Partnership Act of 1962, Act 152 (IPPA) governs partnerships in

Ghana. The Act defines partnership as “the association of two or more individuals carrying on

business jointly for the purpose of making profits”. However, the maximum number of persons

for the formation of a partnership is twenty (20).

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The Act does not consider the following arrangements as a partnership;

• A company registered under the Companies Act 1963 (Act 179) or any statutory re-

enactment

• A company, body corporate or unincorporated association formed under any other

enactment

• A family ownership or co-ownership of property whether or not the family or co-owners

share any profits made by the use of that property

• The remuneration of a servant or agent of a person engaged in business by a share of

profits of the business shall not necessary make the servant or agent a partner

Differences between a Partnership and Sole Proprietor

PARTNERSHIP SOLE PROPRIETOR

Membership Minimum of two (2) maximum of One (1) person as member
twenty (20) with exception of
professional firms
Profit and Loss Shared by all partners Sole proprietor enjoys all profits and
Sharing bears all losses
Capital Contribution Larger resources from shared Relatively small resources provided
contribution by the sole owner
Decision Making Collectively made by partners with Made by the sole owner who bears
shared risks and responsibility all the risk and responsibility
although decision making could be although decision making could be
slow quick
Final Accounts Income Statement, Profit and Loss Income Statement, Statement of
Appropriation Account, Current Financial Position
Account, Capital Account,

34 | P a g e
 Statement of Financial Position

Legality Regulated by IPPA, 1962 (Act 152) regulated by the Registration of

Business Names Act, 1962 (Act
151)

Differences between a Partnership and Company

PARTNERSHIP COMPANY
Membership Minimum of two (2) Minimum of One (1) person and
maximum of twenty (20) with maximum is fifty (50) for private
exception of professional companies, infinity for public
firms companies
Separate Legal Entity Not a separate legal entity It is a separate legal entity
unless it is incorporated
Liability of Members Unlimited liability Limited to amount of shares or
guarantee respectively held by
members
Separation of Ownership Ownership not entirely Ownership is entirely separate from
From management separate from management management

Legality Regulated by IPPA, 1962 (Act regulated by the Companies Act,

152) 1963 (Act 179)

Nature of Partnership

The partnership which is referred to as the firm (as a corporate body) is distinct from the

partners.

The partnership is formed by formal agreement (partnership agreement).

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The partners are jointly and severally liable. This means;

• The partnership is liable if any individual partner acting in normal course of business

carries out any wrong doing.

• If one partner is sued for wrong doing, the other partners may be sued also.

The liability of the partners is unlimited.

The relationship between partners is a fiduciary one.

Every partner is also an agent of the firm. Thus every partner can bind the firm in an agreement.

A partnership (the firm) cannot carry on business unless it is registered under Act 152. A key

requirement for registration by the Registrar is a copy of the partnership agreement. This

agreement is needed to promote peace and understanding among the partners and formalize their

relationship upon registration.

Contents of the Partnership Agreement

The partnership agreement should include the following particulars among others;

• Name and nature of business of the firm.

• The amount of capital to be contributed and maintained by each partner.

• The rate of interest (if any) to be paid on capital.

• The extent to which drawings are allowed and the rate of interest (if any) to be charged

on drawings.

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 • The remuneration (if any) to be paid to partners for their services

• The ratio in which profits and losses are to be shared.

• Keeping of books and accounts.

• Arrangements for admission of new partners.

Rules in the Absence of Partnership Agreement

Act 152 prescribes that the following arrangements should guide the relationship of the partners

in the absence of a partnership agreement;

• All partners are to share equally in capital, profits and losses.

• No interest is allowed to be charged on capital.

• No remunerations are to be paid to partners.

• Any advance made by a partner in excess of his agreed shared capital will receive an

interest of 5% p.a.

• Every partner may take part in the management of the business of the firm

• No partner shall be entitled to remuneration for acting in the firm’s business

• No person may be introduced as a partner without his consent and the consent of all the

existing partners

• The partnership books and accounts shall be kept at the place of business of the firm

Accounting Requirements of Act 152

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The Act requires that every firm shall, at intervals of not more than 15 months, cause to prepare

financial statements. The books of accounts that is prescribed by law to be prepared by the

partnership are as follows;

• a cash book

• purchases and sales books

• a record of assets, liabilities and capital and current accounts of partners

• the preparation of final accounts;

i. a manufacturing account

ii. a statement of profit and loss

iii. a profit and loss appropriation account

iv. a statement of financial position

38 | P a g e
SECTION 4: PREPARING THE FINAL ACCOUNTS OF A PARTNERSHIP

Introduction

Now that you understand how partnership businesses are organized, this section will introduce

you to the financial statements that are prepared for partnership businesses.

Objectives

At the end of this section, you should be able to;

• Explain the purpose of and be able to prepare a profit and loss appropriation account.

• Prepare current accounts, capital accounts and financial statements of a partnership

The Final Accounts of a Partnership

The final accounts of a partnership is similar to other businesses except that for partnership

businesses, additional accounts such as the profit and loss appropriation account, current

39 | P a g e
accounts and capital accounts are prepared. The income statement and the statement of financial

position are the same for partnerships and other businesses.

The Income Statement

This is prepared to ascertain the profit or loss from the business activity undertaken by the firm.

Only business revenue/income and expenses are presented in the income statement for the

determination of profit or loss. The income statement is prepared the same way as we did for sole

proprietorship in section 1. It has two sections; the trading account section for the determination

of gross profit and the profit and loss section for the determination of net profit. The profit or

loss from the business will have to be shared among the partners in their agreed profit and loss

sharing ratio. This distribution will be done in the profit and loss appropriation account.

The Profit and Loss Appropriation Account

The partnership agreement may make provision for some additions or deductions from the

business profit or loss before the eventual distribution to the partners. These items will become

the elements for the preparation of the profit and loss appropriation account.

The items that usually added to the business profit or loss are;

• Interest on drawings

• Interest on debit current accounts balances

The items that usually subtracted from the business profit or loss are;
40 | P a g e
 • Interest on credit capital accounts balances

• Interest on credit current accounts balances

• Salary to a partner(s) for actively engaging in the management of the business

• Any other payments from profits to partners

The residual amount of profit or loss after the additions and subtractions is then distributed to the

partners according to their agreed profit and loss sharing ratio.

A typical profit and loss appropriation account will look like this;

Profit and Loss Appropriation account for the year ended 31st December, 2015.

GH¢ GH¢

Net Profit/loss from income statement Xxx

Add: Interest on drawings

A xx

B xx Xx

Interest on current accounts

B (DR) Xx

Xxx

Less: Interest on capital

A xx

B xx (xx)

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 Interest on current accounts

A (CR) (xx)

Partner’s salary: B (xx)

Profit to be shared xxx

Share of profit

A Xxx

B Xxx

Xxx

The Capital Accounts of Partners

The capital account of the partners is used to record the capital contributions of the individual

partners. It is credited with contributions from partners and debited with withdrawals from

capital by partners. The firm can choose to have either a fixed capital account or a fluctuating

capital account.

A fixed capital account records only capital increases and decreases. It records only capital

introduced and additions, and capital withdrawals. Thus it takes care of capital transactions only.

Where a fixed capital account is kept, then a separate current account must also be kept.

The current account records items of recurring nature which relate to the partner such as

drawings, interest on drawings and capital, interest on partners loan, salaries to a partner. The

balance on the current account will represent undrawn or withdrawn profits. A credit balance

will be undrawn profits while a debit balance is withdrawn profits (drawings in excess of the

profits to which the partner is entitled).

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A fluctuating capital account records all resource flow, to and from the partners. Thus all

transactions relating partners are recorded in the capital account. That is, both capital

transactions and recurring transactions.

It should be noted that the fixed capital account and the current accounts are preferred.

A typical fixed capital account in columnar form will look like this;

Details A B Details A B

GH¢ GH¢ GH¢ GH¢

Balance b/d xxxx Xxxx

Balance c/d Xxxx Xxxx xxxx Xxxx

Cash

Xxxx xxxx xxxx Xxxx

Balance b/d xxxx Xxxx

A typical Current Account in columnar form will look like this;

Details/Particulars A B Details/Particulars A B

GH¢ GH¢ GH¢ GH¢

Balance b/d - xx Balance b/d xx -

Interest on drawings Xx xx Interest on capital xx Xx

Drawings (cash/goods) Xx xx Interest on current a/c xx -

Partners salaries xx Xx

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 Share of profit xx Xx

Balance c/d - xx Balance c/d xx -

xx xx xx Xx

Balance b/d xx Balance b/d - Xx

The Statement of Financial Position

The statement of financial position for a partnership is the same for other businesses except that

the financed by section or the equity section appears a bit different. The equity is represented by

the balances on the capital accounts and the current accounts. Remember that any addition of

profits and subtraction of drawings will have been effected in the current accounts already so

will not appear at the equity section of the statement of financial position again. The equity

section is illustrated below;

Financed By:

Capital Account:

A xxxx

B xxxx xxxx

Current Account:

A xxxx

B xxxx xxxx

Xxxx

Illustration 1

44 | P a g e
 GHC GHC
Capital Accounts:
Johnson 4,000
Selina 2,500
Current Accounts:
Johnson 1,000
Selina 500
Cash Drawings
Johnson 800
Selina 600
Freehold Buildings 5100
Motor Vehicles 1,260
Plant & Machinery 1,000
Stock at 1st Jan 2011 3,600
Purchases 25,700
Sales 38,610
Debtors 3,960
Creditors 3,670
Wages & Salaries 4,140
Motor Vehicles 1,480
General Trade Expenses 1,994
Rates & Insurance 964
Cash & Bank 782
Loan – Selina 1,000
Provision for doubtful debts 100
51,380 51,380
You are also provided with the following information:

a. Stock at December 31st 2011 was GHC 4,100

b. Provision is to be made for depreciation as follows;

45 | P a g e
 Motor Vehicle – 25%

Freehold Buildings -5%

Plant & Machinery – 10%

c. The provision for doubtful debt is to be increased to GHC125

d. Selina is to be paid a salary of GHC500 for the year

e. The partners have agreed to charge an interest of 10% on capital and drawings accounts

