INTRODUCTION TO

FINANCIAL ACCOUNTING
(UGBS 208)

Departmental Accounting

College of Humanities, UGBS

2019/2020
 Learning Objectives

Identify the advantages of keeping departmental

records

Allocate direct expenses and apportion common

(indirect) expenses associated with departments

Prepare departmental income statements (trading,

profit and loss account)

Godfred, Edem, Emmanuel, Edward 17-Jun-23 2

 What is Departmental Accounting?
 A method of accounting which is designed to
ascertain the trading and operational results of each
department of a departmental business
organization.

 The process of providing accounting information

analysed by departments, so that each department
of an organization can be treated as a separate unit .

Godfred, Edem, Emmanuel, Edward 17-Jun-23 3

4

Purpose of Departmental Accounting

To provide management with the

information to evaluate the
profitability or cost effectiveness of
each department as well as to help set
up responsibility centers to assign
costs to department managers.

17-Jun-23
Godfred, Edem, Emmanuel, Edward
5

Illustration (OK Company Ltd)

OK Company Ltd is a retail business

with three departments:
•Clothing
•Housewares
•Electronics

17-Jun-23
Godfred, Edem, Emmanuel, Edward
6
OK Company Ltd

Income Statement for Year Ended December 31, 2005

Sales GH₵3,000,000

Cost of Goods Sold GH₵1,000,000

Gross Profit GH₵2,000,000

Expenses:

Wages Expense GH₵400,000

Utilities Expense GH₵200,000

Supplies Expense GH₵100,000

Total Expenses GH₵700,000

Net Income GH₵1,300,000

17-Jun-23
Godfred, Edem, Emmanuel, Edward
 OK Company Ltd
Departmental Income Statement

For Year Ended December 31, 2005

Clothing Housewares Electronics Combined
(GH₵) (GH₵) (GH₵) (GH₵)

Sales 1,500,000 500,000 1,000,000 3,000,000

Cost of Goods Sold 250,000 300,000 450,000 1,000,000
Gross Profit 1,250,000 200,000 550,000 2,000,000

Expenses:
Wages Expense 150,000 150,000 100,000 400,000
Utilities Expense 100,000 75,000 25,000 200,000

Supplies Expense 75,000 10,000 15,000 100,000

Total Expenses 325,000 235,000 140,000 700,000
Net Income (Loss) 925,000 (35,000) 410,000 1,300,000
17-Jun-23 7
Godfred, Edem, Emmanuel, Edward
8

Advantages of Departmental Accounting

• It helps in assessing departmental performance
critically.
• It helps management in taking decisions with respect
to :
– Expansion program of a particular department
– Closing down of a particular department due to poor
performance
– Improvement in the areas of a particular department.
• It helps in taking effective measures for improving
the performance of department and departmental
personnel.
17-Jun-23
Godfred, Edem, Emmanuel, Edward
9

Advantages of Departmental Accounting

• It helps in creating an environment for competition
among the departments and as a whole helps to
increase the overall profitability of a business.
• It helps in assessing the effectiveness of departmental
budgeting and planning.
• Helps in achieving the targeted profit of the enterprise.
• Helps in identifying successful managers.

17-Jun-23
Godfred, Edem, Emmanuel, Edward
Methods and Techniques of Departmental
Accounts
 Separate sets of books for each department.
 To keep accounting records of departments analytically,
but its very expensive.

 Single set of books for all departments kept in a

columnar/tabular form.
 Subsidiary books such as sales and purchases are also
prepared in a columnar form to show records for each
department.

Godfred, Edem, Emmanuel, Edward 17-Jun-23 10

 Allocation and Apportionment of
Expenses
 Expenses which are related to a particular/specific
department
 Charged to that particular department. E.g. salary paid to foreman
in production department, may be charged directly to the
production department.
 Expenses which relate to two or more departments
 Apportion to the departments concerned on some
suitable/equitable basis. E.g. rent of the shop can be apportioned
according to the floor area occupied by each department.
 Expenses which cannot be allocated/apportioned
reasonably
 Directly recorded in the combined Income Statement. E.g. bank
interest, audit fees etc.
17-Jun-23 11
Godfred, Edem, Emmanuel, Edward
 Common Basis of Apportionment
Income/Expenses Basis of Apportionment
Salesmen salary, salesmen Commission, Selling Sales of each department
expenses, Discount allowed, Advertisement, Bad
debts, Carriage outward, Provision for bad debts,
Showroom rent etc.
Discount received, Carriage inward Purchases of each department
Rents and rates, Insurance on Floor area of each department
building, air conditioning expenses, Repairs and
maintenance of building
Canteen expenses, Labour welfare Number of employees of each
expenses, Medical expenses department
Depreciation of assets, repair and maintenance of Asset value of each department
assets, Insurance on asset
Lighting Light points, Number of lights
Power Horse Power
17-Jun-23 12
Godfred, Edem, Emmanuel, Edward
 Format of Departmental Income
Statement
Dept. A Dept. B Total
Sales xx xx xxx
Returns Inward (xx) (xx) (xxx)
Net Sales (A) xx xx xxx
Cost of Goods Sold
Opening stock xx xx xxx
Purchases xx xx xxx
Carriage Inwards xx xx xxx
xx xx xxx
Return Outwards (xx) (xx) (xxx)
Goods available for sale xx xx xxx
Closing stock (xx) (xx) (xxx)
(B) xx xx xxx
Gross Profit (A-B) xx xx xxx
17-Jun-23 13
 Format of Departmental Income
Statement
Dept. A Dept. B Total

Gross Profit b/d xx xx xxx

Other Income xx xx xxx

Total Income xx xx xxx

Expenses (xx) (xx) (xxx)

Net Profit xx xx xxx

NB: This format is used when preparing the income statement on gross profit basis

17-Jun-23 14
Godfred, Edem, Emmanuel, Edward
 Types of Departments
• Independent departments
– Have negligible inter department transfers

• Dependent departments
– Have transfer of goods from one department to another
for further processing
– Issues may arise as a result of the transfer price (at
cost/selling price)

17-Jun-23 15
Godfred, Edem, Emmanuel, Edward
 Inter-departmental Transfers
• Goods and services could be transferred from one
department to the other on one of the following
basis:
– Cost
– Market price
– Cost plus a percentage of profit

17-Jun-23 16
Godfred, Edem, Emmanuel, Edward
 Unrealized Profit
• Transfers made at cost price are credited to the supplying
department and debited to the receiving department.
– Further adjustments not needed

• Transfers made at cost plus profit/market price

– Provides a possibility of unrealized profit when part of the
goods transferred remain unsold

• Any unrealized profit arising from transfer of goods and

services should be eliminated in the final accounts.

Godfred, Edem, Emmanuel, Edward 17-Jun-23 17

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Manufacturing Accounts

College of Humanities, UGBS

2019/2020
 Learning Objectives
Identify and explain the elements of cost of
production.
Determine and calculate prime cost and the cost of
production.
Prepare a manufacturing account by adjusting for
work-in-progress.
Show how cost of a product is built up in the final
accounts of a manufacturing company.
Determine manufacturing profit and adjust for
unrealized profits.
Godfred, Edem, Emmanuel, Edward 6/17/2023 2
 What is a Manufacturing Account?
• An account that details the cost of
producing or manufacturing products
(goods or services) in a given period.

