Financial Accounting Lesson Note SS1 Second Term

Financial Account Notes –






  1. Revision of 1st term’s work
  2. – Admission of new partners. Terminologies Goodwill accounts, valuation of assets, treatment of goodwill according to profit sharing ratio.
  3. Dissolution of partners reasons for dissolution, entry requirements in closing the firm’s books of account (settlement account).
  4. Accounting Ratio

Introduction to ratio, types with working exercise.

5. Single entry/incomplete records – Determination of profit and loss from statement of affairs, preparation of trading, profit and loss accounts and Balance sheet from incomplete records.

6. Accounts of non-profit making organization – meaning, terminologies, features of receipts and payments account and format.

7. Receipts and payments account, income and expenditure account – meaning, rules, similarities and differences between receipts and payments account and income and expenditure account.

8. Treatment of subscriptions other nominal ledgers in arrears and in advance.

9. Preparation of income and expenditure account and balance sheet with working exercise.

10 – 11. Revision

12. Examination



Goodwill is the amount by which the value of a business as a going concern exceeds the value of its net assets, if they were sold separately. It is an intangible asset because it cannot be touched or seen physically. Goodwill may not be shown in the balance sheet for reasons that will be explained later. Nevertheless, it must be considered when a partnership change occurs.

Factors that can give rise to goodwill are as follows:

  • The location of the company.
  • The quality of the product and services.
  • The quality of the employees willing to continue after the business changes hand.
  • Monopolistic advantage of the company.
  • Possession of trademarks and patent rights to be used by the buyer.
  • Opportunity for the buyer to retain the same name.
  • Quality of the research and development that can be taken over.
  • Good public image and reputation build by organization over the years.

Introduction of Goodwill

Goodwill may be introduced if any of the following situations occur:

  • Admission of a new partner
  • Change in profit-sharing ratio of partners
  • Retirement or death of a partner
  • Dissolution of partnership business
  • Business purchase

Types of Goodwill

  • Inherent goodwill
  • Fugitive goodwill
  • Purchased goodwill

The first two are non-purchased goodwill. Value cannot be placed on them. These types of goodwill exist in a business but will disappear immediately as the business changes hand. Examples include goodwill attached to the owner of the business, location, employees and so on. When any of these are not taken over, the goodwill will be vanished.

However, purchased goodwill arises as a result of one company acquiring another. This type of goodwill remains in the business even if the ownership changes. The value of goodwill is the difference between the purchase price (purchase consideration) and the book value of the assets.

Valuation of Goodwill

There are many methods of valuing goodwill, the method adopted is the sole responsibility of the partnership. The common methods are as follows:

  • Purchase of average profit
  • Purchase of average gross fee income
  • Purchase of average super profit
  • Excess of purchase price of a business over value of tangible net assets taken over.

Accounting for Goodwill in the Books of a Partnership Business

Irrespective of the method of a valuation of goodwill used, the value of goodwill can be retained in the books or written off immediately. Goodwill account is opened and credited to partners in their old profit-sharing ratio.

How to account for goodwill when no goodwill account is opened.

Partner often do not wish to record goodwill in their books for two reasons:

  • The value placed on goodwill is usually very difficult to justify being a matter of opinion; it may not even exist.
  • If goodwill is shown in the balance sheet, it would be difficult to persuade a prospective purchaser of the business to pay more, even if the value had increased since goodwill was first introduced into the books.

When there is a partnership change and the partners decide not to open a goodwill account, the procedure to be followed is as follows:

Step 1: Credit the partner’s capital accounts with their share of goodwill in their old profit-sharing ratio

Step 2: Debit the partners’ capital accounts with their share of goodwill in their new profit-sharing ratio.

Apportionment of Profit

Partnership changes often occur in the middle of a firm’s financial year. If a profit and loss account is not prepared at the time of the change, the profit and loss for the financial year must be apportioned between the periods before and after the change. If the profit and loss is assumed to have been earned evenly throughout the year, it should be divided between the old and new partnership on a time basis. However, any expenses not incurred on time basis must be allocated to the period to which they belong. The profit and loss account can be prepared in columnar form to show the apportionment of profit.

Illustration 4: Change in profit-sharing ratio

Shola and Shogo are partners sharing profits and losses equally after allowing Shola a salary of N10,000 p.a. On 1 January 2010, their capital and current accounts balances were as follows:

Capital accounts Current accounts25,000 7,50020,000 5,000

On 1 July, 2010, the partners agree to the following revised terms of partnership.

  1. Shola to transfer N5,000 from his capital accounts to a loan account on which he would be entitled to interest at 10% per annum.
  2. Shogo to bring his private car into the firm at a valuation of N12,000
  3. Shogo to receive a salary of N5,000 per annum.
  4. Profits and losses to be shared: Shola – , Shogo- 

Additional information for the year ended 31 December, 2010 is as follows:

Sales (spread evenly throughout the year) Cost of Sales Rent Wages General expenses200,000 87,500 25,000 35,000 15,000

Of the general expenses, N5,000 was incurred in the 6 months to 30 June 2010.

Shogo’s car is to be depreciated over four years on the straight line basis and is assumed to have no value at the end of that time.

All sales produces a uniform rate of gross profit.


  • Prepare the trading, profit and loss and appropriation accounts for the year ended 31 December 2010.
  • Prepare the partners current accounts for the year ended 31 December 2010.


