BOBBY ACCOUNTING 2 COMBINED.pdf

MASTERMINDS STUDY GROUP INTRODUCTION TO FINANCIAL ACCOUNTING COMPILED BY; KASSIM ISSAKA FELIX WOODE RAYMOND ABAYATEYE DISCLAIMER; This is documents contain lecture slides from previous years, solely intended for educational purposes. The contents were n...

MASTERMINDS STUDY GROUP INTRODUCTION TO FINANCIAL ACCOUNTING COMPILED BY; KASSIM ISSAKA FELIX WOODE RAYMOND ABAYATEYE DISCLAIMER; This is documents contain lecture slides from previous years, solely intended for educational purposes. The contents were not created by those who compiled them. KASSIM ISSAKA FELIX WOODE RAYMOND ABAYATEYE UGBS 208 INTRODUCTION TO FINANCIAL ACCOUNTING College of Humanities School of Business 2015/2016 INTRODUCTION TO FINANCIAL ACCOUNTING  Departmental Accounting College of Humanities School of Business 2015/2016 KASSIM ISSAKA FELIX WOODE RAYMOND ABAYATEYE  Learning Objectives Identify the advantages of keeping departmental records Allocate direct expenses and apportion common ( indirect) expenses associated with departments Prepare departmental income statements (trading, profit and loss account) 4 © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, U.G.B.S., (Accounting Dept.) What is Departmental Accounting?  A method of accounting , which is designed to ascertain the trading and operational results of each department of a departmental business organization.  The process of providing accounting information analysed by departments, so that each department of an organization can be treated as a separate unit. © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 5 U.G.B.S., (Accounting Dept.) Advantages of DepartmentalAccounting Evaluation of performance Evaluation of growth potential Provides justification for capital outlay Evaluation of efficiency Facilitates planning and control Helps in creating competitive environment Helps in identifying successful managers 6  © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, U.G.B.S., (Accounting Dept.) Methods and Techniques of Departmental Accounts  Separate sets of books for each department.  To keep accounting records of departments analytically, but its very expensive.  Single set of books for all departments kept in a columnar/tabular form. © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 7 U.G.B.S., (Accounting Dept.) Subsidiary books such as sales and purchases are also prepared in a columnar form to show records for each department. 8  Allocation and Apportionment of Expenses  Expenses which are related to a particular/specific department  Charged to that particular department. E.g. salary paid to foreman in production department, may be charged directly to the production department.  Expenses which relate to two or more departments  Apportion to the departments concerned on some suitable/equitable basis. E.g. rent of the shop can be  © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 9 U.G.B.S., (Accounting Dept.)     apportioned according to the floor area occupied by each department.  Expenses which cannot be allocated/apportioned reasonably  Directly recorded in the combined Income Statement. E.g. bank interest, audit fees etc. Common Basis of Apportionment  Income/Expenses Basis of Apportionment Sales of each department Salesmen salary, salesmen Commission, Selling expenses, Discount allowed, Advertisement, Bad debts, Carriage outward, Provision for bad debts, Showroom rent etc. Discount received, Carriage inward Purchases of each department Rents and rates, Insurance on Floor area of each department building, air conditioning expenses, Repairs and maintenance of building © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 11 U.G.B.S., (Accounting Dept.) Canteen expenses, Labour welfare Number of employees of each expenses, Medical expenses department Depreciation of assets, repair and maintenance of Asset value of each department assets, Insurance on asset Lighting Light points, Number of lights Power Horse Power Format of Departmental Income Statement  Dept. A Dept. B Total Sales xx xx xxx Returns Inward (xx) (xx) ( xxx ) Net Sales (A) xx xx xxx Cost of Goods Sold Opening stock xx xx xxx Purchases xx xx xxx Carriage Inwards xx xx xxx xx xx xxx Return Outwards (xx) (xx) ( xxx ) Goods available for sale xx xx xxx Closing stock (xx) (xx) ( xxx ) © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, U.G.B.S., (Accounting Dept.) © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 13 U.G.B.S., (Accounting Dept.)  (B) xx xx xxx Gross Profit (A-B) 10 xx xx xxx Format of Departmental Income Statement Dept. A Dept. B Total Gross Profit b/d xx xx xxx Other Income xx xx xxx  Total Income xx xx xxx Expenses (xx) (xx) ( xxx ) Net Profit xx xx xxx NB: This format is used when preparing the income statement on gross profit basis © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 15 U.G.B.S., (Accounting Dept.)  Types of Departments Independent departments – Have negligible inter department transfers Dependent departments – Have transfer of goods from one department to another for further processing – Issues may arise as a result of the transfer price (at cost/selling price) © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 16 U.G.B.S., (Accounting Dept.)  Inter-departmental Transfers Goods and services could be transferred from one department to the other on one of the following basis: – Cost – Market price – Cost plus a percentage of profit © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 17 U.G.B.S., (Accounting Dept.)  Unrealized Profit Transfers made at cost price are credited to the supplying department and debited to the receiving department. – Further adjustments not needed Transfers made at cost plus profit/market price – Provides a possibility of unrealized profit when part of the goods transferred remain unsold © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 18 U.G.B.S., (Accounting Dept.)  – Any unrealized profit arising from transfer of goods and services should be eliminated in the final accounts. © F. Aboagye-Otchere, B. Darko, A. Donkor, K. Appiagyei, 19 U.G.B.S., (Accounting Dept.) INTRODUCTION TO FINANCIAL ACCOUNTING Manufacturing Accounts  Prepared by Boateng and Edem College of Humanities Lecturers in Accounting School of Business University of Ghana Business School 2015/2016 Learning Objectives Identify and explain the elements of cost of production. © Boateng and Edem, U.G.B.S., (Accounting 21 Dept.)  Identify and explain the elements of cost of production. Determine and calculate prime cost and the cost of production. Prepare a manufacturing account by adjusting for work-in-progress. Show how cost of a product is built up in the final accounts of a manufacturing company. © Boateng and Edem, U.G.B.S., (Accounting 22 Dept.)  Determine manufacturing profit and adjust for unrealized profits. What is a Manufacturing Account? An account that details the cost of producing or manufacturing products ( goods or services) in a given period. It determines the cost of production needed for the calculation of cost of © Boateng and Edem, U.G.B.S., (Accounting 23 Dept.)  goods sold in the general income statement of a manufacturing company. Elements of Cost of Production  Direct Material Cost  Materials which become a physical part of the goods produced. E.g. raw materials  Direct Labour Cost  © Boateng and Edem, U.G.B.S., (Accounting 24 Dept.)     Cost of labour actually working on the goods produced. E.g. wages of production workers.  Other Direct Expenses  Other expenses directly attributed to the production of the goods. E.g. royalties  Indirect Manufacturing Expenses (Overheads) - All production costs which are indirect  Indirect materials e.g. lubricants  Indirect labour e.g. wages of foreman, cleaner  General overheads e.g. depreciation, rents etc. Other Divisions of Cost © Boateng and Edem, U.G.B.S., (Accounting 25 Dept.)  Prime Cost – Aggregate of all direct cost of manufacturing i.e. direct material cost plus direct labour cost plus direct expenses. Conversion cost – Cost involve in converting raw materials into partlyfinished product or finished product. i.e. direct labour cost plus direct expenses plus all factory overheads Production cost – Cost of manufacturing the product i.e. prime cost plus manufacturing overheads © Boateng and Edem, U.G.B.S., (Accounting 26 Dept.)  