UDFA - SERIES ONE complte by daniel onoriode

Understanding

FINANCIAL ACCOUNTING “Series One”

OYELAMI WASIU OYETUNJI,

HND,MBA,FCA,ACTI,AMNIM.

First Edition March 2001 Revised Edition October 2002 Revised Edition October 2004 Revised Edition August 2006 Revised Edition October 2009

Published by: OYELAMI W. OYETUNJI, 2009 All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, and recording or otherwise without the prior written permission of the author.

Your suggestions, observation and complaint should be directed to the Author: W.O.A. OYELAMI, hnd, mba, fca, fcti, amnim. NOOKIA VENTURES ACADEMY LTD, AGBOJU. P.O. BOX 15291, IKEJA POST OFFICE, LAGOS. believeoye@yahoo.co.uk. 08023136728; 08055168374; 08033725943.

Printed in Nigeria by:

Mularpak Corporate Services 20/22, Onadeko Street, Lawanson, Surulere, Lagos. Tel: 0802-328-5810

ISBN NUMBER: 978-34072-2-8

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

PREFACE The text “UNDERSTANDING FINANCIAL ACCOUNTING – SERIES ONE” is designed for use by all students; particularly students offering Accounting Courses in the Universities, Polytechnic, Colleges of Education and Senior Secondary Schools.

Candidates writing the Basic Accounting Processes and Systems (BAP&S), Accounting Framework (AF), Principles and Practice of Financial Accounting (PPFA), and Financial Accounting Papers of the Institute of Chartered Accountants of Nigeria will find the book a tremendous companion.

The book also covers topics, which are of relevance to students writing Financial Accounting in the Nigerian Institute of Bankers and Chartered Institute of Taxation Examinations, and other professional examinations.

“If the foundation be destroyed, there is little the righteous can do”. This book provides you the required foundation in your understanding of Financial Accounting.

OYELAMI WASIU OYETUNJI

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III

FORWARD I knew OYELAMI WASIU OYETUNJI as far back as 1990.

He is a lecturer of Financial Accounting and has been involved in the training of students both for academic and professional examinations for over a decade. He has lectured at the Yaba College of Technology, Mayo Associates, Alpha Tutors, Safe Associates Ltd, and the Polytechnic Ibadan (Lagos Centre). Currently he lectures at Nigerian Army School of Finance and Administration (NASFA), Lagos State Polytechnic and Triumph Associates.

“The Ultimate” or “The Oluaye of Financial Accounting” as his numerous students often call him, is an authority in Financial Accounting. His experience and brilliant teaching techniques is brought into use in the writing of this book.

“FINANCIAL ACCOUNTING – The Basics”; a questions and answers text, is equally written by him. I have no hesitation in recommending “Understanding Financial Accounting – Series One” for students and professionals. A.A. ABIOYE, HND, MBA, FCA, FCTI Head of Department, Professional Accountancy Department Nigerian Army School of Finance & Administration (NASFA) Apapa, Lagos.

Understanding Financial Accounting – Series 1

ACKNOWLEDGEMENTS I give glory to God Almighty for His mercy, grace, protection and compassion. I acknowledge the contribution of my mother, Mrs. Limota Abeke Oyelami for bringing me to this world and instruct me the way she did. She tried her best. May her gentle soul rest in peace. I am grateful to Mr Oyelami Asimiyu Ayogbe for his support. I am indebted to my wife, Mrs. Julian Oluwabunmi Oyelami, nee Ladipo, my children, Master Peter Oluwadamilare Oyetunji, Master Enoch Ayomikun Oyekunle and Miss Esther Fiyinfolowa Ideraoluwa for their understanding. I appreciate my parent-in-law Mr. and Mrs. Victor Ladipo for always being there when it matters most. I express gratitude to Engr A.O. Gasper, Alhaji Y.A. Salimanu, Chief A.S. Edet, Brig-Gen DA Bako, Brig-Gen J.O. Lartey, Brig-Gen C. Airhiavbere, and Col BB Adewinmbi. I cherished the contribution of friends and professional colleagues in the realization of this work. I say thank you to Mr. J.B. Akeju (my teacher), Mr. A.A. Abioye, Mr. Tella Oladimeji, Pastor (Brig-Gen) Tony Okpobrisi, Pastor (Mrs) Tolu Peters, Mr Audu Onumoh, Mr Ajibola Oduola, Mr. Festus Adebisi, Chief A.O. Owanikin (AR/DOS – Alagbado Annex), Mr A. Akinsanya (AR – Ikeja Annex); Mr T.A. Sobande (AR/DOS – Obalende Annex); Mrs Marcus (AR – Ejigbo Annex) and others too many to mention. The motivation I got from these people contributed to the determination and zeal to produce this revised edition. I appreciate the assistance and encouragement from the entire students of Nigerian Army School of Finance and Administration (NASFA), Lagos State Polytechnic Ikorodu, Lagos State University Ojo, The Polytechnic Ibadan and Lagos City Polytechnic Ikeja. I am grateful to the Institute of Chartered Accountants of Nigeria (ICAN) for the permission granted me to reproduce past examination questions, some of which I have adapted for illustrations and practice questions in this book. The suggested solutions are however prepared by me. Once more, I give glory and adoration to the Almighty God.

Understanding Financial Accounting – Series 1

OYELAMI WASIU OYETUNJI

DEDICATION This revised edition is dedicated to my children, Master Peter Oluwadamilare Oyetunji. Master Enoch Ayomikun Oyekunle, and Miss Esther Fiyinfoluwa Ideraoluwa.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

Notes for students This textbook is organized so as to provide you with what has been found to be the most appropriate sequencing of topics as you build the foundations of your knowledge in accounting. In order to make best use of this book, you should consider the following tips as being a proven path to success: (a)

At the end of each chapter meditate on what you have learnt and assess your level of understanding.

(b)

Learn the meaning of each new term as it appears. Do not wait until you are revising for examination.

(c)

Attempt each of the practice questions (objectives and practical) at the point at which they appear. Do not look at the suggested answers before you attempt the questions, you will just be cheating yourself.

Note that only questions with “A” against the number are solved in this revised edition. (d)

Learn the accounting equation when you first come across it in Chapter 1. It is the key to understanding many of the aspects of accounting that students found difficult.

(e)

Do not be discouraged by the mystery of double entry. It is really not difficult, so long as you remember the accounting equation and can distinguish between things that you own and things that you owe. Like driving a car, once you understand it, you will never forget it and, the more you do it, the easier it becomes.

(f)

Remember that accounting is a vehicle for providing financial information in a form that assists decision-making. Work hard at presenting your work as neatly as possible.

(g)

Practice Questions are set at the end of each chapter for you to gauge how well you understand and can apply what you have learnt. If you simply read the text without attempting the questions, then you can be sure you will not pass your examinations.

(h)

Allocate time to attempt as many exercises as possible. Even though you may think you understand the topic, when you come to answer the questions you may often find your understanding incomplete. The true

Understanding Financial Accounting – Series 1

VII

test of understanding is whether or not you can tackle the questions competently. Practice makes perfect. Practice also develops your speed in answering questions. (i)

Your work should not only be neat and well laid out; headings should always be given, and any dates needed should be inserted. If proper headings are not given you will lose a lot of marks. Always put in the headings properly. Do not wait until your examination to start this correct practice.

