Principles of Accounting II

Transcription

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2 2 Contents COURSE MAUAL Principles of Accounting II AC102 Modibbo Adama University of Technology Open and Distance Learning Course Development Series

3 2016 Academic Collective. All rights reserved. o part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner Academic Collective. Institution: mail@cdl.mautech.edu.ng Website:

4 4 Contents Course Development Team Credits All illustrations (photos and charts) used are sourced from except otherwise indicated. Credits / source are properly placed by the image.

5 Principles of Accounting II Contents Course Development Team 4 Credits 4 List of Figures... 1 About this Course Manual 2 How this Course Manual is structured... 2 Course overview 5 Welcome to Principles of Accounting I AC Principles of Accounting I AC102 is this course for you?... 5 Course outcomes... 6 Study Skills... 6 Timeframe... 6 eed help?... 6 Academic Support... 7 Assessments... 7 Study Session 1 8 Preparation of Final Accounting... 8 Introduction Completing the Accounting Cycle Preparing Financial Statements From The Worksheet Preparation of Final Accounting Session Review Assessment Resources Study Session 2 24 Uses of Account Introduction Characteristics of Accounting Information Objectives of Financial Reporting Users of Financial Statements Classification of the Profit and Loss Account Items and Assets and Liabilities... 29

6 ii Contents Session Review Assessment Resources Study Session 3 34 Accounts of on-profit Organization Introduction Defining on-profit Organisations Receipts and Payments Account Income and Expenditure Account Balance Sheet of on-trading Concern Session Review Assessment Resources Study Session 4 50 Asset Valuation and Business Income Introduction What is Asset Valuation? Business Income Session Review Assessment Resources Study Session 5 55 Accounting Errors and Correction Introduction What is Accounting Errors? Forms of Accounting Errors Session Review Assessment Resources Study Session 6 62 Manufacturing Account Introduction Component Of The Cost Of Production Market Value of Goods Manufactured Session Review Assessment Resources Study Session 7 71 Consignment Account Introduction Account Of Sales Valuation Of Unsold Stock In Consignee s Hands... 73

7 Session Review Assessment Resources Study Session 8 82 Joint Venture Account Introduction Method Of Accounting For Joint Venture Transactions Session Review Assessment Resources Study Session 9 91 Bill of Exchange Introduction What is a Bill of Exchange? Uses/Advantages Of Bill Of Exchange Session Review Assessment Resources Study Session Departmental Account Introduction Explaining Departmental Account Inter-Departmental Transfers Session Review Assessment Resources Feedback to SAQ Items 108 Glossary of Terms 119 References 121

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9 AC102 Principles of Accounting II List of Figures igure 1.1 Adjustments in the Worksheet 11 igure 3.1 Format of Income and Expenditure 39 1

10 About this Course Manual About this Course Manual Principles of Accounting II AC102 is provided to you by MAUTECH-CDL, AS IS. Module is mixed, and some selected modules are attributed to Libby Rittenberg and Tim Tregarthen. It is localised and adapted to ODL format under the Academic Collective. How this Course Manual is structured Course overview The course overview gives you a general introduction to the course. Information contained in the course overview will help you determine: If the course is suitable for you. What you can expect from the course. How much time you will need to invest to complete the course. Where to get help. Course assessments. We strongly recommend that you read the overview carefully before starting your study. The course content The course is broken down into Study Sessions. Each Study Session comprises: An introduction to the Study Session content. Learning outcomes. Study Session preview. ew terminology. Structured content of the study session with a variety of focus articles, learning activities and learning devices. Study Session review. Self Assessments. Resources for further studying. Your comments 2

11 AC102 Principles of Accounting II After completing Principles of Accounting II we would appreciate it if you would take a few moments to give us your feedback on any aspect of this course. Your feedback might include comments on: Course content and structure. Course reading materials and resources. Course assessments. Course duration. Your constructive feedback will help us to improve and enhance this course. You can forward your comments to feedback.mautech@edutechportal.org 3

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13 AC102 Principles of Accounting II Course overview Welcome to Principles of Accounting II AC102 This is continuation of AC101. An understanding of accounting is necessary to examine the performance and financial health of business. For this reason, accounting is often referred to as the language of business. AC101 is an introduction to the basic concepts and standards underlying financial accounting systems. Several important concepts will be studied in detail. The course emphasizes the construction of the basic financial accounting statements - the income statement, balance sheet, and cash flow statement - as well as their interpretation. This course manual supplements and complements a blend of resources & platforms: AC102 Audiobook available via Audio Resources Library app on your official mobile device and accessible online at: AC102 Courseware available in your course pack as a disk, it is also downloadable from your course website: Schoolboard offers a multi-channel platform for you to discuss with content experts and other learners from across the nation and the globe at large. You may also use the platform to enrich your learning with engaging webinars, articulate presentations, smart puzzles, audiobooks, podcasts, interactive gloassaries, smart quizzes, case studies and discussions. Schoolboard comes with updates and is accessible on web and on app. It is also linkable from your course CD. Principles of Accounting II AC102 is this course for you? This course is for Accounting students who wants to pursue a carrier in Accounting. It discusses the basic principles and workings of Accounting.... AC102 is a 2 unit course. AC101 is a prerequisite/requirement to the course. 5

