CHAPTER ONE INTRODUCTION TO ACCOUNTING The History Of Accounting The name that looms largest in early accounting history

is Luca Pacioli, who in 1494 first described the system of double-entry bookkeeping used by Venetian merchant in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita. Of course, businesses and governments had been recording business information long before the Venetians. But it was Pacioli who was the first to describe the system of debits and credits in journals and ledgers that is still the basis of today's accounting systems. The industrial revolution spurred the need for more advanced cost accounting systems, and the development of corporations created much larger classes of external capital providers - shareowners and bondholders - who were not part of the firm's management but had a vital interest in its results. The rising public status of accountants helped to transform accounting into a profession, first in the United Kingdom and then in the United States. In 1887, thirty-one accountants joined together to create the American Association of Public Accountants. The first standardized test for accountants was given a decade later, and the first CPAs were licensed in 1896. The Great Depression led to the creation of the Securities and Exchange Commission (SEC) in 1934. Henceforth all publicly-traded companies had to file periodic reports with the Commission to be certified by members of the accounting profession. The American Institute of Certified Public Accountants (AICPA) and its predecessors had responsibility for setting accounting standards until 1973, when the Financial Accounting Standards Board (FASB) was established. The industry thrived in the late 20th century, as the large accounting firms expanded their services beyond the traditional auditing function to many forms of consulting. The Enron scandals in 2001, however, had broad repercussions for the accounting industry. One of the top firms, Arthur Andersen, went out of business and, under the Sarbanes-Oxley Act; accountants faced tougher restrictions on their consulting engagements. One of the paradoxes of the profession, however, is that accounting scandals generate more work for accountants, and demand for their services continued to boom throughout the early part of the 21st century. MEANING OF ACCOUNTING Accounting like any other subject has several definitions but according to one common definition given by American Institute of certified public accountants terminology committee, it is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results there of. It can also be defined as the processes of recording; classifying, selecting, measuring, interpreting and communicating financial data of an organization to enable users make assessment and decision. 1. Accounting as an art: Art is that part of knowledge which enables us to achieve our goals in the best possible manner. In this case accounting is considered an art because it helps us in the best possible manner by accumulation, measurement and communication of information. Accounting deals with events and transactions of financial nature. Only events and transactions, which are capable of being measured in monetary terms, are recorded in accounting. Transactions of financial nature affect the resources of the business and the claims against such resources. E.g. payment of electricity bills,
1

2.

3.

4.

5.

6.

acquisition of assets, payment of wages and salaries etc. Non financial events like, serious problems with the workforce, laws which cause extra expense, incompetence of a director etc, though have equally economic importance, but are not recorded because it will be impossible to work out money value for them. Recording: By statute, accounting records should not only be kept but also stored to keep tract of events of the business. Records of transactions are needed for financial analysis and economic decisions. In the accounting process, the transactions are first recorded in the subsidiary books. The recording aspect of accounting is called book keeping. Classifying: After recording, the transactions are then grouped based on similarity in nature. For example transactions relating to credit purchases may be initially recorded in the purchases daybook. Then these transactions relating to purchases are collected at one place technically known as account. The classification is therefore done in ledgers where the accounts for the various items are entered. Classification is needed if a clearer picture is to be ascertained. Summarising: This entails the preparation of financial statements and other financial reports that are required by users for their decisions. These financial statements include; the profit and loss accounts, the balance sheet, the cash flow statement, the value added statement etc. The summarisation makes the classified data comprehensible to management and other users. Analysing and interpreting: For accounting information to be useful, it should be capable of being analysed and interpreted for the purpose of decision making. Hence the accounting process extends beyond the summarisation of transactions. Analysing the information helps to provide the right information to all interested parties. For instance it assists to find out the growth trend, profit trend, liquidity, solvency etc of the business by the use of ratios. Uses of accounting information

1. Accounting is a useful practical subject. It is important for any large and complex organization. The administration of such organisation involves delegation of responsibility. Accounting records, reports, transactions and events provide the means by which it is possible to assess the performance of those to whom responsibility has been delegated. 2. It assists in maintaining systematic records of financial transactions and events. This serves as evidence for the verification of financial information. 3. Through the preparation of final accounts, it helps in communicating the results obtained from data collected to interested parties. 4. It assists in the protection of the assets of an organization through the design of internal control systems for their use. 5. The records are used by tax departments for tax assessment. 6. The records provide means by which the finances of a business are controlled. Book-keeping It is the art of recording business transactions capable of being measured in monetary terms. This keeps track of the firms relationship that result in the transfer of or money worth within or between entities. The purpose of recording business transactions is to enable the
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owner s and other interested parties to evaluate the performance of the organisation that is to know the amount contributed by the proprietor(capital), the resources of the business(assets) and claims of third parties against the resources of the firm(liabilities). Simply, it is the recording part or aspect of accounting. Branches of accounting 1. Financial accounting- This is concerned with the provision of information to interested parties and requires the use of fundamental accounting principles or generally accepted accounting principles (GAAP). 2. Cost accounting: This is concerned with the ascertainment of cost for stock valuation to meet requirements of external reporting. 3. Management accounting: This is concerned with the provision of information to people within an organization for decisions. It involves the application of professional judgment and skills. 4. Auditing: This is concerned with the examination of records with a search for evidence to support the records to express an independent opinion. Users of accounting information and their information needs There are several groups of people who have vested interest in the business organisation or those who have influence in the business organisation. They include: Shareholders, Management, Employees, Customers, Creditors, Government, Local Community etc. They are either internal users or external users. Internal users are those who operate in the organization concern and external users are outsiders who have stake in the business. Shareholders: Both existing and potential, will want to know how effectively directors are performing their stewardship. They will use the accounts as a base for decisions to dispose of some or all of their shares or to buy. They are interested in the profitability, liquid position of the organisation as well as the leverage ratios of the organisation. Employees: They include existing, potential and past. They are interested in the stability of their employment. They want information about the organisations ability to pay them their wages and salaries when they fall due. Their interest is in the profitability and liquid position of the business Management: They need information to carry out their functions such as planning, decision making, controlling etc. They are interested in the financial and the liquid positions of the business. Bankers: Where the bank has no dealings with the organisation, there will be no need for the bank to require information from the organisation. On contrary, where money is owed to the bank they will want to ensure the organisations ability to pay interest and the repayment of the loan. Their interest is thereby tied to the profitability and the liquidity of the business. Trade debtors: They are the customers or those that the firm buys goods and services on credit from. They always want to ensure the continuous supply of goods and services from the firm. They are interested in the profitability and the continuous existence of the firm.
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Trade creditors: They are those the firm receives goods and services on credit from. They will always want to ensure the potentials of the firm to pay its debts promptly. Hence they are interested in the solvency and the liquid position of the firm. Government: The government is responsible for ensuring full employment in the country. To this effect, the government should have a means of generating resources for its policies. The major source of revenue to the government is taxation. The government will therefore require information from all organistions for tax purposes. The government is interested in the profits of all organisations. Limitations of accounting Accounting records, as historical documents are liable to the limitations to which historical records are subjected. They are used as records of the past to assess and evaluate the past and to anticipate the future. Conditions in the past are not the same as in the present Past values do not necessarily hold for the present nor the future Accounting does not record all transactions and events of the firm except those which can be measured in money terms. Purchasing power of money may be different from time to time. Characteristics of useful accounting information Reliability: The information should be free from material errors and must be capable of independent verification. Though 100% is not possible to achieve, but it should be such that users should be able to achieve some degree of confidence in the information Relevance: The information should be relevant to the needs of the user. Information is said to be relevant when it can influence the economic conditions of the user. The information should therefore have some predictive and feedback values Timeliness: Information should be presented within a short time after the period to which it relates. Information presented at the time it is not needed will not be useful though it may be relevant Completeness: Every information that is necessary to meet the needs of the users should be included. But care must be taken not to include unnecessary information Objectivity: The information must not be biased towards the needs of some user groups. Any group of users should not also influence it. It must be neutral to meet the needs of all users. Comprehensibility: The information should be clearly understandable by the users. Information may be difficult to understand because it is incomplete. Too much detail can also make the information not understandable.

CHAPTER TWO FINANCIAL STATEMENTS Financial statements are statements that provide information about the financial positions performances and changes in the state of affairs of an entity. Financial statements show the financial effects of transactions and other activities of the entity. The essence of financial statements to users is to enable them take their economic decisions. Basically there are four main financial statements. They are: (1) Balance Sheet; (2) Income Statement; (3) Cash Flow Statement; and (4) Statement of Shareholders Equity. Others also include the value added statement and the statement of corporate objectives. The balance sheet The balance sheet is sometimes called the statement of financial position or statement of affairs. A balance sheet provides detailed information about a companys assets, liabilities and shareholders equity.It lists the assets, liabilities and capital of a business at a particular date. It shows the financial position of the business at that particular date. It is made up of three (3) components namely; Capital (owner equity), Assets (resources of the business) and Liabilities (claims against the resources by outsiders). Capital/ Owners Equity. It is sometimes called Shareholders equity (for PLC) or net worth. It refers to the resources invested by the owner of the business. Mathematically, it is represented by Assets Liabilities. It is the money that would be left if a company sells all of its assets and pay off all of its liabilities. This leftover money belongs to the shareholders, or the owner, of a sole proprietorship. Types of capital and their distinctions Working capital: - This is the amount needed for the day to day running of the business. It is the excess of current assets over liabilities (Working Capital = Current Assets Current Liabilities). Negative working capital is termed over trading. This is where the current liabilities exceed the current assets. Capital invested: This is the resources brought into the business by the owner(s) from his/her outside interest. The amount of capital invested is not disturbed by the profit or loss made by the business. It is also called opening capital. Capital employed: It is the effective resources used in the business. That is, if all the assets are added and the current liabilities of the business are deducted, (Assets Current Liabilities). It is however the amount of money employed in the business. Liabilities Liabilities are amounts of money that a company owes to others. These are claims against the resources of the business by outsiders. This can include all kinds of existing financial obligations, like money borrowed from a bank, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government which a firm intends to meet sometime in the future. The existence of such obligation is as a
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result of the past events of the firm and the settlement of such obligation will result in the outflow of cash. Liabilities also include obligations to provide goods or services to customers in the future. To be recognized, a liability must satisfy the following conditions: It must exist at present time It must involve ascertained with reasonable accuracy It must be quantifiable It must be ascertained with reasonable accuracy Types of Liabilities a. Current liabilities: - These are liabilities, which have shorter period of time to be met. E.g. creditors, Bank overdraft, Owings etc. The payment of current liabilities do not expand more than one accounting year b. Long Term Liabilities: - These are liabilities, which do not have to be paid in the near future. They take a long time to be repaid. E.g. loan, debenture etc. c. Contingent Liabilities: - SSAP 18 Accounting for contingencies defines a contingency as a condition which exist at the balance sheet date, the outcome of which will be confirm by only the occurrence or non occurrence of one or more uncertain future events. Thus such liabilities substantially depend on the occurrence of future events. E.g. The existence of unresolved legal cases, insurance claims at the balance sheet etc. Assets These are resources owned/possessed by a business organisation or things that an entity owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. The existence of these resources is as a result of past event from which future benefits are expected to flow to the firm. There is one important qualification to this statement. That is, the asset must have cost (something that can easily be measured in monetary terms). Whilst therefore, your skill and knowledge may be an asset in ordinary everyday language, it cannot be classed as such in business sense as it did not cost anything to the business. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that cant be touched but nevertheless exist and have value, such as trademarks and patents. Cash itself is an asset, so are investments a company makes. Types of assets Fixed Assets: Assets are said to be fixed when they are of long life are to be used in the business and are not bought with the intention of resale. E.g. Building, Machinery, Fixtures, Motor Vehicle Current Assets: These are assets that represent cash or primarily for conversion into cash. Eg stock, debtors, cash etc. They are also called floating or circulating assets. They are usually exhausted within one accounting year. Intangible Assets: They are assets that cannot physically be represented by any property. They cannot be seen, felt or touched physically. E.g. Goodwill, Trademark, Copyright etc

FORMAT OF THE BALANCE SHEET HORIZONTAL FORMAT

Capital Add: Net profit Less: Drawings LIABILITIES Loan Creditors Bank overdraft Owings

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

FIXED ASSETS Land and Building Plant and Machinery Fixtures & Fittings CURRENT ASSETS Stock Debtors Bank Cash

XXX XXX XXX XXX XXX XXX XXX XXX XXX

XXX

XXX

NB: The balance sheet is not an account. As a result, it does not have debit and credit entries in terms of arrangement of capital, assets and liabilities.

Arrangement of assets in the balance sheet Order of permanence: This is where the assets are arranged in a way that the permanent assets appear before the less permanent ones. The essence of this method is to help identify which assets are permanent and could be used as security when going for loans. Order of liquidity: Assets are generally listed based on how quickly they will be converted into cash. This is the reverse of the order of permanence. This order aims at helping in the ascertainment of cash items to help a business when deciding on what to fall on in the event of insolvency. . Arrangement of liabilities in the balance sheet Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.

Income statement An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal bottom line of the statement usually shows the companys net earnings or losses. This tells you how much the company earned or lost over the period. Income statements also report earnings per share (or EPS). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)
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The cash flow statement This is a statement that records the amounts of cash and cash equivalents entering and leaving a company. The Cash Flow Statement allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. Structure of the cash flow statement Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing, Operations: Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations. Investing: Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term assets such as marketable securities. However, when a company divests an asset, the transaction is considered "cash in" for calculating cash from investing. Financing: Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash. Cash inflows (sources of fund) This shows where the organisation generates cash. They include issue of shares, issue of debentures, sale of assets, profits, decrease in stock, interest received etc. Cash outflow (application of funds) This refers to how cash generated by the organisation is used. They include: purchase of fixed assets, dividend payment, payment of long term loan, redemption of shares redemption of debentures etc. Reasons / purposes of cash flow statement It is a supplementary statement to the financial statement because it provides information that the financial statement (profit and loss and the balance sheet) do not provide. To provide information on the amount of change in the working capital and the reasons responsible for the fund change To provide information on the major investment and financing activities which are responsible for changes in the financial position of the firm To provide information on the flow of cash and the changes in the financial position of the firm during a given period. To highlight the timing and the certainty of the generation of the cash flow of the organisation
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i. ii. iii. iv. v.

i. ii. iii.

Advantage of the cash flow statement It highlights the various ways through which cash and cash equivalent are generated and spent It is simple and easy because it does not depend on the accrual concept Historical cash flow is an indication of the timing, amount and certainty of future cash flows It shows a companys financial structure and its ability to generate cash to meet short term financial obligations It enhances the comparability of the performances of the business with others because it eliminates the use of different accounting methods and deals cash and cash equivalent. Uses of cash flow statement It provides information to assist decision makers to evaluate changes in the net assets and the financial structure of the organisation It may be used to show at a glance how cash is obtained and used. This serves as a guide to ash management. It helps to assess the ability of the business to regulate the amounts and timings of its cash flows so that it can take advantage of business opportunities and also adapt to changing circumstances

Uses of financial statements 1. 2. 3. 4. 5. 6. 7. To determine the future prospects of a business For financial analysis For inter firm comparisons To determine the extent of compliance with statutory requirements. It facilitates the determination of the firms tax liability To show the quality and worth of a firm assets. To know the financial position of the business in terms of its assets, liabilities and capital.

