Lesson Note on Financial Accounting SS3 Second Term
FINANCIAL ACCOUNTING E-LEARNING NOTE SECOND TERM – Edudelight.com
SUBJECT: FINANCIAL ACCOUNTING CLASS: SS 3
SCHEME OF WORK
WEEKS TOPICS
1 Purchase of Business
2 – 3 Accounting Ratios and Interpretation of Financial Statements
4 – 5 Public Sector Accounting
6 – 7 Public Sector Accounting
8 – 9 Branch Accounts
10 Introduction to Data Processing
WEEK ONE
TOPIC: PURCHASE OF BUSINESS
CONTENT
- TERMINOLOGIES IN PURCHASE OF BUSINESS
- ACCOUNTING ENTRIES ILLUSTRATION
INTRODUCTION
Purchase of business is the activity of buying or acquiring a business as a going concern. This means acquiring an existing business with the intention of continuing its operations . this acquisition cam be in any of the following ways
- A sole trader acquiring the existing business of a sole trader
- A partnership acquiring the business of another partnership or a sole trader
- A company may be buying another or a partnership business.
In any of the acquisitions above , the assets and liabilities taken over by the purchasing businesses will be recorded in the same way.
TERMINOLOGIES IN PURCHASE OF A BUSINESS
- Vendor. This is the person or partnership or company that sold the business to another. The vendor may be paid cash, cheque or in shares of the new company
- Purchase consideration. The is the price which a purchaser would pay to the vendor in order to acquire his business
- Goodwill. This is the excess of the purchase consideration over the net value of assets taken over. Net assets means total assets less liabilities . it is also called the net worth of the business.
- Capital reserve. Where the purchase consideration is lesser than the net worth of the business, the difference is referred to as capital reserve.
ACCOUNTING ENTRIES:
1. Agreed purchase price
Dr.Business Purchase A/C
Cr. Vendors A/C
2. Take over value of assets
Dr.Assets Account
Cr. Business Purchase A/C
3. Agreed value of liabilities taken over
Dr. Business Purchase A/C
Cr. Liabilities A/C
4. Excess of purchase consideration over net asset
Dr. Goodwill
Cr. Business Purchase A/C
5. Excess of asset over purchase consideration.
Dr. Business Purchase A/C
Cr. Capital Reserve A/C
6. Settlement of the vendor’s A/C with cash
Dr. Vendor’s A/C
Cr. Cash A/C
7. Settlement of Vendor’s A/C with shares
Dr. Vendor’s A/C
Cr, Share Capital A/C
Journal entries:
JOURNAL
| Dr | Cr | |
| N | N | |
| Asssets : fixtures | X | |
| Motor vans | X | |
| Debtors | X | |
| Stock | X | |
| Goodwill | X | |
| Liabilities: creditors | x | |
| Purchase consideration | x | |
| Assets and liabilities taken over | ||
| Purchase of business account | X | |
| Vendor account | x | |
| Agreed purchase price of the business | ||
| Vendor’s account | X | |
| Bank account or share capital account | x | |
| Cash or share paid in full settlement | x |
EVALUATION
1. Explain the following terms:
a. Goodwill
b. Capital reserve
c. Purchase consideration
d. Vendor
2. List six factors which can create goodwill for any firm or organization.
ILLUSTRATION
Lanka had taken over the business of Olaiya on 31/1/99 on the bais of the last balance sheet as follows:
Balance sheet
N N
Capital 180,000 Premises 100,000
Creditors 60.000 Fixtures 45,000
Accruls 10,000 Motor car 55,000
Debtors 15,000
Stock 5,000
Bank 30,000
250,000 250,000
ADDITIONAL INFORMATION:
- The purchase consideration to be N200,000
- All assets and liabilities where taken over with the exception of bank
- Assets to be re-valued are as follows :
Premises 140,000
Fixtures 40,000
Motor car 57,000
Debtors 13,000
Stock 10,000
4. The purchase price was paid on January 10th, 1999.
You are required to prepare
- Journal entries in respect of the acquisition b)ledger A/C c) balance sheet
SOLUTION:
JOURNAL
DR CR
N N
Premises 140,000
Fixtures 40,000
Motor van 57,000
Debtors 13,000
Goodwill 10,000
Creditors 60,000
Accruals 10,000
Purchase of Business. 200,000
Assets and liabilities taken over
Purchase of business A/C 200,000
Vendor A/C 200,000
Purchase price per agreement
Vendor A/C 200,000
Bank A/C 200,000
Cash or share paid in full settlement
B. LEDGER ACCOUNTS:
Business Purchase Account
N N
Liabilities taken over Asset taken over
Creditors 60,000 Premises 140,000
Accruals 10,000 Fixtures 40,000
Purchase price 200,000 Motor van 57,000
Debtor 13,000
Stock 10,000
Goodwill 10,000
270,000 270,000
Bank Account
Vendor 200,000
Vendor Account
Bank 200,000 Purchase Consideration 200,000
Goodwill Account
Purchase of business 10,000
Balance Sheet
N N
Capital A/C 200,000 goodwill 10,000
Premises 140,000
Fixtures 40,000
Creditors 60,000 Motor van 57,000
Accruals 10,000 debtors 13,000
Stock 10,000
270,000 270,000
Evaluation
Explain the following: i. vendor ii. Purchase consideration
GENERAL EVALUATION/REVISION QUESTIONS
- State six characteristics of depreciable assets
- Explain three differences between a trial balance and a balance sheet
- List seven errors that will affect the agreement of the trial balance
- Explain the following : (i) real account (ii) nominal account (iii) personal account
- List eight items that cause disagreement between Cash Book and bank statement balance
Reading assignment
Essential Fin. Accounting by O.A Longe page 299-307.