Suggested Solution

In the books of Johnson and Selina Partners

Income Statement for the year ended 31/12/2015

GH¢ GH¢

Sales 38,610

Less: Cost of Sales

Opening inventory 3,600

Add: Purchases 25,700

Goods available for sale 29,300

less: Closing inventory (4,100)

COGS (25,200)

Gross profit 13,410

Less Expenses:

46 | P a g e
 Wages and Salaries 4,140

Motor Vehicle Expenses 1,480

General Trade Expenses 1,994

Rates and Insurance 964

Provision for doubtful debt 25

Motor Vehicle (0.25*1260) 315

Building (0.05*5100) 255

Plant and Machinery (0.1*1000) 100

(9,273)

Net Profit 4,137

Profit and Loss Appropriation Account

GH¢ GH¢

Net Profit 4,137

Add: Interest on Drawings

Johnson 80

Selina 60

140

4,277

Less: Interest on Capital

Johnson 400

Selina 250

47 | P a g e
 Salary 500

(1,150)

Undistributed Profit 3,127

Share of Profit

Johnson 1,876.2

Selina 1,250.8

3,127

Current Accounts

Particulars Johnson Selina Particulars Johnson Selina

GH¢ GH¢ GH¢ GH¢

Interest in drawings 80 60 Bal b/d 1,000 500

Cash Drawings 800 600 Interest on capital 400 250

Bal c/d 2,396.2 1,840.8 Salary 500

Share of profit 1,876.2 1,250.8

3,276.2 2,500.8 3,276.2 2,500.8

Bal b/d 2,396.2 1,840.8

48 | P a g e
 Statement of Financial Position as at 31/12/2015

Non-Current Assets Cost Depn. NBV

GH¢ GH¢ GH¢
Motor Vehicle 1,260 315 945
Building 5,100 255 4,845
Plant and Machinery 1,000 100 900
6,690
Current Assets
Inventory 4,100
Trade Receivables 3,835
Cash and Bank 782
8,717
Current Liability
Trade payables (3,670)
Working Capital 5,047
11,737
Financed by:
Capital accounts:
Johnson 4,000
Selina 2,500
6,500
Current accounts:
Johnson 2,396.2
Selina 1,840.8
4,237
Loan 1,000

49 | P a g e
 11,737

Illustration 2

SADA, GYADA and KADA are into a partnership business for the sale of “AKONFEM”

sharing profits/losses in the ratio 1:2:2. The partners have agreed to charge interest on their

capital accounts and drawings account. The trial balance of the partnership as at 31st December

2015 after preparing the income statement for the period was as follows;

Dr Cr

GH¢ GH¢

Capital Accounts:

Sada 25,000

Gyada 22,500

Kada 20,000

Current Accounts:

Sada 4,000

Gyada 1,000

Kada 2,250

Loan: Kada 5,000

Income Statement 5,800

Land and Building 50,000

50 | P a g e
 Office Equipment 3,750

Inventory (31/12/2014) 8,750

Receivables 6,750

Payables 7,200

Cash on hand 5,250

Motor Vehicle 16,250

91,750 91,750

The following entries have not been made in the books;

a. A salary of GH¢750 to be paid to Kada

b. Cash drawings made by partners;

Sada GH¢1,500

Gyada GH¢1,000

Kada GH¢750

c. Interest on drawings;

Sada GH¢162

Gyada GH¢88

Kada GH¢50

d. Interest on capital accounts

Sada GH¢1,250

Gyeda GH¢ 1,120

Kada GH¢ 1,000

Capital accounts are to remain fixed.

51 | P a g e
You are required to prepare the profit and loss appropriation account and the statement of

financial position as at 31/12/2015 for the partnership.

Suggested Solution
In the books of Sada, Gyada and Kada Partners
Profit and Loss Appropriation Account
GH¢ GH¢
Profit as per Income Statement a/c 5,800
Interest on Drawings:
Sada 162
Gyada 88
Kada 50 300
6,100

Interest on Capital:
Sada 1,250
Gyada 1,120
Kada 1,000
Salary 750 (4,120)
Undistributed Profit 1,980
Share of Profit:

52 | P a g e
 Sada 396
Gyada 792
Kada 792
1,980

Current Account
Particulars Sada Gyada Kada Particulars Sada Gyada Kada
GH¢ GH¢ GH¢ GH¢ GH¢ GH¢
Bal b/d 1,000 Bal b/d 4,000 2,250
Cash Drawings 1,500 1,000 750 Interest on Capital 1,250 1,120 1,000
Interest on Drawings 162 88 50 Share of Profit 396 792 792
Salary 750
Bal c/d 3,984 3,992 Bal c/d 176
5,646 2,088 4,792 5,646 2,088 4,792

Statement of Financial Position as at 31/12/2015

Non-current Assets NBV

GH¢ GH¢
Land and Building 50,000
Motor Vehicle 16,250
Office Equipment 3,750
70,000
Current Assets
Inventory 8,750
Receivables 6,750
Cash (5,250-3,250) 2,000
17,500

53 | P a g e
 Current Liability
Payables (7,200)
Working Capital 10,300
80,300
Financed by:
Capital a/c:
Sada 25,000
Gyada 22,500
Kada 20,000
67,500
Current a/c
Sada 3,984
Gyada (176)
Kada 3,992
7,800
Loan 5,000
80,300

SECTION 5: INTRODUCTION TO COMPANY ACCOUNTS

Introduction

This section will introduce how companies are formed in Ghana. Although companies formed in

Ghana may not be practically different from those in other countries, the requirements for the

formation of a company in Ghana is regulated by Ghanaian law.

Objectives

At the end of this section, you should be able to;

• Discuss the characteristics of companies

54 | P a g e
 • Distinguish between private and public companies

• Identify the requirements for the formation of a company in Ghana

Definition of a Company

In Ghana companies are regulated by the Companies Act 1963 (Act 179). The Act defines a

company as “a body corporate formed and registered under this code (Companies Act 1963 - Act

179) or an existing company”. Section 5 of the Act provides that “No company, association or

partnership consisting of more than twenty persons shall be formed for the purpose of carrying

on business … unless it is registered as a company under (the company’s Act) or formed in

pursuance of some other enactment for the time being in force.”

Characteristics of a Company

A company possesses some unique characteristics which distinguishes it from other business

organizations. The characteristics of a company include the following;

• Separate legal Entity

A company formed under the Act assumes the status of natural person with full capacity, except

to the extent that it’s Regulations otherwise provide, for the furtherance of its objects and of any

business carried on by it and authorized by its Regulations. As a body corporate, it exists as a

legal entity separate and distinct from its members.

• Separation of management and ownership

55 | P a g e
Since a company has separate legal personality, the membership of a company can be separate

from the management. The shareholders appoint the Board to oversee the management of the

company.

• Limited liability

The liability of a company may be limited to the amount paid by the shareholders to acquire the

shares of the company for companies limited by shares.

• Perpetual succession

The company is an artificial person, hence it does not die. The death of members of the company

does not affect the existence of the company.

Formation of Companies

In Ghana, the minimum number of persons who can form a company is one. The total number of

members and debenture holders for a private company is restricted to fifty. The Act requires a

minimum number of two (2) directors for the formation of a company. The Act requires that a

company can be duly formed to start operations after meeting the following requirements;

– Compliance with the provisions in the Act and satisfying the registrar general.

– Certificate of Incorporation issued to the Promoters after meeting the minimum capital

requirement

– Certificate of Commencement of Business issued to start trading.

– Regulations of the company - content includes the name of the company, nature of

business, status, names of first directors and their powers.

56 | P a g e
Types of Companies

An incorporated company may be a company limited by shares, limited by guarantee or an

unlimited liability company.

Company limited by shares

This is a company having the liability of its members limited to the amount, if any, unpaid on the

shares respectively held by them. Usually the last word of the name of the company limited by

shares is “limited”.

Company limited by guarantee

This is a company that has the liability of its members limited to the amounts that the members

undertake to contribute to the assets of the company in the event of it being wound up. The

amount guaranteed is the same for all and is determined by the subscribers to the Memorandum.

Professional associations, clubs and society are usually registered as companies limited by

guarantees.

Unlimited Liability Company

This is a company that has no limit on the liability of its members. That is, the liability of the

members is not limited. Thus, if the assets of the company are insufficient to pay its debt, the

shareholders can be called upon to contribute more than the value of the shares held by them to

pay for the debts.

57 | P a g e
Companies in Ghana could also be either private companies or public companies. The Act

describes a private company as one that;

– restricts the right to transfer its shares.

– the total number of members and debenture holders is restricted to 50, excluding the

bona fide current and former employees.

– prohibits the company from making any invitation to the public to acquire any shares or

debentures of the company.

– prohibits the company from making any invitation to the public to deposit money for

fixed period or payable at call, whether bearing or not bearing interest.

Any other company is deemed as a public company.

Differences between Private Company and Public Company

Characteristics Private Company Public Company

Membership Limited to fifty members The number of members is
excluding existing employees unlimited
and former employees
Transferability of Interest Restrictions on the transfer of No restriction on the transfer
its shares. Share transfer of shares. A shareholder does
requires consent of other not require the consent of other
members members to transfer his shares
Invitation to the Public for Prohibited from inviting the No prohibition on invitation to
shares and debenture public to acquire its shares or the public to acquire shares
debenture and debenture of the company
Publication of Accounts Not required to publish its Required by the Companies
accounts/make public its Act to publish its accounts
accounts

58 | P a g e
Advantages of a Company

• It is easier to raise capital through share issue making availability of more capital an

important advantage of companies

• There can be a formal separation between the business and the members of the company

which may be helpful for the management of the company

• The company can exist for generations

• Companies may enjoy economies of scale due to their larger outputs

Disadvantages of a Company

• Formation of the company may be expensive and cumbersome

• The cost of running companies may also be high compared to other forms of business

organizations

• Decision making may be slow which can cause the business to miss some opportunities

• The interest of members and management may conflict leading to agency problems

• The activities of the company may be restricted by the regulations of the company

59 | P a g e
 SECTION 6: ACCOUNTING FOR THE ISSUE OF EQUITY CAPITAL

(SHARES)

Introduction

Companies require long-term capital in order to operate or run its business. There are two main

sources of long-term capital for companies; equity capital and loan capital. This section focuses

on the process of issuing equity/share capital by companies in Ghana and how it is accounted for.