Shola and Shogo

Trading, Profit and Loss and Appropriation Account for the

Year Ended 31 December 2010

  Sales Less: cost of sales   Gross profit c/d N 200,000   87,500   112,500  
6 months 30/06/20106 months 31/12/2010  Year to 31/12/2010
Gross profit b/d 56,250 56,250 112,500
Rent12,500 12,500 25,000 
Wages17,500 17,500 35,000 
General expenses5,000 10,000 15,000 
Interest loan  250 250 
Depreciation – Car  1,500 1,500 
  (35,000) (41,750) (76,750
Net profit 21,250 14,500 35,750
Less: Salary – Shola                                     Shogo     5,000         2,500 5,000   2,500
Net profit b/f 16,250 12,000 28,250
Share of profit      
Shola (  ),   (  )8,125 7,200 15,325 
Shogo (  ), (  )8,125 4,800 12,925 
  16,250 12,000 28,250

(b) Partners Current Account

 SholaShogo SholaShogo
Bal. c/d27,82520,425Bal. b/d Salary Share of profit7,500 5,000 15,3255,000 2,500 12,925
 27,82520,425 27,82520,425
   Bal. b/d27,82520,425

Financial Account Notes –



Partnership changes usually occur during a financial year and the accounting records are contrived without interruption. Final accounts are prepared at the end of the financial year. When a partner leaves the firm or a new partner joins, it marks the end of one partnership and the beginning of a new one. No records and entries are made in the books as at the period of change until the end of the financial year. In the process, revaluation of asset, valuation of goodwill and changes in the profit/loss sharing ratio may occur.

Illustration 5: Admission of a new partner

Dami and Lola have shared profits and losses in the ration of 3:2. On 1 October 2010, they decided to admit Bola as a partner. No entries to record Bola’s admittance as a partner were made in the books before the end of the financial year on 31 December 2010.

Information extracted from the books for the year ended 31 December 2010 include the following:

Turnover Cost of sales Wages Rent General expenses Deprecation of fixed assets: 1 January to 30 December 2010 1 October to 31 December 2010400,000 240,000 40,000 8,000 9,600   6,000 4,350

(based on the asset revaluation as shown below)

At December 2009, the balances on Dami and Lola’s capital and current accounts were as follows:

 Capital AccountsCurrent Accounts

On 1 October 2010, the partnership assets were revalued as follows:

Freehold premises Other fixed assets Current assets50,000 increase 14,000 decrease 3,000 decrease

The partners agreed the value of goodwill on 1 October 2010 at N40,000 and decided that no goodwill account should be opened in the books.

On 1 October 2010, Bola paid N20,000 into the firm’s bank account as capital. On the same day, Dami lent the partnership N20,000. He is entitled to interest at a rate of 100% per annum on the loan.

The balances on the partners drawings account at 31 December 2010 were as follows:

Dami Lola Bola23,000 17,000 3,000

The new partnership agreement provided for the following as from 1 October 2010.

  • Interest was allowed on the balances on capital accounts on 31 December each year at a rate of 5% per annum.
  • Lola was entitled to a salary of N12,000 per annum.
  • The balance of profits and losses were to be shared. Dami –  , Lola   and Bola –  


  • Prepared the capital accounts of Dami, Lola and Bola as at 31 December 2010.
  • Prepare the partnership trading, profit and loss and appropriate account for the year ended 31 December 2010.
  • Prepare the partners current accounts as at 31 December 2010.




Revaluation a/c

Other fixed assets Current asset Profit to capital a/c Dami (  x 33,000) = Lola  (  x 33,000) =14,000 3,000   19,800 13,200 50,000Freehold premises50,000         50,000
  • Goodwill: Since the partners agreed that no goodwill account should be opened, then working of the share of goodwill to capital account is only shown as follows:

Value of goodwill N40,000 as at 1 October 2010 share to Dami and Lola in their old profit-sharing ratio as follows:

Dami (  x 40,000)      =          24,000

Lola (  x 40,000)        =          16,000

Goodwill to be written off immediately from the books as follows using new profit-sharing ratio:

Dami (  x 40,000)      =          16,000

Lola (  x 40,000)        =          16,000

Bola (  x 40,000)        =          8,000

  • Partners Capital Account
 Dami (N)Lola (N)Bola (N) Dami (N)Lola (N)Bola (N)
Goodwill w/off Bal c/d16,000 77,800       93,80016,000 43,200       59,2008,000 12,000       20,000Bal. b/d Bank Profit on Revaluation Goodwill   Bal b/d50,000     19,800 24,000 93,800 77,80030,000     13,200 16,000 59,200 43,200– 20,000   – – 20,000 12,000
  • Dami, Lola and Bola

Trading, Profit and loss and Appropriation Account for the Year Ended 31 December, 2010


Turnover                               400,000

Less: Cost of Sales    240,000

Gross profit c/d                   160,000

            9 months to 30                      3 months to 31                      year to

            September 2010                    December 2010                     31 December 2010

Gross profit b/d 120,000 40,000 160,000
Wages30,000 10,000 40,000 
Rent6,000 2,000 8,000 
General expenses7,200 2,400 9,600 
Interest on loan 500 500 
Net profit 70,800 20,750 91,550
Interest on capital at 5% p.a.      
Dami –  973 973 
Lola –  540 540 
Bola –  150 150 
   1,663 1,663 
Salary – Lola  3,000 3,000 
    (4,663) (4,663)
  70,800 16,087 86,887
Share of profit      
Dami (3/5), (2/5)42,480 ( ½ ) 6,435 48,915 
Lola (2/5), (2/5)28,320 (  ) 6,435 34,755 
Bola (1/5)  (  ) 3,217 3,217 
  70,800 16,087 86,887
  • Partners’ Current Account
 DamiLolaBola DamiLolaBola
Drawings23,00017,0003,000Bal. b/d2,0003,000
Bal. c/d29,38824,295367Loan interest500
    Int. on capital973540150
    Share of profit48,91534,7553,217
 52,38841,2953,367 52,38841,2953,367
    Bal. b/d29,38824,295367

Essay Type Questions

  1. (a)  Define ‘partnership’.