Limitations of financial statements 1. The choice of methods may not be uniform. 2. Financial information may be manipulated to show desired results. 3. One set of accounting information may not be equally useful to all users since users have different information needs. 4. Preparation of financial statements is guided by concepts, principles, conventions etc which may at times conflict each other.

CHAPTER THREE BOOKS OF ACCOUNTS There are two books of accounts. They are the principal book and the subsidiary books. All financial transactions must necessarily pass through these books. Subsidiary books (journals) Journals in accounting were traditionally called the 'day book'. This is due to the term's derivation from the French word "jour", which means 'day', and the fact that it was expected that journals would record all the financial transactions that occurred on each particular day. Journals recorded these original transactions in a date and time order as the transaction occurred or as soon as possible thereafter. Journal also became known as the 'books of original entry' because it is the entry point for financial information to get into the accounting information system. This system manages this financial data as it is entered into the journal, transferred to the general ledger, summarised in the trial balance and finally presented for stakeholders in the form of financial reports. The journals are books where transactions are originally entered. They serve as a working sheet to accumulate the numerous daily transactions of the business. The totals of these books are then transferred to their respective ledger accounts. They include. i. The sales journal ii. The purchases journal iii. Return inwards journal iv. Return outwards journal v. The cash book vi. The petty cash book vii. The journal proper Below is the tabular representation of the various day books, their uses and their source documents Subsidiary/ Daybook 1. Sales day book 2. Purchases day book 3. Return inwards day book 4. Return outwards day book 5. Cash book 6. Petty cash book Uses / Purpose For recording credit sales For recording credit purchases For recording goods returned by customers For recording goods return to suppliers To record cash inflows and outflows To record petty cash disbursements Source Document Sales invoice Purchases invoice Credit note Debit note Receipts, cheque stubs etc Petty cash voucher

Source documents Invoice: This is a document sent by a supplier to his/ her customers. It sets out the full details of the quantity of goods sent, price per unit, discount, total amount etc. it is used to write the sales and the purchases journals. Credit note: It is a document issued by a seller to a buyer informing him/ her that the account of the buyer has been credited with the amount stated on the note
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Debit note: It is a document prepared to acknowledge the indebtedness of the person whose name is stated on the note. It is usually sent by a supplier to a buyer who is undercharged for goods supplied. It informs the buyer to pay additional amount to what is stated on the invoice. It is used to write the return outwards book. Petty cash voucher: This covers payments credited to the petty cash book. It shows details of petty cash expenses like postage, travelling, stationery etc. It is the source document for the petty cash book. Receipts: This is a document which shows evidence of cash receipts. The date of payment the name and the address of the seller, the quantity, the amount etc. It is the source document for the cash book and serves as a proof of receipt and payment of cash. The cash book It is a book used to record cash transactions. These are transactions involving money received and paid in the form of cash. Uses of the cash book Payment of expenses Payment of taxes Receipt of money from debtors Receipt of money on sales Payment of dividend Types of cash book The single column cash book The two column cash book The three column cash book The petty cash book

The one column cash book: Is used where the business only bank or cash transactions. It has cash or bank column in the cash book Two column cash book: this is used where the business enters into both cash and cheque transactions. It has columns for both cash and bank Three column cash book: This has three amount columns. (i) cash (ii) Bank and (iii) Discount The petty cash book: This type of cash book is kept mainly for the payment of expenses and other miscellaneous items. The petty cash book is kept under two systems. These are the imperest system and the analytical system. The imperest system: Under this system, the petty cashier is given a definite amount to operate with depending on the cash policy of the organisation. At the end of the period, he / she is reimbursed with the amount spent to keep the float intact. Float is the amount of money the petty cashier is given periodically to enable him pay for all relevant petty cash expenses.

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Analytical petty cash system: It is a type of petty cash book where the cash float depends on the size of the economic activity. With this system, the size of the float is large when the business is flourishing and the opposite is also true. Advantages of the petty cash book. i. ii. iii. The risk of fraud is reduced The burden on the main cahier is reduced It saves the ledger accounts from containing a lot of trivial details. Other primary documents Proforma invoice: It is a document showing details about goods not yet sold and does not require the enquirer to pay. It is usually sent to a prospective customer who enquires about goods, their prices and the terms of sales. It contains information on the invoice except that it does not require the enquirer to pay as goods are not yet sold. Purchases order: This is a document prepared by a buyer offering to buy specified quantity of goods at a stated price. The purchases order request the supplier to dispatch the goods stated on the list and charge the amount to the accounts of the customers. The following details are shown on the purchases order. The names and addresses of the buyer and the seller, the date of the sale, the date of the order, the quantity and the description of the goods. It must be noted that the order does not contain amount as the buyer does not know exactly how much he/ she will pay. Sales order: It is a document sent from the seller to the buyer and their ultimate dispatch. It is similar to the purchases order and contains all information therein. The only difference is that the buyer sends the sales order and the seller sends the purchases order. Goods Received Note (GRN): It is a document that shows the receipt of goods into stock. It is usually prepared by the stores department to indicate that goods dispatched have been received into stores. Way Bill: This is a document that is issued by a supplier of goods to the carrier of such goods. It shows details of the goods which include: quantity, the signature of the sender, the destination of the goods and the date of consignment etc. This shows a proof that goods have actually been dispatched. DISCOUNTS There are two types of discount. They are cash discount and Trade Discount. Cash discount: This is an allowance paid or received for prompt payment. Usually when goods are sold on credit to customers they are given credit terms. E.g. if an invoice is marked 5\10 it means 5% discount will be allowed if full payment is made within 10 days. The numerators always represent the rate and the denominator the number of days. Trade discount: They are deductions from the invoice price. They are given based on quantity. That is someone who buys in bulk enjoys this discount. NB: There is no double entry record for trade discount since it is for mere calculation of sales price.

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THE GENERAL JOURNAL The general journal or Nominal journal or simply the Journal as it may be called is a book of prime entry in which transactions are recorded in a chronological order. That is the running of day to day transactions according to the order they occur. It shows the accounts that must be debited and corresponding account to be credited. It also shows a brief description of the transaction disclosing necessary information to understand the events being recorded. USES OF THE JOURNAL It is used to correct errors To record purchases and sale of fixed asset on credit The recording of opening and closing entries Recording the issue and sale of shares by companies Use to record adjustment made to accounts It may also use to record depreciation Writing off bad debts Advantages of the journal It provides a complete chronological records of all transactions It reduces the risk of omission of transactions It provides explanation for each transaction. This makes the entries understandable. The total effect of each transaction is shown at one place More than one person may record transactions simultaneously

Classes of entries in the journal Simple entries: Here only two accounts are involved. One account will be debited and the order one credited Composite entries: Here there may be several accounts to be debited with only one account to be credited or vice versa. THE PRINCIPAL BOOK: LEDGER The ledger can be defined as principal book of account, which contains, in a classified and summarised manner permanent record of transactions in the subsidiary books. The ledger is used for the double entry book keeping. The account kept in the ledgers follow a specific rule. This rule is called the double entry rule of book keeping. It states, For every debit entry there must be a corresponding credit entry and vice versa. The ledger is divided into sections called account. DIVISIONS OF THE LEDGER Personal Ledger:This is the ledger which contains personal accounts. They include the sales ledger for debtors account and the purchases ledger for creditors accounts General Ledger: This is the ledger for real and nominal accounts. It contains accounts of expenses, revenue and account for all other assets. E.g. sales account, purchases account, rent accounts, machinery account etc Private account: Thisledger for drawings and capital of the owner (proprietor).
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ACCOUNT It can be defined as a record in the double entry system that is kept for a class of asset, liability, revenue and expenses. It is also a place where all the information referring to a particular asset, liability or capital is entered. Classification of accounts Account is broadly classified into personal and impersonal Personal Account: They are those accounts that bear the names of persons and organizations. These are either debtors or creditors. e.g .Morales a\c, Ability Ltd A\C, Capital A\C etc. Rule: Debit the receiver, Credit the giver. Impersonal Account: They are non-personal Accounts. They are account for property, Items of revenue and expenditure nature. Impersonal account is sub divided into two (2) namely: Real Account and Nominal Accounts. Real Account: They are accounts of permanent nature where their values are not exhausted within one accounting period. They relate to tangible and intangible things such as building, Furniture, patent, cash etc. Simply put they are accounts for tangible and intangible assets other than debtors. Rule: Debit what comes in, Credit what goes out. Nominal Account: These are accounts for expenses, revenue, losses, gains etc. related to items that exist in name only. E.g. Rent account, insurance account, profit and loss account etc. Rule: Debit expenses and losses, Credit revenue and gains. CHARACTERISTIC OF THE LEDGER i. ii. iii. iv. Every ledger has a little at the top (heading). It has folio column. A folio is a page in book keeping books. It has a column for amount. It has a debit and credit columns.

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CHAPTER FOUR DEPRECIATION The IAS 4 defined depreciation as the measure of wearing out, consumption or other reduction in the useful economic life of fixed asset, whether arising from use, passage of time or obsolesces through technological or market changes. It is therefore the reduction in the value of fixed asset due to physical or economic factors. Depreciation Accounting deals with the allocation of costs of fixed assets over their useful lives. More simply, that part of cost of an asset which is being periodically allocated as expense into the Income Statement to match the revenue the asset is generating. For example, when you buy a fixed asset like factory machinery, this is merely an advance payment of which you expect that the fixed asset is able to enhance or earn certain earnings for the business. Over a period of time, the fixed asset you buy will become valueless or unable to generate the necessary earnings. To reflect this continuing diminution in the value of the factory machinery, you need to apply depreciation accounting. CAUSES OF DEPRECIATION The causes of depreciation can be divided between Physical deterioration Economic factors The time factor and Depletion

PHYSICAL DETERIORATION (Wear and tear): This is where an asset depreciates as a result of constant usage. When asset are constantly used they become prone to breakdown. Part of the asset may also breakdown. Examples of asset that wear and tear are motor vehicle, machinery, fixtures and fittings etc. ECONOMIC FACTORS: These factors render the asset useless though it may be in good physical condition. These factors include obsolesce and inadequacy. OBSOLESCENCE: This is where asset become out of use due to changes in technology or fashion and it becomes not efficient or economic to use the asset. INADEQUACY: This is where an asset becomes too small or inadequate due to expansion in the production capacity. TIME FACTORS: Depreciation occurs in some assets with the expiration of time. As example you can provide patents or know how, which have certain validity time and after that time can become public and lose their value. Examples of assets that depreciate by time factor include: leaseholds, patent, copyright etc. The term amortization is usually used instead of depreciation for such assets. DEPLETION: Some natural resources like gold, oil or tin deposits become worthless when the deposits have been depleted. These assets are also called wasting assets.

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METHODS OF DEPRECIATION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Straight line method\Fixed installment method Reducing balance method\ Diminishing balance method Revaluation method Production units method Sum of year digits method Sinking fund method Annuity method Depletion unit method Insurance policy method Retirement and replacement method etc

Straight-line depreciation
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of the original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed off. Salvage value is also known as scrap value or residual value.

Reducing balance method/ Diminishing Balance Method

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset.Many assets are most useful when they are new. Under this method the book value is multiplied by a fixed rate. Annual Depreciation = Depreciation Rate X Book Value of the asset It is possible to find a rate that would allow for full depreciation by its end of life with the formula:

Where N is the estimated life of the asset. Revaluation Method As the name implies under revaluation method, the assets are valued at the end of each period so that the difference between the old value and the new value, which represents the actual depreciation can be charged against the profit and loss account. This method is mostly used in case of assets like bottles, horses, packages, loose tools, casks etc. On rare occasions when on
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revaluation the value of an asset is found to have increased, it being of temporary nature not taken into account. Revaluation method is open to various objections. Firstly, the method do not specify as to which is the value that the experts are to estimate at the end of each year. It however appears that this is the market value. If so, to assess depreciation with reference to market value is against the basic principles and theory of depreciation. A fixed asset has nothing to do with market value.Secondly, the charge against profit and loss account on account of depreciation will vary year to year though the asset renders the same service throughout of its life time. Thirdly, this method is unscientific, because there is great chance of manipulations. Production method (units of production) - Under this method it is assumed that the asset decreases in value depending on its actual usage in production of goods or provision of services, i.e. the depreciation might depend on such factors as how many items were produced or how many hours the asset worked. Under the units-of-production method, useful life of the asset is expressed in terms of the total number of units expected to be produced: Annual depreciation expense = Cost of Fixed Asset Residual Value X Activity Level Estimated Production

Sum of digits method - Under this method it is also assumed that more cost of asset is allocated to the expenses during the first years of usage.However such allocation is smoother than under the declining method. The method also results in a more accelerated write-off than straight line, but less than reducing balance method. Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions. Depreciable cost = original cost salvage value Book value = original cost accumulated depreciation First, determine years' digits. Example if an asset has a useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1. Next, calculate the sum of the digits. 5+4+3+2+1=15 The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to the useful life of the asset. The example would be shown as (52+5)/2=15 Depreciation rates are as follows: 5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th year Factors influencing depreciation expense. The cost price of the asset The economic useful life of the asset or service life The estimated residual value of the asset Repairs and maintenance
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Reasons for charging depreciation 1. Tax avoidance: Depreciation is charged against profit. It therefore reduces the profit enabling the organisation to pay less tax 2. The depreciation charged can be used to replace the asset at the end of its useful life period. 3. It follows the matching concept. The cost of the asset is spread over its useful life by matching revenue(profit) against cost( depreciation expense) 4. The fixed assets in the Balance Sheet will be overstated if depreciation is not provided for 5. If depreciation is not provided for and assuming the whole profits were withdrawn during the life of the asset, additional capital would have to be raised when it is time to replace the fixed assets. 6. Ascertainment of true cost of production: Goods are produced with the help of plant and machinery which incurs depreciation in the process of production. Capital Expenditure This is expenditure whose benefits are spread over more than one accounting period or simply it is an expenditure on fixed asset. Capital expenditure is incurred when a firm expends money to (a) buy a fixed asset and (b) add value to an existing fixed asset. Included in these amounts should be those spent on a. The amount spent in acquiring the fixed asset b. Legal cost of buying the asset c. Carriage expense on the asset d. The cost incurred to put the asset into use etc. Capital expenditure forms part of the cost of the asset. It must therefore be taken care of before charging depreciation on the asset. Revenue Expenditure It is an expenditure incurred as a result of the day to day running of a business. This expenditure expires within one accounting year. The entire amount of such expenditure is charged to the profit and loss account in the year it is incurred. Examples include rent, rates, lighting and heating etc. Distinction between capital and revenue expenditure a. Capital expenditure is incurred in acquiring or improving fixed asset whilst revenue expenditure is incurred on items other than those relating to acquisition and improvement of fixed asset b. Capital expenditure is a non recurring expenditure whereas revenue expenditure is a recurring expenditure incurred in the normal course of business. c. Capital expenditure benefits the business for several years whereas revenue expenditure benefits the business in the current year only. d. Capital expenditure seeks to improve the earning capacity of the business whereas revenue expenditure is incurred in the normal course of the business. Importance of classification of capital and revenue expenditure a. It helps to ensure that values of fixed assets in the balance sheet represent a true and fair view of affairs b. It helps in the proper ascertainment of profit or loss for the business. This is because
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without the classification capital expenditure may be charged to the profit and loss accounts which will obviously give a misleading profit or loss Ways by which fixed assets may be disposed a. By sale: Exchanging the asset for money b. Trade In: Exchanging the asset for a new or similar asset c. Scrapping: Dumping the asset or giving it free of charge Provision for depreciation: Is the amount of yearly depreciation set aside from profits and accumulated over the useful life of the asset. Double entry: Debit profit and loss account and credit provision for depreciation account. Appreciation: Increase in the value of fixed asset. Example is land. However because of the prudence concept, appreciation is not recognised in the income statement until the asset is disposed

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CHAPTER FIVE ERRORS AND THE TRIAL BALANCE Two types of errors are basically committed by book keepers. They are those that affect the agreement of the trial balance and those which do not affect the agreement of the trial balance.

