Professional Documents
Culture Documents
LEARNING
KNUST
EXECUTIVE MBA/MPA
CEMBA/CEMPA 560
ACCOUNTING AND FINANCE
LECTURE ONE
BLOCK ONE – PREPARATION
OF FINANCIAL STATEMENTS
UNIT 1
TYPES AND FORMS
OF BUSINESS
CLASSIFICATION BY LEVEL
OF ACTIVITY
• Primary Firms
Involved in extractive industries such as
mining, agriculture, oil extraction etc
• Secondary Firms
Involved in processing and
manufacturing
• Tertiary Firms
Involved in the provision of services in
banking, insurance, education etc.
CLASSIFICATION BY SECTOR
• Public Sector Business Organisation
For profit or non-profit controlled by
government.
30,000
30,000
Illustration 2
The following information relates to Ashili Enterprise
for the month of January, 2008.
a) Started business with GH¢25,000cash.
b) Deposited GH¢15,000 in a newly opened bank
account.
c) Bought goods costing GH¢5,500, on credit from Jalal.
d) Purchase machinery GH¢10,000 paying GH¢7,000
immediately by cheque.
Illustration (Cont.)
e) Sold goods costing GH¢2500 to Zidan on
credit for GH¢3, 000.
f) Borrowed GH¢4,000 cash from Sham.
g) Cash purchases of goods GH¢5,300,
h) Zidan paidGH¢2,200, cash in partial
settlement of his debt.
i) Goods withdrawn for personal use GH¢500.
• Required:
show the effect of each transaction
on the accounting equation and
prepare a balance sheet as at 31st
January, 2008.
Analysis of Illustration 2
Started business with GH¢25,000cash
a) ASSETS = LIABILITIES + CAPITAL
Cash = 0 + Capital
¢25,000 = ¢ 0 + ¢25,000
Deposited GH¢15,000 in a newly opened bank account.
b) Cash + Bank = Capital
Old bal. 25,000 + 0 = 25,000
Effects (15,000) + 15,000 0
10,000 + 15,000 25,000
Analysis (Cont.)
Bought goods costing GH¢5,500, on credit from Jalal.
c) Cash + Bank + Stock = Creditors + Capital
Old bal. 10,000 + 15,000 + 0 = 0 + 25,000
Effect 0 + 0 + 5,500 = 5,500 + 0
New 10,000 15,000 5,500 5,500 25,000
h)
Cash + Bank + Stock + Machinery + Debtors= Creditors +
Loan+ Capital
Old bal.8,700 + 8,000 + 3000 + 10,000 + 3,000 = 8,500
+ 0 + 25,500
Effects 2,200 + 0 + 5,300 + 0 + (2,200) = 0
+ 4,000 + 0
New 10,900 8,000 8,300 10,000 800 8,500
4,000 25.500
Goods withdrawn for personal use
GH¢500.
i)
Cash + Bank + Stock + Machinery + Debtors=
Creditors + Loan+ Capital
Old bal.10,900 + 8,000 + 8300 + 10,000 + 3,000 = 8,500
+ 0 + 25,500
Effects 0+ 0+ (500) + 0 + 0 =
0 + 4,000 + (500)
New 10,900 8,000 7,800 10,000 3,000 8,500
4,000 25.000
Ashili Enterprise
Balance Sheet as at 31 January 2008
GH¢
GH¢ GH¢
Capital Fixed Assets
25,000 Machinery
10,000
Long term Liabilities: Current Assets:
Loan Stock
4,000 7,800
Debtors
800
Current Liabilities: Bank
8,000
Creditors Cash
8,500 10,900
37,500
27,500
UNIT 1.2 :
The Recording Process
• Most companies employing more than a handful
of staff use the system of recording called
double entry bookkeeping.
• This system records both cash and credit
transactions as they occur at their different
times.
• The name double entry derives from the fact
that each individual transaction is entered
twice, recognizing two aspects.
• These two aspects are referred to by
accountants as debits and credits.
To Summarize:
DEBIT SIDE CREDIT SIDE
• Expenses • Income
• Increase in Assets • Liabilities
( including ( including owing to
customers debts) suppliers)
• Decrease in • Decrease in Assets
liabilities • Cash Payments
• Cash receipts
• AN ACCOUNT
• An account is a statement, which records all the
transactions of a specific class, which have taken place
during a given period.
• Account in its simplest form, has three elements:
– (1) a title consisting of a particular assets, liability or owner’s
equity;
– (2) a left side, which is called debit side; and
– (3) a right side, which is called the credit side
This form of account, illustrated below, is
called a T account because of its
resemblance to the letter T.
