SCHEME OF WORK
WEEK TOPIC:
THEME 4: CLASSES OF ACCOUNTS AND FINAL ACCOUNT OF A SOLE TRADER (PROPRIETOR)
1. Revision of last term’s work
2. Classification of Accounts: (a) Personal account(b) Impersonal account;Real and Nominal.
3. Trial Balance and Correction of Errors: (a) The need for Trial balance(b) Preparation of Trial balance(c) Correction of errors
4. Trading Account: (a) Trading Account Terminologies: (i) Opening Stock (ii) Closing(iii.) Purchases(iv.) Cost of goods sold(v)Return inward and outward (vi) Carriage inward.
5. Trading Account:(vii) Gross profit/ Loss (viii) Cost of goods available for sale (ix) cost of goods sold(b) Trading account preparation
6. Profit and Loss Account: (a) Profit and Loss Account (i) Identification of profit and loss account items(ii) format or layout
7. Profit and Loss Account: (b) Profit and Loss Account(i) Preparation (ii) Determination of net profit or loss
8. Adjustment in profit and loss Account: (a) Bad debts and provision for bad debts (distinction, posting of entries into ledger and final account.
9. Adjustment in profit and loss account: (b) Prepayment and accruals – Distinction between prepayment and accruals.
10. Revision
2ND TERM
WEEK 1
TOPIC: Classification of Accounts
CONTENTS: (i) Personal Accounts
(ii) Impersonal Accounts
Sub-topic 1: PERSONAL ACCOUNTS
These are accounts for the names of individuals, firm and business enterprises. Examples: Stephen Account, Rhoda Nigeria Ltd Account, Debtors and Creditors Accounts, Capital Account, Drawing Account, Loan Account, Bank Account, etc.
ILLUSTRATION: Mr. Andrew is given a cheque of N5, 000.00 by L. Deborah.
Two Accounts are opened:
Debit: Mr. Andrew’s Bank Account that receives
Credit: L. Deborah Account that gives out.
EVALUATION:
1. What is a personal Account?
2. Give examples of personal Accounts
3. Olotu return goods to us, which is one is a personal Account amount the two?
4. Mention the personal Account in this statement, ‘’Dapo lent us cash’’
5. Bought goods on credit from Ayo. Open the two Accounts and identify the Personal Account.
Sub- topic 2: Impersonal Accounts
These are accounts for properties, items of expenditure and income. It can be divided into two:
(i) Real Accounts: These are accounts of tangible assets, Physical Assets or properties. On the other way round, they are assets or something we can see, feels touch or move. Examples: motor vehicle, land, cash, furniture, plant and machinery, stock, etc.
(ii) Nominal Accounts: These are accounts in which income and expenditure are recorded. E.g. Rent Account, Discount received, discount allowed, Insurance and Interest account, Sales, Purchases, commission received account, Profit on sales of fixed assets and or investment.
Rules of Double Entry:
a) Personal Account: Dr. Receiver
Cr. Supplier
b) Nominal Account: Dr. Expenses or losses
Cr. Income
EVALUATION:
(i) What is nominal Account?
(ii) Give 5 examples of a nominal Account
(iii) Define Impersonal Account
(iv) Group these Accounts into, Personal, Real and Nominal accounts:
a) David Account
b) Stock
c) Insurance
d) Plant
(v) Which of these is not a Nominal account? Loses, Income, expenses , equipment.
GENERAL EVALUATION:
OBJECTIVE TEST:
1. All of these are personal accounts except?
(a) Lawson (b) Cash (c) OluAbiola Nig. Ltd (d) Debtors (e) Creditors
2. Which of these is true of an account?
(a) It has a record in a double entry system (b) It is a statement of business transactions (c) All entries are maintained on their on their debit and credit sides. (d) It keeps both revenue and expenses (e) All entries are balanced when an account is carried down on either side.
3. Nominal account is naturallycharacterised by all these accounts except?
(a) Losses and gains (b) Discount received account (c) Interest on capital (d) Discount allowed (e) Premises.
4. What is Impersonal Account?
(a) Accounts for properties (b Account for tangible Assets (c) Account for expenditures only (d) Accounts for items of income (e) Accounts for properties, item of expenditure and Income
5. The following are examples of Impersonal Accounts except?
(a) Names of individual, firms, and business enterprises are put as headings in the Accounts. (b) Accounts for assets (c) Accounts for expenses incurred (d) Accounts for income received (e) Accounts for losses and gains e.g. Rent and discount allowed accounts.
ESSAY TEST:
1. Accounts are classified into two, list them
2. With examples, explain what you understand by Impersonal Account.
3. Give 5 examples of Real account.
4. Into how many divisions are Impersonal accounts divided, state them.
5. State the rules of double entry using using Personal and Nominal accounts.
WEEKEND ASSIGNMENT:
Read Essential Financial Accounting for SSS by O. A. Longe et al pp24-25
Pre- Reading Assignment:
Read Trial Balance and Correction of Errors.
WEEK-END ACTIVITIES: (i) State the uses of Trial balance
(ii) State five errors that cannot be disclosed by the Trial Balance.
REFERANCE TEXT: (i) O.A. LongeetalEssential Financial Accounting for SSS 1, TONAD Publishers 4th Edition 2012, pp24-25
(ii) Femi LongeSimplified and Amplified Book Keeping and Accounting for SSS1,2 & 3, Femi Longe Publishers 2012, 3rd Edition, pp26-30.
CONTENTS: (i) Personal Accounts
(ii) Impersonal Accounts
Sub-topic 1: PERSONAL ACCOUNTS
These are accounts for the names of individuals, firm and business enterprises. Examples: Stephen Account, Rhoda Nigeria Ltd Account, Debtors and Creditors Accounts, Capital Account, Drawing Account, Loan Account, Bank Account, etc.
ILLUSTRATION: Mr. Andrew is given a cheque of N5, 000.00 by L. Deborah.
Two Accounts are opened:
Debit: Mr. Andrew’s Bank Account that receives
Credit: L. Deborah Account that gives out.
EVALUATION:
1. What is a personal Account?
2. Give examples of personal Accounts
3. Olotu return goods to us, which is one is a personal Account amount the two?
4. Mention the personal Account in this statement, ‘’Dapo lent us cash’’
5. Bought goods on credit from Ayo. Open the two Accounts and identify the Personal Account.
Sub- topic 2: Impersonal Accounts
These are accounts for properties, items of expenditure and income. It can be divided into two:
(i) Real Accounts: These are accounts of tangible assets, Physical Assets or properties. On the other way round, they are assets or something we can see, feels touch or move. Examples: motor vehicle, land, cash, furniture, plant and machinery, stock, etc.
(ii) Nominal Accounts: These are accounts in which income and expenditure are recorded. E.g. Rent Account, Discount received, discount allowed, Insurance and Interest account, Sales, Purchases, commission received account, Profit on sales of fixed assets and or investment.
Rules of Double Entry:
a) Personal Account: Dr. Receiver
Cr. Supplier
b) Nominal Account: Dr. Expenses or losses
Cr. Income
EVALUATION:
(i) What is nominal Account?
(ii) Give 5 examples of a nominal Account
(iii) Define Impersonal Account
(iv) Group these Accounts into, Personal, Real and Nominal accounts:
a) David Account
b) Stock
c) Insurance
d) Plant
(v) Which of these is not a Nominal account? Loses, Income, expenses , equipment.
GENERAL EVALUATION:
OBJECTIVE TEST:
1. All of these are personal accounts except?
(a) Lawson (b) Cash (c) OluAbiola Nig. Ltd (d) Debtors (e) Creditors
2. Which of these is true of an account?
(a) It has a record in a double entry system (b) It is a statement of business transactions (c) All entries are maintained on their on their debit and credit sides. (d) It keeps both revenue and expenses (e) All entries are balanced when an account is carried down on either side.
3. Nominal account is naturallycharacterised by all these accounts except?
(a) Losses and gains (b) Discount received account (c) Interest on capital (d) Discount allowed (e) Premises.
4. What is Impersonal Account?
(a) Accounts for properties (b Account for tangible Assets (c) Account for expenditures only (d) Accounts for items of income (e) Accounts for properties, item of expenditure and Income
5. The following are examples of Impersonal Accounts except?
(a) Names of individual, firms, and business enterprises are put as headings in the Accounts. (b) Accounts for assets (c) Accounts for expenses incurred (d) Accounts for income received (e) Accounts for losses and gains e.g. Rent and discount allowed accounts.
ESSAY TEST:
1. Accounts are classified into two, list them
2. With examples, explain what you understand by Impersonal Account.
3. Give 5 examples of Real account.
4. Into how many divisions are Impersonal accounts divided, state them.
5. State the rules of double entry using using Personal and Nominal accounts.
WEEKEND ASSIGNMENT:
Read Essential Financial Accounting for SSS by O. A. Longe et al pp24-25
Pre- Reading Assignment:
Read Trial Balance and Correction of Errors.
WEEK-END ACTIVITIES: (i) State the uses of Trial balance
(ii) State five errors that cannot be disclosed by the Trial Balance.
REFERANCE TEXT: (i) O.A. LongeetalEssential Financial Accounting for SSS 1, TONAD Publishers 4th Edition 2012, pp24-25
(ii) Femi LongeSimplified and Amplified Book Keeping and Accounting for SSS1,2 & 3, Femi Longe Publishers 2012, 3rd Edition, pp26-30.
WEEK 2
TOPIC: TRIAL BALANCE AND CORRECTION OF ERRORS
CONTENTS: i) The need for Trial Balance
ii) Preparation of Trial Balance
iii) Correction of Errors
SUB-TOPIC: The Need for Trial Balance
DEFINITION: Trial Balance is a statement showing list of balances in a double entry form extracted from the ledgers to test the arithmetical accuracy of the accounts. The totals of the debit and credit must be in agreement.
Nature of Trial Balance:
i) It consists of all ledger balances extracted from the accountingbooks
ii) It is drawn at a particular time.
iii) The credit and debit column total must agree
iv) It must be titled and dated
v) It must be sequentially arranged in the order of credit and debit items
Benefits of Double Entry:
The following are the benefits of Double Entry:
i) It provides complete record of business transactions.
ii) It reduces the risk for fraud and facilitates the correction of errors.
iii) It provides basis for the test of arithmetical accuracy of the accounting records.
iv) It is a means of providing financial information through the preparation of financial reports.
v) It enhances the reliability of accounting information that may be the product of accounting process.
vi) Double entry aids the effective implementation and review of internal control system of an organization.
Types of Trial Balance:
In accounting practice, there are two major types of Trial Balance, namely:
i) Simple Trial Balance
i) Simple Trail Balance is made up of four column spread-sheet, whereby the extracted ledger balances are listed to confirm the arithmetical accuracy of the accounting records.
ii) Extended Trial Balance consists of approximately 11-15 columns spread-sheet whereby the information contains at least:
i) Particulars Column.
ii) Folio Column.
iii) Debit and Credit columns of the original trial balance.
iv) Adjustments of credit and debit items columns.
v) Final trial balance’s credit and debit items columns.
vi) The balance sheet columns etc.
Extended trial balance is prepared with the help of journal entries.
Uses of the Trial Balance:
The main uses of the Trial Balance in accounting process are as follows:
i) To check the arithmetical accuracy of entries in the ledge accounts.
ii) To facilitate easy preparation of final accounts
iii) It can be used as evidence and to confirm that proper records have been kept.
iv) It can be used to prepare accounting schedule of the material items in the trial balance.
v) To detect such errors of posting that can easily be identified by the trial balance.
EVALUATION:
1) What is the Trial Balance?
2) Mention 3 benefits of the Trial Balance in all business transactions.
3) List 2 major types of Trial Balance.
4) How many columns have the Simple Trial Balance?
5) Enumerate 5 major columns in an Extended Trial Balance.
SUB-TOPIC II: Preparation of the Trial Balance:
Rules guiding the preparation of the Trial Balance:
1. All assets must be put on the debit side.
2. All liabilities must be on the credit side.
3. All income or gain must be recorded on the credit side.
4. All expenses must be recorded on the debit side.
ILLUSTRATION 1:
FORMAT OF THE TRIAL BALANCE:
TRIAL BALANCE Dr. Cr.
Capital X
Plant and Machinery X
Free Hold Premises X
Stock X
Purchases X
Sales X
Rent and Rates X
Wages and Salaries X
Advertisement X
Sundry Expenses X
Cash in Hand X
Bank Overdraft X
Debtors
Creditors X
Furniture and Fittings X
Bad debts X
Provision for doubtful debts X
Prov. Depreciation; Furniture and Fittings X
Motor Van X
Carriage Outwards X
Carriage inwards X
Return Inwards X
Lighting X
Telephone X
Discounts Received X
Discounts Allowed X
Drawings X
5% Loan X
Discount received X
XX XX
ILLUSTRATION 2: Mr. Roumen has the following transactions for the month of June 1999.
N
Cash Purchases 3000
Cash Sales 10000
Paid Wages by cash 200
Paid insurance by cash 800
Settled Olu by cash 300
You are required to record the transactions, balance off and prepare a trial balance.
Dr Cash Account Cr
N N
Sales 10000 Purchases 3000
Wages 200
Insurance 800
Olu 300
Balance c/d 5700
10000 10000
Balance b/d 5700
NOTE: The items on the debit side exceed he items on the credit side by N5700.
Therefore in the next accounting period N5700 will be the next debit balance brought down.
Ledger entries:
Dr Sales Account Cr
N N
Bal. c/d 10000 10000
Bal b/d 10000
Dr Purchases Account Cr
N N
Cash 3000 Bal c/d 3000
Bal. b/d 3000
Dr Wages Account Cr
N N
Cash 200 Bal c/d 200
Bal. b/d 200
Dr Cr
N N
Cash 800 Bal c/d 800
Bal. b/d
Dr Olu’s Account Cr
N N
Cash 300 300
Bal. b/d 300
NOTE: After balancing the whole ledger accounts and the balances are brought down, the Trial Balance will now be prepared by following the format drawn before:
Trial Balance Dr. Cr.
Particular N N
Cash 5700
Sales 10000
Purchases 3000
Wages 200
Insurance 800
Olu 300
10000 10000
EVALUATION:
i) List 5 differences between the Trial Balance and the Balance Sheet.
ii) Which side will capital be entered in the Trial Balance?
iii) Which other names are given to Sales Returns and Purchases Returns and where will they be entered in the Trail Balance?
iv) Differentiate between Discount Allowed and Discount Received and show their entries in the Trial Balance.
v) Compare Bad debt and Provision for doubtful Bad debt and illustrate where they will be entered in the Trial Balance.