Errors that do not affect the agreement of the trial balance All things being equal, if the debit side of the trial balance equals the credit side, then it means the entries in the ledgers are accurate. However, it is not all the time that the trial balance can prove the accuracy of transactions, though both the debit and the credit sides may agree. This is because there are certain errors which could not be revealed by the trial balance. These errors are: i. ii. iii. iv. v. vi. Error of omission Error of commission Error of principle Error of original entry Complete reversal of entries Compensating error

Error of omission: This error occurs when a transaction is completely omitted from the books. Due to oversight or pressure of work, the accountant may forget to post a particular transaction to the legers thus both the debit and the credit entries will be missing in the ledgers. E.g purchase of goods Gh10,000 is omitted from the books. The trial balance will still agree because the Gh10,000 is omitted from both the debit and the credit sides of their respective ledgers. Error of commission: This error occurs when a transaction is entered in the wrong persons account. E.g sale of goods Gh50,000 on credit from Morale was entered in Morals account. Though an error has occurred, the trial balance will still agree. This is because the debit and credit entries are correctly entered except that one person has been mistakenly taken for the other. Error of principle: This is where a transaction is entered in a wrong class of accounts. By class of accounts it means personal, real or impersonal accounts. For example motor van bought was debited to the purchases account. In this case, the debit entry will wrongly be made in the purchases account whereas the corresponding credit entry will be made correctly. The trial balance will still agree because there has been both debit and corresponding credit entries is though one of the debit entries is in the wrong class of account. Error of original entry: This is where the error is made in the subsidiary books. Yet double entry is observed when posting to the appropriate ledgers. This means the error has occurred from where the transaction is originally entered. E. g sale of goods Gh15,000 on credit to Yaw was entered as Gh10,000 in the sales day book. The trial balance will agree because the wrong figure (Gh10,000) will be posted to the debit side of Yaws account in the sales ledger and the credit side of the sales account in the general ledger.
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Complete reversal of entries: This is where an item is posted to the wrong side of the account though the correct accounts are used. E. g where purchase of goods Gh5,000 on credit from Ability is debited to Abilitys account and credited to the purchases account. The correct entries should have been vice versa. The trial balance will still agree because there has been both debit and credit entries. Compensating error (offsetting): This is where two independent errors of the same amount occurs. Eventually they will cancel each other. This normally occur in situations where the debit is overcast or undercast in one account and the credit side is also overcast or undercast in a different account. E.g if the purchases account is overcast by Gh4,000 and the sales account is also overcast the same amount, the trial balance will still agree because both the debit and the credit sides will be over added by the Gh4,000. This is because purchases reveal a debit balance whist sale reveals a credit balance. Errors that affect the trial balance agreement Incomplete / single entry: This is where there has not been a complete double entry. It occurs when a transaction is entered in only one account. That is, debit without credit or credit without debit. The trial balance will not agree because the principle of balancing is based on the theory of double entry. Omission of balance: This is where there has been an oversight of a balance when drawing up the trial balance. E.g when a debit balance in an expense account say rent has been excluded from the list of balances. The trial balance will not agree because the debit side will short fall of the rent figure. Error of casting: Casting means adding up. When there is a mistake in adding up the balances in the trial balance or account, the total of debit and credit will not be equal. Error of transposition: This occurs when a figure is transposed in only one of the two accounts pertaining to a transaction. Such an error may either overstate or understate the figure. A figure is transposed when the position of it digits are interchanged; E.g. 59 may be transposed as 95. SUSPENSE ACCOUNT It is a special account, which contains the difference on a trial balance or balance sheet pending the correction of error that has led to the disagreement. When the error that makes up the difference are in the trial balance are found, they are then rectified through the suspense account. The suspense account is temporal account and is not allowed to stay in the books for a long time and should not be part of the final accounts. NB: All errors are corrected via the journal. THE TRIAL BALANCE. It is the list of debit and credit balances extracted from the ledgers to show the arithmetic accuracy of the ledgers. The purpose of drawing up the trial balance is to ascertain the equality between the debit and credit entries. This is to ensure that there are no errors or clerical mistakes in the books of account.
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USES OF THE TRIAL BALANCE. It is used in testing the accuracy of the double entry. It provides a summary of balances in the ledgers. It helps in the preparation of the financial statements. To ensure that there are no arithmetic errors in the books.

RULES OF TRIAL BALANCE All assets must be place at the debit side All liabilities must be put at the credit side All expenses must be put at the debit side All gains and revenue must be put at the credit side

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CHAPTER SIX BANK RECONCILIATION STATEMENT Bank reconciliation statement is a statement prepared to reconcile the disagreement of the cashbook and the bank statement. The calculation is necessary in order to test the accuracy of the postings in the cashbook by reconciling the balance of the cashbook with that of the bank statement. Bank statement It is a statement prepared by a banker to their customers. It shows the transaction with the customer for a given period of time. It shows details of total deposits, withdrawals, interest charge and balance left etc. Reasons for disagreement between the cash book and bank statement a. b. c. d. e. f. g. h. Unpresented cheques Uncredited cheques Direct debits Credit transfers Standing orders Bank charges Errors Dishonoured cheques etc

Unpresented cheques (withdrawals):- These are cheques duly issued out but have not yet been presented for payment at the time the bank statement is prepared. When a firm issues a cheque it is entered at the credit side of the cashbook to indicate that such an amount is paid out. This reduces the balance of the cashbook. But until the cheque is presented in the bank, the bank statement balance will show their higher figure since recognition has not yet been taken of the unpresented cheque. Uncredited cheques (Lodgments): These are cheques received and entered in the cash book as such but have not yet been entered in the bank statement. Uncredited cheque will show higher cash book balance because the amount is debited to the cash book (addition) and will not be credited to the bank statement at the time the bank statement is prepared. Direct Debits: - These are payments, which have to be made by the bank or on behalf of the account holder at the instance of suppliers with the account holders prior permission. It is called direct debits because the bank without the use of cheques directly debits the amount to the holders account. The balance of the bank statement in this case will show a reduced figure balance because the corresponding credit entry will not reflect in the cash book. Credit transfers: - These are payments made by customers of the account holders into their accounts without the knowledge of the account holders. The account holder will only be aware of this after his/her bank statement is received. Effect: The bank statement will show a higher figure because it would not have a corresponding debit entry in the cashbook.
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Standing order: This is an order to the bank authorising the bank to pay specify amount at a regular interval say monthly, weekly etc to a specify person. The order remains obligatory until the bank is authorised to stop. Such payments may be in respect of rent, subscription, hire purchase etc. Effects: The bank statement will show a smaller figure because it will not reflect in the cash book as a payment. Bank charges: this is an amount deducted by the bank from the account holders balance for the banking services rendered by the bank. The charges are deducted without notifying the account holder. Services that may attract such charges include: collection of outstation cheques, bank drafts, bill of exchange, issues withdrawer or cheque books etc. Effects: The bank statement will show a lesser figure because it will be debited with the charges and the cash book will not be credited. Errors: This is where a mistake is made by the bankers or the cash book clerk. The error may include overstatement of balances, recording of wrong amounts, wrongly debiting or crediting the account of a customer by the bank. Dishonoured cheques: This is where the bank refuses to honour or pay a particular cheque. Effects: The balance of the bank statement will be higher than the cash book balance. Reasons why a cheque may be dishonoured 1. Where the amount written in words is different from the amount written in figures. For example ten thousand and five Ghana cedis written in figures as 10,500 2. Where the date on the cheque is elapsed. Normally a cheque is considered stale six months after the date of issue. 3. If the customer does not have sufficient money in his/ her accounts 4. When the cheque is destroyed 5. Differences in signature. This is where the signature on the cheque is different from the specimen signature Some banking documents Cheque: it is an unconditional order in writing addressed by a customer to his banker instructing the banker to pay on demand a stated sum of money to a specified person. A cheque has three (3) parties to it. They are the drawer, the drawee and the payee. The person who writes the cheque and signs is the drawer. The drawee is the bank who is authorized by the drawer to pay such an amount and the payee is the beneficiary of the amount written on the cheque or he is the one to whom the amount stated on the cheque is paid to. Only current account holders use cheque. Crossed cheque: A crossed cheque has two parallel lines across its face. Money is not paid at the counter on crossed cheques but rather paid into the account of the payee named. Pay- in- slip: This is a document used to pay money into ones account. The money to be paid into the account could either be in the form of hard cash or cheque.
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Bank loan and bank overdraft Bank loan: Is an advance made to a customer of a bank which bears a fixed rate of interest. A fixed rate of interest is paid on the loan account whether it is withdrawn from the bank or not. Bank overdraft: This is an amount a customer is allowed to over withdraw on his account balance. When a customer is allowed to over withdraw his account balance, the account is said to be in red. The balance of the customer will now become debit (negative) instead of credit. Interest is charged on only the amount overdrawn Differences between bank loan and bank overdraft 1. Interest on overdraft is charged on the amount over drawn whereas interest is charged on the entire amount taken in the case of bank loan 2. Bank overdraft is usually small amount of money and requires a short period to be repaid whereas bank loans are usually big amounts and require longer periods to be repaid 3. Bank overdraft is granted to current account holders whereas bank loan granted to all categories of account holders. 4. With bank overdraft the beneficiary must necessarily be a customer of the bank but bank loan can be granted to a person who may not possibly be a customer of the bank. Reasons for preparing bank reconciliation statement 1. To provide independent check on the validity of the cash book balance and the entries which accrued during the period 2. To provide an independent verification of the validity of the cash book balance at the end of the period which represent an asset or liability 3. To provide an independent check on the validity of the transactions recorded in the cash book.

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CHAPTER SEVEN CONTROL ACCOUNTS Control accounts is an account, which records similar groups of transactions usually from the subsidiary/day book in total as a control measure to ascertain the accuracy of the entries in the ledgers. Control Accounts are not necessarily part of the double entry system. They rather perform the function of a trial balance to a particular ledger. It provides a summary of the entries found in the accounts of the subsidiary ledgers. The principle underlying this system is that, the whole must equal the sum of the individual items entered in the respective accounts ledger. Purpose of preparing control accounts To serve as a cross-check for the individual entries posted into the ledgers from the subsidiary books To produce a total figure for the debtors and creditors at the end of the accounting period. To facilitate early detection and correction of errors in the sales and the purchases ledgers. Division/Types of control accounts 1. Sales ledger or total debtors control accounts. 2. Purchases ledger or total creditors control accounts. 3. General ledger control accounts. Sales ledger control accounts: - It records transactions involving all debtors or it summarises the accounts in the sales ledger. The source for entries in the sales ledger control is the sales daybook, the cash book and the return inwards journal. It is also called total debtors control account. Procedure/ Rule: - All items, which will be debited to individual debtors account, are debited to the sales ledger control and all items which are credited to the individual debtors account are also credited to the total debtors control. OR You debit the debtors control account with all items that will increase the debtors balance and credit it with all items that will decrease the debtors balance. Debit entries include: a. Credit sales b. Interest charged on overdue debts c. Bills exchange from customers dishonoured d. Cheques dishonoured and returned e. Cash refund to customers due to overpayment etc. Credit entries include: a. Goods returned by customers and allowances b. Bad debts written-off c. Cash discount allowed to customers d. Payments of accounts e. Bills of exchange receive from customers f. Set-offs etc Purchases ledger control accounts Procedure: - The purchases ledger control is debited with all items that are debited to individual creditors account in the purchases ledger and credited with items credited to the individual
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creditors account in the purchases ledger. OR It is debited with items will decrease the creditors balance.

Debit entries include: a. Return outwards and allowances b. Bills payable c. Set off d. Discount received e. Payments to supplies etc Credit entries include: a. Credit purchases b. Cash refund from creditors c. Bills payable dishonored d. Cheques dishonored etc Debit balances in the purchases ledger control: Debit balance may arise in the purchases ledger control account due to one of the following. a. Return of empty containers b. Overpayment to suppliers c. Return of defective goods after payment have been made. General Ledger Control Account;- In the sales ledger and the purchases ledger there will be a corresponding account called general ledger control account having the items at the opposite sides. Entries at the debit and credit side of the general ledger control accounts are found at the opposite side of the sales ledger and the purchases ledger control accounts. That is items debited to the sales ledger control are credited to the general ledger control and vice versa. Also items credited to the purchases ledger control are debited to the general ledger control and vice versa. Advantages of control accounts 1. It helps to locate errors in the book-keeping system. 2. Internal checks can be facilitated. If the ledgers are sub-divided into sub-units then different clerks can work on separate sections at a time. 3. A complete trail balance can be compiled before the individual personal ledger balances are extracted. This will facilitate the draft of final accounts. 4. Knowledge by clerks that a check is being exercised on their performance through the control accounts will tend to minimize fraud and promote efficiency. 5. They allow homogeneous accounts to be grouped together. 6. As errors are localised, delay in balancing accounts is minimized thereby saving time, labour and money. 7. Where it is important not to disclose all business secrets to the clerical staff, the totals of the accounts but not the details of it can always be used under this system.

Disadvantages of control accounts 1. It is very expensive to keep in terms of labour, and other costs which could be avoided if the staff working on the records is inefficient. Thus under efficient condition, control accounts will not be needed. 2. Keeping control accounts is a duplication of work because without the control account, the trail balance will still be the same.
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CHAPTER EIGHT DEPARTMENTAL A department is a section of an organization whose activities can be distinguished clearly from other section. The division is based on the peculiar function or activities performed in the organization. E.g. sales department, production department, personnel department, accounting department etc Reason why departmental accounts are prepared 1. It shows the relative profitability of each department 2. To assess the performance of each department. 3. It helps management to take decision on which department to revamp and which one to be closed down based on performance. 4. It assists in planning for future activities 5. To apportion common expenses to the departments. Advantages of departmental accounts Unprofitable departments will be revealed. The gross profit of each department can be ascertained. The results of the operation can be used to pay the mangers of each department. The progress of each department can be monitor.

Apportionment of indirect expenses Expenses such as rent and rates, light and heating insurance premiums cannot be traced to a particular department. These expenses are called indirect expenses. In calculating the profits of the various departments indirect expenses must be allotted to each department according to some kind of criteria.

