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SECOND TERM E-LEARNING NOTE
SUBJECT: FINANCIAL ACCOUNTING CLASS: SS 2
SCHEME OF WORK
WEEK TOPIC
1 – 2 Departmental Accounts
3 – 4 Manufacturing Accounts
5 Capital and Revenue Expenditure
6 – 7 Disposal of Fixed Assets
8 Accounting Concepts and Conventions
9 – 10 Introduction to Accounting Ratios
WEEK ONE AND TWO DATE: ______________
TOPIC: DEPARTMENTAL ACCOUNTS
CONTENT
Meaning of Departmental Accounts
Expenses and Apportionment
Final Accounts
MEANING OF DEPARTMENTAL ACCOUNTS
Usually in a large organizations, the operations is divided into separate departments. This is because such organizations have a large volume of transactions coupled with a wide range of lines of product and as such finds it convenient and for accounting purpose to separate or divide its operations into different departments. This affords the organization easy operations and accountability.
In departmentalized organizations, the accounting process entails keeping separate journal and ledger books for each of the departments such as separate cashbook separate purchases and sales books, separate stocks, separate returns and personal ledgers e.t.c.
At the end of the financial year, the accountants bring together the separate journal and ledger books to integrate, compare and determine the department that performs better than the other (see final accounts).
FINAL ACCOUNTS OF A DEPARTMENTALIZED ENTERPRISE
The trading, profit and loss accounts of each of the departments in a departmentalized organization are drawn separately but in a combined format called DEPARTMENTAL, TRADING, PROFIT AND LOSS ACCOUNT.
The aim of departmental, trading, profit and loss account is to compare trading result and to assist the owner of the business in formulating policies, having known the departments that perform better and those that perform worse.
NB: The Balance sheet follows normal procedure: not in a combined format.
Format
Departmental Trading, Profit and loss Account for the
year ended 31st Dec. 19xx
A B C Total A B C Total
N N N N N N N N
Opening stock x x x x Sales x x x x
Add purchases x x x x Returns I.R x x x (x)
Inter dept. T/f x x x –
X x x x
Less clo. Stock (x) (x) (x) (x)
Cost of sales x x x x
Gross profit c/d x x x x
X x x x x x x x
Expenses G/P b/d x x x x
Wages & Salaries x x x x Dis. Rec. x x x x
Rent x x x x
Commission x x x x
Depreciation x x x x
Motor expenses x x x x
Net profit c/d x x x x
X x x x x x x x
INTER DEPARTMENTAL TRANSFER AND APPORTIONMENT OF EXPENSES
Inter Departmental Transfer: Sometimes goods purchased by one department may be transferred to another department by reason of sales and such purchases transferred is deducted from the department giving it out and is added to the department receiving it.
Apportionment of Expenses: Expenses are usually not separated to reflect expenses incurred by each department. As a result of this, there is need for apportionment (i.e division). Expenses must therefore be adjusted and then apportioned for each of the departments.
Methods
a. Turnover Basis: This is the use of sales (i.e Turnover as a basis of sharing (i.e sharing ratio).
b. Floor Space Basis: This uses the area of floor space occupied as the basis of sharing i.e sharing ratio.
c. Number of Articles Sold Basis: Ratio used is the items sold.
d. Direct Analysis Basis: Ratio used here is specified.
e. Equality Basis: The ratio used here is the number of departments existing.
EVALUATION
1. What is departmental account?.
2. State four reasons why organizations separate their operations into different departments.
ILLUSTRATION
Below is the trial balance of Akinbode Electronic shop for the year end 31st December, 2006.