(b) Is it possible for a partnership to exist without agreement? If so, why do you consider a written agreement to be desirable?

(c)  Is it possible for a person

(i)        To receive a share in the profits of a business without being liable as a partner therein;

(ii)       To be liable as partner without receiving a share of the profits of a business?

  • The following trial balance has been extracted from the books of Sam and Dan at 30 April 2011.
Sales 425,000
Stock at 1 May 201030,000 
Heating and lighting16,000 
Office expenses12,600 
Vehicle expenses5,510 
Bad debts written off416 
Plant & machinery at cost125,000 
Provision for depreciation plant & machinery 36,000
Motor vehicle at cost41,000 
Provision for depreciation of motor vehicle 22,000
Trade debtors and creditors45,750 
Provision for doubtful debts 1,000
Bank balance15,724 
Loan from Sam 60,000
Capital a/c                             – Sam                                                  – Dan Current a/c                            – Sam                                                  – Dan Drawings a/c                         – Sam                                                  – Dan        30,000 13,50050,000 40,000 7,000 3,000

 Additional Information

  • Stock at 30 April, 2011 is valued at N27,000
  • Sam is to be credited with interest on the loan at a rate of 10% per annum.
  • The bank reconciliation shows that bank interest of N314 and bank charges of N860 have been debited in the bank statements. These amounts have not been entered in the cash book.
  • On 30 April 2011, rent of N1,500 and advertising of N2,000 have been paid in advance.
  • Depreciation is to be provided as follows:
    • Plant and machinery 10% per annum on cost.
    • Motor vehicles 20% per annum on their written down values.
  • The partners are to be charged interest on drawings and allowed interest on capital at a rate of 10% per annum.
  • Partnership salaries are to be allowed as follows: Sam N10,000 per annum, Dan N8,000 per annum.
  • The balance of profits and losses is to be shared as follows: Sam – 3/5; Dan 2/5.


  • Prepare the partnership trading, profit and loss and appropriate accounts for the year ended 30 April 2011.
  • Prepare the partners’ current accounts for the year ended 30 April 2011.
  • Prepare the balance sheet as at 30 April 2011.
  • Bose, Bukky and Biola are partners sharing profit and losses in ratio 3:2:1 respectively.

The partners’ trial balance as at 31 December 2010 is as follows:

 Dr (N)Cr (N)
Capital account   Bose  Bukky  Biola Current account   Bose  Bukky  Biola Premises Plant Vehicles Furniture Loan – Biola Creditors Stock Debtors Bank              5,018   180,000 74,000 30,000 4,000     125,758 69,960   487,736  170,000 130,000 70,000   7,428   9,356         56,000 38,072     6,880 487,736

Biola retires on 31 December 2010 and Shola was admitted as a partner on that date.

The following matters were agreed on:

  • Assets revalued – premises N24,000 plant N60,000 and stock N108,358.
  • Goodwill of N84,000 is to be recorded in the books on the day Biola retires.
  • Provision is to be made for doubtful debts of N 6,000.
  • The partners in the new firm do not wish to maintain goodwill account
  • Bose and Bukky are to share profits in the same ration as earlier and Shola is to have the same share of profit as Bukky.
  • Biola is to take over car at its book value of N7,800 in part payment and the balance of all she is owed by the firm in cash except N40,000 which she is willing to leave as a loan.
  • The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned.
  • Shola is to contribute cash to bring the capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.
  • The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.


  • Prepare account for the above transactions including goodwill and retiring partners account.
  • Balance sheet of the new partnership of Bose, Bukky and Shola as at 31 December 2010.

Financial Account Notes –



Under a situation whereby a firm or business accounting records were destroyed as a result of fire, flood or any other forms of natural disasters, such firm or business could still prepare its final account despite the facts that the information available will be very inadequate.

In order to prepare the final accounts under such situation, the accountant need to see his or her past experience and ingenuity to prepare the account. In addition, the accountant can make use of some accounting ratios such as the following:

  •  Mark – up
  •  Margin
  •  Rate of turnover
  •  Manager’s commission

Mark – up

Cost Price
x 100

This is the ratio that expressed profit against the cost price of goods. The profit will be expressed as a percentage or fraction or decimal to the cost price.

Mark – up =

Illustration 5

A business made N10,000 profit from goods cost N50,000. You are required to calculate the mark-up.

Cost Price
x 100


x 100

Mark-up = 


     =  20% or 0.2 or


x 100
x 100

This is the ratio of profit to sales or selling price. It can as well be expressed as a percentage or fraction or decimal to sales.