Kinds of Stock/Inventory Stocks/Inventory of Raw Materials – Materials to be converted into finished goods. i.e. the materials that are used to make the product. For example, fruits in a fruit processing company. Stocks/Inventory of Work-in-Process – Materials in their intermediate state of production. Thus, the units of product that are partially complete and will require further work before ready for sale. For example, the mixed dough in a bakery. Stocks/Inventory of Finished goods/products – © Boateng and Edem, U.G.B.S., (Accounting 27 Dept.)  – – – – Units of products that have been completed but have not yet been sold to customers. For a commercial organisation, they are goods bought to be sold and waiting sales. © Boateng and Edem, U.G.B.S., (Accounting 28 Dept.)  Format of Manufacturing Account Manufacturing Account for the year ended … Direct Materials Opening Stock xx Purchases of raw materials xx Carriage inwards xx Return outwards ( xx ) Raw materials available to use xx Closing stock ( xx ) Cost of raw materials used xx 29 Direct labour (wages) xx Accruals/Prepayment xx/(xx) xx Other direct expenses (if any) xx Prime Cost © Boateng and Edem, U.G.B.S., (Accounting Dept.) xx © Boateng and Edem, U.G.B.S., (Accounting 30 Dept.)  Format of Manufacturing Account Manufacturing Account for the year ended … Factory Overheads Expenses Indirect material xx Indirect labour xx General Factory Expense xx Accruals/Prepayments xx/(xx) xx Total overheads xx Cost of production xx Work in process adjustment Opening work-in-progress xx Closing work-in-progress (xx) Xx Cost of goods produced xx © Boateng and Edem, U.G.B.S., (Accounting 31 Dept.)  Format of Income Statement Income Statement for the year ended … Sales xxx Returns Inward ( xxx ) Net Sales (A) xxx Cost of Goods Sold Opening stock of finished goods xx Cost of goods manufactured/produced xx Purchases from outside suppliers (if any) xx Goods available for sale xx © Boateng and Edem, U.G.B.S., (Accounting 32 Dept.)  Closing stock (xx) ( xxx ) Gross Profit (A-B) xxx Other Incomes xxx xxx Format of Income Statement Income statement for the year ended … Profit and other income b/d xxx Expenses Administrative expenses xx Selling and distributive expenses xx © Boateng and Edem, U.G.B.S., (Accounting 33 Dept.) Other Expenses xx ( xxx ) Net Profit xxx CLASS ACTIVITY The following is the Trial Balance of OKUKUSEKU LTD, manufacturers of high target wax print, for the year ending December 31, 2011. © Boateng and Edem, U.G.B.S., (Accounting 34 Dept.)  GHC 000 GHC 000 Capital 48,000 Income surplus 12,000 Rent Expense 10,000 Office Assets at cost 30,000 Factory Assets at cost 40,000 Raw material at Jan 1, 2011 6,000 Indirect material at Jan 1, 2011 7,000 Work in progress at Jan 1, 2011 2,500 General factory expenses 15,000 Direct wages 10,000 Purchases of raw material 25,000 Purchases of indirect material 12,000 Direct expenses 4,000 Indirect factory wages 16,500 Bad debts 1,500 Sales © Boateng and Edem, U.G.B.S., (Accounting Dept.) 26 160,000 Dept.) Debtors 7,000 Bank 20,000 Creditors 5,000 Dividend 3,500 Finished goods at Jan 1, 2011 8,000 Carriage inwards on raw material 1,200 Office expenses 12,000 Commission received 2,200 Motor vehicle 35,000 Loan © Boateng and Edem, U.G.B.S., (Accounting 39,000 Dept.) 266,20027 266,200  Additional notes a. Closing stock : raw material 8,000,000; indirect material 5,000,000; work in progress 4,500,000; and finished goods 12,000,000 b. Provide for depreciation as follows: factory assets 10%; office assets 5%; motor vehicle 10%. Note: the motor vehicle is used equally in the factory and the office c. The rent expense is to be apportioned 70 % in the factory and 30% in the office Required: Prepare the manufacturing account, income statement for the year, as well as the balance sheet as at year end. Dept.)  © Boateng and Edem, U.G.B.S., (Accounting 28 © Boateng and Edem, U.G.B.S., (Accounting Dept.) Manufacturing Account for the year Ended…… GHC 000 GHC 000 GHC 000 DIRECT MATERIALS Opening Inventory 6,000 Purchases 25,000 carraige inwards 1,200 materials available 32,200 Closing Inventory ( 8,000) Materials used 24,200 Direct wages (Labour) 10,000 Direct expenses 4,000 Dept.) PRIME COST 38,200 OVERHEADS; Opening Indirect material 7,000 Purchases indirect material 12,000 Indirect materials available 19,000 Closing Indirect material ( 5,000 ) Indirect materials used 14,000 Indirect factory wages 16,500 Indirect expenses: General factory expenses 15,000 Depn: Factory assets (0.1*40,000) 4,000 Motor vehicle (0.1*35000*0.5) 1,750 Rent expense (.7*10000) 7,000 27,750 Total Overheads © Boateng and © Boateng Edem, U.G.B.S., and Edem,(Accounting U.G.B.S., (Accounting 41 30 58,250 Cost of Dept.) Production 96,450 Adjustment for W.I.P Opening work in progress 2,500 Closing work in progress (4 ,500 ) Cost of goods produced (note- Dept.) to income statement) 94,450 © Boateng and Edem, U.G.B.S., (Accounting 43 Dept.) Income Statement for the year ended… Sales 160,000 COGS Opening Finished goods 8,000 Cost of goods produced 94,450 Goods available for sale 102,450 Closing Finished goods (12,000 ) (90,450 ) Gross profit 69,550 Commission received 2,200 © Boateng and Edem, U.G.B.S., (Accounting 44 Total Income Dept.) 71,750 Expenses; Rent expense (0.3*10000) 3000 Depn; Office assets (0.05*30000) 1500 Motor Vehicle (0.1*35000*.5) 1750 Bad debts 1500 Office expenses 12000 (19750) © Boateng and Edem, U.G.B.S., (Accounting 45 Net profit Dept.) 52,000  Market Value of Goods Manufactured  Gross profit on manufacturing (manufacturing profit) is the difference between the market value of goods manufactured and the cost of goods manufactured. Market value of goods manufactured xx Cost of goods manufactured ( xx ) Manufacturing profit xx  Manufacturing profit is accounted for in the income statement and disclosed separately. © Boateng and Edem, U.G.B.S., (Accounting 46 Dept.)   Where not all goods are sold, unrealized manufacturing profit must be provided for. Treatment of Manufacturing Profit Income Statement for the year ended … Sales xxx Returns Inward ( xxx ) Net Sales (A) xxx Cost of Goods Sold Opening stock of finished goods xx Market value of goods manufactured xx © Boateng and Edem, U.G.B.S., (Accounting 47 Dept.)  Purchases from outside suppliers (if any) xx Goods available for sale xx Closing stock (xx) ( xxx ) Gross profit on trading c/d xxx Manufacturing profit xxx Gross profit xxx Treatment of Provision for Unrealised Profit © Boateng and Edem, U.G.B.S., (Accounting 48 Dept.)  Recall treatment of provision for doubtful debt? Same principle Finding the amount of unrealised profit © Boateng and Edem, U.G.B.S., (Accounting 49 Dept.)  Find the margin percentage Apply the percentage on the value of closing inventory of finished goods to get the profit unrealised Compare current unrealised profit to previous provision for unrealised profit if any Treatment of Provision for Unrealised © Boateng and Edem, U.G.B.S., (Accounting 50 Dept.)  Profit If there is an increase in provision; -charge the “increase” to the I/S as expense (loss) - In statement of financial position, reduce the value of closing inventory of finished goods by the amount of unrealised profit (i.e. the new/computed unrealised profit) Treatment of Provision for Unrealised © Boateng and Edem, U.G.B.S., (Accounting 51 Dept.)  Profit If there is a decrease in provision; - Add the “decrease” to gross profit in the I/S since it is a gain - In the statement of financial position, reduce the value of closing inventory of finished goods by the amount of unrealised profit © Boateng and Edem, U.G.B.S., (Accounting 52 Dept.)  