Account Title
Left or debit side Right or credit side
CLASSIFICATION OF ACCOUNT
• Personal and Impersonal Account
(divided into Real and Nominal Accounts)
• Ledger accounts which bear the names of
individuals, partnerships or companies are
called PERSONAL ACCOUNTS;
• All other accounts are called IMPERSONAL
ACCOUNTS.
• Impersonal accounts may be further
sub-divided into two classes:
– Real Accounts – Recording transactions in
property and material objects. (E.g. motor
van, Land and Building, stock, cash etc)
– Nominal Accounts – records expenses,
losses, revenue, incomes or gains. (E.g.
sales, purchases, rent and rates, interest
paid and receive, etc)
Accounting Cycle
1.The process of recording, classifying and
summarizing which is repeated in the same
order each accounting period is referred to as
the ACCOUNTING CYCLE.
2. Several steps are involved from recording of
transactions, analysis of those transactions to
the generation of financial statements.
These steps are collectively called the
Accounting Cycle.
Accounting Cycle (Cont.)
• Analyse the transactions in terms of its
effects on the accounting equation
• Pass the entry in the journal
• Post the entry to the ledger
• Balance accounts and extract trial balance
• Pass and post adjusting entries
• Prepare financial statements
The Journal
• THE GENERAL JOURNAL
• Many businesses maintain several types
of journals.
• The nature of operation and the volume
of transactions in a particular business
determine the number and types of
journals needed.
• The simplest form of journal is general
journal
General Journal
• The general journal has two money columns, one
for debits and the other for credits
• It may be used for recording any type of
transaction in an organisation.
• The process of a recording transaction in a
journal is called journalizing the transaction.
Format of General Journal
GH¢ GH¢
31/7/08 Balance c/d 4,230 1/7/08 Cash 4,230
4,230 4,320
1/8/08 Balance b/d 4,320
Cash Account
GH¢ GH¢
1/7/08 Capital 4,230 3/7/08 Purchases 1,755
10/7/08 Sales 3,000
14/7/08 Bank 1,800
31/7/08 Electricity 25
31/7/08 Insurance 30
GH¢ GH¢
16/7/08 Sales 8,000 17/7/08 Bank 6,000
GH¢ GH¢
25/7/08 Bank 3,500 31/7/08 Balance c/d 3,500
3,500 3,500
1/8/08 Balance b/d 3,500
Drawings Account
GH¢ GH¢
GH¢ GH¢
31/7/08 Cash 25 31/7/08 Balance c/d 25
25 25
1/8/08 Balance b/d 25
Insurance Account
GH¢ GH¢
31/7/08 Cash 30 31/7/08 Balance c/d 30
30 30
1/8/08 Balance b/d 30
B. HANAN ENTERPRISE
Trial Balance at 31st July, 2008
Cash basis
Revenues are recorded when cash is
receive and expenses when cash is
paid. The net income or loss is the
difference of cash inflows from revenue
and cash outflow for expenses.
Basis of Accounting (Cont.)
Accrual basis
Revenues are recognised in the
period in which they are earned and
expenses when they are incurred
KEY ASSUMPTIONS
UNDERLYING
•
PREPARATION
Accounting Entity
OF FS.
The business entity is treated as a separate entity
apart from its owners and other entities.
It is important in order to evaluate the
performance of the business.
An entity owns its assets and incurs its liabilities.
• Going Concern
The entity will continue to operate for the
foreseeable future
• Accrual basis
Effects of transactions and other events are
recognized when they occur (not when the cash
flows).
The effects are recorded and reported in the
financial statements of the periods to which
they relate.
Assumptions (Cont.)
• Cost Principle
States that acquired assets and services
should be recorded in the books of accounts at
their exchanged price (called historical cost)
agreed by the parties.
• Stable Currency Assumption
Assumes that money’s purchasing power is
relatively the same.
ELEMENTS OF FINANCIAL
STATEMENTS
1. Assets 4. Income
2. Liabilities 5.Expenses
3.Equity
Expenses:
Wages and salaries ¢125,000
General expenses 20,000
Rent 10,000
Telephone 7,000
Office supplies 3,000
Total expenses ¢165,000
Net income ¢ 85,500
Balance Sheet
• The Balance Sheet lists the assets, liabilities,
and equity accounts of the company.
• The Balance Sheet is prepared ‘‘as on’’a
particular day, and the accounts reflect the
balances that existed at the close of business
on that day.
• The Balance Sheet is prepared on the last day
that the Income Statement covers.
Balance Sheet (Cont.)
• If the Income Statement is for the period
ending December 31, 2006, the Balance
Sheet would be as on December 31, 2006.
• The date can be stated in a variety of
formats. All of the following are acceptable:
– As on December 31, 2006
– December 31, 2006
– On December 31, 2006
– As at 31st December, 2006
Typical accounts that are classified as assets, liabilities, and equity accounts.
