Financial Accounting Lesson Note SS3 Second Term
Lessons on Accounting – Edudelight.com
FINANCIAL ACCOUNTING
SECOND –TERM
S.S 3
SCHEME OF WORK
WEEKS
1. Contract Accounts
– Meaning, terminologies – National profit, retention fee, work certified.
– Work-in-progress, calculation of percentage of work completed.
– Preparation of contract Account.
2. Contract Accounts – calculation of ratios e.g liquidity ratio, acid test ratio, working capital etc.
3. Departmental Account – Meaning
– Reason for departmental Account
– Inter Departmental transfer.
– Lost Apportionment.
– Preparation of departmental Account.
– Differences between branch and departmental Account.
4. Branch Account
– Meaning, types of branches – Local, foreign.
– Reasons for the branch Account.
– Branch memorandum Account.
– Branch returns Account
– Branch debtors Account.
– Branch Profit and loss Account.
– Branch mark-up and margin.
5. Public Sector Accounting.
– Meaning, basis for preparation of Account, sources of government revenue.
– Capital/Re-current expenditure.
– Heads and sub-heads.
– Types of fund.
– Capital and revenue Account.
– Income and expenditure Account.
– Differences between government Accounting and public sector Accounting – Term in government Accounting.
6. Preparation of personnel cost Budget.
7. Revision
8. Mock Examination.
CONTRACT ACCOUNT
WEEK 1
INTRODUCTION
The contract account is a system of cost accounting used by contractors engaged in construction and building works, where it is common for a firm to be engaged in execution of many separate contracts at the same time, and which can continue over a long period (many years). The contract accounts make it possible to allocate most of the expenditure incurred directly to the individual contracts, thus making it very easy to prepare, within the framework of financial accounts, a separate account which will disclose the profit or loss on each contract.
The contract accounts take care of such businesses whose nature of work does not conform to a financial year’s calculation of profits, based on the duration of period required to complete the job. Assume that a firm of contractors has only one contract in progress, which is construction of a large stadium complex which might take three years to complete. In this instance, the actual profit or loss on this type of contract can only be correctly calculated on the completion of the contract.
However, if the company has been formed especially for this contract, the owners may not want to wait for three years before profit could be calculated and dividend paid. Therefore, an attempt is made to calculate yearly profits.
In contract accounts, it is important that a firm should keep a close check on the costs incurred on each contract, and eventually on the profit actually realized. This is more so important where the contract will extend more than one accounting period its imperative that annual account be prepared to determine the yearly profit or loss on the contract.
Definitions
The Nigeria Accounting Standards Board defines construction contract as the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications normally evidenced by an agreement between two or more parties.
The standard classifies the construction contract as:
- Short-term construction contract
- Long-term construction contract
The short-term construction contract are those contracts that are expected to be completed within 12 months, while the long-term construction contracts are those contracts that are expected to take more than 12 months to complete.
Methods of Revenue Recognition
Revenue recognition means the process of accounting for and inclusion of revenue from a contract in financial statement. In contract account, revenue is deemed realized at the point where the portion of the work responsible for generating the revenue has been performed.
There are two main methods of recognizing revenue under contract account as follows:
- Completed contract method
- Percentage of completion method
Completed Contract Method
This is a method used for long-term contracts (i.e. a contract that will take more than 12 months to complete), particularly in situations where there are no dependable estimates or where there are uncertainties which make accurate forecast impossible. Under this method, revenue from a contract is recognized only when the contract is completed. Thus, all costs incurred on a contract and billing there from are accumulated until the contract is completed. No interim charges and credits are made to the profit and loss account.
This method has a major problem of subjecting the periodic revenue from long-term contract to distortion. Revenue earned before the completion of the contract is not reflected in the accounts of a business, even if operations on a contract are uniform throughout the contract period.
On 1 July 2005, the Consortium builders were engaged to construct a stretch of 2km road at a contract price of N100,000. The contract was tagged contract No. 6 by the company. During the year, the company incurred the following expenditure on the contract:
| Material issued from store Materials purchased Wages Sub-contracting work on contract Purchase of special equipment On 30 June material on site amounted to | 25,000 24,000 24,750 6,000 45,000 2,500 |
The equipment purchased has an estimated useful life of four years and the company adopts straight line method of depreciation in providing for depreciation on all its assets.
You are required to prepare a contract account for contract No. 6 for the year ended June 2006.
Consortium of Builders
Contract No. 6
| June 2006 Materials issued from Store Purchases Wages Subcontracting fees *Depreciation of equipment Profit on contract | 25,000 24,000 24,750 6000 11,250 11,500 102,500 | June 2006 Contract price Material issued | 100,000 2,500 102,500 |
Depreciation calculation
Cost of equipment = N45,000
Estimated useful life = 4 years
Scrap value = NIL
Depreciation =
= N11,250
Percentage of Completion Method
This method apportions revenue from a contract to each accounting period involved in the execution of a contract on the basis of the proportion of the contract executed during the period to total value of the contract. Under this method costs that are incurred on a contract are accumulated in an asset account. It is usual to ascertain the proportion of revenue to be included in a period account in relation to the work done through one of the following two methods:
- The percentage of estimated total revenue that the cost incurred to data bears to the estimated total costs.
- The percentage of total contract value that the engineering and architectural work done to date bears to the engineering and architectural estimate of the whole contract.
This method attempts to match revenue with incurred cost in the accounting period.
Example 1
The following relates to the expenditure incurred on contract No. 30 by a contractor on building contract during the year ended 31 December, 2009.
| Contract price Work certified by architects Cash received Work not yet certified at year end Materials issued during the year Direct labour Overhead expenses Plant purchased * Stock of materials at 31/12/09 * Accrued Expenses * Plant Value at 31/12/2009 | 450,000 157,500 112,500 6,750 112,500 45,000 4,500 36,000 13,500 2,250 18,000 |
Based on the above information, you are required to prepare a contract account for contract No. 30 for the year ended 31 December 2009.
Contractor
Contract N. 30
| 31/December 2009 Materials Labour Overheads Plant purchased Accruals c/f | 112,500 45,00 4,500 36,000 2,250 200,250 | 31/December 2009 Plant value at year end Material value at year end Work-in-progress c/f Loss (profit & loss) | 18,000 13,500 64,250 4,500 200,250 |
Computation of loss taken to profit and loss account
| Cost on contract to year end Total expenditure to rate Loss: Value of plant at 31 December 2009 Value of material at 31 December 2009 Less: Cost of work not certified Cost of work certified Work certified by architects Loss | 200,250 (18,000) (13,500) | 168,750 6,750 162,000 157,500 4,500 |
Determination of Profit Realized on a Contract
Some contracts may take several years to complete, during which time a firm (contractor) may receive some payment on account of the work done. It is usual for firms to determine the amount of profit realized and pay dividends to their owners.
In small contract, payment for the job executed may be paid in one lump sum after the work is completed, while in the case of large contracts, there is usually an agreement between the parties to provide for the payment in stages.
Work Certified
This is the part of a contract work to which a certificate has been issued by a project architect or engineer as an evidence that such part of the contract has been satisfactorily completed.
Work-in-progress
These are the accumulated certifiable costs which relate to a contract that is yet to be completed. The progress payments received and receivable on such contract are deducted from them.