CLASS ACTIVITY The following is the Trial Balance of NEW OKUKUSEKU LTD, manufacturers of high target wax print, for the year ending December 31, 2011. Additional notes; a. Closing stock : raw material 8,000,000; indirect material 5,000,000; work in progress 4,500,000; and finished goods 12,000,000 b. Goods produced are transferred at a mark-up of 20% 53  c. Provide for depreciation as follows: factory assets 10%; office assets 5%; motor vehicle 10%. Note: the motor vehicle is used equally in the factory and the office d. The rent expense is to be apportioned 70 % in the factory and 30% in the office GHC 000 GHC 000 Capital 48,000 Income surplus 12,000 Rent Expense 10,000 Office Assets at cost 30,000 Factory Assets at cost 40,000 Raw material at Jan 1, 2011 6,000 Indirect material at Jan 1, 2011 7,000 Work in progress at Jan 1, 2011 2,500 General factory expenses 15,000 Direct wages 10,000 Purchases of raw material 25,000 Purchases of indirect material 12,000 Direct expenses 4,000 Indirect factory wages 16,500 Bad debts © Boateng and Edem, U.G.B.S., (Accounting 1,50041 Dept.) Sales 160,000 Debtors 7,000 Bank 20,000 Creditors 5,000 Dividend 3,500 Finished goods at Jan 1, 2011 9,600 Provision for unrealized profit 1,600 Carriage inwards on raw material 1,200 Office expenses 12,000 Commission received 2,200 Motor vehicle 35,000 Loan 39,000 267,800 267,800  CLASS ACTIVITY NOTE THE DIFFERENCE BETWEEN THIS AND THE PREVIOUS EXAMPLE? b. Goods produced are transferred at a mark-up of 20 % Provision for unrealized profit- 1,600 Dept.) © Boateng and Edem, U.G.B.S., (Accounting 43  New Okukuseku Ltd Manufacturing account for the year ended…. GHC 000 GHC 000 GHC 000 DIRECT MATERIALS Opening Inventory 6,000 Purchases 25,000 carraige inwards 1,200 materials available 32,200 Closing Inventory ( 8,000) Materials used 24,200 Direct wages (Labour) 10,000 Direct expenses 4,000 44 Dept.) PRIME COST 38,200 OVERHEADS; Opening Indirect material 7,000 Purchases indirect material 12,000 Indirect materials available 19,000 Closing Indirect material (5,000) Indirect materials used 14,000 Indirect factory wages 16,500 Indirect expenses: General factory expenses 15,000 Depn: Factory assets (0.1*40,000) 4,000 Motor vehicle (0.1*35000*0.5) 1,750 Rent expense (.7*10000) 7,000 27,750 Total Overheads 58,250 © Boateng and Edem, U.G.B.S., (Accounting 45 Cost of Production Dept.) 96,450 Adjustment for W.I.P Opening work in progress 2,500 Closing work in progress (4,500) Cost of goods produced 94,450 Manufacturing Profit (0.2* 94,450) (note mark-up is on cost) 18,890 © Boateng and Edem, U.G.B.S., (Accounting 46 Dept.)  Transfer at market value gives rise to manufacturing profit and hence provision must be made for any unrealised profit; NB: Since finished goods are at market value, find unrealised profit by Multiplying margin% by inventory of finished goods; 25 % * 12,000 = 3,000 Previous provision= 1,600 Hence, increase of (3,000- 1 ,600)= 1,400 1 ,400 to Income Statement 3,000 to statement of financial position- to reduce value of finished goods © Boateng and Edem, U.G.B.S., (Accounting 47 Dept.) Income Statement for the year ended… Sales 160,000 COGS Opening Finished goods 9,600 Market value (from manufacturing) 113,340 Goods available for sale 122,940 Closing Finished goods (12,000) (110,940) Gross profit 49,060 Manufacturing profit 18,890 Commission received 2,200 Total Income 70,150 Expenses; Rent expense (0.3*10000) 3000 Depn; Office assets (0.05*30000) 1500 Motor Vehicle (0.1*35000*.5) 1750 Bad debts 1500 Office expenses 12000 Increase in prov. For unrealised profit 1400 (21,150) Net profit 49,000 INCOME SURPLUS Opening bal. 12000 Net profit 49 ,000 61000 Dividend (3500) Closing bal. 57500 © Boateng and Edem, U.G.B.S., (Accounting 50 Dept.) Financed by; Capital 48000 Income surplus 57500 105500 Loan 39000 144500 © Boateng and Edem, U.G.B.S., (Accounting 52 Dept.) INTRODUCTION TO FINANCIAL ACCOUNTING Partnership Accounts College of Humanities School of Business 2015/2016  Learning Objectives Identify and explain the characteristics of partnership. Describe the main features of partnership agreement and the rules governing partnerships in Ghana. Explain the purpose of and be able to prepare a profit and loss appropriation account. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 70 U.G.B.S., (Accounting Dept.)  Prepare current accounts, capital accounts and financial statements of a partnership. What Partnership is Incorporated Private Partnership Act of 1962, Act 152 ( IPPA) governs partnership in Ghana. It is “the association of two or more individuals carrying on business jointly for the purpose of making profits”. S.3 (1) of IPPA Maximum number of persons is 20. S.4 (2) of IPPA © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 71 U.G.B.S., (Accounting Dept.)  Formed by formal agreement (partnership agreement). What Partnership is not A family ownership or co-ownership of property whether or not the family or coowners share any profits made by the use of that property © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 72 U.G.B.S., (Accounting Dept.)  The remuneration of a servant or agent of a person engaged in business by a share of profits of the business shall not necessary make the servant or agent a partner Nature of Partnership  Firm (as a corporate body) is distinct from the partners.  Formed by formal agreement (partnership agreement).  Partners are jointly and severally liable. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 73 U.G.B.S., (Accounting Dept.)   The partnership is liable if any individual partner acting in normal course of business carries out any wrong doing.  If one partner is sued for wrong doing, the other partners may be sued also.  Liability is unlimited.  Relationship between partners is a fiduciary one.  Every partner is also an agent of the firm. Partnership Agreement Name and nature of business of the firm. The amount of capital to be contributed and maintained by each partner. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 74 U.G.B.S., (Accounting Dept.)  The rate of interest (if any) to be paid on capital. The extent to which drawings are allowed and the rate of interest (if any) to be charged on drawings. The remuneration (if any) to be paid to partners for their services The ratio in which profits and losses are to be shared. Keeping of books and accounts. Arrangements for admission of new partners. Rules in the Absence of Partnership Agreement. [Section 35] All partners are to share equally in capital, profits and losses. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 75 U.G.B.S., (Accounting Dept.)  No interest is allowed to be charged on capital. No remunerations are to be paid to partners. Any advance made by a partner in excess of his agreed shared capital will receive an interest of 5% p.a. Every partner may take part in the management of the business of the firm No partner shall be entitled to remuneration for acting in the firm’s business No person may be introduced as a partner without his consent and the consent of all the existing partners The partnership books and accounts shall be kept at the place of business of the firm Accounting Requirements © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 76 U.G.B.S., (Accounting Dept.)  Every firm shall cause to be kept proper accounts with respect to: – its financial position and changes therein, –the control of, and accounting for, all property acquired. Partnerships and Other Forms of Businesses Now lets compare partnerships with other forms of business organizations. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 77 U.G.B.S., (Accounting Dept.)  Partnership vs. Sole Proprietor © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 78 U.G.B.S., (Accounting Dept.)   Risk is spread and shared.  Partners provide a range of specialised skills.  More capital available.  Some partners work harder for the firm than others.  There may be disputes.  Slow decision making.  Joint and several liability. Partnership vs. Companies © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 79 U.G.B.S., (Accounting Dept.)  Less formal set up. No company formalities (e.g. statutory audits and accounts filing). Much easier to sell shares than to realise capital in a partnership. Partnership structure can be cumbersome. Liabilities are unlimited. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 80 U.G.B.S., (Accounting Dept.)  Differences in Financial Statements Income statement –Profit and loss appropriation account Statement of Financial Position –Capital accounts for each partner © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 81 U.G.B.S., (Accounting Dept.)  –Current accounts for each partner Profit and Loss Appropriation Account Typical appropriations are  interest on capital (%) – gives recognition to partners contributing different amounts of capital to the firm  salary (annual) – not to be confused with salaries paid to employees (which are an expense in the Profit and loss) © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 82 U.G.B.S., (Accounting Dept.)   Interest on drawings  Interest on current accounts  Share of profit and loss © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 83 U.G.B.S., (Accounting Dept.)  Format of Appropriation Account Profit and Loss Appropriation account for the year ended … Net Profit b/d xxx Add: Interest on drawings A xx B xx xx Interest on current accounts B (DR) xx xxx Less: Interest on capital A xx B xx (xx) Interest on current accounts A (CR) (xx) Partner’s salary: B (xx) Profit to be shared xxx Share of profit A xxx © F. Aboagye-BOtchere, A. Donkor, B. Darko, G. M. 66 xxx Y. Owusu U.G.B.S., (Accounting Dept.)  Capital Account Account maintained to record the capital contributions of the individual partners. – It is credited with contributions from partners and debited with withdrawals from capital by partners. Fixed Capital Account – Only capital increases and decreases are recorded in the capital account. Floating/ Fluctuating Capital Account © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 85 U.G.B.S., (Accounting Dept.)  – Records all other resource flow, to and from the partners. Current Account When a fixed capital account method is used, the current account takes care of all the short term interests or otherwise of the partners in the firm. This relieves the capital account of the details such as share © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 86 U.G.B.S., (Accounting Dept.)  of profit, interest on capital and drawings, partners’ salaries among others. A Typical Current Account In Columnar Form Details/Particulars A B Details/Particulars A B Balance b/d - xx Balance b/d xx - Interest on drawings xx xx Interest on capital xx xx Drawings (cash/goods) xx xx Interest on current a/c xx - © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 87 U.G.B.S., (Accounting Dept.)  Balance c/d - xx Partners salaries xx xx Share of profit xx xx xx - Balance c/d xx xx xx xx Balance b/d Balance b/d xx - xx Partner’s Loan Account © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 88 U.G.B.S., (Accounting Dept.)  Where a partner gives a loan to the firm or makes an advance in excess of the agreed capital contribution, the amount should be credited to a separate loan account and not included in the capital account: – Such advances attracts an interest rate of 5% per annum. ( S 35 of ACT 152) – On the winding up of the firm, repayment of partners’ loans rank at a higher priority to that of partners’ capital. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 89 U.G.B.S., (Accounting Dept.)  CLASS ACTIVITY Refer to Question 1 of Worksheet 3 (Partnership Accounts): Kako, Koobi, Kewuro Partners © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 90 U.G.B.S., (Accounting Dept.) INTRODUCTION TO FINANCIAL ACCOUNTING Accounting for Companies  College of Humanities School of Business 2015/2016 Learning Objectives Explain and discuss the nature of limited liability companies © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 92 U.G.B.S., (Accounting Dept.)  according to the Company’s Act, 1963 (Act 179). Explain the differences between the different classes of shares. Account for the issuance of shares. Explain the purpose of and prepare an income surplus account. Prepare the Income Statement and Statement of Financial Position of a limited liability company. Definition of a Company © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 93 U.G.B.S., (Accounting Dept.)  A company is “a body corporate formed and registered under this code (Companies Act 1963 - Act 179) or an existing company”. – A body corporate is “a corporation formed under (the company’s Act) or otherwise and whether in Ghana or elsewhere”. (First Schedule) – “No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on business … unless it is registered as a company under (the company’s Act) or formed in pursuance of some other enactment for the time being in force. (Section 5) Characteristics of Companies © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 94 U.G.B.S., (Accounting Dept.)  Separate legal Entity – A company formed under the Act assumes the status of natural person with full capacity, except to the extent that its Regulations otherwise provide, for the furtherance of its objects and of any business carried on by it and authorized by its Regulations. – As a body corporate, it exists as a legal entity separate and distinct from its members. (Section 24) Separation of management and ownership Limited liability Perpetual succession Transferability of interests Legal personality © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 95 U.G.B.S., (Accounting Dept.)  Formation of Companies The minimum number of persons who can form a company is one. The total number of members and debenture holders for a private company is restricted to fifty. (Section 8) Section 180 requires a minimum number of two (2) directors. Formation requires: – Compliance with the provisions in the Act and satisfying the registrar general. – Certificate of Incorporation issued to the Promoters after meeting the minimum capital requirement – Certificate of Commencement of Business will be issued to start trading. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 96 U.G.B.S., (Accounting Dept.)  – Regulations of the company - content includes the name of the company, nature of business(es), status (section 24), names of first directors and their powers. Types of Companies (Section 9) Company limited by shares – liability of members is limited to the amount, if any, unpaid on the shares respectively held by them. Company limited by guarantee – liability of its members is limited to the amount the members may respectively undertake to contribute to the assets of the company in the event of it being wound up. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 97 U.G.B.S., (Accounting Dept.)  Unlimited company – the liabilities of its members is not limited. Private and Public companies Private And Public Companies A private company shall be a company which by its regulations: – restricts the right to transfer its shares – the total number of members and debenture holders is restricted to 50, excluding the bona fide current and former employees. – prohibits the company from making any invitation to the public to acquire any shares or debentures of the company. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 98 U.G.B.S., (Accounting Dept.)  – prohibits the company from making any invitation to the public to deposit money for fixed period or payable at call, whether bearing or not bearing interest. The Act in section 9 (4) says that “any other company shall be a public company”. Accounting and Audit Requirements (Section 123-136) Keeping of books of account Circulation of profit and loss account, Statement of Financial Position and reports Profit and loss account Statement of Financial Position © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 99 U.G.B.S., (Accounting Dept.)  Group accounts Particulars of Directors emoluments and pensions Particulars of amounts due from officers Signing and publication of accounts Directors’ report Auditors’ report Appointment and remuneration of auditors Removal of auditors Duties and powers of auditors Shares © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 100 U.G.B.S., (Accounting Dept.)  