BHM 107 General Accounting II

NATIONAL OPEN UNIVERSITY OF
NIGERIA
COURSE CODE:-BHM 107
COURSE TITLE:-
GENERAL ACCOUNTING II
BHM 107 GENERAL ACCOUNTING II
COURSE
GUIDE
BHM 107
GENERAL ACCOUNTING II
Course Writer/Developer Sani U. Gurowa

Dept. of Accounting
University of Abuja, Abuja
Programme Leader Dr. O. J. Onwe

National Open University of Nigeria
Course Coordinator S. O. Israel-Cookey

NATIONAL OPEN UNIVERSITY OF NIGERIA
ii

Headquarters
14/16 Ahmadu Bello Way
Victoria Island
Lagos
Abuja Office
No. 5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria
e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng
Published by
Printed 2009
ISBN: 978-058-906-6
All Rights Reserved
iii
CONTENTS PAGE
Introduction…………………………………………… 1
Course Contents……………………………………..... 1
Course Aims…………………………………………… 1
Course Objectives……………………………………… 2
Course Materials………………………………………. 2
Study Units……………………………………………. 3
Assignment …………………………………………… 4
Tutor-Marked Assignment……………………………. 4
Final Examination and Grading………………………. 4
Summary……………………………………………… 5
Introduction
BHM 107: General Accounting is a core course which carries two credit
units. It is prepared and made available to all the students who are taking
the Bachelor Degree in Entrepreneurial and Small Business
Management in the School of Business and Human Resources
Management. The course is a useful material to you in your academic
pursuit as well as in your workplace.
The course is made up of twenty one units, covering areas such as the
evolution of accounting, accounting equation and concept of double
entry book-keeping, book-keeping to the trial balance, cash book, bank
reconciliation, depreciation of fixed assets, trading account, profit and
loss account, balance sheet, accounts of non-trading organizations,
department accounts, consignment account, container accounts,
partnership accounts, and ratio analysis.
The course guide is meant to provide you with the necessary

information about the course, the nature of the materials you will be
using and how to make the best use of the materials towards ensuring
adequate success in your programme. Also included in this course guide
are information on how to make use of your time and information on
how to tackle the tutor-marked assignment questions. There will be
tutorial sessions during which your instructional facilitator will take you
through your difficult areas and at the same time rub minds with your
fellow learners.
Course Contents
The course consists of the evolution of accounting, accounting equation

and concept of double entry book-keeping, book-keeping to the trial
balance, cash book, bank reconciliation, depreciation of fixed assets,
trading account, profit and loss account, balance sheet, accounts of
iv
non-trading organizations, department accounts, consignment account,

container accounts, partnership accounts, and ratio analysis.
Course Aims
The main aim of the course is to expose you to the nature of evolution of
accounting, accounting equation and concept of double entry
book-keeping, book-keeping to the trial balance, cash book, bank
reconciliation, depreciation of fixed assets, trading account, profit and
loss account, balance sheet, accounts of non-trading organizations,
department accounts, consignment account, container accounts. The
course is also meant to introduce you to the treatment of partnership
accounts in the areas of preparation of partnership accounts, admission
of new partners, retirement of partners, and dissolution of partnership
business. Also included in the course is the ratio analysis.
The aims of the course will be achieved by:
2.0 Explaining the evolution of accounting;

3.0 Discussion accounting equation and concept of double entry book-
keeping;
4.0 Explaining and preparing book-keeping to the trial balance;
5.0 Describing and preparing the cash book;
6.0 Explaining and preparing bank reconciliation;
7.0 Explaining and working examples of depreciation of fixed assets;
8.0 Explaining and working examples of trading, profit and loss account,
trading account, and balance sheet;
9.0 Explaining and working examples of partnership accounts; and
10.0 Explaining and working examples of ratios.
Course Objectives
After completing this course, you should be able to:
5.0 analyze the evolution of accounting;

6.0 discuss the accounting equation and concept of double entry book-keeping;
7.0 explain and prepare the cash book and the book-keeping to the trial balance;
8.0 explain the nature of and prepare the bank reconciliation and treatment of
depreciation of fixed assts;
9.0 explain and prepare the final accounts and the balance sheet;
10.0operations;
11.0explain and prepare the partnership accounts; and
12.0discourse and prepare ratios from any given accounts records such as the
final accounts and balance sheet.
v
Course Materials
Major components of the course are:
1. Course Guide
2. Study Units
3. Textbooks
4. Assignment Guide
Study Units
There are twenty one units in this course, and they are divided into four
modules, which should be studied carefully. They are as follows:
Module 1
Unit 1 The Evolution of Accounting

Unit 2 The Accounting Equation and the Concept of Double
Entry Book-keeping
Unit 3 Book-keeping to the Trial Balance
Unit 4 The Cash Book
Unit 5 Bank Reconciliation
Module 2
Unit 1 Depreciation of Fixed Assets I

Unit 2 Depreciation of Fixed Assets II
Unit 3 The Trading Account
Unit 4 Profit and Loss Account
Unit 5 The Balance Sheet
Module 3
Unit 1 Accounts of Non-Trading Organizations

Unit 2 Departmental Accounts
Unit 3 Consignment Accounts
Unit 4 Container Accounts
Unit 5 Introduction to Partnership Accounts
Module 4
Unit 1 Admission of New Partners

Unit 2 Partnership Admission II
Unit 3 The Partnership Accounts (Retirement)
vi
Unit 4 Dissolution of Partnership

Unit 5 Ratio Analysis
Unit 6 Ratio Analysis (Potential and Actual Growth)
The first unit simply presents the general background on the evolution
of Accounting. The second unit is used to discuss the nature of double
entry system of bookkeeping. The next unit describes the cash book.
The next unit is used to espouse on the bank reconciliation. The next
two units are used to explain the nature of depreciation of the fixed
assets.
The next three units are used to explain the nature of the final accounts
and balance sheet. The next unit (11) discusses the nature of the
accounts of the non-trading organizations. The next unit is used for the
treatment of departmental accounts. The next two units (13 and 14) are
used for the treatment of the consignment and container accounts.
The next five units (15 to 19) are used for the treatment of partnership
accounts. The last two units (20 and 21) are used for the treatment of
ratio analysis.
Each study unit will take at least two hours, and it includes the
introduction, objectives, main content, self-assessment exercises,
conclusion and summary as well as references. The other aspect of the
course borders on the tutor-marked assignment questions, which you are
supposed to attempt and submit for your Tutor's grading.
There are also textbooks under the references and other resources for
further reading. They are meant to give you additional information if
only you can lay your hands on any of them. You are advised to practice
the self-assessment exercises and tutor-marked assignment questions for
greater understanding of the course. By so doing, the stated learning
objectives of the course will be achieved.
Assignment
There are many assignments on this course and you are expected to do
all of them by following the schedule prescribed for them in terms of
when to attempt them and submit same for grading by your tutor.
Tutor-Marked Assignment
In doing the tutor-marked assignment, you are to apply your transfer

knowledge and what you have learnt in the contents of the study units.
These assignments which are many in number are expected to be turned
vii
in to your Tutor for grading. They constitute 30% of the total score for
the course.
Final Written Examination
At the end of the course, you will write the final examination. It will
attract the remaining 70%. This makes the total final score to be 100%.
Summary
The course, BHM 107: General Accounting exposes you to the nature of
evolution of accounting, accounting equation and concept of double
entry book-keeping, and preparation of accounts for business
transactions, from the journal entries to ledger, trial balance, final
accounts and the balance sheet. It is also exposes you to the treatment of
bank reconciliation, partnership accounts and ratio analysis, among
others.
On the successful completion of the course, you would have been armed
with the materials necessary for efficient and effective handling of
simple business transactions and the treatment of the accounting records
of the operations of the non-trading organizations.
viii
Course Code BHM 107
Course Title General Accounting II
Course Writer/Developer Sani U. Gurowa

Dept. of Accounting
University of Abuja, Abuja
Programme Leader Dr. O. J. Onwe

Course Coordinator S. O. Israel-Cookey

NATIONAL OPEN UNIVERSITY OF NIGERIA
ix

Headquarters
14/16 Ahmadu Bello Way
Victoria Island
Lagos
Abuja Office
No. 5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria
e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng
Published by
Printed 2009
ISBN: 978-058-906-6
All Rights Reserved
x
CONTENTS PAGE
Module 1 ……………………………………………… 1
Unit 1 The Evolution of Accounting……………. 1

Unit 2 The Accounting Equation and the Concept
of Double Entry Book-keeping…………… 9
Unit 3 Book-keeping to the Trial Balance……….. 15
Unit 4 The Cash Book…………………………… 24
Unit 5 Bank Reconciliation Statement…………… 29
Module 2 ………………………………………………… 37
Unit 1 Depreciation of Fixed Assets I……………. 37

Unit 2 Depreciation of Fixed Assets II…………… 47
Unit 3 The Trading Account……………………… 57
Unit 4 Profit and Loss Account…………………… 61
Unit 5 The Balance Sheet…………………………. 66
Module 3 ………………………………………………… 73
Unit 1 Accounts of Non-Profit Organizations…….. 73

Unit 2 Departmental Accounts……………………. 82
Unit 3 Consignment Accounts……………………. 89
Unit 4 Container Accounts………………………... 97
Unit 5 Introduction to Partnership Accounts……… 104
Module 4 ………………………………………………… 110
Unit 1 Admission of New Partners…………………. 110

Unit 2 Partnership Admission II…………………….. 118
Unit 3 The Partnership Account (Retirement)………. 127
Unit 4 Dissolution of Partnership…………………… 143
Unit 5 Ratio Analysis……………………………...... 147
Unit 6 Ratio Analysis (Potential and Actual Growth).. 154
xi
MODULE 1
Unit 1 The Evolution of Accounting

Unit 2 The Accounting Equation and the Concept of Double
Entry Book-keeping
Unit 3 Book-keeping to the Trial Balance
Unit 4 The Cash Book
Unit 5 Bank Reconciliation Statement
UNIT 1 THE EVOLUTION OF ACCOUNTING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Evolution of Accounting
3.2 Evolution of Accountability
3.3 Meaning of Modern Accounting
3.4 Accounting Concepts
3.5 Accounting System
3.6 The Double Entry Principle
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings
1.0 INTRODUCTION
Historically, the practice of accounting is said to have evolved from the

old practice of the Roman merchants who used to send trade delegations
around the world with each trade delegations tendering accounts at the
end of each trips. In this unit, we shall study the historical development
of accounting.
2.0 OBJECTIVES
At the end of this unit, you should be able to:
•explain the evolution of accounting

•describe the basic concepts of accounting
•explain the meaning of the modern accounting.
1
3.0 MAIN CONTENT
3.1 The Evolution of Accounting
3.2 Evolution of Accountability
Accounting evolved over a long period of time. It dates back to between

2050 BC when King Hammurabi of Babylon promulgated the earlier
known set of laws dealing with methods by which owners of wealth
made their workers (stewards) accountable for the utilization of assets
entrusted to their care. Eleven of the laws dealt with the relations
between the cultivator of the land and the owner from whom he rented
it, eight with problems connected with loans, at least with agency
problems, seven with deposit for safe custody, and one with a form of
partnership.
In the classical Athens, there was an arrangement whereby meritocracies

held the offices of state and the people were made the sovereign body by
having the power to call to account the officials. The arrangement
provided that all public officials be subjected to monthly interim audits
and an annual audit. The annual audit was divided into two parts – the
first was intended to examine the officials’ handling of public funds and
the second part was a review procedure intended to give the members of
the public the opportunity to make open complaints about any aspect of
the officials’ administration. The officials who passed these audit tests
were usually honoured.
The Roman governments of the second and third centuries BC practice

of electing consuls on a yearly basis at the end of which they were
obliged to account for their actions to the people. The people (the
citizens) have the singular power of the conferment of honours and the
impositions of punishments on officials. The idea of accounting to the
people at the end of every year may be the beginning of the annual
preparation of final accounts by companies today.
In medieval England, the Normandy dynasty established and developed

an efficient system of royal representatives centered on the countries
who were held accountable by summons to appear for judicial audit
before the Exchequer. The Exchequer was a formidable collection of the
king's commissioners made up of great men in their respective field of
endeavour. After a sheriff had been sent to a country, he was charged
with the regular revenue and any other debts and paying these dues to
the king. Under this system the sheriff had to account for his
performance as well as for the debts of the people of the country to the
Exchequer.
2
During the so-called voyages of discovery in Europe, many people were

called upon to contribute to adventures, which were aimed at trading and
profit. Since not every contributor could go on the voyage, the need to
prepare accounting statements showing the revenue and cost of the
voyage and its consequent profits or loss became essential. At first, at
the end of every voyage the contributors would share all the revenue in
accordance with their capital contribution ratio but soon the adventurers
discovered that to finance adventures, a single basis was not as
economical as to finance them on permanent basis. Then contribution
become shares which could be sold in the highly organized London
market in company stocks and shares. This provided permanent
financing means of the adventures. This was the period when the need
for accounts extend from the state to private concerns.
However, the formation of limited liability companies and their growth

introduced the complex accounting and auditing procedures.
Management became separated from ownership when companies grew
in size and in some cases ownership became more spread so the need for
the hired managers to render stewardship accounts to the owners also
became necessary. Modern development in accounting almost follow
the direction of the development of business. When partnership
business started, partnership accounts had to be introduced; when
companies started going bankrupt or reorganizing and winding-up,
accountants had to introduce reconstruction and smaller business
thereby creating a holding and subsidiary relationships group account
was introduced to deal with the problem.
It is generally believed that Pacioli, an Italian clergyman and

mathematician, is the father of modern accounting. This is because he
introduced the ‘double-entry system’ in 1494. The double-entry
principle states that for any debit entry there must be a giver. Another
person that contributed immensely to the development of accounting in
the Middle Ages is Simon Steven, also an Italian, who was the first to
devised system of balance sheet under the name of statement of affairs
in the 1530’s.
3.2 Meaning of Modern Accounting
The American Institute of Certified Public Accountants defines

accounting as the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events
which are in part in least of a financial character, and interpreting the
result thereof. The American Accounting Association later defines
accounting as the process of identifying, measuring and communicating
economic information to permit informed judgments and decision by
3
users of the information. And in Nigeria, the users of the information

define it as the process of identifying, measuring and communicating
economic and financial information to permit informed judgment and
decision.
Generally speaking, a system is set of elements, which operate together

in order to obtain a goal. Accounting as an information system consists
of three elements - input, processing of the input, and the output.
Accounting information system unites together Information system of
other operational areas of management such as marketing, production,
personnel, and research and development because information produced
by these operational areas will ultimately be expressed in financial terms
for planning strategy.
Accounting occupies a central place in the management of modern

business. Its ability to express and communicate large volume of
information in a compact form has been so recognized in recent times
that some authorities have begun to refer to it as true language of
business.
Being an il1formation system, accounting must then face the problem of

precisely defining the users for who the information is being provided,
their needs and how best to serve the needs. Accounting has a difficult
task in an attempt to communicate information. In the first place, the
quantitative dates which are the input of an accounting system must be
converted into an understandable message in order for accounting to
fulfil its function, and in the second, there is the problem in trying to
satisfy the wide variety of interested parties who require different types
of information for business decisions. The interested parties include the
owners (shareholders ill the case of companies and partners in the case
of partnership business), creditors, management, government
employees, financial analysts, prospective investors, auditors,
competitors and those interested in mergers, amalgamations and
takeovers. As an attempt to solve the communication problems, the field
of accounting has developed along two lines-financial Accounting and
Managerial Accounting.
The purpose of financial accounting is to communicate relevant

information to external parties as an aid in decision making. External
parties encompass anyone who is not directly involved in the day-to-day
running of the activities of the concern. This goes on to explain that with
the exception of management, all interested parties mentioned earlier are
external parties to the business. Financial accounting information is
provided to users by means of profit and loss account, the balance sheet
and funds-flow statement with explanations by supporting schedules.
4
The task of management accounting, on the other hand, is to

communicate relevant information to internal parties as an aid in
decision-making. Internal parties encompass anyone within an
organization's system who is directly involved in the day-to-day
operating activities of that organization. Management, then, is the major
internal group that utilizes the output of the managerial accounting.
3.3 Accounting Concepts
Accounting concepts embody the rules and standard guiding the

financial reporting of all enterprises. These concepts may be described
as the broad rules adopted by the accounting profession (through the
various statements of standard accounting practice SSAPS, in the case
of the United Kingdom, Financial Accounting Standards, FASS in the
USA and Statements of Accounting Standards, SASS in Nigeria) as
guides in measuring, recording and reporting the financial affairs and
activities of a business to its owners and other interested parties.
Accounting concepts develop originally on the basis of "experience,
reason, custom, usage and practical necessity".
The accounting concepts are neither laws of nature nor commandments

but mere consensus of opinions among accountants. In the United
Kingdom, they derive their modern important backing mainly from
SSAP 2 issued in 1971 under the broad heading of disclosure of
accounting policies. The standard statement gave formal recognition to
four main accounting concepts-the Going Concern Concept, the
Accruals Concept, the Prudence Concept and Consistency Concept. The
publication of the SSAP2 was a formal attempt to give a theoretical
basis to traditional accounting practices since it treats concepts as the
basic assumptions about the economic setting in which accounting
operates.
The Going Concern assumes that a business once formed, will continue
in operational existence for the foreseeable future. With such a
recognition of perpetual existence, accounting comes face to face with
the problem of breaking such a continuous period into discrete short
period for income determination. Since the determination of such
income is dependent on what values are assigned to the assets of the
enterprise the problem of income determination cannot be divorced from
asset valuation. However, the values assigned to assets for periodic
reports do not constitute any attempt to show their intrinsic worth or
even realize values but only their written down values.
The Accruals Concept assumes that revenues and costs should be

recognized, as they are earned or incurred and not just when cash is
5
received or paid. It also assumes that revenue and expenditure should be

matched so far as their relationship can be established or justifiably
assumed, that is, expenses and expired costs should be deducted from
the revenue they helped to generate before reporting the residual amount
either as net income or loss for the period. A good example of expired
costs is the yearly depreciation of fixed assets.
The Prudence Concept is the accounting rule that "revenue and profits
should not be anticipated but should only be recognized for inclusion in
the profit and loss account when realized in the form of either cash or
other assets, the ultimate cash realization of which can be assessed with
reasonable certainty. It also states that provision should be made for all
known liabilities and losses when the amounts of these are known with
certainty or are the best estimates in the light of the available
information. This concept (formerly called the principle of
conservatism) also states that the accountant should resolve uncertainties
with a conservative attitude especially as they relate to the determination
of net income and the valuation of assets. The conservative lead to the
two very important principles of accounting – the principles of
objectivity and materiality.
The objectivity principle requires that, as much as possible, personal

biases should be removed from all reported financial information and
that such reports only be based on information that can be supported and
verified by documentation. On the other hand, materiality principle is
the accounting rule that all transactions and events involving
insignificant amounts be treated with full regards in financial report. The
objectives test of materiality is whether the disclosure or non-disclosure
of an item would influence or affect the opinion fom1ed of the accounts
by a reasonable person.
And the consistency concept is the accounting rule requiring the

application of the same selected accounting method or procedure, period
after period. The concept allows management to choose one method or
procedure in areas where choice is recognized such as provision for
depreciation, valuation of stocks and the dividing line between capital
and revenue expenditure. However, once a method is chosen it must be
consistently applied in order to produce financial information that could
be meaningfully compared overtime. This concept has received a fair
amount of legal backing in the sense that companies are required to
disclose their accounting policies.
Another very important concept, which was n~ recognized by the SSAP,

is the entity concept even though accountants and lawyers are
religiously applying it. This concept was well defined in the case of
Salomon V s. Salomon limited 1897 A.C.22. In the case, Mr. Salomon
6
incorporated his private business into a company with a share capital of

20,007 ordinary shares of £ 1 each. He held 20,001 of the shares and the
remaining six shares were distributed among his family members. He
gave personal debenture of £10,000 to the business secured on the assets
of the company. The company debenture of £ 1 0,000 to the business
secured on the assets of the company. The company also obtained a
floating loan of over £7,000 from outside source. The company ran into
trouble and its assets realized a little over £6,000. Despite all the protests
by the other creditors, the court held that Mr. Salomon whose debenture
was secured on the company's Salomon is not the same as Salmon
limited and therefore should be treated as a separate entity. This is the
concept that gives legitimacy to crediting capital account in the business
financing books because capital is regarded as a loan to the company
and hence a liability of the business entity from its owners.
3.4 Accounting System
Accounting has been traditionally regarded as the process of recording,

classifying, summarizing and reporting business transactions. In the
1960's when the system revolution started taking place, the systems
concept had to be introduced to accounting. The American Accounting
Associating simply summarized this development by stating that
essentially, accounting is an information system. A system in general
has been defined as a group of elements, either physical or non-physical
in nature that exhibits a set of interrelations among themselves and
interacts together toward one or more goals, objectives or ends.
Accounting system is completely financial and quantifiable in nature. A
typical accounting Information system contains only three elements –
the inputs which result directly from business events, processing of the
inputs to make them meaningful and outputs which provide information
to decision makers.
Accounting system differs from country to country on the basis of the

differences in the technology employed and even from organizations
depending on the needs of each organization. The systems are no doubt
designed to serve the organizations in which they are employed.
Accounting systems should be designed in such a way that they fulfil
certain objectives. The American Accounting Association maintains that
such objectives are to provide information for the purpose of making
decision concerning the use of limited resources, including the
identification of crucial decision areas, and determination of objectives
and goals; effectively directing and controlling an organization's human
and materials resources; maintaining and reporting on the custodianship
of resources; and of facilitating social functions and controls. And
finally, counting system may be loosely described as a collection of
7
business forms, financial record, procedures and policies used to

transform economic data into useful information.
3.5 The Double Entry Principle
Among the oldest known and indisputable principles of accounting is

the Double-Entry principle. The principle states that for every debit
entry) there must be a corresponding credit entry, which in everyday
English means that for every receiver, there must be a giver. The
receiver is always regarded as the debtor while the giver is regarded as
the creditor under this principle. As far as double entry principle is
concerned, there must always be two parties to a transaction so when a
transaction's accounting entries are to be made they must appear both at
the debit and credit side for the creditor or giver.
In the case of accrued transactions such as credit sales and purchase, a

debtor is defined as one who is owing; a creditor is defined as one to
whom something in being owed. In the same vein, what a business owns
are its assets while what it owes and is liable to pay its liabilities.
SELF ASSESSMENT EXERCISE
1. Define the term accounting

2. What are the elements of the accounting system?
4.0 CONCLUSION
In this unit, the Evolution of accounting from the days of King
Hammuarbi of Babylon to present day of detailed information disclosure
period was highlighted. The various accounting systems and concept
were also discussed.
5.0 SUMMARY
Accounting systems differ from country to country on the basis of the
differences in the technology employed, but the accounting concept is a
unifying factor were accountants all over the world accept the concept
dogmatically. The issuing of standards also help in uniform reporting
accounting information worldwide.
6.0 TUTOR-MARKED ASSIGNMENT

List and discuss the accounting concepts or conventions.
7.0 REFERENCES/FURTHER READINGS

Birds (1973). Standard in Financial Reporting. (Accountancy Age
Book).
8
Damagum, Y. M. (2003). Introduction to Financial Accounting.