Retention money
This is the retained part of the cash payment made to a contractor on the value of the work certified. The money is retained as a penalty in case the contract is not completed by a stated date or against claim for faulty workmanship etc. the retention money is later paid on satisfactory completion of the whole contract. For example, where an engineer issue a certificate for N100,000 as value of work completed, and the contractor is to be paid subject to deduction of say 10 per cent as retention money, then the contractor will receive N90,000 on the certificate issued.
Profit on work certified
The profit on a contract is determined by deducting the cost required to complete the work from the contract price. Thus the profit to be taken to work certified is the contract value of the work completed less the cost of the work completed. For example if a contract that is worth N200,000 is certified as 40 per cent complete, then the value of the completed work is N2,000,000 x 40% = N80,000.
Assume the total cost of the contract is to be N150,000, the cost of the work completed should be about N150,000 x 40% = N60,000.
Therefore the profit made would be N(80,000 – 60,000) = N20,000.
Account Entries of Contract Work
A contract account should be debited with all expenditure directly incurred on the contract, and debited with such proportion of the indirect expenditure that can conveniently be apportioned to it.
The direct expenses will consist of the materials, labour, plant and equipment purchased specially for a particular contract and any other expenditure which are incurred on the contract site wholly for the purpose of the contract.
The indirect expenditure will normally be small and in relation to direct charges, and will include administrative expenses office salaries, directors remuneration, audit fees, postages, telephone, stationery and so on. these expenditures are apportioned to various contracts using some arbitrary basis, such as a percentage on prime cost, or labour cost or the use of time occupied on a contract etc. the contract account is credited with the contract price at the completion of the contract. The balance on the account thus represents the ultimate profit or loss.
Methods of Book-keeping
Where the contract has fairly advanced but is impossible to estimate future expenditure to complete the contract.
- Debit the contract account with all expenditure to date.
- Credit and carry down the value of plant and equipment and unused materials at the end of the accounting period.
- Credit and carry down work-in-progress at cost plus the proportion of profit taken to date.
- Debit the contract account and credit the firm profit and loss account with the proportion of profit taken in the accounting year.
Note
- The proportion of profit to date can be calculated using this formula:
x Apparent Profit to date x
Apparent profit is determined as follows:
| Value of architect certificates to date Less cost of work to date Less cost work not yet certified Cost of work certified | x (x) | x (x) x |
Example 2
The Chairman of Boripe Local Government awarded a contract for the building of a modern canteen hall. By the end of the year the following items have been charged to the contract account.
| Wages for labour on site Wages for foremen and office staff on site Materials Purchase of plant for the contract Hire of special machines for contact Payment to subcontractor on site Other site expenses | 20,000 2,400 16,000 8,00 1,600 3,600 1,200 |
During the year, architect’s certificate amounting to N56,000 have been issued relation to the value of work done, and retention of 10 per cent is to be made, while the local government has paid N50,400.
The cost of stock of materials unused amounting to N3,200 at the site at the year end is not included in the architects certificate and is therefore carried forward to the next year. Also the value of the plant at the end of the year estimated at N56,000 was carried forward.
You are required to prepare the contract account for the building of the canteen
Solution
Boripe Local Government Canteen
Contract Account
| Wages of labour on site Wages of foreman and administration staff on site Materials Plant purchased Hire of special machines Payment to subcontractors Other site expenses Profit and loss account Reserve (part of the apparent Profit not yet recognized as earned) c/d Stock of unused materials b/d Value of plant b/d | 20,000 2,400 16,000 8,000 1,600 3,600 1,200 7,200 4,800 64,800 3,200 5,600 | Value of architect certificates Stock of unused Materials c/d Value of plant c/d Reserve b/d | 56,000 3,200 5,600 64,800 4,800 |
In the example, the difference between the totals of the two sides (i.e. the debit side has a total of N52,800, while the credit side has a total of N64,800) is N12,000, which is called the apparent profit. But, because the contract has not been completed, it is possible that there may be occurrence of costly problem which may erode any potential profit earned or there may have been the occurrence of faults which has not been noticed yet. Thus the convection of conservation is now applied to the profit to be recognized as profit earned, and available for distribution as divided. The apparent profit is reduced using the following formula;
Apparent Profit x x
Applying the formula to above illustration, we will have
1200 x x = N7,200
In the example above, the apparent profit was shown to be N12,000, which was reduced by applying a formula. But the action taken would have been different if instead of showing a profit a loss of N12,000 was shown. In such a case, the whole amount of loss shown (i.e. N12,000) would have been transferred to profit and loss account.
Lessons on Accounting – Edudelight.com
DEPARTMENT ACCOUNT
WEEK 2
INTRODUCTION
The most important objective of accounting is the segregation and recording of transactions of buying selling, production, distribution and administration of business organizations. There are several organizations whose business involve the separation or division of the organization to different units, sections or departments. Thus a departmental account is aimed at segregating and reporting on several activities of a business with multiple divisions in order to:
- Compare results of trading activities
- Assist the owner(s) in planning and decision-making process
- Evaluate the performance of the departmental managers and reward them based on the results produced.
Departments may be classified according to their functions, for example buying, selling, production or manufacturing, or may be based on subsidiary services such as transport, packaging, repairs, maintenance etc.
In order to achieve the targets of departmental accounts, it is important that the accounting system be devised in a way that allows the trading results of each department of an organization to be accurately ascertained as regards the turnover, expenses and profits. Separate records must be kept for purchases and sales of each department. Stock of each department must be taken separately and proper records of all transfers from one department to another adequately kept. Any expenses that can be allocated directly to any department must be charged to it, while other expense are apportioned using some reasonable basis.
Where the number of departments in an organization is small, it is convenient to use columnar forms of bought-and-sold day books, return books etc., each having a total column from which the posting is made to the personal accounts and detail columns, and the total posted to the respective accounts in the impersonal ledger at the end of each month or for a specific chosen period.
Allocation of Joint Expenses
There are some common expenses incurred by an organization for which all or some of the departments are beneficiary. These expenses to be shared among the departments involved using an appropriate parameter for each expense.
- All expenses incurred specifically for a department will be charged directly to it, for example maintenance of motor vehicle charged to transport department.
- Any expense incurred for the benefit of all departments and capable of precise allocation will be charged accordingly, for example lighting can be charged using meterage.
- Expenses incurred for the benefit of all departments not capable of precise allocation can be treated and charged as follows:
- Selling expenses can be charged on a sale basis using either the value of items sold or units or quantities sold.
- Administration expenses such as rent and rates may be apportioned to give approximately true results on the basis or area, windows used, cubic content, average stock held or sold and so on.
- Heating and lighting in absence of use of separate meter may be apportioned on the basis of (1) points wired (2) lamp used and (3) area of inversely to the number of windows. Many other expenses such as insurance and advertising may be apportioned exactly or approximately on the basis of nature and function of the expenditure, whereas depreciation will normally be allocated on the basis of assets employed in each department.
- Where expenses incurred on behalf of all departments have no know basis of apportionment, it is very usual to determine and bring down the departmental balance of profits and apportion the expenses equally against it, so that the management will not misguided by the arbitrary nature of the apportionments and at same time management will be able to ascertain the approximate net profit of each department.
- A charge (which does not represent an actual item of expenditure) is often made for interest and this is usually based on the estimated amount of average capital employed by each department. In real sense, this does not affect the total net profit, since it is only an internal adjustment. A debit is made to each department as the share of interest and a total credit to profit and loss account.