Magin =

Illustration 6

A firm made N15,000 profit from a sales of N60,000. You are required to calculate the margin.


x 100

Margin =


            = 2.5% or 0.25 or ¼

In a situation whereby the mark-up is given, as well as, the selling price then the mark-up must be converted to margin. This can be explained as follows:

SP = Selling price

CP = Cost price

Profit = P

SP = CP + P               (i)

SP = CP = P               (ii)

SP – P = CP                (iii)

Mark-up =   =  

Margin =   = 

Conversion of mark-up to margin

Mark-up =   to margin =  

Mark-up =  to margin  =  =

Mark-up =  to margin =  =

Conversion of margin to mark-up

Margin =  to mark-up =   =

Margin =  to mark-up =   =

Margin =  to mark-up =   =

Illustration 7

A business cost price is 100% and profit is 10%. Calculate mark-up and margin.


Mark-up =  =  =  = 0.1

Margin =  =  =  =  = 0.091

Illustration 8

The following data were extracted from the books of God Grace Venture.

Opening stock          16,000

Sales                           400,000

Closing stock 20,000

The business uses a uniform mark-up rate of 33 %

You are required to calculate:

  • Profit
  • Purchases
  • Prepare the trading account


Mark-up                    33 % = 

Mark-up                 =  = 25%

Margin                        =  =

                                    4P = 400,000

                                    P  = 400,000 ÷ 4

                                    P  = N100,000

Cost of sales  = N400,000 – N100,000 = N300,000

Purchase                    = 300,000 + 20,000 – 16,000 = N304,000

God Grace Trading Account

Sales Less: Cost of Sales Opening stock Add: Purchases Less: Closing stock Profit    16,000 304,000 320,000 (20,000)400,000       300,000 100,000

Stock Turnover

This is also called the rate of turnover. This is the number of times a business stock will be turned over within a given period of time. It is computed as follows:

Rate of turnover       =          Cost of goods sold

                                                Average of stocks

It can also be expressed in numbers of days as follows:

                                                Average stocks (x 365 days)

                                                     Cost of goods sold

Average stock is computed as follows:

                           Opening stocks + Closing stocks


Manager’s Commission

This is an allowance granted to a business manager for a good performance and to encourage him or her to work harder in future. It is usually computed as follows:

Percentage of commission x Profit before commission

                   100 + Percentage of commission 

Illustration 9

The following information was extracted from Folarin Ventures books in 2008.

Stock at 01/01/2008 Stock at 31/12/2008 Creditors at 01/01/2008 Creditors at 31/12/2008 Cash paid for goods during the year Mark-up 25% Selling expenses130,000 110,000 80,000 100,000 400,000     55,000

You are required to calculate:

  • Margin
  • Purchase
  • Stock turnover in days
  • Gross profit
  • Sales
  • Margin
  • Prepare the trading, profit and loss account for the year ended 31 Dec. 2008.

Solution:                   FOLARIN VENTURES

  • Margin =  or  = 20% or 0.2
  • Purchase

Creditors Ledger Control Account

 N N
Bal c/f Cash paid100,000 400,000 500,000Bal.  b/f Purchases (credit)80,000 420,000 500,000

130,000 +110,000

x  365



x  365

                                                =  120,000


                                                = 99.5 days = 100 days

Folarin Ventures

Trading and Profit and Loss Account for the period Ended 31 December 2008

Sales 550,000
Opening stock130,000 
Add: Purchase420,000 
Less: Closing stock  
Gross profit 110,000
Less: Expenses (55,000)
Net profit 55,000

Percentage of gross profit to sales = 110,000 x 100 = 20%


Percentage of Net profit to sales = 55,000 x 100 = 10%


Illustration 10

Madam Adeotun produces the following data from her books.


Stock at the beginning                           30,000

Purchases                                                27,000

The mark-up on cost of sales is 50%. Her average stock during the year was N20,000. You are required to calculate:

  • Closing stock
  • Prepare trading, profit and loss account
  • Ascertain the total amount of profit and loss expenditure that she must not exceed if she is to maintain a net profit on sales of 10%


Let x represent closing stock

  • Closing stock = x + 30,000 = 20,000


                                    = x + 30,000  = 40,000

                                        = 40,000 – 30,000

Closing stock = x  = N10,000

  • Madam Adeotun Trading, Profit and Loss Account
Sales (290,000 + 145,000) Less: Cost of sales Opening prayer Add: Purchases   Less: Closing stock   Gross profit (0.5 x 290,000) Less: Expenses Net profit (0.1 x 435,000)    30,000 270,000 300,000 (10,000)      435,000           290,000 145,000 (101,500) 43,500


Objective Questions

  1. A firm’s average stocks is N50,000 while the closing stock is N30,000. Calculate the opening stock:
    1. N40,000
    1. N30,000
    1. N70,000
    1. N50,000
  2. The ratio between profit and sales is called
    1. Gross profit
    1. Net profit
    1. Mark-up
    1. Margin
  3. The excess of opening capital over closing capital represents
    1. Gross profit
    1. Net profit
    1. Loss
    1. Sales
  4. A business stock turnover time is 9, its average stocks is N60,000. Calculate its cost of goods sold
    1. N54,000
    1. N27,000
    1. N60,000
    1. N540,000
  5. The record or book where credit sales could be generated is
    1. Cash book
    1. Creditors ledger
    1. Debtors ledger
    1. Statement of affairs

Fill in the Blanks

  1. The number of times a business stock could be replenished is called _______________
  2. If a business operational margin is 0.2. calculate the mark-up _______________
  3. The act of recording a business transaction one in the book is called _________________
  4. The financial summary prepared to ascertain a firm’s opening capital is called ________________
  5. If a manager is qualified for 7½% commission on profit before the commission is N15,000. Calculate the commission that would accrue to the manager.