14 About this Course Manual Course outcomes Upon completion of Principles of Accounting II AC102, you will be able to: develop and understand the nature and purpose of financial statements in relationship to decision making. acquire the ability to use the fundamental accounting equation to analyze the effect of business transactions on an organization's accounting records and financial statements. attain the ability to use a basic accounting system to create (record, classify, and summarize) the data needed to solve a variety of business problems. develop the ability to use accounting concepts, principles, and frameworks to analyze and effectively communicate information to a variety of audiences. use accounting information to solve a variety of business problems. Study Skills Being a self-learner has become increasingly feasible due to Open and Distance Learning (ODL) Systems. Studying a course or obtaining a certificate for career advancement can occur from the comfort of your home, on your own time, and at your own pace. You can be a successful higher education student by self-learning, it isn't magic! But it does require desire, dedication and a lot of work. Active listening to your audiobook, desktop publishing on your laptops, reading comprehension in your course manual, notetaking in the white margins, stress management, time management, assessment taking, and memorization are study skills required for a self-learner. If you really want to learn how to become a successful student, then you should explore the links that follow: Timeframe This is a 15 week course. It requires a formal study time of 12 hours. We recommend you take an average of one to two hours for an extra personal study on each Study Session. You can also benefit from online discussions with your course tutor. eed help? You may contact via any of the following channels for information, learning 6

15 AC102 Principles of Accounting II resources and library services. CDL Student Support Desk Tel: (+234) For technical issues (computer problems, web access, and etcetera), please visit: or send mail to Academic Support A course facilitator is commissioned for this course. You have also been assigned an academic tutor to provide learning support. See contacts of your course facilitator and academic advisor at the course website: Assessments Generally, there are two types of assessment: formative assessment and summative assessment. With regards to your formative assessment, there are three basic forms of assessment in the course: in-text questions (SELF-CHECKs), self-assessment questions (SAQs), and tutor marked assessment (TMAs). This manual provides you with SELF-CHECKs and SAQs. Feedbacks to the SELF-CHECKs are placed immediately after the questions, while the feedbacks to SAQs are at the rear of manual. You will receive your TMAs as assignments at the MAUTECH schoolboard platform. Some of your TMAs will be graded and will constitute 30 percent of your course marks. Feedbacks to TMAs will be provided by your tutor in not more than 2 weeks after entries. Your summative assessment is your final examination. AC102 exam is in multiple choice / essay format; and it carries 70 percent of your total earning in the course. Schedule dates for submitting assignments and engaging in course activities is available on the course website. 7

16 Study Session 1 Preparation of Final Accounting Study Session 1 In this study session, we will be looking at the preparation of final account. We will begin by highlighting the completing the accounting cycle. In doing this, we will look at the work sheet. We will then proceed to discuss how to prepare the financial statements from the work sheet. We will also examine how to journalize entries in the work sheet. We will illustrate the Closing process. Lastly, we will examine how to prepare the final accounting. Learning Outcomes When you have studied this session, you should be able to: 1.1 describe the process of completing the accounting process 1.2 prepare financial statements from the worksheet 1.3 draw-out a final accounting Preparation of Final Accounting Preparing the Accounting Cycle The Work Sheet Preparing FInancial Statements from the Worksheet Journalizing Entries in the Worksheet The Closing Process Horizontal Format Preparation of Final Accounting Vertical Format Vartical Format for Balance Sheet This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. 8

17 AC102 Principles of Accounting II Terminologies We will be beginning this session by looking at how to complete the accounting cycle. To do this, we must follow some simple procedures. We will start by looking at the Work Sheet. For you to complete the accounting cycle, several processes come into play which begins from closing all journals and moving all closing balances to the general ledger and then to the worksheet, which would be discussed in details in the course of this session starting with its definition. The worksheet is a columnar sheet of paper or a computer spreadsheet on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements. Usually, they save these worksheets to document the end-ofperiod entries. A worksheet is only an accounting tool and not part of the formal accounting records. Therefore, worksheets may vary in format; some are prepared in pencil so that errors can be corrected easily. Other worksheets are prepared on personal computers with spreadsheet software. Accountants prepare worksheets each time financial statements are needed monthly, quarterly, or at the end of the accounting year. Accountants use these initial steps in preparing the worksheet. The following sections describe the detailed steps for completing the worksheet. 1. Enter the titles and balances of ledger accounts in the Trial Balance columns. 2. Enter adjustments in the Adjustments columns. 9