Inter-Departmental Transfers
It is nearly impossible for a department of an organization to work and function effectively in isolation form other departments in the same organisation. Hence it is usual for departments to transfer goods and render service to one another. Where goods, the employment of staff or the performance of services are exchanged between departments, these should be separately recorded and shown as separate items in the departmental columns of the trading and profit and loss account. The transfer of goods is done either at cost or at the loaded price. Where it is done at loaded price, adequate care must be taken to eliminate from the total results the unrealized profit. This is so because such profit is not realized by the organization until the goods have been disposed to outside purchases.
Advantages of Departmental Account
Maintaining the departmental account has some of the following benefits to an organization:
- It assists an organization to easily determine the profitability to each department.
- It makes it possible for an organization to quickly determine the department earning the highest profit and to plan with little effort to increase its sales.
- It assists management to determine the necessary amount to commit to capital expenditure in departments of the organization.
- It can be used to determine the performance bonus for managers by using their departmental results.
- It allows an organization to be able to identify the department requiring re-organization or possible closing down.
Example 1
Yakowa Abdala is the owner of a store specializing in sales of adults and children clothing. For the purpose of accounts, the store is divided into two departments. Department A is responsible for sales of adult clothing, while department B is responsible for children wear. The following balances were extracted from the ledgers of the store as on 31 December 2008.
| N | |
| Sales: Department A Department B Stock: 01/01/2008 Department A Department B Purchases: Department A Department B Wages of sales assistants: Department A Department B Delivery wages for adult section General office salaries Rates Insurance Electricity Repairs to premises Telephone General cleaning Accounting and audit fees General office expenses Stock at 31 December 2008 December A December B The portion of the total floor area occupied by each department was: Department A = one-fifth Department B = four-fifth | 375,000 250,000 6,250 5,000 295,000 205,000 25,000 18,750 3,750 18,750 3,250 1,250 3,000 6,250 1,625 900 1,800 1,500 7,500 3,750 |
You are required to prepare a departmental trading and profit and loss account for the business for the year ended 31 December 2008.
For the purpose of apportioning the expenses which are general to the business (i.e. incurred and used for running the two departments), the following basis of apportionment will be used:
- Area occupied will be used to apportion rates, insurance, electricity, repairs, telephone and cleaning expenses.
- Turnover will be used apportion, general officer salaries, accountancy and audit feeds and general office expenses.
Solution
YAKOWA ABDALA
Departmental Trading, Profit and Loss Account for Year Ended
31st December 2008
| Department A | Department B | Total | ||||
| Sales Opening stock Purchases Lead closing stock Gross profit Expenses Wages Delivery wages Office salaries Rates Insurance Electricity Repairs Telephone Cleaning Accounting Office expense Net profit | 6,250 295,000 301,250 7,500 25,000 3,750 11,250 650 250 600 1,250 325 180 1,080 900 | 375,000 293,750 81,250 – 45,235 36,015 | 5,000 205,000 210,000 3,750 18,750 7,500 2,600 1,000 2,400 5,000 1,300 720 720 600 | 250,000 206,250 43,750 40,590 3,160 | 11,250 500,000 511,250 11,250 43,750 3,750 18,750 3,250 1,250 3,000 6,250 1,625 900 1,800 1,500 | 625,000 500,000 125,000 85,825 39,175 |
Working Notes
(a) General office salaries (based on the turnover of each department)
A = x 18,750 = 11,250
B = x 18,750 = 7,500
(b) Rates (based on the floor area)
A = x 3,250 = 650
B = x 3,250 = 2,600
(c) Insurance (based on the floor area)
A = x 1,250 = 250
B = x 1,250 = 1,000
(d) Electricity (based on the floor area)
A = x 3,000 = 600
B = x 3,000 = 2,400
(e) Repairs (based on floor area)
A = x 3,250 = 650
B = x 3,250 = 2,600
(f) Telephone (based on floor area)
A = x 1,625 = 325
B = x 1,625 = 1,300
(g) Cleaning (based on floor area)
A = x 900 = 180
B = x 900 = 720
(h) Accounting fees (based on turnover)
A = x 1,800 = 1,080
B = x 1,800 = 720
(i) General office (expenses based on turnover)
A = x 1,500 = 900
B = x 1,500 = 600
Example 2
From the trial balance of Bokorama presented below, prepare in two-sided form, departmental trading and profit and loss account for the year ended 31 December 2009.
Trial Balance as at 31 December 2009
| Stock: 01/01/2009 Department A Department B Purchases: Department A Department B Sale: Department A Department B Wages: Department A Department B Rent, rates and insurance Sundry expenses Salaries Lighting and heating Discount allowed Discount received Advertising Carriage inwards Furniture as fittings Plant and machinery Debtors Creditors A-capital A-drawing Cash the bank Cash in hand | 17,000 14,500 35,400 30,200 18,200 12,700 9,390 3,600 33,000 2,100 2,220 3,680 2,340 3,000 21,000 6,060 14,500 9,900 170 238,960 | 90,800 81,250 650 18,600 47,660 238,960 |
The following information are also relevant:
- There was an internal transfer of goods from department A to department B worth N420.
- Advertising is to be apportioned between the departments equally.
- Services rendered by department B to department A included in wages is N500.
- The items of rents, rates and insurance, sundry expenses, lighting and heating, salaries and carriage inwards to be apportioned to department A at two-third and to department B at one-third.
- Discounts allowed and received to be apportioned on the basis of the sales and purchases (excluding transfers) of the departments.
- Depreciation charged on furniture and fittings and plant and machinery at 10 per cent per annum to be apportioned to department A at three-fourth and to department B at one-fourth.
- The stock of goods at 31 December 2009 for department A is N16,740 and for department is B N12,050.
Lessons on Accounting – Edudelight.com
BRANCH ACCOUNTING
WEEK 3
INTRODUCTION
A branch of an organization whether business or non-business can be defined as a part of the organization operating with some degree of independence. For example, a business concern may have its head office situated in one city with several branches in different parts of the country. Thus, a branch is created where a section of a business is segregated physically from the main section. In other words, if the location of activities is separated from the main place or operation, a relationship is created between the branches and the head office.
The method of accounting for branch essentially depends on the dealings and transaction between the head office and the branches. A branch may be a small retail shop managed by a single person, selling only goods sent by the head office, or it may be a foreign branch located thousands of kilometers away from the head office, purchasing the required materials, manufacturing and distributing the products in its area, with its activities controlled only in a very small degree by the head office.
Divisions of Branches
For accounting purposes, branches may be divided into the following three classes:
- Branches for which the whole of the accounting records are kept by the head office
- Branches which maintain separate accounting records
- Foreign branches
Methods of Accounting for Branches
Where the Head Office Keeps the Accounts
This method is used basically when the branches are regarded as sales department, receiving all goods they deal in from the head office which the branch manager must account for. In this methods, the head office does all the buying and the branch only sells. The branches receive goods from the head office at selling price and the branches must as a necessity produce the cash or stock to cover the value of goods received. Managers at the branches are put on check through preparation and forwarding of reports giving the details of goods received and returned to the head office, cash sales, credit sales, cash received from debtors, stock, expenses and debtors at regular intervals.