Essay Type Questions

  1. The following information was extracted from the book of Olaoni.
Sales Opening stock Closing stock Expenses Purchases45,000 20,000 30,000 15,000 25,000

You are required to calculate the following:

  • Cost of goods sold
    • Net profit
    • Net profit percentage
    • Gross profit percentage
    • Stock turnover
  • The following is a summary of the bank account of Mary Parker, a retail trader for the year 2008.
Balance b/f Shop takings Payments Creditors Rent and rates drawings 1,448 34,722   28,364 1,488 5,816

You are given the following additional information:

Furniture Stock Debtors Creditors1,000 5,260 2,900 3,7501,000 4,380 3,270 3,946

During the year, wages amounting to N1,300 and N220 general expenses were paid in cash out of shop takings. All the remaining shop taking were paid into the bank and all other payments were made by cheque.

You are required to prepare:

  • Trading, profit and loss account for the year
  • A balance sheet as at 31 December, 2008 (SSCE, June 1993).

Financial Account Notes –




This topic is about how to prepare trading, profit and loss account under an incomplete record or single-entry accounting system.


This is system of accounting of financial transactions that are recorded without conformity with the rule of double entry’.

The records so prepared based on a single entry or one-leg entry by any bookkeeper or record keeper is hence incomplete or inadequate for proper accounting system. In order to prepare a normal accounting report, an accountant has to use one of his or her mental experience and ingenuity to prepare the accounts or financial reports from the incomplete records.

Features of Single Entry/Incomplete Records

  • Final accounts are prepared by comparing financial data of two or more years.
  • Accounting information is grossly inadequate.
  • Accounting records or books are not in existence or not well organized.
  • Mostly, records are kept on loose sheet or only cash book is kept.
  • There is no any accounting system in such an organization.
  • Record keeping is flexible.

Areas Where Single-Entry Accounting Systems Are Used

Areas where single accounting systems are used are as follows:

  • Schools                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
  • Government parastatals and agencies
  • Club association, unions (not-for-profit organization) and so on.
  • Sole traders, or small-scale business
  • Organizations that have no finance or accounting unit
  • Business or companies that are victims of artificial or natural disasters.
  • Business where records are kept on loose sheets.

Preparation of Statement of Affairs

A statement of affairs is the summary of a firms’ or a business’ assets, liabilities and owners stake at any given time.

It could be drawn at the beginning or at the end of every accounting year or period. The statement is drawn to ascertain any growth or increases in the components of the statements at any point in time. The information required to prepare this statement are: all fixed assets, total of debtors and creditors, owing and prepaid expenses, cash in hand and at bank and so on.

When two statements of affairs for different periods are compared, it will help to ascertain the followings:

The format for the statement of affairs is given in the following:

(a)        Opening Statement of Affairs

Fixed assets Current assets   Less: Liabilities Opening CapitalXXX XXX XXX (XXX) XXX

Opening capital = Total assets – Liabilities

(b)       Closing Statement of Affairs

Fixed assets Current assets   Less: Liabilities Closing CapitalXXX XXX XXX XXX XXX

Computation of profit Between the Two Profits

Closing capital XXX
ADD: Drawings XX
Less: Opening CapitalXX 
Additional CapitalXX(XX)
Net Profit XX/(XX)

Profit or loss can as well be computed as follows:

(a)        Opening capital + Profit – Drawings + Additional capital = New or closing capital

(b)       Profit = New capital + Drawing – Opening Capital – Additional Capital

Illustration 1

Abraka Ventures statements of affairs components as at 1 January, 2016 are given below.

Creditors Bills payable Plants and equipment Stock Debtors Bills receivable Cash40,000 12,000 60,000 20,000 10,000 20,000 2,000

On 31 December, 2010, the following information was extracted from the business. Creditors N30,000, bill payables N16,000 equipments N50,000, stock N10,000 Debtors N20,000, Bills receivable N14,000, Cash N200 and drawings for the period were N16,000.

You are required to:

  • Calculate the opening capital
  • Show the closing capital and net profit

Illustration 2

Olaore Supermarket records all its financial transaction in a notebook. The following are extracts from the notebooks:

      Stock Creditors Debtors Cash in hands Bank overdraft Fixtures and fittings Motor vanNotebooks
31 December, 200831 December 2009
N 33,000 30,000 40,000 500 50,000 15,000 20,000N 46,000 28,800 35,000 4,000 38,000 15,000 20,000

The drawings during the year amounted to N5,000. Depreciation on furniture and fittings to be 10%, while N2,000 to be written off motor van. N1,000 of the debtors are irrecoverable and a general provision of 5% should be made on the debtors balance.

You are required to:

  • Ascertain the profit and loss for the year ended 31 December 2009.
  • Prepare a statement of affairs as at that date.


Conversion of Single Entry to Double Entry

An organization that keeps single entry or incomplete records of accounting may decide to prepare its annual final accounts from the inadequate information. It is possible under this incomplete records situation to prepare such final accounts by merely converting the single entry records to double entry records given the available information.     The following are the necessary books that need to be opened for such conversion:

  • Cash book
  • Sales ledger
  • Purchases ledger
  • Assets and liabilities account
  • Nominal accounts

If such conversion is done properly, a trial balance could be drawn to test the arithmetical accuracy of the records. For the purpose of the conversion and the preparation of final accounts from this situation, the following procedure should be adopted.

Step 1:            Prepare the opening statement of affairs purposely to ascertain opening capital.