Objectives

At the end of this section, you should be able to;

• Explain the capital structure of a company

• Explain the differences between the different classes of shares

• Account for the issuance of shares

Financing for Companies

Companies in Ghana can obtain long-term finance from share capital and loan capital. Share

capital refers to the initial contributions by the members while loan capital is obtained from

persons or organizations who are not members of the company. Capital refers to long-term

sources of funds that are available to a company. A company may decide to use either share

capital or loan capital in its financing or a combination of the two in appropriate proportions.

60 | P a g e
At this level of our studies, we will focus on the nature of share capital and how it is accounted

for by companies.

Raising Share Capital

Section 28 of the code (as amended by Act 531, 1997) requires that a minimum capital be raised

by members of a company to give it a commercial breath of life or money to trade with. This

requirement must be met before the Certificate for Commencement of Business is issued. Sale of

share is the basic means of raising funds to run the affairs of the company and this is done

through public invitation through the floatation of shares on the stock exchange, if the company

is a public company, or otherwise if it is a private company.

This involves the flow of financial resources and must be accounted for in the books.

Share capital

This is the initial contributions by the members or shareholders of the company. A share

represents an individual’s interest in a company. Having shares confers some rights on the holder

to participate in some activities of the company and also receive any benefits that are associated

with the share. The level of interest or rights to be exercised by a holder of a share is in

proportion to the number of shares held. The amount paid for the shares is not the basis of

claiming more interest or rights but the number of shares acquired.

Shares can be acquired by shareholders in the form of;

• Cash contributions or

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 • Other form of contribution in kind as me be agreed

Section 42 of the Act provides that “Shares shall be issued for valuable consideration and paid

for in cash, except otherwise agreed”.

Value of shares in Ghana

Section 40 of the Act provides that “All shares created after the commencement of the Act shall

be shares of no par value”. Thus, in Ghana, shares do not have a fixed amount or price attached

to it upon its creation, hence, shares can neither be issued at a premium nor discount. The amount

to be paid for the shares represents the exchange value at the time of issue, which is decided by

the board of directors taking the market conditions into consideration.

In other countries such as the United Kingdom, shares have a fixed amount or price attached to it

upon its creation. When the shares are issued at a price more than the par value/the nominal

value determined upon its creation, the extra value (the excess amount over the par value) is the

premium. In a situation where the shares are issued at a price lower than the par value, the

difference is the discount. However issues of discounts and premiums from the issue of shares

will not arise in Ghana since shares in Ghana do not have par value.

Classifications of Share Capital

• Authorized capital

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This is the amount of capital stated in the company’s regulations. It is the maximum amount of

capital that the regulations of the company will allow to be issued. The amount can be increased

by way of a resolution by the shareholders to amend the regulations of the company.

• Issued capital

This is the portion of the authorized capital that has been issued or offered to the public for

subscription.

• Called up capital

This is the portion of the issued capital that has been called-up by the company for the

shareholders/subscribers to make payment.

• Uncalled capital

This is the amount of the subscribed capital that has not been called up. It is the portion of the

issued capital which the company has not demanded payment for.

• Paid up capital/stated capital

This is the portion of the share capital that has been paid for by subscribers.

• Unissued capital

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This is the amount of the authorized capital which the company has reserved for issue in the

future.

Types of shares

There are two broad categories of shares. Each type of share has its associated rights as well as

risk levels attached to it. The shares issued by a company could be ordinary shares (common

shares/stock) or preference shares.

• Ordinary shares/Common shares (stock)

Holders of ordinary shares are the risk bearers of the company. Thus, they have the right to

participate in the residual profits of the company after all other parties have been paid. Holders

of ordinary shares only receive dividends when they are declared and the amount in the income

surplus is sufficient to pay the dividends. The shares are not entitled to any fixed dividend

payment. Ordinary shareholders have voting rights and are considered the real risk bearers of the

company since they can lose their entire capital when there is a business failure. They are the last

to be paid in the distribution of profits (dividends) and capital in the case of a winding up.

• Preference shares

Holders of preference shares bear less risk than ordinary shareholders. They are entitled to a

fixed amount of dividend from profits before ordinary shareholders are considered. They are

given the preference in the distribution of profits (dividends) and capital before other

shareholders. Preference shareholders are not entitled to any right to participate beyond the

amount specified that is associated with the shares. There could be different classes of preference

64 | P a g e
shares which may have some unique features. Examples are cumulative preference shares, non-

cumulative preference shares, participating preference shares, redeemable preference shares.

Forms of Issuing Shares

The shares of a company may be issued to the public or existing shareholders through the

following means;

• Initial Public Offer

This involves the sale of shares by a private company for the first time to the public. Private

companies that want to become public companies can invite the public to acquire its shares.

• Private Placement

This involves the sale of shares by the company to private investors without the use of public

market exchanges. In this form of share issue, an invitation is not made to the public. Rather

private and institutional investors such as banks, mutual funds, insurance companies and pension

funds are chosen to acquire the shares of the company.

• Capitalization/Bonus/Scrip Issue

This involves the issuing of shares to existing shareholders as fully paid since the monies in a

company’s reserve is converted into capital and then distributed to shareholders as new shares in

proportion to their existing shareholdings. It is effected by transfer from the income surplus

account to the sated capital account. Originally, shareholders will be entitled to the distributions

65 | P a g e
from the income surplus account as dividend. However, the amount is used to pay for the

additional shares issued to them.

• Rights Issue

This involves issuing shares to existing shareholders in proportion to their current shareholding,

respecting their pre-emption rights and usually at a lower price than the current share price of the

company. In a rights issue, the shareholders are expected to pay for the shares in cash or other

form as agreed. However, shareholders who are not interested may waive their pre-emption

rights and allow other individuals to acquire the shares.

Process for the Public Issue of Shares

When a company as satisfied all the requirements for the issuance of its shares to the public, the

following procedure will be used in making the share issue;

1. Invitation to the Public to apply for shares

The public is invited to make offers for the shares of the company through circulation of

prospectus and advertisement in the mass media, which gives the conditions of the offer.

2. Application

Application for the shares of a company involves an offer from the public to the company

accompanied by cash from the public. The offer from the public will states the number of shares

desired by the applicants. It should be noted that an application remains an offer to buy shares in

the company until the company accepts or rejects this offer. Applicants cannot refer to

themselves as shareholders at this stage.

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 3. Allotment of shares

This involves the acceptance or rejection of the offers from the applicants by the company. It is

the process of allocating shares to applicants. The company may accept entirely the offer of an

applicant (full allotment), Reject entirely the offer of an applicant or accept a part of the offer

from the applicant (partial allotment).

4. Calls for arrears on share values

This involved the demand for subsequent payment on the value from applicants who were

allotted shares (shareholders). The call may divided into a number of calls for part payments

until the full value of the shares have been paid for.

5. Forfeiture of shares

Shareholders who are unable to make the subsequent payments on the value of the shares upon

call may forfeit their shares if the directors by resolution decide after several attempts to get the

shareholder to make the payments. Shares that are forfeited goes back to the company as treasury

shares which will be re-issued at a future date.

Accounting for the Issuance of Shares

In accounting for the issuance of shares, it is important to determine whether the payment for the

value of the shares will be made in installments or the entire value will be paid upon application.

67 | P a g e
It should be noted that so far in Ghana all the shares issued on the stock market had been paid in

full upon application only, and not as stated above.

Accounting for Shares Payable by Installments

Accounting for shares payable by installments will follow the procedure outlined for the public

issue of shares. Thus the stages involved are;

• Invitation to the Public to apply for shares

No accounting entries are passed when an invitation is made to the public to make on offer for

the shares of the company.

• Application (offer from the public to the company accompanied by cash from the

public)

At the application stage, the company becomes aware of the total number of shares the public

want to acquire. The number of shares in issue may be more (under-subscription) or less (over-

subscription) the number applied for. Where there is over-subscription, the company will not be

able to give each applicant the number applied for. In such situations, the company may deal

with the applications by allotting shares to successful applicant based on a criteria. The accounts

necessary at this stage are the Application account and the Bank account.

Allotment of shares (acceptance or rejection by the company)

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After receiving the applications, the company may decide to deal with any over-subscriptions in

order to have the required number of shares in issue available for successful applicants by way

of;

• Full acceptance for some applicants

• Total rejection of application for not meeting certain requirements and return the money

for some applicants and;

• Partial rejection or partial acceptance with or without return of the money for the rejected

portion.

At this stage all fully successful applicants or partially successful applicant may receive a

number of shares allocated to them. This is the stage that an applicant becomes a shareholder.

The accounts necessary at this stage are the Allotment account and the Bank account.

Calls for arrears on share values

At this stage the company asks a successful applicants to whom shares have been allotted, to

make payment of money for any outstanding balance on the shares. Shareholders who are unable

to make the payments at the call stage may lose the share allotted to them (Forfeiture of shares).

The accounts necessary at this stage are the Calls account and the Bank account.

Re-issue of forfeited of shares

Where shares have been forfeited, the shares becomes the property of the company and is kept as

treasury shares which can be re-issued. The share deals account is used in accounting for

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transactions involving treasury shares. The accounts necessary at this stage are the share deals

account and the Bank account.

If there is no over-subscription at the end of the issue, the balances in the Application, Allotment

and Calls account are transferred to the Stated Capital account. Note that the share deals account

is not closed off. The balance is shown in the statement of financial position as part of

shareholders equity.

