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UNIVERSITY OF GUYANA FACULTY OF SOCIAL SCIENCES DEPARTMENT OF BUSINESS AND MANAGEMENT STUDIES

SEMESTER I LECTURER: TROY J. WISHARTMARIA CHRISTY

ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES I

HISTORY

Historically, we know that double entry bookkeeping emerged in Italy about the thirteenth century. The oldest surviving records we have of double entry date from the last years of the thirteenth century, but it is probable that double entry was used many years before that. Historical evidence shows that double entry bookkeeping was practiced in Florence in the late thirteenth century. The oldest surviving records include those of Rinerio and Baldo Fini, between 1296 and 1305, and the branch ledger of Giovanni Forolfi for the years 1299 and 1300. The first record of a complete double entry system is the Massari (treasurers) accounts of the city of Genoa in 1340.De Roover explained, Double entry was born when people came to see that you could not take something out of one pigeonhole without putting it into another. Apparently, this is simple but it took a long time before the mechanics of it were fully understood.Luca Pacioli’s book Summa de Arithmetica Geometria Proportioni et Proportionalita (Review of Arithmetic, Geometry and Proportions) in 1944 is the first book on double entry bookkeeping to be published. However, according to Peragallo the first person to write on double-entry was probably Benedetto Cotrugli, whose book was completed in 1458 but not published until 1573. Pacioli’s book was very influential in spreading the knowledge of double-entry bookkeeping. Printing with loose metal type had only been recently invented in Germany, therefore Pacioli’s book must have been one of the first to be printed in Venice by the new method. This reveals the high regard people had for him and the subject matter of his book.

DEFINITIONS AND CONCEPTS

BOOKKEEPINGBookkeeping is the systematic recording of each relevant business transaction as it occurs.

It is important to note that we are not recording the transactions as we feel, or at random, but, the transactions are to be recorded in a particular or prescribed manner as is the norm or practice. The transactions that are recorded in the books are the business’s transactions, and therefore all personal transactions that have no relationship with the business are to be excluded. The transactions are also to be recorded as they occur. This is important, as all transactions must be recorded in chronological order based on the date of the transactions.

ACCOUNTING

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Accounting is the recording, classification, summarizing of transactions and events in a significant manner, which are of a financial nature and interpreting of the results thereof.

Accounting goes beyond merely recording the transactions, which is the first phase in the accounting process. Recording includes such activities as writing up receipts and payment vouchers, as well as other source documents. The various transactions then have to be classified or categorize based on the nature of the transactions, and posted to the various accounts or under common heads, after which they are summarized in accordance with generally accepted accounting practice. They are summarized so as to allow the users to have an over all view of the activities of the business. A transaction is an external event involving a transfer or exchange between two or more entities, while an event generally is the source or cause of changes in assets, liabilities and equity. Events may be external or internal. It is a happening of consequence. Accounting also involves the interpreting of the results, since the results have little meaning as they are presented. Interpreting tools include ratio analysis, which gives further meaning to the financial information. FINANCIAL STATEMENTStatements that reflect the collection, tabulation and summarizing of the accounting data. Financial statements include Profit and Loss Account, Balance Sheet, Cash Flow Statement, notes to the accounts and the Directors’ and Auditor’s reports.

BALANCE SHEETThe balance sheet is a financial statement of a person or business as at a particular date or time. It shows assets and liabilities as well as net worth.

It should be note that the balance sheet changes after each transaction, as either one asset may increase while another will decrease as a result of a transaction, or an asset may increase with a liability increasing to a similar extent, or an asset may decrease resulting in a liability decreasing to a similar degree. The balance sheet in also prepared in a prescribed manner, with each item having a particular place in the statement. Consecutive balance sheets can also be used to determine the performance of a business for the period between the balance sheets dates.

ASSETSProbable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

An economic benefit is expected from the action taken by the business, however, the benefit may not materialize, though it is more likely than not expected to bring about economic benefit to the business in the future, whether the near or distant future. It may be obtained or controlled by the business. The item does not have to be owned by the business, that is, the business need not have title of ownership of the item. It may be controlled by the business in such a way that it may be perceived by others to be owned by the business base on it use and existence in the business. The second and more important feature is that the transaction or event must have occurred, not expected to occur.

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Whether there is future economic benefit or not, if the event or transaction had not occurred the item cannot be deemed an asset. Assets are therefore items or things owned by the business, as well as things controlled by the business.

FIXED ASSETSThese are assets that are held for use, rather than realization and which are intended to provide services or generate revenues over future accounting periods.

Fixed assets are items purchased by the business either to provide services or generate revenues over more than one accounting period. If the item is purchased for resale it cannot be treated as a fixed asset. If it is purchased to be used by the business, after which it would be disposed of by way of sale, such intentions would not alter the fact that it is a fixed asset. However in considering whether an item that will be used for more than one accounting period would be treated as a fixed asset, materiality (the significance of the value) would be an important factor, since things that are immaterial are not capitalize, that is, the cost is not spread over more than one accounting period. Eg. A paper weight though it will be used for more than one accounting period, would be expensed in the period it was purchased. It would be treated as an expense. On the other hand if the value of the item is significant it would be capitalized and treated as a Balance Sheet item.

CURRENT ASSETSThose assets, which are intended to be held within a period of one year and are expected to be exhausted in one operating cycle.

These are assets that are expected to be used up by the business during the next accounting period, or change their form during the next accounting period. The operating cycle is the period of time it takes a firm to buy inputs, make or market a product and collects the cash from a customer. Unlike expenses that are related to the current period, current assets relate to the next period.

LIABILITIESProbable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

To be a liability there must be a present obligation. The obligation must be currently existing, that is, it would have arisen from a past transaction. Here we are not looking at an obligation that is likely in the future, but one that had already occurred. It is a probable future sacrifice of economic benefit because the economic benefit may be given up by the business to meet the obligation. Liabilities are amounts owed to third parties by the business. A liability can be eliminated by giving up some assets or creating another liability.

CURRENT LIABILITIESThese are short-term debts or obligations, which are expected to be satisfied in one accounting period.

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The portion of a long-term liability, which would be paid during the next accounting period, must be classified as current liabilities for the current reporting period. EQUITYThe residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the owner’s interest. This is often the amount invested by the owner, as well as accumulated profits from period to period. Equity or capital as it is commonly called is the amount owed to the owner by the business.

DRAWINGSThis is the withdrawal of cash or good by the proprietor from the business for his personal use.

Drawings reduce capital, which the amount owing to the owners, and is usually a debit balance. Drawings is also placed in the balance sheet and is subtracted from opening capital.PROFIT & LOSS ACCOUNTThis account is part of the double entry system, and is a financial statement used to determine the performance of the business for a given period of time. It shows the expenses and revenue incurred and earned during the period. The profit and loss account is used to determine the performance of the business over a given period of time.

EXPENSESOutflow or other using up of assets or in-currences of liabilities, or a combination of both during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

Expense is the value of assets given up to generate revenue.

REVENUEThese are inflows or other enhancements of assets of an entity or settlement of liabilities, or a combination during a period.

EXPENDITUREThe amount paid and amount expected to be paid for an item over a given period. Expenditure can be further subdivided into capital and revenue expenditure

CAPITAL EXPENDITUREThese can be describe as expenditure incur in acquiring assets of a permanent nature the benefit of which extend over one or more accounting periods. Capital expenditure is another term used for the purchase of fixed assets.

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REVENUE EXPENDITUREThis type of expenditure are those incurred for the day to day running of the business, the benefit of this type of expenditure do not extend beyond the accounting period in which the expenditure would have taken place. It includes such items as services and maintenance of assets in good working condition.

ACCOUNTA systematic arrangement, that shows the effect of transactions and other events on a specific asset or equity. A separate account is kept for each asset, liability, revenue, expenses and for capital.

REAL ACCOUNTSThese are accounts that record physical assets such as land, buildings, plant, vehicles, cash and investments.

Additions to real accounts are always made on the debit side. Reductions such as disposals and depreciation are entered on the credit side. It is important to note that stock is a special sort of real account, which has a debit entry only at accounting year-ends, which is removed by a credit at the start of the next succeeding year.

PERSONAL ACCOUNTSThese accounts show the dealings with and the balances due to or from persons or institutions.

Transactions that increase the amount due to a person by the enterprise are entered on the credit side. A purchase on credit from a supplier requires an entry on the credit side of the supplier’s account. Transactions that reduce the amount due to a creditor are entered on the debit side of the creditor’s account. Transactions that increase the amount due from a person to the business are entered on the debit side of that person’s account. Example, sales invoices are entered on the debit side of the customer’s account. Transactions that reduce the amount due from a person to a business are entered on the credit side of that person's account.

The capital account is also a personal account. It is the account of the proprietor. Profit is credited as it increases the sum due to the proprietor and drawings are debited as they reduce the amount due.