18 Study Session 1 Preparation of Final Accounting 3. Enter adjusted account balances in the Adjusted Trial Balance columns. 4. Extend adjusted balances of revenue and expense accounts from the Adjusted Trial Balance columns to the Income Statement columns. 5. Extend any balances in the Retained Earnings and Dividends accounts to the Statement of Retained Earnings columns. 6. Extend adjusted balances of asset, liability, and capital stock accounts from the Adjusted Trial Balance columns to the Balance Sheet columns. Question (Answer the following as True or False) The following are true concerning the steps in preparing a Worksheet except A. Enter the titles and balances of ledger accounts in the Trial Balance columns. B. Enter adjustments in the Adjustments columns. C. Enter adjusted account balances in the Adjusted Trial Balance columns. D. Extend adjusted balances of revenue and expense accounts from the Adjusted Trial Balance columns to the Income Statement columns. E. Extend the prior period balance to the current period If you chose option A as true, then you are correct as this is the first step in preparing a worksheet. If you chose option B as true, then you are correct as this is the second step in preparing a worksheet. If you chose option C as true, then you are correct as this is the third step in preparing a worksheet If you chose option D as true, then you are correct as this is the fourth step in preparing a worksheet If you chose option E as true, then you are wrong, as every other option except this is true, extending prior period balance to current period isn t a step in preparing the workbook. Balances before accountants prepare the income statement, statement of retained earnings, and balance sheet. You enter these adjustments in the Adjustments columns of the worksheet. Also, you cross-reference the debits and credits of the entries by placing a key number or letter to the left of the amounts. This key number facilitates the actual journalizing of the adjusting entries later because you do not have to rethink the adjustments to record them. 10

19 AC102 Principles of Accounting II Worksheet preparers often provide brief explanations at the bottom for the keyed entries. Although these explanations are optional, they provide valuable information for those who review the worksheet later. The adjustments are: When the worksheet is completed, all the necessary information to prepare the income statement, statement of retained earnings, and the balance sheet is readily available. ow, you need only recast the information into the appropriate financial statement format. The information you need to prepare the statement of retained earnings is taken from the Statement of Retained Earnings columns in the worksheet. Look at, Salisu Company's statement of retained earnings for the month ended 2010 December 31. To prepare this statement, use the beginning Retained Earnings account balance (Account o. 310), add the net income (or deduct the net loss), and then subtract the Dividends (Account o. 320). Carry the ending Retained 11

20 Study Session 1 Preparation of Final Accounting Earnings balance forward to the balance sheet. Remember that the statement of retained earnings helps to relate income statement information to balance sheet information. It does this by indicating how net income on the income statement relates to retained earnings on the balance sheet. Salisu inc Statement of Retained Earnings For the Month Ended December 31, 2010 Retained earnings, 2010 December 1 0 et income for the December 7,290 Total 7,290 Less: Dividends 3,000 Retained earnings, 2010 December 31 4,290 Salisu Inc Balance Sheet for the year ended December 31, 2010 Cash 8,250 Accounts receivable 6,200 Supplies on hand 900 Prepaid insurance 2,200 Prepaid rent 800 Interest receivable Trucks ,000 Less: Accumulated depredation ,250 Total assets Liabilities and Stockholders' Equity Liabilities: Accounts payable 58, Unearned service fees 3,000 Salaries payable 180 Total liabilities Stockholders' equity: Capital stock Retained earnings 3,910 50,000 4,290 Total stockholders' equity 54,290 Total liabilities and stockholders' equity 58,200 The information needed to prepare a balance sheet comes from the Balance Sheet columns of Salisu worksheet. As stated earlier, the correct amount for the ending retained earnings appears on the statement of retained earnings. 12

21 AC102 Principles of Accounting II After completing Salisu financial statements from the worksheet, you should enter the adjusting entries in the general journal and post them to the appropriate ledger accounts, except that the worksheet is now your source for making the entries. The preparation of a worksheet does not eliminate the need to prepare and post adjusting entries because the worksheet is only an informal accounting tool and is not part of the formal accounting records. The numerical notations in the Adjustments columns and the adjustments explanations at the bottom of the worksheet identify each adjusting entry. The Adjustments columns show each entry with its appropriate debit and credit. Salisu's adjusting entries as they would appear in the general journal after posting are: Salisu COMPAY General Journal Date Account Titles and Explanation Post. Debit Ref. Credit 2010 Adjusting Entries Dec. 31 Insurance Expense (-SE) Prepaid Insurance (-A) To record insurance expense for December Rent Expense (-SE) Prepaid Rent (-A) To record rent expense for December Supplies Expense (-SE) Supplies on Hand (-A) To record supplies used during December Depreciation Expense Trucks (-SE) Accumulated Depredation Trucks (-A) To record depreciation expense for December Unearned Service Fees (-L) Service Revenue (+SE) To transfer a portion of training fees from the liability account to the revenue account Interest Receivable (+A) Interest Revenue (+SE) To record one month's interest revenue Accounts Receivable (+A) Service Revenue (+SE) To record unbilled training services performed in December Salaries Expense (-SE) Salaries Payable (+L) To accrue one day's salaries that were earned by are unpaid Once the entries have been journalized, you learned that revenue, expense, and dividends accounts are nominal (temporary) accounts that are merely sub-classifications of a real 13

