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INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Departmental Accounting College of Humanities, UGBS 2019/2020  Learning Objectives Identify the advantages of keeping departmental records Allocate direct expenses and apport...

INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Departmental Accounting College of Humanities, UGBS 2019/2020  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) Godfred, Edem, Emmanuel, Edward 17-Jun-23 2  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. Godfred, Edem, Emmanuel, Edward 17-Jun-23 3 4 Purpose of Departmental Accounting To provide management with the information to evaluate the profitability or cost effectiveness of each department as well as to help set up responsibility centers to assign costs to department managers. 17-Jun-23 Godfred, Edem, Emmanuel, Edward 5 Illustration (OK Company Ltd) OK Company Ltd is a retail business with three departments: Clothing Housewares Electronics 17-Jun-23 Godfred, Edem, Emmanuel, Edward 6 OK Company Ltd Income Statement for Year Ended December 31, 2005 Sales GH₵3,000,000 Cost of Goods Sold GH₵1,000,000 Gross Profit GH₵2,000,000 Expenses: Wages Expense GH₵400,000 Utilities Expense GH₵200,000 Supplies Expense GH₵100,000 Total Expenses GH₵700,000 Net Income GH₵1,300,000 17-Jun-23 Godfred, Edem, Emmanuel, Edward  OK Company Ltd Departmental Income Statement For Year Ended December 31, 2005 Clothing Housewares Electronics Combined (GH₵) (GH₵) (GH₵) (GH₵) Sales 1,500,000 500,000 1,000,000 3,000,000 Cost of Goods Sold 250,000 300,000 450,000 1,000,000 Gross Profit 1,250,000 200,000 550,000 2,000,000 Expenses: Wages Expense 150,000 150,000 100,000 400,000 Utilities Expense 100,000 75,000 25,000 200,000 Supplies Expense 75,000 10,000 15,000 100,000 Total Expenses 325,000 235,000 140,000 700,000 Net Income (Loss) 925,000 (35,000) 410,000 1,300,000 17-Jun-23 7 Godfred, Edem, Emmanuel, Edward 8 Advantages of Departmental Accounting It helps in assessing departmental performance critically. It helps management in taking decisions with respect to : – Expansion program of a particular department – Closing down of a particular department due to poor performance – Improvement in the areas of a particular department. It helps in taking effective measures for improving the performance of department and departmental personnel. 17-Jun-23 Godfred, Edem, Emmanuel, Edward 9 Advantages of Departmental Accounting It helps in creating an environment for competition among the departments and as a whole helps to increase the overall profitability of a business. It helps in assessing the effectiveness of departmental budgeting and planning. Helps in achieving the targeted profit of the enterprise. Helps in identifying successful managers. 17-Jun-23 Godfred, Edem, Emmanuel, Edward 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. Godfred, Edem, Emmanuel, Edward 17-Jun-23 10  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. 17-Jun-23 11 Godfred, Edem, Emmanuel, Edward  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 17-Jun-23 12 Godfred, Edem, Emmanuel, Edward  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) (B) xx xx xxx Gross Profit (A-B) xx xx xxx 17-Jun-23 13  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 17-Jun-23 14 Godfred, Edem, Emmanuel, Edward  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) 17-Jun-23 15 Godfred, Edem, Emmanuel, Edward  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 17-Jun-23 16 Godfred, Edem, Emmanuel, Edward  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. Godfred, Edem, Emmanuel, Edward 17-Jun-23 17 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Manufacturing Accounts College of Humanities, UGBS 2019/2020  Learning Objectives 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 2  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 goods sold in the general income statement of a manufacturing company. Godfred, Edem, Emmanuel, Edward 6/17/2023 3  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 4  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 involve 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 manufacturing overheads Godfred, Edem, Emmanuel, Edward 6/17/2023 5  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 6  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 (wages) xx Accruals/Prepayment xx/(xx) xx Other direct expenses (if any eg. royalties) xx Prime Cost 6/17/2023 7 xx Godfred, Edem, Emmanuel, Edward  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 6/17/2023 8 xx Godfred, Edem, Emmanuel, Edward  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 9 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 Other Expenses xx (xxx) Net Profit xxx Godfred, Edem, Emmanuel, Edward 6/17/2023 10  CLASS ACTIVITY Refer to Question 1 on Worksheet 2 (Manufacturing Accounts)- Okukuseku Ltd. Godfred, Edem, Emmanuel, Edward 6/17/2023 11 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 PRIME COST 38,200 Godfred, Edem, Emmanuel, Edward 6/17/2023 12 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/factory 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 (0.7*10000) 7,000 27,750 Total Overheads 58,250 6/17/2023 13 Cost of Production 96,450 Adjustment for W.I.P