Step 2:            Prepare the cash book with the details. This must include both the cash and bank accounts as the case may be either separately or in a cash book.

Step 3:            Prepare both debtors and creditors ledger control accounts to ascertain the total credit sales and total credit purchases.

Step 4:            Prepare a schedule or summary for total sales and purchases by adding the total credit sales and purchases with the cash sales and cash purchases.

Step 5:            Prepare control accounts for the nominal items that have outstanding or prepaids either at the beginning or at the end of the period in question.

Step 6:            Prepare any other required working schedules.

Step 7:            Prepare trading, profit and loss accounts from steps 1 – 6 above.

Step 8:            Prepare the balance sheet.

Illustration 3

Arsenal ventures had the assets and liabilities as at 1 January 2008.

Delivery van120,000
Creditors for expenses10,000

They do not keep proper records for their business transactions but the following were extracted from sketch books.

Opening cash balance100,000
Receipts from debtors85,000
Repairs of van20,000
Creditors for expenses10,000

On 31, December 2008, debtors were owning N150,000 and closing stock was valued at N10,000

The following additional information was available:

Provision for depreciation Delivery van Machine Accrued telephone expenses Provision for doubtful debts  10,000 20,000 4,000 3,000

You are required to prepare:

  • Statement of affairs as at January 2008.
  • Trading, profit and loss account for the year ended 31 December 2008 and the balance sheet as at that date.


Opening Statement of Affairs as at 1 January 2008.

  Delivery van Machine Debtors Stocks Bank   Less: Liabilities Creditors for expenses Opening capital  120,000 180,000 70,000 25,000 100,000 495,000   (10,000) 485,000  

Bank Account

Opening cash balance Receipts from debtors   Less: Payments Materials Repairs of van Telephone Creditors for expenses   Closing cash balance        52,000 20,000   2,500 10,000100,000   85,000 185,000           84,500 100,500

Debtors Ledger Control Account

 N N
Balance b/f Credit sales a/c   Balance b/f70,000   165,000   235,000   150,000Bank a/c Balance c/f85,000 150,000 235,000  

Accrued Expenses Account

 N N
Balance a/c Balance c/f10,000       4,000     14,000  Balance b/f P & L   Balance b/f10,000 4,000 14,000   4,000

Arsenal Ventures

Trading Profits and Loss Account for the Period Ended 31 December 2008

Sales Less: Cost of sales Opening stock Purchases   Closing stock   Gross Profit Less: Expenses Repairs of van Telephone (2,500 + 4,000) Provision for doubtful dents Depreciation: Delivery van Machines   Net profit    25,000 52,000 77,000 (10,000)       20,000   6,500   3,000     10,000 20,000165,000           (67,000) 98,000                 (59,500) 38,500

Arsenal Ventures

Balance Sheet as at 31 December 2008

 CostDepreciation NetNET Book Value
Delivery van Machine   Current assest Stock Debtors (150,000 – 3,000) Bank  120,000 180,000 300,000(10,000) (20,000) (30,000)   10,000 147,000 100,500 257,500110,000 160,000 270,000    
Less: Accrued expenses     Financed by Capital Profits (4,000)253,500 523,500           N 485,000   38,500 523,500

Illustration 4

Wayne Salako Enterprises could not keep proper book for their business transactions during the year 2004. The following were extracted from the books.

Purchases: Cash Credit Cash received from debtors Purchases of furniture Cash Sales Expenses Paid: Salaries Electricity Rent Insurance Rate Advertisement  300,000 500,000 1,300,000 48,000 500,000   144,000 24,000 48,000 80,000 12,000 24,000

The following additional information was available:


 01/01/2009 N31/12/2009 N
Stock Outstanding electricity Rent owing Insurance Prepaid Debtors Creditors Rates In advance100,000 1,600 4,000 3,600 50,000 30,000 3,000140,000     2,400     3,600     4,000   64,000   44,000     2,400

(b)       Fixed assets on 1 January 2009 are as follows:

Furniture Motor vehicle Building Cash at bank on 1 January 200972,000 500,000 700,000 200,000

(c)        Fixed asset should be depreciated as follows:

            Furniture and building                   5%

            Motor vehicle                                   20%

You are required to prepare trading, profit and loss accounts for the year ended 31 December 2009.




At the end of this topic, the students should be able to:

  • Distinguish between the final accounts of the organizations that are not-for-profit and those that are profit-oriented.
  • Define receipts and payments account and income and expenditure account as well as show the differences between the two forms of accounts.
  • Prepare the following accounts:
    • Receipts and payments accounts
    • Income and expenditure accounts
    • Subscription accounts
    • Accumulated fund.


There are several organizations that are established and run for the purposes of meeting the social, cultural, health and , at times, educational needs of the citizens. Such organizations are not set-up for the purpose of making profits from their activities and are thus called not-for-profit organizations. Examples include government-owned hospitals, voluntary health and welfare organizations, social clubs and organizations, religious bodies and so on.

These organizations even though are not for profit-making, but need to prepare accounts so as to be able to tell their stakeholders and other donors how they have utilized the contributed funds.

The legal status of such organizations is usually well defined in club (or association) rules and regulations. It is important that external financial information provided by such organization must conform to the generally accepted account principles.

Usually, the accounts of non-for-profit organizations consist of the following:

  • Receipts and payments account
  • Income and expenditure account
  • Balance sheet

Receipts and Payments Account

The receipts and payments account is a summarized cash book (i.e. it incorporates the cash and bank transactions of a non-profit organization).

