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FIRST TERM E-LEARNING NOTE

 

SUBJECT: FINANCIAL ACCOUNTING CLASS: SS3

 

SCHEME OF WORK

 

WEEKS  TOPIC

1 Partnership Accounts  

2   Final Accounts of a Partnership

3 – 4 Admission of Partners

5 – 6 Dissolution of Partnership

7 Introduction to Company Accounts

8 Final Accounts of Limited Liability Companies

ecolebooks.com

9 – 10 Issue of Shares and Debentures

 

 

WEEK ONE

PARTNERSHIP ACCOUNTS

  1. Partnership Agreement
  2. Capital and Current Account

INTRODUCTION

PARTNERSHIP can be defined as the relationship which exists between two or more persons who are carrying on business in common with a view to making profit. The rules governing the conduct of a partnership business is contained in the document known as the Deed of Partnership or Articles of Partnership or Partnership Agreement.

 

CONTENTS OF THE DEED OF PARTNERSHIP

The partnership Deed contains among others, the following.

  1. Name of the partnership
  2. Names of the partners
  3. Capital contribution
  4. Nature of the partnership business
  5. Profit and loss sharing ratio
  6. Interest on capital contribution
  7. Interest chargeable on drawings
  8. Duration of the partnership
  9. Rules regarding admission or retirement of a partner
  10. Rules on dissolution of the partnership

 

WHEN THERE IS NO AGREEMENT

Where there is no specific arrangement concerning the partnership agreement, section 24 of the Partnership Act 1890 laid down the rules that should be applied as follows:-

  1. No interest to be paid on capital contributed by each partner
  2. No partner should receive salary or remuneration.
  3. No interest is to be charged on drawings
  4. Profits and losses are to be shared equally.
  5. 5% interest should be allowed on any loans made by any partner in excess of the agreed capital contribution.

 

FIXED CAPITAL ACCOUNT

The capital accounts of partners are usually regarded as fixed so as to provide a permanent evidence of the initial amount with which the partnership is commenced. Where capital is regarded as fixed, a current account must be opened for each of the partners.

 

PARTNERS CURRENT ACCOUNT

The current account of each partner is prepared to show what such a partner is entitled to withdraw from the business at any point in time. It is credited with salary, commission, share of profits, interest on capital, and debited with drawings, interest on drawings, etc.

EXERCISE 1

Obi and Oba are partners in a firm of chartered accountants with initial capital contributions of N50,000 and N40,000 respectively which are to be kept fixed in the partnership books. You are required to show the cash account, partners’ capital accounts and balance sheet extracts.

SOLUTION

Image From EcoleBooks.comImage From EcoleBooks.com CASH ACCOUNT (EXTRACTS)

 N

 Capital:  Obi  50, 000

Oba  40, 000

Image From EcoleBooks.comImage From EcoleBooks.com PARTNERS CAPITAL ACCOUNT

 

Obi Oba  

NN

Cash A/c 50, 000  40, 000

 

Image From EcoleBooks.comImage From EcoleBooks.com BALANCE SHEET (EXTRACTS)

 

 Capital A/c N  N

Obi  50, 000

Oba  40, 000  Cash in hand 90, 000

FIXED CAPITAL ACCOUNT WITH CURRENT ACCOUNT

As illustrated above where capital account will remain fixed according to agreement, current account must be opened for each partner. It is debited with drawings, interest on drawings and credited with interest on capital, share of profit and partner’s salary.

ILLUSTRATION II

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comDR   FIXED CAPITAL ACCOUNT CR

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com  A  B A B

N N

Balance b/d  100, 000  20, 000

 

CURRENT ACCOUNT

Image From EcoleBooks.comDR CR

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com  A B  A B

Image From EcoleBooks.comImage From EcoleBooks.com  N N  N  N

Drawings 4, 000 3, 500   Balance B/f 3,000 6, 000

Interest on drawings   400 350   Int. on capital  10, 000 20, 000

  Share of profit   5, 000 6, 000

Balance c/d 14, 600  30, 150 Salary 1, 000   2, 000

Image From EcoleBooks.comImage From EcoleBooks.com  19, 000  34, 000 19, 000 34, 000

Image From EcoleBooks.comImage From EcoleBooks.com

However, there are instances where the partners in accordance with the partnership deed, maintain floating or fluctuating capital account.

 

FLOATING CAPITAL WITHOUT CURRENT ACCOUNT

This is simply a combination or mixture of the capital and current accounts of each partner in a capital account hence such a capital account is referred to as “floating” or “fluctuating” because the balance can increase or decrease at any time depending on how much is paid in and how much is withdrawn.

ILLUSTRATION 3

FLUCTUATING CAPITAL ACCOUNT

DR  CR

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com  A B   A   B

Image From EcoleBooks.com  N N  N  N

Drawings 4, 000 3, 500 Bal of capital b/f 100, 000 200, 000

Interest on drawings   400  350 Bal of current b/f 3, 000 6, 000

Balance c/d 114, 600 230,150 Interest in capital   10, 000 20, 000  Share of profit   5, 000 6, 000

Image From EcoleBooks.comImage From EcoleBooks.com  Salary 1, 000 2, 000

Image From EcoleBooks.comImage From EcoleBooks.com  119, 000 234, 000  119, 000  234, 000

 

EVALUATION

  1. Define Partnership
  2. List seven items that should be contained in a partnership deed.

 

READING ASSIGNMENT

Essential Financial Accounting by O.A. Longe Page 249-251.

 

WEEKEND ASSIGNMENT

  1. Where there is no partnership agreement the Partnership Act 1890 section _______ should be applied (a) 20 (b) 25 (c) 24 (d) 34
  2. Which of the following is not true where there is no laid down agreement for the partnership? (a) Profits and losses to be shared equally (b) No interest on drawings (c) No interest in capital (d) Members of the public can invest in the shares of the business.
  3. Which of the following increases the profit of a partnership? (a) Drawings (b) Interest on capital (c) Interest on drawings (d) Partnership salary
  4. Which of the following statements is NOT true? (a) When we keep fixed capital accounts for partners we open their current accounts (b) When losses are made they are to be shared by the partners (c) When we keep floating capital account no current account is kept (d) A partnership can exist forever.
  5. Which of the following can represent capital contributed by a partner to a partnership? (a) Cash only (b) Cheques only (c) Cash and cheques only (d) Cash, cheque and other assets.

 

THEORY

  1. List the rules approved by the Partnership Act 1890 to be applied where there is no partnership agreement.
  2. Prepare the capital and current accounts of the following partners:-

    N

    Capital accounts  Obi 50, 000 cr.

    Oba 20, 000 cr.

    Interest in capital 5% p.a.

    Salaries Obi 5, 000

    Oba 6, 000

    Interest on drawings 5%

    Drawings Obi 2, 000

    Oba 1, 500

    Current accounts balances b/f

    Obi 3, 000 cr.

    Oba 500 dr.

GENERAL EVALUATION

  1. Differentiate between accounting concepts and convention
  2. Explain four classifications of cost found in manufacturing accounts
  3. State five reasons why a trial balance may not balance
  4. State five limitations of the Receipts and Payments Account
  5. Explain five events that may lead to the dissolution of a partnership

 

 

WEEK TWO

FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS

i.  Profit & Loss Appropriation Account of a partnership

ii.  Balance Sheet of a Partnership

PROFIT AND LOSS APPROPRIATION ACCOUNT OF A PARTNERSHIP

This, as the name implies, is the account where either the profit or loss of the partnership business is shared between or among the partners as stipulated in the partnership agreement. The profit and loss appropriation account marks the beginning of the difference between the final accounts of a sole trader and that of a partnership. This is because while the sole trader does not share his profit with any-body, the profit of the partnership must be shared by the partners.

 

Some Terminologies in profit & Loss Appropriation Account of a partnership

1.  Drawings:- Partners can withdraw at regular or irregular intervals, from the sum they are entitled to at the end of the year. The total drawings is credited to the cash book and debited to current accounts.