Opening work in progress 2,500 Closing work in progress (4,500 ) Cost of goods produced (NB - to income statement) 94,450 Godfred, Edem, Emmanuel, Edward 6/17/2023 14 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 Total Income 71,750 Godfred, Edem, Emmanuel, Edward 6/17/2023 15 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 (19,750) Net profit 52,000 Godfred, Edem, Emmanuel, Edward 6/17/2023 16  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, unrealized manufacturing profit must be provided for. Godfred, Edem, Emmanuel, Edward 6/17/2023 17  Treatment of Manufacturing Profit Income Statement for the year ended … Sales xxx Returns Inward (xxx) Net Sales (A) 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 18  Treatment of Provision for Unrealised Profit Recall treatment of provision for doubtful debt? Same principle Godfred, Edem, Emmanuel, Edward 6/17/2023 19  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 Compare current unrealised profit to previous provision for unrealised profit if any Godfred, Edem, Emmanuel, Edward 6/17/2023 20  Treatment of Provision for Unrealised 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) Godfred, Edem, Emmanuel, Edward 6/17/2023 21  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 22  CLASS ACTIVITY Refer to Question 2 of Worksheet 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 23  Okukuseku Refined 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 PRIME COST 38,200 Godfred, Edem, Emmanuel, Edward 6/17/2023 24 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 Cost of Production 96,450 Godfred, Edem, Emmanuel, Edward 6/17/2023 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 26  Cont’d 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 27 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 28 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 29 INCOME SURPLUS Opening bal. 12,000 Net profit 50,000 61,996 Dividend (3,500) Closing bal. 58,500 Godfred, Edem, Emmanuel, Edward 6/17/2023 30 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 31  Financed by; Capital 48000 Income surplus 58500 106500 Loan 39000 145500 Godfred, Edem, Emmanuel, Edward 6/17/2023 32 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Partnership Accounts College of Humanities, UGBS 2019/2020  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. Prepare current accounts, capital accounts and financial statements of a partnership. Godfred, Edem, Emmanuel, Edward 6/17/2023 2  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 Formed by formal agreement (partnership agreement). Godfred, Edem, Emmanuel, Edward 6/17/2023 3  What 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 4  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.  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 5  Partnership Agreement 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. Keeping of books and accounts. Arrangements for admission of new partners. Godfred, Edem, Emmanuel, Edward 6/17/2023 6  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 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 7  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 8  Partnerships and Other Forms of Businesses Now lets compare partnerships with other forms of business organizations. Godfred, Edem, Emmanuel, Edward 6/17/2023 9  Partnership vs. Sole Proprietor  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 10  Partnership vs. Companies 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 11  Differences in Financial Statements Income statement –Profit and loss appropriation account Statement of Financial Position –Capital accounts for each partner –Current accounts for each partner Godfred, Edem, Emmanuel, Edward 6/17/2023 12  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)  Interest on drawings  Interest on current accounts  Share of profit and loss Godfred, Edem, Emmanuel, Edward 6/17/2023 13  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 Emmanuel, Edward Godfred, Edem, 6/17/2023 14 xxx 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 15  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 16  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 17  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 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 18  CLASS ACTIVITY Refer to Question 1 of Worksheet 3 (Partnership Accounts): Kako, Koobi, Kewuro Partners Godfred, Edem, Emmanuel, Edward 6/17/2023 19 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Accounting for Companies College of Humanities, UGBS 2019/2020  Learning Objectives Explain and discuss the nature of limited liability companies 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. 6/17/2023  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 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) 6/17/2023  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 6/17/2023  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. – 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. 6/17/2023  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 6/17/2023  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”. 6/17/2023  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 6/17/2023  Shares 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. 