Weekend Assignment
- Goodwill is a ——- (a) current asset ( b) intangible asset( c) current liability( d)fictitious asset
- Vendor means the seller of the (a) business (b) asset (c) liabilities (d) capital
- Capital reserve is( a) current assets( b) fixed assets (c) liabilities (d) equity
- The double entry for payment of cheque to vendor is (a) Dr. vendor A/C, Cr. bank (b) Cr. Vendor,Dr. bank (c) Cr.cheque Dr. vendor (d) Dr. Vendor Cr. Cash
- The double entry for agreed purchase price is (a) Dr.purchase of business A/C,Cr. Vendor (b) Dr. asset Cr. liabilities (c) Dr. Cash Cr. Vendor (d) Dr. Asset Cr. Cash
THEORY
- Explain the accounting entries in purchase of a business by a partnership from a sole trader.
- Explain i. Capital reserve ii. Goodwill on purchase of a business
FINANCIAL ACCOUNTING E-LEARNING NOTE SECOND TERM – Edudelight.com
WEEK TWO AND THREE
TOPIC: ACCOUNTING RATIOS AND INTERPRETATION OF FINANCIAL STATEMENTS
CONTENT
- Introduction
- Uses of ratio
- Disadvantages of using ratio
- Types of ratio – explanation
- Illustration
INTRODUCTION
To interpret accounts is to try to gain insight into the information value of financial statements , this can be done through analysis, evaluation ,criticism and comparison and all this is done by the use of accounting ratios. A ratio can be defined as the relationship that exists between two figures.
USES OF RATIO
- Ratios are used in preparing industrial averages.
- They can be used to interpret financial statements.
- They help in comparing performances between and among related organizations.
- Ratios help to measure the ability of a given entity to meet its short-term obligations.
- They are used in evaluating the performance of companies in the same business
DISADVANTAGES OF USING RATIO
- Ratios can easily be affected by inflation
- They can be manipulated upon or abused
- Different accounting policies affect ratio calculation
TYPES OF RATIO
- Profitability and efficiency ratio
- Liquidity ratio
- Investment ratio
PROFITABILITY AND EFFICIENCY:
Profitability and efficiency ratios measure the effectiveness of the management as shown by the returns obtained on sales and capital invested. This can be broken down into the following.
- Net profit%
- Gross profit%
- Returns on capital employed
- Assets turnover ratio
- Individual expenses items to sales ratio e.g advertising carriage outwards etc
Formulae:
- NP% = NET PROFIT × 100
SALES 1
- GP% = GROSS PROFIT × 100
SALES 1
- Returns on capital employed ROCE. This measures management ability to utilize effectively the organizations resources.
It is PROFIT × 100
CAPITAL EMPLOYED 1
Where capital employed can be:
a) total asset b) total assets to current liabilities
- ASSETS TURNOVER RATIO:
This ratio measures the turnover generated by assets and show how fully a company is utilizing its assets.
Formula: SALES
CAPITAL EMPLOYED
- INDIVIDUAL EXPENSE TO SALES:
This helps to reveal the reason for improvement or reduction in the net profit to sales.
Formula: INDIVIDUAL EXPENSES × 100
SALES 1
- LIQUIDITY RATIOS:
These ratios help in measuring the ability of an organization to meet its obligations as they fall due.Ratios under this heading are:
- Current ratio or working capital ratio
- Average stock
- Stock to net current assets
- Debtors ratio
- Creditors ratio
- Current ratio or working capital ratio: This ratio indicates the ratio of current assets to current liabilities. It shows the extent the firm can meet up with its short-term creditors. Low ratio implies lack of working capital while high ratio suggests too much of working capital or capital tied up.
Formula: CURRENT ASSETS CA
CURRENT LIABILITIES CL
- ACID- TEST/LIQUID RATIO:
This ratio provides measures of the firm’s ability to meet its current liability. Should it fall below 1:1,the firm may have some difficulty in paying its debt.
Formula: CURRENT ASSETS – STOCK OR INVENTORY
CURRENT LIABILTIES
- STOCK TURNOVER RATIO:
This is used to measure the number of times stocks are replaced during a given period.
Formula: COST OF GOODS SOLD
AVERAGE STOCK
- AVERAGE STOCK: OPENING STOCK + CLOSING STOCK
2
N.B: Where there is no opening stock,average stock could be calculated by adding closing stock to purchases and dividing by 2
- STOCK TO NET ASSET. This ratio is used to express the stock as a percentage of net assets.
Formula: = STOCK × 100
NET ASSET 1
- DEBTORS RATIO: Debtors ratio measures the average collection period from debtors. It shows the average credit period given to debtors.
Formula: DEBTORS × 365 DAYS
CREDIT SALES
Long collection dates indicate poor credit policy.
- CREDITORS RATIO: This ratio shows the average credit period received from suppliers.
Formula: TRADE CREDITORS × 365 DAYS
CREDIT PURCHASES
- INVESTMENT RATIOS : These ratios used by investors to evaluate the return,which they receive from their investments, they cover the following:
- Earnings per share ratio
- Price earning ratio
- Earning yield
- Dividend yield
- Dividend cover
- EARNINGS PER SHARE RATIO: This ratio compares the net earnings attributable to the shares to the number of shares issued.
Formula: PROFIT AFTER TAX(PAT) – LESS PREFERENCE DIVIDEND.
NOS. OF EQUITY SHARE
- PRICE EARNING RATIO: This ratio considers the average price of the share to the reported earnings per share.
Formula: MARKET VALUE PER SHARE
EARNINGS PER SHARE
- DIVIDEND YIELD: This ratio measures the current actual returns on the shareholders investment.
Formula: DIVIDEND PER SHARE × 100
SHARE PRICE 1
- DIVIDEND COVER: This ratio compares the earnings per share to the dividend per share.