22 Study Session 1 Preparation of Final Accounting (permanent) account, Retained Earnings. You also learned that we prepare financial statements for certain accounting periods. The closing process transfers (1) the balances in the revenue and expense accounts to a clearing account called Income Summary and then to Retained Earnings and (2) the balance in the Dividends account to the Retained Earnings account. The closing process reduces revenue, expense, and Dividends account balances to zero so they are ready to receive data for the next accounting period. Accountants may perform the closing process monthly or annually. The Income Summary account is a clearing account used only at the end of an accounting period to summarize revenues and expenses for the period. After transferring all revenue and expense account balances to Income Summary, the balance in the Income Summary account represents the net income or net loss for the period. Closing or transferring the balance in the Income Summary account to the Retained Earnings account results in a zero balance in Income Summary. Also closed at the end of the accounting period is the Dividends account containing the dividends declared by the board of directors to the stakeholders? We close the Dividends account directly to the Retained Earnings account and not to Income Summary because dividends have no effect on income or loss for the period. In accounting, we often refer to the process of closing as closing the books. Remember that only revenue, expense, and Dividend accounts are closed not asset, liability, Capital Stock, or Retained Earnings accounts. The four basic steps in the closing process are: 1. Closing the revenue accounts transferring the balances in the revenue accounts to a clearing account called Income Summary. 2. Closing the expense accounts transferring the balances in the expense accounts to a clearing account called Income Summary. 3. Closing the Income Summary account transferring the balance of the Income Summary account to the Retained Earnings account. 4. Closing the Dividends account transferring the balance of the Dividends account to the Retained Earnings account. Revenues appear in the Income Statement credit column of the worksheet. The two revenue accounts in the Income Statement credit column for Micro Train Company are service revenue of 13,200 and interest revenue of 600 Because revenue accounts have credit balances, you must debit them for an amount equal to their balance to bring them to a zero balance. When you debit Service Revenue and Interest Revenue, credit Income Summary (Account o. 600). Enter the account numbers in the Posting Reference column when the journal entry has been posted to the ledger. Do this for all other closing journal entries. Question (Answer the following as True or False) The following are the four steps in closing the accounts for the period except A. Closing the revenue accounts B. Closing the expense accounts C. Closing the Income Summary account D. Closing the Dividends account Closing the Balance sheet account 14

23 AC102 Principles of Accounting II If you choose From Option A-D you are correct as this is the four basic steps required in closing the books, if you observe closely you will see that it consist Revenue, Capital, Expenses and dividend accounts If choose Option E you are wrong as all option A-D are true except option E which is a complete report of its own and not accounts to be close, actually the closing balances from the closed account are posted to the balance sheet to determine the true position of the company. Salisu Company General Journal Date Account Titles and Explanation Post. Debit Credit Dec. 31, 2010 Closing Entries Ref. Service Revenue Interest Revenue Income Summary To close the revenue accounts in the Income Statement credit column to Income Summary. We show the Income Summary Account in Step Expenses appear in the Income Statement debit column of the worksheet. Salisu Company has eight expenses in the Income Statement debit column. As shown by the column subtotal, these expenses add up to 6,510. Since expense accounts have debit balances, credit each account to bring it to a zero balance. Then, make the debit in the closing entry to the Income Summary account for 6,510. Thus, to close the expense accounts, Salisu makes the following entry: Salisu COMPAY General Journal Date Dec 31, 2010, Account Titles and Explanation Post. Ref. Debit () Credit (). Income Summary Advertising Expense Gas and Oil Expense Salaries Expense Utilities Expense Insurance Expense Rent Expense Supplies Expense Depreciation Expense Trucks Total

