COMBINED UGBS 208_PRINCE-MARVIN.pdf

UGBS 208 Introduction to Financial Accounting Session 1 – Departmental Accounting Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Edu...

UGBS 208 Introduction to Financial Accounting Session 1 – Departmental Accounting Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview Large trading organisations may be engaged in several activities and operate in more than one location. Where it becomes more convenient for the business to be divided into separate sections with separate managers, the performance of each separate department is important for business decisions as well as assessment of managerial effectiveness. This session seeks to enable students draw up the income statement of businesses organised on departmental basis. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to; – Identify the advantages of keeping departmental records – Allocate direct expenses and apportion common (indirect) expenses associated with departments – Prepare departmental income statements Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics – Departmental Accounting – Advantages of Departmental Accounting – Methods and Techniques of Departmental Accounts – Allocation and Apportionment of Expenses – Types of Departments – Inter-departmental Transfers Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 25 of Marfo-Yiadom, Asante & Tackie (2015) and Chapter 38 of Wood and Sangster (2008) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  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 is what departmental accounting entails. Messrs. Donkor and Appiagyei, UGBS 6 Advantages of Departmental Accounting 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 Useful in shut-down decisions by managers Messrs. Donkor and Appiagyei, UGBS 7  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.  Subsidiary books such as sales and purchases are also prepared in a columnar form to show records for each department. Messrs. Donkor and Appiagyei, UGBS 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 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. Messrs. Donkor and Appiagyei, UGBS 9  Common Basis of Apportionment Income/Expenses Basis of Apportionment Salesmen salary, salesmen Commission, Selling Sales of each department 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 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 Messrs. Donkor and Appiagyei, UGBS 10  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 Inventory 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 Inventory (xx) (xx) (xxx) (B) xx xx xxx Gross Profit (A-B) xx xx xxx Messrs. Donkor and Appiagyei, UGBS 11  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 Messrs. Donkor and Appiagyei, UGBS 12  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) Messrs. Donkor and Appiagyei, UGBS 13  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 Messrs. Donkor and Appiagyei, UGBS 14  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 Any unrealized profit arising from transfer of goods and services should be eliminated in the final accounts. Messrs. Donkor and Appiagyei, UGBS 15  CLASS ACTIVITY Refer to Question 1 in Assignment 1 (Departmental Accounts): Sakora Stores Messrs. Donkor and Appiagyei, UGBS Slide 16  UGBS 208 Introduction to Financial Accounting Session 2 – Manufacturing Accounts Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview Merchandising or trading organizations buy and sell goods at a profit. However, there are some organizations that produce or manufacture their own goods for sale. Manufacturing firms can determine their selling prices and profitability when they are aware of the total cost incurred in transforming the raw materials into finished goods. This session seeks to help students to determine the cost of production and prepare the final accounts for a manufacturing organization. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to; – 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. – Determine manufacturing profit and adjust for unrealized profits. Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics – Manufacturing Accounts – Elements of Cost of Production – Kinds of Inventory for a Manufacturing Firm – Determination of Market Value of Goods Manufactured – Manufacturing Profit – Provision for Unrealized Profit Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 17 of Marfo-Yiadom, Asante & Tackie (2015) and Chapter 37 of Wood and Sangster (2008) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  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 goods sold in the general income statement of a manufacturing company. Messrs. Donkor and Appiagyei, UGBS 6  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  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 (Factory 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. Messrs. Donkor and Appiagyei, UGBS 7  Other Divisions of Cost Prime Cost – Aggregate of all direct cost of manufacturing i.e. direct material cost plus direct labour cost plus direct expenses. Conversion cost – Cost involved in converting raw materials into partly- finished 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 indirect manufacturing expenses (factory overheads) Messrs. Donkor and Appiagyei, UGBS 8  Kinds of Inventory 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. 