(j)

Examination technique: • Get to the examination hall on time. • Read the instructions carefully. Underline the key words in each question to ensure that you answer the question set. • Plan your time before you start. • Tackle the easiest questions first. • Hand in all your workings. • Be neat; also include all proper headings, dates, sub-totals. A lot of marks can be lost here. • Only answer as many questions as you are asked by the examiner. • Do not cultivate the habit of paying your school fees or any form of levy or completing registration formalities on the day of examination. This may destabilize you.

Best of luck with your examination. I hope you get the reward you deserve! If you can boldly say ‘Amen’ to this prayer then you are on the right course.

“The problem with many Nigerian youths is that they sleep too much, eat too much and indulge in idle chatter and gossips”. Chief Obafemi Awolowo

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VIII

TABLE OF CONTENTS i. ii. iii. iv. v. vi. vii. viii.

Title page . Publishers page .. Preface .. .. Forward .. .. Acknowledgement Dedication .. Notes to students .. Table of Contents ..

.. .. .. .. .. .. .. ..

Page i ii iii vi v vi vii ix

CHAPTER (1)

Introduction

(2)

Double Entry Concept.

(3)

Capital and revenue items

(4)

Books of Accounts.

(5)

Final accounts of a sole trader.

(6)

Depreciation of fixed assets.

(7)

Valuation of Stock

126

(8)

Accounting Principles

141

(9)

Bank Reconciliation

145

(10)

Bills Of Exchange

169

(11)

Control Accounts ..

178

(12)

Suspense Accounts..

198

(13)

Incomplete Records ..

212

(14)

Accounts off Clubs and Societies ..

239

(15)

Manufacturing Accounts ..

(16)

Departmental Accounts

286

(17)

Joint Venture Accounts

294

(18)

Consignment Accounts. ..

309

(19)

Royalties Accounts…

326

Solution to practice questions Index

267

342 ..

401

Understanding Financial Accounting – Series 1

Chapter One

INTRODUCTION BUSINESS • Business is a commercial or industrial activity which exists to dealings in the manufacture, resale or supply of goods and services to consumers. • Business is an organisation, which uses economic resources to create goods or services which customers will then buy. Economic resources can be defined either as: a) Land, labour, and capital, or b) The "4 Ms" - men, material, machines and money. • Business is the sum of all the activities involved in the creation and distribution of goods and services for private profit.

WHY KEEPING BOOKS? The recording of business transactions which can be expressed in terms of a monetary unit is known as book-keeping. The aim of this book is not only to show as clearly as possible how these transactions are entered in the books of accounts, but also to underline the theory that lies behind these entries. It must be borne in mind that book-keeping systems are not rigid, once the principles are known they can be adapted to suit the needs of the business owner(s). No matter how big or small the enterprise is, the recording of transactions is vital. Even in the smallest of businesses there are numerous changes taking place hourly and it is impossible to retain a clear picture of the overall effect of these movements unless they are committed to paper. At regular intervals the owner will want to know what assets it possesses (an inventory of the business machines and fixtures); the amount owed to the business by customers (debtors). Similarly, with the business’s liabilities he must know how much it owes to outsiders. The main purpose of being in business is to make a profit and obviously the accurate determination of this figure is essential. Not only is the final figure important but also how it is made up.

ASSETS Asset is anything of material value or usefulness that is owned by a person or company. They are properties and possessions (resources) of the business, which are available for future use. The different types of assets are Fixed

Understanding Financial Accounting – Series 1

Assets; Current Assets; Tangible Assets; Intangible Assets; Fictitious Assets and Wasting Assets. • Fixed assets are the tangible resources of the business. For an item to be classified as a fixed assets, it must satisfy the following conditions: (a) It is acquired at a cost (for valuable consideration). The adequacy of the consideration is not important. (b) It is meant for use in the business for more than one year. (c) It is not be meant for resale in the ordinary course of business. (d) It value declines as time goes by through wear and tear. Examples include land, buildings, motor vehicles, and furniture. • Current assets are assets with a relatively short life or are constantly changing their constitution, and are necessary for the day-to-day trading of the business. They are either cash or primarily for conversion into cash. Examples include stock-in-trade, debtors, prepaid expenses, cash at bank, cash in hand, receipt outstanding etc. Note:

The same asset may be fixed or current depending on the nature of the business. For instance, Machinery would be a fixed asset to a manufacturer of goods, but a current asset to a machinery seller.

• Tangible assets are definite assets, which can be seen and touched. Most fixed assets are tangible. • Intangible assets are assets that cannot be seen and touched, although they may have value e.g. goodwill, patents, copyright and trademarks. • Fictitious assets are debit balances - losses that have been carried forward from one period to the next, e.g. P & L Account balance, Preliminary expenses of a limited company. • Wasting assets are fixed assets that depreciates through wear and tear (e.g. plant and machinery); those whose value expires with lapse of time (e.g. leases and patents); those that become exhausted or consumed through being worked (e.g. mines, quarries etc). The expression is more generally applied to the last named.

LIABILITIES Liability is any amount, which a business is legally bound to pay. It is a claim by an outsider on the assets of a business. Liabilities represent the debts of the business to third parties. It is mainly of two types - current liabilities and long-term liabilities:

Understanding Financial Accounting – Series 1

â&#x20AC;˘ Current liabilities represent the short-term debts of the business. They are debts, which are expected to be discharged within 12 months after the balance sheet date. They consist mainly of trade creditors, accrued expenses, bank overdraft, income received in advance. â&#x20AC;˘ Long-term liabilities represent debts (creditors), which are not expected to be paid back until after more than one year after the balance sheet date. These comprised debentures and long-term loans.

PROFIT AND LOSS Business is an economic institution that MUST make profit in order to survive and for it to have a going concern. The opportunity for profit and the risk of loss are central to any business activity. Profit is the excess of income over expenditure. When expenditure exceeds income, there is a loss. The determination of how much profit or loss has been made is one of the jobs of the accountants.

BUSINESS AS AN ENTITY One of the fundamental conventions of accounting is the business entity conventions. This means that the firm or the business is dealt with completely separate from any other personal dealings of the owner(s). The business is treated as an entity completely divorced from the owner. All, and only, the transactions of the firm pass through the accounting system. Sometimes this is a legal necessity, as with a limited company. This may be difficult to visualise in the case of a sole trader who owns and runs the business on their own, but all private expenses and income must be ignored in the books of account. No matter the type of business undertaking, it has owner(s); however, for accounting purposes, the business has it own existence, separate from the identity of its owner(s). Accounting is concerned with an entity, an organisational unit, specifically defined and precisely delineated.

BUSINESS CAPITAL This comprises resources, be it cash or any other assets appropriated or invested into the business by the owner(s). Accounting looks at capital, as debts owed to the proprietor by the business.

CREDITOR This is a person to whom the business owes money. This is usually in respect of goods or services bought or received without paying for it immediately. A creditor is a liability of a business.