Pricing Method
There are three different pricing methods which a head office can use to charge goods to the branches as follows:
- Cost price
- Cost plus a percentage
- Selling price
Cost Price Method
The cost price method can be used where goods are perishable in nature or where the selling prices are difficult to determine due to fluctuations. The method charge out goods sent to branch at cost price and the opening and closing stocks also taken at cost price.
This method has the major disadvantage of lacking the check imposed on trading activities of the branch by the selling price method.
Example 1
Kuranta opened a new branch in Western Avenue on 1 January 2004. The head office maintains all records and charges goods to branch at cost. From the following information extracted from the ledger, prepare the trading and profit and loss account for the branch.
| Goods sent to branch at cost by head office Returns from branch at cost Branch credit sales Cash takings remitted to head office Cash takings stolen uninsured Goods stolen uninsured Branch expenses paid by head office Closing stock at branch at cost Cash received from branch debtors Discounts allowed branch debtors Head office Opening stock on 1 January Purchases Sales Closing stock on 31 December Expenses | 135,000 6,000 101,000 32,000 600 230 5,225 37,500 85,050 5,005 180,000 900,000 1,300,000 135,000 56,000 |
Solution
Kuranta
Western Avenue Branch Stock A/C
| Goods sent to branch account Goods from head office Profit and loss account Gross profit | 135,000 42,330 177,330 | Goods sent to branch account Returns Credit sales (debtors) Cash sales Cash sales stolen Good stolen Closing stock at cost Carried forward | 6,000 101,000 32,000 600 230 37,500 177,330 |
Goods Sent to Branch A/C
| Western Avenue Branch Stock A/C: returns Head office trading A/C: purchases | 6,000 129,000 135,000 | Western Avenue stock A/C | 135,000 135,000 |
Western Avenue Branch Debtors Account
| Branch Stock Account: credit sales | 101,000 101,000 | Cash Received Discount Allowed Balanced carried forward | 85,050 5005 10,945 101,000 |
Branch Expenses Account
| General Cash | 5225 | General Profit & Loss a/c | 5225 |
Defalcations Account
| Cash stolen Good stolen | 600 230 830 | General Profit & Loss Account | 830 830 |
Head Office Trading Account for the Year Ended 31st Dec. 2004
| Opening stock Purchases Less: Transfer to Western Avenue Branch Less closing stock Cost of goods sold Gross profit | 900,000 129,000 | 180,000 771,000 951,000 135,000 816,000 484,000 1,300,000 | Sales | 1,300,000 1,300,000 |
General Profit and Loss A/C
| Branch discount allowed Defalcations Branch expenses Head office expenses Net profit | 5,005 830 5,225 56,000 459,270 526,330 | Head office profit transferred from trading A/C Western Avenue branch Profit | 484,000 42,330 526,330 |
Cost Plus a Percentage Pricing Method
This is regarded as the most effective method of charging goods to the branch. Goods are sent to branches at cost plus a fixed percentage. The head office will keep accounts which will disclose the gross profit or loss of the branch, in a situation where cost plus a percentage at which the goods are charged is equivalent to selling price, the head office will also have stock control. Hence the total goods received by branch from head office must be equal to sales plus returns to head office plus the branch closing stock.
Under cost plus method, the head office keeps:
- Branch stock accounts.
- Goods sent to branch account.
- Branch stock adjustment account.
Basically, there are two methods used in recording and presenting accounting entries under the cost plus percentage method. These are as follows:
- Branch stock adjustment method.
- Memorandum or double column method.
Branch stock adjustment method
Using this method, the following accounts are prepared.
- Branch stock account: This account records goods sent to branch by head office at the involved price.
- Branch stock adjustment account: This account is used to record the amount of loading added to the cost of the goods sent to the branch. The account is used to ascertain the actual gross profit of the branch.
- Goods sent to branch account: This account is recorded at the cost price of the good sent.
- Debtors account: This account records transactions of the debtors.
Accounting Entries
| Transaction | Debit | Credit | |
| When goods are sent to the branches | Branch stock account at the full amount at which the goods are invoiced. | Goods sent to branch account with the cost price of the goods.Branch stock adjustment account with the percentage of profit added to cost of the goods i.e. profit loading. | |
| When goods are returned to head office by the branch | Goods sent to branch account at cost price of goods.Branch stock adjustment account with the percentage of profit added to the cost of goods (i.e. profit loading). | Branch stock account at the amount at which the good are invoiced and sent to branches. | |
| When sales are made | Cash account if it is cash sales.Debtors account if it is credit sales. | Branch stock account whether it is cash or credit sales. | |
| With the opening stock | Brach stock account with the invoiced price of goods. | Branch stock adjustment account with the percentage of profit added to the goods. | |
| With the closing stock | Branch stock adjustment account with the percentage of profit added to the goods | Branch stock account with the invoiced price of the goods. | |
| When goods are transfer red by a branch to another branch | Goods sent to branch account with the cost price of such goods.Branch stock adjustment account with the percentage of profit added to such goods. | Branch stock account with the involved price. | |
| Where goods are still in transit | Branch stock adjustment account with the percentage of profit on such goods. | Branch stock account at the invoiced price of such goods. | |
| When goods are lost in transit | Branch stock adjustment account with the percentage of profit added to cost of such goods.Goods lost in transit account with the cost price of such goods. | Branch stock account at the invoiced price of such goods. | |
| When there is a reduction in selling price or allowance is give off the selling price | Branch stock adjustment account with the total allowance. | Branch stock account with the total allowance. | |
| When goods are returned by the customers directly to the | Branch stock adjustment account with the percentage added to the cost of such goods. Goods sent to branch account with the cost price of such goods. | Debtor account with the invoice price of such goods. | |
| When goods are stolen or there is deficiency of goods | Branch stock adjustment account with the percentage of profit added to the cost of such goods.Goods stolen account or deficiency account with the cost price of such goods. | Branch stock account with the invoiced price of the goods. | |
| When cash from cash sales of goods are stolen | Defalcation account with the total amount stolen and later transfer to profit and loss. | Branch stock account with the total amount. |
At the end of the period, the goods sent to branch account will be closed by transferring the balance to the head office purchases account. This transfer relieves the head office trading account to charge for these goods, since they have been fully accounted in the branch stock account and the branch stock adjustment account.
The balance on the adjustment account will be transferred to profit and loss account.
The above debit and credit entries can be represented in the following format:
Branch Stock Account
| Opening stock Goods sent to branch | x x xx | Goods transfer to another branch Cash sales Credit sales Returns to head office Goods in transit Reduction in selling price Goods stolen Cash stolen Expenses paid out of cash takings Goods stolen Normal loss Cash at hand Closing stock | x x x x x x x x x x x x x xx |
This account is maintained at invoiced price.
Goods Sent to Branch A/C (at Cost Price)
| Returns to head office Transfer to other branch Head office purchases account | x x x xx | Branch stock account | x xx |
Branch Stock Adjustment A/C
| Profit element of Goods return to head office Goods returned by customers directly to head office Goods in transit Goods in transit Goods stolen Goods transfer to other branch Normal loss at selling price Reduction in selling price Profit on closing stock Gross profit transfer to profit and loss account | x x x x x x x x x xx | Profit on Opening stock Goods sent to branch | x x xx |
Profit and Loss A/C
| Cost of goods stolen Sundry expenses Cost of goods lost in transit Cash stolen Net profit | x x x x x x | Branch adjustment account: Gross profit b/d | x x |
Example2
Omatsola Enterprises has it head office in Abuja, but operates other branches in Lagos, Ibadan and Kano. All goods are purchased by the head office in Abuja and sent to the branches at cost price plus 20 per cent.