2.  Interest on drawings:-This is the interest charged on drawings made by the partners. In order to discourage or reduce the amount of cash withdrawn, a fixed sum or % will be charged as interest. The interest on drawing will increase net profit and discourage drawings. It can be calculated on monthly basis.

 Interest is calculated from the date the amount is withdrawn to the end of the financial year.

3.  Partners’ Salary: – The agreement made provision for salary to be paid to active partners. It is desirable to compensate the active partner for the day-to-day running of the business.

4.  Interest on Capitals: Partners contribute different amounts as capital. In order to compensate the partners for capital contributed, interest on capital is allowed.

 

BALANCE SHEET OF A PARTNERSHIP BUSINESS

There is no significant difference between the balance sheet of a sole trader and that of a partnership. The only difference is on the display of capital accounts and current accounts of partners which will be illustrated in the formats below:-

 

Format 1

Trading, profit and loss of A and B Enterprises for the year ended 31st December 2006

N  N N  N

Opening stock  x Sales  x

Add Purchases x less Returns inwards  x  x

Add Carriage inwards x  

X

Less Returns Outwards x  x

Cost of goods available for sale  x

Less Closing stock  x

Cost of goods sold   x

Gross profit c/d  x  

X  x

Expenses

Wages and salaries  x Gross profit b/d x

Depreciation of assets x Discounts received x

Sundry expenses  x  

Bad debts x

Interest on loan  x

Discount allowed  x

Carriage outwards  x

Net profit c/d   x

X  X

Format 2

Profit and Loss Appropriation account A and B

 N  N N  N

Partners salary x Net profit b/d x

Interest on capital: A  x Interest on drawings:

B  x  x  A  x

Share of profit  B  x  x

 A (½ x) x

 B (½ x) x  x __

Image From EcoleBooks.comImage From EcoleBooks.com X x

 

Format 3

Balance sheet of A and B Enterprises as at 31st Dec 2006

Image From EcoleBooks.comImage From EcoleBooks.com  N  N  N  N

Capital accounts  Fixed assets

A x Furniture & fitting  x

B x  x  Less depreciation  x  x

Current accounts  Motor van x

A x

B x  x  Current assets

Current liabilities  Stock x

Loan  x Debtor x

Creditors x Bank x

Expenses owing x  x  Cash in hand x  x

X x

Example

O and D are in partnership sharing profit and loss in the ratio 3:2. The following is the Trial Balance as at 31 December 2005

DR CR

Capital   O  100,000

  D   50,000

Drawings: O   6,000

  : D   5,000

Purchases 120,000

Sales 200,000

Sales returns   4,000

Purchases returns 2,000

Stock at 1st January 2005 10,000

Carriage inwards 1,200

Salaries and wages 15,000

Bad debts   1,000

Office expenses 2,400

Loan-Okafor   14,000

Provision for doubtful debts   300

Discounts allowed 1,150

Discounts received 1,100

Building at cost 30,000

Machinery at cost 109,000

Cash at bank   8,000

Motor van at cost 50,000

Electricity   50

Provision for dep. on motor van   10,000

Debtors   20,000

Creditor   10,000

Bills payable   9,000

Bills receivable 17,500

Carriage outwards 500

Currents account: O 1,500

Image From EcoleBooks.comImage From EcoleBooks.com D 3,000

Image From EcoleBooks.comImage From EcoleBooks.com   400,900 400,900

 

Additional Information

i.  Stock at close N 15,000

ii.  Salaries and wages accrued N 1,000

iii.  Electricity prepaid N 20

iv.  Interest on capital at 10%

v.  Interest on drawings at 5%

vi.  Depreciate motor can 10% on cost

vii.  Partnership salary: O N 2,000

viii.  Provision for doubtful debts to be reduced to N 200

viiii.  O withdrew N 7,000 goods for own use

 

You are required to:

a.  Prepare the Trading, Profit and loss account for the year ended 31 Dec, 2006.

b.  Partners’ capital account

c.  Balance sheet as at 31st Dec. 2006

 

 

Solution

Trading, Profit and Loss of O and D for the year ended 31st December 2006.

N N N N

Opening stock 10,000 Sales 200,000

Add purchases  120,000  Less Returns inward  s   4,000

Add carriage inwards 1,200

121,200

Less Ret outwards   2,000

119,200

Less Goods withdrawn 7,000  112,200

Cost of Goods available for sale   122,200

Less closing stock 15,000

Cost of goods sold 107,200

Image From EcoleBooks.comImage From EcoleBooks.comGross profit   c/d 88,800

Image From EcoleBooks.com 196,000 196,000

Image From EcoleBooks.com

Expenses  Gross profit bld 88,800

Salaries and wages (wk 1) 16,000 Discount received 1,100

Decrease in provision for

Bad debts   1,000   bad debts (wk 3)   100  

Office expenses 2,400

Discount allowed 1,150

Electricity (wk 4) 30

Carriage outwards 500

Depreciation-motor can (wk 2)   5,000

Image From EcoleBooks.comNet profit c/d   63,920

Image From EcoleBooks.comImage From EcoleBooks.com 90,000 90,000

 

Image From EcoleBooks.comAppropriation account

N N N N

 Net profit  63,920

Partner salary – O 2,000 Interest on drawings:

Interest on capital:    O 300

 O 10,000  D 250 550

 D 5,000 15,000

Share of profit:

 D 18,988

Image From EcoleBooks.comImage From EcoleBooks.com  O 28,482  47,470

64,470 64,470

Image From EcoleBooks.comImage From EcoleBooks.com

Partnership Columnar current account

O D O D

N N N N

Drawings 6,000 5,000 Balance b/f 1,500 3,000

Int on drawings   300 250 Share of profit 28.482   18,988

Goods withdrawn   7,000 – Interest on capital 10,000   5,000

Balance c/d   28,692   21,738   Salary 2,000 -____

Image From EcoleBooks.comImage From EcoleBooks.com 41,982  26,988  41,982  26,988

Image From EcoleBooks.com

Bal b/d 28,692  21,738

Balance sheet as at 31st December 2006

  N N  N  NN

Capital: O 100,000

  D 50,000  150,000  Fixed assets  

Building 30,000 30,000

Current account: Machinery 109,100 109,100

O   28,682 Motor van 50,000 139,100

D   21,738   50,420  Less Depr. 15,000 35,000

174,100

Current liabilities Current assets

Loan Okafor 14,000  Stock 15,000

Creditors 10,000  Bank 8,000

Bills payable 9,000  Debtors  20,000

Wages owing 1,000  34,000 Less provision 200  19,800

Bills receivable   17,500

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com Electricity prepaid   20 60,320

234,420   234,420

Image From EcoleBooks.comImage From EcoleBooks.com

Workings

1.  Salaries and wages

 Amount paid 15,000

+ Owing 1,000

 Profit and loss  16,000

2.  Depreciation: Motor van

 10% x 50,000

 Profit and loss  5,000

 Accumulated depreciation = 10,000 + 5,000 = 15,000

3.  Provision for bad debts  4.  Electricity 50

 Old provision 300 Less Prepaid 20

 Less New provision 200  Profit and loss  30

 Profit and loss 100

5.  Interest on capital: 6.  Share of profit

 O : 10% x 100,000 O = 3/5 x 47,470 = 28,482

 = 10,000  D = 2/5 x 47,470 = 18,988

 D : 10% x 50,000

 = 5,000

7.  Interest on drawings:

 O : 5% x 6,000

= 300

 D : 5% x 5,000

= 250

EVALUATION

1.  Explain (a) appropriation account (b)  Balance sheet

2.  What is interest on capital?

 

READING ASSIGNMENT

Essential Financial Accounting by O. A. Longe, Page 249 – 258

 