The cash book is an example of a personal account. It deals with the balance due to or from the bank. Receipts (payments into the bank), goes on debit side and payments (cheques drawn) goes on the credit side. It should be noted that we are talking about the bank account in the cash book, and not the cash account which is also found in the cash book. NOMINAL ACCOUNTSThese accounts accumulate the data required for the trading and profit and loss accounts.

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They are temporary accounts that are transferred to the trading and profit and loss account at the end of the period. While real and personal accounts and placed in the balance sheet, nominal accounts are placed in the trading and profit and loss account.

LOSSESDecrease in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period, except those that result from revenue or investment by owners.

GAINIncrease in equity (net assets) from peripheral or incidental transaction of an entity and from all other transactions and other events and circumstances affecting the entity during a period, except those that result from revenue or investment by owners.

GOODWILLAn intangible asset representing the value of the whole business in excess of the combined individual value of tangible assets, which it is made up of. Goodwill is incapable of realisation separately from the business as a whole, and is the value of a business as a whole from the value of its separate net asset.

DEPRECIATIONThis is the measure of the wearing out, consumption or other reductions in the useful economic life of a fixed asset, whether arising from use, passage of time or obsolescence. Depreciation has nothing to do with the valuation of assets, though it affects the value of assets. It is the allocation of cost of fixed assets over the assets useful life.

Obsolescence is the ending of an asset’s useful life for reasons other than deterioration. Obsolescence is caused by new technology.

PROVISIONAn amount retained as reasonable necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred, but uncertain as to amount or as to the date on which it will arise.

NET REALISABLE VALUEThe actual or estimated selling price of an asset less all further costs to completion, and all costs to be incurred in the marketing, selling and distribution.

LIQUIDITYIs the ease with which funds can be raised by the sale of assets.

ACCRUALS

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Expenses that have been consumed or enjoyed but which have not been paid for at the accounting date.

PREPAYMENTAn amount on a balance sheet representing the cost of future benefits, which have already been paid for.

TRADE DEBTORSThose who owe money to the business, as a result of credit sales transactions.

TRADE CREDITORSThose to whom the firm owes money, as a result of credit purchases transactions.

WORKING CAPITALThe excess of current assets over current liabilities also called net current assets.

TRADE DISCOUNTReduction in sales price given to favoured customers, special classes of customers or for bulk purchases. Accounting is always on the net amount of invoice.

Trade discount is of no accounting importance to the entity receiving the discount, since only the net amount is required for accounting purposes. It is neither a loss nor a gain to the entity giving the discount, and therefore no recording of such is required.

CASH DISCOUNTThis is the granting of a reduction in the amount payable by a debtor to introduce prompt payment or early payment.

Unlike trade discount, cash discount is important for accounting purposes, and is a loss or gain to the business. If the business gives a cash discount to a trade debtor, the discount is referred to as discount allowed, and is a loss to the business. The discount reduces the amount owing to the business, and the balance or total of such discounts is placed in the profit and loss account. On the other hand, if the business receives a cash discount from a trade creditor, the discount is referred to as discount received and is a gain by the business. This also reduces the amount to be paid by the business. TRADING STOCKTrading goods that were not sold at a particular date or time are referred to trading stock.

CONSUMABLE STOCKThose items that were intended to be consumed (used up) during the accounting period, but have not been exhausted at the end of the accounting period.

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ACCOUNTING CONCEPTSAccounting concepts are assumptions under which financial accounts of a business enterprise are prepared.

- Accruals- Consistency- Prudence- Going Concern- Substance Over Form- Materiality- Business Entity- Money Measurement- Cost- Realisation- Dual Aspect

(i) Accrual – Revenue and cost are accrued, that is recognised as they are earned or incurred (and not as money is received or paid), and recorded in the financial statements of the periods to which they relate.

(ii) Consistency – It is assumed that accounting policies are consistent from one period to another, and there is consistency of accounting treatment of like items within each accounting period.

(iii) Prudence – Revenue and profit are not anticipated but are recognised by inclusion in the profit and loss account only when realised in the form either of cash or of other assets, the ultimate cash realisation of which can be assessed with reasonable certainty; provision is made for all known liabilities (expenses and losses), whether the amount of these is known with certainty or is a best estimate in the light of the information available.

(iv) Going Concern – The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.

(v) Substance Over Form – Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form.

(vi) Business Entity – Only transactions that affect the firm are recorded in the firm’s books. The accounting records are limited to the firm and do not extend to personal resources of the proprietor. The only attempt to show how the transaction affects the owners of a business, is limited to showing how their capital is the firm affected.

(vii) Money Measurement – Accounting is only concern with those facts that can be measure in monetary terms with a fair degree of objectivity.

(viii) Cost – Assets are normally shown at cost price, and this is the basis for assessing the future usage of the assets.

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(ix) Realisation – Profits are taken into account when they are earned, that is when the goods or services are passed to the customer and he incurs liability from them.

(x) Dual Aspect – This states that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. These two aspects are always equal to each other. Double entry is the name given to the method of recording the transactions so that the dual aspect concept is upheld.

The accounting equation: Assets = Liabilities + Capital

ASSET ACCOUNT EXPENSE ACCOUNTDebit Credit Debit Credit(increase) (decrease) (increase) (decrease) + - + -

LIABILITIES ACCOUNT REVENUE ACCOUNTDebit Credit Debit Credit(decrease) (increase) (decrease) (increase)

- + - +OWNER’S EQUITY ACCOUNT

Debit Credit (decrease) (increase)

- +

DOUBLE ENTRY THEORYThe double entry system requires for every debit there must be a corresponding credit.

A separate account should be opened for each subject on which a record is to be kept.

Each account is divided into two halves a left side called the debit and the right side called the credit.

An account must have the following information relating to a particular transaction.

(a) The date of the transaction.(b) The corresponding account or the cross-reference of the account.(c) The value of transaction in terms of money.

EXERCISE 1

List three fixed assets that can be found in the office.List two fixed assets that can be found in a home.

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List two current assets that a business may own.Give two current assets that you own personally.List two capital expenditure items that a business may incur.List three revenue expenditure items that a business may incur.Give two real accounts.Give two nominal accounts.Give two personal accounts.Which of the two is relevant for accounting purpose, trade discount or cash discount?State how the following would affect the accounting equation.

(a) Owner invests $100,000 to commence business.(b) Paid $25,000 cash for insurance for the year.(c) Purchase office stationery for $5,000 on credit.(d) Received $14,000 cash from debtor.(e) Pays off a short-term loan of $3,000.(f) Declares a cash dividend of $25,000 at the end of the year.(g) Sold an old motor vehicle with a net book value of $10,000 for $16,000

cash.(h) Purchase on terms, an equipment costing $55,000 paying a deposit of

$20,000.(i) Sold an asset valued at $80,000 for $65,000.

State how the following would affect the accounting equation.

(1)Owner invests $40,000 for use in the business.(2)Paid $2,000 cash for wages.(3)Purchase office equipment priced at $52,000 giving a promissory note in

exchange.(4)Receives $4,000 cash for services rendered.(5)Pays off a short-term liability of $7,000.(6)Declares a cash dividend of $10,000.(7)Pays cash of $16,000 for a delivery van.(8)Purchase on terms, an equipment costing $75,000 paying a deposit of

$25,000.(9)Sold an asset valued at $80,000 for $65,000.(10) Borrowed $5,000 from the bank.

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ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES II

Goods purchase for resale are not entered into the stock account, but the purchases account. They are entered on the debit side of the account. The purchases account is debited whether the transaction is a cash or credit purchase. The corresponding entries are made either to the cash or creditor’s account. If goods purchase for resale were entered in the stock account at cost, when they are sold they would have to be entered in the stock account at cost, requiring calculations for each transaction of sale.Both cash and credit sales of trading goods are entered on the credit side of the sales account. The corresponding entry if it is a cash sale goes to the debit side of the cash account. A credit sale will require a debit entry to the debtor’s account (credit customer).

Return of sales, are entered in a separate account known as the sales return or returns inward account. The corresponding account if the sales transaction was on credit would be a credit to the debtor’s account.

Return of purchases, are entered in the purchases return account or returns outward account. The corresponding account if the purchase was on credit would be a debit to the creditor’s account. These accounts are used so as not to offset the transactions in one account and thus reduce our ability to analyze.

Cost is defined in relation to the different categories of stock as being that expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition. This expenditure should include, in addition to purchase; such costs of conversion as are appropriate to the location and condition.

CLOSING OF AN ACCOUNT.

(i) Add both sides(ii) Place the greater of the two sides on both sides(iii) Record the difference on the smaller side.(iv) Balance (bal.) carried down (c/d) is placed next the balancing figure and

balance brought down (b/d) at the bottom figure under the total of the greater side.