Basis of apportionment of indirect expenses Indirect expenses must be apportioned to reflect the benefit derived from that expenditure by the various departments. The common bases used include 1. Total sales 2. Floor area or space occupied 3. Cost of assets 4. Total credit sales 5. Purchases etc. TOTAL SALES Indirect expense often apportioned based on total sales include: Sundry expense Salaries Administrative expenses Depreciation of delivery van Accounting and auditors fee etc. TOTAL CREDIT SALES Bad debits Provision for bad debts. Discount allowed.

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FLOOR AREA OR SPACE OCCUPIED Electricity Rent and rates PURCHASES Discount receive Storage cost Other utilities Inspection cost etc

TOTAL ASSETS OR COST OF ASSET Provision for depreciation on machinery Insurance cost of asset Loss on disposal of asset .

Inter - department transfers. Inter - departmental transfers occur when one department transfer goods or expenses for use by another department. Book-keeping entries for inter departmental transfers 1. Transfer of goods Debit: The trading accounts of the receiving department. Credit: The trading account of giving department. 2. Transfer of service (wages). Debit: Trading account of receiving department. Credit: Trading account of the giving department 3. Transfer of general or profit and loss expenses: Debit: The profit and loss account of the department receiving. Credit: The profit and loss account of the giving department.

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CHAPTER NINE NON- PROFIT MAKING ORGANISATIONS These are organizations, which exist primarily to seek the welfare of their members. Such organizations are not set up principally to make profit but to provide social services to their members or to the general public free of charge or for a token fee. Examples of such organizations include: Churches, sporting clubs, societies for promotion of art, libraries charitable bodies etc. Sources of funds Organization of competitions Donations from outsiders Revenue from operation of bars Prizes Entrance fees from new members Subscription etc. Accounts and funds In place of trading profit and loss accounts by commercial concerns,such organizations prepare the following accounts to show the financial affairs of their members. a) Receipts and payment account b) Income and expenditure accounts c) Subscription accounts d) Balance sheet/ statement of affairs.

Receipts and payments account This is a summary of the cashbook or bank account over a period of time. It is kept on similar basis as the cash account. It records details of cash and cheques.A receipt is debited whereas cash and cheques payment are credited to the receipt and payment account. Features of receipts and payment account a) Items are treated in the same way as the cash book b) All receipts and payments are recorded on cash basis. c) Amount owing or prepaid are not shown Limitations of receipts and payments account a) Lack of comparability between successive years as income and capital items are not segregated b) It is not a useful guide as to whether or not the organization is paving its way c) There is no figure for net income or net expenditure. Advantages of receipts and payment account a) It is very simple to keep b) It does not require any formal training and it is very easy to understand c) It forms the basis for the preparation of income and expenditure account and balance sheet.

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Income and expenditure account It is simply the name given to profit and loss account in the case of profit making organization. It brings together all incomes earned from the various source as well as all expenses incurred by the association in pursuit of its functions. Therefore the rule in the profit and lossaccount is the same rule applied in the preparation of income and expenditure account. That is all expenses and losses are debited and all revenues and gains are credited Differences between receipt and payment and income and expenditure account Receipt & payment account Income & expenditure account 1. Receipt and payment account is a summarized cashbook 2. Receipt and payment account is a real account. 3. Receipt and payment are prepared on cash basis. 4. Receipt and payment record both items of capital and revenue nature. 5. The objective is to arrive at the cash balance 6. Credit sides records outgoing values in the form of cash 1. Income and expenditure account is a profit and loss account 2. Income and expenditure account is a nominal account 3. Income and expenditure is prepared on accrual basis 4. Income and expenditure records only items of revenue nature. 5. The objective is to arrive at surplus or deficit. 6. Credit side records revenues and gains.

Subscription This is a periodic contribution of the members to the association. This contribution may be made yearly, half yearly or even quarterly depending on the policies of the organization. Subscriptions can be paid in advance or in arrears. Subscription in arrears:- This is the sum of money remained unpaid by members at the end of the year. This is treated as a current asset in the balance sheet. Subscription in advance:- This is the sum of money paid for the future or prepaid by members. It is treated as a current liability item in the balance sheet. OTHER TERMS Honorarium:- It is a payment made to a person who renders professional service to an non profit making organization. It is a revenue expenditure item which must accordingly be charged as expenses to the income and expenditure account. Entrance fees: - This is money paid on application for membership of an association or a club. It is an income to the association and must therefore be credited to the income and expenditure account. The amount to be paid is reviewed from time to time. Donations: - This is a gift either in cash or kind received or given by a non-profit making organization. Large donations are capitalized and therefore forms part of the accumulated finds of the organization where as small donations received are treated as income and therefore credited to the income and expenditure account. Donation given by the organization is an expense and is debited to the income and expenditure account. Accumulated fund: - This is a word used for the capital of a non-profit making organization. It is ascertained by subtracting liabilities from the assets of the organization.

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Terms in relation to profit making organisations PROFIT MAKING ORGANISATION 1. Trading account 2. Profit and Loss Account 3.. Cash or Bank Account 4. Balance Sheet 5.Capital 6.Prifit /Loss NON PROFIT MAKING ORGANISATION 1. Bar Trading 2.Income and Expenditure Account 3. Receipt and payment Account 4. Statement of Affairs 5. Accumulated Fund 6. Surplus/Deficit

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CHAPTER TEN MANUFACTURING ACCOUNIS This topic deals with firms which do not buy goods for resale but they produce or manufacture their own goods and sell to the general public. Manufacturing on the other hand is the act of transforming raw materials into finished products. Such firms prepare special accounts called the manufacturing account which helps to ascertain the cost of production/ manufacturing. Advantages of manufacturing account (1) It shows the cost of production. (2) It shows profit on production / manufacturing (3) It shows the element of cost (4) It differentiates between direct and indirect cost (5) It helps management to decide whether it is more profitable to produce or to buy and sell Elements / components of cost They are those item or factors upon which expenditure is incurred in production. They are cost of material, cost of labour and expense. The cost incurred on the various factors, that is, the various cost element are added together to get the cost of sale of the product. Material:- Material is anything, which is added upon by human effort, and machine to convert it into finished product. Material for the purpose of production may either be direct or indirect. Direct Material: - these are the raw materials used for production of the product. Such material can easily be traced to the unit produce and the cost of which is charged to the unit only. Direct material normally forms a greater part of the commodity .E.g. Cotton for textile, sugar cane for sugar, cocoa for Milo etc. Indirect materials: - They are materials known not to have been used in producing a particular cost unit and the cost of which cannot be identified with the final product. E.g. wrappers, Containers, Consumables, spare or past etc. Labour: - This consists of human effort that is applied in the production process. It can be direct or indirect Direct Labour: - This refers to persons who are directly involved in the production of the product. That is, it is that part of labour cost, which is allocated to the cost units only. E.g. wages of factory worker. Indirect Labour: - It refers to wages and salaries to factory workers whose activities are not directly traceable to the units produced. E.g. wages and salaries of supervisors. Expenses (cost of services): - This is the cost of human or machine effort purchased from outside the business organization. Expenses can also be classified as either direct or indirect. Direct Expenses: - These are the cost of labour or machine effort purchased from outside to assist in the production of specific or a particular or some cost incurred as a result of undertaking a production process apart from material and labour cost. E.g. hire of a special machine, royalties, special labour etc. Indirect Expenses: They are expenses other than direct expenses incurred in the factory. E.g. Factory rent. factory lighting and heating, depreciation of plant etc. Prime Cost: This is the aggregate or summation of direct material, direct labour and direct expenses.
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Factory overheads/ Indirect Cost: - They are expenses incurred in the factory but which are not direct in nature. They consist of indirect materials, indirect labour, and indirect expenses Production /Manufacturing cost: - This is the amount or actual amount of money spent in the production of a giving product. It is the sum of prime cost and factory overheads. Thus it is made up of direct material, direct labour, direct expenses and factory overheads. Total Cost: - It is the sum of the production cost, selling and distribution expenses administrative expenses and financial charges. A diagrammatic representation of cost build up

Direct material Direct Labour Direct Expenses +

FACTORY OVERHEADS

Prime Cost

+ (Plus) +
Production Cost

Plus

Selling and Distribution Expenses Administration Expenses Financial Charges

TOTAL COST

Loose Tools: - The sum of all small tools in production is grouped as lose tools. All such tools strictly speaking are assets but only that they are comparatively insignificant in value. The cost of such tools that has gone into production is therefore treated as factory overheads. The cost of the loose tools that has gone into production = loose tools at start add loose tools purchased for the period and less loose at close. TRANSFRER OF GOODS Goods produced are either transferred to the selling department at (i) production cost or (2) Market Value. (i) Production cost: - this is where the goods are transferred to the selling department at the cost of production. The cost of production serves as the cost of goods purchased for the period since manufacturing organisations do not normally make purchases of good. (2) Market Value: - This is where goods are transferred to the selling department at production cost plus profit on manufacturing Gross Profit on Manufacturing This is the excess of market value of goods over its production cost. This profit comes about as a result of production and it is debited to the manufacturing account and credited to the profit and loss account to ascertain the net profit for the period. NB: Where the production cost exceeds the market value, the difference is gross loss on manufacturing.

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CHAPTER ELEVEN SINGLE ENTRY AND INCOMPLETE RECORDS Single entry: Is a bookkeeping system, which does not provide for the two-fold aspect of a business transaction. This means that every transaction does not follow the double entry principle. Under this method, accounts are kept for cash debtors and creditors. E.g. where purchases of goods 5,000 is credited to the cash account only. Incomplete records: - It means a situation where a full set of account is not kept or where part of the records kept are destroyed accidentally. This means that only single entries are made for transactions conducted by the business. Reasons for single entry/incomplete book keeping 1. The records under this system are easy to be kept. 2. Deliberate attempt by proprietors to evade tax by understating profit, since no genuine records will be in existence to disprove disclosure. 3. Disasters like flood, five etc. may destroy the records of the firm leaving just information. 4. Fear of embezzlement by accounting staff. As a result accountants will not be employed to prepare and keep proper goods of accounts. 5. Self employed businesses, small and sole proprietorship are not compelled by law to keep proper books, and hence such people keep incomplete records. Features of single entry o Real and personal accounts are not kept except the personal account for debtors and creditors. o Profit or loss could be determined by comparing opening and closing capital. I.e. Opening capital + Additional capital + Profit Drawings = Closing capital. Disadvantages of single entry/incomplete records It facilitates fraud or forgery of accounting records. It lacks credibility for decision-making It may be costly when an audit report is required. It lacks uniformity because every organisation will use what it thinks will be convenient for it. 5. It cannot be used to analyse expenses and therefore no control of expenses. 6. It is difficult to arrive at profit for the year 1. 2. 3. 4.

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CHAPTER TWELVE PARTNERSHIP A 'partnership' (in this context) is the relationship between two or more persons carrying on business together with a view to make profit. Formation of partnership In the formation of apartnership, a partnership deed is generally drawn up to define the rights and obligations of the partners. Content of the Deed of Partnership The 'deed' will often contain some or all of the following clauses: 1. 2. 3. 4. 5. The capital to be contributed by each partner The rate of interest to be allowed on partners capitals The rate of interest to be charged on partners drawings Any salaries payable to partners The ratio in which the remaining profit / loss is to be shared

Provisions of the act in the absence of a partnership deed

(a) (b) (c) (d) (e) (f) (g) (h)

(i)

Partners contribute capital equally; Partners share profits and contribute equally towards losses; Partners are not entitled to interest on capital; Partners are not entitled to receive salaries; Partners are entitled to interest at 5% per annum on any advances beyond their agreed capital from the date of advance; A new partner may not be introduced without the consent of all the existing partners; Matter arising from disagreements must be decided by a majority of partners Any differences that will result concerning the ordinary matters of the business may be decided by majority votes of the members. However, no changes should be made concerning the nature of the firms operation without the consent of all partners The firm must indemnify any partners who make payment or incur a personal liability in the normal course of the business.

Features of partnership 1. It has a minimum member of two partners and a maximum of twenty (20) 2. There is usually an unlimited liability for partner just like sole proprietorships 3. All partners contribute towards the capital of the business. 4. There is no board of directors Types of partnership Ordinary unlimited partnership. Members in this type of partnership do not enjoy limited liability. That is they stand to lose their capital contribution in addition to their private assets when the business becomes bankrupt Limited partnership In this type of partnership, liability of their members is limited to their capital contribution. That means in the event of bankruptcy partners will only lose their capital contributed.
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Kinds of partners Active, general or ordinary partners-These are partners who take active part in the running or the management of the business, enjoy profits and also bear loses even beyond their capital contribution. Dormant/Sleeping Partner:- These are partners who do not take active part in the management of the day- to day running of the business. They only bear to the amount of money they have contributed in the business. Nominal Partners:- These are partners who allow their names only to be used as partners. They neither take part in the running of the business nor take part in the sharing of profit and losses. Their names exist as partners only for the sake of goodwill. Quasi Partner:- If a person allows himself to be thought of as a partner of business, the law will hold him liable to anyone acting on that assumption. Such a person is termed in law as a quasi partner. Rights of partners 1. All partners must consent the admission of a new partner 2. Partner must be reimbursed with official expenses 3. Partners are entitled to interest on their capitals 4. Each partner has the right to inspect the partnerships books and documents.

Advantages of a partnership business over a sole proprietorship business 1. Large number means larger capital 2. Risks are shared among the partners hence the burden is lighter than in the case of a sole proprietorship. 3. Administrative work could be evenly shared and use of deferent expertise of partner is made possible. 4. It has the chance of raising huge loans from financial institutions due to larger security being available. 5. The partners are able to take a collective decision, which will be effective than decision by one person. 6. It has a persistent existence. That is if one partner dies or retires the business still operates. Disadvantages of partnership business over sole proprietorship business 1. There is the possibility of disputes arising in times of sharing profits and losses 2. The wrongful act of one partner binds all the other partners 3. Independence enjoyed by the sole trader is lost to the partners, as they must act in agreement with each other. Discussions cannot be made without consultations first. 4. Delay in decision-making. The taking of decision is mostly slow as compared to sole proprietorship because of the joint ownership. Advantages of partnership over limited liability companies 1. Members can easily be identified with the firms but this is not possible for companies with large number of shareholders. 2. Being smaller. partnership are more manageable as far as personal relationships with customers is concerned. 3. Decision-making is much quicker than companies
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Disadvantages of partnership over limited liability companies 1. In partnerships, full involvement of owner in the running of the business is required which this not so in companies. 2. Unlimited liability of partnership means members must bear in full all debts of the firm to the extent of their private personal property 3. Comparatively, the withdrawal or death a partner affects its existence substantially Cessation of a partner Partner ceases to be a member of the partnership business if any of the following occurs. When the partner dies. When a partner becomes insolvent i.e the partner is debt-ridden and unable to pay. When a partner becomes an alien enemy in times war or Suffers his interest (capital plus any credit balances) in the partnership to be used to discharge his personal debts.

Accounts of a partnership business In addition to the ordinary trading and profit and loss account and balance sheet, a partnership requires a number of several account to meet the requirements of the act, these accounts include: Capital account, current account, loan account, drawings account and appropriation account Capital account:- Two situation must be distinguished with regard to capital account.(i) Fixed Capital Account (ii) Fluctuating capital account. Fixed capital accounts Under this method, a separate capital account is kept to record the contribution of the partners. A separate account called current account is opened to cater for all other transactions relating to a partner. Such transaction may include: Interest on capital, salaries, drawings, and Interest on drawing, share of profit or loss etc. The subscribed capital of the partner therefore remains unaltered unless there is an increase or a decrease in the capital contribution.