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. Inventory of Finished goods/products – 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 awaiting sales. Messrs. Donkor and Appiagyei, UGBS 9  Format of Manufacturing Account Manufacturing Account for the year ended … Direct Materials Opening Inventory xx Purchases of raw materials xx Carriage inwards xx Return outwards (xx) Raw materials available to use xx Closing Inventory (xx) Cost of raw materials used xx Direct labour (direct wages) xx Accruals/Prepayment xx/(xx) xx Other direct expenses (if any eg. royalties) xx Prime Cost xx Messrs. Donkor and Appiagyei, UGBS 10  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 Messrs. Donkor and Appiagyei, UGBS 11  Format of Income Statement Income Statement for the year ended … Sales xxx Returns Inward (xxx) Net Sales xxx Cost of Goods Sold Opening Inventory of finished goods xx Cost of goods manufactured/produced xx Purchases from outside suppliers (if any) xx Goods available for sale xx Closing Inventory (xx) (xxx) Gross Profit xxx Other Incomes xxx xxx Messrs. Donkor and Appiagyei, UGBS  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 Other Expenses xx (xxx) Net Profit xxx Messrs. Donkor and Appiagyei, UGBS 13  CLASS ACTIVITY Refer to Question 1 in Assignment 2 (Manufacturing Accounts): Okukuseku Ltd. Messrs. Donkor and Appiagyei, UGBS 14  Market Value of Goods Manufactured  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.  Where there are unsold manufactured goods, unrealised manufacturing profit must be provided for. Messrs. Donkor and Appiagyei, UGBS 20  Treatment of Manufacturing Profit Income Statement for the year ended … Sales xxx Returns Inward (xxx) Net Sales xxx Cost of Goods Sold Opening Inventory of finished goods xx Market value of goods manufactured xx Purchases from outside suppliers (if any) xx Goods available for sale xx Closing Inventory (xx) (xxx) Gross profit on trading c/d xxx Manufacturing profit xxx Gross profit xxx 21 Messrs. Donkor and Appiagyei, UGBS  Finding the amount of unrealised profit Find the margin percentage Apply the percentage on the value of closing inventory of finished goods to get the profit unrealised or use the formula: Closing inventory * Manufacturing Profit Market value Messrs. Donkor and Appiagyei, UGBS 22  Treatment of Provision for Unrealised Profit Compare current unrealised profit to previous provision for unrealised profit if any 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) Messrs. Donkor and Appiagyei, UGBS 23  Treatment of Provision for Unrealised 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 Messrs. Donkor and Appiagyei, UGBS 24  CLASS ACTIVITY Refer to Question 2 in Assignment 2 (Manufacturing Accounts): Okukuseku Refined Ltd. 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 Messrs. Donkor and Appiagyei, UGBS 25 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 Market value (to trading department) 113,340 Messrs. Donkor and Appiagyei, UGBS 28  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; Converting from mark-up to margin= 20/100+20 = 0.166667 * 100= 16.67 16.7% * 12,000 = 2,000 Previous provision= 1,600 Hence, increase of (2,000- 1,600)= 400 400 to Income Statement 2,000 to statement of financial position- to reduce value of finished goods Messrs. Donkor and Appiagyei, UGBS 29 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 Messrs. Donkor and Appiagyei, UGBS 30 Expenses; Rent expense (0.3*10000) 3,000 Depn; Office assets (0.05*30000) 1,500 Motor Vehicle (0.1*35000*.5) 1,750 Bad debts 1,500 Office expenses 12,000 Increase in prov. For unrealised profit 400 (20,150) Net profit 50,000 Messrs. Donkor and Appiagyei, UGBS 31 INCOME SURPLUS Opening bal. 12,000 Net profit 50,000 61,996 Dividend (3,500) Closing bal. 58,500 Messrs. Donkor and Appiagyei, UGBS 32 Statement of Financial Position as at…. Cost NBV Non-current assets; (GHC'000) Depn (GHC'000) (GHC'000) Office Assets 30000 1500 28500 Factory Assets 40000 4000 36000 Motor Vehicle 35000 3500 31500 105000 9000 96000 Current assets: Inventory; Direct materials 8000 Indirect materials 5000 Work-in-progress 4500 Finished goods (12,000 – 2,000) 10000 Receivables 7000 Bank 20000 54500 Current liabilities: payables (5000) Working capital 49500 Net assets 145500 Messrs. Donkor and Appiagyei, UGBS 33  Financed by; Capital 48000 Income surplus 58500 106500 Loan 39000 145500 Messrs. Donkor and Appiagyei, UGBS 34  UGBS 208 Introduction to Financial Accounting Session 3 – Accounting for Partnerships Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview People would like to start businesses and be sole owners. However, for some reasons it could be advantageous for individuals to come together and run a business with the aim of making profit. This session will introduce students to the essential features of a partnership and the preparation of final accounts for a partnership firm. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to; – Identify and explain the characteristics of a 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. – Prepare current accounts, capital accounts and financial statements of a partnership. Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics – Defining Partnerships – Nature of Partnerships – The Partnership Agreement – Financial Statements of Partnership Firm Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 20 and 21 of Marfo-Yiadom, Asante & Tackie (2015) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  Partnership Incorporated Private Partnership Act of 1962, Act 152 (IPPA) governs partnerships 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] Formed by formal agreement (partnership agreement/deed). Messrs. Donkor and Appiagyei, UGBS 6  Partnership – A partnership is not… A family ownership or co-ownership of property whether or not the family or co-owners share any profits made by the use of that property The remuneration of a servant or agent of a person engaged in business by a share of profits of the business shall not necessary make the servant or agent a partner Messrs. Donkor and Appiagyei, UGBS 7  Nature of Partnership  Firm (as a corporate body) is distinct from the partners.  