ACCOUNTING STEPS

1. Double entry bookkeeping for each transaction or event.2. Closing of the accounts and bring down the balances.3. Prepare a trial balance indicating Balance Sheet items and Profit and Loss

items.4. Prepare a Trading and Profit and Loss Account.5. Prepare Balance Sheet Statement

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TRIAL BALANCEThe Trial Balance is a summary of the balances in a double entry system, and is used to check the arithmetic accuracy, and prepare the financial statements.Errors that are not revealed in the Trial Balance:-1. Errors of Omission – there is neither a debit nor a credit in relation to the

transaction. 2. Errors of Principle – the amount is correctly recorded but placed in the

wrong class.3. Errors of Commission - where an amount is correctly recorded but entered

in the wrong account.4. Errors of Original Entry - where the transaction is recorded with the wrong

amount.5. Errors of Compensation – here the error on one side is compensated by an

error/s of similar amount on the other side.

Errors revealed by the Trial Balance:-1. Errors in extraction of the Trial Balance.2. Omission of an account balance.3. Errors in computation of the balances of the accounts.4. Non-correspondence of debit and credit.

In the Trial Balance, the stock usually is of the previous year. The value of the stock at the end of the year or at the Trial Balance date is usually given as a note.

Stock Account is not continuously updated, it is updated once a year when stock is counted and valued.

Items or accounts that will always appear on the debit side of the Trial Balance:-

(a) All assets(b) Debtors(c) Cash at Bank(d) Cash in Hand

These accounts are also referred to as debit balances, as the debit side is greater than the credit side.

Those that will appear on the credit side:-(a) All liabilities(b) Creditors(c) Capital(d) Bank Overdraft

These accounts are referred to as credit balances, as the credit side is greater than the debit side.

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Those accounts with the debit side being equal to the credit side are referred to as zero balances. Such accounts are not placed in the trial balance.

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ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES III

BOOKS OF PRIME ENTRY

The Recording Process

(a) The transactions(b) Evidencing the transactions in the form of documents(c) Entering the details of each transaction in a Primary book or Journal.(d) Entering the details of each transaction in the double entry accounts

The majority of transactions are first entered in the one of the following books of prime entry:-(a) Sales Day Book(b) Sales Return Day Book(c) Purchases Day Book(d) Purchase Return Day Book(e) Cash Book (and discount columns)(f) Petty Cash Book

JournalThe book of original entry where transactions and selected other events are initially recorded. Various amounts are transferred to the ledger from the book of original entry. [Kieso & Weygandt, 1992:66].

In practice, transactions and selected other events are not recorded originally in the ledger because a transaction affects two or more accounts, each of which is on a different page in the ledger. To circumvent this problem and to have a complete record of each transaction or other event in one place, a journal [the book of original entry] is employed. [Keiso & Weygandt, 1992:71].

The Journal is used as a book of prime entry for any sequence of transactions, which are non-routine. The Journal entries form a connected story and thus items, which might properly be included in other books of prime entry are included for the sake of completeness. [Millichamp 1992: 142,144]

Today the journal, if used at all is used for the following transactions:-(i) The purchase and sale of assets on credit(ii) Opening and closing entries(iii) The correction of errors(iv) Transfer between accounts(v) Any other items not recorded in another book of original entry

All credit entries [those in which no cash changed hand] – into the journal first.

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Unusual Cash Entries – all such cash transaction as purchase or sale of assets [cash here includes bank entries] – into the Journal first.

Transactions, except for routine cash entries and sales and purchases of goods are entered first in the journal.

The function of the Journal in bookkeeping can be described as(i) Acting as a diary in which events [business transactions] are recorded as

they occur;(ii) Acting as a book of explanation, since after each entry is recorded a brief

explanatory note called a narration; and(iii) Acting as a book of instruction, since it states which accounts in the

ledger are to be debited and which to be credited [Favell, A.J. 1977:49]Journal

DATE PARTICULARS FOLIO DR CRJan 5 Office Equipment A/c

Bank AccountBeing purchase of computer 123 for use in the Admin. Office

L.17CB1

$65$65

Opening journal entries at the start of business will include all assets, liabilities and capital at that date.

The narration is a short explanation of the nature of the transaction, which should always be given before the journal entry is closed. This is particularly so in the case of correction of errors as the nature of the entries would not other wise be clear. [Garbutt, Douglas, 1981:0119]

The items found in the general journal includes- The date a transaction occurred.- The accounts to be debited and the amounts.- The accounts to be credited and the amounts.- The reference/folio where the account can be found in another book.- A narration which is a short explanation of the transaction.

Nov. 1 Buys a new delivery truck on account from Auto Sales Ltd. $22,400Nov. 3 Received an invoice from Evening Graphic for advertising $280.

Carl, a dealer in antiques, acquired the assets of a rival business owned by Robin for $20,000. The deal was financed by Carl paying cash $10,000 and leaving the remainder on loan from Robin at 15%. The assets acquired were valued as:-

Leasehold premises $3,000; Delivery Van $2,500;Fixtures & Fittings $1,500; Rent & Rates prepaid $500 and Stock $7,650

Purchase Day Book

Also referred to as the Purchases Journal, Bought Journal, Purchases Book and Bought Day Book, Is Kept for.

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Purchases on credit for resale, and a separate ledger called the Bought or Purchases Ledger is kept for the accounts of suppliers of these goods. At the end of the month or other convenient time, the invoices total in the Purchases Day book is added up and one large aggregate debit entered in the Purchases Account in the General Ledger.

The source document used to write up the purchases day book is the invoice. An invoice is a document, which is made out whenever one person sells goods to the other. It is made out by the seller, and at least one copy is sent to the buyer. [Whitehead 1074:97]

A record of the return of goods purchased on credit is kept in a Returns Outwards Day Book. The information to record these transactions is obtained from a source document called the credit note.

A credit not is a business document, which made out whenever one person returns goods to another. The credit note is made out by the original supplier of the goods; after the returned goods have reached his warehouse. [Whitehead, 1974:108]

The functions of a credit note are:-1. To evidence the acceptance of the return of goods by the seller from the

buyer. Usual reasons for return of goods are that they were faculty or otherwise unsatisfactory or they were damaged.

2. To evidence to a buyer that he need not pay for goods invoiced to him because the goods have been lost in transit.

3. To correct errors on invoices, such errors may be over pricing or inclusion of goods not actually sent [Millichamp 1992:7]

Sales Day Book

Also referred to as the Sales Journal or Sales Book, Is Kept for.

The sale of goods on credit, and a separate ledger called the Sales Ledger is kept for the accounts of customer of these goods.

Like the Purchases Day book at the end of the month or other convenient time, the invoices total in the Sales Day book is added up and one large aggregate credit entered in the Sales Account in the General Ledger. A record of the return of goods sold on credit kept in a Returns Inwards Day book. It is important to note that the day books do not form part of the double entry system.

Sales Day BookDATE PARTICULARS INVOICE # FOLIOAMOUNT

SLSLSL

30.9.99 Transferred to sales account GL

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ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES IV

ACCRUALS AND PREPAYMENTS

Accruals and prepayments are determined at the end of the financial period under review, so as to charge expenses to the period that they are incurred and not when cash is received. This is in keeping with the accruals concept.

Accruals are debited to the expense account so as to increase it and credited to the accrual account.

Prepayments are credited to the expense account to reduce it and debited to the prepayment account.

It is important to note that expenses are charged to the period in which they are incurred, that is when the benefit would have been obtained by business, whether cash is paid or not. Expenses are therefore, time related, and are charged to the period to which they relate. If an expense is paid for in one period for a future period, then such an expense is not related to the period in which it was paid, but the future period, and must be charged to the future period. Such a transaction would require a transfer from the period in which it was paid to the period it is related to. If an expense is incurred in one period, that is the benefit was obtained, but paid for in a future period, the transaction must be reported in the period that it was incurred and not the period that it was paid.

To illustrate accruals and prepayments, a time line can be used since time is of great importance when we are addressing this issue.

(Accrual) (Prepayment)REPORTED Past Current Future

PAID Past Current Future(Prepayment) (Accrual)

The determining factor as to which period the transaction is to be charged, is the period in which the benefit was obtained, whether the transaction was paid for or not.

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ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES V

BAD DEBT & PROVISION FOR BAD AND DOUBTFUL DEBTS

Bad Debt is an amount written off against a debtor who has failed to honour his obligations within a reasonable period, as a result of a credit transaction in the past. Bad Debt is charged direct to the debtor’s account so as to eliminate the amount owing, which is an asset of the Business. The double entry is, debit the Bad Debt account and credit the Debtor’s account with the amount written off.

Actual debts are written off in the profit and loss account in the year that the debt is recognised as bad. If bad debt is recovered during the next accounting period, we must re-open the account by debiting the Debtor’s account and crediting Bad Debt account. Then to account for the receipt from the Debtor, we must debit the Cash account and credit the Debtor’s account. If the debt is recovered sometime in the future, we must credit the bad debt recovery account and debit the cash account with the amount received.

As was earlier stated a provision is any amount retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which it will arise. The provision for bad debts account is opened to cater for expected or probable loss.