Formula: EARNING PER SHARE = EPS
DIVIDEND PER SHARE DPS
Dividend cover is also called payout ratio.
EVALUATION
1. State three limitations to the use of accounting ratios in evaluating and comparing business organizations
2. List five uses of accounting ratios.
ILLUSTRATION:
The following was extracted from the books of capital ltd for two years, 31/12/001/002.
| 2001 | 2002 | ||||
| ₦ | ₦ | ₦ | ₦ | ||
| Sales | 60,000 | 90,000 | |||
| Less | |||||
| cost of sales | |||||
| Opening stock | 18,750 | 16,875 | |||
| Add purchases | 37,500 | 68,250 | |||
| 56,250 | 85,125 | ||||
| Less closing stock | 11,250 | 45,000 | 13,125 | 72,000 | |
| Gross profit | 15,000 | 18,000 | |||
| Less expenses | 7.500 | 6,750 | |||
| Net profit | 7,500 | 11,250 | |||
| Balance sheet | |||||
| Fixed asset | |||||
| Motor car | 15,000 | 10,500 | |||
| Current asset | |||||
| Stock | 11,250 | 13,125 | |||
| Debtors | 18,750 | 15,000 | |||
| Bank | 3,750 | 1,875 | |||
| 33,750 | 30,000 | ||||
| Less current liability | |||||
| Creditors | 3,750 | 30,000 | 7,500 | 22,500 | |
| 31,500 | 33,000 | ||||
| Financed by: | |||||
| Capitals | 28,500 | 27,000 | |||
| Add net profit | 7,500 | 11,250 | |||
| 36,000 | 38,250 | ||||
| Less drawing | 4,500 | 5,250 | |||
| 31,500 | 33,000 | ||||
You are required to calculate the following ratios.
i. Gross profit ii. Net profit iii. Expenses as a % of sales iv. Stock turnover v. Current ratio vi. Acid – test ratio vii. Rate of returns on capital employed viii. Creditors /Purchases ratio ix. Debtors/sales ratio ix. Average stocks
Solutions:
- GP% = GP × 100
SALES 1
2001 = 15,000 × 100 = 25%
60,000 1
2002 = 18,000 × 100 = 20%
90,000 1
- NET PROFIT% = NP × 100
SALES 1
2001 = 7,500 × 100 = 12.5%
60,000 1
2002 = 11,250 × 100 =12.5%
90,000 1
- EXPENSES AS A % OF SALES = EXPS. × 100
SALES 1
2001 = 7,500 × 100 = 12.5%
60,000 1
2002 = 6,750 × 100 = 7.5 %
90,000 1
- STOCK TURNOVER = COST OF GOODS SOLD
AVERAGE STOCK
2001 45,000 = 45,000 = 3TIMES
(18750 + 11,250)1/2 15,000
2002 72,000 = 72,000 = 4.8 TIMES
(16,875 + 13,125)1/2 15,000
- CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
2001 = 33,750 = 9 = 9:1
3,750 1
2002 = 30,000 = 4 = 4:1
7,500 1
- ACID TEST RATIO = CURRENT ASSET – STOCK
CURRENT LIABILITIES
2001 = 33,750 – 11,250
3,750
= 22,500 = 6 = 6:1
3,750 1
2002 = 30,000 – 13,125 = 1,687 = 225
7,500 7,500 10
= 2.25
- RETURNS ON CAPITAL EMPLOYED
= NP × 100
CAPITAL EMPLOYED 1
N.B: Capital employed is total assets less current liabilities.
2001 = 7,500 × 100 = 23.8%
31,500 1
2002 = 11.250 × 100 = 34%
33,000 1
- CREDITORS/PURCHASES RATIO = CREDITORS
PURCHASES
2001 = 3,750 × 365 DAYS 365 DAYS OR (12 MOS.)
37,500
= 36.5 DAYS OR 1.2 MONTHS
2002 = 7.500 × 365 DAYS
68,250
= 40.11 DAYS OR 1.3 MONTHS
- DEBTORS/SALES RATIO = DEBTORS × 365 DAYS
SALES
2001 = 18750 × 365 DAYS
60,000
= 114 DAYS OR 3-8 MONTHS
2002 = 15,000 × 365 DAYS
90,000
= 60-8 DAYS OR 2 MONTHS
- AVERAGE STOCK = (OPENING STOCK + CLOSING STOCK) ½
2001 = 18750 + 11250 = 15000
2
2002 = 16,875 + 13,125 = 15000
2
EVALUATION
- What is the formula for stock turnover
- What is the other name for stock turnover
GENERAL EVALUATION/REVISION QUESTIONS
- What is depreciation
- Explain the following methods of calculating depreciation (i) staight line (ii) reducing balance (iii) sum of the years digit
- What is the difference between depreciation and amortization
- State ten uses of the general journal
- Explain the principle of double entry system
READING ASSIGNMENT
Essential Financial Accounting page 308-317
WEEKEND ASSIGNMENT
- Which of the following formulae is for average stock?( a) (sales – returns)1/2 ( b) (opening stock + purchases)1/2 (c) (opening stock + closing stock)÷ 2 (d) net profit/2 + opening stock
- What is the formula for stock turnover?
(a) cost of goods sold (b ) sales – returns ( c)sales ÷ returns (d) profit + sales – returns
average stock inwards
3. ROCE is calculated thus
(a) NP × 100 (b) SALES × 100 ( c) NP × 100 (d) GP + NP/SALES
SALES PURCHASES NET ASSETS
4. Acid – test ratio is obtained by (a) current assets – stock ( b) total assets – stock
current liabilities current liability
(c) current assets – current liability (d) current assets + current liabilities
5. When current asset is less than current liability it means (a) over trading (b) under trading (c) optimum
trading (d) counter trading
THEORY
- Explain a) debtors /sales ratio b) creditors/purchases ratio
- What will be revealed to a business when the above ratios are compared?