DEBTOR This is a customer who buys goods without paying for them straight away. A debtor is an asset of the business.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

BOOKKEEPING AND ACCOUNTING Bookkeeping is the recording branch of accounting. Accounting is the art of recording, classifying and summarising in a significant manner all the financial transactions of a business and interpreting the result thereof. Bookkeeping is the art of recording in books of account all the financial transactions of a business in such a way that the financial position of an undertaking and its relationship to both its owner(s) and to outside persons can be readily ascertained. To make a distinction between bookkeeping and accounting is difficult. Accounting includes bookkeeping, but bookkeeping itself is a broader subject. For instance, accountant designs the system of records used by the bookkeeper. The bookkeeper writes up books and make accounting records, while the accountants summarises and interprets these figures. Financial Accounting can therefore be defined as the process of collecting, recording, presenting, analysing and interpreting financial information for the users of financial statements. During the data collection phase, relevant details relating to financial transactions are captured as they occur. The details are captured on source documents. Examples of source documents include invoices, bills, debit notes, receipts, vouchers, credit notes etc. The significance of source documents are that they capture the details of transactions at the origin and subsequent recording of the transactions will be based on details on the source documents. A typical source document will contain certain key information as; date of the transaction(s); brief details about the transaction(s); amount of the transaction(s) in Naira, and signature of the authorising or approving officer. During the recording stage, the information on the source documents are recorded in the books of accounts. The books of accounts consist of the LEDGER and SUBSIDIARY BOOKS.

FUNCTIONS OF ACCOUNTING These includes: a) Enables businessmen and other interested parties determines the profitability or otherwise of an enterprise. b) Allows for proper control to be exercised on resources invested in a business venture. c) Facilitate decision-making. d) Ensures proper accountability to the owner(s) of the business. e) It assists evaluation of future prospects of the company. f) Record in a systematic manner the transactions of an enterprise and reports on the performance.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

g) h) i) j)

Provides information on the current financial position of an enterprise. Assists employees assess their job security. Enables evaluation of financial stability and the level of capital gearing. Assists financial institutions (e.g. banks) assess the credit worthiness of an enterprise.

USERS OF FINANCIAL STATEMENTS The information needs of users are hardly ever the same, so the financial statements prepared are not designed to meet the information requirements of any specific users; they are multi-purpose statements. The followings are the users of financial statements: owner(s); potential investors; creditors (trade and expenses); management, government; employees; financial institutions like banks; financial analyst; research students, rival firms (companies), and customers (debtors). The above will requires accounting information for diverse reasons (including but not restricted to the following): Owner(s)/Shareholders: They want to be able to know whether or not the business is profitable . They equally want to know what the financial resources of the business are. Shareholders of limited companies wants to know their dividends expectations and also assess the management efficiency. Management/directors: Business owners uses financial information to make short and long-term decisions and evaluate the effectiveness of their own policies. Government (including the tax authorities, government bodies concerned with consumer protection and regulatory agencies): Financial information enable tax authorities determine tax liability of business concern and evaluate the status of the business for tax incentives. They want to determine whether all the regulations of the government have been complied with in the interest of shareholders and general public. Employees: to assess security of employment; as a basis for negotiating for higher wages and fringe benefits; to evaluate the ability of the firm to survive on the long run; as a basis for requesting for staff promotion. Investors (existing one or potential ones): They want to know whether or not to invest their money in the business. Creditors (trade and expense): to assess the credit worthiness of the company; to evaluate the length of time it takes to pay its suppliers; to assess the companyâ&#x20AC;&#x2122;s going concern status; to determine the lending terms to the company. Financial institutions (e.g. Banks): to assess the credit worthiness of the

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

company; as a basis for granting loans/overdrafts to the company; to determine the companyâ&#x20AC;&#x2122;s going concern status. Financial analysts: to enable them analyses trends in the economy. Research students: to support case studies in research or project writing. Rival firms: to monitor progress of other firms in the same industry and plan for improvement. Customers (debtors): to monitor source of supply of their products or raw materials; to evaluate fairness of pricing policies.

ACCOUNTING EQUATION When we add up what the accounting records say belongs to a business and deducting what they say the business owes, we can identify what a business is worth according to those accounting records. The whole of financial accounting is based upon the Accounting Equation. This equation is important, for it is the basis for the "double-entry recording system". Let us assume that it is the owner of the business who has supplied all of the resources; the equation can be shown as: Resources supplied by the owner = Resources in the business. The amount of the resources supplied by the owner is called Capital. The actual resources that are then in the business are called Assets. This means that when the owner has supplied all of the resources, the accounting equation can then be shown as: Capital = Assets Usually, people other than the owner normally supplied business resources in form of loans or credits. Liabilities is the name given to the amounts owing to outsiders. The accounting equation will now look like this: Capital = Assets - Liabilities This is the most common way in which the accounting equation is presented. The financial position of a business at any point in time can be expressed in the form of an equation, which expresses the relationship between assets, liabilities and capital.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

The equation states that the sum of the assets is equal to the sum of claims against the assets (that of the outsiders and the owner(s)). By derivation the equation can be expressed as: Capital = Assets – Liabilities (C = A - L). Assets = Liabilities + Capital (A = L + C), Assets – Liabilities = Capital (A – L = C). Transactions are analysed in terms of their effect on assets, liabilities and ownership equity. No matter how complex the transaction, the equation always stays balance. Illustration 1: Chief Alhaji Ahmed commenced a one-man business with cash at bank of N200,000 on 1st January 20*1. The following transactions took place in the first week of commencing the business: Jan 1 Bought office premises by cheque N80,000. Jan 2 Withdrew N20,000 cash from bank for potential purchase. Purchased goods for resale by cheque N20,000 and on credit N10,000. Jan 3 Bought Delivery Van N82,000 (N80,000 by cheque and N2,000 by cash). Sold goods costing N5,000 for N12,000 on credit. Jan 4 Sold goods costing N8,000 for N20,000 on cash. Paid N25,000 cash into bank. Took goods costing N2,000 (selling price N6,000) for personal use. Returned part of the goods bought on credit to the supplier; the cost of goods returned is N4,000. Jan 5 Drew cheque N5,000 for self and bought furniture N30,000 by cheque. Paid creditors N5,000 in cash. Received N20,000 cash loan from Alhaji Muktal, which he paid into the business bank account. You are required to show the daily financial position of Chief Alhaji Ahmed for first week of trading, using the accounting equation A - L = C.