Formed by formal agreement (partnership agreement/deed).  Partners are jointly and severally liable.  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. Messrs. Donkor and Appiagyei, UGBS 8  Partnership Agreement The information contained in a partnership agreement include; Name and nature of business of the firm. The amount of capital to be contributed and maintained by each partner. The rate of interest (if any) to be paid on capital. The extent to which drawings are allowed and the rate of interest (if any) to be charged on drawings. The remuneration (if any) to be paid to partners for their services The ratio in which profits and losses are to be shared. The keeping of books and accounts. Arrangements for admission of new partners. Messrs. Donkor and Appiagyei, UGBS 9  Rules in the Absence of Partnership Agreement [Section 35] All partners are to share equally in capital, profits and losses. No interest is allowed to be charged on capital. No remunerations are to be paid to partners. Any advances (loans) made by a partner(s) will attract 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. Messrs. Donkor and Appiagyei, UGBS 10  Accounting Requirements 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. Every firm shall, at intervals of not more than 15 months, cause to prepare financial statements. [Section 32] Messrs. Donkor and Appiagyei, UGBS 11  Partnerships and Other Forms of Businesses Now lets compare partnerships with other forms of business organizations. Messrs. Donkor and Appiagyei, UGBS 12  Partnership vs. Sole Proprietor PARTNERSHIP SOLE PROPRIETOR Membership Minimum of two (2) maximum of One (1) person as member twenty (20) with exception of professional firms Profit and Loss Sharing Shared by all partners Sole proprietor enjoys all profits and bears all losses Capital Contribution Larger resources from shared Relatively small resources provided contribution by the sole owner Decision Making Collectively made by partners with Made by the sole owner who bears shared risks and responsibility all the risk and responsibility although decision making could be although decision making could be slow quick Final Accounts Income Statement, Profit and Loss Income Statement, Statement of Appropriation Account, Current Financial Position Account, Capital Account, Statement of Financial Position Legality Regulated by IPPA, 1962 (Act 152) regulated by the Registration of Business Names Act, 1962 (Act 151) 13  Partnership vs. Companies PARTNERSHIP COMPANY Membership Minimum of two (2) Minimum of One (1) person and maximum of twenty (20) maximum is fifty (50) for private with exception of companies, infinity for public professional firms companies Separate Legal Entity Not a separate legal entity It is a separate legal entity unless it is incorporated Liability of Members Unlimited liability Limited to amount of shares or guarantee respectively held by members Separation of Ownership not entirely Ownership is entirely separate Ownership From separate from from management management management Legality Regulated by IPPA, 1962 regulated by the Companies Act, (Act 152) 1963 (Act 179) 14  Financial Statements of Partnerships Income statement –Profit and loss appropriation account Statement of Financial Position –Capital accounts for each partner –Current accounts for each partner Messrs. Donkor and Appiagyei, UGBS 15  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 Income Statement)  Interest on drawings  Interest on current accounts  Share of profit and loss Messrs. Donkor and Appiagyei, UGBS 16  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 B xxx Messrs. Donkor and Appiagyei, UGBS 17 xxx  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 – Records all other resource flow, to and from the partners. Messrs. Donkor and Appiagyei, UGBS 18  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 of profit, interest on capital and drawings, partners’ salaries among others. Messrs. Donkor and Appiagyei, UGBS 19  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 - Balance c/d - xx Partners salaries xx xx Share of profit xx xx Balance c/d xx - xx xx xx xx Balance b/d xx Balance b/d - xx Messrs. Donkor and Appiagyei, UGBS 20  Partner’s Loan Account 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 attract 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. Messrs. Donkor and Appiagyei, UGBS 21  Statement of Financial Position Same as the statement of financial position for other forms of business organisations, except that; –Capital accounts –Current accounts Messrs. Donkor and Appiagyei, UGBS Slide 22  CLASS ACTIVITY Refer to Question 1 in Assignment 3 (Partnership Accounts): Kako, Koobi, Kewuro Partners Messrs. Donkor and Appiagyei, UGBS 23  UGBS 208 Introduction to Financial Accounting Session 4 – Company Accounts Instructors: Augustine Donkor, UGBS, [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview An incorporated business with a separate legal entity is known as a company. This form of business organization is highly regulated since the source of capital contribution could be dispersed. This session will introduce students to the main requirements for the formation of companies, issuance of shares and preparation of the final accounts for companies. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to; – Explain and discuss the nature of limited liability companies according to the Companies Act, 1963 (Act 179). – Explain the differences between the various 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. Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics – Characteristics of a Company – Types of Companies – Issuing Shares in a Company – Financial Statements of a Company Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 22 – 24 of Marfo-Yiadom, Asante & Tackie (2015) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  Definition of a Company 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 companies 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 companies Act) or formed in pursuance of some other enactment for the time being in force. (Section 5) Messrs. Donkor and Appiagyei, UGBS 6  Characteristics of Companies 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 Messrs. Donkor and Appiagyei, UGBS 7  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 issued to start trading. – 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. Messrs. Donkor and Appiagyei, UGBS 8  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. Unlimited company – the liabilities of its members is not limited. Private and Public companies Messrs. Donkor and Appiagyei, UGBS 9  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. – 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”. Messrs. Donkor and Appiagyei, UGBS 10  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 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 Messrs. Donkor and Appiagyei, UGBS 11  Shares A share represents the interest of members of a body corporate who are entitled to share in the capital/income of such body corporate. – The level of interest is in proportion to the number of shares held. – The amount paid for the shares is not the basis for claiming more interest 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. Messrs. Donkor and Appiagyei, UGBS 12  Types of Shares 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 Messrs. Donkor and Appiagyei, UGBS 13  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. Shares shall be issued for valuable consideration and paid for in cash, except otherwise agreed. (Section 42) Messrs. Donkor and Appiagyei, UGBS 14  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 – 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. Messrs. Donkor and Appiagyei, UGBS 15  Procedure for Issuance of Shares Invitation to the Public to apply for shares – Through the circulation of Prospectus and advertising in the mass media, which gives the conditions of the offer. 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 Messrs. Donkor and Appiagyei, UGBS 16  Treasury Shares 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 Messrs. Donkor and Appiagyei, UGBS 17  Share Deals Account 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. Messrs. Donkor and Appiagyei, UGBS 18  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 from this account. Capital Surplus – Usually results from revaluation of non-current assets (appreciation). It is not intended to be distributed as dividend as they are unrealized surpluses. 19 Messrs. Donkor and Appiagyei, UGBS  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 – Interim or/and proposed Messrs. Donkor and Appiagyei, UGBS 20  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 of offer by the company) – Calls for arrears on share values – Forfeiture of shares Messrs. Donkor and Appiagyei, UGBS 21  Application Stage When cash/cheque is received on application Dr Bank/cash Account Cr Application Account with the total amount of cash received on application When consideration other than cash is received Dr The relevant asset account Cr Application account with the agreed value of the consideration received on application Messrs. Donkor and Appiagyei, UGBS 22  Application Stage 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. Transfer to Stated Capital Account Dr Application Account Cr Stated Capital Account with the total application amount received in respect of shares allotted. Messrs. Donkor and Appiagyei, UGBS 23  Allotment Stage Retention of excess funds at application stage for other stages (partly successful applicants) Dr Application Account Cr Allotment Account 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 Messrs. Donkor and Appiagyei, UGBS 24  Allotment Stage Transfer to the stated capital Dr Allotment account Cr Stated capital account with the total sum received on allotment Messrs. Donkor and Appiagyei, UGBS 25  Calls Stage On receipt of cash/cheque Dr Bank/cash account Cr Call account Transfer to Stated Capital account Dr Call account Cr Stated capital account Refund of excess application money, if any, after full payment. Dr Application Cr Bank account Messrs. Donkor and Appiagyei, UGBS 26  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 Messrs. Donkor and Appiagyei, UGBS 27  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 Cr Cash/Bank account with amount refunded to rejected applicants Messrs. Donkor and Appiagyei, UGBS 28  Shares Payable on Application Transfer to Stated Capital Dr Application account Cr Stated Capital account with amount received for shares issued Messrs. Donkor and Appiagyei, UGBS 29  Issuance of Treasury Shares 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 