N N
Sales: Dept E 30,000
Dept F 20,000
Stock (1/1/2006): Dept E 800
Dept F 750
Purchases: Dept E 22,000
Dept F 18,500
Commission 1,500
Salaries 800
Insurance premium 1,000
Stationery 450
Discount allowed 100
Discount received 350
Sundry expenses 110
Stock at close: Dept E 1,100
Dept F 900
NOTE
- The total floor area occupied by each departments is Dept: E (2/5)
F (3/5)
- Apportionment basis are:
- Commission, discount allowed – sales ratio
- Discount received – purchases ratio
- Insurance – floor area
- Other – equal apportionment
Solution
AKINBODE’S DEPARTMENT TRADING, PROFIT AND LOSS ACCOUN FOR THE YEAR END 31SY DEC. 2006
DEPT E DEPT F DEPT E DEPT F
Stock (1/1/2006) 800 750 Sales 30,000 20,000
Purchases 22,000 18,500
Cost of goods avail. 22,800 19,250
Less stock (31/12) (1,100) (900)
Cost of sales 21,700 17,350
Gross profit c/d 8,300 2,650
30,000 20,000 30,000 20,000
Expenses G/P b/d 8,300 2,650
Commission 900 600 D/R 190 160
Salaries 400 400
Insurance 400 600
Stationeries 225 225
Discount allowed 60 40
Sundry expenses 55 55
Net profit 6,450 890
8,490 2,810 8,490 2,810
Apportionment Basis
a. Sales Ratio
Dept. E: 30,000: Dept. F: 20,000 = 50,000
= 30,000/50,000 = 20,000/50,000
b. Purchases Ratio
Dept. E: N22,000 Dept. F: 18,500 = 40,500
= 22.000/40.500 = 18,500/40,500
c. Floor area already given Dept. E 2/5; Dept. 3/5
d. Other expenses = equally = (÷ 2) or 50%; 50%
Evaluation
1. Discuss the term inter-departmental transfer.
2. Explain any four bases of apportionment of common expenditure in a profit and loss account of a department store.
READING ASSIGNMENT
1. Essential Financial Accounting by O.A. Longe page 160-171
2. Comprehensive Accounting for S.S. by J.U. Anyaele
GENERAL EVALUATION QUESTIONS
- Explain five errors that would affect the agreement of the trial balance
- List and explain three classifications of ledger accounts
- List ten accounts found in the nominal ledger
- State the purpose of departmental accounts
- List six items each found in the asset and liability sides of the balance sheet of a sole trader
WEEKEND ASSIGNMENT
Use the information provided below to answer question 1 – 4
WB LTD is departmentalized as follows:
DEPARTMENT
W X Y Z
Purchases 625,000 375,000 125,000 325,000
The company use purchases figure to apportion the following expenses to the various departments’ expenses:
Amount
N
Commission paid 9,000
Salaries 60,000
General expenses 20,000
Insurance 1,000
1. What is the proportion of commission paid to be charged to dept W?
(a) N3,879 (b) N,2328 (c) N 2,017 (d) N776
2. How much of the commission paid shall be charged to dept Z? (a) N 431 (b) N 776
(c) N 2,017 (d) N 2,328
3. What is the proportion of salary to be charged to dept X? (a) N25,862
(b) N15,517 (c) N13,448 (d) N5,173
4. What is the proportion of general expenses to be charged t dept “Y”
(a) N8,621 (b) N5,172 (c) N1,724 (d) N776
5. Insurance premium on business premises should be apportioned on the basis of (a) sale
(b) purchases (c) carriage outwards (d) floor space occupied per department
THEORY
1. List six items of expenses and their basis of apportionment into departments.
2. State and explain four advantages of department accounts.
WEEK THREE AND FOUR DATE: _______________
TOPIC: MANUFACTURING ACCOUNTS
CONTENT
- Meaning of Manufacturing Accounts
- Purpose of Manufacturing Account
- Element of Cost of Production
- Layout of Manufacturing Account
- Transfer Pricing
- Practical Illustration
MEANING OF MANUFACTURING ACCOUNTS
Manufacturing can simply be described as the transformation of raw materials into finished goods e.g. manufacturing companies like Nestle, Cadbury, PZ e.tc. These manufacturing firms do manufacture their goods or product before they are sold to their customer. They do not buy to sell but produce what they sell.
There manufacturing companies prepare a final accounts called Manufacturing Account.
PURPOSE OF MANUFACTURING ACCOUNTS
Manufacturing Account are prepared to ascertain the cost of goods manufactured during the financial
year. Therefore manufacturing accounts have the following purposes.
- To ascertain the cost of production
- To determine the profit on the manufacturing process.
ELEMENTS OF COST OF PRODUCTION
- COST OF PRODUCTION: This is the total expenditure incurred in the production of goods. Production costs include PRIME COST + FACTORY OVERHEADS
- PRIME COST: These are cost directly related in the production process. It is also called Direct Cost which include: Direct materials, direct labour, direct expenses and any other direct expenditure.
- Direct materials cost: These are cost of raw materials
- Direct labour cost: These are cost of labour wages paid
- Direct expenses: These are cost of other expenditure incurred in the production process.