Malthouse Press Ltd.
UNIT 2 THE ACCOUNTING EQUATION AND THE
CONCEPT OF DOUBLE ENTRY BOOK-
KEEPING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 The Accounting Equation and the Concept of Double Entry
Book-Keeping
3.1 The Accounting Equation
3.2 Double Entry Book-Keeping
3.3 Double Entry Principle
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In accounting, there is the general belief that the assets possessed by a

business at any point in time must equal the amount of capital injected
into the business. Subsequently, as the business grows older some other
resources in the form liabilities may be injected therein. However, there
still has to be equality between the total assets on one hand and the
liabilities plus the capital on the other.
The desire to keep the accounting equation balanced at every point in

time is what gave rise to the concept of double entry book-keeping.
Thus, what ever goes into one account must equally go into the other
pair of account so as to maintain the desired balance.
2.0 OBJECTIVES
By the end of the unit, you should able to:
•explain the different versions of the accounting equation

•explain the meaning of concepts like assets, liabilities, capital, etc
•describe the rational behind the double entry book-keeping and the
procedures followed.
9
3.0 MAIN CONTENT
3.1 The Accounting Equation
The simplest form of the equation provides that:
A=C
Where:
A = Assets
C = Capital
Putting it in practiced terms, assuming a sole trader starts a business

with an initial capital of N100,000 cash, our A = C hold thus:
Asset (cash) = Capital

N100,000 N100,000
Let us assume further that the trader used N20,000 of the each to buy
furniture. In this case, the equation still has to balance i.e.
Assets
Cash + Furniture = Capital

N80,000 + N20,000 = N100,000
With the introduction of the liabilities, the equation changes to:
A=C+L
Where:
A = Assets
C = Capital, and
L = Liabilities
So, assuming we continue with our earlier example of the sole trader,
should he obtain a Bank loan of N120,000 to finance the business
further, the equation A = C + L, holds as follows:
Cash + Furniture + Bank Bal. = Capital + Loan

N80,000 + N20,000 + N120,000 = N100,000 + N120,000
Or
N220,000 = N200,000
10
Introduction of Profits and Losses

Where a business generates profits or incurs losses, the adjustment to the
equation will be as under:
In cases of profit,
A=C+L+P
Where:
A = Assets
C = Capital
P = Profits
In case of loss,
A = C + L1 L2
Where:
A = Assets
C = Capital
L1 = Liabilities
L2 = Losses incurred
The underlying assumption is that, the amount of profit generated must

have led to an addition to the firm's assets, while a loss must have the
amount of assets also.
3.2 Double Entry Book-Keeping
Book-keeping in the accounting sense simple refers to the actual

recording of transactions in various accounting records in a manner that
shows the history of all the transactions of a firm and it's assets and
liabilities.
What all Book-keepers should know
In order to achieve proper book keeping, it is necessary that:
(i) All necessary source documents supporting various transactions

e.g. receipts, vouchers, bills etc. are made available so as to
support all entries that the book-keepers pass.
(ii) The book-keeper is familiar with the accounting classification of

various accounts i.e. Assets, liabilities, income, expenses etc.
11
(iii) The book-keeper is also capable of interpreting each transaction

correctly, i.e. to know precisely whether a transaction leads to
increase or decrease in assets, liabilities, income expenses etc.
(iv) The numerical ability of the book-keeper must not be in doubt to

be able to sum figures and extract balance.
Classification of Accounts
For proper identification and appropriate documentation of transactions,

accounts are often classified into Real, Nominal, and Personal accounts.
Accounts used to record tangible assets that are held for a long duration
e.g. fixed are referred to as Real Account.
The accounts used in recording transactions that are temporary, that is,
terminated at the end of particular accounting periods are referred to as
nominal accounts. Example includes all revenue and expenditure
accounts.
3.3 Double Entry Principle
The basic underlying assumption of the double entry principle is that

every transaction has that effects on the resources and liabilities of an
entity, and therefore, two entries must be passed to account for the
duality of each transaction.
Assuming Mr. A. invests N10,000 as his take-off capital. The

transaction can be interpreted thus:
i. An asset (cash) has increased, you debit the account.

ii. A liability (capital) was introduced, you credit the account.
The Golden Rules
Once a transaction is interpreted correctly, the book-keeper applies the

golden rules to pass the double entry.
These golden rules are summarized below:
Type of Account Entry Purpose
1. Assets Debit Increase in Assets

Credit Decrease in Assets
2. Liabilities Debit Decrease in Liabilities

Credit Increase in Liabilities
12
3. Income Debit Decrease in Income

Credit Increase in Income
4. Expenses Debit Increase in Expenses

Credit Decrease in Expenses
5. Capital Debit Decrease in Capital

Credit Increase in Capital
1. What is accounting equation?

2. Mal. Bello started business with N50,000 cash, motor vehicle
worth N30,000, and Bank overdraft of N15,000.
(a) The capital of the business must have been N---------

(b) Use the above figures to prove the equation that:
Assets = capital + liabilities + profit
4.0 CONCLUSION
In this unit, we have analysed the golden rule of double entry, once a
transaction is interpreted correctly the bookkeeper applies the golden
rules to pass the double entry.
5.0 SUMMARY
In this unit, we considered the accounting equation in which accountant

try equates the Assets of a firm to its capital or to capital plus liabilities.
We also know the golden rules that entries are used to show increase in
assets or decreases in liabilities and capital.
Al Yasa Ltd. Started business with a sum of N200,000 in a bank

account, subsequently, the following transactions took place:
1. Brought goods worth N20,000 paying by cheques

2. Obtained a cash loan of N50,000 from a credit agency
3. Transferred N30,000 cash to the Bank account
4. Sold all the goods brought for a sum of N30, 000 proceeds being
received by cheque.
13
Damagun, Y. M. (1999). Introduction to Financial Accounting. Jos:

Destinno Press.
Okwoli, A. A. (1997). Principle of Financial Accounting. Malthouse

Press Ltd.
14
UNIT 3 BOOK-KEEPING TO THE TRIAL BALANCE
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Book-Keeping
3.2 The Process of Book-Keeping
3.3 Essential Notes
3.4 Uses of the Trial Balance
3.5 Errors not Detected by the Trial Balance
3.5.1 Errors of Omission
3.5.2 Errors of Commission
3.5.3 Errors of Principle
3.5.4 Errors of Compensation
3.5.5 Errors of Original Entry
3.5.6 Errors of Complete Reversal of Entry
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
This unit addresses the problem of basic book-keeping from the

interpretation of each transaction correctly, to posting of entries in
ledger or 'T' accounts. In addition, it touches on the preparation of Trial
Balance and certain accounting errors which a Trial Balance cannot
detect.
2.0 OBJECTIVES
•interpret all transactions in terms of their accounting treatments

•open ledgers or T accounts correctly and post the details of respective
transactions therein
•close or balance off ledger account and extract Trial Balance
•outline the purpose of the Trial Balance and the types of errors that
cannot be detected through it.
15
3.0 MAIN CONTENT

3.1 Book-Keeping
Book-keeping simply means the correct recording of details of
transactions in appropriate accounting records. Proper book keeping is
achieved using the techniques of double entry. The purposes of book
keeping are:
i. The need to have permanent records of all transactions,

ii. To provide basic input for the preparation of final account, and
iii. To ensure proper accountability over all resources owned by an
organization.
3.2 The Process of Book Keeping

To achieve proper book keeping objective, the following processes are
essential:
i. Proper interpretation of transaction i.e. to determine correctly

what a transactions entails. Whether it is resulting in decreases or
increases in assets, liabilities, income, expenses etc.
ii. Obtaining appropriate supporting documents such as invoices
receipts, vouch, etc. in support of each transaction.
iii. Entering the details from source documents into the books of
prime entry.
iv. Posting from the books of prime entry to the ledgers.
v. Balancing of the ledger accounts.
vi. Extracting a Trial Balance from a summary of the balance in the
individual ledgers, and
vii. Preparing relevant financial statements:- profit and loss account,
balance sheet, etc. from the Trial Balance
3.3 Essential Notes

As a pre-requisite to understanding the processes of book keeping, a
beginner must be familiar with the following:
i. The correct way of journalizing transactions. This is because
posting to ledger accounts is done with reference to the journal
entries. As such, when, or instance, a journal entry reads:
Dr. Furniture and fittings a/c XX
Cr. Cash a/c XX
The bookkeeper automatically knows that the ledger accounts for

furniture and fittings and cash are to be affected and also the type
of posting i.e. whether a debt or credit entry is required.
16
ii. The type of balance normally carried by each type of account.

We have already made mention of the fact that all assets and
expenses normally carry debit balances, so such accounts are
debited when transactions involve increases to such items while
in case of decreases, credit entries are passed. The reverse is the
case for the liability, capital and revenue accounts. They are
credit accounts, so to record increases, we credit such accounts
while debit entries represent decreases.
iii. Balances brought forward (b/f) or brought down (b/d). The two
terms mean the same thing and are used interchangeably. They
simply refer to the balance standing in an account when it was
last closed either at the end of an accounting year or any
determined period.
iv. Balances carried down (c/d) or carried forward (c/f). These terms
are also used interchangeably and usually at the time of the
closure of an account. These are balances, which mark the end of
an accounting period and are carried to the next accounting
period.
By these definitions, balance carried down at the end of one period
automatically become balance brought down in the succeeding
accounting period ceteris paribus.
Illustration
Assume the following details in respect of the business of Sambo
Enterprises. Starting business with the following balances on l/1/96
Cash N100,000
Bank Balance N80,000
2/1/96 bought a typewriter N20,000 paying cash
3/1/96 paid rental expenses N2,000 cash
4/1/96 bought goods N70,000 for resale from UTC on credit
6/1/96 sold goods, N15,000 to FCT on credit
7/1/96 cash sales N30,000
9/1/96 introduced N50,000 cash as additional capital
10/1/96 returned goods N6,000 to UTC
11/1/96 paid UTC N50,000 in cash
12/1/96 paid for expenses as follows
N
Stationary 3,000
Telephone 2,500
Wages 2,800
Sundries 4,000
All the payments were in cheques.
17
Required:
Open the necessary books of account, enter the individual transactions
and extract a trial balance as at 12 January 1996.
Solutions
Sambo Enterprises: General Journal
Date Particulars Folio Dr. Cr.

1/1/96 Cash a/c 100,000
Bank a/c 80,000
Capital a/c 180,000
Being the initial capital
Introduction
2/1/96 Typewriter a/c 20,000
Cash a/c 20,000
Being typewriter bought by cash
3/1/96 Rental expenses a/c 2,000
Cash a/c 2,000
Being rental expenses paid by cash
4/1/96 Purchases a/c 70,000
UTC a/c 70,000
Being credit purchases from UTC
5/1/96 FCT a/c 15,000
Sales a/c 15,000
Being credit sales to FCT
7/1/96 Cash a/c 30,000
Sales a/c 30,000
Being cash sales made
9/1/96 Cash a/c 50,000
Capital a/c 50,000
Being additional capital
Introduced
10/1/96 UTC a/c 6,000
Returns outwards a/c 6,000
Being good returned to UTC
11/1/96 UTC a/c 50,000
Cash a/c 50,000
Being cash payment to UTC
12/1/96 Stationery expenses a/c 3,000
Telephone expenses a/c 2,500
Wages expenses a/c 2,800
Sundry expenses a/c 4,000
Bank a/c 12,300
Being expenses paid by cheques
18
You can now post to the individual ledger accounts going strictly by the
narration in the journal. That means you open a ledger (T) account as
shown by the journal's narration and post the debit or credit entries as
indicated therein.
Note that you may see some accounts featuring many times in the
journal depending on the nature of the transactions. For example cash a/
c. In such situations, you are not supposed to open more than one cash a/
c, rather just open cash a/c and post all entries involving cash into
account.
Below are the ledger accounts we require per the above journal entries.
Cash Account
N N
1/1/96 Capital a/c 10,000 2/1/96 Typewriter a/c 20,000
7/1/96 Sales a/c 30,000 3/1/96 Rental exp. a/c 2,000
9/1/96 Capital 50,000 11/1/96 UTC a/c 50,000
12/1/96 Balance c/d 108,000
180,000 180,000
Bank Account
N N
1/1/96 Capital a/c 80,000 12/1/96 Stationary 3,000
“ Telephone exp. a/c 2,500
“ Wages exp. a/c 2,800
“ Sundry exp. a/c 4,000
80,000 “ Balance c/d 80,000
Capital Account
N N
12/1/96 Capital a/c 230,000 1/1/96 Cash a/c 100,000
1/1/96 Bank a/c 80,000
9/1/96 Cash a/c 50,000
230,000 230,000
Typewriter Account
N N
3/1/96 Cash a/c 20,000 12/1/96 Balance c/d 20,000
Rental Expenses Account

N N
3/1/96 Cash a/c 2,000 12/1/96 Balance c/d 2,000
19
Purchases Account
N N
9/1/96 UTC a/c 70,000 12/1/96 Balance c/d 70,000
Purchases Account
N N
19/1/96 Returns inwards 6,000 4/1/96 Purchase a/c 70,000
11/1/96 Cash a/c 50,000
12/1/96 Balance c/d 14,000
70,000 70,000
FCT Account
N N
5/1/96 Sales a/c 15,000 12/1/96 Balance c/d 15,000
SAMBO ENTERPRISES
Trial Balance as at 12 January 1996

Dr. Cr.
N N
Cash 108,000
Bank 67,000
Capital 230,000
Typewriter 20,000
Rental expenses 2,000
Purchases 70,000
UTC 14,000
FCT 15,000
Sales 45,000
Returns Outwards 6,000
Stationary expenses 3,000
Telephone expenses 2,500
Wages expenses 2,800
Sundry expenses 4,000
295,000 295,000
The agreement of the above balance is supposed to serve as an

indication that the book-keeping exercise was correctly done unless we
have committed some of those accounting errors which are not usually
detected by the trial balance. We shall be addressing these errors in the
later part of the unit.
20
Meanwhile, note that all the 14 (fourteen) ledger accounts were included
in the trial balance because they contain some balances.
Where an account carries no balances at the end of a particular period

(i.e. it has been niled as accountants usually say), such accounts are not
to be included the trial balance. For example where we bought goods on
credit from Mr. A. N10,000 on 1/7/96 and paid for them fully on 3/1/97
by cash, the account will appear as under;
Customer A's Account
N N
3/1/97 10,000 1/1/96 Purchase a/c 10,000
Such an account has no balance and will therefore not from part of a
trial balance assuming it has to be drawn on 3/1/97 or a later date.
3.4. Uses of the Trial Balance
Although we have stated earlier that there are a number of book-keeping

errors which a trial balance cannot detect, the trial balance is still useful
in the following ways:
1. We can detect the following book-keeping problems with

reference to it.
(a) Errors in the computation of account balances,

(b) Failures to complete double entries in some accounts.
(c) Errors in entering debit and credit entries to some ledgers.
(d) Errors in compiling the trial balance
(e) Errors in ascertaining the trial balance totals.
2. The trail balance provides the relevant information for the

preparation of final accounts viz: Trading and profit and loss
account, balance sheet etc.
3.5 Errors Not Detected by the Trial Balance
Among the errors that a trial balance cannot detect are:
1. Errors of Omission
This occurs where a transaction is left out of the book-keeping system

completely. The complete absence of the entry will not show in the trial
balance.
21
2. Errors of Commission
This arises where fictitious transactions or figures are brought into the
book keeping system and correct book keeping procedures are followed
in recording such transactions or figures. Assuming a debtor owing a
certain sum of money is mistakenly considered to have paid N1,000
cash, so long as the book keeperpasses a N1,000 debit entry to the cash
a/c and a N1,000 credit entry to the debtor's a/c a trial balance extracted
at the end will not reveal such an error.
3. Errors of Principle
This occurs where a book keeper enters correct amounts but in the
wrong class of accounts against conventional accounting principles.
An example is where an amount of N1,000 representing fuel expenses is

posted in the motor vehicle account. Since both the fuel expenses and
the motor vehicle account are debit accounts, so long as the correct
double entry principle is observed, the trial balance will not reveal such
an error.
4. Errors of Compensation
Such errors involve the coincidental cancellation of one error by another

in the process of book keeping. Assuming Mr. A debtor paid a sum of
N5,000 over statement of the debtor's balance. Supposing by
coincidence another Mr. B. paid a sum of N500 in settlement but by
mistake a sum of N5000 was credited to his account, it will mean
N4,500 understatement of the debtor's balance. The two errors thus
cancel out and the trial balance will still agree.
5. Errors of Original Entry
It occurs where wrong figures are entered in respect of a particular

transaction right from the start. Once that wrong entry is passed in
conformity with double entry requirement, the trial balance drawn at the
end of the postings will not reveal that initial error.
6. Errors of Complete Reversal of Entry
This arises where a transaction is given the correct double entry

treatment but in the revealed order. For example where the account to be
credited is debited and the account to be debited is credited. So long as
the figures posted are correct and the double entry requirement
observed, a trial balance cannot reveal such an error.
22
What are the uses of the trial balance?
4.0 CONCLUSION
In this unit, the concept of book keeping to the trial balance was
discussed extensively, all the essential items in the preparation of book
keeping to trial balance was enumerated.
5.0 SUMMARY
This unit considered the basic procedures involved in book keeping with
particular reference to the posting, balancing of ledgers and the
extraction of trial balance. Note was also taken of the uses of the trial
balance and various errors that are detectable by the trial balance.
Mention three types of errors that cannot be detected by the trial balance
Damagun, Y.M. (1999). Introduction to Financial Accounting. Jos:

Destinno Press.
Okwoli, A.A. (1997). Principles of Financial Accounting. Malthouse

Press Ltd.
23
UNIT 4 CASH BOOK
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Cash Book
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Organizations always keep their cash and bank transactions in a

common book referred to as the cash book. Where only the cash Bank
columns are maintained, it is referred to as a two-column cash book,
while it becomes a three columns by adding to it, the discount columns.
2.0 OBJECTIVES
By end of this unit, you should be able to:
• explain the techniques of maintaining two-column and

three-column cash books
• describe the difference between two-column cash book and
three-column cash book.
3.0 MAIN CONTENT
3.1 The Cash Book
The cash book is the book into which all cash receipts and payments of a
business are entered. Some authors do not regard this book as a book of
original entry, because balancing, which is characteristic of ledger
accounts, also takes place in it and so refer to it as cash account but
because individual items are necessarily posted from it into the ledger it
is still reasonable to regard it as book of original entry. The equivalent
of cash book in non-trading organizations such as clubs, societies and
associations is the receipts and payments account. The term cash book
covers the one-column, two-column, three-column and petty types.
The cash book is ruled in such a way that it has two sides coinciding
with left and right hands. The left side, which is the receiving side, is
called debit side while the right hand side which is the paying or giving
24
side, is called the credit side. Any cash received by the entity enters the
debit side while any cash leaving the business goes through the credit
side. The one-column cash book is so called because it contains only
one monetary column in each of its two sides-one at the debit side and
one at the credit side.
Conventionally, a double or thick line normally divides the account

books into two equal sides for debit and credit entries. Double or thick
lines are recommended immediately before monetary column or
immediately after ledger folio columns.
Illustration
I, A Agbo started business with cash of N8,000 after his retirements

from civil service on 1st January, 1988 and the following transactions
took place during the month:
Jan. 2 Bought goods for cash 2,000.00

5 Bought furniture for cash 1,000.00
8 Cash sales to date 3,000.00
11 Paid rent 300.00
12 Cash sales 200.00
15 Lent C. Onuh 1,000.00
18 Bought stationary 100.00
19 Paid wages 200.00
25 Purchased goods for cash 2,000.00
27 C. Onuh paid on account 500.00
28 Received from D. Obande 2,000.00
Withdrew cash for private use 500.00
30 Paid D. Obande 500.00
Paid insurance premium 20.00
31 Purchases 1,000.00
Sales 1,000.00
Required:
Enter the transactions in the column cash book of A. Agbo and balance
the account (book) on 31st January 1988.
25
A. AGBO'S CASH BOOK (JANUARY 1988)

DR. CR.
Date Particular L/F Amount Date Particular L/F Amount
Jan.1 Capital 8,000.00 Jan.2 Purchases 2,000.00
8 Sales 3,000.00 5 Furniture 1,000.00
12 Sales 200.00 11 Rent 300.00
27 C. Onuh 500.00 15 C. Onuh 1,000.00
28 D.Obande 2,000.00 18 Stationary 100.00
29 Sales 1,500.00 Wages 200.00
19
30 Sales 1,000.00 Purchase 2,000.00
29 Drawings 500.00
30 D. Obande 500.00
30 Insurance 20.00
Premium
31 Purchases 1,000.00
Balance c/d 7.580.00
16,200.00 16,200.00
7,580.00
Calculation Method
N
Debit side total 16,200.00
Credit side total 8.620.00
Balance carried down 7.580.00
Explanation of Abbreviations Used
Dr. Debtor or debit side

Cr. Credit or credit side
L/F Ledger Folio column where the page number of the ledger
into which the item may be posted or written.
Balance c/d Balance carried down from the bigger side to balance off
the smaller side since financial account totals must
necessarily be equal.
Balance b/d Balance brought down as cash in hand to begin the
following month's business with. The balance brought
down should necessarily be the same as balance carried
down.
1) The two-column & three-column cash books should be treated

with examples
2) The difference(s) between the two should be pointed out in order

to achieve the objectives of this unit.
26
The two-column cash books on the other hand) is so called because it

contains two monetary columns in each of the debit and credit sides-the
cash and bank. Cash is maintained both in office and at bank. It also
means that the business transacts some of its businesses though the
bank. Here, cash transaction is entered in the cash column while cheques
transactions entered in the bank columns. While it is not possible for the
credit side of the cash column to be greater than the debit side because
one cannot give because on a special arrangement with the bank the
business may be allowed to overdraw its account to an agreed limit.
In a cash book containing both cash and bank columns, internal

transactions may also take place. For instance, money may be
withdrawn from bank for office use or money may be taken from office
to bank. Any of these transactions represent contra entries. That means
that it would enter both debit and credit sides of the same book although
different columns. Contra entries are never posted into the ledger
because they are deemed to have satisfied the double entry principle.
Enter the following transactions in the two-column cash book of J. Oga,

a trader, for the month of February, 2004
Feb. 1 Capital cash 5,000.00

Bank 12,000.00
2 Bought goods for cash 3,000.00
5 Bought furniture by cheques 4,000.00
8 Withdrew cash from bank for office use 4,000.00
10 Cash sale paid into bank" 2,000.00
13 Bought stationary by cheque 600.00
16 Received cheques from A. Edache 1,800.00
19 Bough goods by cheques 2,750.00
23 Cash sales 3,100.00
24 Paid cash into bank 2,800.00
25 Withdrew cash for private use 300.00
26 Paid wages in cash 600.00
28 cash sales paid into cash 300.00
29 Paid rent by chehge 1,300.00
500.00
4.0 CONCLUSION
The practice of accountancy will be virtually impossible if there is no

day-to-day recording of financial transaction as they occur. The books
of original entry other wise known as subsidiary books of accounts
include the cash book.
27
The cash book is the book into which all cash receipts and payments of a
business are entered.
5.0 SUMMARY
This unit treated two-column and three-column cash books. The

columns are the discount cash and banks.
Mr. Oji trading as Oji & sons, started business on 1 st April, 2006, with a
capital of N20,000 divided to N8,000 cash in hand and N12,000 as cash
in the bank. The following transactions took place during the month.
N
April 2 Purchased goods for cash 5,000
3 Bought stationery for cash 500
5 Bought furniture & fitting by cheques 2,100
8 Cash sales paid into bank 4,200
9 Withdrew cash from bank for office use 5,000
11 Received a cheque of N1,900 from
J. Ujo in full settlement of his debt of N2000
13 Paid ala N500 cash in full settlement of debt
N550 owned to him
17 Cash sales 3,000
20 T. Ojo who owned in full settlement of debt
of N550 owned to pay N355 cash in full
settlement of the debt
23 Paid cash into bank 2,500
27 Paid cash into bank 500
30 Bought goods by cheques 3,600
30 Cash sales paid into bank 2,400
Required:
Enter the transactions into three-column cash book and balance the
account on 30th April 2004.
Damagun, Y. M. (1999). Introduction to Financial Accounting. Jos:

Destinno Press.
Okwoli, A. A. (1997). Principles of Financial Accounting. Malthouse

Press Ltd.
28
UNIT 5 BANK RECONCILIATION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Bank Reconciliation (Unpresented Cheques)
3.1.1 Uncredited Cheques
3.1.2 Bank Charges
3.1.3 Direct Payments
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
It is normal for a business to be interested in knowing his balance of

cash in hand and at bank at the end of every month. While the customer
prepares a cash book to show the required balances, the bank prepares a
bank statement. The usual practice is that bank debits all cheques that
are credited to the cash book because they reduce the amount of money
in the customer's credit and credit all cheques that are debited to the cash
book because they work to increase the customer's credit in it (bank).
One should be right then to think that the balance in the bank column of
the cash book should always agree with the bank statement since all
cheques received are assumed to be paid straight into the bank while
cheque payment’s are made through the bank; but that is not always true
because of supervening events that may have countervailing positive or
negative effects on either of the balance. One or more of usually
create(s) a difference between a business man's actual cash balance in
the bank column of his cash book and the balance as shown by the bank
statement.
2.0 OBJECTIVES
• explain the causes of discrepancy between cash and bank balance

• describe the causes of the discrepancy and reconcile.
29
3.0 MAIN CONTENT
3.1 Bank Reconciliation (Unpresented Cheques)
At the time the bank is preparing its statement to send to the customer,
some of the customer's cheques issued to outsiders, which are duly
credited to the cash book, may not have been presented to the bank for
payment, so the bank would not have debited the customer's account
with such amounts. The effect of unpresented cheques is that the balance
in the bank statement is higher than the cash book balance in the bank
column.
The difference created by the unpresented cheques is reconciled by

either adding the amount of such unpresented cheque bank to the cash
book balance or subtracting it from the bank statement balance.
3.1.1 Uncrdited Cheques
When a businessman receives cheques, he debits the bank column of his

cash book immediately thereby creating a possibility for showing high
cash balance in the bank but the bank may take sometime before
crediting his account since the cheques may need to be cleared before
crediting it. The cheques may be dishonored unknown to the customer at
the time he prepares his cash book balance. The bank does not credit a
customer's account with dishonoured cheques. The techniques for
reconciling difference created by the uncredited cheque is either to
deduct the amount of such uncredited cheque from the cash book
balance (bank column) or add it to the balance as shown by the bank
statement if it is not a dishonoured cheque. When a cheque is
dishonoured, there is just the need to reverse entries in the cash book.
That is, to credit the cash book (bank column) to neutralized the original
debit entry.
3.1.2 Bank Charges
The bank charges commission on certain services on current accounts,

and interest on overdrafts and cheque books supplied to the customer.
When any of these are made the customer's account is debited in the
bank but the Information may not immediately be communicated to the
customer to effect entries in his cash book. To reconcile the discrepancy
created by bank charges, the amount of such charges should be deducted
from the cash book balance. That is, to credit the cash during its (cash
book) adjustment
30
3.1.3 Direct Payments

In everyday business, there is the possibility that the bank may pay
certain amount of money on behalf of its customer on the authority of
prior notice. Sometime, an authority may be given to the bank by a
customer to pay regular subscriptions to certain organizations and when
such a payment is made, the customer's balance in bank will be reduced
without the customer knowing immediately. This will create a
discrepancy between the cash book balance and the bank balance. Such
discrepancy may be reconciled by deducting such payments from the
cash book balance by crediting the cash book during the amendment.
The bank may also receive certain amount on behalf of the customer.
When money such as interest, loan or dividend is paid directly into the
customer's account, the bank statement balance will exceed the cash
book balance by such payments and the difference can be corrected by
adding the payments to the cash book during the cash book (bank
column) amendment.
And finally, the bank reconciliation is a process of adjusting the

different figures as may be shown by the cash book and the bank
statement to a common point. Bank reconciliation statemen1 therefore,
is the statement showing that process of adjustment and the consequent
result. It IS suggested that the actual reconciliation should be made with
the unpresented and uncredited cheques. All other items should be used
in the amendment of the book to bring its balance to the authentic figure
before the reconciliation.
SELF ASSESSMENT EXERCISE 1

Illustration
On 30th April, 2000 the cash book of U. Mohammed showed a balance
in bank of N 12,409 .44 and on the same day bank statement showed a
favorable balance of N11,482.44. On cross-checking the details in the
bank statement with the cash book, it was discovered that the
discrepancy was due to the following:
(a) The credit side of the cash book was under-cast to the tune of
N120.00
(b) Cheques dishonoured
Ngozi 156.00
(c) Cheques drawn and recorded in the cash book (Book column) but
not shown in the bank statement.
T. Abel 132.00
31
Amufu Limited 246.84

(d) Items debited by the bank:
Bank charges 30.00
Costs of cheques book 18.96
(e) Items duly debited in the cash book but not yet cleared by the
bank:
cheques received from D. Okeke 243.96
cheques received from P. Ojimekwe 174.00
cheques received from R. Owate 562.00
Required:
Show the amended cash book and the bank reconciliation statement for
U. Muhammed on 30th April, 2000.
U. MOHAMMED AMENDED CASH BOOK (BANK COLUMNS

ONLY)
DR. CR
N N
April 30 Bal. b/f 12,409.44 April 30 Under-cast written
Back 120.00
P. Ngozi
Dishonoured cheques 156.00
Bank charges 30.00
Cost of cheques book 18.96
Balance c/d 12,084.48
12 409.44 12,409.44
April 30 Bal.b/d 12,084.48 12
Note:
(i) What we have done here is to amend the cash book by bringing
up to the cash book all those items that would ordinary be treated
in the cash book. When the cash book has been amended we will
be left with unpresented and uncredited cheques items to use in
reconciliation process.
(ii) If there is an under-cast, the amount is written back to the side

that has the shortfall but if there is an overcast the techniques is to
write the amount at the opposite side of the side that has been
overcast to neutralize the effect of the overcastting.
32
BANK RECONCILIATION STATEMENT
N N
Balance as per cash book 12,084.48
Add unpresented cheques
T. Abe l 132.00
Amufu Limited 246.84 378. 84
12,463.32
Less Uncredited Cheques:
D. Okeke 243.96
P. Orjimekwe 174.00
R. Owate 562.92 980.88
Balance as per bank statement 11.482.44
We many also start the process of reconciliation from the balance as per
bank statement.
BANK RECONCILIATION STATEMENT
N N
Balance as per Bank Statement 11,482.44
Add uncredited cheques
D. Okeke 243.96
P. Ojimekwe 174.00
R. Owate 562.92 980.88
12,463.32
Less unpresented cheques
T. Abel 132.00
Amufe Limited 246.84 378.84
Balance as per Cash Book 12,463.43
1. Below are the cash book (bank column only) and the Bank
Statement of R. Nuhu for month of March, 1998.
Dr. Cr.
Date part L/F Amount Date part L/F Amount
Mar.1 Bal. b/f 4,201.50 Mar 1 J. Onalo 1,500.00
5 J. Sambo 400.90 11 E.Uzo 406.50
8 Cash 1,200.08 12 V.Okwuosa 707.70
11 G.Nwanikwe 900.00 16 R. Onuh 133.00
17 Cash 4,200.00 26 K. Idoko 2,100.00
26 M. Dogo 1,600.00 28 S. Agwai 500.00
29 J. Aruwa 2,004.00 31 F. Agada 204.20
31 P. Egbe 100.00 31 A. Atama 300.00
c/d 8,755.14
April Bal. 14,606.54 14,606.54
8,755.14
33
UNITY BANK
BANK STATEMENT SENT TO 31ST MARCH, 1998
Date Particular Dr. Cr. Balance

March 1 Balance b/f 4,201.50
6 J. Onuh 1,500.00 2,701.50
6 J. Sambo 400.96 3,102.46
8 Cash 1,200.08 4,302.54
13 E. Uzo 406.50 3,896.04
14 G. Nwanikwe 900.00 4,796.04
17 Cash 4,200.00 8,996.04
24 V. Okuosa 707.70 8,288.34
27 M. Dogo 1,600.00 9,888.34
28 K. Idoko 2,100.00 7,788.34
29 M. Dogo (cheque Dis.) 1,600.00 6,188.34
30 Charges 30.34 6,158.00
30 Divided from Ota Ltd 500.00 6,658.00
2. Given below are the cash book (bank columns only) and the bank
statement of Dansani for the month of 31st May, 2006.
UNITY BANK PLC

BANK STATEMENT SENT DANSANI ON 31ST MAY, 2006
34
Required:
Amend and balance Dansani cash book (bank column only) and
reconcile this with his bank statement.
4.0 CONCLUSION
This unit treated the issue of reconciling the bank column of the cash
book with the bank statement issued by the bankers. The major causes
of the discrepancy are the unpresented cheques and uncredited
lodgment.
5.0 SUMMARY
The normal practice in reconciliation of bank statement and the cash

book is to identify those items in the cash book that are not in the bank
statement and those in the bank statement that are not in the cash book.
D. Bako, trading as Bako Brothers, pays all business takings into the
bank and makes all payments by cheques. The balance of his cash book
on 31st January, 1999 agreed with balance as shown by his cash as at
that date. The following statement shows the summary of figures
appearing on the bank statement for the year.
N
Balance brought forward on 31st January 600.00
Amount paid in by Bako and credited by the bank for the year 15,000.00
Cheques drawn by Bako and paid by the bank for the year 14,500.00
Bank charges 45.00
Dividends received by the bank on behalf of D. Bako 1,255.00
On the 31st December of the same year, D. Bako had drawn two
cheques to Musa and Abdullahi for N60 and N675 respectively. On the
same day, D. Bako paid in a cheques of N80, which he received from
Abubakar. The above cheques were not included in the totals shown
above, having been paid and credited respectively by the bank in
January of the following year.
Required:
a) A summary of the cash book (bank column only) in the books of

D. Bako for the year.
b) A summary of the bank statement for the year and
c) A bank reconciliation statement at 31st December, 1999.
35
Jennings, A. R. (2004). Financial Accounting 2nd Edition. Hampshine,

UK: Ash Lord Colour Press.
Okwoli, A. A. (1997). Principles of Financial Accounting. Malthouse

Press Ltd.
36
MODULE 2
Unit 1 Depreciation of Fixed Assets I

Unit 2 Depreciation of Fixed Assets II
Unit 3 The Trading Account
Unit 4 Profit and Loss Account
Unit 5 The Balance Sheet
UNIT 1 DEPRECIATION OF FIXED ASSETS I
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Depreciation of Items and Fixed Assets
3.2 Methods of Depreciation
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The preparation of final accounts has two main aims-that every trading
and profit and loss account show the 'correct' profits or losses for the
period and every balance sheet gives the 'true and fair' view of the
affairs of the business at a given period. The correct profit or loss can
only be obtained if the accounts carry every kobo of loss incurred and
every kobo of revenue earned. For a balance sheet to show a ‘true and
fair’ view of a business affair it must show the assets and liabilities at
their ‘correct’ values.
The accountant, in attempting to achieve the two aims of final

accounting, must take into consideration matters which require
adjustments. Such adjustments include:
1) Depreciation and appreciation of fixed assets;

2) Amortization of intangible and factious assets;
3) Bad debts and provision for doubtful debts;
4) Provisions for cash discounts;
5) Payments in advance to and by a firm; and
6) Payments accrued due to and from the firm.
37
2.0 OBJECTIVES
At the end of this unit, you should be able to: explain
3.0 MAIN CONTENT
3.1 Depreciation of Items of Fixed Assets
SSAP 12 defines depreciation as the measure of the wearing out,

consumption or other loss of value at" fixed assets arising whether from
use, effluxion of time or obsolescence though technology and market
changes. In effect, the main causes of deprecation include, wear and
tear, physical factors such as evaporation of liquids, loss of potency of
acids, erosion and dampness, obsolescence due to invention or change
in fashion, fall in market prices which include unfavourable foreign
exchange rate, and effluxion. In other words, depreciation may be
described loosely as the permanent and continuing diminution in the
quantity, quality or value of fixed asset.
3.2 Methods of Depreciation
any methods exist for the deprecation of an asset and as directed by

SSAP 2, management is at liberty to make choice of the method they
consider most suitable for their type of business subject to the
requirement that once a basis is selected it has to be applied for period in
keeping with the consistency concept. Any change in such a policy is
both legally and professionally required to be disclosed in the note
accompanying the main statements. A fundamental fact of accountancy
is that depreciation represents the expired part of the total cost of the
fixed asset and so it is a charge against the profit of the period. The
importance of depreciation to company management and government of
Nigeria can be seen from the requirements of schedule 32 of the
Nigerian Companies and Allied Matters Decree of 1990 which states
that ‘the amount charged to revenue by way of provision for
depreciation, renewals or diminution in value of fixed assets must be
disclosed in the published accounts'.
SSAP 12 which deals with depreciation of fixed assets does not attempt
to recommend particular methods to be used by companies. It concerns
itself with the provision that financial statement should disclose for each
major class of assets, the depreciation method used, the expected useful
lives of the assets or the depreciation rates used, the total depreciation
associated for the period, and the gross amount of depreciable assets and
the related accumulated depreciation. It also provides that where asset is
38
revalued, the provision for depreciation should be based on the revalued

amount and the current estimate of the remaining useful life of the asset.
A number of depreciation methods are in use today. Prominent among
them are the straight line, reducing balance, sinking fund, endowment
insurance policy, revaluation, annuity, depletion unit, machine hour, unit
product, sum of the year’s digit and the double decline methods.
a) Straight Line Method
The straight line method of depreciation otherwise known as the fixed

insta1lment method, determines the amount of annual depreciation
charge by dividing the cost of the asset, less the salvage or scrap value,
by the number of years of estimated useful life of whose useful life can
be determined with some degree of accuracy. It spreads the provision of
depreciation equally over the period of its anticipated use and it is easily
applicable. This method is criticized on the ground of equal provision
from year to year because it cannot be true that cost of an asset can
expire by the same extent each year throughout its useful life.
Illustration
On 1st January, 2000 a trader buys a plant for N4,000 which the estimate
would have a useful life of ten years. The salvage or scrap value at the
end of the period is estimated at N100.
Required:
Using the straight line method of depreciation, show in the books of the
company for the first three years.
Yearly depreciation will be obtained as follows:
Formular = Cost – Salvage value

Life span of the asset
4,000 − 100
=
10
= N390
3,900
=
10
Depreciation provision is an adjustment that normally passes through

the journal proper as follows:
39
3RD YEAR 2002

Depreciation
Plant 390
BALANCE SHEET AS AT 31ST DECEMBER, 2000 TO 2002

EXTRACTS ONLY
N N
Fixed assets:
1st Year 2000
Plant 4,000.00
Less depreciation 390.00 3,610.00
2nd Year 2001

Plant 3,610.00
3rd Year 2002

Plant 3,220.00
b) The Reducing Balance Method
This method, otherwise known as the declining or diminishing balance

method, provides for depreciation by computing a fixed percentage rate
of the book value of the assets as reduced by previous provisions for
depreciation, if any. In effect, under this method, the amount charged to
the profit and loss account in the name of depreciation reduces revenue
because it is believed that asset will produce more revenue when it is
new than when it starts falling in value and as the asset ages on and
contributes less to the revenue generating efforts of the firm smaller
amounts are then charged the profit and loss account as it depreciation.
Under this method, the scrap value is always the negligible amount that
is left after year of depreciation. It is an accelerated method of
depreciation.
Illustration
On 1st January, 1998 a trader buys a machinery for N4,000 which by his
experience depreciates at the rate of 10% per annum.
Required:
40
Using the reducing balance of depreciation, show the entries for the first
three years.
Solution
Here, the yearly depreciation will not be equal from year to year but will
depend on the value of the asset at the beginning of the period. The
annual values of depreciation will be calculated as follows:
10 4,000
1st Year, 1998 = x or 0.10 x 4,000 = N400.00
100 1
10 4,000 − 400
2nd Year, 1999 = x or 0.10 x (4,000 – 400)
100 1
10 3,600
x or 0.10 x 3,600 = N360.00
100 1
10 3,600 − 360
3rd Year, = x or 0.10 x (3,600 – 360)
100 1
10 3,240
x or 0.10 x 3,240 = N324.00
100 1
JOURNAL PROPER
DATE PARTICULARS L/F DR CR

N N
1st Year 1998
Depreciation account Dr.
Machinery account 400.00
(Being depreciation written off 400.00
the machinery for the first year)
Profit and Loss account Dr.
Depreciation account 400.00
(Being depreciation for the first 400.00
year transferred to profit and
loss account)
2nd Year 1999

Depreciation account Dr.
(Being depreciation written off 360.00
the machinery for the second year)
Profit and Loss Account Dr. 360.00
Depreciation Account 360.00
(Being depreciation for the
second year transferred to profit
41
and loss account)
DATE PARTICULARS L/F DR CR

N N
3rd Year 2000
Dec. Depreciation
(Being depreciation written 324.00
off the plant for the first year)
Profit and Loss Account Dr.
Depreciation account
third year transfer to profit
and loss account)
MACHINERY ACCOUNT
1ST YEAR 1998
N N
Jan. 1 Cash 4,000.00 Dec. 31 Depreciation 400.00
31 Balance c/d 3,600.00
4,000.00 4,000.00
2ND YEAR 1999

N N
Jan. 1 Balance b/f 3,600.00 Dec. 31 Depreciation 360.00
31 Balance c/d 2,400.00
3,600.00 3,600.00
3RD YEAR 1999

N N
Jan. 1 Balance b/f 3,240.00 Dec. 31 Depreciation 324.00
31 Balance c/d 2,916.00
3,240.00 3,240.00
Jan. 2001
Balance b/f 2,916.00
DEPRECIATION ACCOUNT
1ST YEAR 1998
N N
Dec. 31 Balance b/f 400.00 Dec. 31 Profit & Loss account 400.00
2ND YEAR 1999

N N
Dec. 31 Machinery 360.00 Dec. 31 Profit & Loss account 360.00
42
3RD YEAR 2000

N N
Dec. 31 Machinery 324.00 Dec. 31 Profit & Loss account 324.00
PROFIT AND LOSS ACCOUNT FOR THE YEARS ENDED
31ST DECEMBER, 1998 TO 2000
1ST YEAR 1998

Depreciation
Machinery 400.00
2ND YEAR 1998

Depreciation
Machinery 360.00
3RD YEAR 1998

Depreciation
Machinery 324.00

(EXTRACTS ONLY)
N N
Fixed assets:
1st Year 1998

Plant 4,000.00
2ND Year 1999

Plant 3,600.00
3RD Year 2000

Plant 3,240.00
c) Revaluation Method
This method of depreciation is most popular with companies that make

use of loose tools such as spanners, screw drivers, small drills in an
engineering concern or barrels, bottles and create in a brewery. The
amount of depreciation to be charged against the profits is determined
by subtraction the values assigned to such assets at the end of the
accounting period from the values at start. This technique, therefore,
necessitates valuing such assets at starts as well as at close of accounting
year.
43
Illustration
An engineering firm bought loose tools for N1,000 on 1st July 1991. On
1st January of the following year, further tools worth N800 were bought
for the business. If the value of the tools at the end of June, 1992 is put a
N1,200, what is the amount written off as depreciation? If by June 1993,
the value of the tools is put at N800, what would be the depreciation
charge for that year?
Computation formular = Value at start – value at close
1st Year 1992

Depreciation: July 1 (1991) Cash 1,000.00
July 1 (1992) Cash 800.00
1,800.00
Less value at close
(June, 1993) 1,200.00
Depreciation 600.00
2nd Year 1993
Depreciation:
July1, 1992 Bal. b/f 1,200.00
Less value at close
(June, 1993) 800.00
Depreciation 400.00
JOURNAL PROPER 1991 TO 1993

Date Particulars L/F Dr. Cr.
N N
1st Year 1992
June 30 Depreciation Account Dr. 600.00
Loose tools account 600.00
(Being depreciation written off
the loose tools for the first year)
June 30 Profit and Loss Account Dr. 600.00
(Being Depreciation for
the first year transferred
to profit and loss account)
2nd Year 1993

June 30 Depreciation Account Dr. 400.00
Loose tools account 400.00
(Being depreciation written
off the loose tools for the
first year)
Profit and Loss Account Dr. 400.00
44

second year transferred to
profit and loss account)
LOOSE TOOLS ACCOUNT
1ST YEAR
N N
July 1, 1991 Cash 1,000.00 June 30, 1992 Depreciation 600.00
Jan. 1, 1992 Cash 800.00 June 30, 1992 Balance c/d 1,200.00
1,800.00 1,800.00
2ND YEAR
July 1, 1992 Balance b/f 1,200.00 June 30, 1993 Depreciation 400.00
June 30, 1993 Balance c/d 800.00
1,200.00 1,200.00
June 1, 1993 Balance c/d 800.00
1ST YEAR
June 30 Loose tools 600.00 June 30 Depreciation 600.00
2ND YEAR
June 30 Loose tools 400.00 June 30 Balance c/d 400.00
1. Calculate the annual depreciation on a motor vehicle acquired on

1st January, 2000 at N50,000 and its expected life span is 4 years
with a scrap value of N3,000.00, using straight line method.
2. What do you understand by the term “Depreciation”?
4.0 CONCLUSION
In this unit, we discussed three methods of depreciation i.e. straight line

method, reducing balance method and revaluation method.
5.0 SUMMARY
This unit focused on the various methods of accounting for depreciation

and the way to disclose assets and depreciation information in financial
statement.
ABG Ltd bought an asset for a sum of N298,000 on 1 st January, 2000.