Summary of accounts needed for recording transactions on the issue of shares

Application account

Allotment account

Calls account

Bank account

Stated capital account

Share deals account

Summary of Accounting Entries

Application Stage

• When cash/cheque is received on application

Dr. Bank/cash Account} with cash received

Cr. Application Account}

With monies received on application

• When consideration other than cash is received

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 Dr The relevant asset account

Cr Application account

With the agreed value of the consideration received

• Refund of money for rejected applications

Dr Application Account

Cr Bank/Cash account

With the amount received on applications in respect of total applications rejected.

• Retention of excess funds for other stages (partly successful applicants)

Dr Application Account

Cr Allotment Account

With amounts received in respect of rejected portions of applications retained for allotment

• Transfer to Stated Capital Account

Dr Application Account

Cr Stated Capital Account

With the total application amount received in respect of shares allotted

Allotment Stage

• On receipt of allotment monies (cash/cheque) due on shares issued

Dr Cash/Bank Account

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 Cr Allotment Account

With monies received on allotment

• Transfer of excess funds to the next stages (Call account)

Dr Allotment account

Cr Call(s) Account

With amounts received in respect of rejected portions of applications

• Transfer to the stated capital

Dr Allotment account

Cr Stated capital account

With the total sum received on allotment.

On Calls stage

• On receipt of cash/cheque

Dr Bank/cash account

Cr Call account

With monies received

• Refund of excess money to applicants, if any, after full payment.

Dr Call account

Cr Bank account

With amounts received in respect of rejected portions of applications

• Transfer to Stated Capital account

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 Dr Call account

Cr Stated capital account

With the total sum received on call

Upon forfeiture of shares; no entry is made

• On Re-issue of forfeited shares

Dr Cash account

Cr Share Deals account

• Capitalization/Bonus issue

Dr Income Surplus account

Cr Stated capital account

Accounting for Shares Payable on Application

When the full value of the shares are paid on upon application, the recording process becomes

simple. All successful applicants are accepted while rejected applicants receive a refund of their

monies.

Summary Accounting Entries

• Receipt of monies on application

Dr Cash/Bank Account

Cr Application account

With the total amount received with applications

• Refunds of reject applications

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 Dr Application account

Cr Cash/Bank account

With amount refunded to rejected applicants

• Transfer to Stated Capital

Dr Application account

Cr Stated Capital account

With amount received for shares issued

Illustration 1

AKONFEM Ltd. is issuing 10,000 shares on the following terms:

On Application GH¢400

Allotment GH¢300

First Call GH¢200

Final Call GH¢100

Applications have been received for 18,000 shares, which they decided to deal with them as

follows:

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 • On 5th March, they decided to reject applications for 3,000 shares and the monies so

received are refunded

• Applications for 6,000 shares were accepted in full and

• Applications for 9,000 shares were accepted pro-rata. Any excess application monies so

received were transferred to allotment and call accounts. Any excess application money

still remaining is to be repaid.

• The allotment monies were due on March 30th 2000. The first call was made on 5th May

2000. The final call was made on 1st June 2000, and on that date an applicant to whom

500 shares have been allotted defaulted. The shares were subsequently forfeited and re-

issued to Opele at GH¢ 600 each payable on application.

Required: Prepare the necessary ledger accounts and show the extract of the Statement of

Financial Position.

Suggested Solution

DESCRIPTION COMPUTATION AMOUNT (GH¢)

APPLICATION

EXPECTED AMOUNT 10,000 * GH¢ 400 4,000,000

AMOUNT RECEIVED 18,000 * GH¢ 400 7,200,000

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EXCESS APPLICATION AMOUNT 3,200,000

REJECTED APPLICATIONS REFUND 3,000 * GH¢ 400 1,200,000

EXCESS APPLICATION REMAINING 2,000,000

ALLOTMENT

EXPECTED AMOUNT 10,000 * GH¢ 300 3,000,000

AMOUNT RECEIVED 6,000 * GH¢ 300 1,800,000

TRANSFER FROM APPLICATION 1,200,000

DESCRIPTION COMPUTATION AMOUNT (GH¢)

FIRST CALL

EXPECTED AMOUNT 10,000 * GH¢ 200 2,000,000

AMOUNT RECEIVED 6,000 * GH¢ 200 1,200,000

TRANSFER FROM APPLICATION 800,000

FINAL CALL

EXPECTED AMOUNT 10,000* GH¢ 100 1,000,000

AMOUNT RECEIVED 9,500* GH¢ 100 950,000

RE-ISSUE

AMOUNT RECEIVED 500* GH¢ 600 300,000

APPLICATION A/C

GH¢ GH¢

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BANK 1,200,000 BANK 7,200,000

ALLOTMENT 1,200,000

FIRST CALL 800,000

STATED CAPITAL 4,000,000

7,200,000 7,200,000

BANK A/C

GH¢ GH¢

APPLICATION 7,200,000 APPLICATION 1,200,000

ALLOTMENT 1,800,000 BAL. C/D 10,250,000

FIRST CALL 1,200,000

FINAL CALL 950,000

SHARE DEALS 300,000

11,450,000 11,450,000

ALLOTMENT A/C

GH¢ GH¢

STATED CAPITAL 3,000,000 BANK 1,800,000

APPLICATION 1,200,000

3,000,000 3,000,000

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 FIRST CALL A/C

GH¢ GH¢

STATED CAPITAL 2,000,000 BANK 1,200,000

APPLICATION 800,000

2,000,000 2,000,000

FINAL CALL A/C

GH¢ GH¢

STATED CAPITAL 950,000 BANK 950,000

950,000 950,000

SHARE DEALS A/C

GH¢ GH¢

BAL. C/D 300,000 BANK 300,000

300,000 300,000

STATED CAPITAL

GH¢ GH¢

BAL. C/D 9,950,000 APPLICATION 4,000,000

ALLOTMENT 3,000,000

FIRST CALL 2,000,000

FINAL CALL 950,000

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 9,950,000 9,950,000

STATEMENT OF FINANCIAL POSITION EXTRACT

ASSETS: GH¢

BANK 10,250,000

FINANCED BY:

STATED CAPITAL 9,950,000

SHARE DEALS A/C 300,000

10,250,000

Components of Shareholders’ Equity

Shareholders equity refers to the total resources owned by the members or owners of the

company. It consists of:

• Stated Capital

This is derived from either the cash or other consideration received through the issue of shares or

transfers made into the stated capital account from the income surplus (capitalization issue)

• Share Deals Account

• Income Surplus

It is made up of the retained earnings of the company over the years. All distributions from

profits are made from this account.

• Capital Surplus

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Usually results from revaluation of non-current assets (appreciation). It is not intended to be

distributed as dividend as they are unrealized surpluses.

Final Accounts of a Company

The final accounts of a company may comprise the basic financial statements which is made up

of;

• The Income statement

• The Income surplus Account

• The Statement of Financial Position

• The Statement of Cash flow

• Notes to the accounts

The preparation of final accounts for a company will be studied in Financial Accounting III.

80 | P a g e
 SECTION 7: SINGLE ENTRY AND INCOMPLETE RECORDS

Introduction

Some organizations may not have laid down procedures and relevant accounting books to keep

the records of the business. An organization that does not follow the double entry principle in

recording their transactions may also be required to determine the performance of their

operations at some time. This section focuses on the methods that can be used to determine the

profitability of organizations operating a single entry system of accounting or has incomplete

accounting records.

Objectives

At the end of this section, you should be able to;

• Identify the importance of keeping records

• Explain how the accounting equation permits the measurement of profit when accounting

records are incomplete.

• Draw up a statement of affairs of a business with single entry and incomplete records.

• Determine profit from incomplete records using opening and closing statement of affairs.

81 | P a g e
 • Draw up a full income statement and statement of financial position from single entry or

incomplete records

Single entry describes a situation where the transactions of a business organization are not

recorded based on the double entry principle of accounting, thus there is no full set of books for

the organization. However, in some situations the organization may fail to record every

transaction which will lead to the records available being incomplete. Thus single entry or

incomplete records within an organization may arise where no records are kept at all by the

organization, single entry records are kept and where records get destroyed.

Importance of Keeping Records

Keeping accounting records are important for some of the following reasons;

• Performance assessment

• Planning and control of operations

• Tax purposes

• Determination of profit/loss

• Requirement for sourcing for funds

• Business Valuations

• Others- extraction of trial balance, identification of errors, misappropriation

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Causes of Incomplete Records/Single Entry

Incomplete records or single entry may arise due to the following;

• The proprietor of the business does not want to keep a full set of accounts

• High rate of illiteracy among owners of small businesses

• Some of the business accounts are accidentally destroyed or lost

• There is no legal requirement

• The cost of a bookkeeper is not justified

• Information for preparation of financial statements can be obtained from other sources

Determination of Profit from Single Entry and Incomplete Records

Every business owner is interested in the performance of the organization. Small businesses that

do not have proper accounting records may have to prepare financial statements at some point or

at least determine their profit or loss for the year. To determine the profit or loss of organizations

using single entry or incomplete records, we will consider two approaches at this level.

Net Assets (Capital) Approach for the determination of profit or loss

This approach is based on the accounting equation. The assumption is that the only way

capital/equity can increase is either by introduction of cash/resources by the owner or making

profit. In addition, capital/equity decreases with withdrawals by the owner or making losses.

Profit or loss is determined using opening and closing capital via the preparation of statement of

affairs.

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The statement of affairs list the assets and liabilities at a given date. Based on the accounting

equation the capital at the beginning and end of the period is determined;

• Accounting equation: Assets – Liabilities = Capital

The difference between the capital at the beginning and at the end represents profit or loss. Profit

is assumed when the capital at the end is greater than the capital at the beginning (growth in

capital). Loss is assumed when the capital at the end is lesser than the capital at the beginning.

Format of Statement of Affairs

Statement of Affairs as at …

Assets:

Non-current assets xx

Current assets xx

xx

Liabilities:

Non-current liabilities xx

Current liabilities xx (xx)

Net Assets (capital) Xx

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In determining profit for the year, there could be withdrawals or additional capital form the

owners within the year. This has an effect on the apparent profit or losses hence has to be

considered.