Format of Manufacturing Trading Profit and Loss Account
N N N
Opening stock of raw material x Cost of production x
Add purchases of raw material x
Carriage inward of raw material x x
X
Loss closing stock or raw material net (x)
Cost of raw material consumed x
Add direct wages x
Royalties x
Direct expenses x
Prime cost x
Factory overheads: x
Factory power x
Factory rent & rates x
Indirect wages x
Factory insurance x
Depreciation of P & M x
Fuel and power x
Lubricants x x
X
Add opening stock W.I.P X
X
Less closing stock W.IP X
Cost of production x x
Manufacturing Trading, Profit and loss Account contd
N N N N
Opening stock of finished goods x sales x
Add cost of production x
Cost of good available for sale x
Less closing stock of finished goods (x)
Cost of goods sold x
Gross profit c/d X
X x
Expenses Gross profit b/d x
Selling & distribution Discount received x
Carriage outward x x
Commission sales x
Salesmen salaries x x
Administration exp
Admin salaries x
Office rent x
Office insurance x
Office lighting x
Depreciation of
Office machinery x x
X
Net profit c/d x
X x
TRANSFER PRICING
In the trading account, the cost of production is charged to determine profit on sales. The changing of cost of production of goods may be done in two ways.
- Actual factory cost
- Current market values
When goods manufactured are charged at the current market value to the trading account, the main objective is obtain profit on the manufacturing process. The manufacturing accounts will then have to show a balance which represents a profit or loss on production and this is transferred to profit and loss account.
EVALUATION
1. State four classifications of costs revealed by manufacturing accounts.
2. State two reasons for the preparation of manufacturing accounts.
PRACTICAL ILLUSTRATIONS
The following information was extracted from the books of Tasty Enterprises for the year ended 31st December 1991
N
Manufactured goods 9,740
Raw materials 3,000
Discount allowed 3,740
Depreciation on plant and machinery 13,000
Printing and stationery 930
Purchases: Manufactured goods 12,740
Carriage inwards 500
Debtors 21,740
Cash at bank 1,710
Purchases of raw material 87,260
Office rent and rates 6,500
Repairs to machinery 2,500
Plant and machinery 75,200
Factory electricity 5,790
Carriage inwards (raw materials) 3,410
Office salaries 9,400
Carriage outwards 2,330
Factory rent and rates 22,710
Cash in hand 570
Manufacturing wages 110,290
Sales 299,420
Capital 77,820
Creditors 21,790
Additional
(a) Stock on 31st Dec 1991
Manufactured goods N27,940
Raw material N 2,000
(b) Goods manufactured to be posted to the sales department at net realizable value of N271,500
You are required to prepare manufacturing trading profit and loss account for year ended 31st Dec. 1991.
SOLUTION: TASTY ENTERPRISES
Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.
Dr N N N N
Opening stock of r.m 3,000 Transfer cost 271,500
Add. Purchases of r.m 87,260
Carriage of raw mat. 3,410 90,670
93,670
Less closing stock of r.m 2,000
91,670
Manufacturing wages 110,290
Prime cost 201,960
Factory overheads
Depreciation p&m 13,000
Repair to machinery 2,500
Electricity 5,790
Factory rent and rates 22,710 44,000
Production cost 245,960
Gross profit on production 25,540
271,500 271,500
Opening stock of finished gds 9,740Sales 299,470
Add: Transfer cost 271,500
Purchases of finished gds 12,740
Carriage inwards 500
284,740
Cost of goods available 294,480
for sales
TASTY ENTERPRISES
Manufacturing Trading Profit and Loss Account for the year ended 31st December, 1991.
N N N N
Cost of goods available 294,480 Sales b/f 299,420
for sale b/f
Less closing stock 27,940
Cost of goods sold 266,540
Gross profit c/d 32,880
299,420 299,420
Expenses Gross profit b/d 32,880
Discount allowed 3,740 Profit on manufacture 25,540
Office rent & rates 6,500
Office salaries 9,400
Carriage outward 2,330
Printing & stationary 930
Net profit 35,520
58,420 58,420
EVALUATION
1. What is factory overhead?
2. What is prime cost?
3. Define cost of production by way of formula
GENERAL EVALUATION QUESTIONS
- Explain three differences between a trial balance and a balance sheet
- State four reasons for disagreement between a bank statement balance and cash book balance
- List five methods of providing for depreciation
- State five reasons for making provision for depreciation
- List six factors to be considered in computing the depreciation on fixed assets
READING ASSIGMENT
Essential Financial Accounting for S.S. by O.A. Longe page 160-171
WEEKEND ASSIGNMENT
1. The following is the main objective of a manufacturing account (a) to ascertain gross profit (b) to ascertain net profit (c) to ascertain profit on asset (d) to ascertain cost of production
2. The cost components of manufacturing directly related in the per unit of good produced is called (a) factory cost (b) cost of production (c) prime cost (d) fixed cost.