WEEKEND ASSIGNMENT

Use the following information to answer questions 1 – 5. A, B, and C are in partnership sharing profits and losses in the ratio 3:2:1 respectively. Their capital accounts are A: N60,000 B. N40,000 and C: N 30,000. Interest on capital is agreed at 5% p.a. interest on drawings is also agreed at 5% p.a. Their drawings for the year are: A: N 6,000 B: N 4,000 and C: N 3,000. The profit for the year before appropriation is N 30,000 C is entitled to a partnership salary of N2,000 p.a

1.  What is the total of A and B’s interest on capital? (a) N4,000 (b) N3,000 (c) N5,000

(d) N10,000

2.  What is the total of B and C’s interest on drawing? (a) N350 (b) N250, (c) N450

(d) N400

3.  Total interest on the partners’ capital for the year is (a) N7,000 (b) N6,000 (c) N6,500 (d) N5,500

4.  Total credit entries in the appropriation account is (a) N550 (b) N30,000 (c) N35,500

(d) N30,550

5.  Which of the following is not debited to the profit and loss appropriation account?

(a) C’s salary (b) Partner’s interest on capital (c) Share of profit (d) Share of loss

 

THEORY

1.  Write short notes on (a) Interest on capital (b) Interest on drawing

2.  Give the double entries for the following in the final account of a partnership. (i) Interest on drawings N500 (ii) Partnership salary N3,000 (iii) Interest on capital N5,000 (iv) Share of profit N10,000

 

GENERAL EVALUATION

  1. List five items that are debited in the sales ledger control account
  2. List five items that are credited in the purchases ledger control account
  3. List five subsidiary books from which the sales ledger control is compiled
  4. State five contents of the Appropriation Account of a partnership
  5. List five characteristics of depreciable assets

 

 

WEEK THREE AND FOUR

ADMISSION OF PARTNERS, GOODWILL AND REVALUATION OF ASSETS

CONTENTS

  1. Admission of a new partner – meaning and reason for admission
  2. Goodwill admission of a new partner (a) meaning of goodwill (b) reasons for paying for goodwill (c) treatment of goodwill (d) example
  3. Revaluation of asset on admission of partnership (a) introduction (b) accounting entries (c) example

 

ADMISSION OF NEW PARTNERS

This occurs when a new partner is admitted into an existing partnership business. The reasons for such admission usually are: expiration of old partnership agreement, to inject in more fund, bring in a specialist, death of an old partner, etc.

However, it will be unfair to the existing partners for a new person to come in and take part in the established prosperous business without any reward to the old partners. This compensation to the old partners is goodwill.

 

GOODWILL ON ADMISSION OF A PARTNER

Definition of Goodwill: Goodwill is the benefit and advantage attached to an old established business as a result of its good name, efficient management good connection, good location, etc which make it to earn more profit.

 

REASONS FOR PAYMENT FOR GOODWILL

Thus, a partner of an existing business or an incoming partner will be induced to pay for goodwill because of:

  1. quality of goods and services (ii) favourable business location (iii) efficient and loyal work force (iv) efficient management (v) possession of monopoly power (vi) patents and trade marks (vii) successful research and development (viii) good public image, etc.

 

TREATMENT OF GOODWILL

Then goodwill will be brought into the business. This will be dealt with as follows:

  1. Raising and retaining Goodwill account in the books: Here, the value of goodwill is debited to goodwill account and credited to the capital accounts in the partners old profit and loss sharing ratio.

     

    Image From EcoleBooks.comImage From EcoleBooks.comAccounting Entries: Dr. Goodwill A/c

    Cr. Partners capital A/c

 

Any cash introduced by the new partner as capital, Dr Cash A/c; Cr. Capital A/c

 

  1. Goodwill is written off: If the business does not desire to retain the goodwill in the books, it will be necessary to write it off to the capital account of the partners in their NEW P&L sharing ratio

Image From EcoleBooks.comImage From EcoleBooks.comAccounting Entries – goodwill written off

Dr. Capital A/c; Cr. Goodwill A/c

 

EXAMPLE:  

A and B are Partners who share profit equally. They decide to admit C by agreement, goodwill valued at N60,000 is to be introduced into the books. C is required to provide capital equal to that of B after he has been credited with his share of goodwill. The new profit sharing ratio is to be 4:3:3 to A, B and C respectively.

The partner’s balance sheet before the admission of C is as follows

Image From EcoleBooks.comImage From EcoleBooks.comBalance sheet

Capital: A 80,000 Building 80,000

  B 40,000 Motor Vehicle 30,000

Furniture 40,000

Creditors 30,000 Cash 20,000  

Other liabilities  20,000  

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com 170,000 170,000

 

Prepare the following:

  1. Journal and Ledger entries for the admission of C if goodwill account is to be retained.
  2. The new balance sheet as a result of admission of C and the retention of goodwill account.
  3. Journal and Ledger entries for the admission of C if goodwill account is not retained.
  4. New balance sheet showing C admission and goodwill not retained.

 

Solution

  1. Journal entries – goodwill account retained

    JOURNAL

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com

Image From EcoleBooks.comDebit Credit

Good will Account 60,000

Capital Account – A 30,000

— B  30,000

Being goodwill introduced and shared based

on old profit sharing ratio

Image From EcoleBooks.comCash Account 70,000

Capital Account C 70,000

Image From EcoleBooks.comBeing capital contributed by C

 

Note: Since B’s capital was N40,000 before the goodwill of N30,000, then B’s capital will now be N70,000. Hence, C must contribute same amount as stated in the question.

Ledger – goodwill account retained

Image From EcoleBooks.comImage From EcoleBooks.comGoodwill Account

N N

Capital: A 30,000

  B 30,000 Bal c/d 60,000  

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com 60,000 60,000

Bal b/d 60,000

Capital Account

 

A

B

C

 

A

B

C

 

 

 

Bal c/d

N

 

 

Image From EcoleBooks.com110,000

Image From EcoleBooks.com110,000

N

 

 

Image From EcoleBooks.com70,000

70,000

N

 

 

Image From EcoleBooks.com70,000

70,000

 

Bal b/d

Cash

Goodwill

 

Bal b/d

N

80,000

Image From EcoleBooks.com30,000

110,000

110,000

N

40,000

Image From EcoleBooks.comImage From EcoleBooks.com30,000

70,000

70,000

N

 

70,000

70,000

70,000

 

Image From EcoleBooks.comImage From EcoleBooks.comCash Account

NN

Bal b/d 20,000

capital 70,000 Bal c/d 90,000  

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com 90,000 90,000

Bal b/d 90,000  

A, B and C

Balance Sheet

  

N

N

N

Goodwill

   

60,000

Fixed Assets

    

Building

  

80,000

 

Furniture

  

40,000

 

Motor vehicle

  

30,000

150,000

   

Image From EcoleBooks.com

Image From EcoleBooks.com210,000

Current asset

    

Cash

  

90,000

 

Current liabilities

    

Creditors

 

30,000

  

Other liabilities

 

20,000

Image From EcoleBooks.com50,000

 

Net current asset

 

Image From EcoleBooks.com

Image From EcoleBooks.com

40,000

    

Image From EcoleBooks.com250,000

 

Financed by

   

Image From EcoleBooks.com

Capital account

    

A

   

110,000

B

   

70,000

C

   

70,000

    

Image From EcoleBooks.com250,000

Image From EcoleBooks.comJournal entries – goodwill account not retained

 

JOURNAL

 

Debit

Credit

 

N

N

Goodwill Account

60,000

 

Capital – A

 

30,000

B

 

30,000

Being creation of goodwill as agreed on

  

Admission of C

  

Cash account

70,000

 

Capital Account – C

 

70,000

Being Capital contributed by C

  

Capital Account – A

24,000

 

B

18,000

 

C

18,000

 

Goodwill Account

 

60,000

Being goodwill written off using new

  

Profit sharing ratio

  

 

Image From EcoleBooks.comImage From EcoleBooks.comCash Account

N N

Bal b/d 20,000

Image From EcoleBooks.comImage From EcoleBooks.comC’s – Capital 70,000 Bal c/d 90,000  