6/17/2023  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 6/17/2023  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) 6/17/2023  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. 6/17/2023  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. 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 6/17/2023  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 6/17/2023  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. 6/17/2023  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 (appreciation). It is not intended to be distributed as dividend as they are unrealized surpluses. 6/17/2023  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 6/17/2023  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) – Calls for arrears on share values – Forfeiture of shares 6/17/2023  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 Dr The relevant asset account Cr Application account with the agreed value of the consideration received 6/17/2023  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 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. 6/17/2023  Allotment Stage Retention of excess funds for other stages (partly successful applicants) Dr Application Account Cr Allotment Account with amounts received in respect of rejected portions of applications On receipt of allotment monies (cash/cheque) due on shares issued Dr Cash/Bank Account Cr Allotment Account with monies received on allotment 6/17/2023  Allotment Stage Transfer to the stated capital Dr Allotment account Cr Stated capital account with the total sum received on allotment 6/17/2023  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 6/17/2023  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 6/17/2023  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 6/17/2023  Shares Payable on Application Transfer to Stated Capital Dr Application account Cr Stated Capital account with amount received for shares issued 6/17/2023  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 6/17/2023  CLASS ACTIVITY Refer to Question 1 of Worksheet 4 (Accounting for the Issue of Shares) 6/17/2023 Financial Statements of a Company Income Statement Income Surplus Account Statement of Financial Position Statement of Cash flow Notes to the Financial Statements 6/17/2023  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 xxxx xxxx surplus 6/17/2023  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 6/17/2023  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 6/17/2023  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 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 6/17/2023  Structure of IFRS IFRS comprise: – IASs (written by the IASC from 1973 to 2000; amended by IASB) – IFRS (written from 2001 by the IASB) – 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 6/17/2023  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 Godfred, Edem, Emmanuel, Edward  IFRS adopted in Ghana 36 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 6/17/2023  The IFRS Objective 37 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. 6/17/2023  Why IFRS? Investors are acting on a global market !! National standards don’t work on a global market Cross boarder business is hindered by national standards 6/17/2023  Benefits to Capital Markets Credibility of local market to foreign investors More cross-border investment Efficient capital allocation Comparability across political boundaries Facilitates global education and training 6/17/2023  Benefit to companies Lower cost of capital Facilitates raising capital abroad Integrated IT systems “One set of books” + easier consolidation Better understanding of financial statements from business partners abroad 6/17/2023  Implementing IFRS: Challenges Commitment => Decision: leaders, law, regulation Responsibility Stakeholders involvement Solid financial system Training Educational programs Divergencies between local GAAP and IFRS Transition: systems, processes, professionals Tax neutrality (identified as key in many countries) 6/17/2023 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Accounting for Single Entry and Incomplete Records College of Humanities, UGBS 2019/2020  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. Determine profit from incomplete records using opening and closing statement of affairs. Deduce sales and purchases figures from single entry and incomplete records. Godfred, Edem, Emmanuel, Edward 6/17/2023 2  Importance of Keeping Records 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 3  Cash Basis and Accrual Basis Cash Basis of accounting – Used when revenue is recognized based on cash actually received and expenses is recognized only when 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 expenses are incurred once benefits is derived or services are provided by another party. – This method is widely used by most businesses and all corporations. Godfred, Edem, Emmanuel, Edward 6/17/2023 4  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. – 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 5  Determination of Profit Net Assets (Capital) Approach – Based on the accounting equation. – 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 6  Net Assets (Capital) Approach 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 