3. Cost of production is also called (a) factory overhead (b) factory expenses (c) manufacturing cost (d) prime cost
4. Prime cost can also be described as (a) indirect cost (b) direct cost
(c) fixed cost (d) variable cost
5. Royalties is an example of ________ cost (a) factory cost (b) indirect cost (c) prime cost (d) selling and distribution
THEORY
1. Write short note on:
a. Prime cost
b. Factory overhead
2. Distinguish between
a. Work in progress (W.I.P) and finished goods
b. Prime cost and factory overhead.
WEEK FIVE DATE: ______________
TOPIC: CAPITAL AND REVENUE EXPENDITURE
CONTENT
- Definition of Capital and Revenue Expenditure
- Distinct between Capital and revenue expenditure
- Effects of Overstatement and Understatement of Capital and Revenue Eexpenditure
- Statement of Capital and Revenue Expenditure
- Capital Expenditure: Capital expenditure are payment made on items of capital nature. They are expenses which add to the value of fixed assets. Capital expenditure therefore can simply be described as the expenditure that consist of cost of fixed assets and other associated costs.
E.g: (a) Cost of purchase (b) Cost of delivery
(c) Installation cost (d) Legal costs of purchase
(e) Architect fees. (f) Cost of demolition before new building is sited
(g) Cost of inspection and test of fixed asset before use.
- Revenue Expenditure: Revenue expenditures are payments made on running the daily activities of business enterprises. They are expenses which do not add to the value of fixed assets but are for maintenance and repairs of fixed assets and to generally run the business on daily basis.
- Eg: (a) Cost of maintenance of fixed assets (b) Cost of repairs
(c) Payment of rents and rates (d) Payment of wages and salaries
(e) Cost of transportation etc.
Distinction between Capital and Revenue Expenditure
CAPITAL EXPENDITURE REVENUE EXPENDITURE
1. Capital expenditure consist of cost of fixed assets and other associated cost. | Revenue expenditure consist of cost of maintenance or repairs of fixed assets |
2. Capital expenditure are incurred in long term projects | Revenue expenditure are incurred daily weekly, monthly and yearly and are better describe as Recurrent |
Capital expenditure are expenses that result in increases of value of fixed assets in the balance sheet | Revenue expenditure are expenses chargeable to the profit and loss accounts |
Capital expenditure are made on capital items which are long term and have enduring influence on profit of the organization | Revenue expenditure are made on revenue items which are shore term and have a temporary influence on the profit of the organization |
EFFECTS OF OVERSTATEMENT AND UNDERSTATEMENT OF CAPITAL AND REVENUE EXPENDITURE.
Capital and revenue expenditure when wrongly posted or interpreted or wrongly mistaken for each other, will have a great effect of overstatement or understanding on profit.
Example
Capital expenditure overstated has the following effect
- Overstatements of profit because revenue expenditure must have been understand.
- Overstatement of value of fixed asset
Revenue Expenditure understated has the following effects:
- Understatement of profit
- Understatement of value of fixed assets
STATEMENTS OF CAPITAL AND REVENUE EXPENDITURE
These are prepared to show the distinction between them mostly in government office.
ILLUSTRATION
The Federal Ministry of Health incurred in 1989 the following:
N
Construction of hospital ward 28, 500, 000
Purchase of beds 920, 000
Repairs of ambulances 25, 000
Salaries and wages 31, 000, 000
Maintenance of vehicles 7, 500, 000
Purchases of petrol and lubricants 800, 000
Purchase of theater equipment 7, 920, 000
Construction of boreholes 1, 200, 000
Purchases of drugs 10, 550, 000
Purchases of vaccines 1, 330, 000
Maintenance of mortuary buildings 670, 000
Purchase of incubators 3, 800, 000
Purchase of X-ray machines 4, 200, 000
Prepare statements of
- Capital expenditure
- Revenue expenditure
Solution
Statement of Capital Expenditure
Particulars N
Construction of hospital ward 28, 500, 000
Purchase of beds 920, 000
Purchase of theater equipment 7, 920, 000
Construction of boreholes 1, 200, 000
Purchase of incubators 3, 800, 000
Purchase of X-ray machines 4, 200, 000
Total 46, 540, 000
Statement of Revenue Expenditure
Particulars N
Repairs pf ambulances 25, 000
Salaries and wages 31, 000, 000
Maintenance of vehicles 7, 500, 000
Purchases of petrol and lubricants 800, 000
Purchases of drugs 10, 550, 000
Purchases of vaccines 1, 330, 000
Maintenance of mortuary buildings 670, 000
Total 51, 875, 000
Reading Assignment
Essentials Financial Accounting for S.S by A.O Longe page 186-192
GENERAL EVALUATION QUESTIONS
- State five reasons why organizations separate their operations into different departments
- List six errors that will not affect the agreement of the trial balance
- Explain four classifications of cost found in the preparation of manufacturing accounts
- Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
- List five prime books of account used in recording financial transactions
WEEKEND ASSIGNMENT
- Purchase of lubricant oil is an example of (a) Revenue expenditure (b) Capital Expenditure (c) Accrued Expenses (d) Running cost
- Purchase of Fixed Assets is an example of (a) running cost (b) accrued expenses (c) revenue expenditure (d) capital expenditure
- Revenue expenditure can better be described as (a) recurrent expenses (b) ordinary expenses (c) general expenses (d) yearly expenses.