Image From EcoleBooks.comImage From EcoleBooks.com 90,000 90,000

Bal b/d 90,000  

 

Image From EcoleBooks.comImage From EcoleBooks.comGoodwill Account

Capital Account – A 30,000  Capital Account – A 24,000

Capital Account – B 30,000  Capital Account – B 18,000

Capital Account – C 18,000

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com  60,000 60,000

Image From EcoleBooks.com

 

Capital Account

 

A

B

C

 

A

B

C

 

N

N

N

N

N

N

N

Goodwill

Bal c/d

24,000

86,000

Image From EcoleBooks.com

Image From EcoleBooks.com110,000

18,000

52,000

Image From EcoleBooks.com

70,000

18,000

52,000

Image From EcoleBooks.com

70,000

Bal b/d

Cash

Goodwill

 

Bal b/d

80,000

Image From EcoleBooks.com30,000

110,000

86,000

40,000

Image From EcoleBooks.comImage From EcoleBooks.com30,000

70,000

52,000

70,000

70,000

52,000

A, B and C

Balance Sheet

Capital Account:

 

Fixed Assets

 
 

N

 

N

A

86,000

Building

80,000

B

52,000

Furniture

40,000

C

Image From EcoleBooks.com52,000

Motor vehicle

Image From EcoleBooks.com30,000

 

190,000

 

150,000

Current liabilities

 

Current asset

 

Creditors

30,000

Cash

90,000

Other liabilities

20,000

  
 

Image From EcoleBooks.comImage From EcoleBooks.com240,000

 

Image From EcoleBooks.comImage From EcoleBooks.com240,000

 

EVALUATION

1.  Explain the term Goodwill.

2.  List five circumstances that can give rise to the valuation of goodwill in partnership accounts.

 

REVALUATION OF ASSETS ON ADMISSION OF A NEW PARTNER INTO A PARTNERSHIP

The assets of a partnership should be revalued to show their current value in any of the following circumstances: (i) admission of a partner (ii) retirement of a partner (iii) changes occur in P & L sharing ratio of partners.

 

ACCOUNTING ENTRIES

  1. Open a Revaluation A/c;
  1. Dr. Assets A/c; Cr. Revaluation A/c with increase in value of asset
  1. Cr. Assets A/c; Dr. Revaluation A/c with reduction in value of assets.
  1. Dr. Revaluation A/c; Cr. Liabilities A/c with increase in value of liabilities
  2. Cr. Revaluation A/c; Dr. liabilities with reduction in the value of liabilities
  3. If Goodwill is introduced

    Dr. Goodwill A/c; Cr Revaluation A/c with the amount of the Goodwill

  4. Transfer of profit on revaluation to the old partners capital account:

    Dr. Revaluation A/c in the old P & L sharing ratio

    Cr. Capital A/c in the P & L sharing ratio

  1. Transfer of loss on revaluation

     Cr. Revaluation A./c in the P & L sharing ratio

     Dr. Capital A/c in the P & L sharing ration

  2. Goodwill to be written off

     Cr. Goodwill A/c in the NEW P & L sharing ration

     Dr. Capital A/c in the P & L sharing ratio

In revaluation of assets, the following accounts will be prepared.

  1. Revaluation b. Capital accounts of partners c. Balance sheet

 

Example

S & O are in partnership, sharing profits and losses equally. On 1/1/1995 they decided to admit J, who would be entitled to one quarter of any future profits, the balance being shared equally between S and O.

The financial position of the business before the admission of J was a follows:-

Freehold premises: N75, 000, Fixtures and fittings: N26, 000, Stock in trade: N105, 000 Debtors: N45, 000, Cash in hand: N12, 640, Creditors: N58, 940.

Additional information:

  1. It is agreed to value and retain goodwill at N30,000, b. Revalue the other assets as follows: Freehold premise: N100,000, Fixtures and fittings: N24, 000, Stock: N103, 000, c. Provision for bad debts of N3, 000 is to be made d. Capital is contributed by S and O equally e. J is to bring N80, 000 into the business as capital. You are required to prepare: i. Revaluation account ii. Partners capital accounts in columnar form iii. Opening balance sheet of the new partnership of S, O and J.

 

Solution

The closing balance sheet of the partnership must be prepared to show the capital contributed by J and S.

Balance Sheet

Image From EcoleBooks.comImage From EcoleBooks.com N N

Capital: S 102,590

  O 102,590   205, 180 Freehold premises  75, 000

 Fixtures & fittings 26, 000

Creditors 58, 940 Stock 105, 480

 Debtors 45, 000

Image From EcoleBooks.comImage From EcoleBooks.com  Cash in hand 12, 640

  264, 120   264, 120

Image From EcoleBooks.comImage From EcoleBooks.comNote: The question states that capital is contributed equally by S and O.

Dr. Revaluation account   Cr

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Decrease invalue of assets Increase in value of asset

Fixture and fittings 2,000 Freehold premises 25,000

Stock 2,480 Goodwill  30,000

Provision for bad debts 3,000

Share of profit:

S  23,760

O  23,760  47,520  

Image From EcoleBooks.comImage From EcoleBooks.com55,000 55,000

 

Image From EcoleBooks.comDr  Partners’ capital accounts   Cr

Image From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.comImage From EcoleBooks.com S O J S O J

Image From EcoleBooks.com

Balance c/d  126,350  126,350 80, 000 Bal. b/f 102,590  102,590  –

  Cash   – – 80,000

Image From EcoleBooks.comImage From EcoleBooks.com Share of profit 23,760  23,760  –

Image From EcoleBooks.comImage From EcoleBooks.com 126,350  126,350 80,000 126,350  126,350 80,000  

 

Share of profit S (1/2 x 47,520)=23,760 O (1/2 x 47, 520)=23,760

 

 Balance Sheet as at 1st January, 1995

  

N

  

N

N

N

Capital:

   

Fixed Assets

   
 

S

126,350

 

Goodwill

 

30,000

 
 

O

126,350

 

Freehold Premises

 

100,000

 
 

J

80,000

332,700

Fixtures and fittings

 

24,000

154,000

    

Current Assets

   

Creditors

  

58,940

Stock

 

103,000

 
    

Debtors

45,000

  
    

Less Provision

3,000

42,000

 
    

Cash balance

 

92,640

237,640

   

391,640

   

391,640

Image From EcoleBooks.comImage From EcoleBooks.comEVALUTION

1.  What is a revaluation account?

2.  List five assets that may be revalued in partnership accounts.

 

READING ASSIGNMENT

Essential Financial Accounting by O.A. Longe, Pages 278-281

Financial Accounting with Ease by OnafowokanYombo, Pages 247-251

Simplified Bookkeeping & Accounting by F.L. Olatunji, Pages 303-307

 

Weekend Assignment

1.  The double entry for the N5,000 salary paid to partner A is (a) Dr. Appropriation  A/c N5,000, Cr A’s current A/c N5,000 (b) Dr. A’s Capital A/c N5,000,

 Cr Appropriation A/c N5,000 (c) Cr Revaluation A/c N5,000; Dr. Salary A/c N5,000

 (d) None of the above

2.  Goodwill is (a) Fixed Asset (b) Current Asset (c) Current Liability (d) Intangible  Asset

3.  Goodwill can be classified into (a) Liquid (b) tangible (c) intangible (d) Inherent  and purchased

4.  _________ A/c is credited with increase in values of assets (a) goodwill

  (b) capital (c) revaluation (d) current

5.  For a reduction in the value of an asset ___ the asset A/c and debit Revaluation  A/c (a) debit (b) credit (c) deduct (d) Add

 

Theory

1.  Explain clearly but briefly the terms goodwill and revaluation of assets. Why and  when are they necessary in accounting?

2.  Give the journal entries for each of the following transactions:

 (a)  Goodwill A/c of N50,00 is to be retained in the books of A& B who share profits and losses in ratio 2:1 respectively.

 (b)  A&B admitted C and the new P & L sharing ratio is 2:2:1 respectively. Write of the goodwill A/c in (a) above

 (c)  N4,000 provision for bad debt is to be made on revaluation of assets.