• Drawings

This has the tendency to reduce the closing capital and hence the profit. If the owner had not

made the drawings, the closing capital would have been higher for a higher profit or lesser losses

to be arrived at. Drawings are either added to “apparent profit” or subtracted from “apparent

losses”.

• Capital Introduced

This has the effect of increasing the closing capital and hence the profit. The closing capital

would be swollen by the additional capital introduced. If the owner had not made the additional

capital contribution, the closing capita would have been lower for a lower profit or higher losses

to be arrived at. It is therefore subtracted from the ‘‘apparent profit” or added to the “apparent

losses”.

Format of Net Assets (Capital) Approach for the Determination of Profit or Loss

Determination of Profit

Closing Capital Xxx

Plus: Drawings Xxx

Xxx

Less: Opening Capital (xxx)

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 Additional Capital (xxx)

Profit /(Loss) xx/(xx)

Summary of Procedure for the Net Assets/Capital Approach

• Determine the opening and closing capital at the beginning and end of the period via

preparation of statement of affairs.

• Trace all withdrawals made by owners for their personal use (drawings).

• Determine whether there have been any injection of additional capital

• Based on the accounting equation, determine the profit or loss.

Illustration 1
Below are the opening and closing balances of Sweet Dreams Enterprise, a trader at the night

market for the year 2014 and 2015:

As at 31.12.2014 As at 31.12.2015

Van - GH¢18,000 Van (net of depreciation) - GH¢15,000

Furniture - GH¢5,400 Furniture (net of depreciation) - GH¢4,800

Trade Receivables - 12,300 Trade Receivables - GH¢18,600

Inventories - GH¢9,000 Inventories - GH¢11,400

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 Cash & Bank - GH¢15,000 Cash & Bank - GH¢23,400

Trade Payables - GH¢3,600 Trade Payables - GH¢5,400

Loan from Kaya - GH¢10,500 Loan from Kaya - GH¢6,000

Drawings - GH¢15,600

Madam Abowoso the owner of sweet dreams Enterprise wants to determine the amount of profit

or loss she made in 2015.

Suggested Solution
In the Books of Sweet Dreams Enterprise
Statement of Affairs as at 31/12/2014
Assets: GH¢ GH¢
Van 18,000
Furniture 5,400
Trade Receivables 12,300
Inventories 9,000
Cash and Bank 15,000
Total Assets 59,700

Liabilities:
Trade payables 3,600
Loan (Kaya) 10,500
14,100
Opening Net Assets (Capital) 45,600

Statement of Affairs as at 31/12/2015

GH¢ GH¢

Assets:

Van 15,000

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 Furniture 4,800

Trade Receivables 18,600

Inventories 11,400

Cash and Bank 23,400

Total Assets 73,200

Liabilities:

Trade Payables 5,400

Loan from Kaya 6,000

(11,400)

Closing Net Assets (Capital) 61,800

Statement of Profit for the Year Ended 31/12/2015

GH¢

Closing Capital 61,800

Add: Drawings 15,600

77,400

Less: Opening Capital (45,600)

Profit 31,800

Cash Book (Income) Approach for the Determination of Profit or Loss

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This approach requires that elements of the financial statements are determined via series of

adjusting entries. In this approach, a full income statement and statement of financial position are

prepared from the incomplete records provided. It is mostly used when a cashbook could be

drawn up, opening and closing balances are available and expenses incurred and revenue earned

could be derived.

Missing Figures in the Cash Book

When the cash book is prepared, there could be a missing figure to be determined. This is

because the opening and closing cash balance would be known. Any missing figure on a side of

the cash book needed to make the balances on both sides to agree, could be drawings or cash

received or cash paid.

Where the missing amount is in respect of payments (receipts side of the cash book more than

the payments side), then it is normal to assume that the missing figure is drawings or cash paid.

Where the payments side of the cash book is more than the receipts side, it is likely that the

missing figure is cash receipts from customers.

It should be noted that for bank related transactions a copy of all transactions can always be

obtained from the bank.

Procedure for the Income Approach

• Compute the opening capital (using the statement of affairs template)

• Prepare your cash account to find missing figures such as drawings etc.

• Ascertain credit sales (using trade receivables control account)

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 Total Receivables Control Account

Dr GH ¢ GH ¢

Cr

Balance b/fwd xxx Discount allowed xxx

Dishonoured cheque xxx Cash/bank-debtors xxx

Bad debts written off xxx

Credit Sales(diff.) xxxx Balance c/fwd xxx

Xxxx Xxxx

If there are cash sales, find total sales by adding the cash sales to credit sales

• Ascertain credit purchase (using trade payables control account)

Total Payables Control Account

Dr GH ¢ GH ¢

Cr

Discount received xxx Balance b/fwd xxx

Cash paid to trade payables xxx Refund from trade payables xxx

Cheque paid to suppliers xxx

Balance c/d xxx Credit Purchases (diff) xxx

Xxxx Xxxx

If there are cash purchases, find total purchases by adding cash purchases to credit

purchases.

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 • Ascertain the expenses chargeable to the profit and loss account by making adjustments

for accruals and prepayments.

Prepayments

Expense A/c

GH¢ GH¢

Bal. b/d (prepayment beg.) xxxx Income Statement (difference) xxxx

Cash Book (amount paid) xxxxx Bal c/d (prepayment end) Xxxx

xxxxxx Xxxxxx

The prepayment at the end will be shown under current assets in the statement of financial

position

Accrual

Expense A/c

GH¢ GH¢

Cash Book (amount paid) xxxx Bal. b/d (Owings beg.) xxxx

Bal c/d (Owings end) xxxx Income Statement (difference) xxxx

xxxxxx xxxxxx

The owing at the end will be shown as current liability in the statement of financial position

• Prepare Income Statements

91 | P a g e
 • Prepare Statement of Financial Position

Illustration 1

As a student of accounting, you have been contacted by Alhaji Imoro, owner of Dogo Yaro

Enterprise, a sole proprietorship dealing in ‘fula’ ‘wagashi’ and ‘pinkaso’ at Zongo to help

prepare his business’ final account for the year ending 31/12/2015. Alhaji Imoro has admitted

that he does not keep full set of accounting books. After a thorough check on his books you have

obtained the following information about his business:

a. No record of sales has been kept (most of which is usually on credit). A payment of

GH¢61,500 (GH¢48,000 by cheque) has been received from a customer for credit sale

earlier.

b. A total of GH¢31,600 was paid to suppliers during the period by cheque.

c. Expenses paid during the period (by cheque): rent GH¢3,800; general expenses GH¢310;

rent (by cash) GH¢400

d. Alhaji Imoro took GH¢250 on a weekly basis as drawings.

Additional information on Dogo Yaro Enterprise are as follows:

31.12.2014 31.12.2015

GH¢ GH¢

Trade receivables 5,500 6,600

Trade payables 1,600 2,600

Rent owing - 350

Bank 5,650 17,940

Cash 320 420

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 Inventories 6,360 6,800

Dogo Yaro Enterprise’s only non-current asset was some fixtures valued at 31/12/2014 at

GH¢3,300. This asset is depreciated annually at 10%.

You are required to;

Prepare an income statement for the year ending December 2015 and a statement of financial

position as at that date for Dogo Yaro Enterprise.

Suggested Solution

Compute the opening capital (using the statement of affairs template)

In the Books of Dogo Yaro Enterprise

Statement of Affairs as at 1/1/2015

Assets: GH¢
Fixtures 3,300
Inventories 6,360
Trade receivables 5,500
Cash 320
Bank 5,650
21,130

Liabilities:
Trade payables (1,600)
Opening Capital 19,530

Prepare your cash account to find missing figures such as drawings;

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 Cash Book
GH¢ GH¢
Bal b/d 5,650 Suppliers 31,600
Cash 320 Rent (Cheque) 3,800
Sales: Cheque 48,000 Rent (Cash) 400
Cash 13,500 General expenses 310
Drawings 13,000
Bal c/d Bank 17,940
Cash 420
67,470 67,470

Ascertain credit sales (using trade receivables control account)

Receivables/Sales Ledger Control

GH¢ GH¢

Bal b/d 5,500 Receipts from debtors 61,500

Credit sales 62,600

Bal c/d 6,600

68,100 68,100

Ascertain credit purchase (using trade payables control account)

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 Payables/Purchases Ledger Control

GH¢ GH¢

Bal b/d 31,600 Bal b/d 1,600

Credit purchases 32,600

Bal c/d 2,600

34,200 34,200

Ascertain the expenses chargeable to the profit and loss account by making adjustments for

accruals and prepayments.

Rent A/c

GH¢ GH¢

Cash 4,220 Income Statement 4,570

Bal c/d (Owings end) 350

4,570 4,570

Prepare Income Statements

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 Income Statement for the year ended 31/12/2015

GH¢ GH¢

Sales 62,600

Less: Cost of Goods:

Opening inventory 6,360

Purchases 32,600

Goods available 38,960

Closing inventory (6,800)

(32,160)

Gross profit 30,440

Less: expenses

Rent 4,550

General Expenses 310

Depreciation of fixtures 330

(5,190)

Net Profit 25,250

Prepare Statement of Financial Position

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 Statement of Financial Position as at 31/12/2015

Cost Dep NBV

GH¢ GH¢ GH¢
Non-current Assets:
Fixtures 3,300 330 2,970

Current Assets:
Inventories 6,800
Trade receivables 6,600
Bank 17,940
Cash 420
31,760
Current Liability:
Trade payables 2,600
rent owing 350
(2,950)
Working Capital 28,810
Net Assets 31,780
Financed by:
Capital 19,530
Profit 25,250
Less: Drawings (13,000)
31,780

SECTION 8: ACCOUNTS OF NON-PROFIT MAKING ORGANIZATIONS

Introduction

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The main purpose of non-profit making organization is to achieve other objectives other than

generate profit from their operations. These organizations may exist to provide some services to

members of the organization. Examples are charities, clubs, associations, professional bodies etc.

Rather than preparing income statements, such organizations provide a summary of their cash

transactions and their performance is indicated by how they use revenues generated and the

resources they have available at the end of the period.