The asset is expected to last for a period of 5 years after which its
estimated value will be N48,000. You are required to compute the
amount of deprecation to be charged in each year of the assets life.
45
Damagum, Y.M (2003). Financial Accounting. Jos: Clestinno Press.
Okwuli, A.A. (1997). Principles of Accountings. Malthouse Press.
46
UNIT 2 DEPRECIATION OF FIXED ASSETS II
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Factors Responsible for Depreciation
3.2 The Machine Hour Method
3.3 The Units Produced Method
3.4 The Sum of Years’ Digit Method
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
This unit focuses on the various methods of accounting for depreciation

and the ways to disclose assets and depreciation information in financial
statements.
2.0 OBJECTIVES
• discuss the need to provide for depreciation on fixed assets engaged

in business.
• explain the ways to disclose assets and depreciation figures in
financial statements.
3.0 MAIN CONTENT
3.1 Factors Responsible for Depreciation
Among the factors responsible for depreciation in the utility of an asset

are:
l. Obsolescence: An existing asset can be rendered valueless as

time passes and new models are developed.
2. Wear and tear: Continuous usage leads to deterioration in the
physical features of an asset.
47
3. Technological changes: With changes in technology, new

methods of operations may evolve with time, which renders
certain assets useless.
4. Environmental conditions: Factors like excessive heat, rainfall
and other weather related conditions can eventually reduce the
value of an asset.
5. Instability in prices: As prices fluctuate, the value of an asset
becomes affected either by experiencing a depreciation or
appreciation depending on whether prices are going upwards or
downwards.
3.2 The Machine Hour Method
For this method to be realistically used in any company the total hours
the assets can serve the company in its lifetime must be known with
some degrees of certainty. The per hour depreciation will be determined
by dividing the total cost by the total number of hours allocated to its
life expectancy. This is not a very good method of depreciation
especially during slack times as idle plants are also open to some of the
causes of depreciation.
Illustration
A plant costing N20,000 was bought on 1st January, 1998. The plant has
a life span of 2,000,000 hours of active service. The plant spent 80,000
hours in service in its first year and put in 120,000 hours in the second
year.
Required:
Show the depreciation entries in the books of the company for the two
years.
Solution
Formular = Cost x Hours spent

Estimate number of hours 1
20,000 80,000
First year 1998 = x = N800.00
2,000,000 1
20,000 120,000
Second year 1999 = x = N1,200.00
2,000,000 1
48
JOURNAL PROPER

N N
1st Year 1998
Dec. 31 Depreciation account Dr. 800.00
Plant account 800.00
(Being depreciation
written off the plant
for the first year)
Dec. 31 Profit and loss account Dr. 800.00
(Being depreciation for
2nd Year 1999

Dec. 31 Depreciation account Dr. 1,200.00
Plant account 1,200.00
(Being depreciation
written off the plant for
the second year)
Dec. 31 Profit and loss account Dr. 1,200.00
Depreciation account 1,200.00
PLANT ACCOUNT
49
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED

31ST DECEMBER, 1998 TO 1999 (EXTRACTS ONLY)
N
1ST YEAR 1998
Depreciation: Plant 800.00
2ND YEAR 1999

Depreciation: Plant 1,200.00

(EXTRACTS ONLY)
N N
FIXED ASSETS
1ST YEAR 1998
Plant 20,000.00
Less Depreciation 800.00 19,200.00
2ND YEAR 1999

Plant 19,200.00
Less Depreciation 1,200.00 18,000.00
3.3 The Units Produced Method
Under this method, the total number of units of a particular product to be

produced during the life time of the machine is estimated and then a per
unit depreciation is determined by dividing the cost of the machine by
the estimate number of units. The yearly depreciation to be charged
against the profits will be the per unit depreciation multiplied by the
number of unit produced during the year. This method is not to be
recommended because depreciation, being a fixed cost goes on whether
there is production or not.
Illustration
A machinery costing N12,200 was bought on 1st July, 1990. It was

estimated that the machinery would produce 600,000 units of a
particular product during its life time, 50,000 units of the product in the
first year and 100,000 were produced in the second year.
50
Required:
Show the depreciation entries in the books of the company for the first
two years.
Solution
Formula = cost x Units produced

Number of units to produce 1
1st Year (1991)

12,000 50,000
Depreciation charge = x = N1,000.00
600,000 1
2nd Year 1992

12,000 100,000
600,000 1
JOURNAL PROPER
N N
1st Year 1991
June 30 Depreciation 1,000.00
Machinery account 1,000.00
(Being depreciation
written off the machinery
for the first year)
June 30 Profit and loss account Dr. 1,000.00
2nd Year 1999

June 30 Depreciation account Dr. 2,000.00
(Being depreciation
written off the plant for
the second year)
June 30 Profit and loss account Dr. 2,000.00
51
MACHINERY ACCOUNT

30TH JUNE, 1991 TO 1992 (EXTRACTS ONLY)
N
st
1 Year 1991
Depreciation Machinery 1,000.00
2nd Year 1992

BALANCE SHEETAS AT 30TH JUNE, 1991 TO 1992

(EXTRACTS ONLY)
N N
Fixed Assets:
1st Year (1991)

Machinery 12,000.00
Loss depreciation 1,000.00 11,000.00
52
2nd Year 1992

Machinery
3.4 The Sum of Years’ Digit Method
The sum of the year’s digit method of depreciation is an accelerated

method which aims at writing off higher costs from the asset at the
initial stage and then reducing the depreciation charge recessively as the
years pass by. The underlying assumption here is that more benefits are
recei1led from the computation of the sum of the years' digits.
Depreciation charge is that the discrete digits in the assets estimated
useful life should be added, the numerator for each years' depreciation
should be the number of years remaining in the asset's estimated useful
life at the beginning of the particular year for which the depreciation is
being computed over the sum of the year's digitals, and functions as
produced by the above steps should be multiplied each year by the
asset's depreciation value to arrive at the yearly depreciation charges.
Illustration
On 1st January, 1990 a trader bought a machinery for N10,000 which he

estimated would last for ten years.
Required:
Show the entries for the first two years in the books of the business
providing for depreciation by the sum of the years' digit method.
Solution
Since the asset will last for ten years the formular will be obtained by
1+2+3+4+5+6+7+8+9+10, so that the first year depreciation will be
obtained by:
10 Cost
x
1 + 2... + 10 1
First year 1990

10 10,000
55 1
Second Year 1991
53
9 10,000
Depreciation = x = N1,636.36
55 1
JOURNAL PROPER
N N
1st Year 1990
Dec. 31 Depreciation Account 1,818.18
(Being depreciation written
off the machinery for the
first year)
Dec. 31 Profit and loss account Dr. 1,181.18
2nd Year 1991

Dec. 31 Depreciation account Dr. 1,636.36
second year)
Profit and loss account Dr. 1,636.36
MACHINERY ACCOUNT
N N
st
1 Year 1990
Jan. 1 Cash 10,000.00 Jan. 1 Depreciation 1,818.18
Jan. 1 Balance c/d 8,181.82
10,000.00 10,000.00
2nd Year 1991

Jan. 1 Balance b/f 8,181.82 Jan. 1 Depreciation 1,636.36
Jan. 1 Balance c/d 6,545.46
8,181.82 8,181.82
Jan. 1 Balance b/d 6,545.46
54
N N
st
1 Year 1990
June 30 Machinery 1,181.18 June 30 Profit and loss 1,181.18
2nd Year 1991

June 30 Machinery 1,636.36 June 30 Profit and loss 1,636.36
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST
DECEMBER, 1990 TO 1991 (EXTRACT ONLY)
N
st
1 Year 1990
2nd Year 1991


(EXTRACT ONLY)
N N
Fixed Assets:
1st Year 1990
Machinery 10,000.00
Loss depreciation 1,818.18 8,181.82
2nd Year 1991

Machinery 8,181.82
1. List the causes of depreciation of fixed asset.

2. What do you understand by the term 'sum of year digit' in
depreciation accounting?
4.0 CONCLUSION
In practice, organizations apply different methods to depreciate their

assets as a matter of convince, nature of assets and other considerations.
5.0 SUMMARY
In this unit, we have thoroughly discussed the issue of depreciation of

fixed assets using the various methods. It is normal for a company to
55
decide to charge full depreciation on an asset irrespective of the time of

the year in which it was bought.
Ibro Plc. bought an equipment for N613, 000 which is to last for 6 years
with a residual value of N13,000. Compute the amount of the
depreciation to charge in respect of each of the years using sum of the
year's digit method.
Damagum, Y.M. (2003). Financial Accounting. Jos: Clesinno Press.
Okwoli, A.A. (1997). Principles of Accounts. Malthouse Press
56
UNIT 3 THE TRADING ACCOUNT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Trading Account Formular
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Trading account is designed to determine the gross profit or gross loss of

a trading organization. During the accounting year, items to be found
here include the opening and closing stocks of finished goods, total
purchases or cost of production/market value of goods manufactured for
manufacturing concerns, sales, returns outwards, returns inwards
carriage inwards, and other trading expenses such as wages and
warehouse expenses. The gross profit or loss ultimately is the difference
between the cost of goods sold plus the trading expenses (if any) and the
net sales. When sales revenue exceeds costs there is gross profit and
vice versa.
2.0 OBJECTIVES
3.0 MAIN CONTENT
3.1 Trading Account Formular
a) Average stock = Opening stock + Closing stock

2
b) Stock available for sale = Opening stock + Net purchases.
57
c) Cost of goods sold:

i) Stock available for sale -closing stock
ii) Average stock x rate of turnover
d) Opening stock = cost of goods sold + closing stock-net purchases

e) Closing stock = stock available for sale-cost of goods sold
f) Purchases = cost of goods sold + closing stock-opening stock
g) Sales:
i) Cost of goods sold + trading expenses = gross profit

ii) When percentage of profit is given,
1. If on cost, sales = 100 + % of profit x Cost

100 1
2. If on sale or turnover, sales = 10 x Cost

100% of profit 1
h) Rate of turnover = Cost of goods sold

Average stock
i) Percentage of gross profit on turnover = Gross profit x 100

Sales 1
Illustration
Prepare the trading account of C. Aondo, a sole trader, for the year
ended 31st December, 1999 from the following particulars:
N
Opening stock 3,200.00
Purchases 12,450.00
Sales 15,600.00
Carriage inwards 300.00
Returns outwards 250.00
Returns inwards 600.00
Closing stock 2,500.00
C. AONDO: TRADING ACCOUNT FOR THE YEAR ENDED

31ST DECEMBER, 1999
58
On 1st January, 1990 Mal. Abu’s opening stock was valued at N5,200,
his stock on 31st December of the same year was valued at N6,800; he
turned over his stock five times during the year and made on the whole a
gross profit of 25% on the turnover.
Required:
Show the trading account for the year with necessary calculations.
What is the purpose of a trading account?
4.0 CONCLUSION
5.0 SUMMARY
In this unit, the steps for preparing trading account are stated as follows
i. Enter on the debit side the opening stock as given in the time
balance
ii. Adjust the purchase where necessary by entering the purchase
figure, adding to it carriage inwards if any and deducting the
figure for returns outwards.
iii. Deduct closing stock from the goods available and you get the
cost of sales.
iv. Enter on the credit side the sales figure from the trial balance and
deduct from any returns inwards. The result is the net sales.
v) Compare the net sales figure in (iv) with the cost of sales in (iii)
if the net sales is higher than the cost of sales, the differences is
the Gross profit. Where the cost of sales is higher than the net
sales you have a Gross loss.
59

Prepare the trading account of S.G Company for the year ended 31st
December, 2000 from the following particulars:
N
Opening stock 4,800
Purchase 29,824
Purchases returns 604
Sales 38,380
Sales returns 836
Wages 1,200
Carriage inwards 208
Closing stock 6,128
Okwoli, A.A. (1997). Principles of Accounting. Malthouse Press.
60
UNIT 4 PROFIT AND LOSS ACCOUNT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Illustration
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The profit and loss account is the financial statement in which the
revenue earned by a business is matched against the expenses incurred
in earning the resulting difference being the net profit or net loss.
Earning a reasonable and fair profit requires generation of income and
incurring expenses.
The profitabi1ity or otherwise which this statement indicates is one of

the most important barometers of judging management’s effectiveness
and so it is carefully studied by managers, owners, creditors and
government agencies among others for business decisions. The
statement needs to be prepared in accordance with the generally
accepted accounting principles and standards to ensure that profit or
otherwise of the company is calculated in a manner that is comparable
with the income of sister companies in times of analysis.
Revenue is the inflow of assets which should be recognized at the time

but not before it is earned. In order to create the impression that revenue
earned from gain on sale of items not in the normal course of business is
61
related to the profits of current operation it should be reported as

extraordinary non-operation gain. SSAP 6 (U.K) defines extraordinary
items as any item of revenue or expenditure that does not use in the
normal course of business and whose occurrence is infrequent. This is
different from unusual items which arise in the normal course of
business but the incidence and size of which may make separate desire.
Strictly, there are only two principal types of operating expenses
incurred in carrying out a business selling such goods (including the cost
of office administration) which is normally charged against revenue in
the profit and loss account.
In the final account process, the profit and loss account takes over from
where trading account ends.
2.0 OBJECTIVE
At the end of this unit, you should be able:
• to prepare a Profit and Loss Account.
3.0 MAIN CONTENT
3.1 Illustration
1. The following list of balances are extracted from the books of
M. Orji at 30th June, 2004:
N
Stock at start 6,000.00
Purchases 14.600.00
Purchase return 300.00
Sales 20,200.00
Sales returns 200.00
Wages 1,000.00
Salaries 1,600.00
Insurance premium 500.00
Rent and rates 200.00
Discount allowed 50.00
Discount received 160.00
Commission received 500.00
Stock at close 7,000.00
Required:
From the above information, prepare M. Orji’s trading and profit and
loss accounts for the year ended 30th June, 2004.
62
MR. ORJI: TRADING ACCOUNT FOR THE YEAR ENDED

30TH JUNE, 2004
MR. ORJI, PROFIT AND LOSS ACCOUNT FOR THE YEAR

ENDED JUNE 2004
N N
Salaries 1,600.00 Gross profit b/d 5,000.00
Insurance premium 500.00 Discount received 160.00
Rent and rates 200.00 Commission received 500.00
Net profit 3,310.00
5,660.00 5,660.00
2. The following is the list of the balances extracted from books of

K. Obenta on 30th September, 2005.
N
st
Stock: 1 October, 2004 2,800.00
Stock: 30th September, 2005 3,200.00
Purchases 30,800.00
Returns outwards 400.00
Sales 40,200.00
Returns inwards 200.00
Salaries 2,250.00
Rent and rates 2,000.00
Height and heating 1,760.00
Carriage outward 50.00
Insurance premium 1,000.00
Commission paid 750.00
Required:
63
a) Prepare trading and profit and loss accounts from the above
records for the year ended 30th September, 2005.
b) Answer the following questions:
i) What was the average stock held during the year?

ii) What was the cost of goods sold during the year?
iii) What was the rate of turnover of stock?
iv) Express the gross profit as a percentage of turnover
v) Express the net profit as a percentage of turnover.
K. OBENTA: TRADING ACCOUNT FOR THE YEAR ENDED

30TH SEPTEMBER, 2005

N
bi) Average stock: Opening stock: = 2,800
Closing stock: = 3,200
2,800 + 3,200
= = 3,000.00
2
ii) Cost of goods sold: Opening stock = 2,800

Purchases: = 30,400
= 33,200
64
Less closing stock = 3,200 = 30,000.00
iii) Rate of turnover: Cost of goods sold: = 30,000

Average cost = 3,000
= 33,000
3,000 = 10 times
iv) Gross profit as percentage of turnover:

Gross profit = 10,000
Turnover = 40,000
10,000 100
= x = 25%
40,000 1
v) Net profit as percentage of turnover:

Net profit = N2,000
Turnover = N40,000
2,000 100
= x = 5%
40,000 1
1. What is the purpose of a profit and loss account?

2. What differentiates a profit and loss account and a trading
account.
4.0 CONCLUSION
The profit and loss account starts from the gross profit/loss brought
down, then deduct all expenses and add all revenue you will have net
profit/loss.
5.0 SUMMARY
Profit and loss account involves the deduction of expenses and addition
of income or revenue. The revenue items include discount received,
commission, rent and other receivable items.
Prepare the pro-forma of trading and profit and loss accounts of a typical
company for the year ended 30th September, 2005.
65
Okwoli, A.A. (1997). Principles of Accounting. Zaria: Malthouse.
UNIT 5 THE BALANCE SHEET
CONTENTS
1.0 Introduction
2.0 Objective
3.0 Main Content
3.1 Assets
3.2 The Liabilities and Owners’ Equity
3.3 Balance Sheet Formula
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
A balance sheet is the financial statement showing the assets, liabilities

and owners equity of an enterprise on a specific date. The balance sheet
date is the point in time in which the financial condition of the business
entity is determined. At the cut-off date, it is the dividing line between
successive accounting periods. However, because of the constant stream
of activities of a business entity, its financial condition cannot remain
static. The balance sheet therefore is just a picture of the entity's
financial condition at a point in time-just a still picture of dynamic
process.
The balance sheet of a business just like a coin consists of two sides-the
assets side and the liabilities and owners' equity side. All assets have
sources represented by liabilities and equities. Any process by which an
66
asset is acquired entails increase in either the liabilities or equities.

There are four main sources of acquiring assets that are reported in the
balance sheet-assets can be bought on credit which creates liability;
money can be borrowed which also creates owner's equity and business
can increase by ploughing back profit which also creates equity.
Because all assets are financed by liabilities and owners' equity, the two
sides must balance hence the term balance sheet and the balance sheet
equation: Assets = Liabilities + Owners' Equity.
2.0 OBJECTIVE
• state the objectives.
3.0 MAIN CONTENT
3.1 Assets
The assets side of the balance sheet reports economic resources owned
by the business entity. Assets are properties and rights to properties or
services owned and the potential monetary value and ownership. Some
asset from such economic resources will last over several accounting
periods.
Examples of fixed assets include land and buildings, machinery and

plant, equipment, tools, vehicles and office furniture. This class of assets
is used from year to year and is therefore subject to yearly depreciation.
Depreciation in this case is an attempt to measure that position of the
economic resources the asset had been used in the course of business
during the accounting period under consideration.
Other assets are termed 'current' because the benefits to be derived from
them will be exhausted within one accounting period. These assets are
cash or assets that may be reasonably be expected to be realized in cash
or consumed within one year or one operating cycle of the business.
Good example of current assets includes quoted investments, stocks,
debtors, prepayments, and cash.
And some assets are fictitious because they represent the expired costs
incurred in the business which management has decided to write-off
over several accounting periods because they feel these expenses will
also benefit those future periods. Examples of these assets include
formation expenses, and discounts on shares and debentures. Assets may
67
also be classified into tangible and intangible assets. Tangible assets are
those assets that can be seen and touched. Intangible assets are not
visible but imaginary creations such as patent rights trade marks and
goodwill.
3.2 The Liabilities and Owners’ Equity
The other side of the balance sheet reports the liabilities and owners'
equity-the sources of finance for the business. Liabilities may be
long-term or current. Long-term liabilities are made up of debentures
and other long-terms loans. Current liabilities on the other hand are
debts that are expected to be liquidated within one year or one operating
cycle, and the payment of which requires the use of presently classified
current assets. This class of liabilities is made up of tax payable,
creditors, accrued expenses, proposed dividends and bank overdrafts.
Owners' equity is the interest of the owners in the business. Owners'

equity is made up of the amounts that have been invested in the business
in terms of share capital, and profits that have been earned and retained
in the business in terms of reserves, provision and undistributed
earnings.
Rationally, there are two main approaches to preparing a balance

sheet-the liquidity approach, and the permanence approach. In the order
of liquidity, the balance sheet is prepared by listing all the items that are
most liquid in the business first before bringing in items that are more
permanent. In the order of permanence, items of permanent nature are
first treated in the balance sheet and then current items are taken into
consideration.
Recently, a third approach to preparing a balance sheet was introduced.

This approach prepared the balance sheet in a vertical format by
showing the long-term sources of finance on top of the assets they
finance. This method is most applicable to published accounts of
companies but could be used in any organization.
3.3 Balance Sheet Formula
i. Capital invested = The actual amount of money's worth

brought into the business by the
owner(s) from outside.
ii. Capital owned = The capital at the beginning of the
year plus profit less drawings
iii. Capital employed = Sum of capital owned and the total
liabilities. It is equal to the total
assets.
68
iv. Working capital = Current assets less current liabilities.
Illustration
Prepare A. ldoko's balance sheet from the figures given below in his list
of balances
Dr Cr
Capital 12,000.00
Land and buildings 9,235.00
Mortgage on premises 5,545.00
Drawings 1,500.00
Profit and loss account balance 1,800.00
Furniture and fittings 2,560.00
Motor vehicles 1,731.00
Closing stock 1,500.00

Debtors 5,737.00
Creditors 3,677.00
Cash book balance 759.00
23,022.00 23,022.00
b) And answer the following questions from the above data:
i) What is the capital invested in the above balance sheet?

ii) What is the capital owned?
iii) What is the capital employed?
iv) What is the working capital?
1. Order of Liquidity Approach
A. IDOKA: BALANCE SHEET AS AT 31ST DECEMBER, 1999
2. Order of Permanence Approach
69
A. IDOKA: BALANCE SHEET AS AT 31ST DECEMBER, 1999
3. The Vertical Approach

N N
Capital 12,000.00
Add net profit 1,800.00
13,800.00
Less drawings 1,500.00 12,300.00
Long-term Liabilities
Mortgage on premises 5,545.00
17,845.00
FINANCED BY:
Fixed Assets
Motor vehicle 1,731.00 13,526.00
Current Assets
Stock 1,500.00
Debtors 5,737.00
Cash 759.00
7,996.00
LESS CURRENT LIABILITIES

Creditors 3,677.00 4,319.00
Working capital 17,845.00
N N
i) Capital = Original capital 12,000.00
ii) Capital owned = Capital at beginning 12,000.00
Add net profit 1,800.00
70
13,800.00
Less drawing 1,500.00
12,300.00
iii) Capital employed = Capital owned 12,300.00
Add total liabilities
Long-term liabilities 5,545.00
Current liabilities 3,677.00 9,222.00
21,522.00
iv) Working capital = Capital Assets 7,996.00
Less current liabilities 3,677.00 4,319.00
From the following Trial Balance of D. Galadima’s books, prepare

Trading and Profit and Loss Accounts for the year ended 30th
September, 2002 and also a balance sheet as at that date.
Dr Cr
N N
Capital 38,400.00
Mortgage loan 20,000.00
Drawings 6,500.00
Cash at bank 10,980.00
Motor vehicles 5,920.00
Debtors 11,040.00
Creditors 4,000.00
Salaries 23,416.00
Discount allowed 4,889.00
Discount received 10,220.00
Light and heat 6,520.00
Insurance premium 592.00
st
Stock at 1 October, 2001 18,600.00
Cash in hand 552.00
Carriage outwards 1,300.00
Returns inward 2,900.00
Returns outwards 5,064.00
Purchases 108,984.00
Sales 178,900.00
Closing stock amounted o N21,800 256,384.00 256,584.00
2. What is a balance sheet?
4.0 CONCLUSION
71
In this unit, we have known that a balance sheet is a picture of the

dynamic process of a business; which consists all the net worth of the
organization.
5.0 SUMMARY
The balance sheet of a business, just like a coin, consists of two sides, is
made up of the assets side and the liabilities and owner's equity side.
Prepare Dan Musa’s balance sheet from the figures given below in his
list of balances as of 31st March, 2006.
DR CR
N N
Capital 20,000
Furniture and fitting 5,000
Drawings 1,000
Profit and loss account 5,000
Motor vehicles 9,000
Premises 10,000
Debtors 2,000
Closing stock 1,000
Creditors 5,000
Cash 2,000
30,000 30,000
Jenning, A.R. (2004). Financial Accounting 2nd Edition. UK: Ashfor