WEEK FOUR – SIX
TOPIC: PUBLIC SECTOR ACCOUNTING
CONTENT
- Meaning of Public Sector Accounting
- Differences between Public Sector Accounting and Private Sector Accounting
- Government sources of revenue
- Accounting procedures for revenue allocation/illustration
- Cost budget preparation and illustration
Meaning of Public Sector Accounting
Public Sector Accounting is the process of recording the financial transactions concerning the receipts and payments of government funds, in a systematic way, as well as their analysis and interpretation so as to guide governments and their agents in various financial decisions.
Differences between Public Sector Accounting and Private sector Accounting
Public Sector Accounting Private Sector Accounting
1. Accounting procedure is based on It is based principally on profit
provision of services maximization
2. It does not show creditors It shows creditors for goods
3. Revenues are derived from tax, fees, Revenues are derived from sales of goods
fines, etc.
4. The cost of assets are written off in The cost of assets are spread over the useful
one year life of the assets
5. It is prepared on cash basis It is prepared on accrual basis
6. Public sector accounting is based on It is governed by the companies and Allied
the constitution of the country Matters Act.
7. Public sector accounting report is to Private sector accounting report is to the
the general public shareholder.
Governments Sources of Revenue
Government revenue means the total income accruing to the government of a country. This can be classified under different tiers of government.
a. Federal Government: At the Federal level revenue sources are:
- Direct and indirect taxes: e.g Personal income tax, withholding tax, corporation tax, capital gains tax, capital transfer tax, petroleum tax, tax export duties, tariffs, sales tax, purchase tax, excise duties etc.
- Mining: Royalties, sales of crude oil, rent on oil wells, quarrying licenses
- Fees and Licenses: Visa fees, passport fees, court fees, club registration, church and mosque registration, company registration etc.
- Income from investments and dividends from corporate organization
- Rent from government properties
- Revenue from armed forces external assignment, armed forces equipment rentage etc.
b. State Government: A state’s major sources of revenue are:
- Statutory allocation
- Investment earnings
- Rent on government properties
- Rent of government offices, vehicles etc
- Special grants
- Personal income tax
- Fees from hospitals schools, courts
- Licences, motor, sales of liquors, patent medicine and motorcycle
- Local Government: A local Government’s major sources of revenue are:
- Statutory allocation
- Special grant
- Radio and televsion license
- Tenement rates
- Fines
- Licences on sign post, market stall and liquors
- Loan from state
- Income from street naming etc.
Accounting procedures for revenue allocation
Statutory allocation is the grant from Federal Government to the States and Local Governments. Apart from the statutory allocation various formulae have been devised on various occasions to ensure fair sharing of the total revenue among the three levels of government. The principle usually adopted are:
- Derivation basis
- Equality basis
- Population basis
- Independent revenue
Illustration
The government of Nigeria approved N18,000,000 to six local government areas. The allocation was distributed as follows:
- Equity basis 75%
- Population basis 25%
Local government Population
A 6,000,000
B 4,000,000
C 7,000,000
D 1,000,000
E 3,000,000
F 2,000,000
23,000,000
B. Local government generated the following additional revenue:
N
Radio and television licences 100,000
Court fines 250,000
Liquor licences 400,000
Sign post 20,000
Tenement rates 50,000
Expenses salaries 1,150,000
Transport 20,000
Repairs 200,000
Maintenance of cars 60,000
Stationery 25,000
Medical expenses 15,000
Medical expenses 7,600
Park Fees 60,000
You are required to prepare:
- A statement showing the allocations made to each local government
- Receipts and payments accounts of B Local Government for the year ended 31st December 1999.
Solution
Statement of Allocation of Fund
- Equity Basis 75% = 75% x 18,000 = N13,500,000
Equity allocation = 13,500,000 = 2,250,000
6
Therefore each of the local government will receive N2,250,000
- Population Basis 25% = 25% x 18,000,000
= 4,500,000
Local government A = A’s Population x 4,500,000 =600,000 X 4,500,000
Total population 23,000,000
= N1,173,913
Local government B = B’s population x 4,500,000
= Total population
= 4,000,000 x 4,500,000
23,000,00
= N782,609
Local government C = C’s population x 4,500,000 = 7,000,000 x 4,500,000
Total population 23,000,000
= N1,369,565
Local government D = D’s population x 4,500,000 = 1,000,000 x 4,500,000
Total population 23,000,000 = N586,957
Local government E = E’s population x 4,500,000 = 3,000,000 x 4,500,000
Total population 1 = 23,000,000 = N5586,957
Local government F = F’s population x 4,500,000 = 2,000,000 x 4,500,000
= Total population = 23,000,000 = N391,304
Statement of allocation of Fund
Local Population Basis Equity Basis Total
Government
N N N
A 1,173,913 2,250,000 3,423,913
B 782,609 2,250,000 3,032,609
C 1,369,565 2,250,000 3,619,565
D 195,652 2,250,000 2,445,652
E 586,957 2,250,000 2,836,957
F 391,304 2,250,000 2,641,304
4,500,000 13,500,000 18,000,000
B. Local Government Receipt and payments Account
Receipts N Payments N
Allocation 3,032,609 Salaries 1150,000
Radio and TV 100,000 Transport 20,000
Tenement rates 50,000 Electricity 200,000
Court 250,000 Repairs 60,000
Liquor 400,000 Maintenance 25,500
Sign post 20,000 Stationery 15,000
Park fees 60,000 Medical expenses 7,600
Balance c/d 2,434,509
3,912,609 3,912,609
EVALUATION
1. List eight sources of revenue available to a state government.
2. State five differences between private sector accounting and public sector accounting.
PREPARATION OF PERSONNEL COST BUDGET
Budget: A budget is quantitative statement of income and expenditure.