7  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 8  Profit Determination 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” Godfred, Edem, Emmanuel, Edward 6/17/2023 9  Net Assets (Capital) Approach Determination of Profit Closing Capital xxx Plus: Drawings xxx xxx Less: Opening Capital (xxx) Additional Capital (xxx) Profit /(Loss) xx/(xx) Godfred, Edem, Emmanuel, Edward 6/17/2023 10  Net Assets (Capital) Approach Determine the opening and closing capital at the beginning and end of the period via preparation of statement of affairs. Trace all withdrawals made by owners for their personal use (drawings). Determine whether there have been any injection of additional capital Based on the accounting equation, determine the profit or loss. Godfred, Edem, Emmanuel, Edward 6/17/2023 11  CLASS ACTIVITY Refer to Question 1 of Worksheet 5 (Single Entry and Incomplete Records) Godfred, Edem, Emmanuel, Edward 6/17/2023 12  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 13  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) Ascertain the expenses chargeable to the profit and loss account by making adjustments for accruals and prepayments Prepare income statements Godfred, Edem, Emmanuel, Edward 6/17/2023 14  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 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 15  CLASS ACTIVITY Refer to Question 3 of Worksheet 5 (Single Entry and Incomplete Records) Godfred, Edem, Emmanuel, Edward 6/17/2023 16 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Accounting for Non-for-Profit Organization College of Humanities, UGBS 2019/2020  Learning Objectives Explain the main differences between financial statements of NPO’s and profit making organisations. Prepare receipts and payments accounts, the income and expenditure accounts and the statement of financial position of NPO’s Calculate profits/losses for special entities of NPO’s Make appropriate entries regarding subscriptions, life membership accounts etc. Godfred, Edem, Emmanuel, Edward 6/17/2023 2  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 3  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 4  Format of Receipt & Payments Receipts ¢m Payments ¢m 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 5  Income & Expenditure Account It is the “Income statement” for a non-profit organization 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 6  Differences In Terminologies Profit-oriented organisations Non-profit-oriented organisations Income Statement Income and expenditure account Net profit Excess of Income over Expenditure (surplus) Net loss Excess of expenditure over income (deficit) Godfred, Edem, Emmanuel, Edward 6/17/2023 7  Format of Income & Expenditure ¢m ¢m Incomes: Subscription xxx Bar profit etc. xxx xx Expenditures: stationery xxx Donations etc. xxx xx Excess of income over expenditure ( or vice versa) xxx Godfred, Edem, Emmanuel, Edward 6/17/2023 8  Receipts & Payments vs. Income & Expenditure Receipts and Payments Income and Expenditure It records both capital and revenue It records only revenue expenditure, 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 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 relating to the period under consideration. period to which they relate. Difference is the cash/bank balance Difference is the excess of at a time income/expense over expense/income. (i.e. surplus or deficit) It is a real account It is a nominal account Godfred, Edem, Emmanuel, Edward 6/17/2023 9  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 10  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 to it. Entrance fees – normally paid by first timers Godfred, Edem, Emmanuel, Edward 6/17/2023 11  Annual Subscription ¢m ¢m 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 12  Life Membership Should not be treated as income in the I & E a/c only in the year it was paid Credit it to a life membership account and transfers made to the I & E 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 13  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 14  CLASS ACTIVITY Refer to Question 1 of Worksheet 6 (Accounting for non-profit organisations) Godfred, Edem, Emmanuel, Edward 6/17/2023 15 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Correction of Errors College of Humanities, UGBS 2019/2020  Learning Objectives 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 2  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) Godfred, Edem, Emmanuel, Edward 6/17/2023 3  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 4  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (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 fixed asset is credited to sales account of a buying and selling business. Godfred, Edem, Emmanuel, Edward 6/17/2023 5  CORRECTION OF ERRORS AND SUSPENSE 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 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) Godfred, Edem, Emmanuel, Edward 6/17/2023 6  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 completely.  