• It determines the cost of production

needed for the calculation of cost of
goods sold in the general income
statement of a manufacturing company.
Godfred, Edem, Emmanuel, Edward 6/17/2023 3
 Elements of Cost of Production
 Direct Material Cost
 Materials which become a physical part of the goods produced. E.g.
raw materials
 Direct Labour Cost
 Cost of labour actually working on the goods produced. E.g. wages of
production workers.
 Other Direct Expenses
 Other expenses directly attributed to the production of the goods. E.g.
royalties
 Indirect Manufacturing Expenses (Factory Overheads) - All
production costs which are indirect
 Indirect materials e.g. lubricants
 Indirect labour e.g. wages of foreman, cleaner
 General overheads e.g. depreciation, rents etc.
Godfred, Edem, Emmanuel, Edward 6/17/2023 4
 Other Divisions of Cost
• Prime Cost
– Aggregate of all direct cost of manufacturing i.e. direct
material cost plus direct labour cost plus direct expenses.
• Conversion cost
– Cost involve in converting raw materials into partly-
finished product or finished product. i.e. direct labour cost
plus direct expenses plus all factory overheads
• Production cost
– Cost of manufacturing the product i.e. prime cost plus
manufacturing overheads

Godfred, Edem, Emmanuel, Edward 6/17/2023 5

 Kinds of Inventory
• Inventory of Raw Materials
– Materials to be converted into finished goods. i.e. the materials
that are used to make the product. For example, fruits in a fruit
processing company.
• Inventory of Work-in-Process
– Materials in their intermediate state of production. Thus, the
units of product that are partially complete and will require
further work before ready for sale. For example, the mixed
dough in a bakery.
• Inventory of Finished goods/products
– Units of products that have been completed but have not yet
been sold to customers. For a commercial organisation, they are
goods bought to be sold and awaiting sales.
Godfred, Edem, Emmanuel, Edward 6/17/2023 6
 Format of Manufacturing Account
Manufacturing Account for the year ended …
Direct Materials
Opening Inventory xx
Purchases of raw materials xx
Carriage inwards xx
Return outwards (xx)
Raw materials available to use xx
Closing Inventory (xx)
Cost of raw materials used xx
Direct labour (wages) xx
Accruals/Prepayment xx/(xx) xx
Other direct expenses (if any eg. royalties) xx
Prime Cost 6/17/2023 7 xx
Godfred, Edem, Emmanuel, Edward
 Format of Manufacturing Account
Manufacturing Account for the year ended …
Factory Overheads Expenses
Indirect material xx
Indirect labour xx
General Factory Expense xx
Accruals/Prepayments xx/(xx) xx
Total overheads xx
Cost of production xx
Work in process adjustment
Opening work-in-progress xx
Closing work-in-progress (xx) Xx
Cost of goods produced 6/17/2023 8
xx
Godfred, Edem, Emmanuel, Edward
 Format of Income Statement
Income Statement for the year ended …
Sales xxx
Returns Inward (xxx)
Net Sales xxx
Cost of Goods Sold
Opening Inventory of finished goods xx
Cost of goods manufactured/produced xx
Purchases from outside suppliers (if any) xx
Goods available for sale xx
Closing Inventory (xx) (xxx)
Gross Profit xxx
Other Incomes xxx
Godfred, Edem, Emmanuel, Edward 6/17/2023 9 xxx
 Format of Income Statement
Income statement for the year ended …

Profit and other income b/d xxx

Expenses

Administrative expenses xx

Selling and distributive expenses xx

Other Expenses xx (xxx)

Net Profit xxx

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 CLASS ACTIVITY

Refer to Question 1 on Worksheet 2 (Manufacturing

Accounts)- Okukuseku Ltd.

Godfred, Edem, Emmanuel, Edward 6/17/2023 11

Manufacturing Account for the year Ended……
GHC’ 000 GHC’ 000 GHC’ 000
DIRECT MATERIALS
Opening Inventory 6,000
Purchases 25,000
carraige inwards 1,200
materials available 32,200
Closing Inventory ( 8,000)
Materials used 24,200
Direct wages (Labour) 10,000
Direct expenses 4,000

PRIME COST 38,200

Godfred, Edem, Emmanuel, Edward 6/17/2023 12

OVERHEADS;
Opening Indirect material 7,000
Purchases indirect material 12,000
Indirect materials available 19,000
Closing Indirect material ( 5,000 )
Indirect materials used 14,000
Indirect factory wages 16,500
Indirect/factory expenses
General factory expenses 15,000
Depn: Factory assets (0.1*40,000) 4,000
Motor vehicle (0.1*35000*0.5) 1,750
Rent expense (0.7*10000) 7,000
27,750
Total Overheads 58,250
6/17/2023 13
Cost of Production 96,450
Adjustment for W.I.P

Opening work in progress 2,500

Closing work in progress (4,500 )

Cost of goods produced (NB - to

income statement) 94,450

Godfred, Edem, Emmanuel, Edward 6/17/2023 14

Income Statement for the year ended…
Sales 160,000
COGS
Opening Finished goods 8,000
Cost of goods produced 94,450
Goods available for sale 102,450
Closing Finished goods (12,000 )
(90,450 )
Gross profit 69,550
Commission received 2,200
Total Income 71,750

Godfred, Edem, Emmanuel, Edward 6/17/2023 15

Expenses;
Rent expense (0.3*10000) 3,000
Depn; Office assets (0.05*30000) 1,500
Motor Vehicle (0.1*35000*.5) 1,750
Bad debts 1,500
Office expenses 12,000
(19,750)
Net profit 52,000

Godfred, Edem, Emmanuel, Edward 6/17/2023 16

 Market Value of Goods Manufactured
 Profit on manufacturing (manufacturing profit) is the difference
between the market value of goods manufactured and the cost
of goods manufactured.
Market value of goods manufactured xx
Cost of goods manufactured (xx)
Manufacturing profit xx

 Manufacturing profit is accounted for in the income statement

and disclosed separately.

 Where there are unsold manufactured goods, unrealized

manufacturing profit must be provided for.
Godfred, Edem, Emmanuel, Edward 6/17/2023 17
 Treatment of Manufacturing Profit
Income Statement for the year ended …
Sales xxx
Returns Inward (xxx)
Net Sales (A) xxx
Cost of Goods Sold
Opening Inventory of finished goods xx
Market value of goods manufactured xx
Purchases from outside suppliers (if any) xx
Goods available for sale xx
Closing Inventory (xx) (xxx)
Gross profit on trading c/d xxx
Manufacturing profit xxx
Gross profit xxx
Godfred, Edem, Emmanuel, Edward 6/17/2023 18
 Treatment of Provision for Unrealised
Profit
• Recall treatment of provision for doubtful debt?