Solution to Illustration 1: CHIEF ALHAJI AHMED STATEMENT OF DAILY FINANCIAL POSITION FOR THE PERIOD 1 - 5 JAN, 2001 DATE ASSETS LIABILITIES CAPITAL

20*1 1/1

2/1

N Premises Bank

Premises Stock

80,000 120,000 200,000 80,000 30,000

N Capital

Creditors

10,000

200,000 200,000

Capital

Understanding Financial Accounting – Series 1

200,000

Bank Cash

80,000 20,000 210,000

10,000

200,000

STATEMENT OF DAILY FINANCIAL POSITION FOR THE PERIOD 1 - 5 JAN, 2001 DATE ASSETS LIABILITIES CAPITAL

20*1 3/1

4/1

5/1

N Premises Motor Van Stock Debtors Cash

Premises Motor Van Stock Debtors Bank Cash

Premises Furniture Motor Van Stock Debtor Bank Cash

80,000 82,000 25,000 12,000 18,000 217,000

Creditors

80,000 82,000 11,000 12,000 25,000 13,000 223,000

Creditors

80,000 30,000 82,000 11,000 12,000 10,000 8,000 233,000

Creditors Loan

10,000

N Capital Add: Profit

10,000 6,000

207,000 Capital Add: Profit Drawing

6,000 1,000 20,000

200,000 7,000

207,000 12,000 219,000 (2,000)

217,000 Capital Drawings

21,000

217,000 (5,000)

212,000

HISTORY OF ACCOUNTING The recording of transactions in books of accounts (book-keeping) dates back to 14th century when the Italian merchants began to use the double entry to record their transactions. The earliest known double entry records are the accounts of stewards of the Commune of Genoa for the year 1340. Luca Pacioli published the first known text on double entry accounting in 1494, titled Summa di Arithmetica Geometria Proportion et Proportionalita (meaning Everything about Arithmetic, Geometry and Proportion). This book contain a section on double entry accounting entitled De Computis et Scripture. This section was later separated and published in 1504 under the title La Scuola Perfectta dei Merchant, which in English means The Perfect School of Merchants.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

The double entry system quickly spread across Europe, particularly after the publication of Luca Pacioli’s Summa. Due to its Italia origin, the system in those days was known as the Italian method.

Chapter One - multiple choice questions 1.

Which of the following does not define business: (A) It is a commercial or industrial concern. (B) It uses economic resources to create goods and services. (C) It is creation and distribution of goods and services for profit. (D) It is land, labour and capital redistribution.

Which of these is not a characteristics of fixed asset? (A) It is tangible. (B) It is acquired for valuable consideration. (C) It is not expected to be sold in the course of business. (D) It is expected to be used for one year.

Which of these statement is wrong? (A) Fixed assets declines in value as time roll by. (B) Current assets are necessary for the day-to-day trading. (C) The same asset may be fixed or current depending on the nature of the business. (D) Current assets does not change their constitution.

Which of the following is not a user of financial statement? (A) Employees. (B) Government. (C) Creditors. (D) Students Union.

Which of these statement is not true? (A) Liability is any amount which a business is legally bound to pay. (B) Current liabilities are expected to be discharged within 12 months. (C) Loss is the excess of income over expenditure. (D) Capital is debts owed to the proprietor by the business.

Which of the following statements is incorrect? (A) Assets – Capital = Liabilities. (B) Liabilities + Capital = Assets. (C) Liabilities + Assets = Capital. (D) Assets – Liabilities = Capital.

Understanding Financial Accounting – Series 1

Which of the following is not an asset? (A) Buildings. (B) Loan to an employee. (C) Debtors. (D) Loan from Kate Ogbonnaya. Given the following, what is the amount of Capital? Premises N40,000; Stock N17,000; Cash in hand N1,000; Bank overdraft N4,000; Creditors N6,000; Loan from Adamu N10,000. (A) N32,000 (B) N38,000 (C) N48,000 (D) N46,000 Which of the following statements are correct? Accounts To record Entry in the account (i) Assets an increase Debit a decrease Credit (ii) Capital an increase Debit a decrease Credit (iii) Liabilities an increase Credit a decrease Debit (A) (i) and (ii). (B) (ii) and (iii). (C) (i) and (iii). (D) (i), (ii) and (iii).

10.

Lenders including bankers will not use financial information (A) Assessing the companyâ&#x20AC;&#x2122;s going concern status. (B) Assessing the credit worthiness of the company. (C) Determining the lending term of the company. (D) To determine return on capital invested.

11.

The Opening Capital of Subomi was N16,500, Closing Capital is N113,500 and Drawings for the year were N33,000. What is the profit or loss for the year.

12.

Complete the gaps in the following table:

(a) (b) (c) (d)

Assets N 55,000 ? 36,100 12,500

Liabilities N 16,900 17,200 ? 1,800

Capital N ? 34,400 28,500 ?

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

(e) (f) (g) (h) (i) (j)

? ? 28,000 11,950 88,000 16,800

11,650 6,300 4,900 1,540 ? ?

39,750 19,200 ? ? 62,000 12,500

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

Chapter One - practice questions 1. Tunde commenced business on the 1st January 2003 by setting aside an initial cash of N400,000. The following transactions were made in the first month of starting the business: Jan 7 Bought premises N120,000, Delivery Van N100,000 in cash. 13 Deposited #80,000 in a new bank account specifically opened for the business. 17 Received loan from his Uncle (in cheque) N100,000. Bought goods in cash N100,000, and on credit N80,000. 22 Sold goods costing N85,000 for N150,0000 on credit. 27 Took goods costing N20,000 (selling price N50,000) for personal use. Sold goods costing N30,000 for N60,000 collecting cheque immediately. 30 Received cash from credit customers N55,000. Paid credit suppliers N50,000 by cheque. Required: Using the Accounting Equation (A-L=C) show the daily financial position of Tunde for the first month of trading. 2A. Segun Quadri commenced business two years ago. As at 31st December, 1999, the following are his assets and liabilities: Bank Overdraft N40,000; Cash in hand N15,000; Delivery Van N65,000; Furniture N45,000; Loan from Ade N10,000; Creditors N20,000; Debtors N25,000; and Stock in trade N30,000. The following transaction took place between January 1st and 5th, 2000: Jan 2 Sold goods costing N8,000 for N19,000 by cheque. Gave goods costing N5,000 (selling price N12,000) as wedding present to his friend Ego Boyo. 3 Paid credit suppliers N10,000 by cash; and sold goods costing N13,000 for N25,000 by cheque. 4 Sold the Delivery Van for cheque N50,000. Bought goods by cheque N15,000; Discharge the loan from Ade by cheque. 5 Bought a new Motor Van for N60,000 on credit from First Motors. Required: Using the Accounting Equation (A-L=C) show the daily financial position of Segun Quadri for the period 1st to 5th January, 2000. (Solution on Page 342) 3.

Complete the columns to show the effects of the following transactions. Effect upon Assets

a) b) c) d)

Liabilities

Capital

Pay creditor N70 in cash. Bought fixtures N200 by cheque. Bought goods on credit N275. The proprietor introduced another N500 cash into the firm

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

e) Grace Alele lends the firm N2,000 in cash. f) A debtor pays us N500 by cheque. g) Return goods costing N60 to a supplier whose bill had not been paid. h) Bought additional shop premises paying N5,000 by cheque. 4. Categorise the following as assets or liabilities or capital: Buildings; Loan to the firm; Equipment; Cash; Cash paid into the firm’s bank account by the proprietor. 5.