Press.
Okwoli, A.A. (1997). Principles of Accounting. Zaria: Malthouse Press.
72
MODULE 3
Unit 1 Accounts of Non-Trading Organizations

Unit 2 Departmental Accounts
Unit 3 Consignment Accounts
Unit 4 Container Accounts
Unit 5 Introduction to Partnership Accounts
UNIT 1 ACCOUNTS OF NON-PROFIT

ORGAIZATIONS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Receipt and Payment Account
3.2 The Income and Expenditure Account
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Clubs, associations, societies and other non-profit making organizations

exist in most countries of the world to promote activities, which interest
members, or to provide useful services to mankind. In Nigeria today, a
lot of these organizations exist to promote activities or to provide
73
services to needy people. Good examples of non-profit making or

non-trading organizations in Nigeria include the Eccodu of Nigeria, the
Red Cross Society, the People's Club, Football Clubs, Old Students'
Associations and so many others. The term ‘non-trading organizations’
and ‘non-profit making organizations’ are used to describe the same
form of organizations as profit machinery is clearly associated with
trading.
These non-profit making organizations generate their income in the

main from registration of members, annual subscriptions by members,
donations and sometimes from the proceeds of social activities
organized by them. Their expenditures result from sponsoring the
activities that interest their members, maintenance of their secretariats
and occasional donations to charitable organizations. The name does not
however restrict launching as commonly organized by these entities to
raise funds from interested members of the public. Certain income and
expenditures are however incidental to the existence of some of the
non-trading organizations.
The equivalent of capital, cash book, profit and loss account and net
profit or loss in the trading organizations are known as the consolidated
or accumulated fund, receipts and payments account, income and
expenditure account, and the net surplus or deficit respectively in the
non-trading organizations.
2.0 OBJECTIVES
• describe the methodology involved in preparing accounts for non-

profit organizations
• explain and prepare the various accounts.
3.0 MAIN CONTENT
3.1 The Receipts and Payments Account
The receipts and payments account operates in the same manner with
the cash book of the trading organizations. It is drawn in such a way that
it has both debit and credit sides. The debit side takes records of all the
entity’s cash receipts, which is the receipt side, while the credit side
(payments side) records all the cash payments.
In effect, all the entity's cash transactions are recorded in this book
irrespective of the period for which the cash is received or paid or
74
irrespective of the transaction for which the cash is received or

expended.
3.2 The Income and Expenditure Account
The income and expenditure account takes records of all revenue items
of the organization for a given period irrespective of whether cash has
been received or paid in respect of them. This account does not take
record of capital items like fixed assets. It operates almost the same way
as the profit and loss account of the trading organizations except that the
end results is either net surplus when revenue exceeds expenditure or net
deficit when expenditure exceeds revenue instead of the profit or loss in
the profit and loss account. All items of revenue nature for the period are
credit entries while all items of expenditure for period are debit entries
in this account.
Illustrations
1. 3,600 old students of a Gwagwalada school decided to form Old

Students Association (OSA) on 1st January, 1995 to which every
member was required to subscribe N5.00 annually. At the end of
the year, all the Old Students except 300 paid their subscriptions.
100 of them paid their subscriptions in advance against 1996. The
school had 100 members on the staff and each member paid N10
to the association. The Old Students decided to issue magazine at
N4 per copy to themselves. All paid without exception. Two local
firms inserted advertisements for which they each paid N75.
3,600 copies of the magazine were printed at the rate of N2.50
each. The association has a full time secretary on a N1,890 salary
per annum out of which Nl,200 had been paid. Traveling
expenses amounted to N2,500 out of which N500 had not been
paid. The association acquired premises at the rate of N5,000;
stationery and postage amounted to N850 for the year.
Required:
a) Prepare the Receipts and Payments Account for the association;

and prepare the income and expenditure account for the
association for the year ended 31st December, 1995.
GWAGWALADA OLD BOYS

RECEIPT AND PAYMENTS ACCOUNT FOR THE YEAR
ENDED 31ST DECEMBER, 1995
RECEIPTS PAYMENTS
75
N N
Subscription (3,600x5) 17,000.00 Printing expenses magazine 9,000.00
Staff donations 1,000.00 Secretary’s salary 1,200.00
Sales of magazine 14,400.00 Traveling expenses 2,000.00
Advertisement receipts 150.00 Premises 5,000.00
Stationery and postage 850.00
32,550.00 32,550.00
Balance b/d 14,500.00
GWAGWALADA OLD BOYS

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR
ENDED 31ST DECEMBER, 1995
Illustration II
The Benue Club has the following assets and liabilities in the books on
1st October, 1994
N
Club premises 5,000.00
Fixtures and fitting 2,000.00
Subscriptions in arrears 1,000.00
Expenses accrued 500.00
During the year, receipts and payments were as follows;
76
Subscriptions received 4,500.00

Printing expenses 1,800.00
Fixtures 800.00
Bar takings 2,500.00
Bar supplies 1,500.00
Receipt from advertisement in the club journal 900.00
Stationery and postage 600.00
Proceeds of dances 2,000.00
Costs of dances 1,500.00
General expenses 1,200.00
The following items must be taken into account:

a) Of the subscriptions paid:
i) N750 was for the previous year, and

ii) N550 was in advance against the following year.
1st October 1994 – 30th September 1995

N N
b) Stock of bar 600.00 800.00
c) Bar creditors 350.00 450.00
d) Printing expenses accrued 200.00
e) Including in the general expenses paid was the N500.00 owing
from the previous year.
f) N400.00 is owing for subscriptions for the current year.
g) The balance of subscriptions for previous year still outstanding is
to be written off as bad debt
h) the balance of fixtures and fitting at 1st October, 1994 is to be
depreciated at 10%.
Required:
As the Financial Secretary of the club, you are required to prepared the:
i. Consolidation funds at start for the club;

ii. Receipt and payments account for the club;
iii. Club Trading Account for the year ended 30th September, 1995
iv. Income and Expenditure Account for the year ended 30th
September, 1995 and
v. Balance Sheet as at 30th
Solution
i. Consolidated or Accumulated Fund = Assets – Liabilities

(all at start)
77
N N
Assets as start:
Club Premises 5,000.00
Fixtures and fitting 2,000.00
Subscriptions in arrears 1,000.00
Bar stock 600.00
Cash at bank 2,500.00 11,100.00
Less liabilities at start:

Accrued expenses 500.00
Bar creditors 350.00 850.00
Consolidated or accumulated fund 10,250.00
THE BENUE CLUB

RECEIPTS AND PAYMENTS ACCOUNT (1995)
RECEIPTS PAYMENT
N N
Balance b/f 2,500.00 Printing expenses 1,800.00
Subscriptions 4,500.00 Fixtures 800.00
Bar takings 2,500.00 Bar supplies 1,500.00
Advertisement receipt 900.00 stationery & postage 600.00
Proceeds of dances 2,000.00 Cost of dances 1,500.00

12,400.00 12,400.00
Balance b/d 5,000.00
iii. In order to prepare the bar trading account there is need to know
the authentic figure for purchase (bar suppliers). Because there
are different figures for opening and closing creditors, the figure
for bar suppliers in the receipt and payments account does not
represent the true figure for the bar suppliers in the receipt and
payments account does not represent the true figure for the bar
supplies any more. If different figures were quoted for opening
and closing debtors in the question in the authentic figure for
sales (bar taking) different from the one reported in the receipts
and payments account would also need to be calculated to
prepare to prepare the bar trading account.
Bar supplies:
78
N
Creditors at close 450.00
Add cash paid to bar suppliers 1,500.00
1,950.00
Less creditors at start 350.00
Bar supplies 1,600.00
THE BENUE CLUB

BAR TRADING ACCOUNT FOR THE YEAR ENDED
N N
Opening stock 600.00 Bar takings 2,500.00
Add bar supplies 1,600.00
Cost of stock available for sale 2,200.00
Less closing stock 800.00
Cost of bar sold 1,400.00
Gross bar profit 1,100.00
2,500.00 2,500.00
iv) THE BENUE CLUB
INCOME AND EXPENDITURE ACCOUNT FOR THE
YEAR ENDED 30TH SEPTEMBER, 1995
v) THE BENUE CLUB

BALANCE SHEET AS AT 30TH SEPTEMBER, 1995
79
1. What are the main differences between trading organizations and

non-trading organization?
2. What are the main sources of income to non-trading
organization?
4.0 CONCLUSION
The non-profit making organizations maintain records in an account
similar to the profit-making organizations.
The similarity is that the receipt and payment is like the cash book while
the income and expenditure have the same setting with the profit and
loss account of the profit making organization.
5.0 SUMMARY
The non-profit making organization generate their income in the main
from registrations and sometimes from the proceeds of social activities
organized by them. And since they do not engage in business, they
maintain different accounting records compared to those of the business
enterprise. Such accounts are the Receipts and Payments account, and
the Income and Expenditure account.
In the next study unit, we shall discuss Departmental Accounts.

Zumuta social club had the following balances as at 31 December, 2005
80
Fixed Assets: N
Plant and equipment 7,500
Furniture and fittings 84,000
Stock:
Catering 2,500
Bar 41,000
Debtor (catering) 1,200
Arrears of subscription 4,300
Prepaid rates and insurance 18,100
Cash at bank 50,500
Liabilities
Creditors:
Catering 4,500
Bar 14,700
Electricity 8,800
Rent 28,000
VAT 5,300
Subscription in advance 20,600
For the year 2006 the club had the following cash book summary
N N N N
Bank Bal. 50,500 Purchases:
Taking; bar 368,000 Bar 262,000
Catering 98,200 466,200 Cathering 97,400 369,400
Subscription 227,600 Wages:
House 82,600
Club 14,300 226,100
Parking rec. 6,400 6,400 Rent, rates
Insurance 85,200
Reg. Fees 37,300 37,300 Electricity 20,600
Printing & Stat. 5,900
Tel./Postage 8,100
Club 23,800
General exp. 9,400
VAT 5,300
Bal. at bank 34,200
788,000 788,000
As at 31st December 2005 the club was owing for; Bar purchase
N16,500, Catering purchases N3,200, Rent N28,000, Electricity N7,400
and VAT N6,000. Subscriptions paid in advance amounted to N22,000
while Rates and insurance paid in advance amounted to N19,800. Club
members owned N1,600 for catering and N4,000 for subscription ending
stock were; Bar N44,200 and catering N3,400, 10 percent is to be
written off the book value of the furniture and fittings.
Required:
Prepared the Zumuata social club's income and expenditure for the
period ended 31st December, and a balance sheet as at that date.
81
Damagum, Y.M. (2004). Introduction of Financial Accounting. Jos:

Clestinno Press.
Okwoli A.A. (1999). Principles of Financial Accounting. Zaria:

Malthouse.
UNIT 2 DEPARTMENTAL ACCOUNTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Departmental Accounting
3.2 Departmental Accounts in Practice
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Departmental accounts are kept by companies that have more than one
department and wish to know the contributions of each department to
their total profits. In this case, it is likely that each department is
regarded as a profit center. Departmental accounts of a company are
customarily shown in columnar form right from the subsidiary books to
the final accounts. Departmental accounts may be prepared just to
ascertain net profits. Departmental accounts in a company are used to
decide on which department to encourage or phase out on the basis of
each department's contribution.
When goods are distributed from the central store of a company to its
departments, it is necessary to charge the goods at selling prices. This is
82
not only to keep adequate control over the department stock but will also
ensure that each department stock is accounted for what may be
regarded as the selling price is simply the addition of the product of a
fixed percentage to the cost price. It necessitates the preparation of two
major accounts in respect of each department-stock account and
mark-up account.
When goods are charged to each department at selling prices the stock
should be debited accounted with the value of the percentage that had
been added. The proceeds of sales are credited to the stock account. If
all charges goods are not sold, the mark up account is debited with the
value of percentage added to such stock so that any balance could
represent the actual gross profit realized. The balance carried forward on
the stock account minus balance carried forward on the mark-up account
is usually the cost price of the unsold stock.
In a situation where the company is forced to reduce selling prices, the

reduction in the mark up should be used in the valuation of the closing
stock also. It is suggested that the stock account and the mark up
account be prepared in memorandum forms.
Goods may be transferred from one department to another. When such

happens the goods should not simply be merged with the purchase or
central transfer of sales of the departments involved but should be
recorded in special columns of inter-departmental transfers at both sides
of the accounts concerned.
In an attempt to ascertain departmental net profits, the accountants

comes face to face with two types of expenditure – the expenditure that
is specific to each department and the expenditure that is common to all
the department. The specific expenditure can only be distributed among
the departments by the process of appointment. It is suggested that
selling and distribution expenses should be apportioned in proportion
either to space occupied by each department, average value of stock held
by each department, departmental turnovers or number of articles sold
by each department and interest charges should be apportioned to the
departments in proportion to the capital employed in each department.
Examination question may however give specific instruction as to the
method of apportionment.
2.0 OBJECTIVES
83
• explain the difference between departmental accounting and a single

accounting system
• describe the various methods of apportioning expenses
• explain the basic concept of segregating departmental functions.
3.0 MAIN CONTENT
3.1 Departmental Accounting
Illustration
1. Okopi stores has a number of departments. A memorandum stock

account and a memorandum mark-up account are kept for each of
the departments. The following figures relate to the clothing
department of the stores.
N
st
Stock at cost 1 July, 1990 50,400.00
th
Purchase to 30 June, 1991 276,300.00
th
Sales to 30 June, 1991 375,000.00
Mark-up 20% on cost
The opening stock included goods, which cost N13, 500. The selling
price of these goods was marked-down by 10%. They were sold during
the year at the new price. Again, goods which had cost N81,000 had
their selling price reduced to N95,300. Four fifths of these goods were
sold during the year.
Required:
Show the memorandum stock account and the memorandum mark-up

account for clothing department of this store for the year ended 30th
June, 1991. Explanatory analyses are also required as appendices to the
accounts.
MEMORANDUM STOCK ACCOUNT AT MARK UP PRICES
84
MEMORANDUM MARK UP ACCOUNT
Analyses
N N
1. Stock:
Stock at 1st July, 1990 50,400.00
Add purchase 276,300.00 326,700.00
Less cost of sales 314,892.00
Stock at close (June 30) at cost 11,808.00
2. Sales:
Selling price Cost price Gross profit
N N N
a) Opening stock at mark down price
Cost 13,500
Add 20% mark up 2,700
16,200
Less marked down 1,350 14,850.00 13,500.00 1,350.00
b) Current year mark down prices;
Selling price (0.8 x 95,300) 76,240.00 - -
Cost price (0.8 x 81,000) - 64,800.00 11,440.00
c) Balance at full marked up price 283,910.00 236,592.00 47,318.00
375,000.00 314,892.00 60,108.00
Selling Cost price Gross profit

3) Marked upon N11,808 at normal 2,362
Rate of 20%
85
Less markdown on unsold stock

0.2 x (1.2 x 81,000-95,300) 380,000
1,982,000
3.2 Departmental Accounts in Practice

The Monguno Limited has two departments: the Garment Department
and the Electronics Department. The following balances are extracted
from the books of the company as at 31st December, 2005.
GENERAL GARMENT ELECTRONICS

N N
Opening stocks 10,000.00 12,000
Machinery
(Cost N8,000.00) 7,200.00
Capital 40,000.00
Debtors 8,900.00
Creditors 3,000.00
Sales 70,000.00 39,600.00
Purchases 56,000.00 17,000.00
Wages 1,600.00 12,200.00
Rent and rates 500.00 960.00
Dept. of Machinery 800.00
Salaries 600.00 600.00
General expenses 600.00 240.00
Carriage outwards 2,000.00
Interest on investment 700.00
General reserve 12,400.00
Investments 10,000.00
Cash in hand 4,100.00
Closing 10,400.00 12,300.00
Required:
Prepare from the above information the trading and profit and loss
accounts for the year ended 31st December, 2005, showing the
percentage which the gross and net profit bear to the turnover of each
department and the total.
MONGUNO LIMITED
TRADING ACCOUNTING FOR THE ENDED,
31 DECEMBER, 2005
86
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED,

31ST DECEMBER, 1995
MONGUNO BALANCE SHEET AS AT 31ST DECEMBER, 2005
Garba Brothers carry on their business through four departments. The

departments are numbered A to D. The following particulars relate to
the departments:
A B C D
Opening stock 50,000.00 20,000.00 10,000.00 15,000.00
Purchases 625,000.00 375,000.00 125,000.00 325,000.00
Sales 600,000.00 262,500.00 118,750.00 287,500.00
87
Closing stocks 150,000.00 175,000.00 25,000.00 75,000.00
Expenses incurred are as follows:

N
Commission paid 9,000.00
Salaries 60,000.00
Discount allowed 2,000.00
Insurance 1,000.00
The expenses are to be charged to each department in proportion to the

purchase of that department.
Required:
Departmental trading and profit and loss account for the year ended 30th
September, 1999.
What are the uses of departmental accounting?
4.0 CONCLUSION
Departmental accounts may be prepared just to ascertain departmental

gross profits or to ascertain both the departmental gross profits and net
profits or loss.
5.0 SUMMARY
Departmental accounting is a system whereby the operational activities

of an organization are accounted for along departmental or segmental
times rather than from a single unit of collective perspective.
What are the methods of apportionment of indirect expenses in

departmental accounting?
Damagum, Y.M. (2003). Introduction to Financial Accounting. Jos:

Clestinno Press.
88
Okwoli, A.A. (1999). Principles of Financial Accounting. Zaria:

Malthouse Press.
UNIT 3 CONSIGNMENT ACCOUNT

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Preparation of Consignment Account
3.2 Consignment Account Illustration
4.0 Conclusion
89
5.0 Summary
1.0 INTRODUCTION
A consignment is an arrangement whereby goods are sent to an agent
who tries to sell then on behalf of the sender on commission basis. There
is therefore a consignment when goods are sent to an agent known as the
consignee for sale by the sending party called the consignor. A paper
called ‘proforma invoice’ which gives brief descriptions of the goods on
consignment and the minimum price in which could be sold normally
accompanies all goods on consignment as instructions from the
consignor to the consignee until they are sold by the consignee. At no
time does ownership of the goods pass to be consignee in his capacity as
a consignee and therefore all expenses in connection with such goods
are borne by the consignor.
When the consignee sells the goods consigned to him, he is allowed to

collect the proceeds, which after the deduction of his expenses in respect
of the goods and his agreed commission should be remitted to the
consignor. A further concession called ‘del credere’ commission may be
granted at an agreed percentage of the proceeds of sales to the consignee
if he guarantees payment in case of occurrence to bad debts in the
transactions. The practice of fair accountability requires the consignee to
render to the consignor an account called ‘account of sale’ showing
particulars of the consignment, the basis of the consignee’s expenses
and commission and finally showing the net amount due to the accounts
that may be prepared by the consignor after taking all associated income
and expenditure into consideration, or after necessary reconciliations.
Two people’s account books are affected when goods are sent on
consignment-the consignor’s books and the consignee’s books. In the
consignor’s books three main accounts may be opened, namely the
consignment outward account which shows the cost of goods sent on
consignment, the consignment to consignee account which shows the
proceeds of sales of the consigned goods and the consequent net profit
or loss on the consignment, and the consignee account which records the
gross proceeds of the sale, his entitlements and the balance to be
remitted to the consignor. In the consignor's balance sheet unsold goods
on consignment form part of his current assets under the name of goods
on consignment.
In the consignee's books only one account - the consignor's account – is

of particular interest. The consignor's account shows the gross proceeds
on sale of the consignment, all expenses incurred by him in respect of
the consignee. He enters the cash proceeds of sale in hid private cash
90
book of sale of the consignment when the consignment is paid the cash
book should be credited. He does not concern himself with any cost not
borne by him. Unlike the consignee, the consignor takes all costs into
account to determine his profit or loss on consignment.
2.0 OBJECTIVES
At the end of this unit, you should able to:
• explain the nature of consignment account

• describe the various concepts of consignment transactions.
3.0 MAIN CONTENT
3.1 Preparation of Consignment Account
The following took place in respect of a consignment of goods from
MaiLafia of Lafia and Achebe of Abagana;
i) On 1st January, 1998 MaiLafia sent 8,000 metres of hand woven

clothes valued by proforma invoice at 50 per metre to Achebe.
ii) The same day, MaiLafia paid the following expenses.
N
Packing charges 103.00
Insurance charges 157.00
Custom duties 200.00
Transport cost 300.00
iii) On 29th January 1998 Achebe sent the account of sale to

MaiLafia showing the following results and associated costs.
N
Proceeds of sales 5,000.00
Fire insurance 20.00
Import duties 50.00
Warehouse expenses 75.00
iv) Achebe is entitled to a flat commission at.5% of the gross sales
and a further 0.5% of the gross sales as del credere commission
for guaranteeing against bad debts.
v) The cloths had cost MaiLafia N0.15 per metre at Lafia on

1st January, 1998.
vi) Achebe remitted the net balance by bank draft to MaiLafia on
31st January, 1998.
Required
91
Show the relevant accounts in the books of the consignor and the
consignee for the month of January, 1998 Journal entries are required.
Solution
DATE PARTICULARS LF DR CR
1998 N N
Jan. 1 Consignment to Achebe Dr. 12,000.00
Consignment Outwards Account (Being 1,200.00
the cost of goods sent on consignment)
to Achebe N15 x 8,000 – N1,200
Jan. 1 Consignment to Achebe Account Dr. 760.00

Jan. 1 Packing charges account 103.00
Insurance charges account 157.00
Custom duties account 200.00
Transport expenses account 300.00
(Being sundry expenses paid by
MaiLafia – the consignor in respect of
his consignment
Jan. 1 Achebe Dr. 5,000.00
Consignment to Achebe 5,000.00
(Being proceeds of sale of the goods on
consignment by Achebe)
Jan. 1 Consignment to Achebe account Dr. 145.00
Achebe: 20.00
Fire Insurance 60.00
Import duties 75.00
Warehouse expenses
(Being sundry expenses paid by Achebe)
Jan. 1 Consignment to Achebe account Dr. 275.00
Achebe: 5% commission 250.00
0.5% del credere commission 25.00
(Being commission due to Achebe on
the consignment
Jan. 1 Bank account Dr. 4,580.00
Achebe 4,580.00
(Being remittance of net proceeds by
Achebe to the consignor – that is the
difference between the gross proceeds
and Achebe’s exp. nd commissions)
CONSIGNMENT OUTWARDS ACCOUNT
N N N N
Jan. 30 Transfer of trading 1,200.00 Jan. 1 Consignment 1,200.00
account to Achebe
Jan. 30 Consignment 1,200.00 Jan. 29 Consignee 5,000.00
Outwards (proceeds of
sale)
Jan. 1 Consignor
92
Expenses:
Packing 103.00
Insurance 157.00
Custom duties 200.00
Transport 300.00
Jan. 1 Consignee:
Import duties 50.00
Warehouse 75.00
Commissions 275.00
Jan. 29 Prof on consignment 2,620.00
5,000.00 5,000.00
ACHEBE, ABAGANA
Jan. 29 Consignment to
Achebe (proceeds
of sales) 5,000.00 Jan. 29 Fire insurance 20.00
Jan. 29 Import duties 50.00
Jan. 29 Warehouse expenses 75.00
Jan. 29 Commission 250.00
Jan. 29 Del credere
Commission 25.00
5,000.00 Jan. 29 Bank 4,500.00
IN THE CONSIGNMENTS BOOKS