Fluctuating capital accounts Under this method, a current account is not kept. All transactions relating to a partner are entered in the capital account. Is therefore a combination of the capital and the current accounts. The capital balance at the end of every period under this method fluctuate as a result of the current account transactions like the interest on drawings, interest on capital, drawings, salaries etc. Current accounts Where fixed capital account is maintained a current account is opened to cater for transactions, which relate to the partners. This account is debited with drawings, interest on drawing and share of losses. If a partner withdraws more than his actual balance he will have a debit balance. It is also credited with interest on capital, salaries to partner, share of profit etc. A credit balance on a current account represents a favourable balance. Loan accounts Where a partner advances money to the partnership above his agree capital, he is entitled to an interest rate of 5% p. a in the absence of agreement. This must clearly be shown as loan and not capital and must accordingly be entered in the loan account. The interest on this loan is an expense of the firm and should be charged to the profit and loss appropriation account of the firm. Loan repayment also ranks priority over the repayment of capital in the event of winding up.
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Drawing accounts This is an account in which drawing made by partners if the deed confers drawing rights. Such drawings are debited to the capital or current depending on which capital system is being used. This account is maintained so that drawings by partner can easily be determined to facilitate the calculation of interest on such drawings. Secondly it reduces congestion in capital/ Current accounts. Appropriation accounts This is a supplement account to the profit and loss account. It is used to allocate the net profit or loss for the year among the various items relating to the partners and to finally share the residual in their profit and loss sharing ratio. The net profit or loss ascertained in the profit and loss account is therefore brought down on the appropriation account.

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CHAPTER THIRTEEN COMPANY The term company is used to describe an association of a number of persons formed with the intention of making profit and registered under the laws relating to companies. In Ghana, the formation and the operations of companies are governed by the Ghana Companys code of 1963, Act 179- popularly known as the code. All companies registered in Ghana are governed by the provisions of this code. The characteristics of a Company A joint stock company is a body corporate with a common seal and perpetual succession owned by a large number of persons known as shareholders who contribute capital to the company and it is being managed by the board of directors elected by the shareholders. The following are the chief characteristics of a joint stock company: Legal person: A company form of business organisation is the creation of law. It is an independent person in the eye of law and as such it is regarded as an artificial person having legal entity distinct from its members. Being a legal person it can enter into contract, own property and can sue and be sued by others. Formation: The formation of company is not easy and it is formed with the initiative of a few persons called promoters. The members of a company are increased by sale of shares. The formation of company require compliance of various provisions of the law as many documents and information are to be submitted to get certificate of incorporation and certificate of commencement of business. Perpetual Succession: A company has perpetual existence as its existence is independent of the life of its members. The existence of a company is not affected by the death, insolvency or lunacy of its members. Because of this nature, it has been told that shareholders may come and go but company continues for ever. Limited Liability: The liability of the members of the company is limited to the extent of the face value of shares held by them. In case of winding up a shareholder can lose money to the extent of his investment only and nothing more. In no case, the personal property of the shareholders are liable to be attached to meet the claim of the creditors of the company. Representative control: The company form of business is controlled by the board of directors elected by the shareholders. The board of directors are representative body as its members are elected by shareholders. The board of directors are known as agents and trustees of the shareholders.

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Separation of Ownership and Control: The owners of the company are called shareholders. Since the shareholders are scattered all over the world, they may not have time to take part in the day-to-day management of the company. Thus, the management of the company is vested in the hands of board of directors elected in the general body meeting of the company. The owners do not exercise a direct control over the business of the company.

TYPES OF COMPANIES From the point of view of liability there are three kinds of Companies (1) Limited companies In case of such companies, the liability of each member is limited to the extent of a face value of shares held by him. Suppose A takes a share of 10, he remains liable to the extent of that amount. As soon as that amount in paid, he is no more liable in the unlikely event of liquidation. (2) Companies limited by guarantee The liability of the member of such companies is limited to the amount he has undertaken to contribute to the assets of the company in the event of its wound up. This guaranteed amount is limited to fixed sum which is specified in the regulation. Chambers of commerce, trade associations and sports clubs are usually guarantee concerns. The object of such companies is not to make profit and distribute dividend. (3) Unlimited Companies They are nothing but large partnership registered under the Companies Act and the members just like partners have unlimited liability and both share contribution as well as their property are at stake when the company is to be wound up. Such companies are rare these days. From the point of view of Public investment companies may be of two kinds: (1) Private Companies: A private company means a company which by its articles (a) restricts the right to transfer its shares, if any (b) limits the number of its members to fifty excluding past or present employees of the company who are also members of the company. (c) Prohibits any invitation to the public to subscribe for any shares in our debentures of the company. (2) Public Companies: Public companies are those companies which are not private companies. All the three restrictions are not imposed on such companies.

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Distinctions between a partnership firm and a company. (1) Registration A company comes into existence only after its registration under the Companies Act, In case of partnership, the registration is not compulsory. (2) Legal Status A company is a legal person and regarded by law as a single person. A partnership is a collection of individuals. (3) Minimum number of person The minimum number of persons required to form a company is two in case of private companies and seven in the case of public companies in other countries but one in Ghana, The minimum number of persons required to form a partnership is two. (4) Maximum number of persons A public company may have any number of members. In the case of a private company the maximum number cannot be more than fifty. In trading partnership the maximum number of partners is twenty. (5) Transferability A shareholder can transfer his share without the consent of other shareholders. In case of partnership, a partner cannot transfer his share without the consent of other partners. (6) Liability of members The liability of the members of a company is limited whereas liability of partners for debts of a firm is unlimited. 7) Contractual capacity The shareholders of a company can enter into contract with the company and can be employees of the company. Partners can contract with other partners but not with firm as a whole. (8) Length of existence The death or retirement of a partner dissolves the partnership. But company having legal existence can continue in spite of death and insolvency of the members. It has a perpetual existence. 9) Statutory obligations A company is required to comply with various statutory obligations regarding management e.g.; filing balance sheet, maintaining prescribed registers. In case of partnership, there are no statutory obligations.

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10) Authority of members Management of a company vests in the hands of a few directors elected from amongst and by the shareholders. A shareholder has no say in the management. Whereas in the case of partnership all partners are entitled to share in the management of a firm. A partner is an agent of the firm and can bind it by his acts. (11) Distribution of Profits Profits of a firm are distributed in agreed proportion or equally in absence of agreement among the partners but profits in case of a company can be distributed according to the provision of the articles by the directors. Share capital Share capital or issued capital: (UK English) or capital stock (US English) refers to the portion of a company's equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can set aside share capital to exchange for computer servers instead of directly purchasing the servers from existing equity. Share capital usually comprises the nominal values of all shares issued, less those repurchased by the company. It includes both common stock (ordinary shares) and preferred stock (preference shares). If the market value of shares is greater than the their nominal value (value at par), the shares are said to be at a premium (called share premium, additional paid-in capital or paid-in capital in excess of par). Types of Share Capital

Authorised Share Capital: is also referred to, at times, as registered capital. This is the total of the share capital which a limited company is allowed (authorized) to issue to its shareholders. It presents the upper boundary for the actually issued share capital (hence also 'nominal capital'). Issued Share Capital: is the total of the share capital issued to shareholders. This may be less than the authorized capital. Subscribed Capital: is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than the issued share capital as there may be capital for which no applications have been received yet ('unsubscribed capital'). Called up Share Capital: is the total amount of issued capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by installments. Paid up Share Capital: is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in arrears ('calls-in-arrears'). Shares

The capital of the company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. There are two types of shares which a company may issue (1) Preference Shares (2) Equity Shares.

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(1) Preferences Shares Shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate of dividend. Preference shares may be

(a)

Cumulative Preference Share

If the company does not earn adequate profit in any year, dividends on preference shares may not be paid for that year. But if the preference shares are cumulative such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company, in subsequent years. Only after such arrears have been paid off, any dividend can be paid to the holder of quality shares. Thus a cumulative preference shareholder is sure to receive dividend on his shares for all the years out of the earnings of the company. (b) Non-cumulative Preference Shares The holders of non-cumulative preference shares no doubt will get a preferential right in getting a fixed dividend which is distributed to equity shareholders. The fixed dividend is to be paid only out of the divisible profits but if in a particular year there is no profit as to distribute it among the shareholders, the non-cumulative preference shareholders, will not get any dividend for that year and they cannot claim it in the next year during which period there might be profits. If it is not paid, it cannot be carried forward (c) Redeemable Preference Shares Capital raised by issuing shares, is not to be repaid to the shareholders (except buy back of shares in certain conditions) but capital raised through the issue of redeemable preference shares is to be paid back by the raised through the issue of redeemable preference shares is to be paid back to the company to such shareholders after the expiration of a stipulated period, whether the company is wound up or not.. (d) Participating or Non-participating Preference Shares The preference shares which are entitled to a share in the surplus profit of the company in addition to the fixed rate of preference dividend are known as participating preference shares. After the payment of the dividend a part of surplus is distributed as dividend among the equity shareholders at a particulate rate. The balance may be shared both by equity and participating preference shares. Thus participating preference shareholders obtain return on their capital in two forms (i) fixed dividend (ii) share in excess of profits. Those preference shares which do not carry the right of share in excess profits are known as non-participating preference shares. (2) Equity Shares (ordinary shares) Equity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year. This rate of dividend is determined by directors and in case of larger profits, it may even be more than the rate attached to preference shares. Such shareholders may go without any dividend if no profit is made.

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PROMOTERS A promoter is someone who helps in the documentation and establishment of a company. The person who does the process of conceiving a business or someone who takes an active part in the formation of a business. Generally, a promoter is in a fiduciary relationship with the corporation and the shareholders. The promoter must avoid conflicts of interests and exercise reasonable care in performing his duties. He must refrain from self-dealing or other types of abuse to take advantage of his position as a promoter.

Types of Promoters Professional Promoters They are experts who specialise in company promotion. They float the company and hand it over to the shareholders or their representatives. Promotion is their main profession or occupation. Occasional Promoters These promoters take interest in floating some companies .They are not engaged in promotion work on a regular basis. They take up the promotion of some company and once it is over they go to their original profession. For instance, engineers, lawyers etc. may float some companies. Entrepreneur Promoters They are both promoters and entrepreneurs. They conceive idea of a new business unit, do the groundwork to establish it and subsequently become a part of the management. Financier Promoters Some financial institutions, like investment banks or industrial banks, may take up the promotion of a company with a view to finding opportunities for investment.

OTHER TERMS Rights Issues: Sharesissued to existing shareholders of a company when that company decides to raise more capital via issuing new shares. Existing shareholders are given the "right" to purchase new shares at a discounted price (generally discounted - not always); if they choose not to take this "right" they can instead sell the rights to purchase the shares on a free market to ensure that their net wealth is maintained (as the increase in supply effectively devalues each pre existing share). Bonus issue: Are generally associated with an investor being issues with extra shares than what they paid for. This can be as means of maintaining net wealth also (redistribution from company held shares to shareholders etc). This is the issue of an actual share that can then be traded on an open market

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Placing Placing usually involves offering your companys shares to a selected base of institutional investors. This allows you to raise capital with lower costs and greater freedom and it gives your company more discretion to choose its investors. The result, however, is a narrower shareholder base, and as such there may be lower liquidity in the shares once your company has been admitted to market. Initial public offering In an initial public offering (IPO), your adviser offers your companys shares to private and/or institutional investors and usually arranges for the offer to be underwritten. An IPO attracts private investors who are important in increasing the liquidity of a companys shares. It is normally the most expensive route to market, often used by larger companies or those looking to raise substantial amounts of capital. Underwriting: The procedure by which an underwriterbrings a new securityissue to the investingpublic in an offering. In such a case, the underwriter will guarantee a certain price for a certain number of securities to the party that is issuing the security (in exchange for a fee). Thus, the issuer is secure that they will raise a certain minimum from the issue, while the underwriter bears the risk of the issue.

Offering: The making available of a new securitiesissue to the public through an underwriting Dividend:A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

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CHAPTER FOURTEEN INTERPRETATION OF FINANCIAL STATEMENTS Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency CLASSIFICATION OF KEY RATIOS PROFITABILITY RATIOS LIQUIDITY RATIOS EFFICIENCY / ACTIVITY RATIOS GEARING RATIOS INVESTOR RATIOS

1. PROFITABITY RATIOS These ratios measure how successful the managers of the organization have been in generating profit. These ratios include: return on capital employed (ROCE), gross profit margin, net profit margin and net asset turnover. i. Return on capital employed (ROCE). This ratio is often referred to as the primary ratio. This is because it relates to the overall profitability of a company to the finance used to generate it. Profit Before Interest and Tax Capital employed NB: capital employed = Total assets less current liabilities or shareholders fund plus long term debts. ROCE is also the product of net profit margin and asset turnover (ROCE= Net Profit Margin X Asset Turnover). This can easily be proved mathematically. ii. Gross Profit Margin: This ratio shows how well cost of production have been controlled as opposed to distribution and administration cost. It provides an easy means of estimating final net profits. It shows the amount of gross profit for every GH100 sales. It shows the volume of sales as well as future the nature of the cost of goods sold. This ratio is directly related to the operating activities of the business and as such is an important yardstick for control purposes. Gross Profit Net Sales X 100 X 100

Formula:

Formula:

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iii.

Net profit margin: This ratio also known as operating margin, indicates the efficiency which costs have been controlled in generating profit from sales. It does not distinguish between operating costs, administrative costs and distribution costs. It indicates whether or not the expenses of the company are proportional to the amount of trade carried on. Net Profit Before Interest and Tax X 100 Net Sales / Turnover

Formula:

iv.

Net asset turnover: This ratio gives a guide to productive efficiency. It measures how well assets have been used in generating sales. A fall in ROCE may be due to a fall in net asset turnover rather than net profit margin. Sales or Turnover Capital Employed

Formula:

2. LIQUIDITY RATIOS Liquidity is the ability to pay debts promptly. These ratios therefore measure the ability of the firm to meet its short term financial commitment as and when they fall due. They indicate the extent to which the current assets of the business cover its current liabilities. They present cash solvency of the firm and its ability to remain solvent in the event of adversity. This means the business can pay its current liabilities when the need arises. These ratios are also used to measure the financial position of the business. These ratios include: current ratio, quick ratios and acid test ratios). Current ratio: This ratio measures a companys ability to meet its financial obligations as they fall due. It is often said that the current ratio should be around 2, but what is normal may vary from industry to industry. Thus sector averages are better guide than rule of thumb. Adequacy of working capital means there is enough cash to take care of operating expenses. A situation where a business current liabilities exceed its current assets is termed overtrading. Formula: Current Assets : Current Liabilities OR Current assets Current Liabilities

Quick Ratio: This ratio is more precise in measuring liquidity. This is because it considers only the most liquid assets in financing the short term financial obligations of the business. Therefore it eliminates stock which might take several days, weeks, months etc to be converted into cash depending on its nature. While a common rule of thumb is that it should be close to 1, in practice the sector average should be used as a guide.

