THIRD TERM E-LEARNING NOTE
SUBJECT: FINANCIAL ACCOUNTING CLASS: SS2
SCHEME OF WORK
WEEK TOPICS
1-3 Single Entry and Incomplete Records
4-5 Control Accounts
6-8 Accounts of Non-Profit-Making Organizations
9 Joint Venture Accounts
10 Consignment Accounts
WEEK ONE
TOPIC: SINGLE ENTRY AND INCOMPLETE RECORDS
CONTENT: (i) Introduction (ii) Steps Involved in preparing a P&L A/C and Balance Sheet from Incomplete Records (iii) Example
i. INTRODUCTION:
Most businesses keep records of receipts and payments. The records may consist of bank paying – in – book counterfoils, cheque book counterfoils and bank statements in addition to supplies invoices and copies of sales invoices. From these records it may be possible to prepare a P&L A/C and Balance Sheet.
ii STEPS INVOLVED IN PREPARING A P&L A/C AND BALANCE SHEET FROM INCOMPLETE RECORDS;- The necessary steps are as follows:-
Step 1: Preparing an opening statement of affairs (so as to obtain opening capital)
Step 2: Prepare a receipt and payments A/C
Step 3: Prepare control A/CS for debtors and creditors, if necessary to calculate sales and purchases. It is the sales and purchase figure that will be required to make the account balance.
Step 4: Adjust the receipts and payments accounts prepayments and accruals at beginning and end of the period.
Step 5: Calculate provisions for doubtful debts, depreciation and any other matters not mentioned above.
Step 6: Prepare the P&L A/C and Balance Sheet from the information now available
Example:
The only record that Azim has kept for his business are bank pay-in-book, counterfoils, cheque book counterfoils and records of debtors and creditors. With these it is possible to summarize his transactions with the bank in the year ended 31/12/03 as follows taking paid into the bank: N8000
Cheques drawn: Payment to suppliers N2430, rent N600, electricity N320, postage and stationeries N80, purchase of shop fittings N480, cheques drawn for personal expenses N2700.
Azim banked all his taking after paying the following in cash:-
Creditor for supplies N400 and sundry expenses N115.
Azim estimated his assets and liabilities at 1st January, 2003 to be: shop fittings N1600. Stock N1960, debtors N240 rent prepaid N80. Bank balance N1500, cash in hand N 50, creditors for goods N420; electricity owing N130.
At 31st December, 2003 Azim listed his assets and liabilities as follows. Shop fittings N1800; stock N1520; debtors N380 rent repaired N50; bank balance N2640; cash in hand N 50; creditors for goods N390; electricity owing N225.
Required prepar Azim’s profit and loss accounts for the year ended 31 December, 2003 and his Balance Sheet at that date.
Solution:
Step 1: Opening statement of Affairs
N N
Assets
Shop fittings 1600
Stock 1960
Debtors 240
Rent prepaid 80
Bank 1500
Cash in hand 50
5,430
Less Liabilities
Creditors for goods 420
Electricity owing 130 550
CAPITAL AT 1ST JAN. 2003 4,880
Step 2: Receipts and payments Account. This includes only those amounts actually received and spent. It is a cash book summary with columns for cash and bank.
Cash Bank Cash Bank
N N N N
1/1/03 Balance b/f 50 1500 Trade
Takings Creditors 400 2430
(8000+460+115) 8515 Rent 600
Cash 8000 Electricity 320
Postage and
Stationery 80
Shop fittings 480
Sundry Exps. 115
*Drawings
(2700+250) 2,950
Bank C 8,000
Balance c/d 50 2640
8565 9500 8565 9,500
*N250 is money not accounted for and is treated as Azim’s drawing.
Step 3:
Debtors and creditors controls accounts
Debtors Control A/C Creditors Control A/C
N N N N
1/1/03 Bal b/f 240 31/12/03 Cash 8515
Bal b/f N380 31/12 Bank1/1/03 Bal b/f 420
Sales (2) 8655 and Cash 2830 Purchase(3) 2800
8895 8895 Bal b/f 390
3220 3220
Steps 4: Adjustment for Prepayment and Accounts
Rent A/C N Electricity A/C
N N N
Prepaid Cash 320 1/1/03
At 31/12/03 50 Owing Accrued b/f 130
1/1/03 P&L ac 31/12/03 225 P&L A/C 415
Prepaid b/f 80 (payable for) 545 545
Cash 600 the year 630
680 680
N
Steps 5: Calculate depreciation of shop fitting: Shop fittings at valuation 1/1/03 1600
Add fittings purchased in the year 480
2080
Shop fittings at valuation 31/12/03 1800
Therefore Depreciation for the year = 280
Step 6: AZIM
Trading and profit and loss accounts for the year
Ended 31 December 2003
N N
Sales 8655
Less cost of sales
Stock at 1st Jan 1960
Add Purchases 2800
Less closing stock 4700
Less stock at 31/12 1520 3240
Gross Profit 5415
Less: EXPENSES
Rent 630
Electricity 415
Postage and stationery 80
Sundry expenses 115
Depreciation – shop fitting 280 1520
NET PROFIT 3,895
Balance sheet at 31st December, 2008
$ $ $
Fixed assets: shop fitting 1800
CURRENT ASSETS
Stock 1520
Trade debtors 380
Rent prepaid 50
Bank 2640
Cash 50
4640
LESS CURRENT LIABILITIES
Trade creditors 390
Electricity owing 229 615 4025
5825
Capital at 1st Jan. 4880
Profit for the year 3895
8775
Less drawings 2925
5825
EVALUATION QUESTIONS
1. What is the purpose of the opening statement of affairs in complete records?
2. What is the debtors control account prepared to reveal?
READING ASSIGNMENT
1. Essential Financial Accounting by O.A. Longe Page 371 – 384
2. Accounting by Harold Randall Page 279 – 290
WEEKEND ASSIGNMENT
- Debtors control account reveals (a) debtors (b) creditors (c) cash received (d)sales
- In incomplete records creditors control account is prepared to reveal (a) sundry creditors (b) purchases (c) cash paid to creditors (d) discount received
- In adjustment accounts prepaid rent A/C should have _______ balance (a) credit (b) Debit (c) both debit and credit (d) either debit or credits
- In adjusting for final account, accrued wages should have ______ balance (a) debit (b) credit (c) debit and credit (d) debit or credit
- Calculation of provisions for doubtful debts, depreciation, etc is done in step ____ in other to prepare P&L a/c and balance sheet from incomplete records (a) 1 (b) 2 (c) 5 (d) 6
Theory
1. List and explain the six steps necessary to prepare a P&L a/c and balance sheet from incomplete records.
2. Prepare debtors and creditors control accounts formats and highlight what each of them reveals.
GENERAL EVALUATION QUESTIONS
- State three characteristics of single entry accounting system
- List four disadvantages of single entry accounting system
- List five steps of converting single entry accounting system to double entry system
- Explain five differences between a trial balance and a balance sheet
- State eight items that will cause a disagreement between the Cash Book balance and the Bank Statement balance