SUB-TOPIC III: Correction of Errors:
The main purpose of the Trial Balance is to show the arithmetical accuracy of the entries in the ledgers. The two sides, Debit and Credit, must be equal. If the debit
side is not equal with the credit side, there must definitely be an indication of error(s). In some situations, some errors may not be disclosed by the Trial Balance. These errors are referred to as errors that do not affect the agreement of the Trial Balance.
Errors can be referred to simply as mistakes made in the preparation of accounts. Errors can be categorized into two:
1. Errors that will affect the totals of the Trial Balance.
2. Errors that do not affect the totals of the Trial Balance.
PROCEDURES TO BE FOLLOWED WHEN CORRECTING ERRORS:
In order to perfectly correct errors the following procedures must be followed:
a) Commit these to memory:
L Liabilities Credit
A Assets Debit
I Incomes Credit
D Drawing Debit
E Expenses Debit
b) Identification of the types of errors: The type of error must be known.
c) Identification of the two accounts involved: two accounts will be affected by the error; hence, care must be taken to identify them and take them into consideration.
d) Interpretation of errors in the ledger: For proper understanding, the errors must be in shown in the ledgers.
e) Preparation of journal: the errors will be posted to the journal to effect correction.
ERRORS THAT DO NOT AFFECT THE AGREEMENT OF THE TRIAL BALANCE:
Since the trial balance is a test of arithmetical accuracy of the ledger, then, as a matter of fact, it must balance i.e. the debit side must be equal to the credit side. In some situations the trial balance may be balanced but there are some errors which may not be disclosed. These errors are those that do not affect the agreement of the trial balance, namely:
i) ERROR OF OMISSION OF TRANSACTIONS: This is an error whereby a transaction is completely omitted from the books of account i.e. from the debit and credit sides. This error is corrected by entering the omitted amount in the journal and posting in the ordinary way. Example: Purchase of goods from Akano. N720 was completely omitted from the account.
ii) ERROR OF COMMISSION: This is a situation whereby an item of transaction is recorded in a wrong person’s account. It will only affect the names of individuals and not the figure in the trial balance. Example: Good of N230 returned by Ajayi has been entered in Ajala account.
iii) ERROR OF ORIGINAL ENTRY: This is where a wrong amount is entered on the debit and credit sides. Therefore, the original amount must be transposed and passed through the double entry system. Example: Purchase of goods from OlaiyaN290 has been entered in the accounts as N920.
iv) ERROR OF PRINCIPLE: Here wrong classes of accounts are involved. It is and error whereby transactions are entered in a wrong class of accounts. A real account item is entered in a nominal account or vice-versa. Example: Sales of Motor Van N800 had been entered in the sales account.
v) COMPENSATING ERRORS: This occurs when errors of the same amount are posted to the two sides of the ledgers therefore they cancelled out each other. The two sides may be overcast or undercast by the same amount. Example: Sales were overcast by N950 as also were motor expenses.
vi) COMPLETES REVERSAL OF ENTRY: This is when an item is posted to the wrong side of the accounts. An account to be debited is credited and vice-versa. In this type of error the figure will be corrected by multiplying it by two. The amount must cancel the error and then the actual entries. Example: Cash paid to James N1500 was entered on the credit side of his account and debited to cash account.
vii) ERROR OF DUPLICATION: The error takes place when the same transaction is recorded more than once in the books of account. Example: Payment of N320 to Abiodun has been entered twice in the two accounts.
CORRECTION OF ERRORS:
1) ERROR OF OMISSION
Purchases account and Akano account
Demonstration in the ledgers
Dr Purchases A/C Cr
No entry N N
Akano A/C
N N
No entry
CORRECTION OF ERRORS
Dr Purchases A/c - N720
Cr Akano A/c - N720
Dr Purchases A/C Cr
N
Akano 720
DrAkano A/C Cr
N
Purchases 720
Journal
Purchases 720
Akano 720
Correction of omission of Purchases of Goods from Akano
(ii) ERROR OF COMMISSION
Ajayi and Ajala Account
Demonstration in the Ledgers
DrAjayi A/c Cr.
N No entry N
DrAjayi A/c Cr.
N
N Return inwards 230
CORRECTION OF ERRORS
DrAjayi A/c Cr.
N N
230
Dr Cr.
N N
230
Demonstration in the Journal
Journal Dr Cr.
N N
Ajala 230
Ajayi 230
Return inwards entered in wrong A/C corrected
(iii) ERRORS OF ORIGINAL ENTRY
Purchases and Olaiya Account
Demonstration Of Errors
Dr Purchases A/c Cr.
N N
Olaiya (Error) 920
DrOlaiya A/c Cr.
N N
Purchases (error) 920
CORRECTION OF ERRORS (Demonstration in the Ledger)
DrOlaiya A/c Cr.
N N
Purchases 920
Dr Purchases A/c Cr.
N N
Olaiya 920
DEMONSTRATION IN THE JOURNAL (Correction of Errors)
Journal Dr Cr.
N N
Olaiya 920
Purchases 920
(iv) ERROR OF PRINCIPLE
Motor Van and Sales Accounts.
DEMONSTRATION IN THE LEDGERS
Dr Motor Van A/C Cr.
N N
No entry
Dr Sales A/C Cr
N N
800
CORRCTION OF ERRORS (Demonstration in the Ledger)
Dr Sales A/C Cr
N N
800
Dr Motor Van A/C Cr
N N
800
Demonstration of the Journal
A/C Cr
Sales N N
Motor Man 800 800
SALES OF MOTOR VAN ENTERED IN SALE ACCOUNT (Now Corrected)
(v) COMPENSATION ERRORS
Sales account and Motor expenses account
Demonstration of Errors
Dr Sales A/C Cr
N N
Overcast by 950
Dr Motor Expenses A/C Cr
N N
Overcast by 950
CORRECTION OF ERRORS (Demonstration in the Ledger)
Dr. Sales account – N950
Cr. Motor expenses account – N950
Dr Sales A/C Cr
N N
950
Dr Motor Expenses A/C Cr
N N
950
CORRECTION OF ERRORS (Demonstration in the Journal)
Dr Cr
N N
Sales 950
Motor Expenses 950
CORRECTION OF SALES AND MOTOR EXPENSES OVERCASTS
(vi) COMPLETE REVERSAL OF ENTRY
Cash account and James Account
DEMONSTRATION OF ERROR
Dr Cash A/C Cr
N N
James 1,500
Dr James A/C Cr
N N
Cash (error) 1,500
Correction of Errors: Dr James A/C – (N1,500 X 2) = N3,000
Cr. Cash A/C - (N1,500 X 2) =N3,000
Demonstration in the Ledger
Dr Cash A/C Cr
N N
James 3,000
Dr James A/C Cr
N N
3,000
DEMONSTRATION IN THE JOURNAL
Journal Dr Cr
N N
James 3,000
Cash 3,000
Payment of Cash to James Mistakenly reserved now corrected
(vii) ERROR OF DUPLICATION
Abiodun account and cash account
DEMONSTRATION OF ERRORS
DrAbiodun A/C Cr
N N
Cash 800
Cash (error) 300
Dr Cash A/C Cr
N N
Abiodun 320
Abiodun (error) 320
CORRECTION OF ERRORS: Cr. Abiodun’s account – N320
Dr. Cash account - N320
DrAbiodun A/C Cr
N N
Cash 320
Dr Cash A/C Cr
N N
Abiodun 320
DEMONSTRATION OF THE JOURNAL
Journal A/C Cr
N N
Cash 320
Abiodun 320
RECORDING OF A TRANSACTION TWICE IN THE ACCOUNT NOW CORRECTED
EVALUATION
1. What is an error in accounting?
2. Enumerate the error that does not affect the agreement of the trial balance.
3. Write short notes
(i) Error of duplication
(ii) Errors of principle
(iii) Errors of reversal of entries.
4. List 5 procedures for correction of error.
5. Which error in trial balance has its figures multiplied by 2 when errors are being corrected?
GENERAL EVALUATION
OJECTIVE TEST
1. All of these are errors that affect the trial balance disagreement between the totals of the two sides.
(i) Arithmetic errors committed in balancing ledges.
(ii) Listing a credit balance to the debit side of the trial balance.
(iii) Error of principle.
(iv) Under or over statement of opening or closing balance
(v) Error of extracting the wrong figure from the ledger to the trial balance.
2. Which error is a complete omission of transaction?
(a) ERROR OF COMMISION
(b) ERROR OF ORIGINAL ENTRY
(c) ERROR OF COMPENSATION
(d) ERROR OF OMISSION
(e) ERROR OF TRANSPOSITION
(f) ERROR OF REVERSALOF ENTRIES
3. The error of debiting an account which should have credited is know as error of:
(a) REVERSAL OF ENTRY
(b) SUSPENCE ERROR
(c) COMMISION
(d) PRINCIPLE
4. Account are commonly classified into
(a) 4
(b) 2
(c) 6
(d) 11
(e) 5
5. Intangible accounts include the following except
(a) COMMISION RECIVED
(b) PATENT
(c) ROYALTY
(d) TRADEMARK
ESSAY QUESTIONS
1. With the aid of good diagram show the detailed classification of a typical business account.
2. Show the disparity between Real account and Nominal account
3. State the uses of suspense account in errors correction
4. Give two broad classification of errors
5. Building cost and it depreciation could be classified under_______________
WEEK-END ASSIGMENT: Read Financial Accounting I by M.A Adesola et al, pp 133 – 134
PRE-READING ASSIGMENT: Preparation of Financial accounts of sole Trader/Entrepreneur
WEEK-END ACTIVITY: Write out all information needed to affect the entries into a final account.
REFERENCE TEXTS:
(i) M.A Adesola et al, Financial Account for Senior Secondary Schools 1. MELROSE PUBLISHER 1st Edition 2012, pp 99-112
(ii) O.A Longe et al, Essential Financial Accounting for Senior Secondary Schools, TONAD PUBLISHERS 4th Edition 2012, pp 90-92
(iii) Femi Longe, Simplified and Amplified Book Keeping and Accounting For Senior Secondary School 1, 2, 3. LONGE PUBLISHERS 3rd Edition, 2012, pp 89 – 105 pp 134 – 140.
CONTENTS: i) The need for Trial Balance
ii) Preparation of Trial Balance
iii) Correction of Errors
SUB-TOPIC: The Need for Trial Balance
DEFINITION: Trial Balance is a statement showing list of balances in a double entry form extracted from the ledgers to test the arithmetical accuracy of the accounts. The totals of the debit and credit must be in agreement.
Nature of Trial Balance:
i) It consists of all ledger balances extracted from the accountingbooks
ii) It is drawn at a particular time.
iii) The credit and debit column total must agree
iv) It must be titled and dated
v) It must be sequentially arranged in the order of credit and debit items
Benefits of Double Entry:
The following are the benefits of Double Entry:
i) It provides complete record of business transactions.
ii) It reduces the risk for fraud and facilitates the correction of errors.
iii) It provides basis for the test of arithmetical accuracy of the accounting records.
iv) It is a means of providing financial information through the preparation of financial reports.
v) It enhances the reliability of accounting information that may be the product of accounting process.
vi) Double entry aids the effective implementation and review of internal control system of an organization.
Types of Trial Balance:
In accounting practice, there are two major types of Trial Balance, namely:
i) Simple Trial Balance
i) Simple Trail Balance is made up of four column spread-sheet, whereby the extracted ledger balances are listed to confirm the arithmetical accuracy of the accounting records.
ii) Extended Trial Balance consists of approximately 11-15 columns spread-sheet whereby the information contains at least:
i) Particulars Column.
ii) Folio Column.
iii) Debit and Credit columns of the original trial balance.
iv) Adjustments of credit and debit items columns.
v) Final trial balance’s credit and debit items columns.
vi) The balance sheet columns etc.
Extended trial balance is prepared with the help of journal entries.
Uses of the Trial Balance:
The main uses of the Trial Balance in accounting process are as follows:
i) To check the arithmetical accuracy of entries in the ledge accounts.
ii) To facilitate easy preparation of final accounts
iii) It can be used as evidence and to confirm that proper records have been kept.
iv) It can be used to prepare accounting schedule of the material items in the trial balance.
v) To detect such errors of posting that can easily be identified by the trial balance.
EVALUATION:
1) What is the Trial Balance?
2) Mention 3 benefits of the Trial Balance in all business transactions.
3) List 2 major types of Trial Balance.
4) How many columns have the Simple Trial Balance?
5) Enumerate 5 major columns in an Extended Trial Balance.
SUB-TOPIC II: Preparation of the Trial Balance:
Rules guiding the preparation of the Trial Balance:
1. All assets must be put on the debit side.
2. All liabilities must be on the credit side.
3. All income or gain must be recorded on the credit side.
4. All expenses must be recorded on the debit side.
ILLUSTRATION 1:
FORMAT OF THE TRIAL BALANCE:
TRIAL BALANCE Dr. Cr.
Capital X
Plant and Machinery X
Free Hold Premises X
Stock X
Purchases X
Sales X
Rent and Rates X
Wages and Salaries X
Advertisement X
Sundry Expenses X
Cash in Hand X
Bank Overdraft X
Debtors
Creditors X
Furniture and Fittings X
Bad debts X
Provision for doubtful debts X
Prov. Depreciation; Furniture and Fittings X
Motor Van X
Carriage Outwards X
Carriage inwards X
Return Inwards X
Lighting X
Telephone X
Discounts Received X
Discounts Allowed X
Drawings X
5% Loan X
Discount received X
XX XX
ILLUSTRATION 2: Mr. Roumen has the following transactions for the month of June 1999.
N
Cash Purchases 3000
Cash Sales 10000
Paid Wages by cash 200
Paid insurance by cash 800
Settled Olu by cash 300
You are required to record the transactions, balance off and prepare a trial balance.
Dr Cash Account Cr
N N
Sales 10000 Purchases 3000
Wages 200
Insurance 800
Olu 300
Balance c/d 5700
10000 10000
Balance b/d 5700
NOTE: The items on the debit side exceed he items on the credit side by N5700.
Therefore in the next accounting period N5700 will be the next debit balance brought down.
Ledger entries:
Dr Sales Account Cr
N N
Bal. c/d 10000 10000
Bal b/d 10000
Dr Purchases Account Cr
N N
Cash 3000 Bal c/d 3000
Bal. b/d 3000
Dr Wages Account Cr
N N
Cash 200 Bal c/d 200
Bal. b/d 200
Dr Cr
N N
Cash 800 Bal c/d 800
Bal. b/d
Dr Olu’s Account Cr
N N
Cash 300 300
Bal. b/d 300
NOTE: After balancing the whole ledger accounts and the balances are brought down, the Trial Balance will now be prepared by following the format drawn before:
Trial Balance Dr. Cr.