State which of the following are wrongly classified: Assets Liabilities Loan from Juliet Stock of goods Cash in hand Debtors Machinery Money owing to bank Capital Premises Loan to Cyprian

6. Deborah is setting up a new business. Before actually selling anything, she bought a motor vehicle for N200,000, premises for N500,000 and stock of goods for N100,000. She did not pay in full for the stock of goods and still owes N40,000 in respect of them. She borrowed 30,000 from Henrietta. After the events just described, and before trading starts, she has N1,000 cash in hand and N7,000 cash at bank. Calculate the amount of capital. 7. Abibu has the following items in his books as on 30th April 2010: Capital N209,000; Creditors N16,000; Fixtures N35,000; Motor vehicles N42,000; Stock N49,500; Debtors N32,800; Bank N64,500; Cash N1,200. During the first week of May 2010; he bought extra stock of goods N7,700 on credit; one of the debtors paid him N2,800 in cash; and he bought extra fixtures by cheque N10,000. Represent the above transactions in the form of an accounting equation Assets – Liabilities = Capital. 8. Dada has the following assets and liabilities as on 30th November 2010: Creditors N39,500; Equipment N115,000; Motor vehicle N62,900; Stock in trade N61,500; Debtors N57,700; Bank balance N72,800; Cash in hand N400. During the first week of December 2010: (a) Dada bought extra equipment on credit for N13,800. (b) He bought extra stock by cheque N5,700. (c) Paid creditors by cheque N7,900. (d) Debtors paid Dada N8,400 bye cheque and N600 by cash. (e) Dada put in an extra N2,500 cash into the business.

Understanding Financial Accounting – Series 1

Using the accounting equation A-L=C; show the statement of financial position as on 7th December 2010.

Chapter Two DOUBLE ENTRY CONCEPT INTRODUCTION The books used in bookkeeping are the following: Ledger(s); Cash Book; Petty Cash Book; Sales Day Book; Sales Returns Book; Purchases Day Book; Purchases Returns Book; Journal Proper; and Bills Book. The principal book of account is the LEDGER, which contains accounts for all the transactions of the business except cash. As is usually the case, so many transactions involved cash, and this is the main reasons why a separate book (called the Cashbook) is opened to record cash transactions. Any other accounts that have to be opened must be opened in the ledger. All other books of accounts are subsidiary to the ledger, and are therefore known as "subsidiary books". They are also referred to as "books of original/first/prime entry".

ACCOUNT The ledger (plus cashbook) contains accounts for all the transactions of the business. For each person or thing involved in a transaction, we use a page. This is called "account". An account is a record of the nature of all financial transactions, the dates on which they took place and the value involved. An account is divided into two halves; the left side is called "debit", while the right side is called "credit". The name or heading of the account is always written at the top e.g. Sales Account. Where the account is a personal one, the name of the person or firm is sufficient. Folio columns may be provided so that the corresponding double entry can be easily referenced. A typical format of an account is presented below: Debit (Dr) Date

Details

(NAME OF THE ACCOUNT) Folio

Amount

Date

Details

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

Credit (Cr) Folio

Amount N

TYPES OF ACCOUNTS There are two types of accounts namely Personal Accounts and Impersonal Accounts. Personal accounts are accounts in which transactions that take place between the business and persons or firms outside are recorded. In other word, they are either debtors or creditors accounts. E.g. Ade, Alpha Tutors, Yaba College of Technology, Oloruntobi, Ultimate Products Ltd, Bank account etc. Impersonal accounts are of two categories; real account and nominal account. (1) Real accounts are accounts that record the transactions concerning property and possessions of the business. E.g. land and buildings, plant and machinery, motor vehicles etc. (2)

Nominal accounts are the accounts that record transactions regarding expenses, incomes, profits, losses and intangible assets of the business. E.g. wages account, rent and rate account, purchases, sales, commission received account, stock loss, goodwill, patents copyrights etc.

DIVISION OF LEDGER The divisions of ledger will vary according to the nature and size of the business; but broadest division is as follows: i. Sales Ledger (or Debtors Ledger) contains accounts of customers (debtors). ii. Purchases Ledger (or Creditors Ledger) contains accounts of suppliers (creditors). iii. General or Nominal Ledger – this contains all other accounts. If the need arises, each of the three ledgers above could be further subdivided. The debtors’ ledger or creditors’ ledger could be sub-divided alphabetically so that, for instance, those whose names begin with letters A-G would be in one ledger, those whose names begin with letters H-O would be in another ledger and so on. Alternatively, they could be further sub-divided geographically so that those who are in defined geographical locations would be in different ledgers. The general ledger can also be sub-divided alphabetically. The sub-division of the ledger allows different persons to work

Understanding Financial Accounting – Series 1

simultaneously and also aids the system of internal controls which becomes more crucial as the business organisation grows bigger.

DOUBLE ENTRY RECORDING SYSTEM In Chapter One, when we are looking at the concept of accounting equation, we saw how various events had changed two items in the financial position of the business. When our debtors paid us cash; this affect the debtors figure and the cash in hand. Events which result in such changes are known as “transactions”. Assuming our debtor merely requested for information about how much he is owing us without paying us then there is no transaction. We have thus seen that every transaction affects at least two items at any point in time. Therefore, when we enter the data relating to the transaction in the accounting books we need to ensure that we do so in a way that ensures that the items that were affected by the transaction are shown as having changed. This is the bookkeeping stage of accounting and the process we use is called double entry. The double entry is a system by which the two-fold aspects of every financial transactions of a business are recorded. This method of keeping records originated in the Middle Ages. Luca Pacioli printed an explanation of the process in Italy as early as 1494. The double-entry concept divides the page of an account into two; the left side is called DEBIT, while the right side is called CREDIT. It states that all financial transactions must be recorded twice in the books, one entry on the debit side and a corresponding entry on the credit side. All financial transactions can be classified into two categories: Category A 1. Assets 2. Expenses/losses 3. Drawings 4. Provision for Receivables Dr

Category B 1. Liabilities 2. Income/revenue 3. Capital 4. Provisions for Losses Cr

Cr.

Dr.

There are two ways in which an item can change - increase or decrease. 1. Increase in “Category A” items will require a debit entry, while a decrease will necessitate a credit entry.

Understanding Financial Accounting – Series 1

Increase in “Category B” items will call for a credit entry, while a decrease will require a debit entry.

In order to apply the double entry principle, it is necessary to first identify the two accounts involved. Having done this, the next step is to identify which category these two accounts belongs. You then apply the simple process described above. As illustrative example, record this transaction in the books of Mr Fatai, a sole trader. On 1st June, 20*2. Bought Furniture N20,000 paying cash. • • • • •

The two accounts affected are Furniture and Cash. Both accounts falls under category A. Furniture is increasing, therefore Debit Furniture Account. Cash is decreasing, therefore Credit Cash Account. Note that in each account, the details of the transaction is simply the account having the corresponding entry. Furniture Account Date

20*2 1/6

Details

Cash

Amount

N 20,000

Date

Details

Amount

20*2

Cash Account Date

20*2

Details

Amount

Date

Details

20*2 1/6

Amount

Furniture

N 20,000

Examples: In each of the following transaction state the accounts to debit and credit. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Start business with cash Open bank account with cash Buy goods for resale by cheque Buy goods for resale on credit Sells goods for cash Sells goods on credit Pays creditors by cheque Pays creditor from own money Owner withdrew stock for own use Owner introduced his motor car

Accounts to Debit

Credit

Cash Bank Purchases Purchases Cash Debtor Creditors Creditor Drawings Motor Car

Capital Cash Bank Creditors Sales Sales Bank Capital Purchases Capital

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11. Owner pays personal expenses from business cash 12. Received cash from debtor 13. Returned part of the goods taken in (9) into the business

Drawings Cash

Cash Debtor

Purchases

Drawings

Advantages of Double entry System i. It provides a complete record of every financial transaction of the business from both personal and impersonal aspects. ii. It provides an arithmetical check on the financial records. iii. The control of the business is facilitated. iv. It makes possible the preparation of the financial statements. v. With a reliable system of internal control it reduces risk, and facilitates detection of errors and fraud. vi. The amount owing to and by person with whom the business deals with can at any time be ascertained.