Provision for bad debt is seen as matching expenses of the period against revenue of that period. The provision is not entered into any debtor’s account, since the specific debtor who may default is not known. The double entry to create a provision for bad debt is, debit the Profit and Loss account and credit the Provision for Bad Debt account. To increase a provision, the double entry is to credit the Provision for Bad Debt account with the increase and debit the Profit and Loss account with the said amount. For a decrease in the provision, the double entry is to debit the Provision for Bad Debt account with the decrease and credit the Profit and Loss account with a similar amount.

The amount to be provided for as bad debt can be determined by various methods. The three most commonly used methods are as follows: -

(i) A percentage of debtors based on past experience.(ii) An examination of the accounts of individual debtor and listing debts

likely to become bad.(iii) Ageing Schedule.

Bad debt can either be written off to a Bad Debt account or written off against the provision for bad debts account.

Two debtors Lall and Greene owed the business $85 and $104 respectively from earlier transactions. Both debtors had failed to honour their obligation, but Greene only after making an earlier payment of $20 in relation to his debt of $104, some 18 months ago. The directors decided to write off both debts. Enter the transactions in the appropriate accounts.

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Year Debtors Amount already Debtors likely toEnd written off as bad become bad19X1 5040 69 4019X2 9032 141 3219X3 10073 197 7319X4 15000 - -

One percent (1%) of the remaining debtors is also to be provided for as bad. From the following data you are required to prepare a bad debt, provision for doubtful debts and extract of the profit and loss account for the periods, as well as bad debt account, which is used to put both bad debts and provision for bad debt account.

Ageing Schedule

Name of Bal. Under 1-3 3-6 OverCustomer Dec. 31 1 mth. mths mths 6 mths

Ray 98,000 80,000 18,000 - -Roy 320,000 320,000 - - -Bob 55,000 - - - 55,000Don 74,000 60,000 - 14,000 -___

547,000 460,000 18,000 14,000 55,000

(a) 4% of debtors under one (1) month will be bad.(b) 15% of debtors 1-3 months will be bad.(c) 20% of debtors 3 – 6 months will be bad(d) 25% of debtors over 6 months will be bad.

You are required to calculate the amount to be provided for as doubtful debts.

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PLEASE DO NOT REPLICATE UNLESS AUTHORISED BY LECTURER

ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES VI

DEPRECIATION

Depreciation is the measure of the wearing out, consumption or other reductions in the useful economic life of a fixed asset, whether arising from use, passage of time or obsolescence.

Depreciation is the term most often employed to indicate that tangible plant assets have declined in service potential. Where natural resources, such as timber, gravel, oil and coal, are involved, the term depletion is employed. The expiration of intangible assets, such as patents, or goodwill is called amortization [Keiso & Weygandt 1990:543]. The term tangible refers to physical assets within the business.

To accountants, depreciation is not a matter of valuation but a means of cost allocation. Assets are not depreciated on the basis of a decline in their fair market value, but on the basis of systemic charges to expense. Depreciation is defined as the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. [Kesio & Weygandt 1990:543]

Unless assets are depreciated their value may sometimes be overstated on the Balance Sheet. Assets such as plant and machinery are held for the purpose of earning income and the loss arising on those assets through wear and tear is undoubtedly an expense against such income. [Garbutt 1976:0602]

Assets may depreciate: -

(i) Through wear and tear in use as in the case of machinery, furniture and fittings, loose tools, motor vans and other vehicles.

(ii) Through effluxion or passage of time as in the case of leases of factories and other buildings and of patent rights.

(iii) Through obsolescence where, for example, a machine is rendered out of date through the invention of a more efficient machine. [Favell 1977:104]

Assets must be depreciated so as to give a true and fair value of the assets in the Balance Sheet. [Whitehead 1974:215]

Depreciation methods may be classified as follows: -

(i) Activity Method (units or use or production)(ii) Straight Line Method (Equal Instalment Method)(iii) Decreasing Charge Methods –

(a) Sum-of-the-years digits(b) Declining-balance method

(iv) Special Depreciation Methods –(a) Inventory Method(b) Retirement & Replacement Methods

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(c) Group & Composite Methods(d) Compound Interest Methods

(i) Activity Method – This method assumes that the asset has a useful life in terms of production hours.

(Cost Less Salvage) x hours this year = Depreciation Total Estimated Hours

(ii) Straight Line Method – Using this method it is assumed that the net cost of the asset should be allocated equally over the useful life of the asset. To determine depreciation for a period, the cost of the asset or value of the asset, its useful life and the estimated scrap value is required.

Depreciation Charge = Cost – Scrap ValueUseful Life

(iii) Sum-of –the year’s digits Method – This method also assumes that more of the net cost should be allocated in the earlier years. Using this method, we must first find the sum of the total years, e.g., if the useful life is 5 years then the sum would be 5+4+3+2+1 = 15, if the life is 3 years it would be 3+2+1 = 6. The depreciation for year would be a fraction of the net cost, have the year as the numerator and total as the denominator.

DepreciationDepreciation

Year Remaining Fraction Charge 1 5 5/152 4 4/153 3 3/154 2 2/155 1 1/15

15/15

(iv) Reducing Balance Method – Using this method, it is assumed that more of the cost of the asset should be allocated to the earlier years as maintenance would be low and less in its later years when maintenance is higher.

Rate of Depreciation = (1 – {n √s/c}] x 100%

n = expected useful/service life in yearss = salvage/residual/scrap valuec = the acquisition cost

Using the reducing balance method multiply the rate by the balance at the beginning of the period and not the cost of the asset.

There is a basic difference between the service life of an asset and its physical life. A piece of machinery may be physically capable of producing a given product for many years beyond its service life, but the equipment is not used for all of those years because the cost of producing the product in later years may be too high [Keiso & Weygandt 1990:544]

Advantages and Disadvantages of Straight Line Method

(a) AdvantagesPage 20 of 48

(i) It is easy to understand and the calculations are simple.(ii) The valuation of the asset appearing on the balance sheet each

year is reasonably fair, and complies with the Income Tax Act in the vast majority of the cases.

(b) Disadvantage(i) The charge to the Profit and Loss account increases over the years,

for in the first year or two repairs will be uncommon, but as the machine gets older it will require more frequent attention.

Advantages and Disadvantages of Diminishing Line Method

(a) Advantages(i) No recalculation is necessary when additional assets are purchased.

[Whitehead 1974:218](ii) It tends to give a fairly even charge against revenue each year. For

while depreciation is heavy during the first few years, this counterbalanced by the repairs being light and in the later years, when repairs are heavy, this counterbalanced by the decreasing charge for depreciation.

(b) Disadvantages(i) The percentage figure to be calculated each year is difficult to

calculate.(ii) For assets with a very short life, the percentage figure is so high

that it becomes ridiculous. (Whitehead 1974:218).

When an asset is acquired or disposed of during the accounting period, the question of how much depreciation is to be charged against profits for that period is determined by, in addition to the basis or method of depreciation, the Policy adopted by the organisation.

Some of the policies that be adopted are:-(i) Full depreciation in the year of acquisition and none in the year of

disposal.(ii) Full depreciation in the year of disposal and none in the year of

acquisition.(iii) Half depreciation in the year of acquisition and half in the year of disposal(iv) Prorated depreciation.

The double entry for depreciation is credit the accumulated depreciation account and debit the profit and loss account with the depreciation charged for the period

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PLEASE DO NOT REPLICATE UNLESS AUTHORISED BY LECTURER

ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES VII

CASH BOOKS

The Cash BookThe Cash book is another book of Prime Entry, where cash transactions are recorded. The Cash book may take the form of two or three columns. The Cash book forms part of the double entry system.

Where two columns are used one is for the individual cheques or amounts paid in, and the other for the totals of the bankings.

The Three column cash booksThe three column cash book has three columns appearing on each side of the cash book representing three types of accounts which are classified as :-(i) Discount which is a nominal account(ii) Cash which is a real account(iii) Bank which is a personal account

Cash discounts are reductions made from accounts receivable (debtors) and accounts payable (creditors) at the time of settlement. The totals are posted to a discounts allowed or a discount received account in the general ledger.

The three-column cash book has the following columns:

Dr CrDate Source Discount Cash Bank Date Payee Discount Cash Bank

These cash columns are used for actual cash receipts and payments and there is an assumption that an actual cash balance is kept as well as a bank account. (Millichamp 1992: 116)

The discount column is not part of the double entry and the actual double entry will be:-

Dr. Discount allowed account – this is an expense account.Cr. The individual customer’s account (Wellington etc.).

The discount column is solely a prime entry and the subsequent double entry is:-Dr. The supplier’s account (Reid etc).Cr. Discount received account – a revenue account required for the year

end profit and loss account.

It is necessary to have three columns on the debit side because:(i) the discount column is required as a prime entry place for discount

allowed;(ii) The individual cheques from each customer or other source are

required so that they form a record of such receipts and can be posted to the credit of the customers’ accounts;

(iii) The actual banking column (which agrees in total with the individual receipts column) is required to record the actual amount banked on each occasion money is banked. These figures can be compared with the entries in the bank statements. (Millichamp 1992: 116)

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Recording of Receipts in the Cash Book

1. On receipt of cash from debtors, the amount actually received is entered in the cash column on the debit side. If the money is paid direct into the bank, the entry would be made to the debit side of the bank column. The corresponding entry is made in each case to the debtor’s account in the ledger.