Particular N N
Cash 5700
Sales 10000
Purchases 3000
Wages 200
Insurance 800
Olu 300
10000 10000
EVALUATION:
i) List 5 differences between the Trial Balance and the Balance Sheet.
ii) Which side will capital be entered in the Trial Balance?
iii) Which other names are given to Sales Returns and Purchases Returns and where will they be entered in the Trail Balance?
iv) Differentiate between Discount Allowed and Discount Received and show their entries in the Trial Balance.
v) Compare Bad debt and Provision for doubtful Bad debt and illustrate where they will be entered in the Trial Balance.
SUB-TOPIC III: Correction of Errors:
The main purpose of the Trial Balance is to show the arithmetical accuracy of the entries in the ledgers. The two sides, Debit and Credit, must be equal. If the debit
side is not equal with the credit side, there must definitely be an indication of error(s). In some situations, some errors may not be disclosed by the Trial Balance. These errors are referred to as errors that do not affect the agreement of the Trial Balance.
Errors can be referred to simply as mistakes made in the preparation of accounts. Errors can be categorized into two:
1. Errors that will affect the totals of the Trial Balance.
2. Errors that do not affect the totals of the Trial Balance.
PROCEDURES TO BE FOLLOWED WHEN CORRECTING ERRORS:
In order to perfectly correct errors the following procedures must be followed:
a) Commit these to memory:
L Liabilities Credit
A Assets Debit
I Incomes Credit
D Drawing Debit
E Expenses Debit
b) Identification of the types of errors: The type of error must be known.
c) Identification of the two accounts involved: two accounts will be affected by the error; hence, care must be taken to identify them and take them into consideration.
d) Interpretation of errors in the ledger: For proper understanding, the errors must be in shown in the ledgers.
e) Preparation of journal: the errors will be posted to the journal to effect correction.
ERRORS THAT DO NOT AFFECT THE AGREEMENT OF THE TRIAL BALANCE:
Since the trial balance is a test of arithmetical accuracy of the ledger, then, as a matter of fact, it must balance i.e. the debit side must be equal to the credit side. In some situations the trial balance may be balanced but there are some errors which may not be disclosed. These errors are those that do not affect the agreement of the trial balance, namely:
i) ERROR OF OMISSION OF TRANSACTIONS: This is an error whereby a transaction is completely omitted from the books of account i.e. from the debit and credit sides. This error is corrected by entering the omitted amount in the journal and posting in the ordinary way. Example: Purchase of goods from Akano. N720 was completely omitted from the account.
ii) ERROR OF COMMISSION: This is a situation whereby an item of transaction is recorded in a wrong person’s account. It will only affect the names of individuals and not the figure in the trial balance. Example: Good of N230 returned by Ajayi has been entered in Ajala account.
iii) ERROR OF ORIGINAL ENTRY: This is where a wrong amount is entered on the debit and credit sides. Therefore, the original amount must be transposed and passed through the double entry system. Example: Purchase of goods from OlaiyaN290 has been entered in the accounts as N920.
iv) ERROR OF PRINCIPLE: Here wrong classes of accounts are involved. It is and error whereby transactions are entered in a wrong class of accounts. A real account item is entered in a nominal account or vice-versa. Example: Sales of Motor Van N800 had been entered in the sales account.
v) COMPENSATING ERRORS: This occurs when errors of the same amount are posted to the two sides of the ledgers therefore they cancelled out each other. The two sides may be overcast or undercast by the same amount. Example: Sales were overcast by N950 as also were motor expenses.
vi) COMPLETES REVERSAL OF ENTRY: This is when an item is posted to the wrong side of the accounts. An account to be debited is credited and vice-versa. In this type of error the figure will be corrected by multiplying it by two. The amount must cancel the error and then the actual entries. Example: Cash paid to James N1500 was entered on the credit side of his account and debited to cash account.
vii) ERROR OF DUPLICATION: The error takes place when the same transaction is recorded more than once in the books of account. Example: Payment of N320 to Abiodun has been entered twice in the two accounts.
CORRECTION OF ERRORS:
1) ERROR OF OMISSION
Purchases account and Akano account
Demonstration in the ledgers
Dr Purchases A/C Cr
No entry N N
Akano A/C
N N
No entry
CORRECTION OF ERRORS
Dr Purchases A/c - N720
Cr Akano A/c - N720
Dr Purchases A/C Cr
N
Akano 720
DrAkano A/C Cr
N
Purchases 720
Journal
Purchases 720
Akano 720
Correction of omission of Purchases of Goods from Akano
(ii) ERROR OF COMMISSION
Ajayi and Ajala Account
Demonstration in the Ledgers
DrAjayi A/c Cr.
N No entry N
DrAjayi A/c Cr.
N
N Return inwards 230
CORRECTION OF ERRORS
DrAjayi A/c Cr.
N N
230
Dr Cr.
N N
230
Demonstration in the Journal
Journal Dr Cr.
N N
Ajala 230
Ajayi 230
Return inwards entered in wrong A/C corrected
(iii) ERRORS OF ORIGINAL ENTRY
Purchases and Olaiya Account
Demonstration Of Errors
Dr Purchases A/c Cr.
N N
Olaiya (Error) 920
DrOlaiya A/c Cr.
N N
Purchases (error) 920
CORRECTION OF ERRORS (Demonstration in the Ledger)
DrOlaiya A/c Cr.
N N
Purchases 920
Dr Purchases A/c Cr.
N N
Olaiya 920
DEMONSTRATION IN THE JOURNAL (Correction of Errors)
Journal Dr Cr.
N N
Olaiya 920
Purchases 920
(iv) ERROR OF PRINCIPLE
Motor Van and Sales Accounts.
DEMONSTRATION IN THE LEDGERS
Dr Motor Van A/C Cr.
N N
No entry
Dr Sales A/C Cr
N N
800
CORRCTION OF ERRORS (Demonstration in the Ledger)
Dr Sales A/C Cr
N N
800
Dr Motor Van A/C Cr
N N
800
Demonstration of the Journal
A/C Cr
Sales N N
Motor Man 800 800
SALES OF MOTOR VAN ENTERED IN SALE ACCOUNT (Now Corrected)
(v) COMPENSATION ERRORS
Sales account and Motor expenses account
Demonstration of Errors
Dr Sales A/C Cr
N N
Overcast by 950
Dr Motor Expenses A/C Cr
N N
Overcast by 950
CORRECTION OF ERRORS (Demonstration in the Ledger)
Dr. Sales account – N950
Cr. Motor expenses account – N950
Dr Sales A/C Cr
N N
950
Dr Motor Expenses A/C Cr
N N
950
CORRECTION OF ERRORS (Demonstration in the Journal)
Dr Cr
N N
Sales 950
Motor Expenses 950
CORRECTION OF SALES AND MOTOR EXPENSES OVERCASTS
(vi) COMPLETE REVERSAL OF ENTRY
Cash account and James Account
DEMONSTRATION OF ERROR
Dr Cash A/C Cr
N N
James 1,500
Dr James A/C Cr
N N
Cash (error) 1,500
Correction of Errors: Dr James A/C – (N1,500 X 2) = N3,000
Cr. Cash A/C - (N1,500 X 2) =N3,000
Demonstration in the Ledger
Dr Cash A/C Cr
N N
James 3,000
Dr James A/C Cr
N N
3,000
DEMONSTRATION IN THE JOURNAL
Journal Dr Cr
N N
James 3,000
Cash 3,000
Payment of Cash to James Mistakenly reserved now corrected
(vii) ERROR OF DUPLICATION
Abiodun account and cash account
DEMONSTRATION OF ERRORS
DrAbiodun A/C Cr
N N
Cash 800
Cash (error) 300
Dr Cash A/C Cr
N N
Abiodun 320
Abiodun (error) 320
CORRECTION OF ERRORS: Cr. Abiodun’s account – N320
Dr. Cash account - N320
DrAbiodun A/C Cr
N N
Cash 320
Dr Cash A/C Cr
N N
Abiodun 320
DEMONSTRATION OF THE JOURNAL
Journal A/C Cr
N N
Cash 320
Abiodun 320
RECORDING OF A TRANSACTION TWICE IN THE ACCOUNT NOW CORRECTED
EVALUATION
1. What is an error in accounting?
2. Enumerate the error that does not affect the agreement of the trial balance.
3. Write short notes
(i) Error of duplication
(ii) Errors of principle
(iii) Errors of reversal of entries.
4. List 5 procedures for correction of error.
5. Which error in trial balance has its figures multiplied by 2 when errors are being corrected?
GENERAL EVALUATION
OJECTIVE TEST
1. All of these are errors that affect the trial balance disagreement between the totals of the two sides.
(i) Arithmetic errors committed in balancing ledges.
(ii) Listing a credit balance to the debit side of the trial balance.
(iii) Error of principle.
(iv) Under or over statement of opening or closing balance
(v) Error of extracting the wrong figure from the ledger to the trial balance.
2. Which error is a complete omission of transaction?
(a) ERROR OF COMMISION
(b) ERROR OF ORIGINAL ENTRY
(c) ERROR OF COMPENSATION
(d) ERROR OF OMISSION
(e) ERROR OF TRANSPOSITION
(f) ERROR OF REVERSALOF ENTRIES
3. The error of debiting an account which should have credited is know as error of:
(a) REVERSAL OF ENTRY
(b) SUSPENCE ERROR
(c) COMMISION
(d) PRINCIPLE
4. Account are commonly classified into
(a) 4
(b) 2
(c) 6
(d) 11
(e) 5
5. Intangible accounts include the following except
(a) COMMISION RECIVED
(b) PATENT
(c) ROYALTY
(d) TRADEMARK
ESSAY QUESTIONS
1. With the aid of good diagram show the detailed classification of a typical business account.
2. Show the disparity between Real account and Nominal account
3. State the uses of suspense account in errors correction
4. Give two broad classification of errors
5. Building cost and it depreciation could be classified under_______________
WEEK-END ASSIGMENT: Read Financial Accounting I by M.A Adesola et al, pp 133 – 134
PRE-READING ASSIGMENT: Preparation of Financial accounts of sole Trader/Entrepreneur
WEEK-END ACTIVITY: Write out all information needed to affect the entries into a final account.
REFERENCE TEXTS:
(i) M.A Adesola et al, Financial Account for Senior Secondary Schools 1. MELROSE PUBLISHER 1st Edition 2012, pp 99-112
(ii) O.A Longe et al, Essential Financial Accounting for Senior Secondary Schools, TONAD PUBLISHERS 4th Edition 2012, pp 90-92
(iii) Femi Longe, Simplified and Amplified Book Keeping and Accounting For Senior Secondary School 1, 2, 3. LONGE PUBLISHERS 3rd Edition, 2012, pp 89 – 105 pp 134 – 140.
WEEK 3
TOPIC: TRADING ACCOUNT TERMINOLOGIES
CONTENTS: DEFINITON OF TERMS: TRADING ACCOUNT OPENING AND CLOSING STOCKS.
ii) Purchases, Cost of goods sold, Return Inwards and Return Outwards
iii) Carriage Inwards and Carriage Outwards
SUB: TOPIC 1:
Trading Account is an account prepared to disclose the Gross Profit. Gross profit is the profit on the activities of buying and selling of goods. It is the excess of revenue over cost of goods sold. The trading account contains:
On the debit side:
i) Opening stock
ii) Add purchases
iii) Add carriage Inwards
iv) Less Return Outwards/Purchases Returns
v) Less stock at close
Equal to cost of Goods sold.
On the Credit Side
i) Sales
ii) Carriage Outwards
iii) Less Return Inwards
iv) From Credit side less Debit side.
Equal to Gross Profit OR
From Debit side Less Credit side.
Equal Gross Loss.
NOTE: The balance of the trading account is transferred to Profit and Loss account. The objective of a trading account is to ascertain either the gross profit or loss resulting from business transactions. The Trading Account has both:
i) T – method and
ii) Vertical method
It has its HEADING as: ‘Trading Account for the year ended....
TERMINOLOGIES
i) Opening Stock: This is the stock of goods available for sale at the beginning of the year or any accounting period.
ii) Closing Stock: This is the stock of goods at the end of an accounting period. Closing stock has a direct relationship with the profit while opening stock has an inverse relationship with profit.
EVALUATION OF STOCK
Stock can be valued at:
(i) Cost (ii) Lower of cost or net realizable value. (iii) Lower of cost, net realizable value and replacement price.
EVALUATION.
I) What is opening stock
II) Explain Closing stock
III) Name the accounting information or terms that are included under Trading Account.
IV) Explain carriage inward in a simple statement.
SUB-TOPIC II: Purchases Cost of goods sold, Return Inwards, and Return Outwards.
i) Purchases: Purchases can be defined as the goods bought for resale. It is also the total credit and cash purchases. Purchases do not include the purchases of fixed assets. Only items bought for resale are debited to the trading account as purchase and those items bought for usage in the business are debited as assets.
ii) Cost of goods sold: This is the cost of goods actually sold. When the closing stock is deducted from the cost of goods available for sale the remaining balance is the cost of goods sold.
iii) Return Inwards: Return Inward is the term used to describe goods returned to the seller or supplier as a result of damage to goods or result for the reason of not the goods requested for by the buyer. Return Inward is deducted from sales. It is also referred to as SALES RETURNS.
iv) Return Outwards: Return outwards is the term used to describe the goods that the buyer returns or sends back to the supplier if either the goods are damaged or for wrong consignment. Return outwards is deducted from purchases.
EVALUATION:
(1) Define Return Inwards.
(2) What is the other name for Return Inwards and Return Outwards?
(3) Give the other name to Return Outwards.
(4) Why are Return Inwards deducted from sales?
(5) Explain the reason Return Outwards are deducted from purchases
SUB-TOPIC III: Carriage Inwards and Carriage Outwards.
(i) Carriage Inwards: This the cost of transportation charged on goods purchased. It is the cost implication in order to bring the goods purchased to specific locations or destinations. On the debit side of a Trading Account it increases the cost of goods bought during the year of business transaction.
(ii) Carriage Outwards: This is the term used to describe cost of transporting goods to the customers. It is also called carriage on sales. It is deducted as an expense in Profit and Loss Account.
EVALUATION:
1) Name the 2 types of carriages in transporting goods.
2) What is Carriage Inwards
3) Explain Carriage Outward.
4) Which other name is give to Carriage Inward.
GENERAL EVALUATION: ESSAY TEST
1) Differentiate between Sales and Purchases in Final Account.
2) Explain the disparity between sales of Fixed Assets and Sales of Goods.
3) List all the terminologies used in Trading Account entries.
4) Give the other names for Carriage Inwards and Carriage Outwards and explain.
5) Explain vividly the Return Inwards and Return Outwards.
MULTIPLE CHOICE TESTS
(1) The difference between Sales and Cost of Goods sold.