- Revenue expenditure when understated has the following effects on the profit (a) understatement of profit (b) overstatement of profit (c) set profit of equilibrium to expenses (d) results in negative profit.
- The followings are example of capital expenditure except _______ (a) cost of fixed assets ( b) installation cost of equipments (c) maintenance cost of assets (d) delivery cost of fixed assets
THEORY
- Define revenue expenditure and give ten example
- What is capital expenditure? Give ten examples.
WEEK SIX AND SEVEN DATE: ______________
TOPIC: DISPOSAL OF FIXED ASSETS
CONTENT
- Meaning and definition of disposal of fixed asset
- Methods of disposal of fixed assets and their format.
- Practical illustration.
MEANING AND DEFINITION OF DISPOSAL OF FIXED ASSETS.
Fixed assets can be sold in the course of the business due to one reason or the other. The sale of fixed assets is recorded in an account called Assets Disposal Account and it is meant to show the profit or loss made on the sales of such a fixed asset. The accounting procedures on the sale of fixed asset are shown below.
METHOD OF DISPOSAL OF FIXED ASSET
There are two methods of recording disposal of fixed asset. They are the old and new methods of depreciation, on the asset sold
The old method:
Which depreciation has been credited to the asset account and the asset is disposed, then:
a. For sale of asset:
i. Debit cash book
ii. Credit asset account
b. If there is profit on sale:
i. Debit asset account
ii. Credit profit and loss account
c. If here is loss on sale:
i. Debit profit & loss account
ii. Credit asset account.
Example
DR Asset account CR
N N
19xx Bal b/d x 19xx Cash book x
Profit x
xx xx
DR Cash book CR
N N
19xx Asset x
DR Profit & Loss Account CR
N N
19xx Loss on sale of asset x Profit on sale of asset x
New method
Where depreciation has been carried to provision for depreciation account. It is best dealt with by opening a disposal account to which the original cost of assets and accumulated depreciation are transferred.
- For cost price of assets:
- Debit asset disposal account
- Credit asset account
- For accumulated depreciation:
- Debit provision for depreciation account
- Credit asset disposals account
- For cash or cheque received on sale:
- Debit cash book
ii. Credit asset disposal
- For profit on sale:
- Debit asset disposal account
- Credit profit and loss account
- For loss on sale:
- Debit profit and loss account
- Credit asset disposal account
Example
DR Asset Account CR
N N
19xx Cash x 19xx Asset disposal x
DR Provision for depreciation account CR
19xx Asset disposal x 19xx Accumulated Bal b/d x
DR Asset Disposal Account CR
N N
19xx Cost of asset x 19xx Cash realized x
19xx Profit x 19xx Prov. For dep. x
X x
DR Cash Book CR
N N
19xx Asset disposal x
DR Profit & Loss Account CR
N N Profit on sale of asset x
EVALUATION
1. State seven methods of charging depreciation on fixed assets
2. Explain five factors that are taken into consideration in determining annual depreciation charge.
Practical illustration
A motor car was bought for N30,000, it is to be depreciated at 25% on cost for 3 years and was sold for N10,000 at the end of the 3rd year. Prepare necessary account for the asset disposed off.