In other words, it is a statement of cash actually received and paid during a given period. It commences with the opening balance of either cash in hand or at the bank. It is debited with all sums of money actually received and credited with all cash paid during the period.

The receipts and payments account include all cash paid or received in a period, whether they relate to capital or revenue items and whether or not they belong to the period when the transactions occur. The final balance of cash in hand and the credit or debit balance at the bank at the end of the period.

Format of Receipts and Payments Account

Hypothetical Example of Receipts and Payments Account for the year Ended…

Opening balance at the beginning of the periodxPurchase of fixed assetsx
DonationxManagement expensesx
Membership subscriptionxStationeriesx
Sundry incomexUtilities (e.g. electricity, water rates etc.)x
Sales of fixed assetsx  
Income from club’s activitiesxBalance at the end of periodx
 xxx xx

Note: The opening balance represents the cash balance either in hand or at bank for the period, while other items appearing on the debit side of the account are sources of revenue to the club or associations.

The items appearing on the credit side represent items on which cash were expended during the period. They include capital and revenue items. The list of items appearing on both sides are, however, not exhaustive as there could be other items that can appear on either side depending on the activities being carried out by the club.

Income and Expenditure Account

The income and expenditure account represents the profit and loss account of a non-profit-making organization. It contains only revenue items. It is debited with all expenditure incurred which are of revenue in nature, and credited with all incomes of a period whether or not they have actually been paid or received in the period.

The final balance of an income and expenditure account represents the excess of income over expenditure or the excess of expenditure over income as the case may be for any particular period. Thus, the final balance is similar to the net profit (i.e. excess of income over expenditure) or net loss (i.e. excess of expenditure over income) or a trading organization. It is important to pint out to the students that:

  • The receipts and payments account and the income and expenditure account are used by non-profit-making organizations to present their financial position to their members and other stakeholders.
  • The two accounts are different from each other in forms and contents.

Difference between receipts and payments account and income and expenditure account are as follows:

Receipts and payment accountIncome and expenditure account
Contains opening balance which will represent the amount of cash in hand or at the bank in the beginning of the year.It has no such item as it records only cash spent.  
It is used to record cash transactions only.It records cash transactions and also includes accrued transactions (i.e. it is prepared on ‘accrual basis’).
It records and includes capital receipts (i.e. cash from sale of fixed asset) and capital payments (i.e. cash spent to purchase fixed asset).All inflows (incomes) are credited while all outflows (expenditure) are debited into this account.
The balance in this account at the end of the period (year) represents cash in hand, cash at bank or bank overdraft as the case may be.The balance in this account will represent surplus (i.e. when income is more than expenditure) or deficit (i.e. when the expenditure is more than income) in any period (year).

Membership Subscription

Clubs, societies and association receive payments from members for benefits which members enjoy in the form of subscriptions usually on an annual basis. Membership subscription is one important source of income to clubs and/or associations. It is usually payable one year in advance. Such payments in advance by members are shown as liability in the balance sheet of clubs; this because the year’s membership still has to run as at the balance sheet date.

However, in practice, a large number of members will never pay their subscription at the appropriate time and will be owing the club, making a substantial amount of subscriptions to be in arrears. As it mostly happens, these subscriptions are never received by the clubs or association.

The treatment of subscriptions in arrears poses a problem in the preparation of clubs’ account as decision has to be made whether to show subscriptions in arrears as debtors in the balance sheet or not, as the balance sheet could be distorted by a fictitious asset of debtors; where subscription in arrears are recognized and included in the balance sheet and are never paid by affected members.

The points to note are as follows:

  • Recognizing subscriptions in arrears and treating them as debtors (assets) in the balance sheet is inappropriate due to the application of the accrual concept. It is recognized that subscriptions in arrears are incomes that have been earned for a particular accounting years, but for which cash has not been received.
  • On the other hand, excluding subscription in arrears from the balance sheet is the application of prudence concept. The exclusion is due to the fact that subscriptions that are owed by the members for a long time end up not being paid eventually.

Irrespective of the method adopted, treatment of subscriptions in arrears by a club in the balance sheet should be applied on a consistent basis and changes made where the club or association conditions justify the change

Illustration 1

The Barca fans club had the following transactions in their subscription account for the year ended 31 December, 2008.

(a)  Cash received for subscription N290,000

(b) Subscription owing by member as at 31 December 2007 amounted to N40,000

(c)     Subscription owing by members as at 31 December, 2008 was N60,000

(d)    Subscription paid in advanced by members for 2008 amounted N10,750, while subscription in advance for 2009 was N54,500.

You are required to prepare the subscriptions account as it would be at the end of 31 December 2006.


Subscriptions Account for the Year Ended 2008

Subscriptions owing at 01/01/2008   Amount transferred to income and expenditure account as income for the year   Subscription paid in advance for 200940,000       266,250         54,500  
Subscription paid in Advance at 01/01/2008   Cash received from members for subscription payment in 2008     subscription owning at 31/12/200810,750       290,000         60,000  
  Subscription paid in Advance b/d  54,500


The carrying forward subscription in advance means the application of matching concept. In the illustration, the payment of N54,500 included in the amount received for subscription for 2009 represents income meant for 2009 accounting year. This must be removed from the current year’s payment of cash received for subscription in the year. Hence, the debit carry forward of the amount of N54,500 on the subscription account. This will be shown in the balance sheet as a liability.