 (d)  Reduction in provision for bad debt of N7,000 on revaluation

 

GENERAL EVALUATION

  1. List six accounts found in the nominal ledger
  2. State four reasons for the need for a bank reconciliation
  3. Mention six items which must be contained in a partnership agreement
  4. Mention four features of not-for-profit making organizations
  5. Differentiate between adjustments and closing entries

 

 

WEEK FIVE AND SIX

DISSOLUTION OF PARTNERSHIP

CONTENT

  1. Meaning of partnership Dissolution
  2. Reasons for Dissolution
  3. Accounting entries
  4. Illustration

 

  1. Meaning: To dissolve a partnership means to bring an existing partnership business to an end. This entails selling the assets of the business, paying its creditors and other liabilities and sharing the balance of cash left between or among the partners in the agreed ratio.
  2. Reasons for Dissolution

    Any of the following reasons can lead to the dissolution of a partnership.

  3. Retirement of partner i.e a partner gives notice of his intention to retire from the partnership
  4. Admission of a new partner
  5. A partner giving notice to other partners of his opinion that the business be dissolved.
  6. Insanity of a partner i.e a partner’s problem of unsound mind.
  7. Bankruptcy or inability of a partner to pay his debt.
  8. Death of a partner
  9. A joint decision by the partners to dissolve the partnership
  10. If any time agreed upon expires
  11. The business can no longer make profit
  12. If it becomes illegal to continue to trade on the main object the business was established.

MAIN ACCOUNTS OPENED: They are:

  1. Cash/Bank A/c: To record the receipt of cash/cheque for assets disposed of, payments to creditors, expenses of dissolution and fund disbursements to the partners.
  2. Realization: To record book value and sales proceeds of assets sold, dissolution expenses, assets taken over by partner and the share of profit or loss on dissolution.
  3. Partner’s Capital A/C: To record share of profit or loss, goodwill, assets taken over, amount paid to partners or amount paid by a partner as a result of deficit, etc.

 

ACCOUNTING ENTRIES

  1. Book value of assets to be realized (excluding bank and cash)

Dr. realization A/c

Cr. Assets A/c.

b.  Assets sold

Dr. Cash or bank A/c

Cr. Realization A/c with cash proceeds

  1. Assets taken over by a partner

    Dr. The capital A/c of partner

    Cr. Realization A/c with the value of such an asset(s).

  2. Settlement of liabilities

    Dr. liability A/c

    Cr. Cash or bank A/c with amount involved

    1. Dissolution expenses

    Dr. Realization A/c

    Cr. Cash or Bank A/c

    1. Discount received from creditors

    Dr. Creditor(s) A/c

    Cr. Realization A/c

    1. Settlement of a creditor

    Dr. Creditor A/c

    Cr. Cash or Bank A/c

    1. Paying off a partner’s loan A/c

    Dr. loan A/c

    Cr. Cash or Bank A/c

    1. Profit on realization

    Dr. Realization a/c

    Cr. Partners A/c

    1. Loss on Realization

    Dr. Partners’ capital A/c

    Cr. Realization A/c

    1. Cash or Cheque paid in by a partner who has a debit balance

    Dr. cash or Bank A/c

    Cr. The capital a/c of partner concerned

    1. Final settlement of cash to partners

    Cr. Cash or Bank A/c

    Dr. each partner’s capital A/c

 

The double entry in item (L) above marks the end of the dissolution process, and the cash or bank balance must be the same as the amount required to be paid to each partner.

FORMATS

Realization A/c

Image From EcoleBooks.comImage From EcoleBooks.com N N

Book Value of Assets Amount from Sales

Business premises x  Business premises   x

Motor vehicle  x  Motor vehicle x

Furniture and fittings x  Furniture and fittings x

Plant & machinery x  Plant & machinery   x

Debtors  x  Debtors x

Stock x  Stock x

Dissolution expenses x  Discount received   x

 

Share of profit

A x  

B x  

C   _x_

  Xxx  xxx

 

Dr Cash Book  Cr

Image From EcoleBooks.comImage From EcoleBooks.com N N

Balance b/f  x  Dissolution cost x

Realization account  Creditors x

Plant and machinery x  Settlement of loan x

Debtors  x  Capital:

Motor Vehicle x K  x

Stock x O  x

Equipment x P _x_  x_

  XX  XX

 

 

Dr Partners Capital Accounts  Cr

 

A

B

C

 

A

B

C

 

N

N

N

 

N

N

N

Cash book

X

X

X

Balance b/f

X

X

X

    

Share pf profit

X

X

X

 

xx

xx

xx

 

xx

xx

xx

 

Ledger entries  

 

Dr. Plant and machinery account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Balance b/f x  Realization account  x

 

Dr. Motor vehicle account  Cr.

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Balance b/f x  Realization account  x

 

Dr. Furniture account  Cr.

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Balance b/f x  Realization account  x

 

Dr. Stock account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Balance b/f x  Realization account  x

 

Dr. Creditors account  Cr.

Image From EcoleBooks.comImage From EcoleBooks.com N  N

Bank X  Balance b/f x

 

Evaluation question

1.  What is the dissolution of partnership?

2.  Give five reasons why a partnership may be dissolved.

 

Example:Ronke and Yetunde are in partnership, sharing profits and losses 3:2 respectively. The balance sheet as at 31st December 2000 when it was dissolved appeared as follows:

Balance Sheet Assets

Image From EcoleBooks.comImage From EcoleBooks.com  Capital:

Ronke 5,500 Fixture and fittings 1,050

 Yetunde  3,500 Plant and machinery   650

 Creditors  1,650 Equipment 1,000

Debtors 900

Bank  7,050

Image From EcoleBooks.com 10,650   10,650

a.  The following assets were realized:

N

Furniture and fittings 1, 500

Plant and machinery 700

Equipment  1, 900

Debtors   850

b.  Dissolution expenses 250

c.  The creditors were settled with  1, 500

 

Required: Prepare the necessary accounts on dissolution

Solution

Dr  Realization account  Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Book value of assets Amount realized from sales

Furniture and fittings  1,050  Furniture and fitting 1,500

Plant and machinery   650  Plant and machinery 700

Equipment 1,000  Equipment 1,900

Debtors 900  Debtors 850

Dissolution expenses   250  Disc Rec. 150

Share of profit

Ronke (3/5 x 1,250)   750

Yetunde (2/5 x 1,250) 500  1,250

Image From EcoleBooks.comImage From EcoleBooks.com  5,100  5, 100

 

Discount on creditor =  N1, 650 – N1, 500 = N150  

 

Dr. Capital account Cr.

 

Ronke

Yetunde

 

Ronke

Yetunde

 

N

N

 

N

N

Cash

6, 250

4, 000

Balance b/f

5, 500

3, 500

   

Share of profit

750

500

 

6, 250

4, 000

 

6, 250

4, 000

Dr.  Creditor account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Cash  1,500  Balance b/f 1, 650

Discount 150

 1,650  1, 650

 

Image From EcoleBooks.comDr.  Cash book Cr.

Image From EcoleBooks.com  N  N

Balance b/f 7,050  Creditors 1,500

Furniture and fittings  1,500  Cost of dissolution   250

Equipment 1,900  Capital:

Debtors 850  Ronke  6,250

Plant and machinery   700  Yetunde  4,000  10,250

12,000  12,000

 

Dr.  Furniture and fittings account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Balance b/f 1,050  Realization 1,050

 

Dr.  Plant and machinery account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Balance b/f 650  Realization 650

 

Dr.  Equipment account  Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Balance b/f 1,000  Realization 1,000

 

Dr.  Debtor account Cr.

Image From EcoleBooks.comImage From EcoleBooks.com  N  N

Balance b/f 900  Realization 900  

 

EVALUATION QUESTION

1.  What is goodwill?

2.  Explain the terms revaluation and realization in partnership accounts

 

READING ASSIGNMENT

Simplified Bookkeeping and Accounting by F.L Olatunji, Page 315-324.