Solution
Using the straight line method of depreciation
Motor van. N30,000
Yr 1 dep. (25%) 7,500
N 22,500
Yr 2 dep. (25%) 7,500 N15,000
Yr 3 dep. (25%) 7,500
Net Book Value (NBV) N7,500
Old Method
DR Motor van account CR
N N
Year 1 Cash 30,000 Year 1 Depreciation 7,500
Bal c/d 22,500
30,000 30,000
Yr 2 Bal b/d 22,500 Yr 2 Depreciation 7,500
Bal c/d 15,000
22,500 22,500
Yr 3 Bal b/d 15,000 Yr 3 Depreciation 7,500
Bal c/d 7,500
15,000 15,000
Yr 4 Bal b/d 7,500 Yr 4 Cash book 10,000
Profit sal 2,500
10,000 10,000
DR Cash Book CR
N N
Yr 4 Motor van 10,000
DR Profit And Loss Account CR
N N
Yr 1 Depreciation 7,500 Profit on sales 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
The Modern Method
DR Motor van Account CR
N N
Yr 1 Cash 30,000 Yr 3 Asset disposal 30,000
DR Provision for depreciation account CR
N N
yr 1 Bal c/d 7,500 Yr 2 Profit & Loss 7,500
yr 2 Bal c/d 15,000 Yr 2 Bal b/d 7,500
Profit & loss 7,500
15,000 15,000
Year 3 Bal c/d 22,500 Yr 3 Bal b/d 15,000
Profit & loss 7,500
22,500 22,500
Yr 4 Asset disposal 22,500 1/1Yr 4 Balance b/d 22,500
DR Asset Disposal Account CR
N N
Yr 1 Cost of assets 30,000 Yr 4 Cash 10,000
Profit 2,500 Prov. For dep. 22,500
32,500 32,500
DR Profit and loss account CR
N N
Yr 1 Depreciation 7,500 Profit on sal e. 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
EVALUATION
1. Define disposal of fixed assets.
2. Mention the two methods of disposal of fixed assets.
READING ASSIGNMENT
1. Essential Financial Accounting for S.S. by O.A. Longe Page 115 – 127
2. Business Accounting 1 by Frank Wood, Page 82 – 93
3. Financial Accounting with Ease by Yomi Onafowokan, Page 65 – 73
GENERAL EVALUATION QUESTIONS
1 What is the difference between depreciation and amortization
2 Give two examples each of assets associated with depreciation and amortization
3 Differentiate between adjustments and closing entries
4 State seven benefits of keeping accounting records in a business
5 List five source documents used in preparing the cash book
WEEKEND ASSIGNMENT
1. When fixed assets are sold, it is recorded in ________ (a) depreciation accounts (b) disposal account (c) sales account (d) deposits account
2. The following is a method of treating disposal of asset (a) good method (b) bad method (c) old method of depreciation (d) cash book method
3. In the old method, depreciation is ________ in the asset account.
(a) debited (b) credited (c) both debited and credited (d) all of the above
4. The double entry posting for profit on sale of fixed asset in the provision method affects the following accounts (a) asset account and provision for depreciation account (b) asset account and profit & loss account (c) assets account and profit & loss account (d) disposal account and profit & loss account
5. Profit and loss account records profit on sale of asset on _________ side (a) debit (b) credit (c) left (d) right
THEORY
1. What is disposal of fixed assets?
2. What are the necessary entries needed to record profit on sale of asset ?
WEEK EIGHT DATE: ______________
TOPIC: ACCOUNTING CONCEPTS AND CONVENTIONS
CONTENT
- Definition of Concepts and Conventions
- Accounting Concepts
- Accounting Convention
ACCOUNTING CONCEPTS AND CONVENTIONS
Accounting concepts and convention are a set of rules or principles that are taken into consideration in the preparation of financial statements. The financial statements include: Trading, profit and loss account as well as the balance sheet. For uniformity of purpose, a generally accepted rules or principles in the form of assumption for its preparation and presentation are adopted, and these are called accounting concepts and conventions.
ACCOUNTING CONCEPTS
- BUSINESS ENTITY CONCEPT: The rule here is that the owner and the business are treated separately. Therefore in the preparation of financial statement, the business is recognized as separate and distinct entity, only things that affect the business are recorded and not wealth of the owner(s) apart from those invested.
- GOING CONCERN CONCEPT: Going concern means continuity and not liquidation. That is no reason or fear of discontinuity exists.
- MONEY MEASUREMENT CONCEPT: This concept states that financial statements must reflect only transaction and entries that are capable of being expressed in monetary terms.
- COST CONCEPT: In the preparation of financial statements. Assets are value at cost. It is on cost and not market value because the business is not for sale.