(a) Not Profit (b) Discount Profit (c) Gross Profit. (d) Net sales (e) Net Purchases
(2) Which of the following does not appear in a Profit and Loss Account?
(a) Carriage Inward (b) Carriage Outward (c) Discount allowed (d) discount received (e) Rent.
(3) Which of the following accounts normally as a credit balance? (a) Discount allowed (b) discount received (c) Purchases (d) Sales returns (e) Insurance.
(4) Trading Account is drawn - (a) as at the year ending... (b) For the year-ended... (c) year ending... (d) in the year ended. (e) as at the beginning of the year...
(5) Where can a closing be found in the accounting entries.
(a) Balance sheet and Profit and Loss Account. (b) Trading, Profit and Loss Account. (c) Trading Account and Balance Sheet. (d) Profit and Loss Account only. (e) Trading Account only.
WEEK END ASSIGNMENT:
Financial Accounting for Senior Secondary School I., M.A. Adesola et al, PP 114 – 116
PRE - READING ASSIGNMENT: Read Trading Account Terminologies (i) Gross Profit/Loss (ii) Cost of Good available for sale. (iii) Cost of goods sold (iv) Trading Account’s preparation.
WEEK END ACTIVITY: Write short notes on:
(i) Gross Profit or Loss
(ii) Cost of goods available for sale.
(iii) Prepare the format of a typical Trading Account.
REFERENCE TEXTS:
1) O.A. Longe et al, Essential Financial Accounting for senior Secondary schools, TONAD PUBLISHER 4th Edition 2012, pp 136 – 141
2) Femi Longe, Simplified and Amplified Book Keeping and Accounting for Senior Secondary Schools 1, 2, 3, LONGE PUBLISHING VENTURES 3rd Edition, pp 181 – 184
3) M.A. Adesola et al, Financial Accounting for Senior Secondary Schools 1, MELROSE PUBLISHING LTD 1st Edition, 2012, pp 113 – 116.
CONTENTS: DEFINITON OF TERMS: TRADING ACCOUNT OPENING AND CLOSING STOCKS.
ii) Purchases, Cost of goods sold, Return Inwards and Return Outwards
iii) Carriage Inwards and Carriage Outwards
SUB: TOPIC 1:
Trading Account is an account prepared to disclose the Gross Profit. Gross profit is the profit on the activities of buying and selling of goods. It is the excess of revenue over cost of goods sold. The trading account contains:
On the debit side:
i) Opening stock
ii) Add purchases
iii) Add carriage Inwards
iv) Less Return Outwards/Purchases Returns
v) Less stock at close
Equal to cost of Goods sold.
On the Credit Side
i) Sales
ii) Carriage Outwards
iii) Less Return Inwards
iv) From Credit side less Debit side.
Equal to Gross Profit OR
From Debit side Less Credit side.
Equal Gross Loss.
NOTE: The balance of the trading account is transferred to Profit and Loss account. The objective of a trading account is to ascertain either the gross profit or loss resulting from business transactions. The Trading Account has both:
i) T – method and
ii) Vertical method
It has its HEADING as: ‘Trading Account for the year ended....
TERMINOLOGIES
i) Opening Stock: This is the stock of goods available for sale at the beginning of the year or any accounting period.
ii) Closing Stock: This is the stock of goods at the end of an accounting period. Closing stock has a direct relationship with the profit while opening stock has an inverse relationship with profit.
EVALUATION OF STOCK
Stock can be valued at:
(i) Cost (ii) Lower of cost or net realizable value. (iii) Lower of cost, net realizable value and replacement price.
EVALUATION.
I) What is opening stock
II) Explain Closing stock
III) Name the accounting information or terms that are included under Trading Account.
IV) Explain carriage inward in a simple statement.
SUB-TOPIC II: Purchases Cost of goods sold, Return Inwards, and Return Outwards.
i) Purchases: Purchases can be defined as the goods bought for resale. It is also the total credit and cash purchases. Purchases do not include the purchases of fixed assets. Only items bought for resale are debited to the trading account as purchase and those items bought for usage in the business are debited as assets.
ii) Cost of goods sold: This is the cost of goods actually sold. When the closing stock is deducted from the cost of goods available for sale the remaining balance is the cost of goods sold.
iii) Return Inwards: Return Inward is the term used to describe goods returned to the seller or supplier as a result of damage to goods or result for the reason of not the goods requested for by the buyer. Return Inward is deducted from sales. It is also referred to as SALES RETURNS.
iv) Return Outwards: Return outwards is the term used to describe the goods that the buyer returns or sends back to the supplier if either the goods are damaged or for wrong consignment. Return outwards is deducted from purchases.
EVALUATION:
(1) Define Return Inwards.
(2) What is the other name for Return Inwards and Return Outwards?
(3) Give the other name to Return Outwards.
(4) Why are Return Inwards deducted from sales?
(5) Explain the reason Return Outwards are deducted from purchases
SUB-TOPIC III: Carriage Inwards and Carriage Outwards.
(i) Carriage Inwards: This the cost of transportation charged on goods purchased. It is the cost implication in order to bring the goods purchased to specific locations or destinations. On the debit side of a Trading Account it increases the cost of goods bought during the year of business transaction.
(ii) Carriage Outwards: This is the term used to describe cost of transporting goods to the customers. It is also called carriage on sales. It is deducted as an expense in Profit and Loss Account.
EVALUATION:
1) Name the 2 types of carriages in transporting goods.
2) What is Carriage Inwards
3) Explain Carriage Outward.
4) Which other name is give to Carriage Inward.
GENERAL EVALUATION: ESSAY TEST
1) Differentiate between Sales and Purchases in Final Account.
2) Explain the disparity between sales of Fixed Assets and Sales of Goods.
3) List all the terminologies used in Trading Account entries.
4) Give the other names for Carriage Inwards and Carriage Outwards and explain.
5) Explain vividly the Return Inwards and Return Outwards.
MULTIPLE CHOICE TESTS
(1) The difference between Sales and Cost of Goods sold.
(a) Not Profit (b) Discount Profit (c) Gross Profit. (d) Net sales (e) Net Purchases
(2) Which of the following does not appear in a Profit and Loss Account?
(a) Carriage Inward (b) Carriage Outward (c) Discount allowed (d) discount received (e) Rent.
(3) Which of the following accounts normally as a credit balance? (a) Discount allowed (b) discount received (c) Purchases (d) Sales returns (e) Insurance.
(4) Trading Account is drawn - (a) as at the year ending... (b) For the year-ended... (c) year ending... (d) in the year ended. (e) as at the beginning of the year...
(5) Where can a closing be found in the accounting entries.
(a) Balance sheet and Profit and Loss Account. (b) Trading, Profit and Loss Account. (c) Trading Account and Balance Sheet. (d) Profit and Loss Account only. (e) Trading Account only.
WEEK END ASSIGNMENT:
Financial Accounting for Senior Secondary School I., M.A. Adesola et al, PP 114 – 116
PRE - READING ASSIGNMENT: Read Trading Account Terminologies (i) Gross Profit/Loss (ii) Cost of Good available for sale. (iii) Cost of goods sold (iv) Trading Account’s preparation.
WEEK END ACTIVITY: Write short notes on:
(i) Gross Profit or Loss
(ii) Cost of goods available for sale.
(iii) Prepare the format of a typical Trading Account.
REFERENCE TEXTS:
1) O.A. Longe et al, Essential Financial Accounting for senior Secondary schools, TONAD PUBLISHER 4th Edition 2012, pp 136 – 141
2) Femi Longe, Simplified and Amplified Book Keeping and Accounting for Senior Secondary Schools 1, 2, 3, LONGE PUBLISHING VENTURES 3rd Edition, pp 181 – 184
3) M.A. Adesola et al, Financial Accounting for Senior Secondary Schools 1, MELROSE PUBLISHING LTD 1st Edition, 2012, pp 113 – 116.
WEEK 4
TOPIC: TRADING ACCOUNT TERMINOLOGIES (CONTD)
CONTENTS:
(i) Gross Profit/Loss
(ii) Cost of goods available for sale and cost of Goods sold
(iii) Preparation of the Trading Account.
SUB-TOPIC 1: Gross Profit or Gross Loss. Gross Profit is the excess of sales revenue over the cost of Goods sold. Both the Gross Profit and Gross Loss are determined in the Trading Account. While the Gross Profit is carried down on the debit side of a Trading Account and brought down on the Credit side of the Profit Loss Account the Gross Loss is also added to sales on the credit side of a Trading Account and brought down into the Profit and Loss Account as an expense on the Debit side
NOTE I: The Gross Loss is added to sales after deducting the Return Inwards.
NOTE II: Sales Less Cost Of Goods Sold = Gross Profit.
EVALUATION:
(1) Define Gross Profit and explain it.
(2) Mention 5 expenses in Profit and Loss Account.
(3) Where will you place the Gross profit in Trading Account?
(4) How is a Gross Loss deduced in trading Account?
(5) Compare a gross profit with a gross loss.
SUB-TOPIC II
I. Cost of goods available for sale and cost of Goods sold.
This is the addition of opening stock and purchases. It is the total amount available for sale in a particular period. i.e.
N N
Opening stock xx
Purchases xx
Less Returns outward xx xx
Xx
Add Carriage inward xx
Cost of goods available Xx
Less Closing stock xx
Cost of goods sold xx
Gross profit c/d xx
xx
ii) Cost of Goods sold
This is also known as cost of sales. It is the total cost of goods actually sold by the organisation at the end of financial year. It is the amount that is arrived at when cost of closing stock is deducted from the cost of goods available for sale. (CGAFS); that is,
N
Costs of Goods Available for sale X
Less closing stock X
Cost of sales / cost of Goods sold X X
EVALUATION
(1) Explain Goods Available for sale.
(2) What are the steps you will take before arriving at Goods Available for sale in Trading Account?
(3) How will you deduce Gross Profit in Trading Account?
(4) Compare and Contrast, Gross Profit and Gross Loss.
(5) Compare and Contrast Goods available for sale and cost of sales.
SUB-TOPIC III: Preparation of Trading Account.
ILLUSTRATION
Dr. Trading Account for the year ended..................... Cr.
NN
Opening Stock x
Add Purchases x
Less Return Outwards x x
x
Add Carriage Inward x
Cost of goods available for sale x
Less Closing stock x
Cost of goods sold x
Gross Profit c/d x
xx
NN
Sales x
Less Return Iwards x x
xx
VERTICAL METHOD
Trading Account for the year ended..........................
N N
Sales x
Cost of goods sold
Opening stock x
Add purchases x
x
Add carriage inwards x
x
Less returns outwards x
X x
Less closing stock
x
Gross profit x
CONTENTS:
(i) Gross Profit/Loss
(ii) Cost of goods available for sale and cost of Goods sold
(iii) Preparation of the Trading Account.
SUB-TOPIC 1: Gross Profit or Gross Loss. Gross Profit is the excess of sales revenue over the cost of Goods sold. Both the Gross Profit and Gross Loss are determined in the Trading Account. While the Gross Profit is carried down on the debit side of a Trading Account and brought down on the Credit side of the Profit Loss Account the Gross Loss is also added to sales on the credit side of a Trading Account and brought down into the Profit and Loss Account as an expense on the Debit side
NOTE I: The Gross Loss is added to sales after deducting the Return Inwards.
NOTE II: Sales Less Cost Of Goods Sold = Gross Profit.
EVALUATION:
(1) Define Gross Profit and explain it.
(2) Mention 5 expenses in Profit and Loss Account.
(3) Where will you place the Gross profit in Trading Account?
(4) How is a Gross Loss deduced in trading Account?
(5) Compare a gross profit with a gross loss.
SUB-TOPIC II
I. Cost of goods available for sale and cost of Goods sold.
This is the addition of opening stock and purchases. It is the total amount available for sale in a particular period. i.e.
N N
Opening stock xx
Purchases xx
Less Returns outward xx xx
Xx
Add Carriage inward xx
Cost of goods available Xx
Less Closing stock xx
Cost of goods sold xx
Gross profit c/d xx
xx
ii) Cost of Goods sold
This is also known as cost of sales. It is the total cost of goods actually sold by the organisation at the end of financial year. It is the amount that is arrived at when cost of closing stock is deducted from the cost of goods available for sale. (CGAFS); that is,
N
Costs of Goods Available for sale X
Less closing stock X
Cost of sales / cost of Goods sold X X
EVALUATION
(1) Explain Goods Available for sale.
(2) What are the steps you will take before arriving at Goods Available for sale in Trading Account?
(3) How will you deduce Gross Profit in Trading Account?
(4) Compare and Contrast, Gross Profit and Gross Loss.
(5) Compare and Contrast Goods available for sale and cost of sales.
SUB-TOPIC III: Preparation of Trading Account.
ILLUSTRATION
Dr. Trading Account for the year ended..................... Cr.
NN
Opening Stock x
Add Purchases x
Less Return Outwards x x
x
Add Carriage Inward x
Cost of goods available for sale x
Less Closing stock x
Cost of goods sold x
Gross Profit c/d x
xx
NN
Sales x
Less Return Iwards x x
xx
VERTICAL METHOD
Trading Account for the year ended..........................
N N
Sales x
Cost of goods sold
Opening stock x
Add purchases x
x
Add carriage inwards x
x
Less returns outwards x
X x
Less closing stock
x
Gross profit x
WEEK 5
Topic: Profit and Loss Account
Contents: i. Profit and Loss Account
ii. Identification of profit and Loss Account items
iii. Format or Layout
Sub-Topic 1:
Identification of Profit and Loss account items.
Profit and Loss account is the account prepared by a business organization to show the net profit or net loss. On the debit side, it shows the expenses incurred by an organization and on the credit side the Gross Profit brought down from trading and other gains. Finally, the profit is carried to the capital account. After all expenses have been deducted from Gross profit, the net profit on the debit side is arrived at which is to be taken to the balance sheet.
Some major items in profit and loss account are identified:
a. Expenses
b. Revenue
c. Profits: i. Gross Profit
ii. Net Profit
d. Net loss
e. Rent receivable
f. Rent payable
h. Goods stolen
a. Expenses: These are total amount paid or to be paid for resources used in the accounting period, namely:
i. Discount allowed
ii. Telephone
iii. Lighting
iv. Legal charges
v. General expenses
vi. Carriage outwards
vii. Postage
viii. Insurance
ix. Advertising
x. Rent and Rates
xi. Salaries and payable
xii. Commission payable
xiii. Travelling expenses.
xiv. Sundry expenses
Note:
a. Purchases of fixed assets do not count as expenses.
b. Revenue: This is the income or money received or to be received with respect to ordinary trading transactions or other uses of assets. Example: discount received.
c. Profits: Another name for profit is gain. It is the financial benefit accruing to a businessman from the business during the year of business transaction. It is different from Revenue and Expenditure. There two types of profits, viz:
i. Gross Profit: The excess of sales revenue over the cost of goods sold is the Gross Profit. It is only determined in the Trading Account. It shows the total profit before deducting the expenses. Gross Loss is the excess of cost of goods sold over the Sales revenue.
ii. Net Profit: It is the excess of gross profit over the expenses of the business at a given period. It is the real profit of the organization. It is determined by preparing the profit and Loss of the organization.
d. Net Loss: Is the excess of total expenses over the gross profit.
e. Rent Receivable: This is debited to the Profit and Loss account as an expense.
g. Uses of Trading Profit and Loss Account
a. It shows the profit of an organization.
b. It is helps to determine the income tax.
c. It is for management purpose
e. It helps in comparing with other years before and after.
h. Goods stolen or destroyed: goods can be stolen or destroyed during the financial year when this occurs; the following adjustment will take place.