HOW TO BALANCE LEDGER ACCOUNTS The following steps must be followed: 1. Add up both sides (in your head or on a piece of paper). 2. Find the difference (of course by subtracting the smaller amount from the greater). 3. Put the difference on the lighter side - describe it as "Balance carried down (abbreviated Balance c/d)". 4. Add up both sides again. This time write down the totals on the same line. 5. Rule off by drawing two lines under the two totals. 6. Bring down the difference (Balance c/d) to the opposite side â&#x20AC;&#x201C; describe it as "Balance brought down (abbreviated Balance b/d)". Note: 1. Where the debit side is greater than the credit side (in total), the account is said to have a debit balance, and vice versa. 2. Where there is only one entry, it makes no difference if such account is not balanced. Illustration 2.1: After posting the bank account, the following appear in the books of Funso Alabi. You are to balance the account as at 31st January and show the opening balance as on 1st February. BANK ACCOUNT

1/1 9/2

Capital Loan a/c

N 30,000 3/1 1,000 10/1 14/1

Buildings Motor Van Shop fittings

N 15,000 4,000 5,000

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22/1 27/1 29/1 30/1

Rent expense Advertising Cash account Drawings

400 300 200 100

Solution to Illustration 2.1: FUNSO ALABI 1. Total: Debit Side N31,000 Credit Side N25,000. This account has a debit Balance because the debit side is greater than the credit side. 2. The difference is N(31,000 - 25,000) = N6,000. 3. Put N6,000 on the credit side, which is the lighter side, and describe it as "Balance c/d". 4. Add up again and write down N31,000 on either side. 5. Rule off by drawing double lines under N31,000 on both sides. 6. Finally, bring N6,000 to the debit side and describe it as "Balance b/d".

1/1

Capital

9/1

Loan account

1/2

Balance b/d

BANK ACOUNT N 30,00 3/1 Building 0 1,000 10/1 Motor expense 14/1 Shop fitting 22/1 Rent expense 27/1 Advertising 29/1 Cash account 30/1 Drawings 31/1 Balance c/d 31,00 0 6,000

N 15,00 0 4,000 5,000 400 300 200 100 6,000 31,00 0

CAPITAL AND DRAWINGS ACCOUNT Because of the unique relationship between the owner and the business, two accounts are included in the general ledger - capital account and drawings account. Capital account is used to record the indebtedness of the business to the owner. The amount involved is the initial money or goods or assets supplied by the owner plus any expenses of the business paid by the owner from his private money. The capital is periodically increased when profits is made (and reduced when loss is incurred).

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Drawings consist of any cash or goods or assets withdrawn from the business for owner's own use, or any private expenses paid out of the business's funds. These items are recorded in a drawing account, which is periodically transferred to the capital account.

BAD DEBTS Bad debts are debts which has been certified or assumed irrecoverable. Debts may be assumed irrecoverable (bad) in the following situations: a) Upon the death of the customer. b) Insanity of a customer. c) Bankruptcy of a customer. d) Non-availability of the customer (disappearance without trace). e) A customer being convicted and jailed (especially life jail), and f) Where the customer decline owing and there is no evidence to prove liability. When it is certified that a particular debt is irrecoverable, such debts should be written off as bad. The double entry is: Dr. Bad Debts account Cr. Debtors (Individual customer) account. At the financial year end, Bad Debts account is closed by transfer to the Profit and Loss account as expense.

BAD DEBTS RECOVERED This is debts written off as bad in one accounting period but recovered in a later accounting period. The accounting entries are: (a) Re-instate the debt Dr. Debtors account } Value of Cr. Bad debts recovered account } debts (b) When cash/cheque is subsequently received from the debtor Dr. Cashbook } Amount Cr. Debtors a/c } received At the end of the relevant accounting year, bad debts recovered account is closed to Profit and Loss account and treated as additional income.

DOUBTFUL DEBTS Doubtful Debts are debts which might become bad in the future but are not yet bad. In essence, the possibility of recovering such debts is uncertain. Provision is usually made against such debts. This is usually based on estimate, and the factors to consider when estimating the amount of doubtful debts are: (i) the age of the debts; (ii) the behaviour of the debtor;

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

(iii) the political climate in the country; and (iv) the economic environment in the country. This is dealt with later in the book.

TRIAL BALANCE Trial Balance is a list or schedule of balances, both debit and credit, extracted from all the accounts in the ledger and cash book. Note: The fact that the trial balance agreed is not a conclusive evidence that the financial records is error proof. This statement is hinged on the fact that the trial balance cannot disclose certain errors as follows: (a) Errors of omission: Where a transaction has been completely overlooked. (b) Errors of Principle: Where an item is entered in the wrong class of account; e.g. Where purchase of Motor Vehicles (fixed assets) is debited to Purchases or Motor Expenses Account rather than Motor Vehicles Account. (c) Errors of commission: This is where the correct amount is posted to the right class of account but using a wrong account name; e.g. credit sale to Funmi debited to Funke. (d) Errors of Original Entry: This is where the original figure is incorrect; yet double entry is observed using this incorrect figure e.g. Return Inwards N210 posted in the books as N120. (e) Compensating Errors: Where two or more errors cancels out each other; for instance, sales and purchases overstated by N1,000. (f) Complete Reversal of Entry: Where the correct account are used but each item is shown on the wrong side of the account, e.g. cash deposits to bank debited to cash and credited to bank instead of the other way round.

ADVANTAGES OF TRIAL BALANCE The advantages of trial balance include: (i) It proves the arithmetic accuracy of the book keeping system. (ii) It confirms the complete observation of the double entry concept. (iii) It serves as a working paper in the course of preparing financial statement. (iv) Helps to detect errors. The trial balance can disclose the following types of errors: a) Addition Error: ledger, cashbook or trial balance may be under or over cast. b) Omission of ledger or Cashbook balances. c) Single Entry Posting, that is, entering an item on one side of the ledger

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

without corresponding entry elsewhere. Transposition of figures during posting; that is, entering one figure on the debit side but a different figure on the credit. e) Where the double entry are carried out on the same side of the ledger. f) Errors of transposition may occur when listing the trial balance. g) Correct balance listed on the wrong column of the trial balance. The following rules may guide when preparing the trial balance by ensuring that balances on the following items appear on the stated column (dr. or cr.) d)

Dr. column

Cr. column

Fixed Assets (e.g. machinery) Current Assets (e.g. Stock etc.) Expenses (e.g. salaries, rates) Purchases Sales Returns Drawings Provision for gains

Long-term liability (e.g. loans) Current Liabilities (e.g. Creditors) Income (e.g. rent received) Sales Purchases Returns. Capital Provision for losses