- ACCRUAL CONCEPT: This concept states that expenses and revenue are recognized and reported in the profit and loss account as they are incurred and earned respectively and not as they are paid or received.
- MATCHING CONCEPT: This concept explains that all expenses must be matched and reported against revenue generated at that period to determine the net profit. NB: This is the same as accrual concept
- DUAL ASPECT CONCEPT: This explains the principle of double entry.
- REALIZATION CONCEPT: This concept explains that income in recognized as soon as goods are exchanged for valuable consideration.
EVALUATION
1. Explain the term “Accounting Concepts”.
2. Explain the following accounting concepts:
(a) going concern (b) money measurement (c) accrual
ACCOUNTING CONVENTIONS
- MATERIALITY CONVENTION: This convention states that amount of materials significant n value must be recorded in the preparation of financial statement. This explains why certain economic events are not reported when the amount of their value are insignificant as to affect the financial statement e.g. depreciations of calculator, wall clock e.t.c.
- CONVENTION OF CONSERVATISM: The convention of conservatism states that the principles of treating income and losses as well as valuation of assets.
- Income should not be anticipated
- All possible losses must be provided for
- When more than one method of valuing an asset is evolved, choose the method with less value (i.e. lower of cost) and or market value.
- CONSISTENCY CONVENTION: This states that there should be consistency in the treatment of similar transactions. This implies that similar transaction within the same period and between one period and another must be treated alike, any changes of method may distort the profit calculation.
EVALUATION
- Define the terms accounting concepts and convention
- Write short notes on the following concepts
- Business entity concept b. Matching concept
READING ASSIGNMENT
Essentials Financial Accounting for SS by O. A. Longe, Page 198-205
GENERAL EVALUATION QUESTIONS
- List five items expenses related to a departmental account and a base of apportioning each item
- State eight uses of the General Journal
- Explain the principle of double entry system
- Explain the following errors giving an example of each (a) principle (b) compensation (c) omission
- What is a bank reconciliation statement
WEEKEND ASSIGNMENT
- A generally accepted points of opinion on ways of doing a thing is called ___ (a) concepts and conventions (b) ideal (c) theories (d) opinion
- The accounting concept that states the rule of double entry book-keeping is known as ____(a) matching concept (b) accrual concept (c) dual concept (d) cost concept.
- Going concern assumes that an enterprise continues (a) for life (b) for a short time (c) for relatively long time (d) liquidate.
- In the case of accounting convention of conservatism, income should _____ (a) be anticipated (b) not be anticipated (c) should be overestimated (d) written off
- The following are examples of accounting concept and convention except (a) dual concept (b) single entry system (c) cost concept (d) money measurement concept.
THEORY
1. Explain the following accounting concept (a) Business entity concept (b) Dual concept
2. Explain the following accounting convention (a) Accounting conventions (b) materiality
(c) consistency
WEEK NINE AND TEN Date: __________
TOPIC: INTRODUCTION TO ACCOUNTING RATIOS
(i). Margin and Mark Up
The ability to calculate margin and mark up may be necessary to solve some incomplete record problems.
MARGIN
When gross profit is expressed as a fraction or percentages of selling price it is known as margin.
Example: N
Cost price of goods 100
Profit 25
Selling price 125
Then the margin = profit x 100 = 25 x 100 = 20% 0r 1/5
Selling price 1 125 1
MARK-UP
When gross profit is expressed as a percentages or fraction of cost of sales it known as mark – up.
In the above example, mark – up is profit x 100 = 25% or ¼
Cost of goods sold 1
Relationship between margin and mark –up
Examples
If mark – up Margin
Is (i) 2 then 2 = 2
5 5 + 2 7
(ii) 1 then 1 = 1
4 4+ 1 5
If margin mark -up
Is (i) 2 then 2 = 2
5 5 – 2 3
(ii) 1 then 1 = 1
3 3– 1 2
(iii) 1 then 1 = 1
7 7 – 1 6
NB:- making-up is always greater than margin
FURTHER EXAMPLES:
- Cost of sales: N3000. Margin 25%. Calculate sales revenue.
Solution: margin is 1 therefore Mark-up = 1 = 1
4 4 -1 3
N 3000 X 1 = PROFIT = N1000
3
Therefore
Sales revenue = cost + profit = N (3000 + 1000)= N 4000
NB: it is mark-up that is a percentage of cost hence the margin given in the question must be converted to mark-up to solve the above problem.
- Sales revenue: N7000. Make-up is 40%. calculate the gross profit.