24 Study Session 1 Preparation of Final Accounting To close the expense accounts appearing in the income: The debit of 6,510 to the Income Summary account agrees with the Income Statement debit column subtotal in the worksheet. This comparison with the worksheet serves as a check that all revenue and expense items have been listed and closed. If the debit in the preceding entry was made for a different amount than the column subtotal, the company would have an error in the closing entry for expenses. The expense accounts could be closed before the revenue accounts; the end result is the same. As the result of closing the revenues and expenses of Salisi ltd, the total revenues and expenses have been transferred to the Income Summary account. After you have completed the closing process, the only accounts in the general ledger that have not been closed are the permanent balance sheet accounts. Because these accounts contain the opening balances for the coming accounting period, debit balance totals must equal credit balance totals. The preparation of a post-closing trial balance serves as a check on the accuracy of the closing process and ensures that the books are in balance at the start of the new accounting period. The post-closing trial balance differs from the adjusted trial balance in only two important respects: (1) it excludes all temporary accounts since they have been closed; and (2) it updates the Retained Earnings account to its proper ending balance. A post-closing trial balance is a trial balance taken after the closing entries have been posted. The only accounts that should be open are assets, liabilities, capital stock, and Retained Earnings accounts. List all the account balances in the debit and credit columns and total them to make sure debits and credits are equal. A post-closing trial balance for Salisu Company as of 2010 December 31. The amounts in the post-closing trial balance are from the ledger after the closing entries have been posted. The next section briefly describes the evolution of accounting systems from the one journal, one ledger manual system you have been studying to computerized systems. Then, we discuss the role of an accounting system. Presentation phase: this phase involves the presentation of the financial information to the users of financial reports. One of the ways that this is done is by preparing the final accounts of the business at the end of the year. For a sole trader, the final accounts consist of:- 1. Trading profit and loss account: this consist of a. Trading account to ascertain gross profit on sales b. Profit and loss account to ascertain net profit or loss for the period. 2. Balance sheet: this is a statement prepare to ascertain the financial position of the business organization at the end of the year 16

25 AC102 Principles of Accounting II The final account of a business organization can be presented in either vertical or horizontal form. S.Modibbo Trading Profit And Loss Account For The Year Ended XXX Opening Stock X Purchases X Purchases return (X) Carriage inward X X Costs of goods available for sale X Closing stock (X) Costs of goods sold X Wages X Costs of sales X Gross profit c/d X X Sales Less return inward X X EXPESES Rent and rates Carriage outward Increase in provision for Bad/doubtful debt Depreciation Printing and stationary Discount allowed Insurance Other expenses et profit/loss X X X X X X X Gross profit b/d Interests received Rents received Commissions received Discount received Decrease in provision for bad/doubtful Debt X X X X X X o 17

26 Study Session 1 Preparation of Final Accounting Below is the vertical format of a final account: S.MODIBBO Trading profit and loss account for the year ended 18

27 AC102 Principles of Accounting II Below is a vertical format for balance sheet: S. MODIBBO Balance Sheet as at 31 st December XXX Cost Acc BVDepn Fixed Assets Land and building x x x Plant and machinery x x x Furfures and fittings x x x Motor vehicle x x x x x x Investment x Current Assets Stock x Trade debtors x Less: provision for bad debt (x) x Prepayments x Accrued income x Bank x Cash x x Current Liabilities Trade creditors x Accrued expenses x Income received in advance x Bank overdraft x (x) Working capital x x Long-term Liabilities Bank loans (x) et asset x Financed By: Owner s Equity Capital x Add: et profit x x Less: Drawings (x) X 19

28 Study Session 1 Preparation of Final Accounting Illustration And Solution The following trial balance was extracted from the book of S. MODIBBO S Enterprises on 31 st December, 19x8 DR CR Purchase 368,400 Sales 517,900 Drawings 14,100 Returns inward 7,300 Return outward 6,200 Discount allowed 10,200 Discount received 8,400 Debtors 45,000 Creditors 57,100 Stock 34,300 Freehold premium at cost 46,000 Motor vehicle at cost 12,000 Furniture at cost 2,500 Provision for depreciation on motor vehicle 4,500 Provision for depreciation on furniture 1,000 Cash at bank 5,000 Cash at bank 1,900 Salaries 40,600 Carriage inward 22,200 Carriage outwards 10,300 Printing and stationary 3,600 Electricity and water 14,900 Insurance 6,800 General expenses 34,800 Provision for bad debt 200 Bad debt written off 400 Capital 70,000 Rent received 3,800 Commission received 11,200 The following information should be taken into account: 1. Stock 31 st December 1998 was valued at 31, Accrued expenses at 31/12/x8 were salaries 1,800 and electricity Prepared expenses at 31/12/x8 were insurance 400 and general expenses Adjust provision for bad debt to 2% of debtors and create provision for discount allowable at 1% of debtors 5. Commission due but yet to be received at 31/12/x9 amounted to Charge depreciation on fixed assets as follows: Furniture 20% on cost Motor vehicle 10% on cost 7. Rent received in advance at 31/12/x8 amounted to Goods costing 1,200 were taken by the owner for private use. This was yet to be recorded in the book Required Prepare trading profit and loss account and balance sheet of S.Modibbo using vertical method 20