 

WEEKEND ASSIGNMENT

  1. The double entry for discount received from creditors on dissolution is (a) Cr. creditor A/c Dr. Cash A/c (b) Cr. Creditors A/c, Dr. Cash (c) Cr. realization A/c; Dr. Creditors (d) Dr. Bank, Cr. Capital A/c
  1. Loss on an asset realized is debited to realization A/c and credited to ________ A/c (a) Cash (b) Asset (c) Realization (d) Revaluation
  1. Assets taken over by partners on dissolution are credited to realization A/c and debited to __________ (a) asset A/c (b) cash A/c (c) Capital A/c (d) all of the above
  2. Discount allowed is debited to ____ A/c (a) capital (b) realization (c) current (d) P & L
  3. For goodwill on dissolution debit _________ A/c and credit _________ A/c respectively (a) cash and capital (b) goodwill and realization (c) realization and goodwill (d) capitasl and cash

 

THEORY

1.  Explain how the proceeds of assets realized is applied in partnership dissolution.

2.  Provide the double entries for the following on dissolution of the partnership of XYZ.

(a)  Discount allowed to debtors N500

(b)  Cars taken over by Z N50, 000

(c)  Share of loss by X N1000

(d)  Y brings cash to meet his deficit N5000

(e)  Discount received N2000

 

GENERAL EVALUATION

  1. State five differences between cash discount and trade discount
  2. Identify any seven prime books of account and highlight the uses of each of

    them where necessary

  3. List five advantages of using the imprest system to record petty cash transactions
  4. Explain the following types of errors (a) omission (b) principle (c) commission

    (d) original entry (e) complete reversal of entry (f) compensating error

  5. Explain how the following items are treated in Profit and Loss Account and Balance

    Sheet (a) provision for doubtful debts (b) depreciation on fixed assets (c) accrued

    income (d) accrued expenses (e) prepaid expenses

 

 

WEEK SEVEN

COMPANY ACCOUNTS

CONTENT

  1. Definition of Company
  2. Kinds of company
  3. Formation of Company & its statutory requirement

NOTE:

A Company is a business owned, managed, controlled and financed by association of people which possess legal entity with the usual motive of maximizing owners’ wealth.

KIND OF COMPANIES

There are three kinds of companies. They are:

  1. Company Limited by Share: This is a company whose owners liabilities is limited to the value of share subscribed in the company.
  2. Company Limited by Guarantee: These are companies whose owners liabilities is limited to the value of share subscribed in the company plus additional fund

they undertake to pay into the company in case of liquidation.

  1. Unlimited Company: This is a company whose liabilities of the owner are unlimited.

 

Characteristics of limited companies

  1. It is a separate legal entity.
  2. The liabilities of the owners are limited
  3. The company enjoys continuity.
  4. The company objective is to maximize owner’s wealth.

 

Types of Limited Companies

Basically there are two types of limited companies. They are:

  1. Private Limited Company: Section 21 of Companies and Allied Matters Act of 1990 defined it as a company which by its articles.
  2. Restricts the right to transfer its shares.
  3. Limits the number of its members to fifty.
  4. Prohibit invitation to subscribe for its shares.
  5. End the name of the company with the word ‘Limited’
  6. Public Limited Companies: These are companies which can invite the public to subscribe for its shares. The minimum number of shareholders to form the business is seven. There is no restriction on the maximum number of shareholders. The name of the company ends with the word “PLC” or public Limited liability Company.

 

Formation of Company and its statutory requirement

In the formation of a limited liability Company, the following procedures must be followed.

  1. Get the promoters who have the idea of a company and undertake to fulfill legal requirements of the company.
  2. Having done that, the following documents should be sent to Register of Companies Corporate Affairs Commission (C.A.C), Abuja.
    1. Articles of Association.
    2. Memorandum of Association.
    3. Statement of Nominal share capital.
    4. Directors list and their particulars.
    5. Statement to show that the Company will always obey the rules and regulation of the Commission as amended.
    6. Documents stamped duties paid.

    c.  If the Registrar of companies perused the documents mentioned above and is satisfied with them, he will issue the Certificate of Incorporation. Meaning that the company is registered.

 

DEFINITION OF TERMS

  1. Articles of Association: This is a document which states the internal regulations of limited company. It states the regulations which govern the internal management of the company affairs. It contains the following:
    1. The rights and responsibilities of shareholders.
    2. The duties and powers of directors.
    3. The company borrowing power.
    4. How directors and auditors can be appointed.
    5. The voting rights of the shareholders, e.t.c
  2. Memorandum of Association: This is a document which interacts the company with outside world. It contains the following:
    1. The name of the company ending with the words ‘Ltd’ or ‘Plc’.
    2. The address of the registered office of the company.
    3. The object clause of the company.
    4. A declaration that it is a limited liability company.
    5. The amount of authorized share capital.
  3. Prospectus: This is a document issued by limited companies, inviting the public to subscribe to it shares. Its contains the following:
  4. Brief history of the company.
  5. Chairman and director speech.
  6. Names of the directors and their particulars, etc.
  7. Certificate of Incorporation: This is a document which gives legal authority to the company to operate as a legal entity.

 

EVALUATION

1.  What is a Company?

2.  Mention and explain three types of companies.

 

Major accounts kept by company

  1. Trading profit & loss account.
  2. Appropriation account.
  3. Balance sheet.

 

Format of Trading Profit & Loss account

Trading Profit & Loss account for the year ended 31/12/9x

Opening Stock x Stock  x

Add purchases x Less return inward x

Less return outward  x  x Gross loss x

Cost of goods available x

Less closing stock x

Cost of sales x

Gross profit c/d x  

X x

Expenses    Gross profit b/d x

Wages & salaries x Income from quoted In.  x

Rent & Rate x Rent receivable x

Depreciation of assets x Discount received x

Directors remuneration x Other incomes x

Auditors remuneration x x

Advertising x

Hire of plant x

Debenture interest x

Insurance  x

Other expenses x

Net profit  x

X x

 

Appropriation account

 

Corporate tax x Balance b/f from last year x

General reserve x Net profit b/d  x

Revenue reserve x

Dividend interim x

Proposed dividend x

Goodwill written off x

Retained profit c/d x  

X x

Balance sheet format

Authorized capital N Fixed asset

 Cost  Dep.  NBN

Ordinary share @ N1 each x Land & build X  (x)  X

10% Preference Share @ N 1 each  x Furniture   x  (x)  x

X Machinery x  (x)  x

Issued share capital Premises   x  (x)  x

Ordinary share @ N 1 each x Goodwill x

10% preference share @ N 1 each  x investments

Reserves   Quoted  x

Share premium x Unquoted  x

General reserve x Current assets x

Retained profit x Stock x  

Capital redemption reserve  x Debtors  x

Long-term liabilities Cash x

10% Debenture x Bank x

Current liabilities Bill receivable x

Bill payable x  Prepayment  x

Income in advance  x  Accrued income  x  x

Corporate tax x  Preliminary expenses  x

Creditors x

Proposed dividend  x

Accruals x  x  

X  x

EVALUATION

  1. List five documents that are used in the formation of companies.
  2. State six contents of the Memorandum of Association.

 

READING ASSIGNMENT

Essential Financial Accounting pags 299-319.

 

WEEKEND ASSIGNMENT

  1. When a company can sue in its own name and right, we say it possesses (a) legal entity (b) legal jargons (c) legal portfolio (d) legal value
  2. The company whose liabilities of its owners are limited to the value of share bought in the company is called (a) limited by share (b) limited by guarantee

(c) unlimited by share (d) limited by decree

  1. The amount of capital a company is allowed to raised in the capital market is
    1. authorized capital (b) issue capital (c) called up capital (d) un-issued capital
  2. The name of private limited company ends with (a) Ltd (b) Plc (c) & co (d) Ent.
  3. The name of public limited company ends with (a) Corporation (b) Ltd (c) Plc (d) Authority

 

THEORY

  1. Mention four documents that must be sent to Corporate Affairs Commission before a company can be register.
  2. What is a prospectus.