Note: if the reversal is in respect of only one account, the trial balance will not agree. Godfred, Edem, Emmanuel, Edward 6/17/2023 7  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 – 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 8  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) Errors Affecting the 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 Godfred, Edem, Emmanuel, Edward 6/17/2023 9  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 10  CORRECTION OF ERRORS AND 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 11  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 Note: Two balances cannot happen at the same time but to show that it could be a debit or credit balance b/fwd. Godfred, Edem, Emmanuel, Edward 6/17/2023 12  CORRECTION OF ERRORS AND SUSPENSE 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 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 13  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d)  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 Godfred, Edem, Emmanuel, Edward 6/17/2023 14  CORRECTION OF ERRORS AND SUSPENSE ACCOUNT (cont’d) 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. Godfred, Edem, Emmanuel, Edward 6/17/2023 15  CLASS EXERCISE Refer to Question 1 of Worksheet 7 (Correction of Errors) Godfred, Edem, Emmanuel, Edward 6/17/2023 16 INTRODUCTION TO FINANCIAL ACCOUNTING (UGBS 208) Introduction to Analysis of Financial Statements College of Humanities, UGBS 2019/2020  LEARNING OBJECTIVES Identify the tools for the interpretation of financial statements Explain the types of accounting ratios Formulate and calculate the various accounting ratios Godfred, Edem, Emmanuel, Edward 6/17/2023 2  TECHNIQUES FOR ANALYSIS Common-size Statements/Vertical Analysis Common Base Year Financial Statements/Horizontal/Trend Analysis Ratio Analysis Godfred, Edem, Emmanuel, Edward 6/17/2023 3  COMMON-SIZE FINANCIAL STATEMENTS/VERTICAL ANALYSIS Vertical analysis of a financial statement reveals the relationship of each statement item to a specified base, which is the 100% figure Every other item on the financial statement is then reported as a % of that base (common-size ratios) – When an income statement is analyzed vertically, net sales is usually the base – Vertical analysis of statement of financial position amounts are shown as a percentage of total assets Godfred, Edem, Emmanuel, Edward 6/17/2023 4  Vertical Analysis Tool Illustrated EPMP COMPANY Income Statement (Adapted) Years Ended December 31, 1998 and 1997 Dollar amounts in millions Net sales $18,284 100.0% $16,701 100.0% Cost of products sold 4,856 26.6 4,464 26.7 Gross profit 13,428 73.4 12,237 73.3 Operating expenses : Marketing, selling, and administrative 4,418 24.2 4,173 25.0 Advertising and products promotion 2,312 12.6 2,241 13.4 Research and development 1,577 8.6 1,385 8.3 Special charge 800 4.4 Provision for restructuring 201 1.1 225 1.3 Other (148) (0.8) (269) (1.5) Earnings before income taxes 4,268 23.3 4,482 26.8 Provision for income taxes 6/17/2023 1,127 6.1 1,277 7.6 NetGodfred, earningsEdem, Emmanuel, Edward $ 3,141 17.2% $ 3,2055 19.2%  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 period amount. Horizontal analysis uses both cedi amounts and percentages. Godfred, Edem, Emmanuel, Edward 6/17/2023 6  Increase (Decrease) 1998 1997 Amount Percent Sales $18,284 $16,701 $1,583 9.5% Net income 3,141 3,205 (64) (2.0%) Godfred, Edem, Emmanuel, Edward 6/17/2023 7  Ratio Analysis Financial ratios are relationships determined from a firm’s financial information. Used to compare and investigate relationships between different pieces of financial information, either over time or between companies. Ratios eliminate the size problem. Godfred, Edem, Emmanuel, Edward 6/17/2023 8  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. Godfred, Edem, Emmanuel, Edward 6/17/2023 9  Liquidity Ratio Current Ratio = Current Assets Current Liabilities Quick Ratio = Current Assets - Inventory Current Liabilities Acid-Test Ratio = Cash + cash Equivalents Current Liabilities Godfred, Edem, Emmanuel, Edward 6/17/2023 10  Long-term Solvency Ratios Debt to Equity Ratio = Long-term Liabilities Stockholders’ Equity Interest Coverage Ratio = Income Before Income Taxes + Interest Expense Interest Expense Godfred, Edem, Emmanuel, Edward 6/17/2023 11  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 6/17/2023 Godfred, Edem, Emmanuel, Edward 12  Profitability Ratios Return on Assets = Net Income (PBIT) Total Assets Profit Margin = Net Income Net Sales Asset Turnover = Net Sales Average Total Assets Return on Equity = Net Income Stockholders’ Equity Godfred, Edem, Emmanuel, Edward 6/17/2023 13  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 market price per share Godfred, Edem, Emmanuel, Edward 6/17/2023 14  Benchmarks for Comparison Ratios are most useful when compared to a benchmark. Time-trend analysis—examine how a particular ratio(s) has performed historically. Peer group analysis—using similar firms (competitors) for comparison of results. Godfred, Edem, Emmanuel, Edward 6/17/2023 15  Limitations of Ratio Analysis No underlying theory to identify correct ratios to use or appropriate benchmarks. Benchmarking is difficult for diversified firms. Firms may use different accounting procedures. Firms may have different recording periods making comparison difficult. One-off events can severely affect financial performance. Effects of inflation Window dressing Godfred, Edem, Emmanuel, Edward 6/17/2023 16