Messrs. Donkor and Appiagyei, UGBS 30  CLASS ACTIVITY Refer to Question 1 in Assignment 4 (Company Accounts): Akonfem Limited Messrs. Donkor and Appiagyei, UGBS 31  Financial Statements of a Company Income Statement Income Surplus Account Statement of Financial Position Statement of Cash flow Notes to the Financial Statements Messrs. Donkor and Appiagyei, UGBS 32  Income Statement Notes 2015 2014 ¢m ¢m Turnover 1 xxxxx xxxx Cost of sales 2 (xxx) (xxx) Gross profit xxxx xxxx 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 surplus xxxx xxxx Messrs. Donkor and Appiagyei, UGBS 33  Income Surplus Account ¢ ¢ ¢ ¢ 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 Messrs. Donkor and Appiagyei, UGBS 34  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 Income Surplus xxx xxx Share Deals xxx xxx Capital Surplus 16 xxx xxx xxxx xxxx Messrs. Donkor and Appiagyei, UGBS 35  CLASS ACTIVITY Refer to Question 3 in Assignment 4 (Company Accounts): YEWOKROM Company Ltd. Messrs. Donkor and Appiagyei, UGBS 36  UGBS 208 Introduction to Financial Accounting Session 5 –Single Entry and Incomplete Records Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview Many businesses in the informal sector do not maintain proper books of accounts for a number of reasons. While some of these organizations may have some records which may not follow the double entry principle, others may have no records at all. Thus the accounts for such organizations can only be prepared from the incomplete records. This session seeks to introduce students to the process of determination of profits and the preparation of final accounts for an organization that does not keep proper books of accounts. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to – Explain how the accounting equation permits the measurement of profit when accounting records are incomplete – Draw up a statement of affairs of a business with single entry and incomplete records. – Determine profit from incomplete records using opening and closing statement of affairs. – Deduce sales and purchases figures from single entry and incomplete records. Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics; – The importance of records keeping – The basis of accounting (cash and accrual basis) – Approaches to profit determination; Net Assets (Capital) Approach Cash Book (Income) Approach Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 18 of Marfo-Yiadom, Asante & Tackie (2015) and Chapter 35 of Wood and Sangster (2008) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  Importance of Keeping Records Records keeping is essential for; Performance assessment Planning and control of operations Tax purposes Determination of profit/loss Requirement for sourcing for funds Business Valuations Others- extraction of trial balance, identification of errors, misappropriation Messrs. Donkor and Appiagyei, UGBS Slide 6  Cash Basis and Accrual Basis Cash Basis of accounting – Used when revenue is recognized based on cash actually received and expense is recognized only when cash payment is made. – This method is commonly used by small and petty traders who are unable to advance credit for goods sold. Accrual Basis of accounting – Revenue is recognized (earned) once goods are delivered or services rendered to a customer and expense is incurred once benefit is derived or service is provided by another party. – This method is widely used by most businesses and all corporations. – It is the approved basis for recording transactions by International Financial Reporting Standards Messrs. Donkor and Appiagyei, UGBS 7  Incomplete Records Accounting records which have not been maintained according to strict double entry principles. Full records may not be available because; – the proprietor of the business doesn’t keep a full set of accounts. – 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. Messrs. Donkor and Appiagyei, UGBS 8  Determination of Profit or Loss When accounting records are incomplete, profit may be determined using any of the following approaches; Net Assets (Capital) Approach – Based on the accounting equation. – The only way capital can change is either by introduction of cash/resources, withdrawal of cash/resources, making profit or loss. Cash Book (Income) Approach – Elements of the financial statements are determined via series of adjusting entries. Messrs. Donkor and Appiagyei, UGBS 9  Net Assets (Capital) Approach This method of determining profit/loss is based on the assumption that capital grows by way of profits 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. Messrs. Donkor and Appiagyei, UGBS 10  Net Assets (Capital) Approach 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 Messrs. Donkor and Appiagyei, UGBS 11  Profit or Loss Determination In the determination of profit or loss using the net assets (capital) approach, consideration should be given to drawings and additional capital introduced 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” Messrs. Donkor and Appiagyei, UGBS 12  Format for Determination of Profit/Loss Closing Capital xxx Add: Drawings xxx xxx Less: Opening Capital (xxx) Additional Capital (xxx) Profit /(Loss) xx/(xx) Messrs. Donkor and Appiagyei, UGBS 13  Guidelines to Net Assets (Capital) Approach Determine the opening and closing capital at the beginning and end of the period via preparation of statement of affairs. Trace all withdrawals made by owners for their personal use (drawings). Determine whether there have been any injection of additional capital Based on the format