29 AC102 Principles of Accounting II Solution S.MODIBBO S Trading, profit and loss account for the year ended 31 st December, 1998 Sale 517,900 Less: Returns inwards (7,300) et sales 510,600 Less: Cost of goods sold Opening stock (ot 1) 34,300 Purchases (368, ) 367,200 Returns outward (6,200) Carriage inwards 22,200 Cost of goods available for sale 417,500 Closing stock (31,800) 385,700 Gross profit 124,900 Add: other income Discount received 8,400 Rent received (3, ) 3,600 Commission (11, ) 12,000 24, ,900 Less: Expenses Discount allowed 10,200 Salaries (40, ,800) 42,400 Printing $ stationary 3,600 Carriage outwards 10,300 Electricity and water (14, ) 14,980 Insurance (6, ) 6,400 General expenses (34, ) 34,300 Bad debt 400 Increase in provision for bad debt 700 Provision for discount allowed (1% x (45, )) 441 Depreciation: Motor vehicle (10% x 12,000) 1,200 Furniture (20% x 2,500) 500 (125,421) 23,479 S. MODIBBO s Balance sheet as at 31 st December 1998 Cost Acc. Depn BV Fixed assets Freehold 46,000-46,000 Motor vehicle 12,000 5,700 6,300 Furniture 2,500 1,500 1,000 60,500 7,200 53,300 Current assets Stock 31,800 Debtors 45,000 Less: provision for bad debt (900) Provision for discount allowable (441) 43,659 Prepayments ( ) 900 Accrued income

30 Study Session 1 Preparation of Final Accounting Cash at bank 5,000 Cash at hand 1,900 84,059 Current Liabilities Creditors 57,100 Accruable (1, ) 1,800 Interest received in advance 200 (59,180) Working capital 24,879 et assets 78,170 Financed By Owner s Equity Capital at 1/1x8 70,000 Add: et profit 23,479 93,479 Less: Drawings (14, ,200) 15,300 78, describe the process of completing the accounting process For you to complete the accounting cycle, several processes come into play which begins from closing all journals and moving all closing balances to the general ledger and then to the worksheet. The worksheet is a columnar sheet of paper or a computer spreadsheet on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements. Usually, they save these worksheets to document the end-of-period entries. 1.2 illustrate how to prepare financial statements from the worksheet When the worksheet is completed, all the necessary information to prepare the income statement, statement of retained earnings, and the balance sheet is readily available. ow, you need only recast the information into the appropriate financial statement format. The information you need to prepare the statement of retained earnings is taken from the Statement of Retained Earnings columns in the worksheet. 1.3 draw-out a final accounting Presentation phase of preparation of final account involves the presentation of the financial information to the users of financial reports. One of the ways that this is done is by preparing the final accounts of the business at the end of the year. For a sole trader, the final accounts consist of:- 1. Trading profit and loss account 2. Balance sheet: this is a statement prepare to ascertain the financial position of the business organization at the end of the year The final account of a business organization can be presented in either vertical or horizontal form. 22

31 AC102 Principles of Accounting II What is Financial Accounting? What do you understand by Worksheet? State the accounting cycle Steps performed during the accounting period. Articulate Presentation This is a complimentary resource to facilitate the quick delivery of this session. It is available in your course pack (Schoolboard disc / online page), and also linked here. Schoolboard Access your schoolboard app, or visit to access updated online activities and resources related to the units of this Study Session. 23

32 Study Session 2 Uses of Account Study Session 2 In this study session, we will be discussing managerial uses of Account. We will start by highlighting what managers use account for. Moving on, we will look at the objectives of financial reporting. We will also examine the characteristics of accounting information. Learning Outcomes When you have studied this session, you should be able to: 2.1 highlight the characteristics of accounting information 2.2 point-out the objectives of financial reporting 2.3 describe the users of financial statement 2.4 classify the profit and loss account items and assets and liabilities Characteristics of Accounting Information Objectives of Financial Reporting Uses of Account Users of Financial Statement Classification of the Profit and Loss Account Item and Assests and Liabilities This Study Session requires a one hour of formal study time. You may spend an additional two hours for revision. 24