2. On receipt of an amount in respect of cash sales, the entry is made in the cash column on the debit side, with the corresponding entry being made to the sales account in the ledger.

3. On receipt of an amount from the sale of a fixed asset, the entry would be to the debit side of the cash or bank column, whilst the credit will be to the asset account in the ledger.

4. All cash discounts given are entered in the discount allowed column, which is on the debit side of the cash book, and the total is subsequently transferred to the debit side of the discount allowed account.

Recording of Payments in the Cash Book

1. On payment of an amount (cash) to a creditor the amount is entered in the cash column on the credit side. If the payment is made by cheque, the amount is entered on credit side in the bank column. The debit entry is made to the creditor’s personal account.

2. On payment of an amount in respect of cash purchase, the entry is made in the cash or bank column on the credit side. The corresponding entry is made to the debit side of the purchases account.

3. On payment of an amount for the purchase of an asset, the credit will be to the cash or bank column, whist the corresponding debit is made to the asset account in the ledger.

4. If cash discount is received, such an amount is entered in the discount received column which is on the credit side of the cash book. The total is transferred to the credit side of the discount received amount in the ledger.

CashCash is the single asset readily convertible into any other type of asset. It is the most liquid of assets, the standard medium of exchange and the basis for measuring and accounting for all other items. To be reported as cash it must be readily available for the payment of current obligations and it must be free from any contractual restriction that limits its use in satisfying debts.

Cash consist of coins, currency and available funds on deposit at the bank. Negotiable instruments such as money orders, certified cheques, cashier’s cheques, personal cheques, and bank drafts are also viewed as cash. Temporary investments are securities that contain restrictions or penalties on their conversion to cash, and are not classified as cash.

Cash equivalents are short-term highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in interest rates. Generally only investments with original maturities of three months or less qualify under these definitions.

A bill of exhange is an unconditonal order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of, a specified person or bearer.

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Contra EntryContra is a book-keeping entry by which a transfer of money from cash to bank and vice versa is made. Surplus cash is paid into the bank and a shortage of cash is made good by withdrawals from the bank. Both entries occur in the cash book and no ledger entry is required. The letter ‘C’ is recorded in the folio column to indicate that the transaction is a contra.

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PLEASE DO NOT REPLICATE UNLESS AUTHORISED BY LECTURER

ACT 110 INTRODUCTION TO ACCOUNTING LECTURE NOTES VIII

BANK RECONCILIATION STATEMENT

The bank reconciliation statement is drawn up so as to agree with the bank balance as shown by the bank statement with bank balance as shown by the bank column of the cash book.

Reasons for difference between the two sources of information are broadly categorised as Timing difference, informational difference and errors.

Factors responsible for cash book balance and balance as shown by the bank statement being different:-

(a) Deposits in transit(b) Unpresented cheques(c) Bank charges(d) Bank credits(e) Bank or depositor’s errors

DEPOSITS IN TRANSIT – End of the month deposit of cash deposits on the depositor’s bank in one month but received and recorded by the bank in the following month.

UNPRESENTED CHEQUES – These are cheques which have been dispatched to the suppliers in payment of their accounts, but which have not been presented for payment at the payer’s bank. In effect these are items that are entered on the credit side of the cash book and had not yet been entered in the bank’s records.

BANK CHARGES - These are charges which have been dispatched to the depositor’s balance for such items as bank services, printing cheques, safe deposit rentals and not sufficient funds (NSF) cheques. The depositor may not be aware of these charges until the receipt of the bank statement.

BANK CREDITS – Collection or deposits by the bank for the benefit of the depositor that may be known to the depositor until the bank statement is received.

BANK OR DEPOSITOR’S ERRORS – Errors on either the part of the bank or the part of the depositor causing the bank balance to disagree with the depositor’s book balance.

STANDING ORDER

A standing order is a request by a customer for the bank to make payments to third parties on a periodic basis. The customer records the transaction in his books on receipt of his bank statement, as he is unaware as to when or if the bank had made the payment on his behalf.

PURPOSE OF A BANK RECONCILIATION STATEMENT

The purpose of a bank reconciliation statement in addition to determining the items responsible for the difference is to ascertain the correct bank balance as at a specific time and date, since the bank balance is needed for the balance sheet.

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Deposits in transit at the end of one months would be included in the next month bank state therefore it must be deducted from the deposits for the month as per bank statement to ascertain those deposits received during the month for that month.

Unpresented cheques at the end of one month may be presented during the next month. Those presented outstanding cheques from the previous period must be deducted from the cheques received during the month to derive those cheques paid and encashed at the bank during the month under consideration.

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SEMESTER I WORKSHEET No. 1

1. For each of the following, describe a transaction that will have the desired effect on elements of the accounting equation.

(a) Increase one asset, decrease another asset and increase a liability.(b) Decrease one asset and increase another.(c) Decrease an asset and decrease a liability.(d) Increase owners’ equity and increase an asset.(e) Increase a liability and increase an asset.

2. (a) John’s Company has total assets of $498,000 and ownersequity amounts to $105,000. What is the amount of its liabilities?

(b) The Balance Sheet of John’s Company Ltd. shows the owner’s equity is $250. It is equal to 1/8 the amount of its assets. What is the amount of the liabilities?

(c) The assets of John’s Company Ltd. amounted to $109,000 on December 31, 1995 but increased to $173,000 by December 31, 1996. During this same year liabilities increased by $75,000. The owners’ equity at December 31, 1995 was $100,000. Drawings for the period was $3,000. What was the amount of owner’s equity at December 1996?

3. Mary decides to open a Library, Well Read, which she does by investing $10,000 on August 1, 1995. During the first month of Well Read Library’s operation, the following transactions occurred:-

(a) Purchased Books for $4,500.(b) Purchased Bookshelves for $2,950.(c) Mary draws out $1,000 out of the business for herself.(d) Cash of $2,250 was received for half of the books sold.(e) Sold a bulk order of books valued $900 on credit for $750.(f) The business received a loan of $1,500 from Hallie Berry, her niece.(g) Purchased curtains on credit $550 from Fullworth’s Store.

REQUIREDWrite down the accounting equation after each transaction has occurred.

4. For each of the following transactions listed below indicate the effect of each transaction on the current liabilities, profits and current assets of the business.

(i) Purchase of machinery $75,000 by way of loan which is repayable over a five (5) year period.

(ii) Paid $5,000 cash for repairs to building.

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(iii) Cash of $6,795 was withdrawn for private use from the business.(iv) Purchase stock on credit $12,000.(v) $15,000 cash was borrowed from the bank.(vi) Stock costing $5,000 was sold for $3,500 cash.(vii) Sold a van for $1,275 cash.(viii) Insurance paid $1,095 cash.(ix) Bought a new car $105,000 by cash.(x) Stock purchased for $35,000 cash.

5. Enter these transactions in the appropriate accounts.

Oct. 1. Purchased goods for cash $10,400.3. Purchased goods by cheque $26,200.6. Purchased goods on credit from Allan $31,100.

10. Returned some faulty goods to Allan received credit note $6,200.

12. Sold goods for cash $21,000.14. Sold goods to Brown who paid a cheque $6,400.15. Sold goods to Clive on credit $30,400.16. Purchased goods from David on credit $29,90017. Received a credit note from Allan who had over charged

$1,000.18. Sold goods for cash $13,200.20. Sold goods on credit to Ray $20,000.21. Purchased an office desk from Frank on credit $8,000.22. Purchased goods on credit from David $20,600.26. Paid David the amount owing by cheque $50,500.

6. The following debtors and creditors existed at 31st October.Dr. Cr.

Grant $100Reid $150Pearson $262Richard $300

S. Singh, a dealer in antiques had the following transactions during the month of November.

1. Bought antiques for cash at auction $500.2. Sold antiques to Pearson on credit $320.3. Bought antiques on credit from Reid $132.6. Returned faulty antiques to Reid $16.8. Sold antiques for cash $100.

10. Sold antiques to Grant on credit $70.13. Pearson paid, on account $100.14. Gave a credit note to Grant for error in the invoice $3.15. Bought antiques for cash $120.16. Sold antiques on credit to Quincy $135.17. Sold antiques for cash $30.18. Richard paid the amount due by him.

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19. Sold for cash antique chest used for storage of documents $100.

REQUIRED: Enter the above transactions in the appropriate accounts.

7. Bill Cashing sets up practice as an architect, investing $10,000 of his own money into the business and effecting a transfer of that sum from his personal account to his business account at the Midland Bank Ltd. The transfer is effected on January 1, 1990, the date on which he formally commenced. The following transactions took place.