Assets Liabilities Equity
Vehicles
A good general rule of
Thumb
• Any account that has the word receivable
in its title will be an asset,
• Any account that has the word payable in
its title will be a liability.
• Any account that has the word expense in
its title is likely to be classified as an
expense on the Income Statement, except
for the account Prepaid expenses, which is
an asset.
Rule of Thumb (cont.)
• Any account with the word income
or revenue in its title is classified as
revenue on the Income Statement,
except for the account Unearned
revenue, which is a liability.
• A sample Balance Sheet is shown in
the next slide.
Haneef Company Ltd.
Balance Sheet as at December 31, 2006
Assets:
Noncurrent Assets
Property, Plant &Equipment ¢ 110,000
Current Assets
Inventory 90,000
Accounts receivable 25,000
Prepaid expenses 50,000
Cash 75,000
Total Assets ¢350,000
Liabilities:
Accounts payable ¢50,000
Salaries payable 75,000
Notes payable 65,000
Total Liabilities (i) ¢190,000
Owners’ Equity:
Ordinary Shares ¢ 10,000
Income surplus 150,000
Total Owner’s Equity (ii) ¢160,000
Total Liabilities and Owner’s Equity (i)+(ii) ¢350,000
Balance Sheet
• On the Balance Sheet, the largest numbers in
each section are not necessarily listed first.
• On the asset side of the Balance Sheet, the
accounts are listed in order of their liquidity.
Liquidity means nearness to cash.
• Cash is listed first, since cash is already cash.
• Each current asset is then listed in the order in
which it is expected to become cash.
• Accounts receivable comes second, since this
company believes that its accounts receivable
will be collected prior to the other assets being
turned into cash.
• On the liability side, the accounts are listed in the
order in which they are expected to be satisfied
(a fancy way of saying paid).
• In a classified Balance Sheet, the assets are
separated into current and noncurrent (or long-
term)
Balance Sheet (Cont.)
• Liabilities are similarly classified as
current and noncurrent.
Adjustments to Final
accounts
• Items requiring adjustments
• Accrued expenses
• Accrued income
• Prepaid expenses
• Prepaid revenue (unearned revenue)
• Depreciation
• Bad debts and doubtful debts
provisions
Accrued Expenses
• Unpaid expenses: economic benefit
has already been acquired but
payment has not yet been made.
• An expense and a liability is to be
recognised.
Adjustments
Expense Account
Amount per Trial balance X
Add expense owing at close X
B/S
X
Less Expense owing at start (X)
X I/S
Prepaid Expense
Expense Account
Amount per Trial balance X
Add expense prepaid at start X
X
Less expense prepaid at close (X)
B/S
X I/S
Prepaid Revenue
Revenue Account
Amount per Trial balance X
Add unearned revenue at start X
X
Less unearned revenue at close (X) B/S
X I/S
Accrued Income
• Income earned but not yet recorded
Adjustments
Revenue Account
Amount per Trial balance X
Add accrued income at end X B/S
X
Less accrued income at start (X)
X I/S
Depreciation
• Fixed Assets are long-lived assets and
benefit several accounting periods
• Their costs therefore need to allocated
as an expense over their useful life.
• The systematic allocation of this cost is
called depreciation.
• The recognition of depreciation means
the recognition of an expense and the
decrease in the value of an asset.
• The decrease in the value of an asset
is not recorded directly in the asset;
rather a contra account “provision for
depreciation” is opened.
• The original cost of an asset is an
objective measure where as provision
for depreciation is an estimate
• The balance sheet discloses the
original cost and the provision for
depreciation (or called
Accumulated depreciation)
• The resulting figure is the book
value
• Bad Debts: Credit sales have
become a must these days and bad
debts occur when there are credit
sales.
• Bad Debt is a loss to the business
and a gain to the debtor.
• Bad debts are charged to income
statement.
P&L Example
ILLUSTRATION
The following trial balance was extracted from the records of Asana, a petty trader at 31st December 2007.
DR CR
GH¢ GH¢
Capital 43,235
Drawings 6,150
Stock in trade (1st January 2007) 2,100
Purchases 40,500
Sales 94,400
Returns outwards 1,300
Carriage outwards 860
General expenses 1,250
Motor expenses 1,900
Salaries 26,500
Discount allowed 350
Discount received 240
Rent and rates 950
Insurance 500
Bad debt written off 1,200
Provision for bad and doubtful debt 750
Premises at cost 25,000
Furniture and fixtures 15,000
Motor van at cost 9,000
Cash in hand 250
Cash at Bank 4,970
Debtors and Creditors 20,500 17,055
156,980 156,980
The following information should be taken into consideration.