The following has been extracted from its books for the year ended 30 June 2008:
| Goods sent to branch at cost Return to head office at cost Sales on credit Cash takings remitted to head office Cash taking stolen Sundry expenses paid out of takings Goods stolen at cost Allowances off selling price Closing stock at cost price | 150,000 1,500 105,000 30,000 1,840 2,750 1,000 210 31,000 |
Required: Prepare
- Branch account as it would appear in the head office books.
- The profit and loss account for the year ended 30 June 2008.
Solution
The first step is to calculate the invoiced price (selling price) of the goods using the mark-up of 20 per cent or cost as stated in the question.
(a) Involved price of goods sent to branch
Profit = Mark-up xx Lost price
= xx 150,000 = N30,000
Selling price = Cost price + Profit
= (150,000 + 30,000)
= N180,000
(b) Selling price of goods returns to head office
Profit = Mark-up xx Cost price
= xx 1,000
= N300
Selling price = Cost price + Profit
= (1,500 + 300)
= N1,800
(c) Selling price of goods stolen
Profit = Mark-up xx Cost price
= xx 1,000
= N200
Selling price = Cost price + Profit
= (1,000 + 200)
= N1,200
(d) Selling price of closing stock
Profit = Mark-up xx Cost price
= xx 31,000
= N6,200
Selling price = Cost price + Profit
= (31,000 + 6,200)
= N37,200
Branch Stock A/C (at Selling Price)
| Goods sent to branch | 180,000 | Returns to head office Credit sales Cash remittance Sundry expenses Cash stolen Good stolen Allowance off selling price Closing stock | 1,800 105,000 30,000 2,750 1,840 1,200 210 37,200 |
| 180,000 | 180,000 |
Goods Sent to Branch A/C (as Cost Price)
| Returns to head office Head office purchases A/C | 1,500 148,000 150,000 | Branch stock | 150,000 150,000 |
Branch Stock Adjustment A/C (Loading Amount)
| Returns to head office Good stolen Allowance off selling price Closing stock Gross profit | 300 200 210 6,200 23,090 30,000 | Profit on goods sent to branch | 30,000 30,000 |
Profit and Loss A/C
| Sundry expenses Cash stolen Good stolen at cost Net profit | 2,750 1,840 1,000 17,500 23,000 | Gross profit | 23,090 23,090 |
Goods Stolen Account
| Branch stock account | 1,000 | Profit and loss account | 1,000 |
Memorandum (double-column) method
This method combined the branch stock accounts and branch stock adjustment account together into a memorandum or double column style. Hence it is not necessary to keep separate branch stock accounts and branch stock adjustment.
The branch stock is ruled with two columns, one column will record transactions at cost and the other column at invoiced price.
The entries made at the invoiced price form no part of the double entry, but just a memoranda for the purpose of checking stock. The method requires the preparation of the following accounts:
- Branch stock accounts prepared with double columns
- Goods sent to branch accounts
- Profit and loss accounts
Format
Memorandum Branch Account
| Invoiced price ( | Cost price ( | Invoiced price ( | Cost price ( | ||
| Opening stock Goods sent to branch Gross profit | x x x | x x x x | Returned to head office Cash sales Credit sales Allowance off selling price Cash stolen Goods stolen Expenses paid out of cash takings Normal loss Closing stock | x x x x x x x x x x | x x x x x x x x x x |
Goods Sent to Branch A/C (at Cost Price)
| Returns to branch Head office purchases A/C | x x xx | Branch stock A/C | x xx |
This account must be shown at cost price.
Profit and Loss A/C
| Branch stock account Sundry expenses Stock deficiency at cost price Cash stolen Net profit | x x x x xx | Gross profit | x xx |
Example 2:
Using the question of Example 1 to demonstrate the use of memorandum column method, we will have the account as presented.
Memorandum Branch A/C
| Invoiced price ( | Cost price ( | Invoiced price ( | Cost price ( | ||
| Goods sent to branch Gross Profit | 180,000 180,000 | 150,000 23,090 173,090 | Returns to head office Credit sales Cash remittance to head office Cash taking stolen Goods stolen Allowance off selling price sundry expenses closing stock | 1,800 105,000 30,000 1,840 1,200 210 2,750 37,200 180,000 | 1,500 105,000 30,000 1,840 1,000 – 2,750 31,000 173,090 |
Goods Sent to Branch A/C (at Cost Price)
| Returns to head office Transfer to head office purchases A/C | 1,500 148,500 150,000 | Branch stock A/C | 150,000 150,000 |
Profit and Loss A/C
| Sundry expenses Cash stolen Goods stolen at cost Net profit | 2,750 1,840 1,000 17,500 23,090 | Gross profit | 23,090 23,090 |
Selling Price Pricing Method
Sometimes goods are sent to the branches by the head office at selling prices, i.e. the goods are sent to branches at actual prices at which they are to be sold by the branches.
Most goods which are proprietary goods are charged and sent to branches using this method.
The aim of this method is to provide adequate check on the branch managers and staff to ensure that all goods sent to them are fully accounted for.
The head office would maintain the following accounts in respect of the branch:
- Branch stock account
- Goods sent to branch account
- Total debtors account
- Expenses account
| DR | CR | ||
| When goods are sent to the branch | Branch stock account with total selling price of all goods sent to the branch | Goods sent to branch account with total selling price of all goods sent | |
| When goods are returned by branch to head office | Goods sent to branch Account with the amount | Branch stock account with the amount | |
| Where goods are transferred between branches | Branch stock account of the transferee at the selling price | Branch stock account of the transferor branch at the selling price | |
| Cash sales | Cash | Branch stock account | |
| Credit sales | Total debtor account | Branch stock account | |
| Cash receipt from debtors | Cash book | Total debtor account |
At balancing time, the balance on the branch stock account represents the closing stock of the branch at selling prices.
Example 3
Kelly & sons have a head office which acts as a distributing centre to their branch office where all sales are made. All purchases are made by the head office, and goods are charged out to the branch at selling price. All expenses are paid by the head office with exception of petty expenses for which imprest is given by the head office.
A stock-taking exercise conducted on the branch revealed that actual stock was short by N120 compared with the balance of the stock account.
From the following particulars extracted from the books, prepare the branch account in the head office books at 31 December 2005.
| Stock at 1 January at selling price Goods sent to branch Credit sales Cash sales Goods returns to head office Allowances off selling price Debtors at 1 January Cash received from debtor Discounts allowed Bad debts Salaries Trade expenses Rent Petty cash | 40,000 180,000 98,200 51,500 2,000 1,180 7,500 96,150 1,600 1,050 6,200 1,150 3,250 180 |
Solution
Branch Stock A/C
| Opening stock Goods from head office | 40,000 180,000 220,000 | Credit sales Cash sales Goods returned to head office Allowances off selling price Differences in stock Balance stock c/d | 98,200 51,500 2,000 1,180 120 67,000 220,000 |
Branch Total Debtor A/C
| Balance b/f Credit sales | 7,500 98,200 105,700 | Cash received from debtors Discounts allowed Bad debts Balance b/d | 06,150 1,600 1,050 6,900 105,700 |
Goods Sent to Branch A/C
| Goods returned from branch Allowances off selling price Differences in stock Transfer to sales account Balance stock c/d | 2,000 1,180 120 119,700 67,000 190,000 | Balance stock bf Goods to branch | 40,000 150,000 190,000 |
Accounting for Branches Which Keep Separate
Account Records
At times, it is considered expedient for a branch to keep complete financial records at the branch. This may be due to:
- The branch being located far from the headquarters
- The nature of activities of the branch
- Where the size of the branch makes it economical for the account to be so prepared
To record the transactions, efforts are made to show the connection between the branch and the head office through the following accounts:
- Head office current account or head office account
- Branch current account or branch account
At any time, the branch account in the head office will show the indebtedness of the branch to the head office. The relationship between the head office and branch is that of debtor and creditor. This is evidenced by debit balance of the branch account in the head office books, and also a corresponding credit balance of the head office account in the branch books.