JOURNAL PROPER (ACHEBE, ABAGANA)
1997 N N
Jan. 29 Mai Lafia Dr. 145.00 20.00
Cash: Fire insurance 50.00
Import duties 75.00
Warehouse expenses
(Being sundry expenses paid in
cash by Achebe-the consignee)
Jan. 29 MaiLafia Dr. 275.00
Commission receivable (Being 275.00
commission receivable by Achebe
and deducted from the consignors
account)
Jan. 29 Cash Account Dr. 5,000.00
Mai Lafia 5,000.00
(Being proceeds of sale of
consignment)
Mai Lafia 4,580.00
Bank account 4,580.00
(Being payment of net proceeds of
sale to the consignor
MAILAFIA, LAFIA
N N
Jan. 29 Cash: Jan. 29 Cash (Sales) 5,000.00
Import duties 50.00
Ware expenses 75.00
Jan. 29 Commission 275.00
Jan. 29 Bank 4,580.00
93
5,000.00 5,000.00
3.2 Consignment Account Illustration
Bankole of Jos consigned goods to Obi in Enugu on 1st April, 1998. The
following data relate to the transactions for the month of April, 1998.
April Bankole consigned 500 crates of goods costing N15 per crate.
April Bankole paid Transport expenses Nl,000
Handling charges 500
Sundry expenses 1,500
April 15 Obi paid Carriage expenses 1,000
Deliver expenses 1,000
Fire insurance 550
April 25 Obi sold 450 of the crates of goods at N30 each
April 26 Obi submitted an account of sale to Bankole and remitted the
net Balance in bank draft to him (Bankole) after deducing his
agree Commission at 5% of the sales.
April 30 10 of the crates were discovered to have been damaged I transit
and had to be discared. Bankole agreed to write them off his
books.
Required:
Show these transaction in the:
i) Consignor's book including the balance sheet on 30th April,

1998; and
ii) Consignee's books.
Solution
This question brings out a situation where both the consignor and
consignee made expenditure on goods that have not been sold in full. It
is suggested that all the expenditure be written-off against the present
revenue instead of spreading the cost in proportion to crates on
consignment as other authors may suggest.
IN THE CONSIGNOR’S BOOKS

JOURNAL PROPER (BANKOLE JOS)
1998 N N
April 1 Consignment to Obi Account Dr. 7,500.00 7,500.00
Consignment outwards account
(being the cost of goods sent on
94
consignment to Bankole N15 x 500)

April 1 Consignment to Obi Account Dr. 3,000.00
Transport charges account 1,000.00
Handling charges account 500.00
Sundry expenses account 1,500.00
(Being sundry expenses paid by the
consigner in respect of his consignment)
April 1 Consignment to Obi Account Dr. 2,550.00
Obi:
Carriage expenses account 1,000.00
Delivery expenses account 1,000.00
Fire insurance account 550.00
(Being sundry expenses paid by the
consignee)
April 26 Obi Dr. 13,500.00
Consignment of Obi account 13,500.00
(Being proceeds of sale of part of goods
on consignment by Obi
April 26 Consignment to Obi account Dr. 675.00
Obi (5% commission) 675.00
(Being commission due to Obi on the
consignment)
April 26 Bank account Dr. 10,275.00
(Being remittance of net proceeds by to 10,275.00
the consignor)
April 30 Consignment outwards account Dr. 150.00
Consignment to Obi account 150.00
(Being goods on consignment which were
damaged and had to written off)
CONSIGNMENT OUTWARDS ACCOUNT
April 30 Consignment to Obi 150.00 April Consignment to Obi 7,500.00

April 30 Stock of unsold goods 600.00
April 30 Transfer of trading account 6,750.00
7,500.00 7,500.00
May 1 Stock balance b/c
CONSIGNMENT TO OBI ACCOUNT
95
OBI, ENUGU
BANKOLE
BALANACE SHEET AS AT 30TH JUNE, 1998
Current Asset
Goods on consignment N600.00
IN THE CONSIGNMENT
JOURNAL PROPER (OBI, ENUGU)
BANKOLE, JOB
96
1. What is consignment?
2. What are the parties involved in a consignment transaction and
how do they settle their account?
4.0 CONCLUSION
The .consignment account is mainly concerned with the account records

of transactions involving the consignor and cosignee, as they concern
the consignment of goods by the seller and deliver to the buyer.
5.0 SUMMARY
The consignment transactions involve maintaining two set of books: one

for the consignor's account which shows the gross proceeds on sale of
the consignment and all the expenses incurred by him in respect of the
consigned goods. In the next study unit, we shall discuss container
accounts.
What do you understand by del credere commission in consignment

transaction?
Damagun, Y.M. (2004). Introduction to Financial Accounting. Jos:

Clestino Press.
Okwoli, A.A (1999). Principle of Financial Accounting. Zaria:

Malthouse Press.
UNIT 4 CONTAINER ACCOUNTS
97
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Preparation of Container Account
3.2 Container Account Illustration
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
A container is any item that contains goods for the purpose of either
preservation or conveying to agreed destination. In marketing? the
container is called the package, which may be dividend into three main
levels of materials-the primary, secondary and the labeling level. The
primary package is the producer's immediate container, the secondary
package and the labeling is nay-printed information, which appear on
the package to describe the product in it. In modern times, examples of
container abound every where-a carton of beer, a crate for soft drinks,
waterproof bags containing shirts, bed sheets, granulated sugar, salt and
so on.
In accounting literature, a container is looked at from two main

stand-points-either it is non-returnable or returnable. In costing the
goods, the cost of packaging would have been taken into consideration
for the non-returnable. A container of that nature is treated as a
manufacturing expenses and record is taken of it after sales. Customers
are not chargeable for non-returnable package. The cost of the returnable
container is not taken into consideration in costing the goods that are
sold. It has its own distinct cost, which is returnable. Returnable
containers norn1ally attract deposits from customers at the time of sale.
The amount to refund on return of the containers is less than the amount
of the deposit. The difference between the amount of deposit (the
charge-out price) and the amount refunded (the credit back price) on
return of the containers represents profits to the business. Just like
opening and closing balance of stock of goods for sale there can also be
opening ant closing balances of stocks of containers.
Two main accounts are recommended to use in recording the

transactions concerning containers-the containers stock account and the
containers suspense account. Ideally, each of these accounts should
contain three columns at each of its sides-the quantity columns for the
total figure involved in the transaction, price column for the price at
98
which each transaction takes place and the amount column for the net
totals of the transaction. The containers stock account shows the profit
or loss arising on containers while the containers suspense account deals
with movements of containers to and from customers Four main prices
may be associated with container accounts-the book value which
represents the price at which stock of containers is valued for balance
sheet purposes, cost price which is paid for purchase of new containers,
charge-out price which will and credit back price which represents the
amount which customers are credited with on return of the containers.
2.0 OBJECTIVES
• explain the various prices involved in certain transactions

• describe how certain records can be maintained.
3.0 MAIN CONTENT

3.1 Preparation of Container Accounts
We will take two hypothetical cases for our illustrations. In the first case
it will. Be assumed that the book value, the cost price, the charge-out
price and the credit back price are the same for the containers. The
second illustration will assume that the prices vary.
1. Ojiji Company delivers goods to customers in plastic crates

which are involved to them at N10 each and credited in full if
returned within three months of delivery.
The crates are purchased by the company from another, Plastics limited,
at the same rate of N10 per crate.*
On 1st January, 1993 there were 5,000 crates in the warehouse, 17,000
with customers and 500 in transit.
During the year, the following transactions took place:

- 10,000 crates were purchased during the year;
- 20,000 crates were invoiced to customers;
- 30,000 crates were returned by customers and credited in full;
- 200 crates were retained by customers;
- Repairs to the tune of N1,000 were made to the crates;
- 500 crates were damaged beyond repairs and therefore discarded; and
- the closing stock take shows;
i) 24,000 crates in the warehouse
ii) 6,800 crates in the hands of customers, and
iii) 1,200 crates in transit.
Required
99
Prepare appropriate accounting records for all crate transactions for the
year ended 31st December, 1993 in the books of the company,
Solution
Stock at start: Warehouse 5,000
Customers 17,000
In transit 500
22,500 at N10 = N225,000.00
Cost of new purchase: 10,000 at N10 = N100,000.00
Cost of crate newly issued to customers: 20,000 at N10 = N200,000.00
Value of crates returned by customers: 30,000 at N10 = N300,000.00
Value of crates retained customers: 200 at N10 = N2,000.00
Value of damaged crated: 500 = 0
Stock at close Warehouse 24,000
Customers 6,500
In transit 1,200
32,000 at N10 = N320,000.00
PLASTIC CONTAINERS STOCK ACCOUNT

Qty. Price Amount Qty. Price Amount
N N N N
Opening stock b/ Containers
f
Warehouse 500 Scrapped 500
Customer 17,000 Containers
Transit 500 10 225,000.00 Suspense
Cash 100,000.00 Retained 200 10 2,000.00
Purchases 10,000 10
Cash Repairs Profit and Loss 6,000.00
Containers Closing stock
c/d
Recovered 200 10 Warehouse 24,000
Customers 6,800
Transit 1,200 10 20,000.00
32,700 323,000.00 32,700 328,000.00
Stock b/d
Warehouse 24,000
Customers 6,800
Transit 1,200 10 320,000.00
PLASTIC CONTAINERS SUSPENSE ACCOUNT

Qty. Price Amount Qty. Price Amount
N N N N
Crate returned 30,000 10 300,000.00 Opening
by customer balance with
customers 17,000 10 170,000.00
Container 500 Crate sent to
customers 20,000 10 200,000.00
100
Stock: Containers
Retained by
Customers 200 10 2,000.00
Closing
Balance with
Customers 6,800 10 68,000.00
37,000 370,000.00 37,000 370,000.00
3.2 Container Account Illustration
2. Ijika (Nigeria) Limited delivers goods to customers in wooden

crate. The crates are bought from Wooden Products Limited at
the rate of N8 each but are invoiced to the customers at N10 each.
There is an arrangement that for each crate returned by customers
within three months of delivery in good condition they (the
customers) will be credited with N9.
On 1st July, 2004 there were 7,500 crates in the warehouse 25,500 with
customers and 360 in transit. During the year to 30th June, 2005, the
following transactions took place:
- 27,600 crates invoiced to customers.

- 33,000 crates were returned in good time and credited at
full-agreed price.
- 330 crates were returned late by customers. 150 of these crates
were still credited in full but reminder were credited at N5 each
- Repairs were made to the crates at N780
- 120 crates were retained by customers
- 90 crates damaged and discarded but sold at half of their original
cost as scrap.
On 30th June 1995, the stock of crate had a break down as follows:
- Warehouse 12,900, customers 19,650

- Transit 300
In this company, closing stock of crates were valued at N7 each for wear
and tear.
In other words, the crates depreciate at the rate of 12.5% irrespective of
when the purchases are made.
Required:
Show:
i) the wooden containers stock account
101
ii) the wooden containers suspense account; and

iii) the extracts to the transaction in the balance sheet.
WOODEN CONTAINERS STOCK ACCOUNT
WOODEN CONTAINERS STOCK ACCOUNT
102
1. In accounting, containers are categorized into two distinct groups

– returnable and non-returnable. Discuss.
2. What are the main prices that may be associated with containers?
4.0 CONCLUSION
Container accounting treats those containers that are returnable as a

basis of trading of the organization. The account maintains all records
involved in those containers issued to customers.
5.0 SUMMARY
Those containers that are treated as a manufacturing expenses pose no

problem to the container accounting after sales. In the next study unit,
we shall discuss Introduction to Partnership Accounts.
The management of Plateau Breweries Limited delivers its products to

customers in plastic containers. The containers are bought at N16 per
container but are invoiced at N20 to customers. The company
commenced business on 151 January, 1991 and the following data
represented their transaction for the year.
i) 6,800 containers were purchased;

ii) 4,000 containers invoiced to customers
103
iii) 2,480 containers were returned in good condition and

credit at the agreed credit-back price ofN18 per container.
iv) 40 containers were badly damaged and had to be discard;
and
v) 1,280 containers were retained by customers;
The stocks of containers at 31st December, 1991 were located as follows:
At the warehouse 3,800

With customers 240; and
In transit 720
The company decided to adopt the policy of valuing the stock of

containers at N14 per container to allow for depreciation.
Required to prepare:
1) the containers stock account.

2) the containers suspense account.
Damagum Y.M. (200). Introduction to Financial Accounting. Jos:

Clestino Press.
Okwoli, A.A (1999). Principles of Financial Accounting. Zaria:

Malthouse Press.
UNIT 5 INTRODUCTION TO PARTNERSHIP

ACCOUNTS
CONTENTS
104
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Appropriation Accounts
3.2 Maintenance Capital Accounts of Partners
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Section 1 of the partnership Act of 1890 defines a partnership as

“relationship, which subsists between persons carrying on a business in
common with a view of profit”.
The owners of a partnership business are known simply as partners. A

partnership business may originate from one of three ways:
a) Where two or more independent persons decide to start a wholly

new business or buy an independent going concern. In this case,
the assumption is that none of them (the would-be partners)
possesses an existing business and if there is an existing business
will not be used in the partnership.
b) Where one person who is already in business decides that he
needs somebody to help him in running the business and so
admits a person.
c) Where two or more persons each carrying on separate business as
sole traders decide to amalgamate their independent concern to
form a partnership.
THE PARTNERSHIP DEED
It is usually but not necessarily compulsory for the partners in a

partnership business to draw up a document called a partnership
agreement (deed) setting out the arrangements, which have been decided
between them. Whatever arrangements that have been made between
them will guide their rights and limitations in the business and will also
set out the mode for the preparation of the accounts.
However, in the absence of any expressed implied agreement between

the partners, section 24 of the partnership Act, 1890 provides that the
following rules shall apply:
105
(a) That all the partners are entitled to shared equally in the capital
and profit of the business and must contribute equally towards the
losses, whether of capital nature or otherwise, sustained by them.
(b) That the firm must indemnify every partner in respect of payment
made and personal liabilities incurred by him. In the ordinary
and proper conduct of the business of the firm.
(c) That if a partner lends money to the firm in excess of the capital
he agreed to subscribe, he is entitled to interest at the rate of 5%
per annum of the amount.
(d) That no partner is entitled to interest on capital subscribed by
him.
(e) That partners are not entitled to partnership salaries.
(f) That the partnership books shall be kept at the ordinary place of
business of the firm and any of the partners may have access to
them; and
(g) That without the general consent of all no one can be introduced
to the business as a partner.
2.0 OBJECTIVES
By the end of this unit, you should be able to:
• discuss the legal requirement governing the conduct of partnership

• explain the preparation of appropriation account
• explain partnership capital/current account.
3.0 MAIN CONTENT
3.1 The Appropriation Accounts
In addition to the usual records and accounts from the subsidiary books
of accounts to the profit and loss account, a partnership business
requires the preparation of the appropriation accounts The appropriation
section of the accounts records non-operating costs such as interests on
capital and partnership salaries, non-operating income such as interest
on drawing, and the distribution of the net profit among the partners.
The accounts that are usually found in this section of the partnerships’
financial records are the profit and loss appropriation account, individual
partners' current accounts and the individual partners' drawing account.
If the partnership capital is not fixed, there may be no need for the
current account as all the items of the current account could be used in
adjusting the capital account to their net current value.
Illustration
106
Abu and Bello are in partnership sharing profits and losses equally. The
partnership deed allows interest on capital at the rate of 5% per annum.
Bello is entitled to a partnership salary of N500 per annum. Abu and
Bello contributed N8,000 and N6,000 respectively as t heir capitals on
1st April, 1990. The net trading profit for the year amounted to N4,200
on 31st March, 1991.
Required:
Show the profit and loss appropriation account of the firm at 31 st March,
1991.
Solution
Calculation of interest on capital

Abu = 5/100 x 8,001/1 or 0.05 x 8,000 = N400
Bello = 5/100 x 6,000/1 or 0.05 x 6,000 = N300
Profits to share N N
Net operating profit 4,200.00
Less
Partnership salary - (Bello) 500.00
Interest on capitals – Abu 400.00
Interest on capital – Bello 300.00 1,200.00
3,000.00
Share of profit = 3000/2 = 1,500 each
ABU AND BELLO

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE
YEAR ENDED 31ST MARCH, 1991
ii. Fluctuation Capital Account
Fixed Capital Account:
107
In the case of fixed capital accounts, balance of capital in the beginning

of the year, fresh capital introduced during the current year are recorded
on credit side and permanent withdrawal of excess capital and closing
balance of capital are recorded on debit side of the capital account.
There is always a credit balance in the capital account of a partner,
which is shown on liabilities side of the balance sheet.
To record drawing made by a partner and his share in allocation of

profits including interest on capital, interest on drawings, salary of a
partner etc, an account know as partner's current account is opened.
The closing balance of a partner’s current account is shown on liabilities

side in case of credit balance and it is shown on assets side in case of
debit balance.
It may be noted that in case of fixed capital the balance of capital

account remains unchanged except when either the fresh capital is
introduced or the excess capital is permanently withdrawn. Moreover
the word fixed is not prefixed to capital account of a partner because
maintenance of partner's current account implies that capitals are fixed.
Fluctuating Capital Account:
If current accounts of partners are not maintained, the transactions

relating to drawing by partners and their share in allocation of profits
including interest on capital, interest on drawings, salary payable to
partners, commission payable to partners etc. are recorded in capital
account. In that case, the balance of capital account will fluctuate from
year to year and non-preparation of current accounts implies capital
accounts are fluctuating.
Obi and Oba are partners sharing profits and losses in the ratio of 3:2.
The following trial balance was extracted from their books on 30th June,
1995.
DR DR
N N
Stock 1st July, 1994 12,000.00
Debtor and creditors 18,000.00 14,000.00
108
Capital account at 1st July 1994 30,000.00

Oba 15,000.00
Purchase and sales 18,000.00 240,000.00
Salaries 16,000.00
Rates 2,000.00
Discounts allowed and received 3,000.00
Plant and machinery at cost 20,000.00
Furniture and Fittings
(cost N8,000) 4,800.00
Freehold premises 18,000.00
Drawing for the year:
Obi 8,000.00
Oba 6,000.00
Cash in hand 2,200.00 304,000.00
Additional Information:
a) Stock at 30th June, 1995 was N24,000

b) A provision for bad and doubtful debts of N1,000 is to be created.
c) Rates prepaid on 30th June, 1995 amounted to N500
d) Salaries still outstanding at 30th June, 1995 amounted to N2,000
e) Depreciation is provided as follows: Plant and Machinery – 10%
on cost furniture and fittings – 10% on cost.
f) Interest is charges on the fixed capitals at 5%
g) Interest on gross drawing if to be charged at 5% per annum
irrespective of the time the drawings were made.
Required
Prepare:
i. The trading accounts;
ii. The profit and loss account;
iii. The profit and loss appropriation account;
iv. The partners' current accounts and
v. The balance sheet as at 30th June 1995
4.0 CONCLUSION
This unit focused on partnership business and relevant accounting

procedures required to report the financial operating results of
109
partnership business. Key issues like the treatment of interest on capital,

partnership profit and loss account and balance sheet are adequately
covered.
5.0 SUMMARY
This unit introduced the concepts of partnership ventures and their book-
keeping peculiarities. What constitutes a partnership deed, the treatment
of interest on partner’s capital interest on drawings and partnership
salaries have been adequately treated. In the next study, we shall
discuss Admission of New Partners.
Damagum Y.M (2003). Introduction to Financial Accounting. Jos:

Clestinno Press.
Ashok S. (2003). Fundamentals of Financial Accounting. India: Tan

Prints.
MODULE 4
Unit 1 Admission of New Partners

Unit 2 Partnership Admission II
110
Unit 3 The Partnership Accounts (Retirement)

Unit 4 Dissolution of Partnership
Unit 5 Ratio Analysis
Unit 6 Ratio Analysis (Potential and Actual Growth)
UNIT 1 ADMISSION OF NEW PARTNERS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Admission of Partners with Premium
3.2 Sharing the Premium in Profit Sharing Ratio
3.3 Premium shared but Retained in the Business
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
A business that is started by one or a few people may grow until it

becomes necessary to involve additional hands as partners. When a new
person joins a partnership business or the business of a sole
proprietorship, a partnership admission takes place and a new
partnership business different from the old business emerges. The new
partner may be required to provide management expertise and/or
additional resources to the business.
When a new person is admitted into a business, one out of six decisions
requiring accounting entries must be taken. The new partnership deed
may provide for one of the following:
a) payment of agreed capital amount alone by the incoming partner;

b) payment of agreed capital amount with premium which may be
received privately by the partnership in their old sharing ratio;
c) payment of capital amount with premium which may be received
by the old partners in their sharing ratio through the books of
account;
d) payment of capital amount with premium which is retained in the
business by crediting the capital accounts of the old partners with
the premium paid;
e) revaluation of the assets and liabilities of the existing business
before the payment of the capital amount; or
111
f) creations of goodwill in the business in favour of the old partners

before the payment of the capital sum.
2.0 OBJECTIVES
By the end of the unit, you should be able to:
• discuss the reasons of admitting a new partner

• explain the accounting entries involved in the admission of a partner
with a premium
• describe the mechanism of the double entry concept of admitting a
partner.
3.0 MAIN CONTENT
3.1 Admission of New Partners with Premium
Admission of new partners with premium indicates that the new

partner(s) has to pay a premium to the existing partners in addition to
the capital contribution.
Illustration
Messrs Abba and Yaro who shared profits and losses equally had the
following balance sheet before admitting Bako on 1st January, 1996.
ABBA AND YARO

BALANCE SHEET AS AT 31ST DECEMBER, 1995
N N N N
Capital Account Abba 5,000.00 Fixed Assets:
Land and building 6,000.00
Yaro 5,000.00 10,000.00 Furniture and fitting 3,000.00
Current Liabilities Current Assets: 9,000.00
Trade creditors 2,500.00 Stock 3,000.00
Expenses creditors 500.00 3,000.00 Cash 1,000.00 4,000.00
13,000.00 13,000.00
It was agreed to admit Bako on the conditions that he introduced N5,000

in cash as his capital and N2,000 as premium which is paid privately to
the existing partners.
Required:
Show the exercise in the books of the firm with the assumption that the
decision was implemented to the letter.
112
JOURNAL PROPER
LF DR CR
N N
1996 Cash account Dr. 5,000.00
Bako’s Capital Account 5,000.00
(Being cash introduced by
Bako as his capital in the firms)
CASH ACCOUNT
Jan. 1 Balance b/f 1,000.00 Jan. 1 Balance c/d 6,000.00