 

GENERAL EVALUATION

  1. State five reasons why organizations separate their operations into different departments
  2. List six errors that will not affect the agreement of the trial balance
  3. Explain four classifications of cost found in the preparation of manufacturing accounts
  4. Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
  5. List five prime books of account used in recording financial transactions

 

 

WEEK EIGHT

THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES

The final accounts of limited liability companies comprises the following:

  1. Trading, Profit and Loss Account.
  2. Appropriation Account.
  3. Balance Sheet.

 

Format of Trading Profit & Loss account

Trading Profit & Loss account for the year ended 31/12/9x

Opening Stock x Stock  x

Add purchases x Less return inward x

Less return outward  x  x Gross loss x

Cost of goods available x

Less closing stock x

Cost of sales x

Gross profit c/d x  

X x

Expenses    Gross profit b/d x

Wages & salaries x Income from quoted In.  x

Rent & Rate x Rent receivable x

Depreciation of assets x Discount received x

Directors remuneration x Other incomes x

Auditors remuneration x x

Advertising x

Hire of plant x

Debenture interest x

Insurance  x

Other expenses x

Net profit  x

X x

 

 

Appropriation account  

Corporate tax x  Balance b/f from last year x

General reserve x  Net profit b/d  x

Revenue reserve x

Dividend interim x

Proposed dividend x

Goodwill written off x

Retained profit c/d x  

X x

Balance sheet format

Authorized capital N Fixed asset

 Cost  Dep.  NBN

Ordinary share @ N1 each x Land & build X  (x)  X

10% Preference Share @ N 1 each  x Furniture   x  (x)  x

X Machinery x  (x)  x

Issued share capital Premises   x  (x)  x

Ordinary share @ N 1 each x Goodwill x

10% preference share @ N 1 each  x investments

Reserves   Quoted  x

Share premium x Unquoted  x

General reserve x Current assets x

Retained profit x Stock x  

Capital redemption reserve  x Debtors  x

Long-term liabilities Cash x

10% Debenture x Bank x

Current liabilities Bill receivable x

Bill payable x  Prepayment  x

Income in advance  x  Accrued income  x  x

Corporate tax x  Preliminary expenses  x

Creditors x

Proposed dividend  x

Accruals x  x  

X  x

EVALUATION

1.  List five items that features in the Appropriation Account of a limited liability company.

2.  Explain the following terms:

 a.  Debentures

 b.  Authorised share capital

 c.  Issued capital

 d.  Proposed dividend

 e.  Revenue reserve

 

ILLUSTRATION

The following Trial Balance was extracted from the books of Johnson Nigeria Limited as at 31st December,1990.

 

Dr

Cr

Issued and fully paid 20,000 shares of ₦1 each

 

20,000

Share premium

 

10,000

General reserve

 

8,000

Profit and loss account

 

3,000

Stock 1/1/90

8,000

 

Salaries and wages

5,000

 

Discount

200

400

Carriage inwards

160

 

Loans

 

24,000

Interest on loan

1,000

 

Carriage outwards

560

 

Provision for bad depth

 

2,000

Preliminary expenses

12,000

 

Motor vehicle expenses

1,800

 

Director’s salaries

6,000

 

Repairs to premises

250

 

Rates

1,600

 

Premises at cost

20,000

 

Motor vehicle at cost

23,000

 

Plants and machinery cost

25,000

 

Purchases and sales

45,000

91,740

Provisions for depreciation

  

Plants and machinery

 

2,500

Debtors & creditors

12,390

8,000

Sundry expenses

3,500

 

Cash in hand

300

 

Cash in bank

4,000

 

Returns

240

 
 

170.000

170,000

 

Additional information

  • Stock at close ₦12,500
  • Expense unpaid: motor expenses – ₦ 20

Insurance – ₦ 450

Sundry experiences – ₦400

  • Prepaid expenses: Rate – ₦ 320

    Sundry expenses – ₦ 250

  • Provision for bad debts to be increased to – ₦2,800
  • Part of the premises is sublet at ₦2,400 per annum
  • Bad debts at 31st December, ₦600
  • Monthly salaries and wages bill ₦400
  • Loan interest is 5% per annum
  • Provide for depreciation on a straight line method: premises 2% ,plant & machinery 25%,motor vehicle 10%
  • Write off preliminary expenses
  • Transfer to general reserves ₦5,000 and ₦5,000 to revenue reserve.

Prepare :

  • Trading, Profit and Loss and Appropriation Account of the year ended 31st December ,1990
  • a Balance Sheet as at that date.

 

Solution:

Johnson Nigeria Limited

Trading,profit and loss for the year ended 31st December ,1990

  

 

Opening stock

 

8,000

Sales

91,740

Add purchases

45,000

 

Less return inward

(240)

Add carriage inwards

160

  

91,500

 

45,160

   

Less returns outward

(360)

44,800

  

Costs of goods available

 

52,800

  

Less closing stock

 

(12,500)

  

Cost of good sold

 

40,300

  

Gross profit c/d

 

51,200

  
  

91,500

 

91,500

Operational expenses

  

Gross profit b/d

51,200

Discount allowed

 

200

Discount received

400

Salaries and wages(400×12)

 

4,800

Rental income

2,400

Carriage outwards

 

560

  

Interest on loan(0.05×24,000)

 

1,200

  

Motor on vehicle exp.(1,800+200)

 

2,000

  

Director’s salaries

 

6,000

  

Repairs to premises

 

250

  

Rates (1,600-320)

 

1,280

  

Provision of depreciation

    

Premises (0.02×20,000)

 

400

  

Plant and machinery(0.25×25,000)

 

6,250

  

Motor vehicle (0.1×23,000)

 

2,300

  

Sundry expenses(3,500 + 400)=

    

3,900 – 250

 

3,650

  

Insurance

 

450

  

Bad debts

 

600

  

Provision for bad debts

 

800

  

Net profit c/d

 

23,260

  
  

26,260

 

26,260

General reserves

 

5,000

Net profit b/d

23,260

Revenue reserves

 

5,000

Profit brought forward

3,000

Preliminary expenses written off

 

12,000

  

Undistributed profit c/d

 

4,260

  
  

26,260

 

26,260

Balance sheet as at 31st December ,1990

Authorized share capital ₦

 

Fixed assets ₦

20,000 ordinary shares of ₦1 each

20,000

 

Cost

Dep.

NBC

Issued share capital

Premises

20.000

(400)

19,600

20,000 ordinary shares for ₦1 each

20,000

Motor vehicle

23,000

(2,300)

20,700

 

Plant and machinery

25,000

(8,750)

16,250

Reserves

Current Assets

General reserves(5000+8,000)

13,000

Cash in hand

300

Revenue reserves

5,000

Debtors (12,390 – 600)=

 

 

Share premium

10,000

 

11,790 – 2,800

8,990

Retained profit

4,260

Stock

12,500

Long term liabilities

 

Bank

4,000

Loans

24,000

Rent receivable

2,400

Current liabilities

 

Prepaid :

Rates

320

Creditors

8,000

 

Sundry expense

250

Loan interest owing

200

 

Wages and salaries

200

Motor expenses owing

200

   

Insurance accrued

450

   

Sundry expenses owing

400

   
 

85,510

  

85,510

 

 

Evaluation

  1. What is fixed assets and give five examples of fixed assets.
  1. Define intangible assets and mention three examples

 

Reading assignment

Essential Financial Accounting page 265-282

 

Weekend Assignment

  1. Net purchase in trading account is —————- (a)purchases –return outwards (b) purchases – return inward (c)purchases – carriage inwards (d) purchases – sales
  2. Net sales in trading account is ————– (a)purchases – sales (b)sales – return inwards (c)sales – return outwards (d) sales + purchases
  3. Working capital is ————— (a)current assets – current liabilities ( b) current liabilities – current assets (c) total current assets (d) current assets + stock
  4. Capital owned is ————— (a)current assets – total liabilities (b) total assets – total liabilities (c) total assets + total capital (d) current assets + stock
  5. Capital employed is ———– (a)total assets – current liabilities (b)total assets – total liabilities (c ) total liabilities + all assets (d) current assets + current liabilities

 

THEORY

  1. What is bonus issue?
  2. Enumerate five features of private limited company.

GENERAL EVALUATION

  1. List five methods of providing for depreciation of fixed assets.
  2. State five reasons for making provision for depreciation of fixed assets.
  3. List eight errors that will affect the agreement of the trial balance.
  4. Give five reasons for preparing departmental accounts.
  5. List and explain five classifications of the Ledger.