Objectives

At the end of this section, you should be able to;

• Explain the main differences between financial statements of NPO’s and profit making

organisations.

• Prepare receipts and payments accounts, the income and expenditure accounts and the

statement of financial position of NPO’s

• Calculate profits/losses for special entities of NPOs

• Make appropriate entries regarding subscriptions, life membership accounts etc.

Accounts of Non- Profit Making Organizations

The main financial statements of Non- profit making organizations are;

• Receipts and Payments account

• Income and Expenditure account &

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 • Statement of Financial Position

Receipts and Payments Account

This account is the summary of the Cashbook for the accounting period. It records all the cash or

cheque receipts and payments for the period. If the organization does not have other assets, apart

from cash, and liabilities as well and does not intend showing the income and expense

differently, it will be enough to account for all financial transactions that have taken place in the

period in the receipts and payments account.

Format of Receipts and Payments Account

Receipts GH¢ Payments GH¢

Cash/Bank balance b/d Xxxx Barmen’s wages Xxxx

Members’ dues Xxxx Clubhouse expenses Xxxx

Donations received Xxxx Honorarium Xxxx

Bar takings Xxxx Utilities Xxxx

Rent received Xxxx Donation paid Xxxx

Cash/Bank balance c/d Xxxx

Xxxxx Xxxxx

Income and Expenditure Account

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In a profit oriented organization, this would be the Income statement. The Income and

expenditure account is prepared using the same principles for the income statement. Only

revenue receipts and revenue expenditures are considered in the Income and Expenditure

account. Capital receipts and expenditures go into the statement of financial position. It

summarizes the various income and expenses of the organization for the period just as the

income statement does for profit oriented organizations. It assesses the growth or otherwise in

the organizations “capital” termed as the Accumulated Fund. The only difference between the

income and expenditure account and the income statement for profit oriented organizations will

be the terminologies.

Differences in Terminologies

Profit-oriented organization Non-profit-oriented organization

Income Statement (Trading, profit and loss Income and expenditure account

account)

Net profit Excess of Income over Expenditure (surplus)

Net loss Excess of expenditure over income (deficit)

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Format of Income & Expenditure Account

GH¢ GH¢

Incomes:

Subscription xxx

Bar profit etc. xxx xx

Expenditure

Stationery xxx

Donations etc. xxx Xx

Excess of income over expenditure ( or vice versa) Xxx

Differences between Receipts & Payments and Income & Expenditure Account

Receipts and Payments Income and Expenditure

It records both capital and revenue It records only revenue expenditure, capital
expenditure expenditure goes to the statement of financial
position
It has an opening balance It does not have opening balance
This is the cash book of the organization This is the “income statement” of the
organization
It records all cash receipts and payments It records only incomes and expenses relating to
irrespective of the period to which they the period under consideration.
relate.
Difference is the cash/bank balance at a Difference is the excess of income/expense over
time expense/income. (i.e. surplus or deficit)

It is a real account It is a nominal account

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The Statement of Financial Position

The non-profit making organization also prepares a statement of financial position which is made

up of the assets, liabilities and the balance on the accumulated fund at the end of the period. This

is not different from the statement of financial position prepared for profit oriented organization

just that the equity/capital of non-profit oriented organizations is termed as the “Accumulated

Fund”.

The accumulated fund is the difference between the assets and liabilities of the non-profit

oriented organization;

Accumulated Fund = Assets – Liabilities

The accumulated fund at the beginning of the year is determined by drawing up a statement of

affairs which lists the assets and liabilities of the organization at the beginning of the period. The

difference between the assets and liabilities gives the opening accumulated fund.

Sources of Finance for NPOs

Non-profit making organizations may be financed through the following;

• Membership dues

• Annual subscriptions

• Fund raising activities

• Special fund raising programs-Dinner dance

• Donations

• Trading activities of special entities as supplement, e.g. running a bar/restaurant

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In preparing the income and expenditure account for the organization, the sources of finance has

to be considered. At this level, the key items of interest would be the following;

• Annual Subscription

This is an amount of money contributed and received from members of the association on annual

basis.

• Life Membership Dues

This is an amount that is paid to enjoy privileges of membership of the organization for one’s

lifetime.

• Donations

This is any contribution received by the organization. It could be in cash or in kind such as an

asset donated to it.

• Entrance Fees

This is an amount of money normally paid by first timers in order to be accepted in the

organization.

In determining the revenue and expenses for the period for inclusion in the income and

expenditure account, it should be noted that the accrual/matching concept should be considered.

Thus only revenues and expenses related to the period should be included in the Income and

Expenditure account. Thus any prepayments or accruals have to be dealt with in order to

determine the amount to be included in the income and expenditure account.

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In respect of the annual subscriptions,

1. Subscription owing at the beginning of the year are not part of the income for the year,

though may be received in the current year, but owing at the end is and must be added to

amount received for the year as they have been earned just they are yet to be received.

The receivables on subscriptions go into the statement of financial position as current

assets.

2. Prepaid subscriptions at the beginning of the year are part of income for the

current year but prepayments at end of the year do not form part of the current year’s income

but the following year(s). The prepayments at the end go into the statement of financial position

as current liabilities.

Annual Subscription Account

GH¢ GH¢

Balance b/d (owing at beg.) Xxxx Balance b/d (prepaid at beg) xxxx

Income and Expenditure (diff) Xxxx Receipts and Payments(cash xxxx

received)

Balance c/d (prepayment at end) Xxxx Balance c/d (owing at end) xxxx

Xxxxx Xxxxx

Trading Activities of Non-profit Making Organizations

Sometimes, some non-profit making organizations may engage in profit-making activities to

supplement their incomes. These activities include, the operations of a bar/restaurants. In such

instances, a trading account must be prepared to determine profit or loss made on those activities

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which is then shown as income in the Income and Expenditure Account. The preparation of the

bar trading account follows the principles studied for preparing the trading section of an income

statement.

Format of Bar Trading Account

GH¢

Sales xxxx

Less cost of sales:

Opening bar inventory Xxx

Add purchases Xxx

Xxxx

Less closing bar inventory (xxx)

xxxx

Gross profit xxxx

Less:

Barman's salaries Xxx

Commissions Xxx

(xxxx)

Net profit to I&E account Xxxxx

Summary of Procedure to Prepare Final Accounts for a Non-profit Making Organization

• Prepare receipts and payments account, if not given

• Prepare subscription and other income accounts to determine incomes earned.

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 • Prepare expense accounts to determine the amount incurred.

• Prepare special purpose profit and loss account to arrive at the profit/loss to be transferred

to the income and expenditure account.

• Use opening balances to determine the Accumulated Fund in a Statement of Affairs

• Prepare the Income and Expenditure Account

• Prepare the Statement of Financial Position

Illustration 1

The following information was obtained from the books of Dumso Fun Club for the year ended

30thSeptember, 2014

Receipts GH¢ Payments GH¢

Cash in hand 1/10/13 4,500 Staff salaries 90,000

Balance at bank 1/10/13 48,000 General repairs and Maint. 42,000

Bar Sales 130500 Bar Suppliers 100,500

Members subscriptions 39,600 Equipment 150,000

Donations 204,000 Other expenses 30,000

Easter picnic 102,000 Insurance 6,000

Salary Bar Manager 8,000

Easter picnic expenses 54,000

Cash on hand 30/10/14 8,600

Cash at bank 30/10/14 39,500

528,600 528,600

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The following additional information is also provided:

The net book values of non-current assets as at 30th September, 2013 were as follows:

i. Building GH¢720,000 Equipment GH¢240,000

ii. Provide depreciation on fixed assets as follows:

Building GH¢30,000 Equipment GH¢18,000

iii. Interest of GH¢9,000 has been credited to the account during the year and was not

included in the above receipts.

iv. Other assets and liabilities were as follows:

30th sept, 2013 30th sept, 2014

Accrued Repairs 6,000 -

Creditors (Bar Suppliers) 4,500 5,400

Subscriptions (accrued) 12,500 13,200

Insurance prepaid 1,500 1,800

You are required to prepare:

a. The bar trading, profit &loss account for the year ended 30th Sept 2014

b. Income and expenditure account for the year ended 30th Sept 2014

c. Statement of financial position as at that date.

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Suggested Solution

Prepare receipts and payments account, if not given

Prepare subscription and other income accounts to determine incomes earned.

In the Books of Dumso Fun Club

Subscription A/C

GH¢ GH¢

Bal b/d (Accrued) 12,500 Cash 39,600

Income and Expenditure 40,300 Bal c/d (Accrued) 13,200

52,800 52,800

Prepare expense accounts to determine the amount incurred

General Repairs A/C

GH¢ GH¢

Cash 42,000 Bal b/d 6,000

Income and Expenditure 36,000

42,000 42,000

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 Insurance A/C
GH¢ GH¢

Bal b/d (Prepaid) 1,500 Income and Expenditure 5,700

Cash 6,000 Bal c/d (Prepaid) 1,800

7,500 7,500

Prepare special purpose profit and loss account to arrive at the profit/loss to be transferred to

the income and expenditure account.