Dr. Profit Loss A/C
Cr. Purchases A/C
i. Goods withdrawn by the owner for own use: The owner can withdraw goods for his own use. Account can be treated as follows:
Dr. Drawings A/C
Cr. Purchase A/C
Evaluation:
(i) Compare and contrast Rent receivable and Rent payable.
ii. Explain Gross Profit, Gross Loss, Net Profit Net loss
iii. Enumerate 5 expenses in profit and loss account
iv. What is Revenue?
v. Where is Net Loss found in Profit and Loss Account?
Sub –Topic: Layout of Profit Loss A/C
i. T - Method
Profit and Loss A/C for the year ended ........ 20.......
Expenses N N
Wages and Salaries x Gross profit b/d x
Telephone x Discounts received x
Bad Debts x Bank interest x
Increase in provision for bad debt x Reduction in provision
Motor expenses x for bad debts x
Stationery x Commission received x
Bank charges x Profit on sales of assets x
Loss on sales of assets x Recovery of bad debts x
Telephone x
Advertising x
Lighting and heating x
Repairs x
Postages x
Rent x
Rate x
Discounts allowed x
Motor expenses x
General Expenses x
Depreciation x
(i) Land and Building
(ii) Motor van
(iii) Plant and machinery x
Net Profit xx xx
VERTICAL METHOD
Profit and Loss A/C for the year ended............ 20................
N N
Gross Profit x
Add other incomes x
Less expenses;
Wages and salaries x
Telephone x
Depreciations x
Bad debts x
Discounts allowed x
General expenses x
Office expenses x
Rent and Rates x x
Net profit x
Evaluation:
1. List 5 expenses in profit and loss account
2. Where will you post Bad debt recovered in profit and Loss account
3. Draw a typical layout of T-method of Profit and Loss Account
4. Draw the Vertical Format of Profit and Loss and Account.
5. Which account indicates the (i) Net Profit (ii) Gross Loss (iii) Net Loss?
General Evaluation
Multiple Choice Texts
1. All of these are expenses except
(a) Bad debts (b) Rent and Rates (c) Cost of goods sold (d) Wages and salaries (e) Provision
2. One of these is true of Rent receivable.
(a) It is treated as expenditure
(b) It is debited in the profit and Loss account
(c) It is treated as an income and credited to the profit and loss account
(d) It decreases the revenue of the organization.
(e) It is an expense
3. All these are true of Trading, Profit and Loss account except.
(a) It help to assess the income tax
(b) It is essential for management purpose
(c) It is useful for comparison with other years
(d) It show the profit of an organization
(e) It distorts work in progress of the factory
4. Closing stock can be discovered in
(a) Trading account and profit only
(b) Profit and loss only
(c) Trading Account and balance sheet
(e) Profit and loss and balance sheet only
5. Cost of goods sold is given another name
(a) Cost of sales
(b) Cost of goods available for sale
(c) Gross profit
(d) Consignment
(e) Closing stock
Essay Test
1. Give 2 instances that differentiate a trading account from a profit and loss account.
2. Give an arithmetic statement to show how to arrive at Goods available for sale.
3. Mention 5 major information that will make entries into trading the trading account.
4. Sales information is posted to the credit side of the Trading account where will rent payable be posted in trading, profit and loss account?
5. State how you will derive stock at close in trade profit and loss account.
Weekend Assignment: Work Exercise 15.1 from Essential Financial Accounting for Senior Secondary Schools by O.A. Longe and R.A. Kazeem
Pre-Reading Assignment: Read about Profit and Loss Account’s preparation and determination of net profit and net loss.
Weekend Activity: Explain these accounting terminologies:
(a) Carriage Inward
(b) Carriage outwards
(c) Return Outwards
(d) Return inward
(e) Discount allowed.
Reference Texts
(i) Femi Longe, Simplified and Amplified Book Keeping and Accounting for SSS 1,2,3,Longe Ventures 3rd Edition 2012, PP 180 -187.
(ii) O. A. Longe et al, Essential financial Accounting for Senior Secondary Schools, Tonad Publishers 4th Edition 2012, pp 136 -153.
Contents: i. Profit and Loss Account
ii. Identification of profit and Loss Account items
iii. Format or Layout
Sub-Topic 1:
Identification of Profit and Loss account items.
Profit and Loss account is the account prepared by a business organization to show the net profit or net loss. On the debit side, it shows the expenses incurred by an organization and on the credit side the Gross Profit brought down from trading and other gains. Finally, the profit is carried to the capital account. After all expenses have been deducted from Gross profit, the net profit on the debit side is arrived at which is to be taken to the balance sheet.
Some major items in profit and loss account are identified:
a. Expenses
b. Revenue
c. Profits: i. Gross Profit
ii. Net Profit
d. Net loss
e. Rent receivable
f. Rent payable
h. Goods stolen
a. Expenses: These are total amount paid or to be paid for resources used in the accounting period, namely:
i. Discount allowed
ii. Telephone
iii. Lighting
iv. Legal charges
v. General expenses
vi. Carriage outwards
vii. Postage
viii. Insurance
ix. Advertising
x. Rent and Rates
xi. Salaries and payable
xii. Commission payable
xiii. Travelling expenses.
xiv. Sundry expenses
Note:
a. Purchases of fixed assets do not count as expenses.
b. Revenue: This is the income or money received or to be received with respect to ordinary trading transactions or other uses of assets. Example: discount received.
c. Profits: Another name for profit is gain. It is the financial benefit accruing to a businessman from the business during the year of business transaction. It is different from Revenue and Expenditure. There two types of profits, viz:
i. Gross Profit: The excess of sales revenue over the cost of goods sold is the Gross Profit. It is only determined in the Trading Account. It shows the total profit before deducting the expenses. Gross Loss is the excess of cost of goods sold over the Sales revenue.
ii. Net Profit: It is the excess of gross profit over the expenses of the business at a given period. It is the real profit of the organization. It is determined by preparing the profit and Loss of the organization.
d. Net Loss: Is the excess of total expenses over the gross profit.
e. Rent Receivable: This is debited to the Profit and Loss account as an expense.
g. Uses of Trading Profit and Loss Account
a. It shows the profit of an organization.
b. It is helps to determine the income tax.
c. It is for management purpose
e. It helps in comparing with other years before and after.
h. Goods stolen or destroyed: goods can be stolen or destroyed during the financial year when this occurs; the following adjustment will take place.
Dr. Profit Loss A/C
Cr. Purchases A/C
i. Goods withdrawn by the owner for own use: The owner can withdraw goods for his own use. Account can be treated as follows:
Dr. Drawings A/C
Cr. Purchase A/C
Evaluation:
(i) Compare and contrast Rent receivable and Rent payable.
ii. Explain Gross Profit, Gross Loss, Net Profit Net loss
iii. Enumerate 5 expenses in profit and loss account
iv. What is Revenue?
v. Where is Net Loss found in Profit and Loss Account?
Sub –Topic: Layout of Profit Loss A/C
i. T - Method
Profit and Loss A/C for the year ended ........ 20.......
Expenses N N
Wages and Salaries x Gross profit b/d x
Telephone x Discounts received x
Bad Debts x Bank interest x
Increase in provision for bad debt x Reduction in provision
Motor expenses x for bad debts x
Stationery x Commission received x
Bank charges x Profit on sales of assets x
Loss on sales of assets x Recovery of bad debts x
Telephone x
Advertising x
Lighting and heating x
Repairs x
Postages x
Rent x
Rate x
Discounts allowed x
Motor expenses x
General Expenses x
Depreciation x
(i) Land and Building
(ii) Motor van
(iii) Plant and machinery x
Net Profit xx xx
VERTICAL METHOD
Profit and Loss A/C for the year ended............ 20................
N N
Gross Profit x
Add other incomes x
Less expenses;
Wages and salaries x
Telephone x
Depreciations x
Bad debts x
Discounts allowed x
General expenses x
Office expenses x
Rent and Rates x x
Net profit x
Evaluation:
1. List 5 expenses in profit and loss account
2. Where will you post Bad debt recovered in profit and Loss account
3. Draw a typical layout of T-method of Profit and Loss Account
4. Draw the Vertical Format of Profit and Loss and Account.
5. Which account indicates the (i) Net Profit (ii) Gross Loss (iii) Net Loss?
General Evaluation
Multiple Choice Texts
1. All of these are expenses except
(a) Bad debts (b) Rent and Rates (c) Cost of goods sold (d) Wages and salaries (e) Provision
2. One of these is true of Rent receivable.
(a) It is treated as expenditure
(b) It is debited in the profit and Loss account
(c) It is treated as an income and credited to the profit and loss account
(d) It decreases the revenue of the organization.
(e) It is an expense
3. All these are true of Trading, Profit and Loss account except.
(a) It help to assess the income tax
(b) It is essential for management purpose
(c) It is useful for comparison with other years
(d) It show the profit of an organization
(e) It distorts work in progress of the factory
4. Closing stock can be discovered in
(a) Trading account and profit only
(b) Profit and loss only
(c) Trading Account and balance sheet
(e) Profit and loss and balance sheet only
5. Cost of goods sold is given another name
(a) Cost of sales
(b) Cost of goods available for sale
(c) Gross profit
(d) Consignment
(e) Closing stock
Essay Test
1. Give 2 instances that differentiate a trading account from a profit and loss account.
2. Give an arithmetic statement to show how to arrive at Goods available for sale.
3. Mention 5 major information that will make entries into trading the trading account.
4. Sales information is posted to the credit side of the Trading account where will rent payable be posted in trading, profit and loss account?
5. State how you will derive stock at close in trade profit and loss account.
Weekend Assignment: Work Exercise 15.1 from Essential Financial Accounting for Senior Secondary Schools by O.A. Longe and R.A. Kazeem
Pre-Reading Assignment: Read about Profit and Loss Account’s preparation and determination of net profit and net loss.
Weekend Activity: Explain these accounting terminologies:
(a) Carriage Inward
(b) Carriage outwards
(c) Return Outwards
(d) Return inward
(e) Discount allowed.
Reference Texts
(i) Femi Longe, Simplified and Amplified Book Keeping and Accounting for SSS 1,2,3,Longe Ventures 3rd Edition 2012, PP 180 -187.
(ii) O. A. Longe et al, Essential financial Accounting for Senior Secondary Schools, Tonad Publishers 4th Edition 2012, pp 136 -153.
WEEK 6
Topic: Profit and Loss Account
Contents: i. Preparation of profit and loss account
ii. Determination of net profit or loss
Sub-Topic: Preparation of Profit and Loss account
Question:
From the following trial balance of Rehoboth Nigeria Enterprises Limited, draw up a trading, profit and loss account for the year ended 31st December 1996.
Dr Cr
N N
Capital 22,636
Stock 2,368
Carriage outwards 200
Carriage inward 310
Return inward 205
Sales 18600
Purchases 11874
Salaries and wages 322
Rent 304
Insurance 75
Sundry expenses 664
Adverting 216
General expenses 480
Land and building 500
Furniture and fitting 1800
Motor car 350
Debtors 3896
Bank 10482
Creditor 1731
Drawings 1200
43,289 43,289
Stock at 31st December, 2005 was N3000
SOLUTION
Conventional T Format
Rehoboth Nigeria Enterprises
Dr. Trading Profit and Loss A/C for the year ended 31st December 2005,Cr
N N N N
Opening stock 2,368 Sales 18600
Add purchases 11,874
Add carriage inwards 310 Less Return Inward 205
12,184 18395
Less returns outwards 322 11,862
14,230
Less closing stock 3,000
11,230
Gross profit c/d 7165
18,395 18,395
Expenses
Carriage outwards 200 Cross profit b/d 7,165
Salaries & wages 3862
Rent 304
Insurance 78
Sundry Expenses 664
Advertising 216
General expenses 480
Net profit 1361
7,165 7165
Evaluation:
1. Write out the formula of stock turn or rate of turnover.
2. Using the above formula use this statements to solve for stock turn:
N
Opening stock 2,2500
Closing Stock 5,000
Cost of Goods sold 17,000
3. Find the average stock form the above questions
4. Find the goods available for sale:
N
Opening stock 7,000
Closing stock 2,000
Purchases 1,400
Return outwards 8,000
5. Find the Gross Profit from the statement below:
Sales 20,500
Purchase 5,000
Opening stock 11,000
Sales Returns 65,000
Purchases returns 1,000
Sub – Topic II: Determination of Net Profit over Telephone, rent etc)
Illustration Mr. Olulana realized a gross profit of N415,560 in his trading business about incurred some expenses during his business transaction as follows:
Lighting 15,600
Wages and salaries 3,400
Insurance 113500
Advertising 2500
You are required to determine his Net Profit for the year ended 31st December, 2010.
Mr. Olulana
Dr. Profit and Loss for the year ended 31st December, 2010 Cr.
N N
Expenses Gross Profit b/d 415560
Lighting 15600
Wages & Salaries 3400
Insurance 113500
Advertising 2500
Net Profit c/d 280,560
415560 415560
Net Profit b/d 280,560
Net Loss is the excess of the total expenses over the Gross Profit. It is realized when a business ignorantly or carelessly spends beyond the gross profit it was expecting during the year of transaction. This is determined for the ending of every year or a particular financial period.
Illustration 2:
Glormast Nigeria Enterprises was involved in a trading business with a gross profit of N350,00 but incurred the expenses namely.
Rent 150,000
Rates 50,000
Sundry expenses 20,000
Advertising 55,000
Insurance 80,000
Salaries and wages 100,000
Travelling expenses 40,000
You are required to determine the Net Loss for the year ended 31st December, 1998
RLORIMAST NIGERIA ENTERPRISES
Dr. Profit and Loss A/C for the year ended 31st December, 1998 Cr.