of determination of profit/loss (see slide 13), determine the profit or loss. Messrs. Donkor and Appiagyei, UGBS 14  CLASS ACTIVITY Refer to Question 1 in Assignment 5 (Single Entry and Incomplete Records); Sweet Dreams Ent. Messrs. Donkor and Appiagyei, UGBS 15  Cash Book (Income) Approach A full income statement and Statement of Financial Position are prepared from the incomplete records provided. It is mostly used when a cashbook could be drawn up, opening and closing balances are available and expenses incurred and revenue earned could be derived. Messrs. Donkor and Appiagyei, UGBS 16  Guidelines to Income (Cash Book) Approach Compute the opening capital (using the statement of affairs template) Prepare your cash account to find missing figures such as drawings etc. Ascertain credit sales (using trade receivables control account) Ascertain credit purchase (using trade payables control account) Ascertain the expenses chargeable to the income statement by making adjustments for accruals and prepayments Prepare income statement to determine profit/loss Messrs. Donkor and Appiagyei, UGBS 17  Missing Figures in the Cash Book Drawings/Cash Received/Cash Paid: – Where receipts are more than payments, it is likely that the missing figure is cash drawings or unrecorded cash payments. (NB: in the absence of additional information, such a difference should be treated as drawings). – Where payments are more than receipts, it is likely that the missing figure is cash receipts from customers Messrs. Donkor and Appiagyei, UGBS 18  CLASS ACTIVITY Refer to Question 3 in Assignment 5 (Single Entry and Incomplete Records); Afia Rambo Ent. Messrs. Donkor and Appiagyei, UGBS 19  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] 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. 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. 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 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 Messrs. Donkor and Appiagyei, UGBS Slide 5  Non-Profit Oriented Organizations (NPO’s) Organizations whose main purpose 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 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. 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 xxxxx xxxxx Messrs. Donkor and Appiagyei, UGBS 8  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. Capital receipts and expenditures go into the Statement of Financial Position. Messrs. Donkor and Appiagyei, UGBS 9  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) Capital Accumulated Fund Messrs. Donkor and Appiagyei, UGBS 10  Format of Income & Expenditure ¢ ¢ Incomes: Subscription xxx Bar profit etc. xxx xx Expenditures: stationery xxx Donations etc. xxx xx Excess of income over expenditure ( or vice versa) xxx Messrs. Donkor and Appiagyei, UGBS 11  Receipts & Payments vs. Income & Expenditure Receipts and Payments Income and Expenditure It records both capital and revenue It records only revenue expenditure, capital expenditure 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 This is the “income statement” of the organization organization It records all cash receipts and It records only incomes and expenses payments irrespective of the period relating to the period under consideration. to which they relate. Difference is the cash/bank balance at a Difference is the excess of income/expense time over expense/income. (i.e. surplus or deficit) It is a real account It is a nominal account Messrs. Donkor and Appiagyei, UGBS 12  Sources of Finance for NPOs 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 Messrs. Donkor and Appiagyei, UGBS 13  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. Entrance fees – normally paid by first timers Messrs. Donkor and Appiagyei, UGBS 14  Annual Subscription Account ¢ ¢ 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 xx xx Messrs. Donkor and Appiagyei, UGBS 15  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. 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. Messrs. Donkor and Appiagyei, UGBS 16  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. 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 Messrs. Donkor and Appiagyei, UGBS 17  CLASS ACTIVITY Refer to Question 1 in Assignment 6 (Accounting for non-profit organisations); UGBS Exclusive Alumni Messrs. Donkor and Appiagyei, UGBS 18  UGBS 208 Introduction to Financial Accounting Session 7 – Correction of Errors Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview An unintentional mistake can be made at any stage of the business transaction processing. Errors that occur in the recording of transaction may or may not affect the agreement of the trial balance. Any error identified in the accounting books need to be corrected. This session seeks to help students go through the process of correcting errors after accounts have been finalized. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to – Identify the different types of errors – Understand the basic process of errors management – Appreciate the relationship between errors and profits – Explain the process of rectification of errors after finalisation of accounts Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics – Errors affecting the agreement of the trial balance – Errors not affecting the agreement of the trial balance – The suspense account – Adjustment of profit after correction of errors – Redrafting of Statement of Financial Position Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 10 of Marfo-Yiadom, Asante & Tackie (2015) and Chapters 32 - 33 of Wood and Sangster (2008) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  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: – Those that do not affect the agreement of the Trial Balance (total debits equal to total credits) – Those that affect the agreement of the trial balance (total debits not equal to total credits) Messrs. Donkor and Appiagyei, UGBS 6  Errors Not Affecting Trial Balance Agreement – These are errors which when committed, the trial balance will still agree because the two-fold effect would not be affected. 