Illustration 2.01: Adio Fatai commenced business with a bank balance of N6,750 on 1st May, 20*7. During May, the following transactions took place: 1/5 Bought goods for resale paying by cheque N2,500. 4/5 Sold goods for cash N1,350 5/5 Paid rent of Shop by cash N250 7/5 Bought Shop Fittings paying by cheque N800. 10/5 Paid wages in cash N300. 12/5 Mr Adio withdrew goods for own use N250. 16/5 Received loan from Uche N5,000, which he paid into the bank. 18/5 Purchased goods on credit from Moruf N2,000. 20/5 Sold goods on credit to Mukaila for N1,200. 22/5 Sold goods for cash N1,800. 23/5 Drew cheque N400 for self. 26/5 Bought goods on credit from Moruf N1,000. 28/5 Sold goods for cash N1,000. 30/5 Paid into bank all but N500 of the cash. Required: a. Complete the ledger accounts for the above transactions. b. Balance the ledger accounts and extracts the Trial Balance as at 30 May, 20*7. Solution to Illustration 2.01:

ADIO FATAI Purchases Account N 1/5 18/5

Bank Moruf

2,500 2,000

12/5 31/5

Drawings Balance c/d

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

N 250 5,250

26/5 1/6

31/5

12/5 23/5 1/6

5/5

7/5

4/5 22/5 28/5

1/6

Moruf Balance b/d

Balance c/d

Purchases Bank Bal b/d

1,000 5,500 5,250 Capital Account N 1/5 Bank Sales Account N 5,350 4/5 Cash 20/5 Mukaila 22/5 Cash 25/5 Cash 5,350 1/6 Balance b/d Drawings account N 250 31/5 Balance c/d 400 650 650

5,500

N 6,750 N 1,350 1,200 1,800 1,000 5,350 5,350

N 650 650

Cash

Rent Account N 250

Bank

Shop fittings Account N 800

Sales Sales Sales

Bal b/d

Cash Account N 1,350 5/5 Rent 1,800 10/5 Wages 1,000 30/5 Bank 31/5 Balance c/d 4,150 500

Bank Account N

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

N 250 300 3,100 500 4,150

1/5 16/5 30/5

1/6

10/5

Capital Loan Cash

Bal b/d

Cash

6,750 5,000 3,100

1/5 7/5 23/5 31/5

Purchases Fittings Drawings Bal c/d

14,85 0 11,85 0 Wages Account N 300

Loan from Uche N 16/5 Bank

31/5

20/5

Balance c/d

Sales

2,500 800 400 11,15 0 14,85 0

Moruf N 3,000 18/5 26/5 3,000 1/6

Purchases Purchases Balance b/d

Mukaila N 1,200

ADIO FATAI TRIAL BALANCE AS AT 31 MAY, 20*7 Dr N Capital Purchases 5,250 Sales Drawings 650 Rent 250 Cash 500 Bank 11,150

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

N 5,000

N 2,000 1,000 3,000 3,000

Cr N 6,750 5,350

Shop Fittings Wages Loan from Uche Moruf (Creditor) Mukaila (Debtor)

800 300

1,200 20,100

5,000 3,000 . 20,100

DISCOUNT Discount is allowance allowed off the price of goods and services, so that the customers pays less than the expected price or the suppliers received less than the usual price of the products in question. We have trade discount and cash discounts. Trade Discount is allowance allowed off the list price of goods in order to compensate for bulk purchase or for long patronage. Trade discount is not recorded in the books of account; adjustment to reflect trade discount is carried out on the invoice. Cash Discount is an allowance allowed off the selling price of goods in order to induce or encourage earlier payments. When it is given to customer it is called discount allowed, whereas when it is received from supplier it is called discount received. The accounting entries may be summarized as follows: When given to customers Dr. Discount allowed account Cr. Debtors (Customers) account When received from suppliers Dr. Creditors (Suppliers) account Cr. Discount received account.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

Chapter Two - multiple choice questions 1)

Which of the following are correct?

(i) (ii) (iii) (iv)

Bought office furniture for cash Shola, a debtor pays us by cheque Introduced capital by cheque Paid Lola, a creditor by cash (A) (i), (ii) and (iii) only. (B) (ii), (iii) and (iv) only. (C) (i), (ii) and (iv) only. (D) (i) and (iv) only.

Accounts to be Debited Credited Furniture Cash Bank Shola Capital Bank Lola Cash

Which of the following best describes the meaning of Purchases? (A) Items bought. (B) Goods bought on credit. (C) Goods bought for resale. (D) Goods paid for.

Which of the following should be called Sales? (A) Office fixtures sold. (B) Goods sold on credit. (C) Goods sold for cash. (D) Sales of items previously included in “Purchases”.

Which of the following best describes a trial balance? (A) Shows the financial position of a business. (B) It is a special account. (C) Shows all the entries in the books. (D) It is a list of balances on the books.

A cash discount is best described as a reduction in the sum to be paid (A) If payment is made within a stipulated agreed period. (B) If payment is made by cash. (C) If payment is made either by cash or cheque. (D) If purchases are made for cash, not on credit.

Discounts received are (A) Deducted when we receive cash. (B) Given by us when we sell goods on credit. (C) Deducted by us when we pay our accounts.

Understanding Financial Accounting – Series 1

(D) Received by us when we return bad goods. Which of these errors will affect the agreement of trial balance? (A) Single entry posting. (B) Error of principles. (C) Complete reversal of entries. (D) Compensating errors.

Which of these errors would be disclosed by the trial balance? (A) Cheque of N95 from Sade entered in Sade’s account as N59. (B) Selling expenses had been debited to sales account. (C) Credit sales of N30 entered in both double entry accounts as N3. (D) A purchase of N250 omitted entirely from the books.

Fatai introduced N25,000 cash into his business. The necessary double entries is: (A) Debit Drawings Account; Credit Cash Account. (B) Debit Cash Account; Credit Bank Account. (C) Debit Capital Account; Credit Cash Account. (D) Debit Cash Account Credit Capital Account.

10) Which of these statements is not correct? (A) Bank account is an example of Personal account. (B) Sales ledger is used to record cash and credit sales. (C) Purchases Ledger contains accounts of credit suppliers. (D) A business is distinct and separate from the identity of the owner.

11) The ledger accounts opened for losses and gains are classified as: (A) Real account. (B) Personal account. (C) Nominal account. (D) Impersonal account. 12) Which of these is not a cause of bad debts: (A) Bankruptcy. (B) Insanity. (C) Age of debts. (D) Non-availability. 13) A list of debit and credit balances is called: …………………………….. 14) The same asset may fixed or current depending on the nature of the business concerned. Explain.

Understanding Financial Accounting – Series 1

15) Why is it difficult to make a distinction between book keeping and accounting? 16) Because the information needs of users are hardly ever the same, the financial statements are normally prepared to address the information requirement of specific user. Yes or No. Explain. 17) Luca Pacioli published the first known text on double entry accounting in what year? 18) Mention three posting errors. 19) Classify the following under the headings of Personal, Real and Nominal Accounts and state which side of the ledger you would expect to find the balances in the accounts: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii.