33 AC102 Principles of Accounting II Terminologies When discussing characteristic, we are certainly referring to the inherent qualities of accounting information, this should possess qualitative characteristics which are useful in decision making. This criterion is difficult to apply. The usefulness of accounting information to management in a given instance depends not only on information characteristics but also on the capabilities of the decision makers and their professional advisers. Accountants cannot specify who the decision makers are, their characteristics, the decisions to be made, or the methods are chosen to make the decisions. Therefore, they direct their attention to the characteristics of accounting information. To have RELEVACE, information must be pertinent to or affect a decision. The information must make a difference to someone who does not already have it. Relevant information makes a difference in a decision either by affecting users' predictions of outcomes of past, present, or future events or by confirming or correcting expectations. ote that information need not be a prediction to be useful in developing, confirming, or altering expectations. Expectations are commonly based on the present or the past. For example, any attempt to predict future earnings of a company would quite likely start with a review of present and past earnings. Although the information that merely confirms prior expectations may be less useful, it is still relevant because it reduces uncertainty. Critics have alleged that certain types of accounting information lack relevance. For example, some argue that a cost of G1 million paid for a tract of land 40 years ago and reported in the current balance sheet at that amount is irrelevant (except for possible tax implications) to users for decision making today. Such criticism has encouraged research into the types of information relevant to users. Some suggest using a different valuation basis, such as current cost, in reporting such assets. Predictive value and feedback value since actions are taken now can affect only future events, information is obviously relevant when it possesses predictive value, or improves users' abilities to predict outcomes of events. Information that reveals the relative success of users in predicting outcomes possesses feedback value. For example, a report on the first quarter's earnings of a company reduces the uncertainty surrounding a number of such earnings, confirms or refutes the predicted amount of such earnings, and provides a possible basis on which to predict earnings for the full year. Remember that although accounting information may possess predictive value, it does not consist of 25

34 Study Session 2 Uses of Account predictions. Making predictions is a function performed by the decision maker. Question (Answer the following as True or False) TIMELIESS: Timeliness requires accountants to provide accounting information at a time when it may be considered in reaching a decision. The utility of information decreases with age. To know what the net income for 2010 was in early 2011 is much more useful than receiving this information a year later. If the information is to be of any value in decision making, it must be available before the decision is made. If not, the information is of little value. In determining what constitutes timely information, accountants consider the other qualitative characteristics and the cost of gathering information. Accounting provides information for management in a timely manner. For example, a timely estimate for uncollectible accounts may be more valuable than a later, verified actual amount. Timeliness alone cannot make information relevant, but potentially relevant information can be rendered irrelevant by a lack of timeliness. COMPARABILITY: information must be comparable with other sources of information, for consistency ACCURACY: Accounting information must be accurate. COMPLETEESS: Accounting information must be complete, this would enable the users to have a wholesome view about the information being relayed. VERIFIABILITY: Accounting information must be verifiable from the prior period and other sources. 26

35 AC102 Principles of Accounting II There are various uses of accounting Information. To be able to explain these uses, we will be looking at the different objectives of financial reporting. When you come across the term objective of the financial statement, what can you relate it with? In details, financial reporting objectives are the broad overriding goals sought by accountants engaging in financial reporting. According to the FASB, the first objective of financial reporting is to: 1. Provide information that is useful to present and potential investors and creditors and other users in making a rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. 2. Provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends [owner withdrawals] or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors' and creditors' cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.; This objective ties the cash flows of investors (owners) and creditors to the cash flows of the enterprise, a tie-in that appears entirely logical. Enterprise cash inflows are the source of cash for dividends, interest, and the redemption of maturing debt. 3. Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners' equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources. We can draw some conclusions from these three objectives and from a study of the environment in which financial reporting is carried out. For example, financial reporting should: 1. Provide information about an enterprise's past performance because such information is a basis for predicting future enterprise performance. 2. Focus on earnings and its components, despite the emphasis in the objectives on cash flows. (Earnings computed under the accrual basis generally provide a better indicator of ability to generate favourable cash flows than do statements prepared under the cash basis.) On the 27

36 Study Session 2 Uses of Account other hand, financial reporting does not seek to: 3. Measure the value of an enterprise but to provide information useful in determining its value. 4. Evaluate management's performance, predict earnings, assess risk, or estimate earning power but to provide information to persons who wish to make these evaluations. o Financial in formations are in formations concerning the sourcing and disbursement of fund of an organization and it is obtained in the financial statement of the business. Financial statement are statement which shows the financial position of the business e.g. accounts and balance sheet. These information s are very vital to various users for various reasons. The parties that might be interested in financial information s of a business organization/entity are: 1. These are people appointed by the company s owners to supervise the day-to-day activities of the company. They need information about the company s financial situation as it is current and as it is expected to be in the future. 2. These will want to assess how effectively management is performing its stewardship function. They will want to know how profitable management is running the company s operations and how much profit they can afford to withdraw from the business for their own use. Trade creditors including suppliers who provide goods to the company on credit and customers who purchase the goods or services provided by the company s suppliers will want to know about the company s ability to pay its debts. Customers-need to know that the company is a secure source of supply and is in no danger of having to close down. 3. these might include a bank, which permits the company to operate an overdraft or provide longer-term finance by granting a loan. 4. who will want to know about business profits in order to assess the tax payable by the company for the accounting period. 28