Jan. 1 Bako’s Capital 5,000.00
6,000.00 6,000.00
ABBA’S CAPITAL ACCOUNT
Jan. 1 Balance b/f - 5,000.00
YARO’S CAPITAL ACCOUNT
Jan. 1 Balance b/f - 5,000.00
BAKO’S CAPITAL ACCOUNT
Jan. 1 Cash - 5,000.00
ABBA, YARO AND BAKO

BALANCE SHEET AS AT 1ST JANUARY, 1995
3.2 Sharing the Premium in Profit Sharing Ratio
We will now assume that the premium was paid through the books of
account to the existing partners in the old profit sharing ratio. The
position will then be as follows:
113
JOURNAL PROPER
DATE PARTICULAR LF DR CR
1996 N N
(Being cash introduced
by Bako as his capital on
Admission in the partnership
(Being cash)
Bako’s premium account
Bako as premium) 2,000.00
Jan. 1 Bako’s Premium Account Dr. 2,000.00
Abba’s current account
Yaro’s current account
(Being Bako’s premium shared 1,000.00
by Abba and Yaro in their old)
Profit sharing ratio
Jan. 1 Abba’s Current Account Dr. 1,000.00
Cash Account
(Being Aba’s share of Bako’s 1,000.00
Premium withdrawn from the
Cash books)
Jan. 1 Yaro Current Account Dr. 1,000.00
Cash Account
(Being Yaro’s share of Bako’s 1,000.00
cash book)
CASH ACCOUNT
Jan. 1 Balance b/f 1,000.00 Jan. 1 Drawings – Abba 1,000.00

Jan. 1 Bako’s capital 5,000.00 Jan. 1 Drawings – Yaro 1,000.00
Jan. 1 Bako’s premium 2,000.00 Jan. 1 Balance c/d 6,000.00
Jan. 1 Balance b/d 8,000.00 8,000.00
6,000.00
N N
Jan. 1 Balance b/f 5,000.00
114
N N
N N
Jan. 1 Cash 5,000.00
N N
Jan. 1 Abba’s current account 1,000.00 Jan. 1 Cash 2,000.00
Jan. 1 Yaro’s current account 1,000.00
2,000.00 2,000.00
ABBA’S CURRENT ACCOUNT
N N
Jan. 1 Drawings 1,000.00 Jan. 1 Bako’s premium 1,000.00
YARO’S CURRENT ACCOUNT
N N
Jan. 1 Drawings 1,000.00 Jan. 1 Yaro’s premium 1,000.00
ABBA, YARO AND BAKO

3.3 Premium Shared but Retained in the Business
It is now assumed that the premium is shared among the old partners in
their old profit sharing ratio but retained in the business. The
accounting entries would be as follows:
JOURNAL PROPER
1996 N N
115

(Being cash introduced
by Bako as his capital on
Admission in the partnership
(Being cash)
Bako’s premium account
Bako as premium) 2,000.00
Jan. 1 Bako’s Premium Account Dr. 2,000.00
Abba’s current account
Yaro’s current account
(Being Bako’s premium shared 1,000.00
by Abba and Yaro in their old)
Profit sharing ratio
Jan. 1 Abba’s Current Account Dr. 1,000.00
Cash Account
(Being Aba’s share of Bako’s 1,000.00
Cash books)
Jan. 1 Yaro Current Account Dr. 1,000.00
Cash Account
(Being Yaro’s share of Bako’s 1,000.00
cash book)
CASH ACCOUNT
N N
Jan. 1 Bako’s capital 5,000.00
Jan. 1 Premium 2,000.00
8,000.00 8,000.00

N N
Jan. 1 Balance c/d 6,000.00 Jan. 1 Balance b/d 5,000.00
Jan. 1 Bako’s premium 1,000.00
6,000.00 6,000.00

N N
116
Jan. 1 Balance c/d 6,000.00 Jan. 1 Balance b/d 5,000.00

Jan. 1 Bako’s premium 1,000.00
6,000.00 6,000.00

N N
Jan. 1 Cash 5,000.00
BAKO’S PREMIUM ACCOUNT

N N
Jan. 1 Abba’s Capital Account 1,000.00 Jan. 1 Cash 2,000.00
Jan. 1 Yaro’s Capital Account 1,000.00
2,000.00 2,000.00
ABBA, YARO AND BAKO

BALANCE SHEET AS AT 1ST JAUNARY, 1995
1. What are the reasons for admitting a partner?

2. What are accounting entries required in the admission of a new
partner?
4.0 CONCLUSION
The incoming partners become liable for the acts the business after his
admission and is not liable for any act of the firm done prior to his
admission as a partner.
5.0 SUMMARY
On admission of a partner, existing partners sacrifice a portion of their

share of profit in favour of the incoming partner. The ratio in which
117
existing partners contribute to the share of the profit payable to the

incoming partners is called ‘Scarifying Ratio’ and the ratio in which all
partners (including the incoming partner) decide to share future profits is
called ‘New Profit sharing ratio’.
In the next study unit, we shall discuss further on admission of partners.
A and B who shared profit in the ratio of 3:2 admitted C and decided to
give him 1/6 share of profits. What are sacrificing ratio and new
profit-share ratio of the firm?
Okwoli, A.A (1997). Principles of Financial Accounting. Zaria:

Malthouse Press.
Deepak, S. (2003). Fundamentals of Financial Accounting. New Delhi,

India: Taxman Services.
UNIT 2 PARTNERSHIP ADMISSION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Admission with Revaluation
3.2 Admission with Goodwill
4.0 Conclusion
118
5.0 Summary
1.0 INTRODUCTION
The unit is an extension of unit 1 which explained the purpose and

objective of admitting a new partner into the partnership firm.
In some instances, the partners may decide to retain the revalued figures
in the books while in other cases, they may decide to write then back
again.
2.0 OBJECTIVES
By the end of this unit, you will be able to:
• explain the other method admission of a partners

• understand the double entry concepts on admitting a new partner.
3.0 MAIN CONTENT
3.1 Admission with Revaluation
When a person is being admitted into a business he may not be required

to pay premium. The assets and liabilities of the business may just be
revalued before his admission. The revaluation may have surplus
balance or deficit balance and both affect the capital balance of the
existing partners according to their old profit sharing ratio. A
revaluation
surplus increases the capital balance of the old partners while a deficit
reduces them.
Illustration
Olu and Okoro were partners sharing profits and losses in the ratio of
3:2. It was agreed that Musa should be admitted to the partnership as
from 1st January, 1997. Musa was to introduce N5,000 as his capital but
before the admission could take place, the assets of the firn1 were
revalued. The balance sheet of the firm before his admission and the
revaluations were as follows:
119
OLU AND OKORO

Revaluations:
N
Freehold premises 6,000.00
Furniture and fitting 1,600.00
Stock 3,900.00
Debtors 4,500.00
Required:
Show the revaluation process and its effects on the accounts of the firm.
Show the effects to the admission of Musa in the books of the new firm.
Solution
Revaluation Effects:
N N
New value of premises 8,000.00 5,000.00
Less old values 3,000.00
New value of furniture and fittings 1,600.00
Less old value 2,000.00 (400.00)
New value of stock 3,900.00
Less old value 4,000.00 (100.00)
New value of debtors 4,500.00
Less old value 5,000.00 (500.00)
Revaluation surplus 4,000.00
3 4000
Olu’s share = x or 0.6 x 4,000 = N2,400.00
5 1
Okoro’s share = 0.4 x 4000 = N1,600.00
JOURNAL PROPER (OLU AND OKORO)
120
1996 N N
Dec. 31 Freehold Premises Account Dr. 5,000.00
Revaluation Account 5,000.00
(Being premises revaluation
surplus)
Dec. 31 Revaluation Account Dr. 400.00
Furniture and Fittings
(Being revaluation deficit on
furniture and fittings)
Dec. 31 Revaluation Account Dr. 100.00
Stock Account 100.00
(Being revaluation deficit
on stock)
Revaluation Account 500.00
Debtors Account 500.00
(Being revaluation deficit
on debtors)
Jan. 1. 1997 Revaluation Account Dr. 4,000.00
Olu’s Capital Account 2,400.00
Okoro’s Capital Account 1,600.00
(Being revaluation surplus
shared between Olu and
Okoro in the profit sharing
Ratio)
Cash Account Dr.
Musa’s Capital Account 5,000.00
Musa as his capital) 5,000.00
Dec. 31
FREEHOLD PREMISES ACCOUNT

N N
Dec. 31 Balance b/f 3,000.00 Dec. 31 Balance c/d 8,000.00
Dec. 31 Revaluation 5,000.00
8,000.00 8,000.00
Jan. 1 (1997) Bal. c/d 8,000.00
FURNITURE AND FITTING ACCOUNT
N N
Dec. 31 Balance b/f 2,000.00 Dec. 31 Revaluation 400.00
Dec. 31 Balance c/d 1,600.00
2,000.00 2,000.00
Jan. 1 (1997) Bal. b/d 1,600.00
STOCK ACCOUNT
121
N N
Dec. 31 Balance b/f 4,000.00 Dec. 31 Revaluation 100.00
4,000.00 4,000.00
Jan. 1 (1997) Bal. b/d 3,900.00
REVALUATION ACCOUNT
N N
Dec. 31 Furniture & fitting 400.00 Dec. 31 Freehold premises 5,000.00
Dec. 31 Stock 100.00
Dec. 31 Debtors 500.00
5,000.00 5,000.00
Jan. 1 (1997) Jan. 1 (1997) Balance b/f 4,000.00
Olu’s capital 2,400.00
Okoro’s capital 1,600.00
4,000.00 4,000.00
OLU AND OKORO

N N N N
Capital Account Fixed Assets
Olu 10,400.00 Freehold premises 8,000.00
Okoro 7,600.00 18,000.00 Furniture & fitting 1,600.00 9,600.00
Current liabilities Credit Assets
Creditors 3,000.00 Stock 3,900.00
Debtors 4,500.00
Cash 3,000.00 11,400.00
21,000.00 21,000.00
When the admission takes place, the following entries will be made:
CASH ACCOUNT
N N
Jan. 1 Musa’s capital 5,000.00
8,000.00 8,000.00
OLU’S CAPITAL ACCOUNT
N
OKORO’S CAPITAL ACCOUNT

N
MUSA’S CAPITAL ACCOUNT
122
N
Jan. 1 Cash 5,000.00
OLU, OKORO AND MUSA

N N N N
Olu 10,400.00 Freehold premises 8,000.00
Okoro 7,600.00 Furniture & fitting 1,600.00 9,600.00
Musa 5,000.00 23,000.00
Current liabilities Credit Assets
Creditors 3,000.00 Stock 3,900.00
Debtors 4,500.00
Cash 8,000.00 16,400.00
26,000.00 26,000.00
3.2 Admission with Goodwill
Goodwill is an intangible, asset because it does not possess physical

characteristics. It represents the reputation of the business in the eyes
and minds of the people. Some of the factors that may give rise to
goodwill in a business include the personal characteristic of the owners,
quality of goods or services being sold or rendered, location of the
business premises, possession of monopoly or near monopoly rights
such as patents and trade marks and the quality of management. A
business that has been operating successfully for years should have
made its mark. It’s only fair that a new partner compensates them for
past efforts. The compensation may be in the form of payment of a
premium but where the incoming partner cannot introduce more cash in
addition to his capital for the premium, an agreement may be reached
that a goodwill be raised in the books of the business and credited to the
old partners’ capital accounts in their old profit sharing ratio.
One of the methods of calculating the goodwill is the multiplication of

the average profit of a number of year's profits by an agreed number of
years. For instance, three years' purchases of average of the last five
years profit figures. Let's assume the net profit for past five years had
been N150,000, N170,000, N135,000, N190,000, and N205,000,
respectively and the goodwill is to be valued at three years' purchase of
the average of the five years’ profit figures. The calculation will be as
follows:
Year 1 150,000.00
2 170,000.00
3 135,000.00
4 190,000.00
5 205,000.00
123
900,000.00
N900,000 ÷ 5 x 3
= 180,000 x 3 = 540,000.00
Another method of calculating goodwill is the use of super profit

method. In using this method the average profit of a number of years'
profit figures is capitalized at the normal of rate of return in capital. Let's
assume that the average profit of the last five years’ profit is 17,000, that
the value of the business' tangible assets is 150,000 and that the normal
rate of return on capital is 1 0%. Given this information, the goodwill
will be calculated as follows:
The super profit

10% = NI7,000.00
100% ?
100 17,000
x = 170,000.00
10 1
Goodwill super profit = Super profit – tangible assets

= 170,000 – 150,000
= 20.000
One method of calculating goodwill is to subtract the net value of the

business from its purchase price where the purchase consideration is
higher than the networth of the business. The net worth of the business
is the difference between its net assets and its net liabilities. This method
is most common when the business is being acquired, so we shall return
to it in the section dealing with acquisition.
Goodwill may be calculated for adjustments in partnership books under

so many instances. Such instances include admission of a partner,
retirement of a partner, death of a partner, dissolution of the partnership,
changes in profit sharing ratios and changes in the accounting policies.
Illustration
The following is the balance sheet of Enayi and Omoka who share profit
and losses in the ratio of 2:1 respectively:
ENAYI AND OMOKA

124
The partners agree to admit Atuma into the partnership on 1st January,
1998 on the following conditions:
i) Atuma is to bring in a capital of N8,000 in cash

ii) An account is to be created for the value of goodwill; and
iii) Future profit sharing ratio would be 3:2:2.
The goodwill is to be valued at two years' purchase of the average net

profit for the past three years. Net profits for the past three years had
been N2,400, N3,600 and N3,000 respectively.
Required:
Prepare journal entries and ledger accounts to record the above

transaction and show the balance sheet after admission of Atuma.
Solution
N
Goodwill: Year 1 2,400.00
2 3,500.00
3 3,000.00
9,000
x 2 = 3,000 x 2 = N6,000
3
JOURNAL PROPER (ENAYI, OMOKA AND ATUMA)
1998 N N
Jan. 1 Goodwill Account Dr. 6,000.00
Enayi’s Capital Account 4,000.00
Omoka’s Capital Account 2,000.00
(Being goodwill raised and
125
credited to the capital accounts

of Enayi and Omoka in their old
profit sharing ratio on admission
of Atuma)
Jan. 1 Cash Account 8,000.00
Atuma’s Capital 8,000.00
(Being cash contributed by
Atuma to the business as his
capital on admission)
ENAYI, OMOKA AND ATUMA

1. State the various reasons that may require changes in the

partnership agreement.
2. Ado and Bellow are in partnership sharing profit and losses as

3:2 Caro is admitted for ¼ share, compute the profit the profit-
sharing ratio after admitting Caro.
4.0 CONCLUSION
Both the revaluation and goodwill methods, are applied before admitting
a new partner in order to allow the existing partners to benefit from the
long time of successful operation of the business.
5.0 SUMMARY
The new partner brings in his share of capital and compensates the
existing partners for sacrificing their share of profit in his favour. This
requires adjustment of goodwill at the time of admission of a partner.
Reserves accumulated losses/profit etc. are distributed among the
existing partners.
126
In the next study unit, we shall discuss Partnership Account

(Retirement).
Discuss the problems to solved at the time of admitting a new partner?
Okwoli, A. A. (1997). Introduction to Financial Accounting. Zaria:

Malthouse Press.
Schgal, A. and Schgal, D. (2003). Fundamentals of Financial

Accounting. New Delhi, India: Taxamanns.
UNIT 3 THE PARTNERSHIP ACCOUNT

(RETIREMENT)
CONTENTS
1.0 Introduction
2.0 Objectives
127
3.0 Main Content

3.1 Retirement of a Partner
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In every aspect of human endeavour, a time comes a person is forced to

give up active participation in his occupation.
A partnership business is no exception so a partner may be forced to

retire from a partnership on ground of old age, ill-health or even death.
2.0 OBJECTIVES
By the end of this unit, you should be able to:
• explain the various reasons for a partner’s retirement

• describe the various accounting entries.
3.0 MAIN CONTENT
3.1 Retirement of a Partner
When a partner is retiring from a business, he is entitled to certain

benefits. He is entitled to a refund of his capital sum which may be
arrived at after some adjustments in the accounts of business. The assets
may be revalued and if there is a revaluation surplus, his share, based on
the old profit sharing ratio, should be credited to the balance of his
capital and vice versa to determine his current capital entailment. On the
other hand, a goodwill could be raised in the books of the business based
on an agreed formula and the retiring partner’s capital account be
credited with his own share on the basis of their old profit sharing ratio.
If the business cannot pay the adjustment capital sum of the retiring
partner once, it could be left in the business as a long-term loan which
will be yielding interest to him until the principal sum is paid back in
full. The payments could be instalmental depending on the agreement
prior to retirement.
The retiring partner is also entitled to the refund of his current account
balance, if credit. The current account may also require adjustment if the
partner is retiring sometime after the end of the accounting year of the
business as some profits may have been made during the period, interest
may have accrued on his capital, drawing may has been made, interests
128
may have accrued on such drawing and part of his partnership salary
(if any) may have earned during the period. The adjusted current
account balance is normally paid at once to the retiring partner to enable
him start well in his private life.
Illustration
Abiodun, Bolade and Chike have been in partnership for a number of

years sharing profits and looses equally. The following is their balance
sheet as at 31st March, 1998.
ABIODUN, BOLADE AND CHIKE

BALANCE SHEET AS AT 31ST MARCH, 1998
Abiodun retired from the partnership on the date of the balance sheet on
the following terms:
(a) Goodwill in the partnership is to be revalued at 2 years purchase

of the average profit over the last three years before the
retirement of Abiodun. The profits of the last three years were
N70, N960 and N1,300.
(b) Trade mark is to be written off;
(c) Abiodun to take over the motor vehicle at book value. Any debt
due to him other than that of his current account remains on loan
to the partnership.
(d) A provision of N150 for doubtful debt to be created; and
(e) Current account balance is to be paid in cash.
Required:
Write up the transaction in the books of the partnership and show the
opening balance sheet of the new partnership. Both capital and current
129
accounts are to be in columnar form. (Adopted and simplified from NIB

examination, 1981).
Solution:
Goodwill Year 1 - 740

2 - 960
3 - 1300
3
3,000
= x 2 = N2,000.00
3
JOURNAL PROPER (ABIODUN, BOLADE AND CHIKA)

1998 N N
March 31 Goodwill Account Dr. 1,950.00
Revaluation Account 1,950.00
(Being revaluation of goodwill
on the retirement of Abiodun)
March 31 Revaluation Account Dr. 2,100.00
Trade Marks Account 2,100.00
(Being trademarks written off
on the retirement of Abiodun)
March 31 Abiodun’s Capital Account Dr. 3,000.00
Motor Vehicle Account 3,000.00
(Being the motor vehicle taken
over by Abiodun on his
retirement from the partnership
business)
March 31 Revaluation Account Dr. 150.00
Provision for Bad Debts Account 150.00
(Being provision for bad debts
created in the books on
retirement of Abiodun)
March 31 Abiodun Current Account Dr. 1,400.00
Bolade’s Current Account Dr. 1,500.00
Chika’s Current Account Dr. 2,700.00
Bank Account 5,600.00
(Being the current accounts
withdrawn by the partners on
retirement of Abiodun)
REVALUATION ACCOUNT
130
GOODWILL ACCOUNT
N N
Mar. 31 Balance c/d 50.00 Mar. 31 Balance c/d 2,000.00
Mar. 31 Revaluation 1,950.00
2,000.00 2,000.00
2,000.00
TRADEMARKS ACCOUNT
N N
Mar. 31 Balance b/f 2,100.00 Mar. 31 Balance c/d 2,100.00
MOTOR VEHICLE ACCOUNT

N N
Mar. 31 Balance b/f 3,000.00 Mar. 31 Balance c/d 3,000.00
PROVISION FOR BAD DEBTS ACCOUNT

N N
Mar. 31 Revaluation 150.00
LONG-TERM ACCOUNT
N N
Mar. 31 Abiodun’s capital 900.00
PARTNER’S CAPITAL ACCOUNT
Abiodun Bolade Chike Abiodun Bolade Chike

N N N N N N
Mar. 31 Mar. 31
Reval. Deficits 100.00 100.00 100.00 Balance b/f 8,000.00 6,000.00 4,000.00
Mar. 31
Motor Vehicle 3,000.00 -
Mar. 31
Loan 4,900.00 -
Mar. 31
Balance c/d - 5,900.00 3,900.00
131
8,000.00 6,000.00 4,000.00 8,000.00 6,000.00 4,000.00

Mar. 31
Balance b/f - 5,900.00 3,900.00
PARTNERS’ CURRENT ACCOUNTS

Abiodun Bolade Chike Abiodun Bolade Chike
N N N N N N
Mar. 31 Mar. 31
Cash 1,400.00 1,500.00 2,700.00 Balance b/f 1,400.00 1,500.00 2,700.00
BANK ACCOUNT
N N
Mar. 31 Balance c/d 6,100.00 Mar. 31 Abiodun’s current Account 1,400.00
Mar. 31 Bolade’s Current Account 1,500.00
Mar. 31 Chike’s Current Account 2,700.00
Mar. 31 Balance c/d 500.00
6,100.00 6,100.00
Balance b/d 500.00
BOLADE AND CHIKE

BALANCE SHEET AS AT 31ST MARCH, 1998 AFTER
ABIODUN’S RETIREMENT
N N N N N N
Bolade 5,900.00 Goodwill 2,000.00
Chike 3,900.00 9,800.00 Freehold land 10,000.00 12,000.00
and building
Long terms Current Asset
Liabilities 4,900.00 Stock 3,700.00
Loan (Abiodun) Debtors 2,850.00
less: provision
for bad debt 150.00 2,700.00
Current Liabilities
Trade creditors 3,200.00
Expenses creditor 1,000.00 Cash 500.00 6,500.00
18,900.00 18,900.00
JOURNAL PROPER (ABIODUN, BOLADE AND CHIKA)