Purchases A/C

GH¢ GH¢

Cash 100,500 Bal b/d 4,500

Bal c/d 5,400 Trading a/c 101,400

105,900 105,900

Bar Trading account for the year ended 30/9/2014

GH¢
Bar Sales 130,500
Less: Cost of sales
Purchases (101,400)

Gross profit 29,100

Less: expenses
Salary Bar (8,000)

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Net Profit to Income and Expenditure 21,100

Use opening balances to determine the Accumulated Fund in a Statement of Affairs

Statement of Affairs as at 30/9/2013

GH¢

Assets

Building 720,000

Equipment 240,000

Cash at hand 4,500

Cash in bank 48,000

Subscription accrued 12,500

Insurance prepaid 1,500

1,026,500

Liabilities

Bar Supplies 4,500

Repairs accrued 6,000

10,500

Accumulated fund 1,016,000

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 Prepare the Income and Expenditure Account

Income and Expenditure Account for the Year ended 30/9/2014

Income: GH¢ GH¢

Subscription 40,300

Profit from bar 21,100

Donations 204,000

Easter picnic 102,000

Bank Interest 9,000

376,400

Less: Expenditure

Staff salaries 90,000

General repairs 36,000

Insurance 5,700

Other expenses 30,000

Easter picnic expenses 54,000

Depreciation:

Building 30,000

Equipment 18,000

(263,700)

Excess Income over Expenditure 112,700

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Prepare the Statement of Financial Position

Statement of Financial Position as at 30/9/2014

Non-current Assets: Cost Depn. NBV

GH¢ GH¢ GH¢

Building 720,000 30,000 690,000

Equipment 390,000 18,000 372,000

1,110,000 48,000 1,062,000

Current Assets:

Cash at Hand 8,600

Cash at bank (39500+9000) 48,500

Insurance prepaid 1,800

Subscription accrued 13,200

72,100

Total assets 1,134,100

Current Liability

Bar Supplies (5,400)

Net Assets 1,128,700

Accumulated Fund 1,016,000

Surplus over expenses 112,700

1,128,700

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 SECTION 9: CORRECTION OF ERRORS

Introduction

Errors are often difficult to come identify in the books. However, anytime errors are identified in

the books, they have to be corrected. This section explains on the different types of errors that

can occur in the books of accounts and how they can be corrected.

Objectives

At the end of this section, you should be able to;

• Identify the different types of errors

• Understand the basic process of errors management

• Appreciate the relationship between errors and profits

• Explain the process of rectification of errors after finalisation of accounts

An error is an unintentional mistake and it can occur at any stage of business transaction

processing. When an error is found in the books of an organization, the error must be corrected.

You learnt in ADMN 001 that the uses of the General Journal includes the correction of errors.

Thus correction of any form of error in the books of an organization will be done through the

General Journal.

Two types of errors can broadly be identified as:

• Those that do not affect the agreement of the Trial Balance (the trial balance will still

agree if the error is committed. That is, total debits equal to total credits)

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 • Those that affect the agreement of the trial balance (the trial balance will not agree if the

error is committed. That is, total debits not equal to total credits)

Errors Not Affecting Trial Balance Agreement

These are errors which when committed, the trial balance will still agree because the two-fold

effect would not be affected. That is even though there is an error, for a given credit entry, there

is a corresponding credit entry. This means that irrespective of the error, the trial balance will

still agree.

In correcting these types of errors, the two accounts that were affected by the error must be

identified before proceeding to correct the error.

Examples of such errors are explained as follows;

Error of Omission

This is where a transaction is not recorded in the books of the business at all. It is said that the

transaction is completely omitted from the books. For example if sale of goods worth GH¢8,000

to Kuma, is not recorded in the books, the trial balance will still agree.

Error of Commission

This is where the correct amount is entered in the books but in the wrong account. An example is

Cheque paid to K. Kumah for GH¢500 is debited to K. Kowoah’s account.

Error of Principle

This error occurs when a transaction is entered in the wrong class of account, thereby breaking

the accounting principle. For instance, purchase of a motor van worth GH¢5,000 is debited to

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purchases account. Purchases account is a nominal account while motor van account is a real

account.

Error of Original Entry

This error occurs when the figure used to pass entries in the books is different from the original

correct figure. The original figure as indicated in the source document is wrongly entered in the

books of original entry. Here, the double entry is adhered to but the figure used is wrong.

Example is, Electricity paid GH¢500 was recorded in the books as GH¢1,500 for both the debit

and credit entry.

Complete Reversal of Entry

This error occurs when the correct amounts are used and entered in the correct accounts, but the

entries are posted to the wrong sides of the two accounts involved. That is, the entries are

interchanged. For example, credit sales to Baba is debited to Sales account (instead of credit) and

credited to Baba’s account (instead of debit). Although the entries have been reversed, a credit

entry will have a corresponding debit entry which will make the trial balance agree.

Error of Transposition

This form of error occurs where there is a wrong sequence of the individual characters within a

number when recording. For example, GH¢132 is recorded as GH¢123.

Compensating Errors

This occurs when errors cancel each other out. For example if the sales account was over added

by GH¢100 and the purchases account was also over added by GH¢100, then these two errors

will cancel each other out in the trial balance. Thus the trial balance will still agree since the total

115 | P a g e
of the credit side will be overstated by GH¢100 and the total of the debit side also overstated by

GH¢100.

Note that in correcting the errors not affecting trial balance agreement, the two accounts which

were affected by the error is identified before the correction is made. Correction of such errors

does not involve the suspense account.

Errors Affecting the Trial Balance Agreement

Whenever the trial balance fails to agree, it is an indication that an error has been committed.

Thus a disagreement in the trial balance would require that efforts are made to trace and correct

such errors.

The errors which affect the agreement of the trial balance include the following;

a. Casting Errors

This involves either “over-adding” or “over-subtracting” in an account or book. An example

is when sales are overcast by GH¢500. This will result in an overstatement of credits in the

trial balance.

b. Single Entries

This occurs when one half of the double entry is omitted. That is, when only a debit or credit

entry is made for a transaction. Thus, for a given credit there wouldn’t be a corresponding

debit or vice versa.

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 c. Error in posting

This occurs when an entry is made at the wrong side of an account. This will lead to a

transaction being posted wrongly as two debits or two credits. For example a credit sale to

Kwadjo is credited to the sales account and wrongly credited to Kwadjo’s account instead of

a debit.

d. Omission of a balance

This is where a balance on an account is omitted from the list of balances extracted to the

trial balance.

e. Extraction error

This is where the correct balance is shown in the ledger account but the wrong amount is

extracted to the trial balance or the correct amount is extracted but placed on the wrong side

of the trial balance.

Whenever the trial balance fails to agree and efforts to locate the error have not been fruitful, a

temporary account which is called the “Suspense Account” is introduced to ensure the agreement

of the trial balance pending the location of the error. Thus, in correcting errors that affect the

agreement of the trial balance, the suspense account will be involved.

It should be noted that when the error could not be traced and the Trial Balance was not

agreeing, suspense account stood in for the entry to ensure agreement. Hence, if the error is

identified, then the Suspense Account must leave the books for the right entry to occupy its

rightful place. The suspense account looks like any other T-account;

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 Suspense Account

Difference in trial balance xxx Difference in trial balance xxx

Discount received xxx Purchases xxx

Sales xxx Creditors xxx

Note that two balances cannot happen at the same time but to show that it could be a debit or a

credit balance b/d.

Illustration 1
The book-keeper of a firm, having been unable to make the trial balance agree raised a Suspense

Account in which he entered the difference. The trial balance drawn is as shown below:

Trial balance as at December 2015

DR CR

GH¢ GH¢

Business premises 314,000

Equipment 200,000

Sales 900,000

Purchases 625,000

Inventory 80,000

Trade payables 30,000

Trade receivables 90,000

Bank 180,000

Rates 15,000

General expenses 25,000

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 Capital 600,000

Suspense Account 1,000

1,530,000 1,530,000

Upon examination of the books, the following errors were detected;

1. The purchases journal had been under-cast by GH¢75,000

2. Goods bought from a supplier amounting to GH¢185,000 had been posted to credit of his

account as GH¢158,000

3. A cheques of GH¢160,000 received from a trade receivable and paid to bank has been

dishonoured. Nothing concerning the dishonor has been entered in the books

4. An item of GH¢8,000 entered in the Sales Returns Book had been posted to the debit of

the customer who returned the goods

5. An old equipment sold at GH¢50,000 had been entered in the sales day book, the total of

which has been posted to the Sales Account

6. An amount of GH¢45,000 owing to a supplier had been omitted from the list of sundry

trade payables

7. Discounts amounting to GH¢4,000 allowed to a customer had been duly entered in his

account, but not entered in the nominal ledger

8. An amount of GH¢10,000 being rates treated as prepaid in the previous year, had not

been brought forward as a balance on the Rates Account

You are required to:

• Pass journal entries to correct the errors

• Write up the suspense account

119 | P a g e
Suggested Solution

DR (GH¢) CR (GH¢)

1 Purchases 75,000

Suspense 75,000

With purchase journal under-cast now corrected

2 Suspense 27,000

Creditors 27,000

With wrong post to suppliers account now

corrected

3 Debtor 160,000

Bank 160,000

Dishonor of cheque now corrected

4 Suspense 16,000

Debtor 16,000

With wrong post to customers account now

corrected

5 Sales 50,000

Equipment a/c 50,000

With wrong entry into sales account now corrected

6 Suspense 45,000

Creditors 45,000

With omission form sundry payables now

corrected

7 Discount allowed 4,000

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 Suspense 4,000

With discount allowed not entered in nominal

ledger now corrected

8 Rate 10,000

Suspense 10,000

With prepaid rate not brought forward

now corrected

Suspense A/C

GH¢ GH¢

Bal b/d 1,000

Creditors 45,000 Rate 10,000

Discount

Creditors 27,000 allowed 4,000

16,000 Purchases 75,000

89,000 89,000

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 TRIAL QUESTIONS

Financial Statements of trading organization

PRESENTED BELOW IS THE TRIAL BALANCE OF JUDGE MASEM AS AT 31st

DECEMBER 2015
DR CR
GH¢’000 GH¢’000

Capital 2,462

Drawings 1,000

Trade payable 1,040

20% long term loan 950

Interest on loan 95

Cash-in-hand 5

Bank 265

Trade receivable 2,000

Bad debts 52

Provision for doubtful debts 71

Land and Building at cost 1,200

Equipment and furniture at cost 800

Provision for depreciation: Building 90

Equipment and furniture 240

Investment in 10% Government Bond 500

Investment income Received 25

Sales 10,624

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 Return inwards 710

Carriage outwards 200

General expenses 467

Rent and rates 322

Salaries and wages 2,150

Discount received 110

Discount allowed 56

Inventory as at 1/1/2015 190

Purchases 5,600

15,612 15,612

The following additional information is relevant:

i. The long term loan was contracted at the beginning of 2015 financial year, and the

investment was also made at the beginning of the same year.

i. The inventory in trade were valued at GH¢510,000 at the close of business on

31/12/2015.

iii. Depreciate land and building at 10% on straight line basis and equipment and furniture

at 10% on reducing balance method.

iv. Provision for doubtful debt is to be maintained at 5% of Trade receivables.

v. General expenses of GH¢ 160,000 is accrued and rent and rates of GH¢80,000 is

prepaid at 31/12/15.