January 1 Paid Office rent for January $200.January 1 Purchased Office equipment on account from

Equipit Ltd. $1,000.January 1 Purchased office supplies on account from W. Brown for

$150.January 3 Hired a junior out of school $100January 4 Survey a property for A. Bond and sent out an invoice

for $150.January 7 Decided to transfer his own car to the business at a

value of $2,000.January 10 Bought petrol for $10.January 11 Took a client to lunch at a cost of $20 and was asked to

prepare plans for a new factory for which work he estimated he would earn $1,200.

January 17 Conducted another property survey for A. Bond and invoiced him for $60.

January 20 Took another prospective client to lunch at a cost of $30 and found that he would not be able to undertake work for that client.

January 30 Paid the office junior his monthly wage $70.January 30 Sent a cheque to Equipit Ltd. for $1,000.January 30 Sent a cheque to W. Brown for office supplies $150.January 30 Banked a cheque received for A. Bond for $50.

REQUIRED:

Entered these transactions in Bill Cashing’s accounting records and test the arithmetical accuracy of your work by preparing a trial balance when you have completed the entries needed to be made.

8. Harold Davies is the proprietor of a small building firm. He does not understand the term “balance sheet” and asks you to explain to him whether the following items should be on his balance sheet. Indicate the nature of the items (e.g. current asset, long-term liability, not applicable etc.) and give the reason for your answer.

(i) stock of sand and cement(ii) air compressor purchased for cash(iii) air compressor hired for three (3) weeks(iv) wages paid to labourer

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(v) lorry used for transporting materials(vi) diesel fuel in lorry fuel tank(vii) washing machine bought for Mrs. Davies(viii) bank overdraft(ix) petty cash in hand(x) $2,000 owing to an uncle who says Harold need not repay until five

years have elapsed.

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SEMESTER IWORKSHEET No. 2

1. Enter the following transactions in the appropriate day books of Ricky James during the month of December.

Dec. 3. Purchase goods on credit from M. Smith for $1,895.Dec. 5. Credit sales to K. Persaud totalled $4,900.Dec. 5. R. Roy purchased goods on credit totalling $10,560.Dec. 6 Sold goods on credit to F. Singh amounting to $900.Dec. 7 James purchased goods totalling $25,200 on credit form B. LallDec. 7 James invoiced R. Charles for goods totalling $5,200.Dec. 7 Returned some faulty goods to M. Smith totalling $210, and

received a credit note.Dec. 9 Goods purchased from T. Harry on credit totalled $6,900.Dec. 10 F. Singh returned some damaged goods and was given a credit note

totalling $45.Dec. 10 Sold goods to I. Lloyd who paid cash totalling $2,580.Dec. 11 Credit purchase from L. Chin totalled $6,980Dec. 12 Sold goods on credit to R. Charles totalling $9,770.Dec. 14 Credit purchase by L. John totalled $5,500.Dec. 17 F. Alli purchased goods for $3,200 cash.Dec. 22 Returned some faulty goods to B. Lall totalling $2,900 and received

a credit note for the transaction.Dec. 23 Purchased goods on credit from B. Brown totalling $5,740.Dec. 27 Credit purchase from R. Lee totalled $5,870Dec. 28 Purchased goods from A. Singh totalling $1,100 on credit.Dec. 29 A. Khan purchased goods on credit totalling $5,200.Dec. 30 L. John returned some faulty valued at $200, and was given a credit

for the amount.Dec. 30 Sold goods to P. Persaud for $980 cash.Dec. 31 A. Jaipaul purchased goods for $4,550 on credit.

2. P. Lall started business on the 1st June 1992 and brought into the business a motor car valued at $50,000, furniture valued at $75,000, cash $15,000 and his savings account which had a balance of $250,000. During the month the following transactions occurred:

June, 3rd Purchased equipment for $45,000 on credit from P. Friday. June, 15th Took a Loan from the bank for $200,000 for which he has to

pay interest of 10% per annum.June, 16th An amount of $32, which was incorrectly debited to the

account of R. Ray, was corrected to the account of R. Roy.June, 21st A debt owed by customer Browne for $50, was written off

after it was found that he had died. Required: enter the above transactions in the general journal of P. Lall

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SEMESTER IWORKSHEET No. 3

PROVISION FOR BAD AND DOUBTFUL DEBTS

1. Dolly has five customers. Balances and transactions with these were:Balance Sales Cash Sales Cash Sales Cash31.12.87 1988 1988 1989 1989 1990 1990 $ $ $ $ $ $ $

A 243 436 824 960 864 931 720B 618 930 362 260 - - -C 1,243 2,738 2,346 1,362 1,480 630 -D 390 1,074 888 1,024 320 - 400E - 1,034 1,011 840 786 2,200 1,143

At 31.12.88, Dolly made a provision for doubtful debts against the debt due from B.At 31.12.89 the provision for doubtful debts was solely against the debts due from C, and B’s and D’s were written off as bad.At 31.12.90, the provision for doubtful debts was solely against E’s debt and C’s debt was written off as bad.

REQUIRED:-Enter all these transactions in suitable double entry accounts and show the postings to profit and loss account.

2. Bill Rogers a retailer had the following balances in his books at 31st

December for a period of four years in respect of debtors.

1990 $20,1221991 $24,5801992 $25,7601993 $32,328

The manager of the business decided that a provision for bad debt should be made at the end of each year. The amount to be provided for was 5% of total debtors commencing from 1990.In 1991, it was decided that the general provision was to be made after making a special provision for some debtors of $1750.In addition to bad debt total of $7,800 that should have been written off during the year 1993, a decision was made to revise the provision to 8% of debtors.REQUIRED:-Prepare the provision for bad debt account as it appears in the books for the period 1990 to 1993. (A separate account is used for provision).

3. The balances in the books of Mark James as at 31st December for a four (4) year period in respect of debtors and bad debt were as follows:-

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Year Debtors Bad Debts1994 $10,000 Nil1995 $28,570 $4,7731996 $23,360 $3,8521997 $18,200 $6,574

The James decided that he would make a general provision for bad debt at the end of each year. The amount to be provided for was 5% of the total debtors, and was to be created at the end of 1995.A bad debt total of $2,070 was omitted from the records in 1995.In 1997 a decision was taken that a specific provision for a debtor was to be made in the sum of $500 and a general provision against the remainder.Separate accounts are used for bad debt and provision for bad debts.REQUIRED:-Show how the records would appear in the provision for bad debts account for the period 1995 to 1997.

4. The balances in the books of Bishop Co. Ltd. As at 31st December for a period of four (4) years in respect of debtors and bad debts were as follows:-Year Debtors Bad Debts1992 $24,517 $4,8901993 $28,378 $3,7121994 $22,529 $6,5731995 $32,675 $2,240The directors of the company decided at a meeting to make a general provision for bad debt at the end of each year. The amount to be provided for was 5% of total debtors, and was to be created at the end of 1992.In 1993 a decision was taken that a specific provision for a debtor was to be made in the sum of $2,000 and a general provision against the remainder.A bad debt total of $3,720 was omitted from the records in 1995.It is the company’s policy to have separate accounts for bad debts and provision for bad debts.REQUIREDShow how the records would appear in the provision for bad debt account for the period 1992 to 1995.

5. The balances in the books of Don King as at 31st December for a four (4) year period in respect of debtors before bad debts were written off, were as follows:-Year Debtors Bad Debts to be written off

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1994 $10,000 Nil1995 $28,570 $4,7731996 $23,360 $3,8521997 $18,200 $6,574

King decided that he would make a general provision for bad debt at the end of each year. The amount to be provided for was 10% of the total debtors, and was to be created at the end of 1994.A bad debt total of $1,680 is also to be written off in 1995.In 1997 a decision was taken that only a specific provision for a debtor was to be made in the sum of $1,500.Separate accounts are used for bad debt and provision for bad debts.REQUIRED:-Show how the records would appear in the provision for bad debts account for the period 1994 to 1997.

ACCRUALS AND PREPAYMENTS

6. Wright rents a property in downtown Tipton. His year-end is 31st

December. Payments of rent and receipts in respect of sublets are as follows:-

30.12.87 Paid rent for quarter ending 31.3.88 $50031.12.87 Received rent for sublet for six months

ending 31.5.88 $60030.4.88 Paid rent for half year to 30.9.88 $1,40030.6.88 Received rent for sublet for six months

ending 30.11.88 $60023.10.88 Paid rent for quarter ending 31.12.88 $700The sub tenant continued to rent into 1989.REQUIRED:-(a) Calculate the rent payable charge to Profit and Loss Account for the

year 1988 and the rent receivable credit to Profit and Loss Account for the same year.