The personnel cost budget is prepared to show the analysis of the basic salary and allowances of the staff members of each government ministry department in a particular year.
PROCEDURES FOR PREPARING THE COST BUDGET
- Identification of different positions in the ministry or parastatals
- Calculation of the number of staff in each post
- Identification of grade level.
- Calculation of the basic salary, allowances, etc.
ANNUAL INCREMENTAL RATE
- If the officers are not on first step of their salary; the formula below will be used for calculating staff total emolument
Formula (new stop 1 ) incremental rate) + basic salary
Illustration
Position No Grade Level Salary
Director General 1 17 300,000 x 50,000
Director 4 16 200,000 x 30,000
Assume the staff are on step 3
Solution
Director general: = (New step – 1) incremental rate + basic salary
= (3 – 1) 50,000 + 300,000
= 2(50,000) + 300,000
= N400,000
4 Director = (New step – 1) incremental rate + basic salary
= (3 -1) 30,000 + 200,000
= 2(30,000) + 200,000
= 60,000 + 200,000
= N260,000
2. When employees are on step one
Illustration: The following information was extracted from the ministry of finance on 31/10/99.
Post Grade Level No. in post Rate
DG 17 1 40,000 x 4000 – 60,000
Directors 16 3 32,000 x 3600 – 53,600
Chief Accountant 14 4 28,000 x 2400 – 44800
Additional information
Grade Level Housing Transport
12 and above 8400 P.A 6250 P.A
07 and 11 3600 P.A 2500 P.A.
Workings
One DG’s Basic salary = 40,000
Housing allowance = 8400
Transport allowance = 6250
3 Directors’ basic = 32000 x 3 = 96,000
Housing allowance = 8400 x 3 = 25,200
Transport allowance = 6250 x 3 = 18,750
4 Chief Accountants
Accounts’ Basic Salaries = 28,000 x 4 = 112000
Housing allowance = 8400 x 4= 33,600
Transport allowance = 6250 x 4 = 25,000
Solution
PERSONNEL COST BUDGET
Post Grade No Basic Housing Transport Total
N N N N
Director General 17 1 40,000 8400 6250 54650
Directors 16 3 96000 25200 18750 139950
Chief Accounts 14 4 112,000 33600 25,000 170,600
248,000 67,200 50,000 365,200
Total Personnel Emolument = N365,200
Evaluation
- Define Public sector accounting
- List seven items of government expenditure.
GENERAL EVALUATION QUESTIONS
- What is depreciation?
- Explain the following methods of calculating depreciation (i) staight line (ii) reducing balance (iii) sum of the years digit
- What is the difference between depreciation and amortization?
- State ten uses of the general journal
- Explain the principle of double entry system.
READING ASSIGNMENT
- Essential Financial Accounting by O.A. Longe, Pages 376-388
- Simplified Bookkeeping and Accounting by Femi Olatunji, Pages 489-513
WEEKEND ASSIGNMENT
- Public sector accounting is done on ————-basis (a)credit (b)cash (c)hire purchase (d)installmental payment
- Government parastatal accounting system is on ————-basis (a)cash (b)accrual (c)General (d)all of the above
- Public sector accounts reports are to the ————-(a)shareholders (b)directors (c)public (d)customers
- The chief accounting officer to the government ministries is (a)auditor general (b)minister of finance (c)secretary to the federal government (d)accountant general of the federation
- The formula for calculating emolument where employees are on step 4 is
- (4-1) x salary (b)(4+1) x salary (c) (4-1) incremental rate (d) (4-1) incremental
rate + basic salary.
Theory
- State the formula to apply for (i) calculating emolument when employees are step 1 and (ii) when employees are on step 3
- State seven differences between the public and private sector accounting
FINANCIAL ACCOUNTING E-LEARNING NOTE SECOND TERM – Edudelight.com
WEEK SEVEN
TOPIC: INTRODUCTION TO BRANCH ACCOUNTS
CONTENT
- Meaning of Branch Accounts
- Division of Branch Accounting
- Formats and Illustration
Meaning of Branch Accounts
A branch Account is a system of accounting adopted to record the transactions of a small part of a business organization which has or has not some degree of independence.
Divisions of Branch Accounting
The divisions can be:
- Where the head office keeps all the accounts: This happens where the branch is fully dependent on the head office. In this case the following accounts are kept.
- Branch stock A/C
- Goods sent to branch A/C
- Branch stock adjustment A/C
- Branch debtors A/C (where credit sales are allowed)
- Branch bank A/C
- Branch profit & loss A/C
- Where the branches keep separate accounts: This happens where a branch is semi-autonomous. In this situation the following accounts are kept to show the relationships:
- Branch current A/C in head office books
- Head office current A/C in branch books
Pricing Methods
Three different pricing methods are available for charging goods to branches. They are:
- At cost Price: This is used when the goods concerned are perishable so that branch managers can use their discretions to avoid losses.
- At cost plus a percentage: This helps the head office to exercise control over the branch by stating the required percentage profit.
- At selling price: This is a measure of control also where the branch has no choice but to sell the goods at the selling price given.
Note: Where the cost plus a percentage method of pricing is used, two method of accounting can be used also:
- Double column or a memorandum column method
- Branch adjustment method.
Memorandum or double column method.