A share represents the right of ownership in a company. – The ownership is in proportion to the number of shares held. – The amount paid for the shares is not the basis of claiming more ownership but the number of shares acquired. “All shares created after the commencement of the Act shall be shares of no par value”. (Section 40) – Shares in Ghana do not have a fixed amount or price attached to it upon its creation, hence; – Shares can neither be issued at a premium nor discount. Types of Shares © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 101 U.G.B.S., (Accounting Dept.)  Preference Shares – They are shares that do not entitle the holder thereof to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up or otherwise. – They have priority over equity/ordinary shares in the distribution of dividend and capital in the event of winding up. Ordinary Shares – They are not entitled to a fixed amount of dividend and can only be paid after preference shareholders have been paid. – They are also entitled to residual capital (i.e. rank after preference shares) in the event of winding up. i.e. they bear the residual risk of the company. – They have unrestricted voting rights © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 102 U.G.B.S., (Accounting Dept.)  Issuance of Shares Company may issue shares up to the total number authorized by its regulations (Section 41). – Shares may be issued at such times and for such consideration as the company may determine and shall be paid for at such times as agreed by the members and the company or as may be specified in the regulations, except in capitalization issue. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 103 U.G.B.S., (Accounting Dept.)  Shares shall be issued for valuable consideration and paid for in cash, except otherwise agreed. (Section 42) Forms of Issuing Shares Initial Public Offer – Sale of shares by a private company for the first time to the public. Private Placement – The sale of shares of companies to private investors without the use of public market exchanges. Capitalization/Bonus/Scrip Issue © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 104 U.G.B.S., (Accounting Dept.)  – Monies in a company’s reserve is converted into capital and then distributed to shareholders as new shares in proportion to their existing shareholdings. Rights Issue – Shares are issued to existing shareholders in proportion to their current shareholding, respecting their pre-emption rights and usually at a lower price than the current share price of the company. Procedure for Issuance of Shares Invitation to the Public to apply for shares – Through the circulating of Prospectus and advertising in the mass media, which gives the conditions of the offer. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 105 U.G.B.S., (Accounting Dept.)  Application (offer from the public to the company accompanied by cash from the public) – States the number of shares desired by the applicants. – Application remains an offer to buy shares in the company until the company accepts or rejects this offer. Allotment of shares (acceptance or rejection by the company) – Process of allocating shares to applicants. – Acceptance of the offer, Rejection of the offer or Acceptance of part of the offer. Calls for arrears on share values Forfeiture of shares Treasury Shares © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 106 U.G.B.S., (Accounting Dept.)  Shares which have been once issued but have been recalled by the company through: – Forfeiture – Redemption – Purchase/Acquisition Any issue of shares while there are shares in treasury, is deemed to be an issue first of treasury shares before any fresh issue Share Deals Account © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 107 U.G.B.S., (Accounting Dept.)  An account required by the Act for certain dealings in treasury shares – When shares are reissued, the proceeds are credited to this account. – When the company redeems or acquires it own shares, the transfer from Income Surplus account is also credited to this account. – All expenses incurred in the redemption and acquisition of shares are charged to this account. This is the reserve that prevents the company’s stated capital from reducing. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 108 U.G.B.S., (Accounting Dept.)  Components of Owner’s Equity The total resources owned by the members or owners of the company. It consists of: Stated Capital – Either from the cash or other consideration from the issue of shares or transfers made into the stated capital account from the income surplus (capitalization issue) Share Deals Account Income Surplus – Retained earnings of the company over the years. All distributions from profits are made in this account. Capital Surplus – Usually results from revaluation of non-current assets © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 109 U.G.B.S., (Accounting Dept.)  (appreciation). It is not intended to be distributed as dividend as they are unrealized surpluses. © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 110 U.G.B.S., (Accounting Dept.)  Payment of Dividends A company can only pay dividend to shareholders if: – After such payment the company will be able to pay its debts as they are due – The amount of such payment does not exceed the income surplus of the company prior the payment. Dividend payment could be: – Cash or non-cash © F. Aboagye111 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  – Interim or/and proposed Shares Payable by Installments Accounting for shares payable by installments will be discussed by considering the procedure for issuance of shares: – Invitation to the Public to apply for shares – Application (offer from the public to the company accompanied by cash from the public) – Allotment of shares (acceptance or rejection by the company) © F. Aboagye112 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  – Calls for arrears on share values – Forfeiture of shares Application Stage When cash/cheque is received on application Dr Bank/cash Account Cr Application Account with the total amount of cash received When consideration other than cash is received © F. Aboagye113 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Dr The relevant asset account Cr Application account with the agreed value of the consideration received Allotment Stage Transfer to Stated Capital Account Dr Application Account Cr Stated Capital Account with the total application amount received in respect of shares allotted © F. Aboagye114 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Refund of money for rejected applications Dr Application Account Cr Bank/Cash account with the amount received on applications in respect of total applications rejected. Allotment Stage Retention of excess funds for other stages (partly successful applicants) Dr Application Account Cr Allotment Account © F. Aboagye115 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  with amounts received in respect of rejected portions of applications On receipt of allotment monies (cash/cheque) due on shares issued Dr Cash/Bank Account Cr Allotment Account with monies received on allotment Allotment Stage Transfer to the stated capital Dr Allotment account © F. Aboagye116 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Cr Stated capital account with the total sum received on allotment © F. Aboagye117 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  On Calls Stage On receipt of cash/cheque Dr Bank/cash account Cr Call account Refund of excess money to applicants, if any, after full payment. Dr Call account Cr Bank account Transfer to Stated Capital account Dr Call account Cr Stated capital account © F. Aboagye118 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Forfeiture Upon forfeiture of shares; no entry is made On Re-issue of forfeited shares Dr Cash account Cr Share Deals account Capitalization/Bonus issue Dr Income Surplus account Cr Stated capital account © F. Aboagye119 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Shares Payable on Application Receipt of monies