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Acid test ratio: This ratio is the most precise measure of liquidity. It indicates how best the business can pay its current liabilities any time there is demand for payment. This generally means cash at bank and cash in hand plus any quickly short term realisable investment like 91 days treasury bills to current liabilities Formula: Current Assets (Stock + Debtors) Current Liabilities 3. EFFICIENCY/ ACTIVITY RATIOS These ratios show how efficiently a company has managed short term assets and liabilities. They are closely linked to liquidity ratios. They also measure the activeness of management. Activity ratios include: debtor days, creditor days, stock turnover, cash conversion cycle, fixed asset turnover etc). With each ratio, the average level should be used in any computation. Debtor days/ debtors ratio: This measure the average period of credit being taken by customers. This tells the credit policy of the business. It tells the number of days, weeks, or months within which the business is expected to collect cash from credit customers. If it is compared with a companys allowed credit period, it can give an indication of the efficiency of debtor administration. Formula: Debtors X 365 Days Credit Sales

Creditor days / creditor ratio: This ratio shows the average credit period taken from suppliers. It tells the number of days, weeks or months within which the business is expected to pay its creditors in full. Formula: Creditors X 365 Days

Credit Purchases

Stock Days/ Stock Turnover: This ratio measures how long it takes a company to turn its stock into sales. It shows the number of times stocks are being sold and replaced to make up those total sales during the period. It indicates whether the volume of the stock held is appropriate to the type of business that is being carried on. A low rate indicates slow movement of goods which can arise from any of the following: poor quality of goods, high price, poor sales promotion, obsolete goods etc. Formula: Cost of Sales Average Stock NB: Average Stock = Opening Stock + Closing Stock 2
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Cash conversion cycle (CCC): This is also called the operating cycle or working capital cycle. This ratio measures the period of time for which working capital financing is needed. The longer the cash conversion cycle, the higher the investment in the working capital. Formula: Stock Days + Debtor Days Creditor Days Net asset turnover: this measures the sale that is being generated by the fixed assets of the company. Like ROCE it is sensitive to the acquisition, age and valuation of fixed assets. Formula: Sales or Turnover Fixed Assets 4. GEARING RATIOS Gearing or leverage ratios relate to how a company is financed with respect to equity and debt and can be used to access the financial risk that arises with increasing debt. These ratios therefore give the final answer to the security of ordinary shareholders on liquidation and answers the ownership of a business. The ratio between equity capital and preference share, the loan capital (debentures) and borrowed money (loans from banks) is known as leverage or gearing. If a company has a large proportion of total capital made up of ordinary shares it is said to be low geared. If the proportion of debt capital exceeds the equity capital then the company is highly geared. Gearing ratios include: capital gearing ratio, debt/ equity ratio, interest cover and interest gearing, Capital gearing ratio: The purpose of this ratio is to show the proportion of debt finance used by a company. A company may be thought highly geared if capital gearing is greater than 50% using book values for debt and equity but this is only a rule of thumb. Formula: Long Term Debt X 100 Capital Employed NB: One alternative method replaces long term debt capital with prior charge capital, which includes preference shares as well as debt Debt/ equity ratio: This ratio serves a similar purpose to capital gearing. A company could be said to be highly geared if debt/ equity ratio is more than 100% using book values. Formula: Long Term Debt X 100

Share Capital + Reserves Interest cover: this ratio measures how many times a company can cover its current interest payment out of current profits and indicates whether servicing debts will be a problem. An interest cover of more then seven times is usually regarded as safe, and an interest cover of more than three times as acceptable. However during periods of low and stable interest rates, lower levels of interest cover may be deemed acceptable. Interest cover is a clearer indication of financial distress than either capital gearing or debt/equity ratios, since inability to meet interest payments may lead to corporate failure, no matter what the level of gearing may be.
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Formula:

Profit Before Interest and Tax Interest Charges

5. INVESTOR RATIOS Investor ratios are used for a lot of purposes, including assessing the effects of proposed financing (e.g. on per share); valuing a target company in a takeover, analyzing dividend policy, and predicting the effect of a right issue. Examples include: return on equity, dividend per share, earnings per share, dividend cover, price/ earnings ratios etc. Return on Equity: This ratio measures the earnings attributable to ordinary shareholders with the book value of their investment in the business. Formula: Earnings after Tax and Preference Dividends Shareholders Fund NB: Shareholders Fund = Ordinary Share Capital + Surpluses (Reserves) Dividend per share: This dividend measures how much dividend is to be paid on each share issued. Formula: Total Dividend Paid to Ordinary Shareholders Number of Issued Ordinary Shares Earnings per share: This is considered as a key ratio to stock market investors. This ratio measures the net profit attributable to each equity share based on the profit of the period after tax. Formula: Net Profit after Tax and Preference Dividend Number of Equity (Ordinary shares issued) Dividend Cover: This ratio measures how many times the total dividend of the company is covered by current earnings. The cover indicates how safe the companys dividend payment is. The higher the dividend cover, the more likely it is that a company can maintain or increase future dividends. Formula: Earnings per Share Dividend per Share Price/ Earnings ratio: The price earnings ratio measures how much an investor is prepared to pay for a companys share given is earning per share. Like earnings per share, the price/ earnings ratio is seen as a key ratio by the stock market investors. It can therefore indicate the confidence of investors in the expected future performance of a company. Formula: Market Price per Share Earnings per Share
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Payout ratio: This ratio is used in the analysis of the dividend policy of the company. It tells what dividend policy the company has adopted. Thus the company may choose to pay out a fixed percentage of earnings every year and finance any investment needs not covered by retained earnings from external sources Formula: Total Dividend Paid to Ordinary Shareholders X 100 Earnings after Tax and Preference Dividends Dividend yield: This ratio indicates the percentage of those to the price of the share. This measures how much an investor expects to gain in exchange for buying a given share ignoring any capital gain that may arise. Formula: Dividend per Share X 100 Market Price per Share Earnings yield: Earnings yield gives a measure of the potential returns shareholders expect to receive in exchange for purchasing a given share. It is the reciprocal of the price/ earnings ratio. The return is a potential one since few companies pay out all of their earnings as dividend. Earnings yield can be used as a discount rate to capitalise future earnings in order to determine the value of a company. Formula: Earnings per Share X 100

Market Price of Share

Limitations Of Ratio Analysis Although ratio analysis is very important tool to judge the company's performance, following are the limitations of it. Ratios are tools of quantitative analysis, which ignore qualitative points of view. Ratios are generally distorted by inflation. Ratios give false result, if they are calculated from incorrect accounting data. Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting. Ratios may be misleading if they are based on false or window-dressed accounting information.

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CHAPTER FIFTEEN ACCOUNTING CONCEPTS The topic presents the theoretical foundation for the preparation and presentation of accounting information to users. This covers the basic principles which underline the preparation of the various financial statements. Some of the terms used are confusing and sometimes used interchangeably. Accounting concepts: These are the basic assumptions underlying the recording, the presentation and the application of accounting information. The concepts are like pillars on which the structure of accounting is built. Accounting conventions An accounting convention refers to common practices which are universally followed in recording and presenting accounting information of the business entity. They are followed like customs, tradition, etc. in a society. Accounting conventions are evolved through the regular and consistent practice over the years to facilitate uniform recording in the books of accounts. Accounting Conventions help in comparing accounting data of different business units or of the same unit for different periods. These have been developed over the years. Accounting conventions are not mandatory but their non compliance will render the accounting information unreliable. Generally accepted accounting principles In order to maintain uniformity and consistency in accounting records throughout the world, certain rules and principles have been developed which are generally accepted by the accounting profession. These rules/ principles are called by different names such as principles, concepts, conventions, postulates, assumptions. These rules/principles are judged on their general acceptability rather than universal acceptability. Hence, they are popularly called Generally Accepted Accounting Principles (GAAP). The term generally accepted means that these principles must have support that generally comes from the professional accounting bodies. Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions of financial statements. These principles have evolved over a long period of time on the basis of past experiences, usages or customs, etc. Accounting policies: These are accounting concepts, bases and principles actually selected by organisations in the recording and the presentation of its accounting information. Accounting policies are usually decided upon by management for the operation of its accounting systems. Accounting standards The term standard denotes a discipline, which provides both guidelines and yardsticks for evaluation. As guidelines, accounting standard provides uniform practices and common techniques of accounting. As a general rule, accounting standards are applicable to all corporate enterprises. Once awareness is created about the benefits and relevance of accounting standards, steps are taken to make the accounting standards mandatory for all companies. In case of non compliance, the companies are required to disclose the reasons for deviations and its financial effect: Till date, the IASC has brought out 40 accounting standards
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CONSISTENCY CONCEPT This concept states that once a particular method has been chosen for the treatment of an accounting item, this method must be used for the treatment of similar items in subsequent years so that there will be no distortion in the accounts and also to ease comparison. It however indicates that where there is the need for change of method it should be due to real and significant reason. Such a change must be shown by way of foot notes to the accounts showing clearly the effect of such changes. e.g. A firm which uses the FIFO method in the valuation of its stock should continue to use it unless there is a significant need for change. This means that same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time. But this can be possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period of time. If different accounting procedures and practices are used for preparing financial statements of different years, then the result will not be comparable. Generally this concept is applied in the charging of depreciation on fixed assets or valuation of unsold stock. Once a particular method is used it should be followed year after year so that the financial statements can be analysed and compared provided the depreciation on fixed assets is charged or unsold stock is valued by using particular method year after year. This can be further clarified as: in case of charging depreciation on fixed assets accountant can decide to adopt any one of the methods of depreciation such as diminishing value method or straight line method. Similarly, in case of valuation of closing stock it can be valued at actual cost price or market price or whichever is less. However precious metals like gold, diamond, minerals are generally valued at market price only. Types of consistency There are three types of consistency namely: (i) Vertical consistency(Same organisation): It is to be found within the group of inter-related financial statements of an organisation on the same date. It occurs when fixed assets have been shown at cost price and in the interrelated income statement depreciation has also been charged on the historical cost of the assets. (ii) Horizontal consistency(Time basis): This consistency is to be found between financial statements of one entity from period to period. Thus, it helps in comparing performance of the business between two years i.e. current year with past year. (iii) Dimensional consistency(Two organizations in the same trade) : This consistency is to be found in the statements of two different business entities of the same period. This type of consistency assists in making comparison of the performance of one business entity with the other business entity in the same trade and on the same date. Therefore, as per this convention the same accounting methods should be adopted every year in preparing financial statements. But it does not mean that a particular method of accounting once adopted can never be changed. Whenever a change in method is necessary, it should be disclosed by way of footnotes in the financial statements of that year.

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Significance/ Importance 1. It ensures uniformity in charging depreciation on fixed assets and valuation of closing stock. 2. It reduces the element of subjective analysis by accountants. 3. By applying the consistency method, financial statements will be uniform and will therefore promote effective comparison.

BUSINESS / SEPARATE ENTITY CONCEPT. This states that in the preparation of accounting statements the owners and the business are treated as separate entities. It provides that the affairs of the business must be kept separately from that of the owners. The owners are therefore treated like any other person dealing with the business. The interest of the owner is recorded in his/her capital and drawing account. These are the two accounts kept to cater for the interest of the owner in the case of sole proprietorship business. MATERIALITY CONCEPT The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information. The question that arises here is what a material fact is. The materiality of a fact depends on its nature and the amount involved. Material fact means the information of which will influence the decision of its user. For example, a businessman is dealing in electronic goods. He purchases T.V., Refrigerator, Washing Machine, Computer etc. for his business. In buying these items he uses larger part of his capital. These items are significant items; thus should be recorded in books of accounts in detail. At the same time to maintain day to day office work he purchases pen, pencil, match box, scented stick, etc. For this he will use very small amount of his capital. But to maintain the details of every pen, pencil, match box or other small items is not considered of much significance. These items are insignificant items and hence they should be recorded separately. Thus, the items that are significantly important in recording the details are termed as material facts or significant items. The items that are of less significance are immaterial facts or insignificant items. Thus according to this convention important and significant items should be recorded in their respective heads and all immaterial or insignificant transactions should be clubbed under a different accounting head. Significance It helps in minimising errors in calculation. It helps in making financial statements more meaningful. It saves time and resources.

CONSERVATISM (PRUDENCE) CONCEPT This principle states that the accountant should be conservative in his approach whiles determining income for the business. The concept therefore forbids accountant to anticipate revenue but entreats them to make provision for all possible losses, expenses and liabilities whether the amount involved is certain or not. The accountant should therefore overstate expenses and understate revenue. It is based on the policy of playingsafe in regard to showing profit. The main objective of this convention isto show minimum profit. Profit should not be
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overstated. If profit showsmore than actual, it may lead to distribution of dividend out of capital. Thisis not a fair policy and it will lead to the reduction in the capital of theenterprise.Thus, this convention clearly states that profit should not be recorded until it is realised. But if the business anticipates any loss in the near future, provision should be made in the books of accounts for the same. Application: valuing closing stock at cost or market price whichever is lower, creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill, patent, etc. The convention of conservatism is a very useful tool in situation of uncertainty and doubts. Significance/Importance 1. It helps in ascertaining actual profit. 2. It is useful in the situation of uncertainties and doubts. 3. It makes it possible for the provision of all possible losses in the preparation of financial statements e.g. provision for bad debts. 4. It prevent the eroding of the proprietors capital since large profit that may include unrealized profits may tempt large drawings. 5. Tax avoidance: The concept understates profit hence smaller tax obligation. Disadvantages 1. It introduces subjectivity into accounting records 2. It introduces inconsistency because in one year inventory will be valued at cost and net releasable value in another year depending on which one result in lower profit. 3. It clashes with the principles of cost disclosure and matching. ACCRUAL OR MATCHING CONCEPT This concept states that for the purpose of calculating net profit for a period, expenses incurred in that period are compared with revenue earned for the same period. Costs and benefits to the business are matched within the appropriate accounting period to ascertain profit or loss for the period. This concept gives room for prepayments and Owings. MONEY MEASUREMENT CONCEPT Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc. REALIZATION CONCEPT With this convention, accounts recognize transactions (and any profits arising from them) at the point of sale or transfer of legal ownership rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognize that sale when the transaction is legal at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later if the customer has been granted some credit terms.

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GOING CONCERN CONCEPT Accountants assume, unless there is evidence to the contrary, that a company is not going broke. Thus it is assumed that the business will continue to operate in the foreseeable future. Assets must be considered to be used rather than for sale. This has important implications for the valuation of assets and liabilities.

Instances where going assumptions should not be made a. Where proportions of the will certainly have to be closed down because of lack of cash b. Where it is certain that the business is going to be closed down in the near future Advantages of the going concern concept a. The problem of determining market values of various assets at the time of each reporting is avoided. b. Cost as a basis of valuation mitigates the scope of subjectivity in the valuation. c. In the absence of the concept the distinction between current and non-current assets and liabilities will be useless since both classes will be written off in first year and therefore all current.

CONVENTION OF FULL DISCLOSURE Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an equitable treatment of users. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should fully disclose all relevant information. Application: The business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc. The shareholder would like to know profitability of the firm while the creditor would like to know the solvency of the business. In the same way, other parties would be interested in the financial information according to their requirements. This is possible if financial statement discloses all relevant information in full, fair and adequate manner. Importance/ significance 1. This can also help in the comparison of financial statements of different years of the same business unit. 2. This convention is of great help to investor and shareholder for making investment decisions. 3. The convention of full disclosure presents reliable information.