The current accounts are used for all transactions that are concerned with supplying of resources of the branch as well as transactions involving withdrawals of resources from the branch.
It is noteworthy to emphasise that whatever profit is earned by the branch does not belong to the branch, it should therefore be credited to the head office current account and any loss debited to the account ultimately, the head office will debit the branch current account and credit the profit and loss account.
Example 4
The following details were extracted from the books of Munowede Enterprises to record the transactions between the head office and the branch during the year ended 31 December 2010.
- Goods valued at N150,000 was sent by head office to the branch.
- Of the goods sent to the branch, N13,000 worth of this was not received by the branch at the time of the account.
- Goods returned during the year by the branch to head office amount to N6,250.
- The head office received a total sum of N80,000 out of total sum of N87,000 out of total sum of N87,000 remitted by branch to the head office.
- The head office remitted the sum of N12,000 to the branch at the beginning of the year for the purpose of imprest.
Required: Prepare
- The branch account in the books of the head office.
- The head office current account in the books of the branch office.
Solution
Head Office Book
Branch Current A/C
| Cash Goods sent Balance b/d | 12,000 150,000 162,000 55,750 | Goods return to head office Cash Cash in transit Goods in t transit Balance c/d | 6,250 80,000 7,000 13,000 55,750 162,000 |
Branch Books
Head Office Current A/C
| Cash Returns (goods) Balanced c/d | 87,000 6,250 55,750 149,000 | Cash Goods received | 12,000 137,000 149,000 |
Foreign Branches
Foreign branches occur whenever a business has parts of its trading and manufacturing activities carried out by one or more of its branches located in other countries. In such a situation separate accounting records are maintained at the branch. The branch will thus maintain separate accounting records as described earlier.
The following are the features of the foreign branch:
- The branch account in the head office books is ruled with two columns; one column maintained in foreign currency and the other in local currency (i.e. Naira).
- The entries in the foreign currency are memoranda in nature and necessary for reconciliation with head office account.
- The branch will forward copy of its trading and profit and loss account, its balance sheet and detail copy of head office account to the head office.
- The branch assets, liabilities and revenue items will be converted at the applicable rate between the country of the branch and the head office.
Summary
- The branch account is the through which the business and economic transactions of various small units of a business organization operating with some degree of independence is accounted for.
- The branch account has the objectives of (1) ascertaining the profit or loss of each branch of an organization and (2) exercising proper control over the branches sine the branches are usually situated at a distance from the head office.
- The system of accounting employed by business concern having branches largely depends upon the nature of the trade carried on and the form of organization of the business.
- However, the principal aim is to impose effective control over the branches in order to safeguard goods and cash passing through the branches, and to ensure adequate recording of all transactions and exchanges between the head office and its various branches.
Class Work
Multiple Choice Questions (MCQs)
- Goods in transit means a situation where
- The manager of a branch of a business concern has stolen the goods.
- The goods sent to a branch of an organization have not arrived to the branch.
- The goods have been sold, but then money embezzled.
- The goods have been damaged.
- Under the memorandum method, the entries n the invoiced price is necessary
- To provide a check on the stock.
- To determine profit or loss of the branch.
- To determine the loss sustained by the head office.
- To record the amount of cash taking.
- Which of the following is correct?
- Profit = Mark-up x Cost price
- Profit = Margin x Cost price
- Profit = Mark-up – Cost price
- Profit = Mark-up + Cost price
- Under the branch stock adjustment method of accounting, the percentage of profit added to cost of goods sent to branch is recorded in
- Branch stock account
- Goods sent to branch account
- Branch stock adjustment account
- Profit and loss account
- The nature of transaction between a head office and the branches of a business concern can be said to be
- Debtor and creditor
- Debtor and donor
- Creditor and donor
- Customer and supplier
Short Answer Questions (SAQs)
- A branch of a business concern located in another country responsible for its production and distribution of goods is called………………
- Where goods are sent by a head office to its branches at cost plus a fixed percentage added, it is called…………………..,
What is the name of accounts to be debited in the following instances:
- When goods are returned to the head office by the branch?
- When goods are transferred by Branch A to Branch B of the same business organisation?
- To what account will the balance on the goods sent to the branches be transferred at the end of the accounting year?
Essay Questions
- (a) List and briefly discuss the three methods of pricing goods sent by a head office to its branches.
- MKO Limited, a business concern having its head office in Victoria Island, has a branch in Ikeja. The head office is responsible for the purchase of all goods which are subsequently sent to the branch. The head office maintains the whole books of the organization.
During the year ended 31 December 2010, the following transactions relating to the branch were extracted form the books
| Stock at 1 January 2010 at invoiced price Goods sent to branch by head office at invoiced price Credit sales Cash sales Cash received from debtors Discount allowed Bad debt written off Goods returned to head office at invoiced price Debtor balance at 1 January 2000 Stock on hand at 31 December 2010 at invoiced price | 15,000 71,250 55,000 10,500 50,000 1,500 350 3,800 10,100 10,305 |
Goods are invoiced by the head office to the branch at cost plus 20 per cent.
Required: Prepare
- Branch stock account
- Branch stock adjustment account
- Goods sent to the branch account
- Branch total debtors account
Lessons on Accounting – Edudelight.com
GOVERNMENT ACCOUNTING
WEEK 4
INTRODUCTION
Public sector accounting, also referred to as government accounting, refers to all the financial documents and records of public institutions that relate to the collection of government revenue and their analysis, the control of expenditure, the administration of trust funds, the management of government stores and all the financial responsibilities and duties of the relevant government institution and departments.
Definitions
Government
It refers to the collection of public institution established and given the authority to run the affairs of the country. Government has to do with the whole nation and is represented by organizations that are established to use the resources that belong to the whole nation for this general administration of a country and for the welfare of the citizens.
Government accounting processes
It is defined in another broad way to involve the process of recording, analyzing, classifying, summarizing and interpreting financial information about government in aggregate and in details, reflecting all transactions involving the receipt, transfer and disposition of government funds and properties.
Government accounting system
It is the system of accountability through which the established institutions of the public report on the available revenues of the nation and how these revenues are used.
Self-accounting unit
It is a ministry or extra-ministerial department which has full control over all its accounting records. It is a unit that keeps both above-and below-the-line records completely. This unit does not forward voucher, but keep them and only give the total amount of money.
Examples of self-accounting units are:
- Ministry of finance
- Ministry of works
- Ministry of education
- Office of the Auditor general of the federation
Sub-self-accounting units
It is a unit that keeps an incomplete record of above-and below-the-line record with an approval to spend money. A sub-self-accounting unit performs the same functions as those of a self-accounting unit. An example of a sub-self-accounting unit is the federal pay office located in each of the states of the federation.