You are required to prepare;

a. The Income Statement for the year ended 31/12/2015

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 b. A Statement of Financial Position as at 31/12/2015

Departmental Accounting

Alevi’s Boutique operates a retail store with two departments: Fabrics department and Footwear.

Fabrics are sold on cash basis while footwear is sold on both cash and credit basis. The following

balances have been extracted from her books for the year ended 31st December, 2014.

DR CR

GH¢ GH¢

Capital 756,000

Drawings 142,500

Fixtures and fittings (cost GH¢160000) 120,000

Motor vehicle (bought on 1/1/14) 480,000

Stocks in trade at 01/01/2014 : Fabrics 32,000

Footwear 50,000

Purchases: Fabrics 450,000

Footwear 830,000

Sales: Fabrics 600,000

Footwear 1,200,000

Debtors and creditors 46,500 750,000

Salaries and wages 315,000

Rent and rates 32,500

Motor vehicles expenses 185,000

Electricity 600,000

Cash 22,500

124 | P a g e
 3,306,000 3,306,000

Additional information:

ii. Provision for doubtful debts should be credited at 10% of debtors;

iii. Stocks at 31/12/14 were: Fabrics GH¢96000,Footwear GH¢130000;

iv. Fixtures & fittings are be depreciated at 10% on cost and Motor vehicle at 20% on cost.

The floor area occupied by the fabrics is 12m and that of the footwear is 18m;

v. Expenses are to be allocated between the department on the following bases:

Expenses Bases

Rent and rates; Electricity Floor Area

Salaries and wages Turnover

Motor vehicle expense, Depreciation of Fixed Assets Equally

You are required to prepare:

a. Income statement in columnar form for each department for the year ended 31/12/14;

b. Statement of financial position for the whole business as at 31/12/14

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 Partnership Accounts

Valen and Eraz are partners in trade sharing profits and losses in the ratio of 3:2. The trial

balance of their firm at 31st December, 2015 is given below:

GH¢ GH¢
Capital Account: Valen 16,400
Eraz 13,200
Drawings: Valen 3,600
Eraz 2,400
Provision for doubtful debts (31/12/14) 480
Purchases 101,640
Turnover 131,860
Computers at Cost 11,600
Fittings at Cost 2,400
Provision for depreciation:
Computers 5,920
Fittings 1,140
Inventory (31/12/2014) 17,360
Cash balance 40
Office expenses 6,400
Vehicle expenses 3,960
Cost of motor car (02/01/2015) 1,600
Trade receivables 12,200
Trade Payables 4,200
Bank balance 540
Wages 7,360
Insurance 620
Discount Allowed 2,560

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 173,740 173,740

Additional Information:

1) Inventories as at 31st December 2015 was valued at GH¢26,380

2) Depreciation is charged on the written down value at 10% per annum for fittings, and

20% per annum for Computers and motor car. Valen is to bear personally GH¢400 of the

vehicle expenses and half of the depreciation charge on the motor car.

3) The partners are entitled to an interest on capital at 10% per annum.

4) Bad debts of GH¢200 are to be written off, and a provision for doubtful debts to be

adjusted to two and half percent of the remaining balance.

Required: Prepare income statement, appropriation account and the statement of financial

position as at 31st December 2015.

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 Company Accounts

ONE LUV CO. LTD. was incorporated with 20,000 authorized ordinary shares of no par

value; 10,000 of which were issued and fully paid for as at 1st January. The stated capital of

the company at that date was GHC 17,250,000

The company subsequently invited application for 7,500 ordinary shares at GHC 3,000 per

share, payable as follows;

On Application August 1st 2014 GHC 2,000 per share

Allotment August 31st 2014 GHC 500 per share

Calls Oct 11th 2014 GHC 500 per share

Applications were received for 9,000 shares and on August 8th it was decided to deal with them

as follows:

a. To reject applications of 500 shares and monies relating to these shares immediately

refunded

b. To give full allotment to applicants of 1,000 shares

c. To allot the remainder on pro-rata and

d. To utilize excess application monies in part payment of amounts due on allotment

An applicant to whom 100 shares had been allotted failed to pay the calls monies and these

shares were forfeited on October 31st 2014. Half of these shares were re-issued and fully paid

at GHC 2,100 per share.

a. Show the necessary ledger accounts

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b. Show the extract of the Statement of Financial Position

Single Entry and Incomplete Records

Ama is sole trader who does not keep a full double entry system of bookkeeping. However, she

has been able to furnish you with the following information on July 31st 2013.

31/07/2013 31/07/2012

GH¢ GH¢

Trade receivables 475,600 286,000

Trade payables 527,400 545,000

Travelling and transport expenses owing 213,000 182,000

Inventory 116,310 175,000

Furniture and fittings 893,000 528,000

Delivery van 1,123,000 1,300,000

Prepaid advertising 92,000 87,200

Rent owing 588,000 411,600

Ama pays all cash received into the bank and all payments are made by cheque. Below is a

summary of the business bank transactions:

GH¢

Bank balance (31/07/12) 187,500

Cash from customers 872,000

Sales 1,900,000

2,959,500

Payment to creditors 874,850

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 Rent 590,000

Advertising 165,000

Travelling and transport expense 237,000

Furniture and fittings 460,000

Salaries and wages 218,000

Distribution expense 72,000

Bank charges 28,000

Balance at bank (31/7/13) 314,650

2,959,500

Discount of GH¢43,100 has been allowed on the receipts from customers and GH¢58,900 has

been deducted from the payments to creditors. Ama charged some of her customers GH¢29,000

for delaying their payments.

You are required to prepare:

a) Income statement for the year ended 31/7/13

b) A statement of financial position as at that date.

Mr. Foli runs an angling shop in Takoradi. He spends most of his time fishing and has

consequently kept no accounting records in the year ended 31 August 2012. He knows that he

has taken GH¢6,800 cash out of his business during the year plus bait which cost the business

GH¢250. He can also remember putting his GH¢20,000 winnings from Superbet Lottery into the

business in March.

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Mr. Foli knows that at the previous year end his business had assets valued at GH¢40,000 and

liabilities of GH¢14,600. He has also calculated that the assets of the business at 31/08/12 are

worth GH¢56,000 and the liabilities, GH¢18,750.

Required: Determine the profit or loss for Mr. Foli’s business for the year under review.

Non-profit making organizations

Josephine, the treasurer of Peace Fun Club, has prepared a summary of the club’s receipts and

payments for the year ended 31 December 2014, based on the club’s bank account. She wishes to

present an income and expenditure account and a statement of financial position to the members

and had asked for your assistance in preparing them.

The receipts and payments summary is as follows:

Receipts GH¢ Payments GH¢

Balance at 1 Jan. 2014 660 Rent of field and pavilion 6,000

Subscriptions 13,720 Wages of groundsman 10,800

Sales of sports equipment (Note 1) 23,440 Purchase of sports equipment for sale 18,260

Receipts for hire of sports Purchase of sports equipment for hire

equipment 8,640 to member 11,200

Sale of tickets for annual dinner 2,800 Costs for annual dinner 1,680

Income from investments 410 Sundry expenses 3,140

Balance at 31 Dec. 2014 1,410

51,080 51,080

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Note 1: All sales of sports equipment were from the stock of items for sale. There were no sales

of items held for hire to members.

The following additional information is also available:

At 01/01/2014 At 31/12/2014

GH¢ GH¢

Sports equipment for hire (net book value) 18,600 to be ascertained

(Accumulated depreciation as at 1 Jan. 2014 was GH¢6,200.

The club charges depreciation at 25% (reducing balance

basis) with a full year's charge in the year of acquisition.)

Sports equipment - stock of new items for sale 4,950 5,180

Subscriptions paid in advance 450 800

Subscriptions in arrears (all received shortly after the end of

the year for which they were due) 290 360

Investments at cost 10,500 10,500

Amounts due for payment for sundry expenses 450 580

Required:

(a) Prepare the club’s income and expenditure account for the year ended 2014, showing the

surplus or deficit arising on sales of sports equipment and on the annual dinner, and a

statement of financial position as at that date. Ignore taxation.

(b) Provide an explanation, for presentation to the club, of why an income and expenditure

account and a statement of financial position can give them a better understanding of the

club’s affairs than a receipts and payments account.

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 Correction of errors

The trial balance of ASEM MPE NIPA Ltd. for the year ended 31st December 2015 failed to

agree and the difference of GH¢81,000 was debited to the suspense account. Accounts were

prepared on the basis of the trial balance and showed a net profit of GH¢2,000,000.

The following errors were subsequently discovered:

a. The sales daybook had been overcast by GH¢9,000

b. The discount allowed of GH¢61,200 correctly entered in the sales ledger had been posted

to the wrong side of the discount allowed account in the nominal ledger

c. Cheques received from Ibrahim a customer amounting to GH¢18,200 was entered

correctly in the cash book but has been credited to the personal account as GH¢12,800

d. A credit purchase of GH¢27,000 from Ruth has not been entered on her personal account

in the bought ledger.

e. A credit note of GH¢12,600 for goods returned by Korkor a customer had been entered

twice in the return inward book and credited twice to the personal account of the

customer

f. A payment of GH¢39,000 on 30th Dec for repairs of motor vehicle had been debited to

the motor vehicle account.

g. Part of the company’s premises had been let as from 1st December at a monthly rent of

GH¢6,000 on 1ST Dec. The tenant paid three months’ rent in advance. This amount had

been entered in the cash book but no other entry had been made in any other account.

You are required to:

a. Write up journal entries to correct the above errors

b. Show the suspense account

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c. Calculate the amount of the net profit after correcting the above errors

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