This method combines two accounts:
- Branch Stock Account which appears in the invoice price column and
- Branch Stock Adjustment Account which appears in the “cost price” column However the use of this method requires some items or transactions to be shown at the same price in the two separate columns. These items are:
1. Cash sales 2. Credits sales 3. Cash remitted to head office
4. Cash in transit 5. Sundry expenses from takings (ie sales)
6. Sundry expenses paid out of cash 7. Cash taken stolen.
Thus, the adoption of the memorandum or double column method, in cost plus percentage pricing system, requires the following accounts:
- Branch stock A/C with double column i.e. memorandum branch A/C
- Goods sent to branch A/C (entries in this A/C are made at cost price only)
- Branch P & L A/C//
Formats of the three Account above:
Memorandum Branch Stock A/C
Invoice cost Invoice cost
Price Price Price Price
N N N N
Stock at start X X Rent to head office X X
Goods sent to Branch x x credit sales x x
Gross profit C/D x cash sales x x
Allowance of selling price x x
Goods stolen x x
Cash stolen x x
Expenses paid
Out of takings x x
Normal loss x x stock at close x x
X x x x
Goods sent to branch A/C (at cost)
N N
Returns to branch x branch stock A/C x
Transport to head Office
Trading A/C x
X x
Branch profit & Loss A/C
N N
Branch stock A/C Gross profit x
Sundry expenses x (from memo.
Branch Stock A/C)
Stock stolen at cost price x
Cash stolen X
Net profit x
X x
Evaluation questions
1. What is a branch accounts
2. State the pricing methods in branch accounts
Illustration
Suzi Ltd operates a head office in Lokoja and branch office in Lagos. All goods are purchased by Lokoja and sent to Lagos at cost plus 25%. The following information were given for the year ended 31/12/04.
N
Credit sales 3,500
Goods sent to branch at cost 50,000
Returns to head office at cost 500
Cash takings remitted to H.O. 10,000
Stock at close at cost price 12,500
Cash takings stolen 150
Sundry expenses paid out of takings 950
Goods stolen at cost 40
Allowances off selling price 100
You are required to prepare
- Branch A/C in the head office books including the necessary A/Cs
- The P & L A/C for the ended 31/12/04
The system of accounting the head office uses is the memorandum column method.
Solution
Step 1: Calculate the selling price (or invoice price) using the mark-up of 25% on cost
- Selling price of goods sent to branch
Profit = mark-up x cost price
= 25/100 x 50,000 = N12500
- Selling price = cost + profit
= 50,000 + 12500
= N623,500
- Selling price of returns to Head office
= cost + mark-up
= N500 + (25/100 x 500)
S. P = N500 + 125 = N625
- Selling price of stock at close
= cost + mark-up
= N12500 + (25/100 x 12500
S. P = N12500 + 3,125 = N15,625
- Selling price of goods stolen
= cost + mark-up
= N40 + (25/100 x N40)
S. P. = N40 + 10 = N50
step II: Preparation of branch stock A/C using memorandum colum
Memorandum branch stock A/C
Invoice cost Invoice cost
Price Price Price Price
N N N N
Goods sent to branch 62,500 50,000 Rent to head office 625 500
Gross profit C/D – 9140 credit sales 3500 3500
x cash remitted to H. Office 10,000 10,000
cash takings stolen 150 150
sundry expenses 950 950
goods stolen 50 40
Allowance off selling price 100 – stock at close 15624 12500
62500 59140 62500 59140
Profit & loss A/C
N N
Sundry expenses 950 Gross profit B/D 9140
Cash stolen 150
Goods stolen at cost 40
Net profit 8000
- 9150
Evaluation questions:
1. State four objectives of Branch Accounting.
2. State five reasons why branches may decide to keep their accounts rather than the Head office doing so.
GENERAL EVALUATION QUESTIONS
- State five characteristics of depreciable assets
- Explain three reasons why an accountant will consider end- of- year adjustments
- Differentiate between bad debts and provision for bad debts
- Differentiate between bank statement and bank reconciliation statement
- State four reasons for making provision for depreciation
Reading Assignment
Simplified and Amplified Financial Accounting – page 466-487
Essential financial Accounting by O.A. Longe and others pages 375-379
Weekend assignment
- If the cost of goods is N10,000 and there is a 25% mark-up on it, then the selling price is ———-(a)N10,000 (b)N10,200 (c)N12,500 (d)N13,500
- If the cost of an article is N500 the company’s profit margin is 20% then the selling price is ———-(a)N6250 (b)5000 (c)72250 (d)6000
- If the margin allowed by a business is 25% then the business mark-up is ———-(a)20% (b)30% (c)311% (d)50%
- If the profit on cost price is 1/5 then the profit on selling price is ———-(a)1/2 (b)1/3 (c)5% (d)1/4 (e)1/6
- The margin on sales of a trader is 15% therefore the trader’s mark-up is ———-(a)12/7 (b)15/17 (c)3/20 (d)3/17
THEORY
- Fill the following gaps
Mark-up Margin
If i. 10% i. Then ———-?
ii. ———-? ii. If 30%
iii. 3/7 iii. Then———-?
- State the main pricing methods in branch accounting.
FINANCIAL ACCOUNTING E-LEARNING NOTE SECOND TERM – Edudelight.com
Week EIGHT AND NINE
Topic: PREPARATION OF BRANCH ACCOUNT
Content
- Branch Adjustment Method
- Accounting Entries
- Formats and Illustration
- Where branches keep separate Accounts
Branch Adjustment Method of Branch Accounting
Unlike the memorandum or double column method, under this method, the profit loading will be taken to a separate A/C called “Branch adjustment A/C”. Under this method the following are the main A/C that will be prepared:-
- Branch stock A/C – at invoice price
- Branch stock adjustment A/C showing profit loading
- Goods sent to branch A/C – based on cost price
- Debtors A/C (where goods are sold or credit)
- Branch P & L A/C
Accounting Entries
- When goods are sent to branch Dr. Branch stock A/C at invoice price Cr. Goods sent to branch A/C (at cost)
- When there are sales – cash or credit Dr. Cash A/C with cash sales Dr. Debtors A/C with credit sales Cr branch stock A/C with cash or credit sales.