on application Dr Cash/Bank Account Cr Application account with the total amount received with applications Refunds of rejected applications Dr Application account © F. Aboagye120 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Cr Cash/Bank account with amount refunded to rejected applicants Shares Payable on Application Transfer to Stated Capital Dr Application account Cr Stated Capital account with amount received for shares issued Issuance of Treasury Shares © F. Aboagye121 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Treasury shares have all rights and obligations attached to shares of similar class in the company. Full payment on application method is adopted. Accounting entries: Dr Cash/Bank account Cr Share Deals account with the total amount received in respect of shares issued © F. Aboagye122 -Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  CLASS ACTIVITY Refer to Question 1 of Worksheet 4 (Accounting for the Issue of Shares) © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  99 Financial Statements of a Company Income Statement Income Surplus Account Statement of Financial Position Statement of Cash flow © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Notes to the Financial Statements 100 Income Statement Notes 2015 2014 ¢m ¢m Turnover 1 xxxxx xxxx Cost of sales 2 (xxx) ( xxx ) Gross profit xxxx xxxx © F. Aboagye Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  General administrative and selling expenses 3 (xxx) ( xxx ) Operating profit xxxx xxxx Other income 4 xxxx xxxx Profit Before Interest and Taxation xxxx xxxx Interest/financial charges 5 (xxx) ( xxxx ) Profit before taxation xxxx xxxx Taxation 6 (xxx) ( xxx ) Profit after taxation transferred to income xxxx xxxx 101surplus- Income Surplus Account © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  ¢ ¢ ¢ ¢ 2015 2014 Balance b/fwd xxx xxx Profit for the year xxx xxxx xxxx xxxx Less: proposed dividend-interim xxx xxx Final xxx xxx xxx xxx Transfers to capital surplus a/c xxx xxx Balance c/fwd xxxx xxxx 102 © F. Aboagye Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Statement of Financial Position Notes 2015 2014 ¢m ¢m ¢m ¢m Non-current Assets 7 xxxx xxxx Investments 8 xxx xxx Current Assets Inventory xxx xxx Receivables 9 xxx xxx Short-term investments xxxx xxxx Cash and bank balance xxxx xxxx Current Liabilities Bank overdraft 10 xxx xxx Payables 11 xxx xxx Dividends payable 12 xxx xxx Taxation payable 13 xxx xxxx xxxx xxxx Net current Assets/(Liabilities) xxxx xxxx Long term Liabilities Term loan 14 (xxx) ( xxx ) Net Assets xxxx xxxx Financed By: Stated Capital 15 xxxx xxxx © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.) Income Surplus xxx xxx Share Deals xxx xxx Capital Surplus 16 xxx xxx xxxx xxxx 103 International Financial Reporting Standards (IFRS) IFRS is the collection of financial reporting standards developed by the International Accounting Standards Board (IASB), an independent International Standards setting organization © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  The aim of IFRS is to provide “a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements 104 Structure of IFRS IFRS comprise: – IASs (written by the IASC from 1973 to 2000; amended by IASB) – IFRS (written from 2001 by the IASB) © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  – Standards Interpretation Committee (SIC)’s interpretations – IFRIC’s interpretations IASs, IFRSs, SICs, IFRICs all have full authority IFRS are considered a “principle based” set of standards in that they establish broad principles as well as dictate specific treatments 105 © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.) What is the structure of the international standard setters? IFRS Monitoring Foundation Board International IFRS IFRS Accounting Interpretations Advisory Standards Committee Council Board (IASB) IFRS and  IFRS for SMEs IFRS adopted in Ghana 107 Full IFRSs – required or permitted for financial reporting listed companies Unlisted which are not SMEs (banks, etc) The IFRS for SMEs – issued in July 2009 – required or permitted for financial reporting SMEs © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. 107 Y. Owusu U.G.B.S., (Accounting Dept.) The IFRS Objective 108 IFRS to be : The single set of accounting standards used worldwide providing high-quality, transparent and comparable information for investors and other users of financial information.  108 © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Why IFRS? Investors are acting on a global market !! National standards don’t work on a global market © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Cross boarder business is hindered by national standards 109 Benefits to Capital Markets Credibility of local market to foreign investors More cross-border investment © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Efficient capital allocation Comparability across political boundaries Facilitates global education and training 110 Benefit to companies Lower cost of capital © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Facilitates raising capital abroad Integrated IT systems “One set of books” + easier consolidation Better understanding of financial statements from business partners abroad 111 © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu U.G.B.S., (Accounting Dept.)  Implementing IFRS: Challenges Commitment => Decision: leaders, law, regulation Responsibility Stakeholders involvement Solid financial system Training Educational programs Divergencies between local GAAP and IFRS © F. Aboagye-Otchere, A. Donkor, B. Darko, G. M. Y. Owusu 140 U.G.B.S., (Accounting Dept.)  Transition: systems, processes, professionals Tax neutrality (identified as key in many countries) INTRODUCTION TO FINANCIAL ACCOUNTING Accounting for Single Entry & Incomplete Records  College of Humanities School of Business 2015/2016 113 Learning Objectives Explain how the accounting equation permits the measurement of profit when accounting records are incomplete. Draw up a statement of affairs of a business with single entry and incomplete records. 142 Dept.)  Determine profit from incomplete records using opening and closing statement of affairs. Deduce sales and purchases figures from single entry and incomplete records. © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting  Importance of Keeping Records Performance assessment Planning and control of operations Tax purposes Determination of profit/loss Requirement for sourcing for funds Business Valuations © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 144 Dept.)  Others- extraction of trial balance, identification of errors, misappropriation Incomplete Records Accounting records which have not been maintained according to strict double entry principles. Full records are not kept either because – the proprietor of the business doesn’t keep a full set of accounts. © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 145 Dept.)  – some of the business accounts are accidentally destroyed or lost. – there is no legal requirement. – the cost of a bookkeeper is not justified. – information for preparation of financial statements can be obtained from other sources. Determination of Profit Net Assets (Capital) Approach –Based on the accounting equation. © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 146 Dept.)  –The only way capital can increase is either by introduction of cash/resources or making profit. Cash Book (Income) Approach –Elements of the financial statements are determined via series of adjusting entries. Net Assets (Capital) Approach © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 147 Dept.)  This method of determining profit/loss is based on the assumption that capital grows by way of profit and reduces by losses made. Accounting equation: Assets – Liabilities = Capital Net Assets = Capital Profits are determined using the opening and closing capital via the preparation of statement of affairs. Net Assets (Capital) Approach © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 148 Dept.)  