Same principle

Godfred, Edem, Emmanuel, Edward 6/17/2023 19

 Finding the amount of unrealised profit
• Find the margin percentage
• Apply the percentage on the value of closing
inventory of finished goods to get the profit
unrealised or use the formula:
Closing inventory * Manufacturing Profit
Market value
• Compare current unrealised profit to previous
provision for unrealised profit if any

Godfred, Edem, Emmanuel, Edward 6/17/2023 20

 Treatment of Provision for Unrealised
Profit
• If there is an increase in provision;
-charge the “increase” to the I/S as
expense (loss)

- In statement of financial position, reduce the

value of closing inventory of finished goods by
the amount of unrealised profit (i.e. the
new/computed unrealised profit)

Godfred, Edem, Emmanuel, Edward 6/17/2023 21

 Treatment of Provision for Unrealised
Profit
• If there is a decrease in provision;
- Add the “decrease” to gross profit in the I/S
since it is a gain

- In the statement of financial position, reduce

the value of closing inventory of finished goods
by the amount of unrealised profit

Godfred, Edem, Emmanuel, Edward 6/17/2023 22

 CLASS ACTIVITY

Refer to Question 2 of Worksheet 2 (Manufacturing Accounts)-

Okukuseku Refined Ltd.

• NOTE THE DIFFERENCE BETWEEN THIS AND THE PREVIOUS

EXAMPLE?

b. Goods produced are transferred at a mark-up of 20%

• Provision for unrealized profit- 1,600

Godfred, Edem, Emmanuel, Edward 6/17/2023 23

 Okukuseku Refined Ltd
Manufacturing account for the year ended….
GHC’ 000 GHC’ 000 GHC’ 000
DIRECT MATERIALS
Opening Inventory 6,000
Purchases 25,000
carraige inwards 1,200
materials available 32,200
Closing Inventory ( 8,000)
Materials used 24,200
Direct wages (Labour) 10,000
Direct expenses 4,000
PRIME COST 38,200

Godfred, Edem, Emmanuel, Edward 6/17/2023 24

OVERHEADS;
Opening Indirect material 7,000
Purchases indirect material 12,000
Indirect materials available 19,000
Closing Indirect material (5,000)
Indirect materials used 14,000
Indirect factory wages 16,500
Indirect expenses:
General factory expenses 15,000
Depn: Factory assets (0.1*40,000) 4,000
Motor vehicle (0.1*35000*0.5) 1,750
Rent expense (.7*10000) 7,000
27,750
Total Overheads 58,250
Cost of Production 96,450
Godfred, Edem, Emmanuel, Edward 6/17/2023 25
Adjustment for W.I.P
Opening work in progress 2,500
Closing work in progress (4,500)
Cost of goods produced 94,450
Manufacturing Profit (0.2* 94,450) (note mark-up is
on cost) 18,890
Market value (to trading department) 113,340

Godfred, Edem, Emmanuel, Edward 6/17/2023 26

 Cont’d
• Transfer at market value gives rise to manufacturing profit and
hence provision must be made for any unrealised profit;
• NB: Since finished goods are at market value, find unrealised
profit by Multiplying margin% by inventory of finished goods;
• Converting from mark-up to margin= 20/100+20 = 0.166667 *
100= 16.67
• 16.7% * 12,000 = 2,000
• Previous provision= 1,600
• Hence, increase of (2,000- 1,600)= 400
• 400 to Income Statement
• 2,000 to statement of financial position- to reduce value of
finished goods
Godfred, Edem, Emmanuel, Edward 6/17/2023 27
Income Statement for the year ended…
Sales 160,000
COGS
Opening Finished goods 9,600
Market value (from manufacturing) 113,340
Goods available for sale 122,940
Closing Finished goods (12,000)
(110,940)
Gross profit 49,060
Manufacturing profit 18,890
Commission received 2,200
Total Income 70,150

Godfred, Edem, Emmanuel, Edward 6/17/2023 28

Expenses;
Rent expense (0.3*10000) 3,000
Depn; Office assets (0.05*30000) 1,500
Motor Vehicle (0.1*35000*.5) 1,750
Bad debts 1,500
Office expenses 12,000
Increase in prov. For unrealised profit 400
(20,150)
Net profit 50,000

Godfred, Edem, Emmanuel, Edward 6/17/2023 29

INCOME SURPLUS
Opening bal. 12,000
Net profit 50,000
61,996
Dividend (3,500)
Closing bal. 58,500

Godfred, Edem, Emmanuel, Edward 6/17/2023 30

Statement of Financial Position as at….
Cost NBV
Non-current assets; (GHC'000) Depn (GHC'000) (GHC'000)
Office Assets 30000 1500 28500
Factory Assets 40000 4000 36000
Motor Vehicle 35000 3500 31500
105000 9000 96000
Current assets:
Inventory; Direct materials 8000
Indirect materials 5000
Work-in-progress 4500
Finished goods (12,000 – 2,000) 10000
Receivables 7000
Bank 20000
54500
Current liabilities:
payables (5000)
Working capital 49500
Net assets 145500
Godfred, Edem, Emmanuel, Edward 6/17/2023 31
 Financed by;
Capital 48000
Income surplus 58500
106500
Loan 39000
145500

Godfred, Edem, Emmanuel, Edward 6/17/2023 32

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Partnership Accounts

College of Humanities, UGBS

2019/2020
 Learning Objectives

Identify and explain the characteristics of partnership.

Describe the main features of partnership agreement

and the rules governing partnerships in Ghana.

Explain the purpose of and be able to prepare a profit

and loss appropriation account.
Prepare current accounts, capital accounts and
financial statements of a partnership.
Godfred, Edem, Emmanuel, Edward 6/17/2023 2
 What Partnership is
• Incorporated Private Partnership Act of 1962, Act 152
(IPPA) governs partnership in Ghana.
• It is “the association of two or more individuals
carrying on business jointly for the purpose of making
profits”. S.3 (1) of IPPA
• Maximum number of persons is 20. S.4 (2) of IPPA
• Formed by formal agreement (partnership agreement).

Godfred, Edem, Emmanuel, Edward 6/17/2023 3

 What Partnership is not
• A family ownership or co-ownership of
property whether or not the family or co-
owners share any profits made by the use
of that property
• The remuneration of a servant or agent of a
person engaged in business by a share of
profits of the business shall not necessary
make the servant or agent a partner
Godfred, Edem, Emmanuel, Edward 6/17/2023 4
 Nature of Partnership
 Firm (as a corporate body) is distinct from the partners.
 Formed by formal agreement (partnership agreement).
 Partners are jointly and severally liable.
 The partnership is liable if any individual partner acting in
normal course of business carries out any wrong doing.
 If one partner is sued for wrong doing, the other partners may
be sued also.
 Liability is unlimited.
 Relationship between partners is a fiduciary one.
 Every partner is also an agent of the firm.

Godfred, Edem, Emmanuel, Edward 6/17/2023 5

 Partnership Agreement
• Name and nature of business of the firm.
• The amount of capital to be contributed and maintained by
each partner.
• The rate of interest (if any) to be paid on capital.
• The extent to which drawings are allowed and the rate of
interest (if any) to be charged on drawings.
• The remuneration (if any) to be paid to partners for their
services
• The ratio in which profits and losses are to be shared.
• Keeping of books and accounts.
• Arrangements for admission of new partners.