Non-self-accounting unit
It is a unit that keeps an incomplete record of above-the-line and complete record of the below-the-line. The unit only prepares the vouchers, whereas the payment must be made by the sub-treasury because it had no central pay office. A non-self-accounting unit is a ministry or extra-ministerial department which has no control whatsoever over any of its accounting records. An example of such a unit is the Code of Conduct Bureau in a state.
Below-the-line account
It is account credited and controlled by the accountant general of the federation. The expenditure under this account is not budgeted for in the annual estimate and as such the exact amount of income receivable as well as expenditure incurable cannot reasonably be ascertained.
Above-the-line account
It is the expenditure budgeted for in the amount of income receivable as well as expenditure incurable and reasonably are ascertained, for example, personnel cost, annual running cost and other overheads.
Purpose of Public-Sector Accounting
- To ascertain the propriety of transaction and their conformity with established rules.
- To show evidence of financial accountability.
- It serves as a basis for planning.
- It serves as a basis for controlling.
- It serves as a basis for decision making.
- It serves as a basis for appraisal of performance.
- To show sources of government revenue and the resultant expenditure.
- Providing the details of outstanding long-term commitments and financial obligations.
Division of Public Sector Accounting
Public sector accounting is mainly carrying out its activities through
- Federal government
- State government
- Local government
- Government Parastatals
- Government companies
Users of public sector accounting information can be categorized into the following two categories:
- Internal user
- External user
The internal users are made up of the following:
- The executives such as the president of the federal republic of Nigeria, the governors of the states and chairman of the local government councils and their advisers.
- The federal ministers and state commissioner
- Top administrator of government departments
- The general manager and chief executives of Parastatals
The following are the external users:
- The national assembly
- The members of public
- Government, apart from the one that is rendering the report
- Foreign countries
- Foreign financial institution such as IMF and World Bank
- Creditors, both local and foreign
- Researchers and media men
- Political parties, trade unions and civil liberty organisation
- Regional grouping such as ECOWAS, EEC, etc.
- The public account committee (PAC)
Legal Basis of Government Accounting/Public Sector Accounting
The following are the rules and regulations governing the operation of public sector accounting:
- The 1999 constitution of federal republic of Nigeria
- Finance (control and management) Act CAP A15 LFN 2004
- Audit Act of 1956 (as amended)
- Appropriation Act (budget estimate)
- The Financial Regulation of December 2006
- Treasury and finance circular
- Treasury accounting manual
Sources of Government Revenue
The federal government derived its revenue from different sources among which are as follows:
- Head 1 – Indirect taxes
- Head 2 – Direct taxes
- Head 3 – Mining (oil)
- Head 6 – Direct allocation
- Head 7 – Direct taxes (PAYE)
- Head 8 – License and internal revenue
- Head 9 – Mining (solid minerals)
- Head 10 – Fees
- Head 11 – Earning and sales
- Head 12 – Rent of government property
- Head 13 – Interest and repayment (general)
- Head 14 – Interest and repayment (state government)
- Head 15 – Reimbursement
- Head 16 – Armed forces
- Head 17 – Miscellaneous
Head 1 – Indirect Taxes
These are taxes where the burden of payment is borne by the consumers of goods and services. Examples of these taxes includes Value Added Tax (VAT) custom and excise duties, such as import duties, export duties, excise duties, tariffs and other forms of indirect taxes.
Head 2 – Direct Taxes
These are taxes where the burden of payment is borne by the tax payer directly. It includes company income tax (CIT), petroleum profit tax (PPT), capital transfer tax and pay as you earn (PAYE).
Head 3 – Mining (Oil)
This relates to mining of oil and gas revenue, it includes
- Sales of crude oil for domestic consumption
- Sales of crude oil for exports
- Oil pipeline license fees
- Rent of oil well
- Rent of oil ground
- Royalty for extraction of oil
- Penalties for gas flared, etc.
Head 6 – Share from Federation Account or Direct Allocation
These are revenue from direct allocation from federation account which is 48.5 per cent to federal government, 24 per cent to state government and 20 per cent to local government. The remaining 7.5 per cent is special allocation for amelioration of ecological disasters.
Head 7 – Direct Taxes (PAYE)
These relate to the direct taxes of the personnel, police personnel, foreign service officers and residents of FCT Abuja.
Head 8 – License and Internal Revenue
This is a revenue derived from issuance of license and other internal revenue. Examples are as follows.
- Arms and ammunition license fees
- Gold dealer license fees
- Gold smith license fees
- Company registration fees
- Club registration
Head 9 – Mining (Solid Minerals)
This is a revenue from mining of any other minerals apart from oil. This includes coal, tin, iron-ore, granite, etc.
Head 10 – Fees
These are revenues from court fees, court fines, probate fees, court registration documents and other forms of income arising from court powers.
Head 11 – Earning and Sales
These are revenues from investments of government in companies. Examples include dividend, interest on treasury bills, or fixed deposits, sales of government land, government house, sales of boarded vehicles and other government properties.
Head 12 – Rent of Government Property
This is a revenue from rent of government quarters, government offices, government land, government vehicles etc.
Head 13 – Interest and Repayment (General)
This is a revenue from interest on repayment of loans granted to government workers generally.
Head 14 – Interest and Repayment (State)
This is a revenue from interest on repayment of loans granted to state government for the development projects.
Head 15 – Reimbursement
This is a revenue from the reimbursement of over payment made to government workers and contractors.
Head 16 – Armed forces
These are revenues from armed forces education receipts, training programme, sales of small weapons.
Head 17 – Miscellaneous
These are revenues derived from any other source not mentioned above. They include:
- Conscience money, that is money recovered from looted offices
- Treasury bills issued to finance a deficit budget
- Over-payment refund
- Deposit lapse, etc.
Government Expenditures
Government expenditures are expenses incurred on behalf of the government through ministries, departments and agencies by any officer who is designated for it. All government expenditures are estimated by the spending organizations as authorized by the government financial regulations.
When planning for government expenditure and when the spending plans are approved, spending organizations are expected to make requests for monies to spend on their activities while different authorizations are needed for different spending.
Types of Expenditures
Government expenditures are of two types, recurrent/revenue expenditure and capital/development expenditures.
Recurrent/Revenue expenditures
These are expenditure that are incurred by government departments in the day to day operations and services of the departments. Examples of these expenditures are salaries, stationeries and supplies, and other expenditures for general administration.
Capital/Development expenditures
These are the expenditure that are made or incurred to acquire physical and permanent assets, either in the form of equipments, vehicles or buildings.
Authorization of Government Expenditure
The authorization of government expenditure has to do with the approval to spend money out of government budget. The authority authorizing the officer controlling expenditure to incure expenditure is called warrant.
All warrants must be issued and signed by the minister of finance. Warrants can be divided into two categories as follows:
- Recurrent expenditure warrant
- Capital expenditure warrant
Recurrent Expenditure Warrant
Types of recurrent expenditure warrant
- Annual general warrant (AGW)
- Provisional general warrant (PGW)
- Supplementary general warrant (SGW)
- Reserve expenditure warrant (REW)
- Supplementary statutory expenditure warrant (SSEW)
- Virement warrant
- Contingencies warrant
Annual general warrant (AGW)
The AGW authorises the accountant general to issue fund for the payment of personnel endowment and other services provided in the approved estimates (budget).