Statement of Affairs as at … Assets Non current assets xx Current assets xx xx Liabilities Non current liabilities xx Current liabilities xx ( xx ) Net Assets (capital) xx Profit Determination © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 149 Dept.)  Drawings – This has the tendency to reduce the closing capital and hence the profit. – They are either added to “apparent profit” or subtracted from “apparent losses” Capital Introduced – This has the effect of increasing the closing capital and hence the profit. – It is therefore subtracted from the ‘‘apparent profit” or added to the “apparent losses” Net Assets (Capital) Approach © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 150 Dept.)  Determination of Profit Closing Capital xxx Plus: Drawings xxx xxx Less: Opening Capital ( xxx ) Additional Capital ( xxx ) Profit /(Loss) xx/(xx) Net Assets (Capital) Approach © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 151 Dept.)  Determine the opening and closing capital at the beginning and end of the period via preparation of statement of affairs. Trace all withdrawals made by owners for their personal use (drawings). Determine whether there have been any injection of additional capital Based on the accounting equation, determine the profit or loss. CLASS ACTIVITY © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 152 Dept.)  Cash Book (Income) Approach A full income statement and balance Sheet are prepared from the incomplete records provided. It is mostly used when a cashbook could be drawn up, opening and closing balances are available and expenses incurred and revenue earned could be derived. © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 153 Dept.)  Income Approach - Steps involved Compute the opening capital (using the statement of affairs template) Prepare your cash account to find missing figures such as drawings etc. Ascertain credit sales (using Trade receivables control account) Ascertain credit purchase (using trade payables control account) © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 154 Dept.)  Ascertain the expenses chargeable to the profit and loss account by making adjustments for accruals and prepayments Prepare income statements Incomplete Records and Missing Figures Drawings/Cash Received/Cash Paid: – Where the missing amount is in respect of payments, then its normal to assume that the missing figure is the amount required to make both totals agree in the cash © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 155 Dept.)  column of the cash book (note that for bank related transactions a copy of all transactions can always be obtained from the bank). Where payments are more than receipts, it is likely that the missing figure is cash receipts from customers CLASS ACTIVITY © G. M. Y. Owusu & Rita A. BekoeU.G.B.S., (Accounting 156 Dept.)  UGBS 208 Introduction to Financial Accounting Session 6 - Accounting for Non-Profit Making Organisations Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected]  UNIVERSITY OF GHANA College of Education School of Continuing and Distance Education 2014/2015 2016/2017 - Session Overview Business organizations exist primarily to make profits and provide appropriate returns to its owners. However, there are some organizations whose purpose is to provide services to the public or its members. Such organizations are not intended to be profit oriented. This session seeks to differentiate between profit and non-profit oriented organizations and how to account for NPOs. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to — Explain the main differences between financial statements of NPOs and profit making organisations. — Prepare receipts and payments accounts, the income and expenditure accounts and the statement of financial position of NPOs — Calculate profits/losses for special entities of NPOs — Make appropriate entries regarding subscriptions, life membership accounts etc. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics - Financial Statements of NPOs Receipts and Payments Account Income and Expenditure Account Statement of Financial Position - Sources of Funds for NPOs - Membership Subscription UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 19 of Marfo-Yiadom, Asante & Tackie (2015) and Chapters 36 of Wood and Sangster (2008) Session Slides Other Financial Accounting text books available to students UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS Slide 5  Non-Profit Oriented Organizations Organizations whose main(NPO'spurpose) is not trading or profit making e.g. charities, clubs, associations, professional bodies etc. Their main financial statements are: — Receipts and Payments account — Income and Expenditure account — Statement of Financial Position UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS Slide 6  Receipts & Payments Is the summary of the Cashbook for the accounting period. It records the cash receipts and payments. If the organization does not have other assets, apart from cash, and liabilities as well and does not intend showing the income and expense differently, it will be enough to account for all financial transactions that have taken place in the period in the receipts and payments. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 7  Format of Receipt & Payments Receipts Payments Cash/Bank balance b/d xxxx Barmen’s wages Xxxx Members dues Xxxx Clubhouse expenses Xxxx Donations received Xxxx Honorarium to pastors Xxxx Bar takings Xxxx Utilities Xxxx Rent received Xxxx Donation to orphanages Xxxx Cash/Bank balance c/d xxxx UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 8  xxxxx xxxxx Income & Expenditure Account It is the "Income statement" for a non-profit organization, used to assess the growth or otherwise in its "capital" termed as the Accumulated Fund. It is prepared with the same principle as the normal income statement of a trading organization. Only revenue receipts and revenue expenditures are considered in the Income and Expenditure account. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 9  Capital receipts and expenditures go into the Statement of Financial Position. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 10  Differences In Terminologies Profit-oriented organizations Non-profit-oriented organizations Income Statement Income and Expenditure account Cash Book Receipts and Payments account Excess of Income over Expenditure ( Net Profit surplus ) Excess of expenditure over income ( Net Loss deficit ) UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 11 Capital Accumulated Fund Format of Income & Expenditure 0 0 Incomes: Subscription xxx Bar profit etc. xxx xx Expenditures: UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 12 stationery xxx Donations etc. xxx xx Excess of income over expenditure ( or vice versa) xxx Receipts & Payments vs. Income & Expenditure Receipts and Payments Income and Expenditure It records both capital and revenue UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 13  expenditure It records only revenue expenditure, capital expenditure goes to statement of financial position It has an opening balance It does not have opening balance This is the cash book of the organization This is the “income statement” of the organization It records all cash receipts and payments It records only incomes and expenses relating to irrespective of the period to which they the period under consideration. relate. Difference is the cash/bank balance at a Difference is the excess of income/expense over time expense/income. (i.e. surplus or deficit) It is a real account It is a nominal account Sources of Finance for NPOs UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 14  Membership dues Annual subscriptions Fund raising activities Special fund raising programs-Dinner dance Donations Trading activities of special entities as supplement, e.g. running a bar/restaurant UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 15  Key items to be considered Annual subscription — Amount of money contributed and received from members of the association on annual basis. Life membership dues — Amount is paid to enjoy privileges of membership of the organization for one's lifetime. Donations — Could be in cash or in kind such as an asset donated. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 16  Entrance fees — normally paid by first timers Annual Subscription Account 0 0 Balance b/fwd (owing at beg.) xx Balance b/fwd (prepaid at beg) xx Income and Expenditure (diff) xx Receipts and Payments(cash received) xx Balance c/d (prepayment at end) xx Balance c/d (owing at end) xx UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 17  xx xx Life Membership Subscription It should not be treated as income in the Income & Expenditure a/c only in the year it was received. Credit all amounts received to the life membership account and make transfers to the Income & Expenditure a/c of an appropriate amount annually. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 18  The balance on the life membership account at the end of each period should be shown as a liability in the Statement of Financial Position. Summary of Procedure Prepare receipts and payments account, if not given Prepare subscription and other income accounts to determine incomes earned. Prepare expense accounts to determine the amount incurred. UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 19  Prepare special purpose profit and loss account to arrive at the profit/loss to be transferred to the income and expenditure account. Use opening balances to determine the Accumulated Fund in a Statement of Affairs Prepare the Income and Expenditure Account Prepare the Statement of Financial Position UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 20  CLASS ACTIVITY Refer to Question 1 in Assignment 6 (Accounting for non-profit organisations); UGBS Exclusive Alumni UNIVERSITY OF GHANA Messrs. Donkor and Appiagyei, UGBS 21  INTRODUCTION TO FINANCIAL ACCOUNTING CORRECTION OF ERRORS © F. Aboagye-Otchere, U.G.B.S., (Accounting 146 Dept.)  Prepared by F. Aboagye -Otchere College of Humanities Lecturer in Accounting School of Business University of Ghana Business School 2015/2016 Learning Objectives Identify the different types of errors Understand the basic process of errors management Appreciate the relationship between errors and © F. Aboagye-Otchere, U.G.B.S., (Accounting 147 Dept.)  profits Explain the process of rectification of errors after finalisation of accounts CORRECTION OF ERRORS AND SUSPENSE ACCOUNT Error: An error is an unintentional mistake and it can occur at any stage of business transaction processing Points to note Two types of errors can broadly be identified as: © F. Aboagye-Otchere, U.G.B.S., (Accounting 148 Dept.)  – Those that do not affect the agreement of the Trial Balance ( it will still balance if committed ) – Those that affect the agreement of a trial balance (it will not balance if committed) © F. Aboagye-Otchere, U.G.B.S., (Accounting 149 Dept.)  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Errors Not Affecting Trial Balance – These are errors which when committed, the trial balance will still balance because the two-fold effect would not be affected. Error of Omission – This is where a transaction is not recorded in the books of the business at all. It is said that the transaction is completely omitted from the books. An example is where © F. Aboagye-Otchere, U.G.B.S., (Accounting 150 Dept.)  CORRECTION OF ERRORS AND SUSPENSE sale to Jane, GH¢2,000 is not recorded in the books of K Ltd at all. ACCOUNT (cont’d)  Error of Commission  This error occurs when as a result of confusion with similar names, transactions are sent into the wrong personal account. An example is Cheque paid to Amina for GH¢300 is debited to Anima’s account.  Error of Principle © F. Aboagye-Otchere, U.G.B.S., (Accounting 151 Dept.)  CORRECTION OF ERRORS AND SUSPENSE  This is where a transaction is posted to the wrong class of account, thereby breaking the accounting principle. For instance, cash received from the disposal of a fixed asset is credited to sales account of a buying and selling business. ACCOUNT (cont’d) Error of Original Entry  This error is said to have been committed when the figure used to pass entries into the books is different from the original correct figure. Here, the © F. Aboagye-Otchere, U.G.B.S., (Accounting 152 Dept.)  CORRECTION OF ERRORS AND SUSPENSE double entry is adhered to but the figure used is wrong. Example is, Rent paid GH¢350 was recorded in the books as GH¢500(i.e. for debit and credit) © F. Aboagye-Otchere, U.G.B.S., (Accounting 153 Dept.)  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Complete Reversal of Entry:  In this situation, the correct figures are used but the entries are posted to the wrong sides of the two accounts involved. For example, sales on credit to Ama is debited to Sales account (instead of credit) and credited to Ama’s account (instead of debit). The entries are said to have been reversed © F. Aboagye-Otchere, U.G.B.S., (Accounting 154 Dept.)  completely. Note: if the reversal is in respect of only one account, the trial balance will not balance. CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Error of Transposition: This form of error occurs where there is a wrong sequence of the individual characters within a number when recording. Eg; GHC132 recorded as GHC123 © F. Aboagye-Otchere, U.G.B.S., (Accounting 155 Dept.)  CORRECTION OF ERRORS AND SUSPENSE – Correction of these errors is done by either reversing the wrong entries and posting the correct ones or finding the differences and passing the correct entries. Suspense account will not be affected as the Trial Balance was not affected. ACCOUNT (cont’d) Errors that Affect the Trial Balance © F. Aboagye-Otchere, U.G.B.S., (Accounting 156 Dept.)  – Casting Errors-“over-adding” or “over-subtracting”. – Single Entries-One debit/credit without corresponding credit/debit. – Two debits or two credits for one transaction. – Over/understatements in one account only. – Others CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Suspense Account © F. Aboagye-Otchere, U.G.B.S., (Accounting 157 Dept.)  CORRECTION OF ERRORS AND SUSPENSE This account is introduced anytime the Trial Balance is not balancing and efforts to locate the error have not been fruitful. That is to say, suspense account is an interim account introduced to ensure the agreement of the Trial Balance pending the finding of the error. This means that in correcting any error that affected the Trial Balance, suspense account will be involved. ACCOUNT (cont’d) © F. Aboagye-Otchere, U.G.B.S., (Accounting 158 Dept.)  The principle is that when the error could not be traced and the Trial Balance was not balancing, suspense account stood in for the entry to ensure agreement.  Therefore, if the error has now been identified, then the Suspense Account must now leave the books for the “owner”, the right entry to occupy its rightful place.  Note that suspense account should only be opened after efforts to locate the error had not yielded the desired results and not as a safe haven for dumping imbalances. The structure of the suspense account is like any Taccount. © F. Aboagye-Otchere, U.G.B.S., (Accounting 159 Dept.)  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Suspense Account Difference in trial balance xxx Difference in trial balance xxx Discount received xxx Purchases xxx Sales xxx Creditors xxx © F. Aboagye-Otchere, U.G.B.S., (Accounting 160 Dept.)  CORRECTION OF ERRORS AND SUSPENSE Note: Two balances cannot happen at the same time but to show that it could be a debit or credit balance b/fwd. ACCOUNT (cont’d)  Correction of Net Profit and Redrafting the Statement of Financial Position.  Sometimes interim final accounts are prepared before the errors are located. This means the profit may not be correct and if the errors have effect on items that appear in the computation of profit then it must be revised. After the errors have been corrected, the profit arrived at earlier would be adjusted to show the true position of the performance of the business. © F. Aboagye-Otchere, U.G.B.S., (Accounting 161 Dept.)  CORRECTION