Solution: mark – up . is 2 therefore Margin is 2 = 2
5 5 + 2 7
Therefore Gross profit = 2 x N7000 = N2000
7
- Maheen provides the following information for the year ended 31st Dec. 2003.
N
Stock at 1st Jan. 2003 9000
Stock at 31st Dec. 2003 11,000
Sales in the year ended 31st 84,000
Maheen sells her goods at a make – up of 331/3. prepare Maheen’s trading account for the year ended 31st Dec. 2003 in as much details as possible.
Solution: This is a good example of a problem that is solved by working backwards
MAHEEN
Trading account for the year ended 31 Dec. 2003
N N
Sales (given) 84,000
Less cost of sales
Opening stock 1st Jan (given) 9000
Step 4 purchases (balance figure 3) 65000
Step 3 Gods available for sales (balancing figure 2) 74000
Less closing stock at 31 Dec. (given) 11000
Step 2 cost of sales (balancing fig 1) 63,000
Step 1 gross profile (1/4 x N84,000) 21,000
iii. STOCK LOST IN FIRE OR BY THEFT
The methods used for preparing account from incomplete records are also used to calculate the value of stock lost in a fire or by theft when detailed stock records have not been kept, or have been destroyed by fire.
You can solve this type of problem by preparing a pro forma “trading Account’ (It is described as “pro forma because it is not prepared like a normal Trading account by transferring balances from ledger accounts.)
EVALUATION
1. Define the following accounting terms
(a) Mark-up (b) Margin
2. State the relationship between mark-up and margin.
Example
Uwa’s warehouse was burgled on 10th April 2004. the thieves stole most of the stock but left goods worth N1250. Uwa supplies the following information:
Extracts from Uwa’s Balance Sheet at 31 Dec. 2003
Stock N 30,000
Debtors N 40,000
Creditors N 20,000
Extracts from cash Book, 31 Dec. 2003 to 10 April 2004
Receipts from debtors N 176,000
Payments to suppliers N 120,000
Other information
Debtors at 10th April 2004 N 24000
Creditors at 10th April, 2004 N 26,000
Uwa sells his goods at a mark-up of 25%
Required: calculate the cost of the stolen goods
Solution: UWA
Pro forma Trading Account for the period 1st January, to 10th April 2004
N N
Sales (see wk 1 below) 160,000
Less cost of sales
Stock 1st Jan. 2004 30,000
Purchases (see wk 2 below) 126,000
156,000
Less closing 10/4/04
(Balancing figure) 28,000
Cost of sales 128,000
Gross profit (mark-up is 25% so margin 32,000
Is 20%, (N160,000 x 20%
Therefore Cost of stock stolen = N(28,000 – 12500 = N26,750 i.e. closing stock – stock left after burglary.
Workings (1) Debtors Control A/C
N N
1 Jan. Balance b/f 40,000 10 April Cash 176,000
10 April Sales Debtors out-
(balanced fig) 160,000 standing 24,000 200,000 200,000
Workings (2) Creditors Control A/C
N N
1 Jan. Bal b/f 20,000
10 April, cash 120,000 10 April purchases
(balancing fig.) 126,000
146,000 146,000
EVALUATION
Differentiate between margin and mark-up.
READING ASSIGNMENT
Financial Accounting with, Ease by Onatowokan Oluyombo pages 183 – 167
GENERAL EVALUATION QUESTIONS
- State five features of capital expenditure
- State five characteristics of depreciable asset
- List five advantages and three disadvantages of the straight line method of calculating depreciation
- List ten users of financial accounting information
- List six causes of depreciation of fixed assets
WEEKEND ASSIGNMENT
- If mark-up is 40%, then margin is (a) 1/8(b) 45% (c) 1/7 (d) 2/7
- if margin is 25% and cost of sales is N30,000 then sales revenue is (a)N25,000 (b) N20,000 (c) N35,000 (d) N30,000
- If margin of a business is 331/3% then its mark-up is (a) 60% (b) 25% (c) 50% (d) 1/3
- If the sales of a business is N8400 and the business mark-up is 331/3% then the cost of sales is (a) N5000 (b) N6300 (c) N7000 (d) N84000
- If margin is 1/7 then mark-up is (a) 1/8 (b) 1/9 (c) 1/6 (d) 25%
THEORY
- The sales of a business is N16,000. Its mark-up is ¼. What is its cost of goods sold?
- If the closing stock of the business in question one above is N2,800, what is the cost of goods available for sale?