Provisional general warrant (PGW)
The PGW is issued before the appropriation acts comes into operations, it is issued to ensure the continuity of the service of government. In case the approved budget is late, then the accountant general can spend money using the PGW. The amount to be spent should not be more than what was expended in the previous year for a corresponding period. The PGW is issued at a maximum of four months or until the appropriate act comes into operation, whichever is shorter.
Supplementary general warrant (SGW)
This authority to incurred expenditure is issued for additional personnel emolument and other recurrent services which have been approved as a supplementary budget.
Reserve expenditure warrant (REW)
This is a warrant that authorizes the release of funds initially withheld from AGW and SGW by the minister of finance. The minister of finance has power to withhold any items of expenditure from AGW and SGW in which he need to exercise special control.
Supplementary statutory expenditure warrant (SSEW)
The SSEW authorizes additional expenditure more than that in the AGW and SGW by the legislature, provided it is chargeable to the consolidated revenue fund for statutoru officers.
Virement warrant (VW)
This is an authority to incurred expenditure (AIE) issued to transfer fund from the contingencies account back to consolidated revenue account during the period of natural disaster. This warrant is used in the following exceptional cases:
- Where virement is not possible.
- Where there is a degree of urgency and the expenditure cannot be postponed for supplementary budget to take place.
Contingencies warrant
Capital expenditure is paid from the development fund and it can only be incurred through the issue of one of the following warrant by the minister of finance. Please note that warrant is an authority to incur expenditure (AIE).
Types of capital expenditure warrant
- Development fund annual general warrant (DFAGW)
- Development fund provisional general warrant (DFPGW)
- Development fund supplementary general warrant (DFSGW)
- Development fund reserved expenditure warrant (DFREW)
- Development fund supplementary warrant
- Development fund virement warrant
- Development fund special warrant or development fund contingencies warrant.
The only authority through which funds are expended in government circle is known as warrant. We shall discuss in detail each of these warrant types.
Development fund annual general warrant (DFAGW)
This is used to issue funds for expenditure on capital project as contained in the approved annual estimate (budget).
Development fund provisional general warrant (DFPGW)
This authorizes the payment from the development fund of such monies that are necessary for carrying on projects for which expenditure have been authorized in the previous year. This warrant is issued before the approval of the draft estimate for capital expenditure by the national assembly at the beginning of the year.
Development fund supplementary general warrant (DFSGW)
This is issued for additional new project provided for in the approved supplementary capital estimate.
Development fund reserved expenditure warrant (DFREW)
This issued to release funds which the minister of finance initially withheld in order to exercise special control.
Development fund supplementary warrant
This is issued to authorized additional expenditure over and above that included in the development fund annual general warrant and development fund supplementary genera warrant.
Development fund virement warrant
This is issued to permit additional fund necessary for the completion of a capital project, for which funds have been allocated but the amount allocated in the estimate is not enough to complete the project, but where sufficient offsetting savings can be found in the amount appropriate for other projects in the same economic programme section.
Development fund special warrant
This is used to issue fund for unforeseen capital expenditure where virement is not possible and there is degree of urgency that the capital expenditure cannot be delayed.
Revenue Control
These are several actions embarked upon by the government to ensure that all incomes or revenues due to the organization or government are done.
Government can use any of the following listed ways to control its revenue:
- Timely issuance of control forms
- Policing issuance of control forms
- Timely issuance of demand notices
- Daily banking of all money collected
- Giving authority limit to Government officers
- Established cash limits
- Establishment of functional internal control system
Fund and Fund Accounting
Definition
Fund is a separate fiscal and accounting entity government by special regulation separated from other funds and established for a specific purpose.
Types of Fund
The following are different types of fund available in government:
- Consolidated revenue fund
- Development fund or capital project fund
- Contingency fund
- Special fund
- Trust fund
- Inter-governmental service fund
- Revolving fund
- Self-liquidating fund
Format
Consolidated Fund Accounts
Accounts of Receipts and Payments for the Year Ended 31 October 2012
| Receipts Income tax payee Company tax Value added tax Customs and exercise duty Interest and dividends Vehicle licensing duty Loans – Foreign Treasury bills Donations Miscellaneous receipts | xx xx xx xx xx xx xx xx xx xx xxx | Payments Budgetary allocations to ministry DefenceForeign AffairsEducationAudit service Parliament Pension and trust fund Internal affairs Allocation to contingency fund Allocation to loan fund Balance c/d | xx xx xx xx xx xx xx xx xx xxx |
Exampled 1
From the following information prepare the statements of receipts and payment for the year ended 31 August 2011.
| Receipts | |
| Income tax payee Company income tax Value added tax Vehicle licence duty Payment Budgeting payment: Foreign affairs Internal affairs Pension and trust fund Allocation to contingency fund Balance b/f from previous year | 70,000 90,000 30,000 40,000 30,000 20,000 15,000 20,000 20,000 |
Solution
Statements of Receipts and Payments
| N’000 | N’000 | ||
| Receipts Balance b/f Income tax payee Company income Value added tax Vehicle licence duty Balance b/d | 20,000 70,000 90,000 30,000 40,000 250,000 165,000 | Payments Budgeting payment Internal affairs Pension fund allocation Allocation to contingency fund Bal c/d | 30,000 20,000 15,000 165,000 250,000 |
Summary
- This topic discussed the various sources of government revenue, and explains and distinguishes between the capital and recurrent expenditures.
- Types of capital and recurrent expenditures are explained.
- The uses of revenue by the government and the revenue and expenditure controls in government through various means have been discussed.
Class Work
Multiple Choice Questions (MCQs)
- A warrant which authorizes the officer controlling expenditure to release for payments of personal emoluments and other services are contained in the approved budget is…………………….. (a) Supplementary general warrant (b) Provisional general warrant (c) Annual general warrant (d) Reserve expenditure warrant
- A ministry department or an agency that has full control over its accounting records is known as………………….(a) Self-accounting unit (b) Sub-self-accounting unit (c) Non-self-accounting unit (d) Both self-and sub-self-accounting unit
- ONE of the following is the name giving to estimates in the approved annual budget: (a) Below-the-line account (b) Above-the-line account (c) Personal cost (d) Both (a) and (b)
- ONE of the following is NOT an example of direct taxes as a source of government revenues: (a) Company income tax (b) Petroleum profit tax (c) Export duties (d) Pay as you earn
- A separate fiscal and accounting entity governed by special regulation is known as……………(a) Estimate (b) Revenue (c) Expenditure (d) Fund
Short Answer Questions (SAQs)
- A warrant which is used in exceptional cases, where virement is not possible is called………………………
- Users of public sector accounting can be categorized into…………and….…….
- The rules and regulations governing the operations of public sector accounting is classified as……………….basis
- An authority to incure expenditure as used in public sector accounting is the same as……………..
- The officer responsible for the revenue and expenditure estimates and publication in the budget book is called…………..
Essay Questions
1. (a) List the eight types of funds you know.
(b) What is internal generated fund? Give examples of such funds.
2. (a) Differentiate between direct and indirect taxes and give two examples of each tax.
(b) What is a warrant?
(c) Explain the concept of virement and describe the circumstance under which such concept can apply.
Lessons on Accounting – Edudelight.com