Godfred, Edem, Emmanuel, Edward 6/17/2023 6

 Rules in the Absence of Partnership
Agreement. [Section 35]
• All partners are to share equally in capital, profits and losses.
• No interest is allowed to be charged on capital.
• No remunerations are to be paid to partners.
• Any advance made by a partner in excess of his agreed shared
capital will receive an interest of 5% p.a.
• Every partner may take part in the management of the business of
the firm
• No partner shall be entitled to remuneration for acting in the firm’s
business
• No person may be introduced as a partner without his consent and
the consent of all the existing partners
• The partnership books and accounts shall be kept at the place of
business of the firm

Godfred, Edem, Emmanuel, Edward 6/17/2023 7

 Accounting Requirements
• Every firm shall cause to be kept proper
accounts with respect to:
– its financial position and changes therein,
– the control of, and accounting for, all
property acquired.

Godfred, Edem, Emmanuel, Edward 6/17/2023 8

 Partnerships and Other Forms of
Businesses
Now lets compare partnerships with other forms of
business organizations.

Godfred, Edem, Emmanuel, Edward 6/17/2023 9

 Partnership vs. Sole Proprietor
 Risk is spread and shared.
 Partners provide a range of specialised skills.
 More capital available.
 Some partners work harder for the firm than
others.
 There may be disputes.
 Slow decision making.
 Joint and several liability.

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 Partnership vs. Companies
• Less formal set up.
• No company formalities (e.g. statutory
audits and accounts filing).
• Much easier to sell shares than to realise
capital in a partnership.
• Partnership structure can be
cumbersome.
• Liabilities are unlimited.
Godfred, Edem, Emmanuel, Edward 6/17/2023 11
 Differences in Financial Statements

• Income statement
–Profit and loss appropriation
account
• Statement of Financial Position
–Capital accounts for each partner
–Current accounts for each partner
Godfred, Edem, Emmanuel, Edward 6/17/2023 12
 Profit and Loss Appropriation Account
 Typical appropriations are
 interest on capital (%) – gives recognition to
partners contributing different amounts of capital to
the firm
 salary (annual) – not to be confused with salaries
paid to employees (which are an expense in the
Profit and loss)
 Interest on drawings
 Interest on current accounts
 Share of profit and loss

Godfred, Edem, Emmanuel, Edward 6/17/2023 13

 Format of Appropriation Account
Profit and Loss Appropriation account for the year ended …
Net Profit b/d xxx
Add: Interest on drawings
A xx
B xx xx
Interest on current accounts
B (DR) xx
xxx
Less: Interest on capital
A xx
B xx (xx)
Interest on current accounts
A (CR) (xx)
Partner’s salary: B (xx)
Profit to be shared xxx
Share of profit
A xxx
B Emmanuel, Edward
Godfred, Edem, 6/17/2023 14 xxx
xxx
 Capital Account

• Account maintained to record the capital

contributions of the individual partners.
– It is credited with contributions from partners and
debited with withdrawals from capital by partners.
• Fixed Capital Account
– Only capital increases and decreases are recorded in
the capital account.
• Floating/ Fluctuating Capital Account
– Records all other resource flow, to and from the
partners.
Godfred, Edem, Emmanuel, Edward 6/17/2023 15
 Current Account
• When a fixed capital account method is
used, the current account takes care of all
the short term interests or otherwise of
the partners in the firm. This relieves the
capital account of the details such as
share of profit, interest on capital and
drawings, partners’ salaries among
others.
Godfred, Edem, Emmanuel, Edward 6/17/2023 16
 A Typical Current Account In Columnar Form
Details/Particulars A B Details/Particulars A B

Balance b/d - xx Balance b/d xx -

Interest on drawings xx xx Interest on capital xx xx

Drawings (cash/goods) xx xx Interest on current a/c xx -

Balance c/d - xx Partners salaries xx xx

Share of profit xx xx

Balance c/d xx -

xx xx xx xx

Balance b/d xx Balance b/d - xx

Godfred, Edem, Emmanuel, Edward 6/17/2023 17
 Partner’s Loan Account
• Where a partner gives a loan to the firm or makes an
advance in excess of the agreed capital contribution,
the amount should be credited to a separate loan
account and not included in the capital account:
– Such advances attracts an interest rate of 5% per annum.
(S 35 of ACT 152)

– On the winding up of the firm, repayment of partners’ loans

rank at a higher priority to that of partners’ capital.

Godfred, Edem, Emmanuel, Edward 6/17/2023 18

 CLASS ACTIVITY

• Refer to Question 1 of Worksheet 3 (Partnership Accounts):

Kako, Koobi, Kewuro Partners

Godfred, Edem, Emmanuel, Edward 6/17/2023 19

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Accounting for Companies

College of Humanities, UGBS

2019/2020
 Learning Objectives
Explain and discuss the nature of limited liability companies
according to the Company’s Act, 1963 (Act 179).

Explain the differences between the different classes of shares.

Account for the issuance of shares.

Explain the purpose of and prepare an income surplus account.

Prepare the Income Statement and Statement of Financial

Position of a limited liability company.
6/17/2023
 Definition of a Company
• A company is “a body corporate formed and registered under
this code (Companies Act 1963 - Act 179) or an existing
company”.
– A body corporate is “a corporation formed under (the
company’s Act) or otherwise and whether in Ghana or
elsewhere”. (First Schedule)

– “No company, association or partnership consisting of more

than twenty persons shall be formed for the purpose of
carrying on business … unless it is registered as a company
under (the company’s Act) or formed in pursuance of some
other enactment for the time being in force. (Section 5)
6/17/2023
 Characteristics of Companies
• Separate legal Entity
– A company formed under the Act assumes the status of natural
person with full capacity, except to the extent that its
Regulations otherwise provide, for the furtherance of its objects
and of any business carried on by it and authorized by its
Regulations.
– As a body corporate, it exists as a legal entity separate and
distinct from its members. (Section 24)
• Separation of management and ownership
• Limited liability
• Perpetual succession
• Transferability of interests
• Legal personality
6/17/2023
 Formation of Companies
• The minimum number of persons who can form a company is one.
• The total number of members and debenture holders for a private
company is restricted to fifty. (Section 8)
• Section 180 requires a minimum number of two (2) directors.
• Formation requires:
– Compliance with the provisions in the Act and satisfying the
registrar general.
– Certificate of Incorporation issued to the Promoters after
meeting the minimum capital requirement
– Certificate of Commencement of Business will be issued to start
trading.
– Regulations of the company - content includes the name of the
company, nature of business(es), status (section 24), names of
first directors and their powers.
6/17/2023
 Types of Companies (Section 9)
• Company limited by shares
– liability of members is limited to the amount, if any, unpaid
on the shares respectively held by them.
• Company limited by guarantee
– liability of its members is limited to the amount the
members may respectively undertake to contribute to the
assets of the company in the event of it being wound up.
• Unlimited company
– the liabilities of its members is not limited.
• Private and Public companies

6/17/2023
 Private And Public Companies
• A private company shall be a company which by its
regulations:
– restricts the right to transfer its shares
– the total number of members and debenture holders is
restricted to 50, excluding the bona fide current and former
employees.
– prohibits the company from making any invitation to the public
to acquire any shares or debentures of the company.
– prohibits the company from making any invitation to the public
to deposit money for fixed period or payable at call, whether
bearing or not bearing interest.