N N
Rent 150,000 Gross profit b/d 350,000
Rates 50,000 Net Loss c/d 145,000
Sundry Expenses 20,000
Advertising 55,000
Insurance 80,000
Salaries & Wages 100,000
Travelling Expenses 40,000
495,000 495,00
Evaluation
1. Describe Net Loss and Gross Loss in trading, profit and loss account
2. Define final account of a sole trader.
3. By illustration describe the turnover of business transaction
4. What should be involved if a Net profit or Net loss would be determined?
General Evaluation
Multiple Choice Tests
1. Carriage inwards is shown on the
(a) Debit side of the profit and loss account
(b) Credit side of the Trading account
(c) Debit side of the trading account
(d) Credit side of the profit and loss account
(e) Debit side of the cash book.
Answer questions 2 and 3 from the following information.
i. Stock is N200 at start and N320 at close
ii. Purchases N2,055
iii. Sales N3186
2. Find the cost of Goods sold
(a) N3186 (b) N2866 (c) N2255 (d) N2175 (e) N1935
3. The value of Goods available for sale will be
(a) N3186 (b) N2,255 (c) N2175 (d) N2055 (d) N1935
4. The balance of the sales account is transferred to the trading account by
(a) debiting the profit and loss account (b) debiting the trading account. (c) debiting the sales account (d) crediting the sales account
5. A credit note from a supplier for damaged goods would first be entered in the
(a) Purchase day book (b) Sales day book (c) Cash book (d) Return inwards Book (e) Return outwards book.
Essay Test
1. Solve for the cost of sales N
Opening stock 10,000
Purchases 20,000
Closing stock 4,000
Return outwards 3,500
2. Write short not on:
1. Net Loss and Net Profit
2. Return inwards and Return outwards
3. Carriage inward and carriage outwards
4. Gross profit and gross loss
3. Compare Trading Account with Profit Account
4. What is the disparity between cost of Goods sold and Cost of goods Available for sale.
5. While the Net Profit is debit in the Profit and Loss A/C, also the Net Loss is
(a) debited in Trading Account
(b) Debited in profit loss account
(c) credited in profit and loss account
(d) credited in Trading account
(e) Debited and credited in profit loss
Weekend Assignment:
Essential Financial Accounting for Senior Secondary Schools, O.A. Long et al, pp. 144-148, No., 15.3 -15.4
Pre-reading Assignment
Read “Adjustment in profit and loss account” bad debts and provision for bad debts (distinction, posting of entries into ledger and final account
Contents: i. Preparation of profit and loss account
ii. Determination of net profit or loss
Sub-Topic: Preparation of Profit and Loss account
Question:
From the following trial balance of Rehoboth Nigeria Enterprises Limited, draw up a trading, profit and loss account for the year ended 31st December 1996.
Dr Cr
N N
Capital 22,636
Stock 2,368
Carriage outwards 200
Carriage inward 310
Return inward 205
Sales 18600
Purchases 11874
Salaries and wages 322
Rent 304
Insurance 75
Sundry expenses 664
Adverting 216
General expenses 480
Land and building 500
Furniture and fitting 1800
Motor car 350
Debtors 3896
Bank 10482
Creditor 1731
Drawings 1200
43,289 43,289
Stock at 31st December, 2005 was N3000
SOLUTION
Conventional T Format
Rehoboth Nigeria Enterprises
Dr. Trading Profit and Loss A/C for the year ended 31st December 2005,Cr
N N N N
Opening stock 2,368 Sales 18600
Add purchases 11,874
Add carriage inwards 310 Less Return Inward 205
12,184 18395
Less returns outwards 322 11,862
14,230
Less closing stock 3,000
11,230
Gross profit c/d 7165
18,395 18,395
Expenses
Carriage outwards 200 Cross profit b/d 7,165
Salaries & wages 3862
Rent 304
Insurance 78
Sundry Expenses 664
Advertising 216
General expenses 480
Net profit 1361
7,165 7165
Evaluation:
1. Write out the formula of stock turn or rate of turnover.
2. Using the above formula use this statements to solve for stock turn:
N
Opening stock 2,2500
Closing Stock 5,000
Cost of Goods sold 17,000
3. Find the average stock form the above questions
4. Find the goods available for sale:
N
Opening stock 7,000
Closing stock 2,000
Purchases 1,400
Return outwards 8,000
5. Find the Gross Profit from the statement below:
Sales 20,500
Purchase 5,000
Opening stock 11,000
Sales Returns 65,000
Purchases returns 1,000
Sub – Topic II: Determination of Net Profit over Telephone, rent etc)
Illustration Mr. Olulana realized a gross profit of N415,560 in his trading business about incurred some expenses during his business transaction as follows:
Lighting 15,600
Wages and salaries 3,400
Insurance 113500
Advertising 2500
You are required to determine his Net Profit for the year ended 31st December, 2010.
Mr. Olulana
Dr. Profit and Loss for the year ended 31st December, 2010 Cr.
N N
Expenses Gross Profit b/d 415560
Lighting 15600
Wages & Salaries 3400
Insurance 113500
Advertising 2500
Net Profit c/d 280,560
415560 415560
Net Profit b/d 280,560
Net Loss is the excess of the total expenses over the Gross Profit. It is realized when a business ignorantly or carelessly spends beyond the gross profit it was expecting during the year of transaction. This is determined for the ending of every year or a particular financial period.
Illustration 2:
Glormast Nigeria Enterprises was involved in a trading business with a gross profit of N350,00 but incurred the expenses namely.
Rent 150,000
Rates 50,000
Sundry expenses 20,000
Advertising 55,000
Insurance 80,000
Salaries and wages 100,000
Travelling expenses 40,000
You are required to determine the Net Loss for the year ended 31st December, 1998
RLORIMAST NIGERIA ENTERPRISES
Dr. Profit and Loss A/C for the year ended 31st December, 1998 Cr.
N N
Rent 150,000 Gross profit b/d 350,000
Rates 50,000 Net Loss c/d 145,000
Sundry Expenses 20,000
Advertising 55,000
Insurance 80,000
Salaries & Wages 100,000
Travelling Expenses 40,000
495,000 495,00
Evaluation
1. Describe Net Loss and Gross Loss in trading, profit and loss account
2. Define final account of a sole trader.
3. By illustration describe the turnover of business transaction
4. What should be involved if a Net profit or Net loss would be determined?
General Evaluation
Multiple Choice Tests
1. Carriage inwards is shown on the
(a) Debit side of the profit and loss account
(b) Credit side of the Trading account
(c) Debit side of the trading account
(d) Credit side of the profit and loss account
(e) Debit side of the cash book.
Answer questions 2 and 3 from the following information.
i. Stock is N200 at start and N320 at close
ii. Purchases N2,055
iii. Sales N3186
2. Find the cost of Goods sold
(a) N3186 (b) N2866 (c) N2255 (d) N2175 (e) N1935
3. The value of Goods available for sale will be
(a) N3186 (b) N2,255 (c) N2175 (d) N2055 (d) N1935
4. The balance of the sales account is transferred to the trading account by
(a) debiting the profit and loss account (b) debiting the trading account. (c) debiting the sales account (d) crediting the sales account
5. A credit note from a supplier for damaged goods would first be entered in the
(a) Purchase day book (b) Sales day book (c) Cash book (d) Return inwards Book (e) Return outwards book.
Essay Test
1. Solve for the cost of sales N
Opening stock 10,000
Purchases 20,000
Closing stock 4,000
Return outwards 3,500
2. Write short not on:
1. Net Loss and Net Profit
2. Return inwards and Return outwards
3. Carriage inward and carriage outwards
4. Gross profit and gross loss
3. Compare Trading Account with Profit Account
4. What is the disparity between cost of Goods sold and Cost of goods Available for sale.
5. While the Net Profit is debit in the Profit and Loss A/C, also the Net Loss is
(a) debited in Trading Account
(b) Debited in profit loss account
(c) credited in profit and loss account
(d) credited in Trading account
(e) Debited and credited in profit loss
Weekend Assignment:
Essential Financial Accounting for Senior Secondary Schools, O.A. Long et al, pp. 144-148, No., 15.3 -15.4
Pre-reading Assignment
Read “Adjustment in profit and loss account” bad debts and provision for bad debts (distinction, posting of entries into ledger and final account
WEEK 7
Topic: Adjustment in Profit and Loss Account – Bad debts and Provision for bad debts.
Contents: Bad debts and provision for bad debts - Distinction
i. Posting of entries into ledger
ii. Posting into final account
Sub – Topic: Posting of entries into ledger.
Business organizations normally sell goods on credit to customers. They have the hope that these will be paid for within a reasonable period time. At the end of the Accounting period some customer may not be able to meet their obligations and part of the debts may not be recovered.
BAD DEBTS:
These are known as irrecoverable debts. It will appear on the debit side of profit and loss account as a charge. Bad debts, therefore, takes place when the customer is unable to pay his debt. It will reduce the account of debtors in the balance sheet. Bad debts come into reality as a result of death or he insolvency of the debtor to continue his business.
ACCOUNTING ENTRIES
METHOD: Using a bad debts account only: A consolidated account is often used whereby the provision is raised and adjusted in the Bad debts thus dispensing with the separate provision account.
The Following accounts will be considered
a. Bad debts account
b. Profit and loss account
c. Balance sheet
ILLUSTRATION 1: Dare started trading on 1st January, 2000 During the two years ended 31st December 2000 and 2001, these debts were written off to bad debt account on the dates stated. N
20th May 2000 Blessing 500
11th November, 2000 Rose 900
19th December 200 Dayo 1000
25th June 2001 Lola 700
1st July 2001 Kola 500
8th October 2001 Ahmed 150
On 31st December 2000, the debtors remaining were N50,000. It was decided to make provision for doubtful debts of N2000.
On 31st December 2001, the total debtors remaining were N30000; it was decided to make provision for doubtful debts of N5000.
You are required to prepare the necessary accounts using.
i. Method A
ii. Method B
ILLUSTRATION : METHOD A
Dr. Bad debt accounts Cr.
2000 N 2000 N
20 May Blessing 500 Dec. 31 P/L 2400
11 Nov. Rose 900
19 Dec. Dayo 1,000
21 Dec. Prov for doubtful debt 2000
2400 2400
2001 2001
25 Jun. Lola 700
1 Jun. Kola 500 1st Jan. Provision for
8th Oct. Ahmed 150 doubtful debt 2400
31 Dec. Prov.for doubtful debt 5000 1st Dec. P/L 3950
6350 6350
Method B
Using separate account for bad debts and provision for doubtful debts. The entries for the provision are as follows:
Year 1: Year in which provision is first made:
Dr Profit and Loss Account
Cr. Provision for doubtful debts
Year 2: To Increase the provision
Dr. Profit and Loss account
Cr. Provision for doubtful debts account.
To reduce the provision:
Dr. Provision for doubtful debts account
Cr. Profit and Loss account.
FORMATS
DR. CR
200 N 2000 N
31 Dec. Sundries X 31 Dec PL X
2001 2001
31 Dec Sundries X 31 Dec P/L X
Dr. Provision for doubtful debts accounts Cr.
200 N 2000 N
31 Dec. Bal c/d X 31 Dec. P/L X
2001 2001
31 Dec Bal c/d X 31 Dec P/L X
Dr. Profit & Loss A/C Cr.
2000 N 2000 N
Bad debts X Reduction in
Provision of bad debts X Provision for bad debts X
2001
Bad debts X
Provision for bad debts X
Balance sheet Extract
2000 N 2000 N N
Debtors X
Less Provision for X X
Bad debts
ILLUSTRATION 2
Dr. Bad Debts Account Cr.
200 N 2000 N
20th May Blessing 500 31 Dec P/L 2400
11 Nov. Rose 900
19 Dec. Dayo 1000
2400 2400
2001 2001
25 Jun Lola 700 31 Dec. P/L 1350
1 Jul. Kola 500
8 Oct. Ahmed 150
1350 1350
Dr. Provision for doubtful debts accounts Cr.
2000 N 2000 N
31 Dec Bal c/d 2000 31 Dec P/L 2000
2001 2001 1 Jan 2000
31 Dec Bal c/d 5000 Dec 31 P/L 3000
5000 5000
Evaluation:
1. List the 3 accounting title in the ledge for adjustments by using a bad debt account only.
2. What are the difference between reserves and provisions?
3. Differentiate between Bad debts and Provision for doubtful debts
4. Enumerate the steps in the entries of the ledger using separate accounts for bad debts and provision for doubtful debt.
5. Mention the 2 major reserves.
Sub-Topic II: Posting into final Accounts:
With respect to the above ledger entries into bad debts and provision for doubtful debts the profit and Loss account is, however, opened:
Dr. Cr.
N N
2000 Bad debt 2400
2001 Bad debt 3950
FORMAT OF FINAL ACCOUNT SHOWING ADJUSTMENTS
Dr. Trading Profit and Loss A/C for the year ended ......... Cr.........
N N N N
Opening stock xx Sale xx
Add Purchase xx Less returns inwards xx xxx
Add carriage inwards x
xx
Less Return outward x
x
Less Goods withdraw x x
Goods available for sale xx
Less closing stock x
Cost of Goods sold xx
Gross profit x
xxx xxx
Expenses Discount received xx
Depreciation of Assets x Reduction in Provision
Telephone + Accrued Expenses x for doubtful debt x
Carriage outwards x Income + accrued income x
Lighting – prepared expenses x Income – Prepaid income x
Bad debts x
Increase in provision for
doubtful debt x
Discount allowed x
Telephone x
Lighting x
Legal charges x
General expenses x
Postages x
Insurance x
Provision for discount on
Debtors x
Advertising x
Rent and rates x
Salaries & Wages x
Commission payable x
Travelling Expenses x
Sundry Expenses x
Net Profit x
xxx xxx
ILLUSTRATION
In the Trial Balance of L. Alyson Nigeria Enterprises Limited debtors was considered a sN1000, bad debt written off, N2050 and finally created a provision for doubtful debt at the rate of 20%;
You are required to open profit and Loss account for the year ended 31st December, 2010 if its Gross profit was N36,000
SOLUTION
Dr. Profit & Loss A/C for the year end 31st Dec, 2010 Cr.
N N
Expenses 2050 Gross Profit c/d 36,000
Bor. For doubtful debt 1590
Net Profit 32360
36000 36000
N
Workings: Debtor 10000
Less bad debt 2050
Less Provision for doubtful 7950
Debt at 20% 1590
6360
Evaluation
1. List the types of adjustments made in final accounts
2. Mention 2 types of cash discount in profit and Loss account
3. What makes bad debts different from a provision for doubtful debt?
4. Give 2 reasons for end of the year adjustments in final accounts
5. How will provision for doubtful debt affect debts in profit and loss balance sheet?
General Evaluation
1. A typical example of cash discount is (a) Trade discount (b) Cash allowed (c) cash received (d) Discount received (e) Cash
2. One of these is true of Bad debts and provision for bad debts
(a) They are deducted from fixed assets
(b) They are deducted from creditors
(c) They are deducted from debtors
(d) They are deducted from debtors and creditors
(e) Only bad debts are deducted from debtors
3. Debts are bad only when
(a) They are written off
(b) They are recovery
(c) They are offset
(d) They are paid with provision for doubtful debts
(e) They are offset by provision for discount
4. The two methods of adjustments considered in the ledge entries of bad debts and provision for doubtful debts are:
(a) using bad debts account and profit and loss account
(b) using provision for bad debt and profit and loss account
(c) using bad debts account and bad debt and provision for doubtful account together.