1995 N N
Cash Account Dr. 1,800.00
Debtors Account 1,800.00
(Being cash realized
from debtors)
Sept. 30 Creditor Account Dr. 1,900.00
Cash account 1,900.00
132
(Being cash paid to creditor in

full settlement of their debts
Sept. 30 Creditor Account Dr. 100.00
Discount received account 100.00
(Being discount received
from creditors)
Sept. 30 Bank Account Dr. 1,000.00
(Being bank overdraft repaid)
Sept. 30 Dissolution expenses account Dr. 200.00
(Being dissolution expenses
paid in cash) 200.00
CASH ACCOUNT
AGBO’S CAPITAL ACCOUNT
FREEHOLD PREMISESACCOUNT
133
MOTOR VAN ACCOUNT
STOCK ACCOUNT
DEBTOR’S ACCOUNT
CREDITOR’S ACCOUNT
DISCOUNT RECEIVED ACCOUNT
BANK ACCOUNT
134
DISSOLUTION EXPENSES ACCOUNT
STAGE 2: JOURNAL PROPER (AGBO AKOR)
REALIZATION ACCOUNT
135
MOTOR ACCOUNT
DEBTOR’S ACCOUNT
AKOR’S CAPITAL ACCOUNT
136
STAGE 3: JOURNAL PROPER (AGBO AKOR)
CASH ACCOUNT
THE TOTAL APPROVAL
137
STAGE 1: TRANSFER OF ASSETS
JOURNAL PROPER (AGBO AND AKOR)
MOTOR ACCOUNT
STOCK ACCOUNT
138
N N
Sept. 30 Balance b/f 3,000.00 Sept. 30 Realization 3,000.00
DEBTOR’S ACCOUNT
N N
Sept. 30 Balance b/f 2,000.00 Sept. 30 Realization 2,000.00
REALIZATION ACCOUNT
STAGE 2: ASSET REALIZATION AND DEBT SETTLEMENT
1995 N N
Sept. 30 Cash Account Dr. 30,000.00
Freehold premises account 10,000.00
Furniture and fitting 1,800.00
Realization account 41,800.00
(Being cash from sales
of assets)
Sept. 30 Agbo’s Account Dr. 5,000.00
(Being stock van taken
over by Agbo on the
dissolution of partnership)
Sept. 30 Akor’s Account Dr. 3,000.00
(Being stock van taken
over by Agbo on the
dissolution of partnership)
Sept. 30 Creditors Account Dr. 1,900.00
(Being discount received
from creditors at the time
of setting their debts in cash)
Sept. 30 Discount Account Dr. 100.00
Discount received account 100.00
(Being cash discount
139
received transferred to
realization account)
Sept. 30 Realization Account Dr. 200.00
Dissolution expenses account 200.00
(Being dissolution expenses
transfer to realization account)
Sept. 30 Bank Account Dr. 1,000.00
(Being bank overdraft
repaid in cash)
CASH ACCOUNT
CREDITOR’S ACCOUNT
N N
Sept. 30 Cash 200.00 Sept. 30 Realization 100.00
N N
Sept. 30 Cash 1,000.00 Sept. 30 Balance b/f 1,000.00
140
STAGE 3: CAPITAL DISBURSEMENT

1995 N N
Sept. 30 Agbo’s Capital Account Dr. 23,020.00
Akor’s Capital Account 15,680.00
Furniture and fittings
(Being cash paid back to
the dissolution partners in
respect of their final
entitlement)
CASH ACCOUNT
141
N N
Sept. 30 Cash 23,000.00 Sept. 30 Balance b/f (stage 2) 23,020.00
1. What are the entitlements of the retiring partner in the partnership

firm?
2. The net profits of Bala and Garba partnership for the last five
years have been
Year Amount
1996 6,100
1997 7,800
1998 10,200
1999 12,400
2000 16,000
Calculate Goodwill as representing two years' purchase of the average

annual profit for the five years.
4.0 CONCLUSION
Retirement of a partner takes place when the retiring member ceases to

be a partner and the remaining partners continue to carry on the business
of the firm. A partner may retire from the firm with the consent of all the
partners. However, in case of partnership at will, notice in writing by the
retiring partner to the remaining partners is sufficient to make his
retirement effective.
5.0 SUMMARY
The retiring partner is entitled to receive from the firm the final balance
calculated after taking into account the following.
i) Net balance of his capital account on the date of retirement after

adjustments for drawing current account balance, etc.
ii) His share of profit (or loss) on revaluation of assets and liabilities
on the date of retirement,
iii) His share of accumulated profits (or loss) and reserve on the date
of retirement,
iv) His share of goodwill of the firm subject to adjustment of
goodwill already appearing in the balance sheet, and
v) His share in the surrender value of the joint life policy/individual
life insurance policies subject to adjustment for the value already
appearing in the balance sheet.
142
In the next study unit, we shall discuss dissolution of partnership.
Discuss the focus of the retirement of a partner at the time of retirement?
Ashole, S. and Deepale, S. (2003). Fundamentals of Financial

Accounting. New Delhi, India: Tax Mann’s Press.
UNIT 4 DISSOLUTION OF PARTNERSHIP
CONTENTS
143
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Procedure for Dissolution of Partnership
3.2 Reason for Dissolution
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Dissolution of partnership means bringing to an end the existence of

partnership business. Not only is the existing partnership terminated as
in amalgamation, conversion and absorption, the business is also
brought to an end. Upon the dissolution of partnership, section 44 office
partnership Act 1890 provides that the asset of the firm, including the
sums (if only) contributed by the partners to make up losses or
deficiencies of capital must be applied in the:
(i) In paying the debts and liabilities of the firm to persons who are
not partners in the firm
(ii) In repaying notably, partners’ loans
(iii) In paying to each partner the amount due to him in respect of his
capital and current account balances.
2.0 OBJECTIVES
• explain the accounting entries in dissolution of partnership

• explain reasons for dissolution of partnership.
3.0 MAIN CONTENT
3.1 Procedure for Dissolution of Partnership
There are procedures to be followed in partnership dissolution. The

assets may be disposed of individually or the business may change
hands as a complete unit. The proceeds are applied in discharging the
liabilities of the partnership and in paying the partnership according to
certain legal or agreed priorities as follows:
(a) Outside creditor: If not sufficient, then the rules of bankruptcy
apply.
(b) Amount of any loan made by a partner to the business.
144
(c) Partner's capital

(d) Any profits on the realization, including capital profits, in the
partners profit-sharing ratios.
Illustration
Agbo and Akor who have been in partnership sharing profits and losses
in the ratio of 3:2 decided to dissolve their partnership on 30th
September, 1995. The balance sheet on the day was as follows.
AGBO AND AKOR

BALANCE SHEET AS AT 30TH SEPTEMBER, 1995
Additional information:
(a) Freehold premises realized N30,000 in the open market

(b) Furniture and fitting were sold for N10,000;
(c) Agbo took over the motor van at N5,000
(d) Akor took over the stock at balance sheet valuation;
(e) Debtors realized N1,800
(f) On settling the creditors discount ofN100 was received; and
(g) Dissolution expenses amounted to N200.
Required:
Show the dissolution process in the books of the dissolution partnership.
3.2 Reason for Dissolution
(i) Expiration of the period for which the firm was set up, if a fixed
term was agreed upon.
(ii) Attainment of the objective for which the firm was set up, if a
specific objective was agreed upon.
(iii) Death of a partner
(iv) Retirement of a partner
(v) Bankruptcy of a partner
145
(vi) The occurrence of an event which causes the partnership to

become illegal.
(vii) When one partner allows his share of the partnership to be
charged for his separate debts.
A,B and C were in partnership sharing profits and losses in the ratio of
4:3:1. They decided to dissolve the partnership with effect from 31st
December 1999. In the course of the dissolution, C was adjudicated
bankrupt and could pay 60k in the naira.
The balance sheet of the firm as at that date was as shown below:
A, BAND C
N N N
Capital Land and Building 12,000
A 18,000 Plant & machinery 7,500
B 4,500 22,500 Stock 2,400
Creditors 7,500 Debtors 5,200
Cash 900
C's capital overdrawn 2,000
30,000 30,000
The assets were realized as follows:

Land and building 9,000
Plant and machinery 6,000
Stock 2,700
Sundry debtors 4,050
5% discount was allowed by creditors and 9 ledger charge of N495 was

to be paid in addition to other expenses of realization ofN330.
You are to assume that the loss of profit on realization of each asset was
separately transferred from the asset account to the realization account.
You are required to show:
(a) Realization account

(b) Cash account
(c) Partners capital accounts
4.0 CONCLUSION
146
We have generally discussed reasons for dissolution of partnership as

well as the accounting entries necessary to dissolution partnership.
5.0 SUMMARY
In this unit, you were taught the accounting entries to dissolve

partnership and also the entries needed where a partner is deficient and
is unable to make good his deficiency.
In the next study unit, we shall discuss Ratio Analysis.
What is dissolution of partnership? Discuss the reasons for dissolution.
Robbert, N.I (2003). Accounting Made Simple. Lagos: Rel Publish.
Damagun, Y.M. (2001). Principles of Accounting. Jos: Clestino Press.
UNIT 5 RATIOS ANALYSIS
147
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Analytical Method of Ratio Analysis
3.2 Long-Term Solvency and Stability Ratios
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Financial statements are produced for the uses they are put and not
merely for the sake of producing them. Different users are interested in
different aspects of the financial statements.
The information disclosed by financial statements is of historical nature

and in a summarized form, and the information is highly selective (Net
Book Value and not market values). Despite the nature of the
information disclosed by the financial statements many users still find
help in them as guide into the future and as a basis for action. The users,
(shareholders, investors, suppliers, customers, bankers, employees, trade
unions, etc.) need the financial statement for different purposes. To aid
the different users the accounts must be interpreted and this brings us to
ratios analysis.
2.0 OBJECTIVES
At the end of the unit, you should be able to:
• analyze the financial statement by way of ratios, relevant to solvency

• interpret these ratios and advise on any future action.
3.0 MAIN CONTENT
3. 1 Analytical Method of Ratio Analysis
The analytical technique employed is known as ratio analysis. A ratio is

one number expressed in terms of another number to show the
relationship between the two numbers. Let us look at the relationship
between 5 and 15. It could be 15/5= 3 meaning 15 is three times five.
If the order is reversed from 15 to 5, it means 5/15 = 1/3 or 0.33:1. It
could equally be express as a percentage, e.g. 5/15 x 1 00 = 0.33:1%.
148
There are certain important relationships between items within the

financial statement which become clearer when ratios are calculated.
3.2 Long-Term Solvency and Stability Ratios
These ratios look at the concern or business on a long-term basis bearing

stability in mind.
(i) Fixed Interest Cover Ratio
There are fixed interest charges in business. For instance, debenture

interest is fixed (% debenture) i.e. it does not depend on whether or not
profit is made before it is paid. Infact, it has to be charged in the P & L
A/C before arriving at the Net Profit. There are other fixed interest
charges like loan interest, interest on overdraft, etc. the fixed interest
cover ratio indicate the number of times fixed Interest is covered by
profit. Profit in this context is net profit.
Fixed interest cover = Net Operation Profit/Fixed Interest
(ii) Fixed dividend cover
Dividends are apportioned i.e. they are deducted from the taxed profit.
Fixed dividends do not fluctuate with level of profit. We know that until
every other thing is catered for ordinary shareholders cannot get any
dividend. But preference shareholders are paid dividend before ordinary
shareholders and their dividend is not a function of the level of profit but
a fixed sum (e.g. 5% preference shares) i.e. preference shareholders will
get 5% of whatever amount of preference shares bought. Such dividends
are fixed. Therefore,
Fixed Dividend Cover = Net Profit After Tax (NPAT)

Fixed Dividend
This ratio indicates the number of times fixed dividends are covered by
taxed profit.
(iii) Total Debts to Shareholders’ Funds
Shareholders’ funds include the share i.e. equity plus reserves.
Therefore:
Total External Liabilities = Total debts to shareholders funds

This ratio indicates whether the business is solvent and the extent it can
cover external liabilities. This, therefore, tests financial stability.
149
(iv) Long-Term Debts to Shareholders’ Fund
A long-term debt in this context is the fixed external liabilities e.g. 5%

loan stock, 10% debentures. This ratio tests the extent of cover for these
and show how stable the business is in relation to external obligations.
Therefore, Long-term debtors to shareholders funds =
Fixed External Liabilities

Shareholders' funds
(v) Gearing
This ratio indicates the degree of vulnerability of earning available for

ordinary shareholders. It is a ratio arrived at from the capital structure of
the company. Consider two companies A and B. Every other thing about
them is similar except:
A(N) B(N)
Ordinary shares 100,000 100,000
10% Debenture 50,000 70,000
5% Pref. Share 60,000 80,000
Ordinary Dividend 10% 10%
Note that debenture interest for A (5,000) and B (N7,000) had already
been changed to P & L A/C before at the net profit after tax given. But
before ordinary shareholders get their dividend the preference
shareholders will get first.
A B
NAPT 45,000 43,000
5% Pref. Dividend 3,000 4,000
NPAT & PD - -
10% Ord. 42,000 39,000
Dividend 4,200 3,900
You will notice that the NPAT of Coy B is N2,000 less than that of A
because of the difference in the amount of debentures. Also different is
the preference shares (higher in B). Because of the difference in the
capital structure of the two companies their ordinary shareholders earn
dividends of different amounts. This explains the issue of vulnerability
of earning available for ordinary shareholders.
Gearing = Long-term loan : Total equity funds

Theoretically, a gearing of greater than 1: 1 is high and less than 1: 1 is
low but in practice, greater than 0.6:1 regarded as high and less than
0.2:1 is low.
150
Who are various users of financial statement and what are their
information needs?
3.2 Short-Term Ratio
These ratios show the ability of the company to meet short-term

obligations.
i. Stock Turnover Ratio
The ratio shows the frequency in number of times per period at which
the average figure of trading stock is being turned over. Ordinarily, the
average stock being turned opening stock plus closing stock divide’s by
two but if there were fluctuations during the period of sale then
weighted average should be used.
Stock Turnover = Cost of Sales

Average stock
ii. Current Ratio (or Working Capital Ratio)
This is the relationship between current assets and current liabilities.

Remember that current assets less current liabilities gives you working
capital. This ratio indicates the ability of a business to meet its
short-term liabilities, as they fail due, out of its short-term assets.
Current ratio = Current Assets

Current Liabilities
iii. Liquidity Ratio or Acid Test or Quick Asset Ratio
The three names simply mean the same thing. This ratio considers the
liquid assets that can easily be converted to cash to meet current
liabilities. Liquid assets consists of cash and bank balance, debtors and
marketable securities.
Quick Assets Ratio = Current Assets – Stock

Current Liabilities
iv. Debt Collection Period
151
This looks at the average period a debt stays uncollected. It could be

expressed in months, weeks, days and the figure used in the calculation
should include VAT (Value Added Tax).
Debtors Collection period = Trade Debtors x 12/1 or 52/1 or 365/1

Credit sales
v. Credit Payment Period
This looks at the average periods the creditors are unpaid. It is equally
expressed in terms of days, weeks or months. The figure should be VAT
inclusive too.
Creditor payment period = Trade Creditor x 12/1 or 52/1 or 365/1

Credit purchases
4.0 CONCLUSION
Generally, financial ratios are computed from financia1 statements and

so ratios developed for analysis of a firm's performance and financial
position are subject to the same limitations which are present in the
accounting statement themselves.
5.0 SUMMARY
In this unit, you were taught solvency ratios. Solvency ratios were
broken down into long-tern solvency and stability ratios and short-term
solvency and liquidity ratio. The interpretations of these various ratios
were demonstrated/highlighted. It will be meaningless if ratios are
analyzed but cannot be interpreted. So the analysis of ratios and how
they are used for the information need of various users were taught.
In the last study unit of the course, we shall discuss further on ratio and
analysis in terms of potential and actual growth.
The following are the trading and profit and loss account and the
balance sheet of Amudat Nig. Ltd. for the year ended 31 st December,
1969.
AMUDAT NIG. LTD
152
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR

ENDED 31ST DEC. 1969
N N
Sales 71,689
Opening stock 2,680
Add purchases 63,167
65,847
Less closing stock 2,220
63.627
Gross profit 8,053
General Exp. 3,763
Loan Interest 320
4,083
Net profit
AMUDAT NIG. LTD

BALANCE SHEET AS AT 31/1/1969
N N
Fixed Asset 21,120
Current:
Stock: Raw materials 1,580
Work in progress 2,100
Finished Goods 2,220
Debtor 5,900
Cash in hand 3,880
650
Current Liabilities 10,430
Creditor 3,360
Accruals 170
3,530
Working capital 69,000
Net Assets employed
(Cap. Employed) 28,020
Finance by
Ord. Shares of N1 each 12,000
5% Pref. Share ofN1 each 5,000
Reserves 7,020
24,000
8% Loan 4,000
Capital Employed 28,020
Required:
Calculate all the solvency ratios and interpret them.
153
Damagum, Y.M (2001). Principles of Accounting. Jos: Clestinno Press.
Ambrose, A.O (1997). Principles of Financial Accounting. Jos:

Malthouse Press.
154
UNIT 6 RATIO ANALYSIS (POTENTIAL AND

ACTUAL GROWTH)
CONTENTS
1.0 Introduction
2.0 Objective
3.0 Main Content
3.1 Network Value per Ordinary Share
3.2 Earnings per Share
3.3 Dividend per Share
3.4 Price/Earnings Ratio
3.5 Earning Yield
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In the last unit we treated ratio analysis in the area of solvency, stability
and liquidity. In this unit we shall look at the ratios relating to potential
and actual growth of the business. Investors and their advisers normally
appraise the financial statements of quoted companies. This assists them
in making good investment decisions like buying more shares, selling
out some or all of the shares or holding on to the shares. The appraisal is
done by calculation of certain ratios relating to the potential and actual
growth of the company whose shares are being appraised.
2.0 OBJECTIVE
At the end of the unit, you should be able to:
• calculate ratios relevant to the potential and actual growth of the

business.
3.0 MAIN CONTENT
3.1 Net Book Value per Ordinary Share
This ratio indicates the historical cost base to which the price per
ordinary share relates. The net book value in this respect is shareholders’
funds less preferential share capital. Thus
Net book value of ordinary share

No of ordinary share
155
3.2 Earnings per Share
This ratio is a component of price earning ratio. It indicates the amount

of the net profit after tax exclusive of extraordinary items attributable to
each ordinary share. It is normally calculated in kobo. Thus,
Earning Per Share (EPS) = Total earrning (in kobo)

No of ordinary shares
Note:
Net profit after tax exclusive of extraordinary items x

Less Pref. Dividend x
Minority interest x
-
x
-
x
Earning attributable of ordinary shares xx
3.3 Dividend per Share
This ratio indicates:
i. The dividend paid per share and

ii. Retention policy of the company
It may not necessarily be that the whole earning per share (EPS) is
distributed as dividend. There may be transfer to reserves, writing-off
preliminary expenses etc., before the decision as to the amount of
dividend to be declared is made. So, using the dividend per share (DPS)
m conjunction with the EPS will give us the retention policy of the
company. Thus:
Total Dividend = Dividend per share

No of Ordinary share
A total dividend is usually the figure of net proposed (or actually paid)
plus the associated tax credits.
3.4 Price/Earning Ratio
This ratio is regarded as the indicator of future performance of the

business. This is a ratio of a company's current share price to the earning
per share. A high P/E ratio means strong shareholders’ confidence in the
company and its future. The P/E ratio of a company can be compared
156
with those of other companies generally or with those of the same

industry. Thus:
Market price per share = PER

Earning per share
3.5 Earning Yield
This indicates the potential return on investment. This is an inverse of

the PE ratio, thus:
Earning per share x 100 = Earning Yield

Market price per ordinary share 1
This is a performance indicator and therefore indicates what the

dividend yield could be if (i) the coy paid out all its profits as dividend
and retained nothing and (ii) there were no extraordinary items in the
P & L A/C. This attempts to improve the comparison between
investment in different companies. It simply highlights the amount
earned on each share relative to their market price.
1. Why are investment ratios calculated?

2. The ordinary shares of Ozainah Plc. has a per value of N20 each
and the company has 12,000,000 ordinary shares.
Net profit after tax N150,000

Total dividends N50,000
Market price N55.00
Calculate earning per share, price earning ratio, dividend yield, dividend
cover and dividend per share.
Dividend Yield
This ratio indicates the current return on investment, thus:
Dividend on the share for the ear (grossed up) x 100%

Current mar et value of the share (Ex. Div.)
The dividend per share is taken as the dividend for the previous year.
157
4.0 CONCLUSION
Despite the nature of the information disclosed by the financial

statement may users still use ratio as guide into the future and as a basis
of action.
5.0 SUMMARY
In this unit, you were taught ratios relating to potential and actual
growth of the company or business. Then, you were exposed to the
calculation and the interpretation of the ratios.
You are given the following information about two coys, A and B
A B
PBT (on ordinary activity) 45 4.875
Tax on Pref. of Ordinary 15 1.8
Activity
PAT on ordinary activity 30 3.075

Profit to minority interest 1.5 0.3
28.5 2.775
2.25
Extr. Ord. item before tax 1.275 0.75
Tax 2.475 1.50
Minority interest 0.15 1.50
2.325 0.075 1.425
30.825 4.20
0.375
Pref. Dividend 15.45 15.828 4.05 4.05
15.0 15.00
No. of Ordinary Shares 150 37.5

Market price of shares 213.75 115.5
Compare the dividend yield, dividend cover and earning yield of the two
companies.
Jennings, S.A.R. (1991). Financial Accounting. London: DP Publication

Ltd.
Wood, F. (1980). Business Accounting. London: Longman Group Ltd.
158

BHM 107 General Accounting II

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BHM 107 General Accounting II

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NATIONAL OPEN UNIVERSITY OF

COURSE CODE:-BHM 107

Course Writer/Developer Sani U. Gurowa

Programme Leader Dr. O. J. Onwe

Course Coordinator S. O. Israel-Cookey

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

All Rights Reserved

The course guide is meant to provide you with the necessary

The course consists of the evolution of accounting, accounting equation

non-trading organizations, department accounts, consignment account,

The aims of the course will be achieved by:

2.0 Explaining the evolution of accounting;

After completing this course, you should be able to:

5.0 analyze the evolution of accounting;

Major components of the course are:

Unit 1 The Evolution of Accounting

Unit 1 Depreciation of Fixed Assets I

Unit 1 Accounts of Non-Trading Organizations

Unit 1 Admission of New Partners

Unit 4 Dissolution of Partnership

In doing the tutor-marked assignment, you are to apply your transfer

Final Written Examination

Course Code BHM 107

Course Title General Accounting II

Course Writer/Developer Sani U. Gurowa

Programme Leader Dr. O. J. Onwe

Course Coordinator S. O. Israel-Cookey

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

All Rights Reserved

Unit 1 The Evolution of Accounting……………. 1

Unit 1 Depreciation of Fixed Assets I……………. 37

Unit 1 Accounts of Non-Profit Organizations…….. 73

Module 4 ………………………………………………… 110

Unit 1 Admission of New Partners…………………. 110

Unit 1 The Evolution of Accounting

UNIT 1 THE EVOLUTION OF ACCOUNTING

Historically, the practice of accounting is said to have evolved from the

At the end of this unit, you should be able to:

•explain the evolution of accounting

3.0 MAIN CONTENT

3.1 The Evolution of Accounting

3.2 Evolution of Accountability

Accounting evolved over a long period of time. It dates back to between

In the classical Athens, there was an arrangement whereby meritocracies

The Roman governments of the second and third centuries BC practice

In medieval England, the Normandy dynasty established and developed

During the so-called voyages of discovery in Europe, many people were

However, the formation of limited liability companies and their growth

It is generally believed that Pacioli, an Italian clergyman and

3.2 Meaning of Modern Accounting

The American Institute of Certified Public Accountants defines

users of the information. And in Nigeria, the users of the information

Generally speaking, a system is set of elements, which operate together

Accounting occupies a central place in the management of modern

Being an il1formation system, accounting must then face the problem of

The purpose of financial accounting is to communicate relevant

The task of management accounting, on the other hand, is to

3.3 Accounting Concepts

Accounting concepts embody the rules and standard guiding the

The accounting concepts are neither laws of nature nor commandments