 

 

WEEK NINE AND TEN

ISSUE OF SHARES

CONTENT

  • Definition of shares
  • Classes of shares
  • Issue of shares
  • Explanation of issue of shares
  • Shares payable in full on application at par
  • Shares issued at a premium
  • Shares issued at a discount

 

Definition of shares

Shares can be defined as units of capital of ownership of a limited company. It is an ownership right in a company. A company cannot commence business until it raises capital by selling shares to the public for subscription.

 

CLASSES OF SHARES

There are three classes of shares in a limited liability company, they are:

  • Ordinary shares
  • Preference shares
  • Founder’s shares
  • ORDINARY SHARES: The shareholders of these are entitled to dividend after preference shareholders have settled. They are the owner’s of the company because they bear company risk and their dividend is not fixed. No wonder during the period of prosperity, they receive more dividends. They are often known as equities.
  • PREFERENCE SHARES: The shareholders of these shares are entitled to fixed dividend and they are treated preferentially. They received dividend before any other class of shares. A company can issue redeemable or irredeemable, participating or non-participating, cumulative or non- cumulative preference shares.
  • FOUNDER’S SHARE: These are also called deferred shares. These are shares issued to promoters of the company to compensate them for job well done. And they are entitled to dividend.

 

ISSUE OF SHARES

Shares can be issued in the following terms:

  • Shares issued at a discount
  • Shares issued at a premium
  • Shares issued at par

 

EXPLANATION OF ISSUE OF SHARES

  • Shares issued at a discount: Shares of limited liability companies are said to be issued at a discount, when the company share is issued at a price value less than the nominal value of the company share. For example if XYZ plc’s share nominal value is ₦1 but the company share is issued for subscription at 50k per share, the share is said to be issued at discount. The discount is 50k
  • Shares issued at a premium: shares of limited liability companies are said to be issued at a premium, when the company share is issued at a price value above the nominal value of the company’s share. For example if XYZ plc’s share nominal share value is ₦1 but the company share is issued for subscription at ₦2 per share, the share is said to be issued at a premium. The premium is ₦1.00
  • Shares issued at par: Shares of limited liability companies are said to be issued at par, when the company’s share is issued for subscription at the shares nominal value i.e issued at a price value equal to the nominal value. For example XYZ plc shares nominal nominal value is ₦1, and the company issue the share for subscription at ₦1 per share, the share is said to be issued at par.

 

EVALUATION

  • Define the term shares.
  • Explain the following: Cummulative and non cumulative preference share.

 

ISSUE OF SHARES

NOTE

Shares issued at par, payable in full on application.

 

ACCOUNTING ENTRIES:

On receipt of application of money

DEBIT: Bank Account

CREDIT: Application Account

On allotment:

Debit Application Account

Credit Ordinary Share CapitalAccount

Example: On the 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of ₦2 each at par Application together with total amount received for exactly 13,000 shares and the shares were allotted to the applicants. Show the journal entries and ledger accounts

 

Solution:

Journal

Bank Account

Application Account

 

Being money collected on application

Dr

26,000

 

 

 

 

26,000

Cr

 

26,000

 

 

 

 

26,000

Application Account

 

Share capital account

 

Allotment 13,000 ordinary shares at ₦2

Ledger accounts:

Application 26,000

 

Bank account

 

 

 

 

 

Application Account

 

Share capital 26,000

Bank 26,000

 

Application 26,000

 

Ordinary Share Capital Account

 

 

 

 

Shares issued at a premium payable in full on application: Share can be issued at apremium and paid in full application. This will necessitate the opening of share premium account. The value of the share premium is credited to the share premium account.

 

Accounting entries:

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Share Premium Account

Credit Ordinary Share Capital Account

 

Example 2: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 13,000 ordinary share.Show the journal entries and the ledger account.

Solution:

Journal

 

Dr

Cr

 

Bank account

Application account

Being ₦3 collected on 13,000 shares

 

Application account

Share premium account

Ordinary share capital account

Allotment of 13,000 ordinary shares at a premium

39,000

 

 

 

39,000

 

39,000

 

 

 

13,000

26,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ledger Accounts:

application 39,000

 

 

 

 

 

Bank Account

 

 

 

 

 

 

 

Share premium 13,000

Ordinary share capital 26,000

39,000

Bank 39,000

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39,000

Application Account

 

 

 

 

 

 

 

 

SharePremium Account

 

 

Application and allotment a/c 13,000

Ordinary Share Capital Account

 

Application 26,000

 

  • Share issued at a discount payable in full on application: Here, the share is issued at a discount. The difference is debited to discount account opened.

Accounting entries:

On receipt of application money:

Debit Bank Account

Credit Application Account

On allotment:

Debit Application Account

Credit Ordinary Share Capital Account

Example 3: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦1 each. Application money was received in full,show the journal and ledger account entries.

 

Solution:

Journal

 

Dr

Cr

 

Bank Account

Application Account

Being money collected on 13,000 shares

 

Application Account

Share discount account

Ordinary share capital account

Allotment of 13,000 shares at a discount

13,000

 

 

 

13,000

13,000

 

13,000

 

 

 

 

26,000

 

Ledger accounts:

Bank Account

Application 13,000

 

 

 

Application Account

Ordinary Share Capital 26,000

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26,000

Bank 13,000

Share discount 13,000

26,000

 

Ordinary Share Capital Account

 

Application 13,000

 

  • Under subscription: this is where fewer shares are applied for than available for sale e.g A company issued out 300 shares but only 250 shares were applied for.
  • Over subscription: This is when the number of shares applied for are more than that number actually offered for subscription.

 

Evaluation

  • What is meant by over-subscription
  • Explain the term under subscription

 

READING ASSIGNMENT

Essential Financial Accounting page 321-332

 

GENERAL EVALUATION

  1. What is the effect of understatement of closing stock on : (a) cost of sales (b) gross

    profit (c) net profit

  2. State five causes of a decline in the net profit of a business
  3. Differentiate between ”Discount Allowed” and ”Discount Received”
  4. State five characteristics of the imprest system of keeping petty cash records
  5. List four characteristics of each of the following (a) fixed assets (b) current assets

    (c) intangible assets

WEEKEND ASSIGNMENT

  1. When a company received application for shares fewer than available for sale, the share is said to be a) oversubscribed b) under-subscribed c)subscription at par (d) forfeited
  2. When a company received application for more than available shares for sales, the share is said to be (a) ever-subscribed (b) under- subscribed (c) over- subscribed (d) cancelled
  3. On shares issued at par on application and fully paid, the accounting entries on receipts of money are (a) debit bank and credit application (b)debit application and credit bank (c) debit premium and credit bank (d) debit ordinary shares credit bank
  4. Based on question 3 above ,the accounting entries on allotment of shares are (a) debit ordinary share capital account and credit application account (b)debit application account and credit ordinary shares capital account (c) debit premium and credit application account(d) debit ordinary shares credit bank
  5. A share issued below the nominal value is said to be issued at (a) discount (b) premium (c) at par (d) loss

 

THEORY

On 1st February 1989 ABC plc makes an issue of 15,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 15,000 shares.

Show:

a.  Journal entries

b.  Ledger accounts




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