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STABLE MONEY VALUE This concept states that as account are kept in a terms of money, it must be assumed that the value of money is constant. The variation of money due to inflation and deflation are taken as insignificant and can influence the information presented. DUAL ASPECT CONCEPT This states that all transactions must have two aspects: one debit and one credit. PROVISIONS Provision is an amount written off or retained by way of providing for depreciation, renewals or diminution in value of asset: or retained by way of preventing for any known liability of which the amount cannot be determined by substantial accuracy or an amount set aside to meet a future contingent liability . Usually the exact amount involved in such future liability is not known and either the event will actually occur or not is also uncertain E.g. Provision for bad debit, provision for discounts, provision for depreciation etc. Prevision is charge against profit. They are therefore deducted from the gross profit before arriving at the net profit. RESERVES They are allocations of fund usually to build up the financial strength of the company by retaining function instead to distributing it as dividends. The purpose of creating reserves primary is to meet certain and unknown liability which may arise in the futures. DIFFERENCES BETWEEN RESERVES AND PROVISIONS RERSERVES PROVISIONS A. They are appropriation of profit or deducted A. They are dirge against profit or deducted from net profit after tax. from the gross profit before arriving at the net profit B. They are part of undistributed profit and B. They are diminution of proprietorship in the therefore part of proprietorship. form of asset depreciation C. The outcome for which reserves are created C. They are created for contingencies, which are most often known with certainty. are not often known with accuracy D. They are set aside for prudent measures. D. They are set-aside for a specific purpose. DIVISION OF RESERVES 1. Capital Reserves 2. Revenue Reserves Capital Reserves:- It is a reserve, which is not available for transfer to the profit and loss appropriation account for cash dividend purposes. E.g. a. Capital Redemption fund. b. Profit On Redemption Of Dividends c. Surplus On Revaluation of Asset. d. Premiums on Shares and Debentures etc. Revenue Reserve:- There are reserves, which are available for cash dividend purpose. This reserve may before some particular purpose such as foreign exchange reserve or it could be for a general purpose. Revenue reserve with this is therefore dividend into (1) General Reserve and (2) Specific reserve.
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General Revenue: - This revenue may be created for unspecified contingent liability that is likely to arise in the future. It can also be created with the purpose of consolidating the financial position of the business. E.g. Capital surplus account. Specific Reserve:- It is a revenue reserve created for a specific purpose PROVISIONS AND LIABILITIES The difference between provision and liability hinges around what is meant by substantial accuracy. Electricity owed at the end of the financial year would normally be known with precision. This would obviously be a liability.

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Glossary of financial accounting terms Account payable: An amount due for payment to a supplier of goods or services, also described as a trade creditor. Account receivable: An amount due from a customer, also described as a trade debtor. Accountancy firm: A business partnership (or possibly a limited company) in which the partners are qualified accountants. The firm undertakes work for clients in respect of audit, accounts preparation, tax and similar activities. Accountancy profession: The collective body of persons qualified in accounting, and working in accounting-related areas. Usually they are members of a professional body, membership of which is attained by passing examinations. Accounting: The process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information. Accounting equation: The relationship between assets, liabilities and ownership interest. Accounting period: Time period for which financial statements are prepared (e.g. month, quarter, year). Accounting policies: Accounting methods which have been judged by business enterprises to be most appropriate to their circumstances and adopted by them for the purpose of preparing their financial statements. Accounting standards: Definitive statements of best practice issued by a body having suitable authority. Accruals basis: The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate (see also matching). Accumulated depreciation: Total depreciation of a non-current (fixed) asset, deducted from original cost to give net book value. Acid test: The ratio of liquid assets to current liabilities. Acquiree: Company that becomes controlled by another. Acquirer: Company that obtains control of another. Acquisition: An acquisition takes place where one company the acquirer acquires control of another the acquiree usually through purchase of shares. Acquisition method: Production of consolidated financial statements for an acquisition. Administrative expenses: Costs of managing and running a business. Agency: A relationship between a principal and an agent. In the case of a limited liability company, the shareholder is the principal and the director is the agent.
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Agency theory: A theoretical model, developed by academics, to explain how the relationship between a principal and an agent may have economic consequences. Allocate: To assign a whole item of cost, or of revenue, to a simple cost centre, account or time period. Amortisation: Process similar to depreciation, usually applied to intangible fixed assets. Annual report: A document produced each year by limited liability companies containing the accounting information required by law. Larger companies also provide information and pictures of the activities of the company. Articles of association: Document setting out the relative rights of shareholders in a limited liability company. Articulation: The term 'articulation' is used to refer to the impact of transactions on the balance sheet and profit and loss account through application of the accounting equation. Assets: Rights or other access to future economic benefits controlled by an entity as a result of past transactions or events. Associated company: One company exercises significant influence over another, falling short of complete control. Audit: An audit is the independent examination of, and expression of opinion on, financial statements of an entity. Audit manager An employee of an accountancy firm, usually holding an accountancy qualification, given a significant level of responsibility in carrying out an audit assignment and responsible to the partner in charge of the audit. Bad debt: It is known that a credit customer (debtor) is unable to pay the amount due. Balance sheet: A statement of the financial position of an entity showing assets, liabilities and ownership interest. Bank facility: An arrangement with a bank to borrow money as required up to an agreed limit. Broker (stock broker): Member of a stock exchange who arranges purchase and sale of shares and may also provide an information service giving buy/sell/hold recommendations. Brokers report: Bulletin written by a stock broking firm for circulation to its clients, providing analysis and guidance on companies as potential investments. Business combination: A transaction in which one company acquires control of another. Business cycle: Period (usually 12 months) during which the peaks and troughs of activity of a business form a pattern which is repeated on a regular basis. Business entity: A business which exists independently of its owners. Called up (share capital): The Company has called upon the shareholders who first bought the shares, to make their payment in full.
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Capital: An amount of finance provided to enable a business to acquire assets and sustain its operations. Capital expenditure: Spending on non-current (fixed) assets of a business. Capitalization issue: Issue of shares to existing shareholders in proportion to shares already held. Raises no new finance but changes the mix of share capital and reserves. Cash: Cash on hand (such as money held in a cash box or a safe) and deposits in a bank that may be withdrawn on demand. Cash equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash flow projections: Statements of cash expected to flow into the business and cash expected to flow out over a particular period. Cash flow statement: Provides information about changes in financial position. Chairman: The person who chairs the meetings of the board of directors of a company (preferably not the chief executive). Charge: In relation to interest or taxes, describes the reduction in ownership interest reported in the income statement (profit and loss account) due to the cost of interest and tax payable. Chief executive: The director in charge of the day-to-day running of a company. Close season: Period during which those who are 'insiders' to a listed company should not buy or sell shares. Commercial paper: A method of borrowing money from commercial institutions such as banks. Comparability: Qualitative characteristic expected in financial statements, comparable within company and between companies. Completeness: Qualitative characteristic expected in financial statements. Conceptual framework: A statement of principles providing generally accepted guidance for the development of new reporting practices and for challenging and evaluating the existing practices. Conservatism: Sometimes used with a stronger meaning of understating assets and overstating liabilities. Consistency: The measurement and display of similar transactions and other events is carried out in a consistent way throughout an entity within each accounting period and from one period to the next, and also in a consistent way by different entities. Consolidated financial statements: Present financial information about the group as a single reporting entity.
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Consolidation: Consolidation is a process that aggregates the total assets, liabilities and results of the parent and its subsidiaries (the group) in the consolidated financial statements. Contingent liabilities: Obligations that are not recognised in the balance sheet because they depend upon some future event happening. Control: The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Convertible loan: Loan finance for a business that is later converted into share capital. Corporate governance: The system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. Corporate recovery: department Part of an accountancy firm which specialises in assisting companies to recover from financial problems. Corporate social responsibility: Companies integrate social and environmental concerns in their business operations and in their interactions with stakeholders. Corporation tax: Tax payable by companies, based on the taxable profits of the period. Cost of goods sold: Materials, labour and other costs directly related to the goods or services provided. Credit (bookkeeping system): Entries in the credit column of a ledger account represent increases in liabilities, increases in ownership interest, revenue, or decreases in assets. Credit (terms of business): The supplier agrees to allow the customer to make payment some time after the delivery of the goods or services. Typical trade credit periods range from 30 to 60 days but each agreement is different. Credit note: A document sent to a customer of a business cancelling the customer's debt to the business, usually because the customer has returned defective goods or has received inadequate service. Credit purchase: A business entity takes delivery of goods or services and is allowed to make payment at a later date. Credit sale: A business entity sells goods or services and allows the customer to make payment at a later date. Creditor: A person or organisation to whom money is owed by the entity. Critical event: The point in the business cycle at which revenue may be recognised. Current asset: An asset that is expected to be converted into cash within the trading cycle. Current liability: A liability which satisfies any of the following criteria: (a) it is expected to be settled in the entity's normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is due to be settled within 12 months after the balance sheet date.

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Current value: A method of valuing assets and liabilities which takes account of changing prices, as an alternative to historical cost. Customers' collection period: Average number of days credit taken by customers. Cut-off procedures: Procedures applied to the accounting records at the end of an accounting period to ensure that all transactions for the period are recorded and any transactions not relevant to the period are excluded. Debenture: A written acknowledgement of a debt a name used for loan financing taken up by a company. Debtor: A person or organisation that owes money to the entity. Deep discount bond: A loan issued at a relatively low price compared to its nominal value. Default: Failure to meet obligations as they fall due for payment. Deferredasset: An asset whose benefit is delayed beyond the period expected for a current asset, but which does not meet the definition of a fixed asset. Deferred income: Revenue, such as a government grant, is received in advance of performing the related activity. The deferred income is held in the balance sheet as a type of liability until performance is achieved and is then released to the income statement. Deferred taxation: The obligation to pay tax is deferred (postponed) under tax law beyond the normal date of payment. Depreciable amount: Cost of a non-current (fixed) asset minus residual value. Depreciation: The systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is cost less residual value. Derecognition: The act of removing an item from the financial statements because the item no longer satisfies the conditions for recognition. Difference on consolidation: Difference between fair value of the payment for a subsidiary and the fair value of net assets acquired, more commonly called goodwill.

Director: Person(s) appointed by shareholders of a limited liability company to manage the affairs of the company. Disclosure: An item which is reported in the notes to the accounts is said to be disclosed but not recognised. Discount received: A supplier of goods or services allows a business to deduct an amount called a discount, for prompt payment of an invoiced amount. The discount is often expressed a percentage of the invoiced amount. Dividend: Amount paid to a shareholder, usually in the form of cash, as a reward for investment in the company. The amount of dividend paid is proportionate to the number of shares held.
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Dividend cover: Earnings per share divided by dividend per share. Dividend yield: Dividend per share divided by current market price. Doubtful debts: Amounts due from credit customers where there is concern that the customer may be unable to pay. Drawings: Cash taken for personal use, in sole trader or partnership business treated as a reduction of ownership interest. Earnings for ordinary shareholders: Profit after deducting interest charges and taxation and after deducting preference dividends (but before deducting extraordinary items). Earnings per share: calculated as earnings for ordinary shareholders divided by the number of shares which have been issued by the company. Effective interest rate: The rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. Efficient markets hypothesis: Share prices in a stock market react immediately to the announcement of new information. Enterprise: a business activity or a commercial project. Entity: Something that exists independently, such as a business which exists independently of the owner. Entry price: The value of entering into acquisition of an asset or liability, usually replacement cost. Equities analyst: A person who investigates and writes reports on ordinary share investments in companies (usually for the benefit of investors in shares). Equity A description applied to the ordinary share capital of an entity. Equity portfolio: A collection of equity shares. Equity shares: Shares in a company which participate in sharing dividends and in sharing any surplus on winding up, after all liabilities have been met. Eurobond market: A market in which bonds are issued in the capital market of one country to a non-resident borrower from another country. Exit value: A method of valuing assets and liabilities based on selling prices, as an alternative to historical cost. Expense: An expense is caused by a transaction or event arising during the ordinary activities of the business which causes a decrease in the ownership interest. External reporting: Reporting financial information to those users with a valid claim to receive it, but who are not allowed access to the day-to-day records of the business. External users (of financial statements): Users of financial statements who have a valid interest but are not permitted access to the day-to-day records of the company.
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Fair value: The amount at which an asset or liability could be exchanged in an arm's-length transaction between a willing buyer and a willing seller. Faithful presentation: Qualitative characteristic, information represents what it purports to represent. Financial accounting: A term usually applied to external reporting by a business where that reporting is presented in financial terms. Financial adaptability: The ability of the company to respond to unexpected needs or opportunities. Financial gearing: Ratio of loan finance to equity capital and reserves. Financial information: Information which may be reported in money terms. Financial Reporting Standard: Title of an accounting standard issued by the UK Accounting Standards Board as a definitive statement of best practice (issued from 1990 onwards predecessor documents are Statements of Standard Accounting Practice, many of which remain valid). Financial risk: Exists where a company has loan finance, especially long-term loan finance where the company cannot relinquish its commitment. The risk relates to being unable to meet payments of interest or repayment of capital as they fall due. Financial statements: Documents presenting accounting information which is expected to have a useful purpose. Financial viability: The ability to survive on an ongoing basis. Financing activities: Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Fixed asset: An asset that is held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes on a continuing basis in the reporting entity's activities. Fixed assets usage: Revenue divided by net book value of fixed assets. Fixed capital: Finance provided to support the acquisition of fixed assets. Fixed cost: One which is not affected by changes in the level of output over a defined period of time. Floating charge :Security taken by lender which floats over all the assets and crystallises over particular assets if the security is required. Forecast: Estimate of future performance and position based on stated assumptions and usually including a quantified amount.