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 sale to Jane, GH¢2,000 is not recorded in the books of K Ltd at all. Messrs. Donkor and Appiagyei, UGBS 7 Errors Not Affecting Trial Balance Agreement (cont’d)  Error of Commission This is where the correct amount is entered but in the wrong account. An example is Cheque paid to Amina for GH¢300 is debited to Anima’s account.  Error of Principle 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 non-current asset is credited to sales account of a buying and selling business. Messrs. Donkor and Appiagyei, UGBS 8 Errors Not Affecting Trial Balance Agreement (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 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) Messrs. Donkor and Appiagyei, UGBS 9 Errors Not Affecting Trial Balance Agreement (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 completely.  Note: if the reversal is in respect of only one account, the trial balance will not agree. Messrs. Donkor and Appiagyei, UGBS 10 Errors Not Affecting Trial Balance Agreement (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 – 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. Messrs. Donkor and Appiagyei, UGBS 11  Errors Affecting Trial Balance Agreement – 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 Messrs. Donkor and Appiagyei, UGBS 12  Suspense Account This account is introduced anytime the Trial Balance fails to agree 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. Messrs. Donkor and Appiagyei, UGBS Slide 13  Suspense Account (cont’d)  The principle is that when the error could not be traced and the Trial Balance was not agreeing, suspense account stood in for the entry to ensure agreement.  Therefore, if the error has now been identified, then the Suspense Account must leave the books for the right entry to occupy its rightful place.  Note: Suspense account should only be opened after efforts to locate the error had not yielded the desired results and not to be used as a safe haven for dumping imbalances.  The structure of the suspense account is like any T-account. Messrs. Donkor and Appiagyei, UGBS 14  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 Note: Two balances cannot happen at the same time but to show that it could be a debit or credit balance b/fwd. Messrs. Donkor and Appiagyei, UGBS 15  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 reported profit may not be correct if the errors have effect on items that appear in the computation of profit. After the errors have been corrected, the profit arrived at earlier would be adjusted to show the true performance of the business.  The general principle is that if the transaction had the effect of reducing the profit, then the figure must be added to the “incorrect profit”. On the other hand if it increased the profit unduly, then it must be subtracted from the “incorrect profit” on item by item basis so that in the final analysis the profit will come to what it ought to be, the True Profit. Messrs. Donkor and Appiagyei, UGBS 16  Correction of Net Profit GH¢ GH¢ Net Profit per draft account xxxxx Add: Revenue understated xxxx Income/gain understated xxxx Cost/expense overstated xxxx xxxxx xxxxx Less: Revenue overstated xxxx Income/gain overstated xxxx Cost/expense understated xxxx xxxxx Corrected Net Profit for the Year xxxxx Messrs. Donkor and Appiagyei, UGBS 17  The Statement of Financial Position Redrafting the statement of financial position is done by adjusting the affected assets, liabilities and capital as well as the corrected profit above to arrive at the balance that shows the true financial position of the business as at the given date. Messrs. Donkor and Appiagyei, UGBS 18  CLASS ACTIVITY Refer to Question 1 in Assignment 7 (Correction of Errors): ASEM MPE NIPA Ltd. Messrs. Donkor and Appiagyei, UGBS 19  UGBS 208 Introduction to Financial Accounting Session 8 – Introduction to Analysis and Interpretation of Financial Statements Instructors: Augustine Donkor, UGBS [email protected] Kwadjo Appiagyei, UGBS, [email protected] College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017  Session Overview The end-product of the accounting system is the generation of financial reports to be used by decision makers. Assessment of the performance of organizations can be made by analyzing and interpreting the financial reports. This session seeks to introduce students to the basic tools that can be useful for an elementary analysis of financial reports. Messrs. Donkor and Appiagyei, UGBS Slide 2  Learning Objectives At the end of this session, you should be able to – Identify the tools for the interpretation of financial statements – Explain the types of accounting ratios – Formulate and calculate the various accounting ratios Messrs. Donkor and Appiagyei, UGBS Slide 3  Session Outline This session covers the following topics; – Techniques for analyzing financial statements Vertical Analysis Horizontal Analysis Ratio Analysis – Categories of ratios for financial statement analysis – Limitations