• The Act in section 9 (4) says that “any other company

shall be a public company”.
6/17/2023
 Accounting and Audit Requirements
(Section 123-136)
• Keeping of books of account
• Circulation of profit and loss account, Statement of Financial
Position and reports
• Profit and loss account
• Statement of Financial Position
• Group accounts
• Particulars of Directors emoluments and pensions
• Particulars of amounts due from officers
• Signing and publication of accounts
• Directors’ report
• Auditors’ report
• Appointment and remuneration of auditors
• Removal of auditors
• Duties and powers of auditors
6/17/2023
 Shares
• A share represents the right of ownership in a company.
– The ownership is in proportion to the number of shares
held.
– The amount paid for the shares is not the basis of claiming
more ownership but the number of shares acquired.

• “All shares created after the commencement of the Act

shall be shares of no par value”. (Section 40)
– Shares in Ghana do not have a fixed amount or price
attached to it upon its creation, hence;
– Shares can neither be issued at a premium nor discount.
6/17/2023
 Types of Shares
• Preference Shares
– They are shares that do not entitle the holder thereof to any right
to participate beyond a specified amount in any distribution
whether by way of dividend, or on redemption, in a winding up
or otherwise.
– They have priority over equity/ordinary shares in the distribution
of dividend and capital in the event of winding up.

• Ordinary Shares
– They are not entitled to a fixed amount of dividend and can only
be paid after preference shareholders have been paid.
– They are also entitled to residual capital (i.e. rank after
preference shares) in the event of winding up. i.e. they bear the
residual risk of the company.
– They have unrestricted voting rights
6/17/2023
 Issuance of Shares
• Company may issue shares up to the total number
authorized by its regulations (Section 41).
– Shares may be issued at such times and for such
consideration as the company may determine and
shall be paid for at such times as agreed by the
members and the company or as may be specified in
the regulations, except in capitalization issue.

• Shares shall be issued for valuable consideration and

paid for in cash, except otherwise agreed. (Section
42)
6/17/2023
 Forms of Issuing Shares
• Initial Public Offer
– Sale of shares by a private company for the first time to
the public.
• Private Placement
– The sale of shares of companies to private investors
without the use of public market exchanges.
• Capitalization/Bonus/Scrip Issue
– Monies in a company’s reserve is converted into capital
and then distributed to shareholders as new shares in
proportion to their existing shareholdings.
• Rights Issue
– Shares are issued to existing shareholders in proportion to
their current shareholding, respecting their pre-emption
rights and usually at a lower price than the current share
price of the company.
6/17/2023
 Procedure for Issuance of Shares
• Invitation to the Public to apply for shares
– Through the circulating of Prospectus and advertising in the mass
media, which gives the conditions of the offer.
• Application (offer from the public to the company
accompanied by cash from the public)
– States the number of shares desired by the applicants.
– Application remains an offer to buy shares in the company until the
company accepts or rejects this offer.
• Allotment of shares (acceptance or rejection by the
company)
– Process of allocating shares to applicants.
– Acceptance of the offer, Rejection of the offer or Acceptance of part
of the offer.
• Calls for arrears on share values
• Forfeiture of shares
6/17/2023
 Treasury Shares
• Shares which have been once issued but have been
recalled by the company through:
– Forfeiture
– Redemption
– Purchase/Acquisition

• Any issue of shares while there are shares in

treasury, is deemed to be an issue first of treasury
shares before any fresh issue
6/17/2023
 Share Deals Account
• An account required by the Act for certain dealings in
treasury shares
– When shares are reissued, the proceeds are credited to
this account.
– When the company redeems or acquires it own shares,
the transfer from Income Surplus account is also
credited to this account.
– All expenses incurred in the redemption and acquisition
of shares are charged to this account.

• This is the reserve that prevents the company’s stated

capital from reducing.
6/17/2023
 Components of Owner’s Equity
• The total resources owned by the members or owners of the
company. It consists of:
• Stated Capital
– Either from the cash or other consideration from the issue of
shares or transfers made into the stated capital account from the
income surplus (capitalization issue)
• Share Deals Account
• Income Surplus
– Retained earnings of the company over the years. All
distributions from profits are made in this account.
• Capital Surplus
– Usually results from revaluation of non-current assets
(appreciation). It is not intended to be distributed as dividend as
they are unrealized surpluses.
6/17/2023
 Payment of Dividends
• A company can only pay dividend to shareholders if:
– After such payment the company will be able to pay
its debts as they are due
– The amount of such payment does not exceed the
income surplus of the company prior the payment.

• Dividend payment could be:

– Cash or non-cash
– Interim or/and proposed

6/17/2023
 Shares Payable by Installments
• Accounting for shares payable by installments will be
discussed by considering the procedure for issuance
of shares:
– Invitation to the Public to apply for shares
– Application (offer from the public to the company
accompanied by cash from the public)
– Allotment of shares (acceptance or rejection by the
company)
– Calls for arrears on share values
– Forfeiture of shares
6/17/2023
 Application Stage
• When cash/cheque is received on application
Dr Bank/cash Account
Cr Application Account
with the total amount of cash received

• When consideration other than cash is received

Dr The relevant asset account
Cr Application account
with the agreed value of the consideration received
6/17/2023
 Allotment Stage
• Transfer to Stated Capital Account
Dr Application Account
Cr Stated Capital Account
with the total application amount received in respect of
shares allotted

• Refund of money for rejected applications

Dr Application Account
Cr Bank/Cash account
with the amount received on applications in respect of total
applications rejected.

6/17/2023
 Allotment Stage
• Retention of excess funds for other stages (partly successful
applicants)
Dr Application Account
Cr Allotment Account
with amounts received in respect of rejected portions of
applications

• On receipt of allotment monies (cash/cheque) due on shares

issued
Dr Cash/Bank Account
Cr Allotment Account
with monies received on allotment
6/17/2023
 Allotment Stage
• Transfer to the stated capital
Dr Allotment account
Cr Stated capital account
with the total sum received on allotment

6/17/2023
 On Calls Stage
• On receipt of cash/cheque
Dr Bank/cash account
Cr Call account

• Refund of excess money to applicants, if any, after full

payment.
Dr Call account
Cr Bank account

• Transfer to Stated Capital account

Dr Call account
Cr Stated capital account
6/17/2023
 Forfeiture
• Upon forfeiture of shares; no entry is made

• On Re-issue of forfeited shares

Dr Cash account
Cr Share Deals account

• Capitalization/Bonus issue
Dr Income Surplus account
Cr Stated capital account
6/17/2023
 Shares Payable on Application
• Receipt of monies on application
Dr Cash/Bank Account
Cr Application account
with the total amount received with applications