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Format: A list of items which may appear in a financial statement, setting out the order in which they are to appear. Forward exchange contract: An agreement to buy foreign currency at a fixed future date and at an agreed price. Fully paid: Shares on which the amount of share capital has been paid in full to the company. Fund manager: A person who manages a collection (portfolio) of investments, usually for an insurance company, a pension fund business or a professional fund management business which invests money on behalf of clients. Gearing (financial): The ratio of debt capital to ownership claim. General purpose financial statements: Documents containing accounting information which would be expected to be of interest to a wide range of user groups. For a limited liability company there would be: a balance sheet, a profit and loss account, a statement of recognised gains and losses and a cash flow statement. Going concern basis: The assumption that the business will continue operating into the foreseeable future. Goodwill: Goodwill on acquisition is the difference between the fair value of the amount paid for an investment in a subsidiary and the fair value of the net assets acquired. Gross margin: Sales minus cost of sales before deducting administration and selling expenses (another name for gross profit). Usually applied when discussing a particular line of activity. Gross marginratio: Gross profit as a percentage of sales. Gross profit: Sales minus cost of sales before deducting administration and selling expenses (see also gross margin). Group: Economic entity formed by parent and one or more subsidiaries. Highlights statement: A page at the start of the annual report setting out key measures of performance during the reporting period. Historical cost: Method of valuing assets and liabilities based on their original cost without adjustment for changing prices. IAS: International Accounting Standard. IASB: International Accounting Standards Board, an independent body that sets accounting standards accepted as a basis for accounting in many countries, including all Member States of the European Union. IASB system: The accounting standards and guidance issued by the IASB. IFRS: International Financial Reporting Standard, issued by the IASB. Impairment: A reduction in the carrying value of an asset, beyond the expected depreciation, which must be reflected by reducing the amount recorded in the balance sheet.
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Impairment review Testing assets for evidence of any impairment. Impairment test: Test that the business can expect to recover the carrying value of the intangible asset, through either using it or selling. Improvement: A change in, or addition to, a non-current (fixed) asset that extends its useful life or increases the expected future benefit. Contrast with repair which restores the existing useful life or existing expected future benefit. Income statement: Financial statement presenting revenues, expenses, and profit. Also called profit and loss account. Incorporation: The date on which a company comes into existence. Indirect method (of operating cash flow): Calculates operating cash flow by adjusting operating profit for non-cash items and for changes in working capital. Insider information: Information gained by someone inside, or close to, a listed company which could confer a financial advantage if used to buy or sell shares. It is illegal for a person who is in possession of inside information to buy or sell shares on the basis of that information. institutional investor: An organisation whose business includes regular investment in shares of companies, examples being an insurance company, a pension fund, a charity, an investment trust, a unit trust, a merchant bank. Intangible: Without shape or form, cannot be touched. Interest (on loans): The percentage return on capital required by the lender (usually expressed as a percentage per annum). Interim reports: Financial statements issued in the period between annual reports, usually halfyearly or quarterly. Internal reporting: Reporting financial information to those users inside a business, at various levels of management, at a level of detail appropriate to the recipient. Inventory: Stocks of goods held for manufacture or for resale. Investing activities: The acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investors: Persons or organisations which have provided money to a business in exchange for a share of ownership. Joint and several liabilities (in a partnership): The partnership liabilities are shared jointly but each person is responsible for the whole of the partnership. Key performance indicators: Quantified measures of factors that help to measure the performance of the business effectively. Leasing: Acquiring the use of an asset through a rental agreement.
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Legal form: Representing a transaction to reflect its legal status, this might not be the same as its economic form. Leverage: Alternative term for gearing. Liabilities: Obligations of an entity to transfer economic benefits as a result of past transactions or events. Limited liability: A phrase used to indicate that those having liability in respect of some amount due may be able to invoke some agreed limit on that liability. Limited Liability Company: Company where the liability of the owners is limited to the amount of capital they have agreed to contribute. Liquidity: The extent to which a business has access to cash or items which can readily be exchanged for cash. Listed company: A company whose shares are listed by the Stock Exchange as being available for buying and selling under the rules and safeguards of the Exchange. Listing requirements: Rules imposed by the Stock Exchange on companies whose shares are listed for buying and selling. Listing Rules: Issued by the UK Listing Authority of the Financial Services Authority to regulate companies listed on the UK Stock Exchange. Includes rules on accounting information in annual reports. Loan covenants: Agreement made by the company with a lender of long-term finance, protecting the loan by imposing conditions on the company, usually to restrict further borrowing. Loan notes: A method of borrowing from commercial institutions such as banks. Loan stock: Loan finance traded on a stock exchange. long-term finance, long-term liabilities: Money lent to a business for a fixed period, giving that business a commitment to pay interest for the period specified and to repay the loan at the end of the period Also called non-current liabilities information in the financial statements should show the commercial substance of the situation. Management: Collective term for those persons responsible for the day-to-day running of a business. Management accounting: Reporting accounting information within a business, for management use only. Market value (of a share): The price for which a share could be transferred between a willing buyer and a willing seller. Marking to market: Valuing a marketable asset at its current market price. Matching: Expenses are matched against revenues in the period they are incurred (see also accruals basis).
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Materiality: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Maturity: The date on which a liability is due for repayment. Maturity profile of debt: The timing of loan repayments by a company in the future. Memorandum (for a company): Document setting out main objects of the company and its powers to act. Merger: Two organisations agree to work together in a situation where neither can be regarded as having acquired the other. Minority interest: The ownership interest in a company held by persons other than the parent company and its subsidiary undertakings. (Also called a non-controlling interest). Net assets: Assets minus liabilities (equals ownership interest). Net book value: Cost of non-current (fixed) asset minus accumulated depreciation. Net profit: Sales minus cost of sales minus all administrative and selling costs. Net realizablevalue: The proceeds of selling an item, less the costs of selling. Neutral: Qualitative characteristic of freedom from bias. Nominal value (of a share): The amount stated on the face of a share certificate as the named value of the share when issued. Non-current assets: Any asset that does not meet the definition of a current asset. Also described as fixed assets. Non-current liabilities: Any liability that does not meet the definition of a current liability. Also described as long-term liabilities. Notes to the accounts: Information in financial statements that gives more detail about items in the financial statements. Off-balance-sheet finance: An arrangement to keep matching assets and liabilities away from the entity's balance sheet. Offer for sale: A company makes a general offer of its shares to the public. Operating activities: The principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Operating and financial review: Section of the annual report of many companies which explains the main features of the financial statements. Operating gearing: The ratio of fixed operating costs to variable operating costs. Operating margin: Operating profit as a percentage of sales.
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Operating risk: Exists where there are factors, such as a high level of fixed operating costs, which would cause profits to fluctuate through changes in operating conditions. Ordinary shares: Shares in a company which entitle the holder to a share of the dividend declared and a share in net assets on closing down the business. Ownership interest: The residual amount found by deducting all of the entity's liabilities from all of the entity's assets. Parent company: Company which controls one or more subsidiaries in a group. Partnership: Two or more persons in business together with the aim of making a profit. Partnership deed: A document setting out the agreement of the partners on how the partnership is to be conducted (including the arrangements for sharing profits and losses). Partnership law: Legislation which governs the conduct of a partnership and which should be used where no partnership deed has been written. Portfolio (of investment): A collection of investments. Portfolio of shares: A collection of shares held by an investor. Preference shares: Shares in a company which give the holder a preference (although not an automatic right) to receive a dividend before any ordinary share dividend is declared. Preliminary announcement: The first announcement by a listed company of its profit for the most recent accounting period which precedes the publication of the full annual report. The announcement is made to the entire stock market so that all investors receive information at the same time. Premium: An amount paid in addition, or extra. Prepayment: An amount paid for in advance for as a benefit to the business, such as insurance premiums or rent in advance. Initially recognised as an asset, and then transferred to expense in the period when the benefit is enjoyed. Priceearnings ratio: Market price of a share divided by earnings per share. Price-sensitive information: Information which, if known to the market, would affect the price of a share. Primary financial statements: The balance sheet, profit and loss account, statement of total recognised gains and losses and cash flow statement. Principal (sum): The agreed amount of a loan, on which interest will be charged during the period of the loan. Private limited company (Ltd): A company which has limited liability but is not permitted to offer its shares to the public.
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Production overhead costs: Costs of production that are spread across all output, rather than being identified with specific goods or services. Profit: Calculated as revenue minus expenses. Profit and loss account: Financial statement presenting revenues, expenses, and profit. Also called income statement. Prospective investor: An investor who is considering whether to invest in a company. Prospectus: Financial statements and supporting detailed descriptions published when a company is offering shares for sale to the public. Provision: A liability of uncertain timing or amount. Provision for doubtful debts: An estimate of the risk of not collecting full payment from credit customers, reported as a deduction from trade receivables (debtors) in the balance sheet. Prudence: A degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that gains and assets are not overstated and losses and liabilities are not understated. Public limited company (plc): A company which has limited liability and offers its shares to the public. Purchase method: Method of producing consolidated financial statements Purchases: Total of goods and services bought in a period meant for resale. Qualified audit opinion: An audit opinion to the effect that: the accounts do not show a true and fair view; or the accounts show a true and fair view except for particular matters. Quality of earnings: Opinion of investors on reliability of earnings (profit) as a basis for their forecasts. Realised profit, realization: A profit arising from revenue which has been earned by the entity and for which there is a reasonable prospect of cash being collected in the near future. Recognised: An item is recognised when it is included by means of words and amount within the main financial statements of an entity. Registrar of Companies An official authorised by the government to maintain a record of all annual reports and other documents issued by a company. Relevance: Qualitative characteristic of influencing the economic decisions of users. Reliability: Qualitative characteristic of being free from material error and bias, representing faithfully. Replacement cost: A measure of current value which estimates the cost of replacing an asset or liability at the date of the balance sheet, justified by reference to the value of the business.

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Reserves The claim which owners have on the assets of a company because the company has created new wealth for them over the period since it began. Residual value: The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Retained earnings: Accumulated past profits, not distributed in dividends, available to finance investment in assets. Retained profit: Profit of the period remaining after dividend has been deducted. Return: The yield or reward from an investment. Return on capital employed: Operating profit before deducting interest and taxation, divided by share capital plus reserves plus long-term loans. Return on total assets: Operating profit before deducting interest and taxation, divided by total assets. Return on shareholders' equity: Profit for shareholders divided by share capital plus reserves. Return (in relation to investment): The reward earned for investing money in a business. Return may appear in the form of regular cash payments (dividends) to the investor, or in a growth in the value of the amount invested. Revaluation reserve: The claim which owners have on the assets of the business because the balance sheet records a market value for an asset that is greater than its historical cost. Revenue: Created by a transaction or event arising during the ordinary activities of the business which causes an increase in the ownership interest. Rights issue: A company gives its existing shareholders the right to buy more shares in proportion to those already held. Risk (in relation to investment): Factors that may cause the profit or cash flows of the business to fluctuate. Sales invoice: Document sent to customers recording a sale on credit and requesting payment. Secured loan: Loan where the lender has taken a special claim on particular assets or revenues of the company. Segmental reporting: Reporting revenue, profit, cash flow assets, liabilities for each geographical and business segment within a business, identifying segments by the way the organisation is managed. Share capital: Name given to the total amount of cash which the shareholders have contributed to the company. Share certificate: A document providing evidence of share ownership. Share premium: The claim which owners have on the assets of a company because shares have been purchased from the company at a price greater than the nominal value.
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Shareholders: Owners of a limited liability company. Shareholders' funds: Name given to total of share capital and reserves in a company balance sheet. Shares: The amount of share capital held by any shareholder is measured in terms of a number of shares in the total capital of the company. Short-term finance: Money lent to a business for a short period of time, usually repayable on demand and also repayable at the choice of the business if surplus to requirements. Sole trader: An individual owning and operating a business alone. Specific purpose financial statements: Documents containing accounting information which is prepared for a particular purpose and is not normally available to a wider audience. Stakeholders: A general term devised to indicate all those who might have a legitimate interest in receiving financial information about a business because they have a 'stake' in it. Statement of changes in equity: A financial statement reporting all items causing changes to the ownership interest during the financial period, under the IASB system. Statement of principles: A document issued by the Accounting Standards Board in the United Kingdom setting out key principles to be applied in the process of setting accounting standards. Statement of recognised income and expense: A financial statement reporting realised and unrealised income and expense as part of a statement of changes in equity under the IASB system. Statement of total recognised gains and losses: A financial statement reporting changes in equity under the UK ASB system.

Stepped bond: Loan finance that starts with a relatively low rate of interest which then increases in steps. Stewardship: Taking care of resources owned by another person and using those resources to the benefit of that person. Stock: A word with two different meanings. It may be used to describe an inventory of goods held for resale or for use in business. It may also be used to describe shares in the ownership of a company. The meaning will usually be obvious from the way in which the word is used. Stock exchange (Also called stock market.): An organisation which has the authority to set rules for persons buying and selling shares. The term 'stock' is used loosely with a meaning similar to that of 'shares'. Stock holding period: Average number of days for which inventory (stock) is held before use or sale. Subsidiary company: Company in a group which is controlled by another (the parent company).
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Substance (economic): Information in the financial statements should show the economic or commercial substance of the situation. Subtotal: Totals of similar items grouped together within a financial statement. Suppliers' payment period: Average number of days credit taken from suppliers. Tangible fixed assets: A fixed asset (also called a non-current asset) which has a physical existence. Trade creditors Persons who supply goods or services to a business in the normal course of trade and allow a period of credit before payment must be made. Trade debtors: Persons who buy goods or services from a business in the normal course of trade and are allowed a period of credit before payment is due. Trade payables: Amounts due to suppliers (trade creditors), also called accounts payable. Trade receivables: Amounts due from customers (trade debtors), also called accounts receivable. Turnover: The sales of a business or other form of revenue from operations of the business. Understandability: Qualitative characteristic of financial statements, understandable by users. Unlisted (company): Limited liability company whose shares are not listed on any stock exchange. Unrealised: Gains and losses representing changes in values of assets and liabilities that are not realised through sale or use. Unsecured creditors: Those who have no claim against particular assets when a company is wound up, but must take their turn for any share of what remains. Unsecured loan: Loan in respect of which the lender has taken no special claim against any assets. Variance: The difference between a planned, budgeted or standard cost and the actual cost incurred. An adverse variance arises when the actual cost is greater than the standard cost. A favourable variance arises when the actual cost is less than the standard cost.

Working capital: Finance provided to support the short-term assets of the business (stocks and debtors) to the extent that these are not financed by short-term creditors. It is calculated as current assets minus current liabilities. Working capital cycle: Total of stock holding period plus customers collection period minus suppliers payment period. Work-in-progress: Cost of partly completed goods or services, intended for completion and recorded as an asset.
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TRY QUESTIONS 1. Indicate which accounting concepts involved in the following statements. a. b. c. d. e. A depreciation method currently being used should not be changed annually. A business continues in existence for the foreseeable future. Similar items should be treated in similar way Revenues and profit should not be anticipated unless they can be obtained with certainty. Related revenues and expenses must be match with each other.

2. State four reasons why departmental account is prepared by firms 3. In the preparation of departmental accounts, common expenses are apportioned among various departments. List the generally acceptable basis for apportioning the following common expenses. (i) Discount received (ii) Discount allowed (iii) Lighting and heating (iv) Insurance on building (v) Depreciation of office machine (vi) Rent and rates (vii) Advertising 4. Explain the accounting treatment of the following inter department transfers. (i) Transfer of goods (ii) Transfer of general expenses 5. Outline the main differences between a receipt and payment account and income expenditure account. 6. Explain the following which are used in connection with a non-profit making organization. (i) Honorarium (ii) Donation (iii) Subscription (iv) Accumulated fund 7. What is manufacturing account? 8. What advantages can a firm derive from the preparation of manufacturing account? 9. Explain the following in relation to manufacturing organization and give appropriate examples in each (i) Prime Cost |(ii) Factory overheads (iii) Direct material cost (iv) Indirect labour cost (v)Direct expenses. 10. Explain the following accounting errors (a) Commission (b) Principle (c) Compensation

11. Explain three accounting errors that will course the disagreement of the trial balance 12. Mention and explain five (5) users of accounting information and their information needs 13. Mention five reasons why a partnership business may be dissolved 14. Mention five (5) uses of the general journal 15. Mention and explain the divisions of the ledger 16. Explain the uses of the following (iv) Purchases journal (i). Cash book (ii). Personal account (iii) private ledger

(v) impersonal accounts

(vi) trial balance

17. Differentiate between a private and a public company 18. Mention five provisions of the partnership act in the absence of a deed 19. Give five (5) differences between bank loan and bank overdraft 20. Differentiate between profitability and liquidity ratios

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