Ronke - a supplier; Rates - expenses; Insurance -expenses; Bank Overdraft; Stock; Plant and Machinery Mr Solomon – a customer Rent – income. Purchases Sales Discount received Carriage inwards

Classification

Type of balance

……………… ……………… ……………… ……………… ……………… ……………… ……………… …………. …. ……………… ……………… ……………… ………………

………………… ………………… ………………… ………………… ………………… ………………… ………………… ………………… ………………… ………………… ………………… …………………

20) State the two broad categories into which accounts are classified. 21) The memorandum record for the cash discount received from supplier is shown on the …………. Side of the cash book. 22) Machinery is purchased for cash. The double entry for the transaction is: (A) Debit Cash Account; Credit Machinery Account. (B) Debit Purchases Account; Credit Cash Account. (C) Debit Machinery Account; Credit Cash Account. (D) Debit Cash Account Credit Purchases Account. 23) Which of the following will be classified under personal account? (A) Plant and Machinery (B) Creditors. (C) Sales account. (D) Cash received. (E) Losses.

Understanding Financial Accounting – Series 1

Chapter Two - practice questions 1. Complete the following table showing which accounts are to be debited and which to be credited in the business of Sule a sole trader: (a) Introduced N50,000 cash to start business. (b) Bought Motor Lorry for cash N20,000. (c) Bought goods for resale in cash N5,000. (d) Sold goods for cash to Ola N1,000. (e) Received N20,000 cash loan from Alhaji Umar. (f) Bought goods for resale in cash from Akeem N3,000. (g) Sold goods on credit to Uche N2,000. (h) The proprietor converted his Furniture costing N10,000 to the business property. (i) Uche returned goods to the business N500 (selling price). (j) Bought goods on credit from Funmi N4,000. (k) The proprietor paid Funmi N2,000 cash from his personal money. (l) Returned goods to Funmi N300 (cost price). (m) The proprietor took goods for resale for self N1,200. (n) The proprietor paid personal expenses from business cash N500. (o) The proprietor introduced additional N20,000 into the business in cash. 2.

Post the transactions in (1) in the ledger of Sule, balance the account and extract the list of balances.

3. The following transactions are to be entered in the books of Funmilayo Adebo who commence business on May 1st 2001: 1/5 Started business with N50,000 in the bank and N1,000 cash in hand. Paid rent of shop N800 in cash. 2/5 Bought goods on credit from the following persons: Abibu N1,250; Bukola N2,500 and Caroline N1,750. 3/5 Sold goods on credit to Vigo N2,000; Wale N1,200. 4/5 Bought Motor Vehicles paying by cheque N20,000. 5/5 Sold goods for cash N1,400. Paid wages in cash N500. 7/5 Paid motor expenses in cash N250. 9/5 Bought goods on credit from Bukola N2,000. 10/5 Sold goods on credit to Wale N800. 12/5 Sold goods for cash to Kehinde N800. 14/5 Paid Bukola by cheque the amount due to her less 5% discount. 16/5 Bought goods on credit from Abibu N1,000. Sold goods for cash N1,200. 18/5 Paid personal expenses in cash N500. 19/5 Paid Abibu the amount due to him by cheque less 4% discount.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

22/5

It was decided to write off the amount due from Wale as bad. Wale has been declared bankrupt. 24/5 Gave his wife N200 cash to buy exercise books for his son. 27/5 Paid all but N600 of the cash into bank. You are required to enter the above transactions in the books of Funmilayo Adebo (excluding cash book); balance the accounts as at 31 May, 2001. 4. Alhaji Usman retired from the Nigerian Railway with a retirement benefit of N20,000 which he puts into the business on 1st January, 2001. The following transaction took place during the month of January: 2/1 Obtained a 5% Loan of N50,000 from Access Bank Plc. 3/1 Bought Office Equipment for cash N6,000. 4/1 Bought goods for resale by cheque N5,000, and on credit from Senti Enterprises N6,000. 6/1 Bought Machinery from SCOATRAC on credit N5,500. 8/1 Withdrew N3,000 out of bank account for business expenses. 9/1 Sold goods for cash N3,000; and to Wale on credit N2,000. 16/1 Repaid Access Bank Plc N10,000 by cheque. 18/1 Part payment of N1,500 was made to SCOATRAC in respect of Machinery bought on credit. 26/1 Part of the goods already paid for were returned to the seller Mr Adiele N600 (cost price). The refund is not yet received. 30/1 Sold goods to Obasi N2,400 on credit. You are required to write the accounts necessary to record the above transactions in the books of Alhaji Usman.

5. July

Record the following transactions in the appropriate ledger accounts of Papilo, and extract a trial balance as at 31st July 2009 1 Paid N500,000 into a business bank account. Bought shop fittings N50,000 and a Van N150,000, both paid by cheque. Paid rent by cheque N10,000. 3 Bought goods for resale on credit from Mrs. James, N25,000. 5 Cash sales N10,000. 8 Paid wages in cash N2,000. 10 Paid insurance by cheque N1,500. 12 Cash sales N4,000. Paid wages in cash N2,000. 15 Goods returned to Mrs. James N4,500. 17 Paid Mrs. James by cheque N10,000. 19 Bought goods for resale on credit from Thomas J. N20,000. Cash sales N6,000. 22 Paid electricity bill in cash N1,000. 24 Bought stationery, paid in cash N2,500. Cash sales N5,000. 27 Paid Thomas J. N12,000 by cheque. Sold goods on credit to Femi Okolo N4,000. 29 Paid wages in cash N2,000.

Understanding Financial Accounting â&#x20AC;&#x201C; Series 1

Paid all but N5,000 of the cash into bank. Stock in hand, at cost price, was valued at N15,580.

6. Record the following transactions in the ledger of Jejelogba Aimasiko and then prepare a trial balance as at 31st January 2001: 2/1 Jejelogba introduced capital by paying cheque for N300,000 into the bank. 5/1 Gave a cheque for N200,000 to Dawole for shop premises value at N180,000 and shop fixtures and fittings valued at N20,000. 21/1 Paid Madam Ajoke N12,000 by cheque for equipment. 28/1 Bought a second-hand display cabinet for N4,000 paid by cheque. 29/1 Withdrew N5,000 from the bank for potential purchase. 7. Explain represents; (a) (b) (c) (d) (e)

what the closing balances on the following accounts Debit balance in the bank account. Debit balance in the cash account. Debit balance in a motor vehicles account. Debit balance in a customer’s account. Debit balance in a supplier’s account.

8. Enter the following transactions in the books of Tubonimi H, balance the accounts and extract the trial balance as at 31st May 2010. May 1. Started business with N130,000 in the bank and N5,000 cash. 2. Paid rent by cheque N3,500. Bought office equipment N25,000, paid by cheque. 3 Bought goods on credit from: Wale Peju N25,000; Ladi Prince N19,000. Bought goods for cash N1,200. 5 Sold goods for cash N3,800. 7 Sold goods on credit to Alfa Goje N8,200. 8 Returned goods to Wale Peju N2,000. Paid the following amounts in cash: Wages N500; Stationery N250; Insurance N150. 10 Sold goods for cash N5,200. 11 Paid N6,000 cash into the bank. 13 Paid by cheque: Wale Peju N15,000; Ladi Prince N15,000. 15 Paid wages in cash N500. Sold goods for cash N6,000. 18 Alfa Goje returned goods valued at N1,200 and paid the balance of his account by cheque. 20 Bought goods on credit from Wale Peju N20,000. 21 Sold goods for cash N6,500 and on credit to Ellis Kentu N16,500. 22 Paid wages in cash N500. 24 Ellis Kentu returned goods valued at N1,650.

Understanding Financial Accounting – Series 1