- Stock at start.
Dr. branch stock A/C – (with invoice price) Cr. Branch stock adjust A/C (profit loading)
- Stock at close
Dr. Branch stock adjust A/C (profit loading)
Cr. Branch stock A/C with invoice price
- Returns to head office.
Cr. Branch stock A/C at invoice price
Dr. Goods sent to branch A/C at cost price
Dr. Branch stock adjustment A/C with profit loading
- Transfer to other branch
Cr. Branch stock A/C at invoice price
Dr. Goods sent to branch A/C at cost price
Dr. branch stock adjustment A/C with profit loading
- Allowances of selling price or reduction in selling price
Dr. branch stock adjustment A/C (total allowance )
Cr. Branch stock A/C (total allowance)
- Goods in transit
Dr. branch stock adjustment A/C (with profit loading)
Cr. Branch stock A/C (with invoice price)
- Goods lost in transit
Dr. Branch stock adjustment A/C (with profit loading)
Dr. Goods lost in transit A/C (at cost price and write it off to P & L A/C)
Cr. Branch stock A/C (at invoice price)
- Goods stolen or deficiencies
Cr. Branch stock A/C (invoice price)
Dr. Branch stock adjustment A/C (profit loading)
Dr. Goods stolen A/C (with cost price)
- Cash Stolen
Cr. Branch stock A/C (Total amount)
Dr. Defalcation A/C (total amount) to be written off to P & L A/C
- Goods returned by customers to head office
Cr. Debtors A/C (invoice price)
Dr. goods sent to branch A/C (cost price)
Dr. Branch stock adjustment A/C (profit loading)
- Balance of adjustment A/C will be transferred to branch profit and loss A/C
- The goods sent branch A/C will be closed by transferring the balance to H.O. trading A/C. Formats
Branch Stock Account (invoice price)
N N
Stock at start x goods transferred to another branch x
Goods sent to branch x cash sales x
Credit sales x
Expenses paid out of takings x
Reducting in selling price x
Goods in transit x
Returns to H.O. x
Cash stolen (pilterage) x
Normal loss x
Cash in hand x
Bal c/d stock at close x
xx xx
Goods sent to Branch A/C (cost price)
Return to H.O x Branch stock A/C x
Transfer to other branch x
Bal C/D transp. To H.O
Trading A/C x
x x
Branch stock adj. or branch mark-up Account profit loading
N N
Profit on return to H. O x Profit on opening stock x
Profit on stock at close x profit on goods sent to branch x
Profit on goods returned
By customers to H.O x
Profit on goods in transit x
Normal loss (selling price) x
Profit on goods stolen x
Profit on return to other
Branch x
Reduction in selling price x
GP to branch & P&L A/C
c/d x
xx xx
Branch P & L A/C
N N
Cost of goods stolen x Branch stock Adj A/C b/d x
Sundry expenses x
Cost of goods lost in transit x
Cost stolen x
Net profit c/d x
xx xx
Evaluation questions
1. What are the entries involved in selling goods on credit by a branch?
2. What is the purpose of preparing branch stock accounts?
Illustration
Suzuki Ltd has a head office in Lagos and a branch in Ibadan. All goods are purchased by the head office and sent to Ibadan at cost plus mark-up of 1/3 of the selling price. During the year to 31/12/05 the following transaction took place at Ibadan.
N
Goods received from Lagos 360,000
Goods returned to Lagos 3360
Bad debt 1192
Cash received from debtors 137248
Cash discount given 3616
Cash sales 201600
Credit sales 144,000
The following additional information is relevant
1/1/05 31/12/05
N N
Stock in hand at selling price 32160 42000
Debtors 13216 15160
You are required to prepare
- Branch stock A/C
- Goods sent to Branch A/C
- Branch stock adjustment A/C
- Branch debtors A/C
Solution:
Suzuki Ltd
Branch stock A/C (invoice price)
N N
a. balance b/f 32160 cash sales 201600
Goods sent to branch branch debtors
At cost (2/3 x 360,000) 240,000 -credit sales 144,000
Branch stock adj. goods return
Profit loading (1/3 x 360,000) 120,000 to H.O.
Cost – (2/3 x 3360) 2,240
Branch stock
Adjust-profit
Loading (1/3×3360) 1,120
Branch stock
(The difference) 1,200
bal (c/d stock
at close 4,200
39216 39216
b. Goods sent to branch A/C (cost price)
N N
Branch stock
Goods returned to H.O A/C (2/3×360,000) 240,000
Cost (2/3×3360) 2240
Transferred to
H.O. trading A/C
(Balancing figure) 237,760
240,000 240,000
c. Branch stock adjustment A/C (profit loading)
N N
Branch stock A/C bal b/f (1/3×32,160 10,720
Less in stock 1200 branch stock A/C 120,000
Returns to H.O (profit on G.S.B
(profit on it 1/3×3360 1120 (1/3×360,000)