(d) Using profit and Loss account and the balance sheet.
(e) using bad account and the trial balance
5. How many information are considered in making adjustments on debtors in final account? (a) 3 (b) 2 (c) 1 (d) 4 (e) 5
Essay Test
1. Wrote short notes:
(i) Bad debt and adjustment in the Profit and Loss.
(ii) Provision for doubtful debts and its adjustment in the profit and Loss
2. List all the 2 revenues and 5 expense.
3. What is the information that affects debtors in the profit and Loss Account?
4. Define accruals and state how it affects the creditors.
5. Explain prepayment and Accruals.
Weekend Assignment
Read Femi ‘Longe Simplified and Amplified Book Keeping and Accounting for SSS 1, 2, 3, pp 212 – 213, Nos. 5 and 6
Pre-reading Assignment
Read End of year adjustments final Accounts and Balance sheet.
Weekend Activities
1. Draw the formats of adjustments in the ledger and final accounts
2. Reference Texts: Femi Longer, Simplified and Amplified Book Keeping and Accounting for Senior Secondary Schools 1,2,3,Longe Ventures 3rd Edition 2012, pp 197 -222
3. O. A Long et al, Essential Financial Accounting for Senior Secondary School, TONAD 4th Edition 2012, pp 144 - 159
Contents: Bad debts and provision for bad debts - Distinction
i. Posting of entries into ledger
ii. Posting into final account
Sub – Topic: Posting of entries into ledger.
Business organizations normally sell goods on credit to customers. They have the hope that these will be paid for within a reasonable period time. At the end of the Accounting period some customer may not be able to meet their obligations and part of the debts may not be recovered.
BAD DEBTS:
These are known as irrecoverable debts. It will appear on the debit side of profit and loss account as a charge. Bad debts, therefore, takes place when the customer is unable to pay his debt. It will reduce the account of debtors in the balance sheet. Bad debts come into reality as a result of death or he insolvency of the debtor to continue his business.
ACCOUNTING ENTRIES
METHOD: Using a bad debts account only: A consolidated account is often used whereby the provision is raised and adjusted in the Bad debts thus dispensing with the separate provision account.
The Following accounts will be considered
a. Bad debts account
b. Profit and loss account
c. Balance sheet
ILLUSTRATION 1: Dare started trading on 1st January, 2000 During the two years ended 31st December 2000 and 2001, these debts were written off to bad debt account on the dates stated. N
20th May 2000 Blessing 500
11th November, 2000 Rose 900
19th December 200 Dayo 1000
25th June 2001 Lola 700
1st July 2001 Kola 500
8th October 2001 Ahmed 150
On 31st December 2000, the debtors remaining were N50,000. It was decided to make provision for doubtful debts of N2000.
On 31st December 2001, the total debtors remaining were N30000; it was decided to make provision for doubtful debts of N5000.
You are required to prepare the necessary accounts using.
i. Method A
ii. Method B
ILLUSTRATION : METHOD A
Dr. Bad debt accounts Cr.
2000 N 2000 N
20 May Blessing 500 Dec. 31 P/L 2400
11 Nov. Rose 900
19 Dec. Dayo 1,000
21 Dec. Prov for doubtful debt 2000
2400 2400
2001 2001
25 Jun. Lola 700
1 Jun. Kola 500 1st Jan. Provision for
8th Oct. Ahmed 150 doubtful debt 2400
31 Dec. Prov.for doubtful debt 5000 1st Dec. P/L 3950
6350 6350
Method B
Using separate account for bad debts and provision for doubtful debts. The entries for the provision are as follows:
Year 1: Year in which provision is first made:
Dr Profit and Loss Account
Cr. Provision for doubtful debts
Year 2: To Increase the provision
Dr. Profit and Loss account
Cr. Provision for doubtful debts account.
To reduce the provision:
Dr. Provision for doubtful debts account
Cr. Profit and Loss account.
FORMATS
DR. CR
200 N 2000 N
31 Dec. Sundries X 31 Dec PL X
2001 2001
31 Dec Sundries X 31 Dec P/L X
Dr. Provision for doubtful debts accounts Cr.
200 N 2000 N
31 Dec. Bal c/d X 31 Dec. P/L X
2001 2001
31 Dec Bal c/d X 31 Dec P/L X
Dr. Profit & Loss A/C Cr.
2000 N 2000 N
Bad debts X Reduction in
Provision of bad debts X Provision for bad debts X
2001
Bad debts X
Provision for bad debts X
Balance sheet Extract
2000 N 2000 N N
Debtors X
Less Provision for X X
Bad debts
ILLUSTRATION 2
Dr. Bad Debts Account Cr.
200 N 2000 N
20th May Blessing 500 31 Dec P/L 2400
11 Nov. Rose 900
19 Dec. Dayo 1000
2400 2400
2001 2001
25 Jun Lola 700 31 Dec. P/L 1350
1 Jul. Kola 500
8 Oct. Ahmed 150
1350 1350
Dr. Provision for doubtful debts accounts Cr.
2000 N 2000 N
31 Dec Bal c/d 2000 31 Dec P/L 2000
2001 2001 1 Jan 2000
31 Dec Bal c/d 5000 Dec 31 P/L 3000
5000 5000
Evaluation:
1. List the 3 accounting title in the ledge for adjustments by using a bad debt account only.
2. What are the difference between reserves and provisions?
3. Differentiate between Bad debts and Provision for doubtful debts
4. Enumerate the steps in the entries of the ledger using separate accounts for bad debts and provision for doubtful debt.
5. Mention the 2 major reserves.
Sub-Topic II: Posting into final Accounts:
With respect to the above ledger entries into bad debts and provision for doubtful debts the profit and Loss account is, however, opened:
Dr. Cr.
N N
2000 Bad debt 2400
2001 Bad debt 3950
FORMAT OF FINAL ACCOUNT SHOWING ADJUSTMENTS
Dr. Trading Profit and Loss A/C for the year ended ......... Cr.........
N N N N
Opening stock xx Sale xx
Add Purchase xx Less returns inwards xx xxx
Add carriage inwards x
xx
Less Return outward x
x
Less Goods withdraw x x
Goods available for sale xx
Less closing stock x
Cost of Goods sold xx
Gross profit x
xxx xxx
Expenses Discount received xx
Depreciation of Assets x Reduction in Provision
Telephone + Accrued Expenses x for doubtful debt x
Carriage outwards x Income + accrued income x
Lighting – prepared expenses x Income – Prepaid income x
Bad debts x
Increase in provision for
doubtful debt x
Discount allowed x
Telephone x
Lighting x
Legal charges x
General expenses x
Postages x
Insurance x
Provision for discount on
Debtors x
Advertising x
Rent and rates x
Salaries & Wages x
Commission payable x
Travelling Expenses x
Sundry Expenses x
Net Profit x
xxx xxx
ILLUSTRATION
In the Trial Balance of L. Alyson Nigeria Enterprises Limited debtors was considered a sN1000, bad debt written off, N2050 and finally created a provision for doubtful debt at the rate of 20%;
You are required to open profit and Loss account for the year ended 31st December, 2010 if its Gross profit was N36,000
SOLUTION
Dr. Profit & Loss A/C for the year end 31st Dec, 2010 Cr.
N N
Expenses 2050 Gross Profit c/d 36,000
Bor. For doubtful debt 1590
Net Profit 32360
36000 36000
N
Workings: Debtor 10000
Less bad debt 2050
Less Provision for doubtful 7950
Debt at 20% 1590
6360
Evaluation
1. List the types of adjustments made in final accounts
2. Mention 2 types of cash discount in profit and Loss account
3. What makes bad debts different from a provision for doubtful debt?
4. Give 2 reasons for end of the year adjustments in final accounts
5. How will provision for doubtful debt affect debts in profit and loss balance sheet?
General Evaluation
1. A typical example of cash discount is (a) Trade discount (b) Cash allowed (c) cash received (d) Discount received (e) Cash
2. One of these is true of Bad debts and provision for bad debts
(a) They are deducted from fixed assets
(b) They are deducted from creditors
(c) They are deducted from debtors
(d) They are deducted from debtors and creditors
(e) Only bad debts are deducted from debtors
3. Debts are bad only when
(a) They are written off
(b) They are recovery
(c) They are offset
(d) They are paid with provision for doubtful debts
(e) They are offset by provision for discount
4. The two methods of adjustments considered in the ledge entries of bad debts and provision for doubtful debts are:
(a) using bad debts account and profit and loss account
(b) using provision for bad debt and profit and loss account
(c) using bad debts account and bad debt and provision for doubtful account together.
(d) Using profit and Loss account and the balance sheet.
(e) using bad account and the trial balance
5. How many information are considered in making adjustments on debtors in final account? (a) 3 (b) 2 (c) 1 (d) 4 (e) 5
Essay Test
1. Wrote short notes:
(i) Bad debt and adjustment in the Profit and Loss.
(ii) Provision for doubtful debts and its adjustment in the profit and Loss
2. List all the 2 revenues and 5 expense.
3. What is the information that affects debtors in the profit and Loss Account?
4. Define accruals and state how it affects the creditors.
5. Explain prepayment and Accruals.
Weekend Assignment
Read Femi ‘Longe Simplified and Amplified Book Keeping and Accounting for SSS 1, 2, 3, pp 212 – 213, Nos. 5 and 6
Pre-reading Assignment
Read End of year adjustments final Accounts and Balance sheet.
Weekend Activities
1. Draw the formats of adjustments in the ledger and final accounts
2. Reference Texts: Femi Longer, Simplified and Amplified Book Keeping and Accounting for Senior Secondary Schools 1,2,3,Longe Ventures 3rd Edition 2012, pp 197 -222
3. O. A Long et al, Essential Financial Accounting for Senior Secondary School, TONAD 4th Edition 2012, pp 144 - 159
WEEK 8
TOPIC: ADJUSTMENT IN PROFIT AND LOSS ACCOUNT, PREPAYMENT AND ACCRUALS
CONTENT:
PREPAYMENTS OR DEFERRALS
ACCRUALS
SUB-TOPIC: Adjustment in Profit and Loss account-Prepayments
Adjustments are made in Final accounts to show the true view of their transactions. They are closing entries or amendments made in the books at the end of the of accounting period in order to match revenue with expenses. This will show an accurate picture of account.
REASONS FOR THE YEAR ADJUSTMENTS
1 To provide for depreciation of fixed assets
2 End of year adjustment occurs because it will ensure the application of double entry principle.
3 To ensure that the financial statement are prepared in accordance with the concepts of accounting.
4 To provide for valuation of stock at the end of the year.
5 To ensure that all the income for the year is recorded.
6 To also, make sure that the expenses for the year is also recorded.
CLASSIFICATION OF ADJUSTING ENTRIES IN FINAL ACCOUNTS
1 Deferrals or Prepayments; These are inform of 1 Prepaid income 11 Prepaid expenses; It is prepayment for services in advance of their use .When payment is made beyond the date of accounting period specified it is known as prepaid expenses. NOTE; This will be treated as an ASSET.
11 Prepaid income; This is the receipt of revenue in advance of the related earning activities.
NOTE; It will be treated as a LIABILITY in the Balance sheet.
2 Accruals; This can be categorized into two, (1) Accrued Expenses
(11) Accrued Income
1) Accrued Expenses; They are –expenses for benefits received before cash payments are made. If payment could not meet up with period in question, provision must be made for accruals .This will be in the nature LIABILITY.
11) Accrued Income; this is the revenue that has been earned but for which cash has not been received at the close of final accounts preparation. It must be treated as an ASSET.
ADJUSTMENT AND POSTING OF ENTRIES INTO THE LEDGER
1) PREPAID EXPENSES: These expenses are paid during the period but are for subsequent (following period.) Only expenses for the period must be charged to the profit and loss account .The balance carried forward is an asset.
FORMAT: LEDGER ENTRY
Expenses Account
N
Cash (Trading year) x
Amount prepaid last year x
x N
Amount prepaid for next year x
Profit and loss x
x
Note: The balance b/d is the amount prepaid for next year and must be treated as an asset.
Example:
The financial year of Stephen ended on 31st December, 2011. Show the ledger account.
Advertisement paid during 2011 N500
Prepaid as at 31st December, 2010 N1, 000
Prepaid as at 31st December, 2011 N600
SOLUTION
Advertisement account
N
Cash 500
Prepayment (2010) 1,000
1,500
Profit and loss b/d 900 N
Prepayment(2012) 600
Profit and Loss c/d 900
1,500
ACCRUED EXPENSES
These expenses that have been incurred before being paid for by the organization, it could as well be called; owing, outstanding, arrears, due; if expenses should be properly marched with revenue, expenses should be recognized in the period incurred. It is treated as a liability in the balance sheet.
The procedure:
N
Amount paid during the Trading period x
Add: accrued owing in the Trading period x
X
Less: amount owing for last year x
Profit and Loss x
Ledger Entry
N
Cash paid x
Owing during the Trading period c/d x
x N
Amount owing from last year x
Profit and loss x
X
Balance b/d x
Example
The financial year of Stephen ended on 31st December, 1990. Show the ledger account
N
Telephone paid 31/12/1990 500
Telephone owing 1/1/1990 800
Telephone owing 31/12/1990 400
Solution
Telephone account
N
Cash 5, 000
Balance b/d 400
5, 400 N
Balance b/d 800
Profit and Loss 4, 600
5, 400
Balance b/d 400
INCOME RECEIVED IN ADVANCE
Income received during the current trading year may relate to the next year e.g. rent from premise sublet received in advance. This must be treated as a liability in the balance sheet.
The procedure
N
Cash received in the Trading period x
Add: amount received in advance last year but for current
Trading period x
X
Less: amount received in advance for next year x
Profit and loss x
Ledger entry
Income account
N
Received for next year x
Profit and loss x
x N
Cash received x
Income in advance last year x
X
Balance b/d x
Note: The balance brought down is the income received for next year and it must be treated as a liability.
Example
Write up the ledger account of Dr. Clement during the year ended 31st December, 1997. He earned commission of N40, 000 for the year ending 31st December, 1997, a sum of N10, 000 was received in advance as at 31st December, 1996 and another commission of N5, 000 was paid in advance to him as at 31st December, 1997.