• Refunds of rejected applications

Dr Application account
Cr Cash/Bank account
with amount refunded to rejected applicants
6/17/2023
 Shares Payable on Application
• Transfer to Stated Capital
Dr Application account
Cr Stated Capital account
with amount received for shares issued

6/17/2023
 Issuance of Treasury Shares
• Treasury shares have all rights and obligations
attached to shares of similar class in the company.
• Full payment on application method is adopted.
• Accounting entries:
Dr Cash/Bank account
Cr Share Deals account
with the total amount received in respect of shares
issued

6/17/2023
 CLASS ACTIVITY

Refer to Question 1 of Worksheet 4 (Accounting for the Issue of

Shares)

6/17/2023
Financial Statements of a Company

• Income Statement
• Income Surplus Account
• Statement of Financial Position
• Statement of Cash flow
• Notes to the Financial Statements

6/17/2023
 Income Statement
Notes 2015 2014

¢m ¢m
Turnover 1 xxxxx xxxx
Cost of sales 2 (xxx) (xxx)
Gross profit xxxx xxxx
General administrative and selling expenses 3 (xxx) (xxx)
Operating profit xxxx xxxx
Other income 4 xxxx xxxx
Profit Before Interest and Taxation xxxx xxxx
Interest/financial charges 5 (xxx) (xxxx)
Profit before taxation xxxx xxxx
Taxation 6 (xxx) (xxx)
Profit after taxation transferred to income xxxx xxxx
surplus 6/17/2023
 Income Surplus Account
¢ ¢ ¢ ¢
2015 2014

Balance b/fwd xxx xxx

Profit for the year xxx xxxx

xxxx xxxx
Less: proposed dividend-interim xxx xxx

Final xxx xxx xxx xxx

Transfers to capital surplus a/c xxx xxx

Balance c/fwd xxxx xxxx

6/17/2023
 Statement of Financial Position
Notes 2015 2014

¢m ¢m ¢m ¢m
Non-current Assets 7 xxxx xxxx
Investments 8 xxx xxx
Current Assets
Inventory xxx xxx
Receivables 9 xxx xxx
Short-term investments xxxx xxxx
Cash and bank balance xxxx xxxx

Current Liabilities
Bank overdraft 10 xxx xxx
Payables 11 xxx xxx
Dividends payable 12 xxx xxx
Taxation payable 13 xxx xxxx
xxxx xxxx
Net current Assets/(Liabilities) xxxx xxxx

Long term Liabilities

Term loan 14 (xxx) (xxx)

Net Assets xxxx xxxx

Financed By:
Stated Capital 15 xxxx xxxx
Income Surplus xxx xxx
Share Deals xxx xxx
Capital Surplus 16 xxx xxx
xxxx xxxx
6/17/2023
 International Financial Reporting
Standards (IFRS)
• IFRS is the collection of financial reporting standards
developed by the International Accounting Standards
Board (IASB), an independent International
Standards setting organization

• The aim of IFRS is to provide “a single set of high

quality, global accounting standards that require
transparent and comparable information in general
purpose financial statements

6/17/2023
 Structure of IFRS

• IFRS comprise:
– IASs (written by the IASC from 1973 to 2000; amended by IASB)
– IFRS (written from 2001 by the IASB)
– Standards Interpretation Committee (SIC)’s interpretations
– IFRIC’s interpretations
IASs, IFRSs, SICs, IFRICs all have full authority

• IFRS are considered a “principle based” set of standards in

that they establish broad principles as well as dictate
specific treatments

6/17/2023
 What is the structure of the international
standard setters?
IFRS
Monitoring Foundation
Board

International IFRS
IFRS Accounting Interpretations
Advisory Standards Committee
Council Board (IASB)

IFRS
and
IFRS for SMEs

Godfred, Edem, Emmanuel, Edward

 IFRS adopted in Ghana
36

• Full IFRSs
– required or permitted for financial reporting
• listed companies
• Unlisted which are not SMEs (banks, etc)

• The IFRS for SMEs

– issued in July 2009
– required or permitted for financial reporting
• SMEs

6/17/2023
 The IFRS Objective
37

IFRS to be :
The single set of accounting standards used
worldwide providing high-quality, transparent
and comparable information for investors and
other users of financial information.

6/17/2023
 Why IFRS?

• Investors are acting on a global market !!

• National standards don’t work on a global
market
• Cross boarder business is hindered by
national standards

6/17/2023
 Benefits to Capital Markets

• Credibility of local market to foreign investors

• More cross-border investment

• Efficient capital allocation

• Comparability across political boundaries

• Facilitates global education and training

6/17/2023
 Benefit to companies

• Lower cost of capital

• Facilitates raising capital abroad
• Integrated IT systems
• “One set of books” + easier consolidation
• Better understanding of financial statements
from business partners abroad
6/17/2023
 Implementing IFRS: Challenges

• Commitment => Decision: leaders, law, regulation

• Responsibility
• Stakeholders involvement
• Solid financial system
• Training
• Educational programs
• Divergencies between local GAAP and IFRS
• Transition: systems, processes, professionals
• Tax neutrality (identified as key in many countries)

6/17/2023
INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Accounting for Single Entry

and Incomplete Records

College of Humanities, UGBS

2019/2020
 Learning Objectives
Explain how the accounting equation permits the
measurement of profit when accounting records are
incomplete.

Draw up a statement of affairs of a business with single entry

and incomplete records.

Determine profit from incomplete records using opening and

closing statement of affairs.

Deduce sales and purchases figures from single entry and

incomplete records.

Godfred, Edem, Emmanuel, Edward 6/17/2023 2

 Importance of Keeping Records

• Performance assessment
• Planning and control of operations
• Tax purposes
• Determination of profit/loss
• Requirement for sourcing for funds
• Business Valuations
• Others- extraction of trial balance,
identification of errors, misappropriation
Godfred, Edem, Emmanuel, Edward 6/17/2023 3
 Cash Basis and Accrual Basis
• Cash Basis of accounting
– Used when revenue is recognized based on cash actually
received and expenses is recognized only when payment is
made.
– This method is commonly used by small and petty traders who
are unable to advance credit for goods sold.
• Accrual Basis of accounting
– Revenue is recognized (earned) once goods are delivered or
services rendered to a customer and expenses are incurred
once benefits is derived or services are provided by another
party.
– This method is widely used by most businesses and all
corporations.
Godfred, Edem, Emmanuel, Edward 6/17/2023 4
 Incomplete Records
• Accounting records which have not been maintained
according to strict double entry principles.
• Full records are not kept either because
– the proprietor of the business doesn’t keep a full set of
accounts.
– some of the business accounts are accidentally destroyed or
lost.
– there is no legal requirement.
– the cost of a bookkeeper is not justified.
– information for preparation of financial statements can be
obtained from other sources.

Godfred, Edem, Emmanuel, Edward 6/17/2023 5

 Determination of Profit
• Net Assets (Capital) Approach
– Based on the accounting equation.
– The only way capital can increase is either
by introduction of cash/resources or making
profit.
• Cash Book (Income) Approach
– Elements of the financial statements are
determined via series of adjusting entries.
Godfred, Edem, Emmanuel, Edward 6/17/2023 6
 Net Assets (Capital) Approach
• This method of determining profit/loss is based on
the assumption that capital grows by way of profit
and reduces by losses made.
• Accounting equation:
Assets – Liabilities = Capital
Net Assets = Capital
• Profits are determined using the opening and closing
capital via the preparation of statement of affairs.