(b) State the accruals and prepayments as at 31.12.87 and 31.12.887. Gray is in business as a printer. His year-end is 31st December. Among

his expenses payments are:-Advertising21.12.87 Advert in local paper to appear 12.1.88 $5614.1.88 Advert in journal issue dated November 1987 $12213.6.88 Advert in local paper to appear 4.7.88 $84511.8.88 Advert in local paper free paper June edition $665.9.88 Advert in journal to appear in October issue

$12713.12.88 Advert in journal to appear in December, January

and February editions $12012.1.89 Advert in local paper of 23.12.88 $99

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Subscriptions22.12.87 to “the new stationer” for 1988 $2424.1.88 to the Chamber of Commerce for 1988 $6012.2.88 to his Rotary Club $754.5.88 to “Stationery Now” for the 12 monthly issues

beginning June 1988 $365.10.88 to National Stationers Society for 1988

$717.12.88 to “the new stationer” for 1989 $283.1.89 to the Midland Small business club for the year

ending 31st October 1989 $108

REQUIRED:-(a) Calculate the amounts to be included in his profit and loss account

for each of these expense headings for the year ending 31.12.88.(b) State the accruals and prepayments at 31.12.87 and 31.12.88.

8. An extract from the balance sheet of A Gopaul as at 31st December 1996 showed the following:-Current Assets Current LiabilitiesPrepayments (rates) $260 Accruals (electricity) $230

During the financial year of 1997, the business had transactions resulting in payments for rent, rates, light and heating totalled $6,830 in 1997.At 31st December 1997, rent prepaid amount to $320 and electricity charges accrued due were $270.REQUIRED:-Using an expense account what was the amount charged against profits for the year 1997.

9. The following relates to Angus Haynes a sole trader at the end of 1997:-

Prepaid rates $3,250Electricity owing $2,968During 1998 payments in relation to telephone, electricity, rent and rates totalled $26,650. At the end of 1998 the following was discovered: Telephone charges owing was $1,505 whilst rent prepaid was $3,780.REQUIRED:-Using an expense account what was the amount charged against profits for the year 1998.

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SEMESTER IWORKSHEET No.4

1 Lee Co. purchased a new machinery for $240,000 on May 1, 1992. It is estimated that it will have a useful life of 10 years, scrap value of $15,000, production of 240,000 units, and working hours of 25,000. During 1993 Lee Co. uses the machinery for 2,650 hours, and the machinery produces 26,000 units.

Required: From the information given, compute the depreciation charge for 1993 under each of the following methods:(a) Straight-line(b) Reducing-balance (use 20% as the annual rate)(c) Units-of-output(d) Working hours(e) Sum-of-the-years’-digits

2 On April 10, 1993 Wear & Tear Co. Ltd. Sold equipment that it had purchased for $203,960 on August 20, 1986. It was originally estimated that the equipment would have a life of 12 years and a scrap value of $20,000 at the end of that time, with depreciation been computed on that basis. The policy of the company is to use the Straight line method of depreciation.

Required:(a) Compute the depreciation charge on this equipment for :

1986 1993 the total charge for the period from 1987 to 1992, inclusive under

each of the following six assumptions: (1) Depreciation is computed for the exact period of time during which

the asset is owned. (Use 365 days for base).(2) Depreciation is computed for the full year on the January 1 balance

in the asset account. (3) Depreciation is computed for the full year on the December 31

balance in the asset account.(4) Depreciation for one half year is charged on plant assets acquired

or disposed of during the year.(5) Depreciation is computed on additions from the beginning of the

month following acquisition, and on disposals to the beginning of the month following disposal.

(6) Depreciation is computed for a full period on all assets in use over one half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for the base)

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(3) A firm buys a fixed asset for $10,000. The firm estimates that the asset will be used for 5 years. After exactly 2 ½ years however, the asset is suddenly sold for $5,000. The firm always provides a full year’s depreciation in the year of purchase and no depreciation in the year of disposal.

Required:(a) Write up the relevant accounts (including disposal account but not

Profit & Loss account) for each of the years 1, 2 and 3.(1) Using the straight line depreciation method (assume 20% pa)(2) Using the reducing balance depreciation method (assume

40% pa)(b)What is the purpose of depreciation? In what circumstances would

each of the two methods be preferable? (c) If the assets was bought at the beginning of year 1 but was not used at

all until year 2 (and it is confidently anticipated to last until year 6), state under each method the appropriate charge in year 1, and briefly justify your answer.

(4) Using the information given below prepare a table showing the depreciation charge that would be taken to the Profit and loss account for the years 1993 to 1997 inclusive, for (a) The Straight line method(b) The reducing balance method(c) The sum-of-the-years digits method

Cost of fixed assets $5,000 on 1 January 1993 Estimated useful life five (5) years Estimated salvage value $100 Assume the accounting year ends on 31 December.

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SEMESTER I WORKSHEET NO. 5

1. The following Trial Balance of Michael Bolton has been prepared by an inefficient bookkeeper. You are required to correct it:-

Trial Balance for the period ended 28/02/1998Dr. Cr.$ $

Capital 33,000Premises 27,000Drawings 4,750Plant 14,850Stock (March 1) 4,500Office Furniture (March 1) 3,500Insurance 425Salaries 9,950Commission Received 800Bank Loan 5,000Bank 3,250Bad Debt 325Discount allowed 450Debtors and Creditors 3,100 2,900Return Inwards 400Return Outwards 200Purchases and Sales 28,500 61,250Rent Paid 2,150_______________

88,300 118,000 Notes1. Stock February 28 $6,500.2. Insurance prepaid $25.3. Rent owing $550.

Prepare a Trading and Profit and Loss Account and Balance Sheet for Mr. Bolton

2. The following is a Trial Balance of Amy Grant extracted at December 31 1998. You are required to prepare a Trading and Profit and Loss Account and a Balance Sheet at this date for the year just passed.

Dr. Cr.$ $

Debtors and Creditors 22,501 12,103Plant and Machinery 46,500Purchases and Sales 42,502 145,000Capital (January 1) 111,500Premises & Mortgage (outstanding) 55,000 38,500Cash in Hand 2,502Bank 37,500Discount allowed & received 1,252 2,002Bad Debts 1,200Motor Vehicles 10,500Commission paid 6,500

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Insurance premiums 550Office Furniture 2,500Stock (January 1) 22,500Rent & Rates 4,500Drawings 12,500Returns In and Out 750 2,302Office Salaries 12,150Wages (Trading A/c) 27,500Light & Heat 2,500______________

311,407 311,407

Note: Stock at December 31 was valued at $18,950.

3. From the following Trial Balance of W. Houston extract a Trading and Profit and Loss Account for the year ended December 31, 1998 and a Balance Sheet as at that date.

Trial Balance as at December 31, 1998Dr. Cr.$ $

Stock (January 1, 1998) 3,249Sales 18,462Purchases 11,380Salaries 2,150Motor Expenses 520Rent and Rates 670Insurance 111General Expenses 105Premises 1,500Motor Vehicles 1,200Debtors 1,950Creditors 1,538Cash at Bank 1,654Cash in Hand 40Drawings 895Capital 5,424

25,424 25,424

Stock at December 31, 1998 was $2,548.

4. The following Trial Balance was extracted from the books of J. Jackson on April 30, 1999. From it, and the notes, prepare her Trading and Profit and Loss Account for the year ended April 30, 1999 and a Balance Sheet as at that date.

Dr. Cr.Sales 18,955Purchases 12,556Stock (May 1, 1999) 3,776Salaries and Wages 2,447

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Motor Expenses 664Rent 456Rates 120Insurance 146Packing Expenses 276Lighting and Heating expenses 665Sundry Expenses 115Motor Vehicles 2,400Fixtures and Fittings 600Debtors 4,577Creditors 3,045Cash at Bank 3,876Cash in Hand 120Drawings 2,050Capital 12,844

34,844 34,844

Notes at April 30, 1999(a) Expenses which have been prepaid – Rates $20; Insurance $35.(b) Expenses which are owing – Motor Expenses $56; Rent $24; Sundry

Expenses $26.(c) Stock $4,998.(d) Ignore depreciation of fixed assets.

5. The following Trial Balance was extracted from the books of Baby Face, a trader as at December 31, 1997.

Dr. Cr.$ $

Capital Account 20,500Purchases 46,500Sales 60,900Repairs to buildings 848Motor Car 950Car Expenses 318Freehold land and buildings 10,000Balance at bank 540Furniture and fittings 1,460Wages and Salaries 8,606Discounts Allowed 1,061Discounts Received 814Drawings 2,400Rates and Insurances 248Bad Debts 359Provision for Bad Debts (1.1.1997) 140Trade Debtors 5,213Trade Creditors 4,035General Expenses 1,586Stock-in-Trade (January 1, 1997) 6,300______________

86,389 86,389

The following were taken into account:-(a) Stock-in-Trade December 31, 1997 - $8,800

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(b) Wages and Salaries outstanding at December 31, 1997 - $318.(c) Rates and Insurances paid in advance at December 31, 1997 - $45.(d) The provision for bad debts is to be reduced to $100.(e) During 1997, Baby Face withdrew goods valued at $200 for his own

use. No entry has been made in the books for the withdrawal for these goods.

(f) The item “Repairs to buildings, $848” includes $650 in respect of alterations and improvements to the buildings.

(g) One third of the car expenses represents the cost of Baby Face’s motoring for private, as distinct from the business purposes.

You are required to prepare a Trading and Profit and Loss Account from the year 1997 and a Balance Sheet as on December 31, 1997.