Commission received account
N
Profit and loss 45, 000
Advance for next year 5, 000
50, 000 N
Last year 10, 000
Cash 40, 000
50, 000
Balance b/d 5, 000
INCOME ACCRUED
These are revenue earned for services that have been performed or for goods that have been delivered but the income has not been received at the date of preparing the final account. This is treated as an ASSET in the balance sheet.
The procedure:
N
Cash received in the year x
Add: owing for the trading year x
x
Less: income owing for previous year x
Profit and loss account x
Ledger entry
Income account
N
Income owing in the previous year x
Profit and loss x
x N
Cash received x
Income owing in trading year x
x
Note: The balance brought down is the amount owing as at the end of the trading period, it must be treated as an asset in the balance sheet.
Example
Commission received during the year ended 31st December 1991 amounted to N5, 000
Owing at 31st December, N3, 000
Owing at 31st December, N4, 000
Calculate the commission received for the year.
Commission received account
N
Balance b/d 3, 000
Profit and loss 6, 000
9, 000 N
Cash received 5, 000
Balance c/d 4, 000
9, 000
N
Cash received in 1991 5, 000
Add: owing for trading year 1991 4, 000
9, 000
Less: income owing in previous year 1990 3, 000
Profit and loss account 6, 000
EVALUATION
1) Final account of a sole trader is a periodic statement that covers a periodic statement that covers a specific of time and must be described “as at the end of the year-----“ (True/False)
2) What is prepaid income?
3) Where will prepayment be placed in a balance sheet?
Sub-topic2: Posting of entries in Final Accounts
The following trial balance was extracted from the books of Mighty hand Nigeria Enterprises on 31st March, 2012
Capital
Drawings
Purchases and Sales
Returns
Discounts
Debtors and Creditors
Stock
Cash at bank
Freehold premises
Motor vehicle at cost
Provision for depreciation:
Motor vehicles
Furniture
Salaries
Carriage inwards
Carriage outwards
Stationery
Electricity
Insurance
General expenses
Provision for bad debts
Bad debt
Rent receivable
Commission
12% Fixed deposit with bank
Furniture at cost
DR.
N
141, 000
3,684,000
73,000
102, 000
450, 000
343, 000
69, 000
460, 000
120, 000
406, 000
222, 000
103, 000
36, 000
49, 000
18,000
298, 000
4, 000
200, 000
25, 000
CR.
N
900, 000
5,179,000
62, 000
84, 0000
571,000
45, 000
10, 000
2, 000
38, 000
112, 000
Additional information:
a) Stock at close N318, 000
b) Expenses unpaid were: salaries N18, 000; electricity N800, Expenses prepaid ;Insurance N4, 000
c) Stock of unused stationery at 31/3/2012 was N2500
d) Adjust provisions for bad debts to 2%of debtors and create a provision for discounts allowable at 1%
e) The 12%fixed deposit was placed at the bank on 1st January, 2012.
f) Depreciation is to be provided as follows
Furniture 10% on cost
Motor vehicle 20% on cost
g) N2000 of the rent received is in respect of the next accounting year
You are required to prepare: Trading, Profit and Loss Account
Mighty hand Nigeria Enterprises
DrTrading, profit and loss account for the year ended 31st December, 2012 Cr
N
Opening stock 343
Add purchases 3,684
Add carriage inwards 222
3906
Less returns outwards 623,844
4,187
Less closing stock 318
Cost of goods sold 3,869
Gross profit 1237
5,106
N
Sales 5,179
Less returns inwards 73
5,106
5,106
Evaluation:
1. Which of this is not a liability? A.accrued wages B.prepaymentC.rent arrears or insurance due but unpaid.
2. Where is commission received entered in the_______________________
3. Where is commission received in advance shown in the balance sheet?
4. Where will the carriage outwards posted in the trading, profit and loss account?
5. What is called the payment for future services in business transactions?
GENERAL EVALUATION
Objective test:
1. Sales in trading account is referred to as A.total cash and payment B.total and credit sales
C.the sales of fixed assets D.the sales of goods on credit only E.total cash and debit sales
2. Rent receivable account is an example of A. nominal account B.real account C.personal account
D.private account E.impersonal account
3.Rent prepaid as at 1st January ,2002 was N10,000.Annual rent payable is N8,000 and rent accrued as at 31st December,2002 was N15,000.How much was paid for rent in 2002?
A.N80, 000 B.N75, 000 C.N55, 000 D.N35, 000 E.45, 000
4. Revenue is recognized in the profit and loss account as a A.debtors pay what is due from them
B.sale of goods takes place and money is received C.sale of goods takes place whether or not
money is received D.sale of a fixed asset take place E.purchase of fixed asset takes place
5. Which of the following statements is correct for profit and loss account?
A.for the year ended 31st December, 2009
B.as at 31st December, 2009
C.for the period 31st December, 2009
D.as at the year 2009
E.as on 31st December, 2009
WEEKEND ASSIGNMENT:
Practice Exercises 2 and 4 of the Simplified and Amplified Book Keeping and Accounting for sss by Femi Longe page 210 and 211.
PRE-READING ASSIGNMENT:
Read profit and loss account;
-distinction between prepayments and accruals
-distinction between bad debt and provision for bad debt
WEEKEND ACTIVITY:
Enumerate the prepayments and accruals and explain each of them.
CONTENT:
PREPAYMENTS OR DEFERRALS
ACCRUALS
SUB-TOPIC: Adjustment in Profit and Loss account-Prepayments
Adjustments are made in Final accounts to show the true view of their transactions. They are closing entries or amendments made in the books at the end of the of accounting period in order to match revenue with expenses. This will show an accurate picture of account.
REASONS FOR THE YEAR ADJUSTMENTS
1 To provide for depreciation of fixed assets
2 End of year adjustment occurs because it will ensure the application of double entry principle.
3 To ensure that the financial statement are prepared in accordance with the concepts of accounting.
4 To provide for valuation of stock at the end of the year.
5 To ensure that all the income for the year is recorded.
6 To also, make sure that the expenses for the year is also recorded.
CLASSIFICATION OF ADJUSTING ENTRIES IN FINAL ACCOUNTS
1 Deferrals or Prepayments; These are inform of 1 Prepaid income 11 Prepaid expenses; It is prepayment for services in advance of their use .When payment is made beyond the date of accounting period specified it is known as prepaid expenses. NOTE; This will be treated as an ASSET.
11 Prepaid income; This is the receipt of revenue in advance of the related earning activities.
NOTE; It will be treated as a LIABILITY in the Balance sheet.
2 Accruals; This can be categorized into two, (1) Accrued Expenses
(11) Accrued Income
1) Accrued Expenses; They are –expenses for benefits received before cash payments are made. If payment could not meet up with period in question, provision must be made for accruals .This will be in the nature LIABILITY.
11) Accrued Income; this is the revenue that has been earned but for which cash has not been received at the close of final accounts preparation. It must be treated as an ASSET.
ADJUSTMENT AND POSTING OF ENTRIES INTO THE LEDGER
1) PREPAID EXPENSES: These expenses are paid during the period but are for subsequent (following period.) Only expenses for the period must be charged to the profit and loss account .The balance carried forward is an asset.
FORMAT: LEDGER ENTRY
Expenses Account
N
Cash (Trading year) x
Amount prepaid last year x
x N
Amount prepaid for next year x
Profit and loss x
x
Note: The balance b/d is the amount prepaid for next year and must be treated as an asset.
Example:
The financial year of Stephen ended on 31st December, 2011. Show the ledger account.
Advertisement paid during 2011 N500
Prepaid as at 31st December, 2010 N1, 000
Prepaid as at 31st December, 2011 N600
SOLUTION
Advertisement account
N
Cash 500
Prepayment (2010) 1,000
1,500
Profit and loss b/d 900 N
Prepayment(2012) 600
Profit and Loss c/d 900
1,500
ACCRUED EXPENSES
These expenses that have been incurred before being paid for by the organization, it could as well be called; owing, outstanding, arrears, due; if expenses should be properly marched with revenue, expenses should be recognized in the period incurred. It is treated as a liability in the balance sheet.
The procedure:
N
Amount paid during the Trading period x
Add: accrued owing in the Trading period x
X
Less: amount owing for last year x
Profit and Loss x
Ledger Entry
N
Cash paid x
Owing during the Trading period c/d x
x N
Amount owing from last year x
Profit and loss x
X
Balance b/d x
Example
The financial year of Stephen ended on 31st December, 1990. Show the ledger account
N
Telephone paid 31/12/1990 500
Telephone owing 1/1/1990 800
Telephone owing 31/12/1990 400
Solution
Telephone account
N
Cash 5, 000
Balance b/d 400
5, 400 N
Balance b/d 800
Profit and Loss 4, 600
5, 400
Balance b/d 400
INCOME RECEIVED IN ADVANCE
Income received during the current trading year may relate to the next year e.g. rent from premise sublet received in advance. This must be treated as a liability in the balance sheet.
The procedure
N
Cash received in the Trading period x
Add: amount received in advance last year but for current
Trading period x
X
Less: amount received in advance for next year x
Profit and loss x
Ledger entry
Income account
N
Received for next year x
Profit and loss x
x N
Cash received x
Income in advance last year x
X
Balance b/d x
Note: The balance brought down is the income received for next year and it must be treated as a liability.
Example
Write up the ledger account of Dr. Clement during the year ended 31st December, 1997. He earned commission of N40, 000 for the year ending 31st December, 1997, a sum of N10, 000 was received in advance as at 31st December, 1996 and another commission of N5, 000 was paid in advance to him as at 31st December, 1997.
Commission received account
N
Profit and loss 45, 000
Advance for next year 5, 000
50, 000 N
Last year 10, 000
Cash 40, 000
50, 000
Balance b/d 5, 000
INCOME ACCRUED
These are revenue earned for services that have been performed or for goods that have been delivered but the income has not been received at the date of preparing the final account. This is treated as an ASSET in the balance sheet.
The procedure:
N
Cash received in the year x
Add: owing for the trading year x
x
Less: income owing for previous year x
Profit and loss account x
Ledger entry
Income account
N
Income owing in the previous year x
Profit and loss x
x N
Cash received x
Income owing in trading year x
x
Note: The balance brought down is the amount owing as at the end of the trading period, it must be treated as an asset in the balance sheet.
Example
Commission received during the year ended 31st December 1991 amounted to N5, 000
Owing at 31st December, N3, 000
Owing at 31st December, N4, 000
Calculate the commission received for the year.
Commission received account
N
Balance b/d 3, 000
Profit and loss 6, 000
9, 000 N
Cash received 5, 000
Balance c/d 4, 000
9, 000
N
Cash received in 1991 5, 000
Add: owing for trading year 1991 4, 000
9, 000
Less: income owing in previous year 1990 3, 000
Profit and loss account 6, 000
EVALUATION
1) Final account of a sole trader is a periodic statement that covers a periodic statement that covers a specific of time and must be described “as at the end of the year-----“ (True/False)
2) What is prepaid income?
3) Where will prepayment be placed in a balance sheet?
Sub-topic2: Posting of entries in Final Accounts
The following trial balance was extracted from the books of Mighty hand Nigeria Enterprises on 31st March, 2012
Capital
Drawings
Purchases and Sales
Returns
Discounts
Debtors and Creditors
Stock
Cash at bank
Freehold premises
Motor vehicle at cost
Provision for depreciation:
Motor vehicles
Furniture
Salaries
Carriage inwards
Carriage outwards
Stationery
Electricity
Insurance
General expenses
Provision for bad debts
Bad debt
Rent receivable
Commission
12% Fixed deposit with bank
Furniture at cost
DR.
N
141, 000
3,684,000
73,000
102, 000
450, 000
343, 000
69, 000
460, 000
120, 000
406, 000
222, 000
103, 000
36, 000
49, 000
18,000
298, 000
4, 000
200, 000
25, 000
CR.
N
900, 000
5,179,000
62, 000
84, 0000
571,000
45, 000
10, 000
2, 000
38, 000
112, 000
Additional information:
a) Stock at close N318, 000
b) Expenses unpaid were: salaries N18, 000; electricity N800, Expenses prepaid ;Insurance N4, 000
c) Stock of unused stationery at 31/3/2012 was N2500
d) Adjust provisions for bad debts to 2%of debtors and create a provision for discounts allowable at 1%
e) The 12%fixed deposit was placed at the bank on 1st January, 2012.
f) Depreciation is to be provided as follows
Furniture 10% on cost
Motor vehicle 20% on cost
g) N2000 of the rent received is in respect of the next accounting year
You are required to prepare: Trading, Profit and Loss Account
Mighty hand Nigeria Enterprises
DrTrading, profit and loss account for the year ended 31st December, 2012 Cr
N
Opening stock 343
Add purchases 3,684
Add carriage inwards 222
3906
Less returns outwards 623,844
4,187
Less closing stock 318
Cost of goods sold 3,869
Gross profit 1237
5,106
N
Sales 5,179
Less returns inwards 73
5,106
5,106
Evaluation:
1. Which of this is not a liability? A.accrued wages B.prepaymentC.rent arrears or insurance due but unpaid.
2. Where is commission received entered in the_______________________
3. Where is commission received in advance shown in the balance sheet?
4. Where will the carriage outwards posted in the trading, profit and loss account?
5. What is called the payment for future services in business transactions?
GENERAL EVALUATION
Objective test:
1. Sales in trading account is referred to as A.total cash and payment B.total and credit sales
C.the sales of fixed assets D.the sales of goods on credit only E.total cash and debit sales
2. Rent receivable account is an example of A. nominal account B.real account C.personal account
D.private account E.impersonal account
3.Rent prepaid as at 1st January ,2002 was N10,000.Annual rent payable is N8,000 and rent accrued as at 31st December,2002 was N15,000.How much was paid for rent in 2002?
A.N80, 000 B.N75, 000 C.N55, 000 D.N35, 000 E.45, 000
4. Revenue is recognized in the profit and loss account as a A.debtors pay what is due from them
B.sale of goods takes place and money is received C.sale of goods takes place whether or not
money is received D.sale of a fixed asset take place E.purchase of fixed asset takes place
5. Which of the following statements is correct for profit and loss account?
A.for the year ended 31st December, 2009
B.as at 31st December, 2009
C.for the period 31st December, 2009
D.as at the year 2009
E.as on 31st December, 2009
WEEKEND ASSIGNMENT:
Practice Exercises 2 and 4 of the Simplified and Amplified Book Keeping and Accounting for sss by Femi Longe page 210 and 211.
PRE-READING ASSIGNMENT:
Read profit and loss account;
-distinction between prepayments and accruals
-distinction between bad debt and provision for bad debt
WEEKEND ACTIVITY:
Enumerate the prepayments and accruals and explain each of them.