Godfred, Edem, Emmanuel, Edward 6/17/2023 7

 Net Assets (Capital) Approach
Statement of Affairs as at …
Assets
Non current assets xx
Current assets xx
xx
Liabilities
Non current liabilities xx
Current liabilities xx (xx)
Net Assets (capital) xx
Godfred, Edem, Emmanuel, Edward 6/17/2023 8
 Profit Determination
• Drawings
– This has the tendency to reduce the closing capital and
hence the profit.
– They are either added to “apparent profit” or subtracted
from “apparent losses”
• Capital Introduced
– This has the effect of increasing the closing capital and
hence the profit.
– It is therefore subtracted from the ‘‘apparent profit” or
added to the “apparent losses”

Godfred, Edem, Emmanuel, Edward 6/17/2023 9

 Net Assets (Capital) Approach

Determination of Profit

Closing Capital xxx

Plus: Drawings xxx

xxx

Less: Opening Capital (xxx)

Additional Capital (xxx)

Profit /(Loss) xx/(xx)

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 Net Assets (Capital) Approach
• Determine the opening and closing capital at the
beginning and end of the period via preparation of
statement of affairs.
• Trace all withdrawals made by owners for their
personal use (drawings).
• Determine whether there have been any injection of
additional capital
• Based on the accounting equation, determine the
profit or loss.

Godfred, Edem, Emmanuel, Edward 6/17/2023 11

 CLASS ACTIVITY

Refer to Question 1 of Worksheet 5 (Single Entry and

Incomplete Records)

Godfred, Edem, Emmanuel, Edward 6/17/2023 12

 Cash Book (Income) Approach
• A full income statement and balance
Sheet are prepared from the incomplete
records provided.
• It is mostly used when a cashbook could
be drawn up, opening and closing
balances are available and expenses
incurred and revenue earned could be
derived.

Godfred, Edem, Emmanuel, Edward 6/17/2023 13

 Income Approach - Steps involved
• Compute the opening capital (using the statement of affairs
template)
• Prepare your cash account to find missing figures such as
drawings etc.
• Ascertain credit sales (using Trade receivables control
account)
• Ascertain credit purchase (using trade payables control
account)
• Ascertain the expenses chargeable to the profit and loss
account by making adjustments for accruals and prepayments
• Prepare income statements

Godfred, Edem, Emmanuel, Edward 6/17/2023 14

 Incomplete Records and Missing
Figures
• Drawings/Cash Received/Cash Paid:
– Where the missing amount is in respect of payments,
then its normal to assume that the missing figure is the
amount required to make both totals agree in the cash
column of the cash book (note that for bank related
transactions a copy of all transactions can always be
obtained from the bank).
• Where payments are more than receipts, it is likely
that the missing figure is cash receipts from
customers
Godfred, Edem, Emmanuel, Edward 6/17/2023 15
 CLASS ACTIVITY

Refer to Question 3 of Worksheet 5 (Single Entry and

Incomplete Records)

Godfred, Edem, Emmanuel, Edward 6/17/2023 16

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Accounting for Non-for-Profit

Organization

College of Humanities, UGBS

2019/2020
 Learning Objectives
Explain the main differences between financial statements of
NPO’s and profit making organisations.

Prepare receipts and payments accounts, the income and

expenditure accounts and the statement of financial position of
NPO’s

Calculate profits/losses for special entities of NPO’s

Make appropriate entries regarding subscriptions, life

membership accounts etc.

Godfred, Edem, Emmanuel, Edward 6/17/2023 2

 Non-Profit Oriented Organizations
(NPO’s)
• Organizations whose main purpose is not trading or
profit making e.g. charities, clubs, associations,
professional bodies etc.

• Their main financial statements are:

– Receipts and Payments account
– Income and Expenditure account &
Statement of Financial Position

Godfred, Edem, Emmanuel, Edward 6/17/2023 3

 Receipts & Payments
• Is the summary of the Cashbook for the accounting
period.

• It records the cash receipts and payments.

• If the organization does not have other assets, apart from

cash, and liabilities as well and does not intend showing
the income and expense differently, it will be enough to
account for all financial transactions that have taken
place in the period in the receipts and payments.

Godfred, Edem, Emmanuel, Edward 6/17/2023 4

 Format of Receipt & Payments
Receipts ¢m Payments ¢m

Cash/Bank balance b/d xxxx Barmen’s wages Xxxx

Members dues Xxxx Clubhouse expenses Xxxx

Donations received Xxxx Honorarium to pastors Xxxx

Bar takings Xxxx Utilities Xxxx

Rent received Xxxx Donation to orphanages Xxxx

Cash/Bank balance c/d xxxx

xxxxx xxxxx
Godfred, Edem, Emmanuel, Edward 6/17/2023 5
 Income & Expenditure Account
• It is the “Income statement” for a non-profit
organization to assess the growth or otherwise in its
“capital” termed as the Accumulated Fund.
• It is prepared with the same principle as the normal
income statement of a trading organization.
• Only revenue receipts and revenue expenditures are
considered in the Income and Expenditure account.
• Capital receipts and expenditures go into the
statement of financial position.

Godfred, Edem, Emmanuel, Edward 6/17/2023 6

 Differences In Terminologies
Profit-oriented organisations Non-profit-oriented organisations

Income Statement Income and expenditure account

Net profit Excess of Income over Expenditure

(surplus)

Net loss Excess of expenditure over income

(deficit)

Godfred, Edem, Emmanuel, Edward 6/17/2023 7

 Format of Income & Expenditure
¢m ¢m

Incomes:

Subscription xxx

Bar profit etc. xxx xx

Expenditures:

stationery xxx

Donations etc. xxx xx

Excess of income over expenditure ( or vice versa) xxx

Godfred, Edem, Emmanuel, Edward 6/17/2023 8

 Receipts & Payments vs. Income &
Expenditure
Receipts and Payments Income and Expenditure
It records both capital and revenue It records only revenue expenditure,
expenditure capital expenditure goes to statement of
financial position
It has an opening balance It does not have opening balance
This is the cash book of the This is the “income statement” of the
organization organization
It records all cash receipts and It records only incomes and expenses
payments irrespective of the relating to the period under consideration.
period to which they relate.