( i ) Stock in trade at 31st December, 2007 was GH¢ 3,500
(ii) Provision of doubtful is to be adjusted to 5% of debtors
(iii) Prepaid insurance GH¢50: Motor expenses outstanding GH¢40
(iv). during the year Asana withdrew goods costing GH¢200 for his private use. No entries have been made in the books for the
withdrawal.
(iV) Provide for depreciation for the year: furniture and Fixtures GH¢3,000 and Motor van 15% on cost.
You are required to prepare:
(a) Trading and profit and loss account for the year ended 31st December, 2007.
Workings
1. Provision for doubtful debts
3. Motor Expenses
Amount in trial balance 1900
Amount outstanding 40 B/S
Motor Expense 1940 I/S
Workings (Cont.)
4. Drawings
Amount in trial balance 6,150
Goods withdrawn 200 Trading
Total 6,350 B/S
5. Purchases 40,500
Less goods drawings 200
Net purchases 40,300
Workings (Cont.)
6.Depreciation:
– Furniture & Fittings 3,000
– Motor Van (15% of 9000) 1,350
4,350 I/S
ASANA ENTERPRISE
TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST DECEMBER 2007
Investing Activities:
Payments to acquire intangible fixed assets (XXX)
Payment to acquire tangible fixed assets (XXX)
Receipts from sale of tangible fixed asset XXX
Net cash Outflow from investing activities (XXX)
¢ million
Operating profit XXX
Depreciation charges XXX
Loss on sale of tangible fixed Assets XXX
Increase in stock (XXX)
Increase in debtors (XXX)
Increase in creditors XXX
Current Assets:
Stocks 400 700
Debtors 1,350 1,550
Cash and Bank 100 -
Total Current Assets 1,850 2,250
Current Liabilities
Bank Overdraft - 60
Creditors 650 790
Taxation 230 190
Proposed Dividends 150 130
Total current Liabilities 1,030 1,170
Net Current Assets 820 1,080
Total Assets 1,320 1,480
Represented by:
Stated Capital 500 750
Capital Surplus 150 200
Income Surplus 670 530
1,320 1,480
ILLUSTRATION (CONT.)
Additional Information:
i) During the year to 31st December 2007, some fixed assets originally
costing GH¢25,000 with depreciation of GH¢10,000 had been sold for GH
¢20,000 in cash. Similarly, some of the investments originally costing Gh
¢150,000 had been sold for cash at their book value.
iii)No interim dividend was paid during the year to 31st December 2007
iv) During the year to 31st December 2007, the company made 1-for-2
right issues of 250 equity shares at 120 GHp per share.
Required:
Prepare a cash flow statement for the company for the year to 31st
December 2007 in accordance with the requirements of IAS7.
WORKINGS
ABC COMPANY LTD, BALANCE SHEET
ANALYSIS
2006 2007 INFLOWS OUTFLOWS
FIXED ASSETS 500 650 150
Less Accum.. Depr 200 300 100
300 350
Investment 200 50 150
CURRENT ASSETS
Stocks 400 700 300
Debtors 1,350 1,550 200
Cash and Bank 100 - 100
CURRENT LIABILITIES
Bank Overdraft - 60 60
Creditors 650 790 140
Taxation 230 190 40
Proposed Dividends 150 130 20
1,030 1,170
Net Current Assets 820 1,080
Total Assets 1,320 1,480
Represented by:
Stated Capital 500 750 250
Capital Surplus 150 200 50
Income Surplus 670 530 140
GH¢
Cost 25,000
Acc. Depr. 10,000
Book Value 15,000
Profit 5,000
Sales Proceeds 20,000
Computations of Profit
before Tax
Loss as per the Accounts - 140
Add: back proposed dividends 130
Provisions for tax 190
Profit before tax 180
ABC COMPANY LIMITED
CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2007
OPERATING ACTIVITIES
Net cash flows from operations 180
Add: back depreciation charges 110
Less profit on sale of fixed assets -5
Increase in Stock -300
Increase in debtors -200
Increase in Creditors 140
Cash generated from operations -75
Dividends paid -150
Income Tax paid -230
Net Cash outflow from operating activities -455
INVESTING ACTIVITIES:
Purchase of fixed Assets -175
Sale of Investment 150
Sale of fixed Assets 20
Net cash outflow from investing activities -5
NET CASH OUTFLOW BEFORE FINANCING -460
CASH FLOW STATEMENT(CONT.)
FINANCING
Stated Capital –issue of equity shares 250
Increase in Capital surplus 50 300
NET CASH OUTFLOW FOR THE YEAR -
160
ANALYSIS OF CHANGES IN CASH
100
Net cash outflow during the year -160
-60