6. The following Trial Balance was extracted from the books of Billy Ocean, a trader at December 31, 1992.

Dr. Cr.$ $

Capital account 19,364Freehold land and building 12,500Furniture and fittings 840Motor car (cost 1.1.1990 : $950) 650Purchases 46,982Sales 66,649Rent Received 320Drawings 3,230Car Expenses 396Stock-in-trade, January 1, 1992 4,988Bad Debts 422Provision for bad debts (1.1.1992) 266General Expenses 827Rent and Rates 1,162Trade Debtors 7,921Trade Creditors 6,933Wages and Salaries 8,983Discounts Allowed 2,164Balance at Bank 2,467______________

93,532 93,532

The following matters are to be taken into account:-(a) Stock-in-Trade, December 31, 1992 $5,429.(b) Wages and Salaries accrued, December 31, 1992 $198(c) Rates paid in advance, December 31, 1992 $48.(d) The provision for bad debts is to be increased by $32.(e) Provide for depreciation on the motor car on the basis that it will in

service for four (4) years and will then be traded in for $350.(f) Part of the building was let to a tenant who owed $120 at December

31, 1992.(g) Billy Ocean rents a postal franking machine. Unused stamps at

December 31, 1992 were worth $47. Postages are included in general expenses.

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Required:-Prepare Billy Ocean’s Trading and Profit and Loss Account for 1992 and a Balance Sheet as at December 31, 1992.

7. The following Trial Balance was extracted from the books of L.T.D. on October 31, 1997.

Dr. Cr.$ $

Sales 550,000Stock at November 1, 1996 16,500Purchases 432,400Returns Inwards and Outwards 600 800Carriage Inwards 700Carriage Outwards 300Discounts Received and Allowed 400 200Light and Heat 4,400Rates and Insurance 6,100Wages 68,400Motor expenses 6,300Premises 62,000Vehicles (at cost) 12,000Fittings and Fixtures (at cost) 6,400Provision for depreciation:

Fittings and Fixtures 2,600Vehicles 4,800

Bad Debts 200Cash in hand and in bank 6,600Drawings 22,800Capital 90,300Debtors and Creditors 41,000 38,400

687,100 687,100

The following information is also available:-(a) Stock-in-Trade on October 31, 1997 amounted to $18,400.(b) 20% of the cost price of the vehicles and 10% of the cost price of

the fittings and fixtures is to be written off as depreciation.(c) $1,300 of the motor expenses is deemed to have been for L.T.D.’s

own use.(d) Rates have been prepaid by $200 and there is an account of $450

outstanding for heating.(e) A provision for bad debts equivalent to 2% of debtors is to be

created.

You are required to:-Prepare the Trading and Profit and Loss Account of L.T.D. for the year ended October 31, 1997 and a Balance Sheet as at that date.

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WORKSHEET NO. 6

(1) The balances in the Cashbook of Ray Robinson at the 1st March 1997 were cash $45,000 debit and bank $5,860 credit. The following transactions occurred during the month, and are to be recorded in the Cashbook where appropriate:-

1 March Purchased office furniture for $4,630 and office supplies for $1,540

from C. James, payment by cash.1 March Received from John a debtor $5,500 cheque in full settlement of his

debt totalling $5,750.2 March Paid $1,500 cash for electricity.2 March Cash purchase of goods $12,800, and paid an amount of $3,600 by

cheque to P. Park a creditor.3 March Deposited a sum of $10,000 including the cheque received from

John on March 1st.4 March Credit purchase from T. Lee $4,550 who promise to give a 10%

discount if payment is made in two weeks.6 March Paid to S. Small by cheque $2,000 and was given a discount of

$150.7 March Received $20,000 cash from R. Dickson who was given a discount

of $1,200.9 March An amount of $35,000 was paid directly into the bank by R. Murray,

who was given a 5% discount in full settlement of his debt.12 March Withdrew from the bank $5,000, and paid wages for the week

totalling $8,500 to his employees.15 March Cash sales to R Ross $3,200.19 March Paid to L. Singh a creditor a cheque for $7,500 and received a

discount of $100.21 March Paid to T. Lee the amount due.

Show the balances in the cash book of Ray Robinson as at 30th, March 1997.

(2) Enter the following transactions in the cashbook of S. Persaud during the month of May and carry down the balance to the 1st of June.

1. Balance at the start of the month was cash $15,000 debit, and bank $45,600 debit.

2. Received cheque payment from R. George $2,500 who was given a discount of $25.

3. Purchase a motor car for $75,000 paying a deposit of $25,000 by cheque.4. Purchased goods for $5,000 cash from Raymond.5. Cash sales totalled $15,050.6. Sold goods to Ron who paid by cheque $8,500.7. Deposited the cheques received to date and $10,000 into the bank.8. Paid amount due to Moore $3,000 by cheque in full settlement of a debt

totalling $3,200.9. P. Greene was paid $1,000 by cheque.10. Withdrew $5,500 from the bank to purchase office supplies which cost

$4,320.20. Radder purchased goods for $3,000 cash.25. Paid $650 cash to R. Lewis.

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SEMESTER I WORKSHEET NO. 7

(1) Larry’s Inc. extracted the following information from its records on 31 July, 2001

$Balance as per cash book 156,994Balance statement balance 160,408Outstanding cheques 4,900Note collected by bank on 31 July, 2001 3,000Interest on note 150Dishonoured cheques returned by bank 1,740 Bank service charge 50Cheque # 423 for $239.50 paid to supplier, was posted by the bank as 235.50Deposit in transit 2,850

Required:(a) Prepare a bank reconciliation statement for July 2001.(b) Explain why it is necessary to prepare bank reconciliation?(c) State the balance that will be shown in the balance sheet as at July 31,

2003.

3. Shown below is the information to prepare a Bank Reconciliation for Marley’s Co. at December 31, 2001.(a) At December 31 cash per bank statement was $15,981; cash per

company’s record $17,445.(b) Two (2) debit advices accompanied the bank statement – Service charges

for December - $24 and a $600 cheque drawn by debtor Jane Jones marked “Insufficient Funds”.

(c) Cash receipts of $4,353 were not deposited until January.(d) The following cheques had been issued in December but were not

included among the paid cheques by the bank #620 for $978, # 630 for $2,052 and #641 for $483.

Required:(a) Prepared a bank reconciliation as at December 31, 2001 for Marley’s

Co.

4. The bank statement for Dread Company for March 31, 2000 indicates a balance of $18,286.22. All cash receipts are deposited each evening in a night depository, after banking hours. The account on records indicate the following summary for cash receipts and payments for March:

$Cash balance as at March 1 7,887.00Total cash receipts for march 57,943.20 Total amount of cheques issued in March 56,777.70

Comparing the bank statement and the accompanying cancelled cheques and memoranda with the records revealed the following reconciling items:

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(a) The bank had collected for Dread Company $2,060 on a note left for collection. The face of the note was $2,000.

(b) A deposit of $3,704.42 representing receipts of March 31, had been made too late to appear on the bank statement.

(c) Cheques outstanding totalled $10,530.54(d) A cheque drawn for $278 had been incorrectly charged by the bank as

$314.(e) A cheque for $60 had been recorded in the deposit records as $480.

The cheque was for the payment of an obligation to Super Equipment Company for the purchase of office supplies on Account.

(f) Bank service charges for March amounted to $36.40.

Required:(a) Prepare a Bank Reconciliation Statement for March.

4. The following information is available for Rosemary Company as of April 30, 2001

a. Cash on the books as of April 30 amounted to $114,175.28. Cash on the bank statement for the same date was $141,717.08.

b. A deposit of $14,249.84, representing cash receipts of April 30, did not appear on the bank statement.

c. Outstanding cheques totaled $7,293.64d. A cheque for $2,420.00 returned with the statement was recorded as

$2,024.00.e. The bank service charge for April amounted to $26.00.f. The bank collected $36,400.00 for Rosemary Company on a note.The

face value of the note was $36,000.00.g. An NSF cheque for $1,140.00 from a customer, Chad Altier, was

returned with the statement.h. The bank mistakenly deducted a cheque for $800.00 drawn by Fox

Corporation.i. The bank reported a credit of $460.00 for interest on the average

balance.

Required: Prepare bank reconciliation for Rosemary Company as of April 30, 2001to show the corrected bank balance.

5. Prepare a bank reconciliation for Oldroyd Company at January 31, 2003, using the information shown.

1. Cash per the accounting records at January 31 amounted to $72,802; the bank statement on this same date showed a balance

of $64,502.2. The canceled checks returned by the bank included a check written

by the Oldham Company for $1,764 that had been deducted from Oldroyd’s account in error.

3. Deposits in transit as of January 31, 2003, amounted to #10,928.

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4. The following amounts were adjustments to Oldroyd Company’s account on the bank statement:

Service charges of $26. An NSF check of #1,400. Interest earned on the account, $40.

5. Checks written by Oldroyd Company that have not yet cleared the bank include four checks totalling $5,778.

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