37 AC102 Principles of Accounting II 5. These should have a right to information about the company s financial situation, because their future careers and the size of their wages and salaries are dependent on it. 6. who need information for their clients or audience. o i. ii. iii. iv. There are two major items we have under the trading profit and loss, they are income and expenditure. There are also two major items under the balanced sheet of an organization, they are Assets and Liabilities. Items under Profit and Loss (P & L) Income Expenses Items under Balance Sheet Assets Liabilities Incomes: are revenues received or to be received by the business organization and these revenues/incomes include the following: Interest received Rent received Commission received 29

38 Study Session 2 Uses of Account Discount received; and Decrease in provision for bad/doubtful debt. Expenses: are the spending of the business organization and such expenses includes the followings: Salaries Rent and rates Carriage outward Increase in provision for bad/doubtful debt Depreciation Printing and stationary Discount allowed Insurance Heating and lighting Repairs Telephone Motor expenses Loan interest; and Advertising Assets are the properties of the business and it can be fixed or current. - Under the fixed assets we have the followings: Land and building Plant and machinery Furniture and fitting; and Motor vehicle. etc - Under current assets we have the following: Stock Trade debtors Prepayment Accrued income Bank; and 30

39 AC102 Principles of Accounting II Cash Liabilities are the funds and properties of the business owed by the outsiders of the business; they can be Current and Long-term Liabilities - Under the current liabilities we have they following such as Trade creditors Accrued expenses Income received in advance; and Bank overdraft - Under the long-term liabilities we have the followings such as Bank loans; and Bonds Debentures. o 31

40 Study Session 2 Uses of Account 2.1 highlight the characteristics of accounting information The usefulness of accounting information to management in a given instance depends not only on information characteristics but also on the capabilities of the decision makers and their professional advisers. Accountants cannot specify who the decision makers are, their characteristics, the decisions to be made, or the methods are chosen to make the decisions. Therefore, they direct their attention to the characteristics of accounting information. To have RELEVACE, information must be pertinent to or affect a decision. The information must make a difference to someone who does not already have it. Relevant information makes a difference in a decision either by affecting users' predictions of outcomes of past, present, or future events or by confirming or correcting expectations. ote that information need not be a prediction to be useful in developing, confirming, or altering expectations. Expectations are commonly based on the present or the past. 2.2 point-out the objectives of financial reporting The objectives of financial reporting is to: 1. Provide information that is useful to present and potential investors and creditors and other users in making a rational investment, credit, and similar decisions. 2. Provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends [owner withdrawals] or interest and the proceeds from the sale, redemption, or maturity of securities or loans. 3. Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners' equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources. 2.3 describe the users of financial statement The parties that might be interested in financial information s of a business organization/entity are: 1. Managers of the company 2. Shareholders of the company 3. Providers of finance to the company 4. The Inland Revenue authority 5. Employees of the company 6. Financial analysis and adviser 2.4 classify the profit and loss account items and assets and liabilities There are two major items we have under the trading profit and loss, they are income and expenditure. There are also two major items under the balanced sheet of an organization, they are Assets and Liabilities. 32

41 AC102 Principles of Accounting II Can you list three (3) objectives of financial accounting? List 3 examples of each of the following i. Fixed assets ii. Current assets iii. Current liabilities iv. Long-term liabilities v. Income vi. Expenses Articulate Presentation This is a complimentary resource to facilitate the quick delivery of this session. It is available in your course pack (Schoolboard disc / online page), and also linked here. Schoolboard Access your schoolboard app, or visit to access updated online activities and resources related to the units of this Study Session. 33

42 Study Session 3 Accounts of on-profit Organization Study Session 3 In this study session, we will be discussing the accounts of non-profit organizations. The Final Accounts of non-trading concerns consists of: 1. Receipts and Payments Account 2. Income and Expenditure Account, and 3. Balance Sheet. We will start by define non-profit organisations and looking at receipt and payment account. In the same vein, we will differentiate between income and expenditure accounts. Subsequently, we will discuss balance sheet, under which we will look at the treatment of special items. Lastly, we will highlight the different types of accounting problems. Learning Outcomes When you have studied this session, you should be able to: 3.1 define non-profit organisations 3.2 explain receipt and payment account 3.3 discuss income and expenditure account 3.4 treat special items in balance sheet of non-profit organisations Accounts of on-profit Organization Receipt and Payment Account Features of Receipts and Payment Account Income and Expenditure Account Feature of Income and Expenditure Account Balance Sheet of on- Tarding Concern Traetment of Special Items Types of Accounting Problems 34