Life Membership

At times, subscriptions are received from life members pay a once-and-for-all subscription which entitles them to use of club facilities for the rest of their lives. This once-and-for-all payment from life members are not income relating to the year in which they are received by the club, because the payment is for the life of the members which can last a very long time to come.

In practice, if life membership subscriptions are small, they are credited to income account as received, but if they are significant in amount, they should be credited in equal proportion over the estimated active club membership of such members.

Accumulated Fund

The accumulated fund represents the opening capital of a non-profit-making organization. It has the same meaning with the capital account of a sole trader and partnership.

It is calculated as the difference between total assets and liabilities in a particular period. In situation where a club keeps an incomplete records or single entry, the accumulated fund is derived through preparation of statement of affairs.

Illustration 2

The Swagger Youth Club prepared the following information relating to the club activities for the year ended 31 December 2009.

Cash in hand Subscription:   2008                         2009 Receipts for use of club facilities Receipts from refreshing guests Payments: Repairs Salaries and wages Printing and stationeries Refreshment materials Electricity expenses Vehicle running expenses Caretaker wages Creditors for repairs Creditors for vehicle expenses Creditors for refreshment materials Subscription owning for 2009            120,000 500,000         80,000         58,000         18,000         11,000           3,000           2,000              400           3,000         50,000900,000   1,000,000   4,500,000   1,000,000      100,000

You are required to prepare:

  • Receipts and payments account
  • Income and expenditure account for the year ended 31 December 2009.

Bar Trading Account

As part of the activities to partly provide relaxation and enjoyable moments for members and to partly generate additional income for effectiveness running of a club, a club may engage in running a bar alongside other activities which can generate profit. The profit will not be distributed among members, but rather used for the purpose of the club.

Thus, if a club has a bar, a separate trading and profit and loss account will be prepared for its trading activities. The net profit arising from the bar activities is then included as income in the income and expenditure account, and may loss from the bar trading is included in the expenditure side of the income and expenditure account.

Illustration 3

The Financial Secretary of chop-1-chop Fun Club presented you with the following summary of receipts and payments account of the club for the year ended 31 December, 2007.

Receipts and Payments Account for the Year Ended 31 December 2007

Bal. b/f Membership subscription Entrance fees Bar receipts Sundry receipts49,000 57,600    8,400  75,000  38,000               228,000Rent and rates Bar purchases General wages Bar wages Social activities Expenses Equipment Electricity expenses Postage Bank charges Insurance Bal. c/f      8,040 35,800 25,600 11,040   30,000 57,200       2,080       3,520       1,160       6,040 47,520 228,000

Other additional information includes the following balances:

Furniture and fittingsPremisesBar stocksSubscription in arrearsWages owningSubscription in advanceInsurance prepaid        44,000       600,000         10,400              800           1,800           4,000           1,36028,400     600,000       14,200         1,200               1,800

Depreciation to be provided on equipment at 20%

You are required to prepare:

  • Bar trading accounts
  • Income and expenditure account for the year ended 31 December 2007
  • Balance sheet as at that date.


Bar Trading Account for the Year Ended 31 December 2007

Sales Opening stock bar Add: Bar purchases   Less: Closing stock of bar   Add bar wages Bar profit transfer to income and exp. Account  10,400 35,800 46,200 14,200   32,000 11,040    75,000             (43,040) 31,960  

Income and Expenditure Account for the Year Ended 31 December 2007

Rent & rated General wages (25,600 – 1,800) Social activities expenses Postage Electricity expenses Insurance Bank charges Furniture & fixture (44,000 – 28,400) Equipment (20    x 57,200)                       100 Excess of income over Expenditure       8,040    23,800    30,000     3,520     2,080      5600     1,160   15,600     11,440       39,120 140,360Membership subscription Entrance fees Bar profits Other income    62,000    8,400 31,000 38,000                   140,360

Chop-1-chop Fun Club

Calculation of Accumulated Fund as at 1 January 2007

Assets N
Premises Furniture and fittings Bar stock Insurance prepaid Subscription in arrears Bank balance Liabilities Wages owing Subscription in advance              1,800 4,000    600,000               (5,800)   31,960

This calculation of the accumulated fund is done in order to derive total opening capital of the club as the beginning of the year. Thus, the addition of the total assets of the club at the beginning of the year from which we deduct the total liabilities of the club again at the beginning of the year give us the accumulated fund.

Balance Sheet as at 31 December 2007

Fixed Assets Premises Furniture and fittings Less: depreciation Equipment Less: depreciation   Current Assets Bar stock Subscription in arrears Insurance prepaid Bank       Represented by Accumulated fund Add: excess of income over           expenditure    44,000 (15,600) 57,200 (11,440)     14,200 1,200 1,800 47,520      600,000   28,400   45,760 674,160             64,720 738,880   699,760 39,120 738,880


Subscription Account

Dr                                                                                                                                            Cr

Bal. b/f   Income and Expenditure       Bal. b/f     800   62,000         62,800 1,200Bal. b/f   Receipts and Payment   Bal. c/f  4,000     57,600     1,200 62,800

Insurance Account

Dr                                                                                                                                            Cr

Bal. b/f   Receipt and payment a/c    800     6,040   7,400Income and expenditure a/c   Bal. c/f  5,600     1,800 7,400

Use the Data Below to Answer Questions 1 to 5:

Receipts and payments account for the year ended 31 December 2008

Bal. b/f Subscriptions Receipt and payment a/c      16,000     6,040     7,400Equipment Bar purchases  18,000 60,000   1,800   7,400

Financial Account Notes –

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