of ratio analysis Messrs. Donkor and Appiagyei, UGBS Slide 4  Reading List Read Chapter 26 of Marfo-Yiadom, Asante & Tackie (2015), Chapters 47 of Wood and Sangster (2008) and Chapter 15 Warren, Reeve and Duchac (2015) Session Slides Other Financial Accounting text books available to students Messrs. Donkor and Appiagyei, UGBS Slide 5  TECHNIQUES FOR ANALYSIS The following techniques are useful in analysing the financial statements of organisations; Common-size Statements/Vertical Analysis Common Base Year Financial Statements/Horizontal/Trend Analysis Ratio Analysis Messrs. Donkor and Appiagyei, UGBS 6  COMMON-SIZE FINANCIAL STATEMENTS/VERTICAL ANALYSIS Vertical analysis of a financial statement reveals the relationship of each statement item to a specified base. Every other item on the financial statement is then reported as a percentage (%) of that base. – When an income statement is analyzed vertically, net sales is usually the base – When a statement of financial position is analyzed vertically, total assets is usually the base Percentage = Amount of individual Item * 100 Amount of base Messrs. Donkor and Appiagyei, UGBS 7  Vertical Analysis Tool Illustrated ASEMPAPA COMPANY; Income statement for the years ended 2014 and 2015 2015 Percentage 2014 Percentage GH¢ GH¢ Sales 1,000,000 100% 800,000 100% Cost of goods sold 400,000 40% 300,000 37.5% Gross profit 600,000 60% 500,000 62.5% Expenses; Wages & Salaries 250,000 25% 180,000 22.5% Office rent 50,000 5% 35,000 4.4% Supplies 10,000 1% 8,000 1% Utilities 20,000 2% 16,000 2% Other expenses 90,000 9% 70,000 8.75% Total expenses 420,000 42% 309,000 38.65% Net profit 180,000 18% 191,000 23.85% Messrs. Donkor and Appiagyei, UGBS Slide 8  COMMON BASE YEAR FINANCIAL STATEMENTS/HORIZONTAL/TREND ANALYSIS Horizontal analysis is the process of computing changes in like items from one year to another. Horizontal analysis begins with the computation of changes from the previous year to the current year. The base year is the first year considered. Then dividing the cedi amount of change by the base year amount. Horizontal analysis uses both cedi amounts and percentages. Percentage Change = Individual Item – Base Item * 100 Base Item Messrs. Donkor and Appiagyei, UGBS 9  Horizontal Analysis Tool Illustrated ASEMPAPA COMPANY; Income statement for the years ended 2014 and 2015 2015 2014 Amount of Difference GH¢ GH¢ Change Percentage Sales 1,000,000 800,000 200,000 25% Cost of goods sold 400,000 300,000 100,000 33.3% Gross profit 600,000 500,000 100,000 20% Expenses; Wages & Salaries 250,000 180,000 70,000 38.89% Office rent 50,000 35,000 15,000 42.86% Supplies 10,000 8,000 2,000 25% Utilities 20,000 16,000 4,000 25% Other expenses 90,000 70,000 20,000 28.57% Total expenses 420,000 309,000 111,000 35.92 Net profit 180,000 191,000 -11,000 -5.76% Messrs. Donkor and Appiagyei, UGBS 10  Ratio Analysis Financial ratios are used to compare and investigate relationships between different pieces of financial information, either over time or between companies. Ratios eliminate the size problem. Messrs. Donkor and Appiagyei, UGBS 11  Categories of Financial Ratios Liquidity—measures the firm’s ability to meet short-term debt obligations or the risk of not meeting current liabilities. Solvency—measures the firm’s ability to meet long-term debt obligations or risk of not meeting long-term debt (financial leverage). Asset management/Efficiency—measures the efficiency of asset usage to generate revenue. Profitability—measures the firm’s ability to control expenses and make profits. Investment/shareholder ratios—analyze the company’s shares as an investment. Messrs. Donkor and Appiagyei, UGBS 12  Liquidity Ratio Current Ratio = Current Assets Current Liabilities Quick Ratio = Current Assets - Inventory Current Liabilities Acid-Test Ratio = Cash + cash Equivalents Current Liabilities Messrs. Donkor and Appiagyei, UGBS Slide 13  Long-term Solvency Ratios Debt to Equity Ratio = Long-term Liabilities Stockholders’ Equity Interest Coverage Ratio = Profit before Taxes + Interest Expense Interest Expense Total Debt to Total Assets = Total Liabilities Total Assets Messrs. Donkor and Appiagyei, UGBS 14  Activity/Asset Management Ratios Rate of Inventory Turnover = Cost of Sales Average Inventory Average Collection Period = Receivables * 360 Days Credit Sales Average Payment Period = T. Payables * 360 Days Credit Purchases Messrs. Donkor and Appiagyei, UGBS 15  Profitability Ratios Return on Assets = Net Income (PBIT) *100 Total Assets Profit Margin = Net Income *100 Net Sales Asset Turnover = Net Sales Average Total Assets Return on Equity = Net Income *100 Stockholders’ Equity Messrs. Donkor and Appiagyei, UGBS Slide 16  Investment Ratios Earnings per share = Net income – preference dividend number of ordinary shares Price to earning ratio = market price of per share earnings per share Dividend per share = Dividend number of ordinary shares Dividend yield = Dividend per share *100 market price per share Messrs. Donkor and Appiagyei, UGBS 17  Benchmarks for Comparison Ratios are most useful when compared to a benchmark. In analyzing financial performance, a firms past performance or peer group can be used as a benchmark. Time-trend analysis—examine how a particular ratio(s) has performed historically. Peer group analysis—using similar firms (competitors/industry) for comparison of results. Messrs. Donkor and Appiagyei, UGBS 18  Limitations of Ratio Analysis No underlying theory to identify correct ratios to use or appropriate benchmarks. Benchmarking is diffic