Profit on closing
Stock (1/3×42000) c/d 14,000
Branch P&L A/C GP c/d 114,400
130720 130720
Bal b/d 14000
d. Branch debtors A/C
N N
Bal b/f 13216 cash received from debtors 137248
Credit sales 144,000 Discount allowed 3616
Bad debt 1192
Bal c/d 15,160
157216 157216
Bal b/d 15160
Evaluation questions
1. Explain the following pricing methods used in preparing branch accounts
(a) cost price (b) cost plus a percentage (c) selling price
2. List any five items that may feature in the Branch stock Adjustment Account.
GENERAL EVALUATION QUESTIONS
- List five source documents used in preparing the Cash Book
- State five factors to be considered in determining the depreciation charge for a fixed asset
- State five differences between capital expenditure and revenue expenditure
- State three features of each of the following (a) cash book (b) trading account (c) profit and loss account
- Differentiate between prime costs and overhead costs
Reading assignment
Essential Financial Accounting O. A. Longe, Pages 379-383
Weekend assignment
- Branch stock A/C is prepared to show:
- cost price of goods sent to branch
- Gross profit in goods sent to branch
- Invoice price of goods sent to branches
- None of the above
- In branch accounting, the entries for bad debt written off are:
- Dr. Branch stock A/C Cr. Debtors A/C
- Cr. Bank A/C Dr. debtors A/C
- Cr. Debtors A/C, Dr. branch P&L Mc to branch A/C
- If the margin of a trader is 30% than the mark-up of the trader is
(a)25% (b)33% (c)40% (d)43%
- The balancing figure in the goods sent to branch A/C is (a)transfer to branch debtors A/C (b)credit to branch stock A/C (c)transfer to branch P&L A/C (d)transfer to head office trading A/C
- A branch sold goods on credit for N5000. The accounting entries are debt branch debtors A/C N5000 and credit.
(a) goods sent to branch A/C N5000 (b)branch stock adjustment A/C N5000 (c)branch stock A/C N5000 (d)branch profit & loss A/C N5000
Theory
- What purpose does each of the following serve?
- Branch stock A/C
- Branch stock adjustment A/C
- Goods sent to branch A/C
- Show a comprehensive format of a branch stock A/C
FINANCIAL ACCOUNTING E-LEARNING NOTE SECOND TERM – Edudelight.com
WEEK TEN
TOPIC: INTRODUCTION TO DATA PROCESSING
CONTENT
- Definition of terms
- Stages of Data Processing
- Methods of Data Processing
- The Electronic Computer
Data Processing is the process of producing meaningful information from raw data. It describes the series of actions taken to produce useful information by collecting all items of data together and performing operations on them. The aim of data processing is to convert raw data into information.
Data: Data represent the raw unprocessed input element introduced into a system from which useful information is extracted. Data is used to describe the facts and figure obtained which have not been grouped, related or evaluated in any way.
Information: Information consist of data which have been recorded organized classified and processed into useful and meaningful form. It is the output element of a data processing system.
QUALITIES OF A GOOD INFORMATION
(i) Accuracy
(ii) Timeliness
(iii) Completeness
(iv) Relevance
(v) Up to date
(vi) Cost effectiveness
DATA PROCESSING STAGES
(i) Origination
(ii) Preparation/Sorting
(iii) Input
(iv) Processing
(v) Output
(vi) Storage
(vii) Distribution
METHODS OR TECHNIQUE OF DATA PROCESSING
(a) Manual Data Processing
(b) Mechanical Data Processing
(C) Electronic Data Processing
EVALUATION
1. Differentiate between data and information.
2. List five qualities of a good information.
THE ELECTRONIC COMPUTER
Characteristics of a Computer
i. Speed – high speed of operation
ii. Storage – Large storage volume
iii. Versatility – Can be used to perform wide range of tasks
iv. Diligence – It can perform similar operations at the same speed and accuracy at all times.
v. Automatic – Tasks are performed automatically based on the programme (instructions) given to the computer.
ELEMENTS OR COMPONENTS OF A COMPUTER
1. INPUT DEVICES – i. .e. the unit through which data are fed into the computer e.g. keyboards, terminals, optical mark readers optical character readers, magnetic ink character readers.
2. CENTRAL PROCESSING UNIT – This is the part of the computer that carry out the computations and calculations. It is made up of
(a) The control unit
(b) The Arithmetic and Logic Unit
(c) The Internal Memory or Storage
3. OUTPUT DEVICES – These are used to transmit processed data to the users e.g printer, visual display units, plotters.
4. STORAGE DEVICES – These are external storage devices used to hold information that would be required by the users of the computer e.g. diskettes, magnetic tapes, punched cards etc.
APPLICATION OF COMPUTERS IN AN ACCOUNTING ENVIRONMENT
Computers are used in finance and accounting for such applications as
1. Payroll system
2. Nominal Ledger (or General Ledger) system
3. Stock Control System
4. Maintenance of Fixed Assets Register
5. Reconciliation of Accounts/Auditing
6. Automatic cheque clearing system
7. Purchase Ledger System
8. Sales Ledger System
9. Financial Planning Services
10. Preparation of Management Reports
11. Financial Forecasting/Projections and Budgeting
12. Computation of job cost estimates
13. Electronic fund transfer e.g. from one bank to another.
EVALUATION
1. What is a Computer?
2. List and explain three methods of data processing
GENERAL REVISION QUESTIONS
- List six accounts found in the nominal ledger
- List six accounts found in the general ledger
- State two uses of the trial balance
- List five examples of accounts that have debit balances
- List four examples of accounts that have credit balances
READING ASSIGNMENT
Simplified Book-keeping and Accounting page 487-501
WEEKEND ASSIGNMENT
1. The fourth stage of the accounting information system is ____________
(a) recording (b) interpreting (c) summarizing (d) classifying
2. In the permanent storage device, DASD means________
Direct Access Systems Device (b) Direct Access Storage Device (c) Data Access System Device (d) Data Access Storage Device
3. The input output and central processing units are the basic components of a computers _____
(a) memory (b) software (c) printer (d) skill
4. The computer that functions by taking discrete numbers and performing mathematical calculation is called ______
(a) mainframe (b) digital (c) hybrid analogue
5. Which part of the computer system does the keyboard device belong to ______
(a) output unit (b) logic unit (c) input unit (d) control unit
THEORY
1. Mention and explain with diagrams, the stages of data processing.
2. State four reasons why some firms still use manual data processing instead of electronic data processing.