Difference is the cash/bank balance Difference is the excess of

at a time income/expense over expense/income.
(i.e. surplus or deficit)

It is a real account It is a nominal account

Godfred, Edem, Emmanuel, Edward 6/17/2023 9
 Sources of Finance for NPOs
• Membership dues
• Annual subscriptions
• Fund raising activities
• Special fund raising programs-Dinner dance
• Donations
• Trading activities of special entities as supplement,
e.g. running a bar/restaurant

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 Key items to be considered
• Annual subscription
– Amount of money contributed and received from
members of the association on annual basis.
• Life membership dues
– Amount is paid to enjoy privileges of membership of the
organization for one’s lifetime.
• Donations
– Could be in cash or in kind such as an asset donated to it.
• Entrance fees
– normally paid by first timers

Godfred, Edem, Emmanuel, Edward 6/17/2023 11

 Annual Subscription
¢m ¢m

Balance b/fwd (owing at beg.) xx Balance b/fwd (prepaid at beg) xx

Income and Expenditure (diff) xx Receipts and Payments(cash received) xx

Balance c/d (prepayment at end) xx Balance c/d (owing at end) xx

xx xx

Godfred, Edem, Emmanuel, Edward 6/17/2023 12

 Life Membership
• Should not be treated as income in the I & E a/c only
in the year it was paid
• Credit it to a life membership account and transfers
made to the I & E a/c of an appropriate amount
annually.
• The balance on the life membership account at the
end of each period should be shown as a liability in
the statement of financial position.

Godfred, Edem, Emmanuel, Edward 6/17/2023 13

 Summary of Procedure
• Prepare receipts and payments account, if not given
• Prepare subscription and other income accounts to determine
incomes earned.
• Prepare expense accounts to determine the amount incurred.
• Prepare special purpose profit and loss account to arrive at
the profit/loss to be transferred to the income and
expenditure account.
• Use opening balances to determine the Accumulated Fund in
a Statement of Affairs
• Prepare the Income and Expenditure Account
• Prepare the statement of financial position

Godfred, Edem, Emmanuel, Edward 6/17/2023 14

 CLASS ACTIVITY

Refer to Question 1 of Worksheet 6 (Accounting for

non-profit organisations)

Godfred, Edem, Emmanuel, Edward 6/17/2023 15

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Correction of Errors

College of Humanities, UGBS

2019/2020
 Learning Objectives

Identify the different types of errors

Understand the basic process of errors management

Appreciate the relationship between errors and

profits
Explain the process of rectification of errors after
finalisation of accounts
Godfred, Edem, Emmanuel, Edward 6/17/2023 2
 CORRECTION OF ERRORS AND
SUSPENSE ACCOUNT
• Error: An error is an unintentional mistake and it can
occur at any stage of business transaction processing
Points to note
• Two types of errors can broadly be identified as:
– Those that do not affect the agreement of the Trial Balance
(total debits equal to total credits)
– Those that affect the agreement of the trial balance (total
debits not equal to total credits)

Godfred, Edem, Emmanuel, Edward 6/17/2023 3

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
Errors Not Affecting Trial Balance Agreement
– These are errors which when committed, the trial balance
will still agree because the two-fold effect would not be
affected.

• Error of Omission
– This is where a transaction is not recorded in the books of
the business at all. It is said that the transaction is
completely omitted from the books. An example is where
sale to Jane, GH¢2,000 is not recorded in the books of K
Ltd at all.

Godfred, Edem, Emmanuel, Edward 6/17/2023 4

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
 Error of Commission
 This is where the correct amount is entered but in the
wrong account. An example is Cheque paid to Amina
for GH¢300 is debited to Anima’s account.

 Error of Principle
 This is where a transaction is posted to the wrong class
of account, thereby breaking the accounting principle.
For instance, cash received from the disposal of a fixed
asset is credited to sales account of a buying and selling
business.
Godfred, Edem, Emmanuel, Edward 6/17/2023 5
 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
 Error of Original Entry
 This error is said to have been committed when the
figure used to pass entries into the books is
different from the original correct figure. Here, the
double entry is adhered to but the figure used is
wrong. Example is, Rent paid GH¢350 was recorded
in the books as GH¢500(i.e. for debit and credit)

Godfred, Edem, Emmanuel, Edward 6/17/2023 6

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
 Complete Reversal of Entry:
 In this situation, the correct figures are used but
the entries are posted to the wrong sides of the
two accounts involved. For example, sales on credit
to Ama is debited to Sales account (instead of
credit) and credited to Ama’s account (instead of
debit). The entries are said to have been reversed
completely.
 Note: if the reversal is in respect of only one
account, the trial balance will not agree.
Godfred, Edem, Emmanuel, Edward 6/17/2023 7
 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
• Error of Transposition:
• This form of error occurs where there is a wrong
sequence of the individual characters within a number
when recording. Eg; GHC132 recorded as GHC123

– Correction of these errors is done by either

reversing the wrong entries and posting the
correct ones or finding the differences and
passing the correct entries. Suspense account
will not be affected as the Trial Balance was
not affected.

Godfred, Edem, Emmanuel, Edward 6/17/2023 8

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
• Errors Affecting the Trial Balance Agreement
– Casting Errors-“over-adding” or “over-subtracting”.
– Single Entries-One debit/credit without corresponding
credit/debit.
– Two debits or two credits for one transaction.
– Over/understatements in one account only.
– Others

Godfred, Edem, Emmanuel, Edward 6/17/2023 9

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
Suspense Account
This account is introduced anytime the Trial Balance
fails to agree and efforts to locate the error have not
been fruitful. That is to say, suspense account is an
interim account introduced to ensure the agreement
of the Trial Balance pending the finding of the error.

This means that in correcting any error that affected

the Trial Balance, suspense account will be involved.

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
 The principle is that when the error could not be traced and
the Trial Balance was not agreeing, suspense account stood
in for the entry to ensure agreement.

 Therefore, if the error has now been identified, then the

Suspense Account must leave the books for the right entry to
occupy its rightful place.

 Note: Suspense account should only be opened after efforts

to locate the error had not yielded the desired results and
not to be used as a safe haven for dumping imbalances.

 The structure of the suspense account is like any T-account.

Godfred, Edem, Emmanuel, Edward 6/17/2023 11
 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
Suspense Account
Difference in trial balance xxx Difference in trial balance xxx
Discount received xxx Purchases xxx
Sales xxx Creditors xxx

• Note: Two balances cannot happen at the same time

but to show that it could be a debit or credit balance
b/fwd.
Godfred, Edem, Emmanuel, Edward 6/17/2023 12
 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
Correction of Net Profit and Redrafting the Statement of Financial
Position
 Sometimes interim final accounts are prepared before the
errors are located. This means the reported profit may not be
correct if the errors have effect on items that appear in the
computation of profit. After the errors have been corrected,
the profit arrived at earlier would be adjusted to show the true
performance of the business.
 The general principle is that if the transaction had the effect of
reducing the profit, then the figure must be added to the
“incorrect profit”. On the other hand if it increased the profit
unduly, then it must be subtracted from the “incorrect profit”
on item by item basis so that in the final analysis the profit will
come to what it ought to be, the True Profit.
Godfred, Edem, Emmanuel, Edward 6/17/2023 13
 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)

GH¢ GH¢
Net Profit per draft account xxxxx
Add: Revenue understated xxxx
Income/gain understated xxxx
Cost/expense overstated xxxx xxxxx
xxxxx
Less: Revenue overstated xxxx
Income/gain overstated xxxx

Cost/expense understated xxxx xxxxx

Corrected Net Profit for the Year xxxxx

Godfred, Edem, Emmanuel, Edward 6/17/2023 14

 CORRECTION OF ERRORS AND SUSPENSE
ACCOUNT (cont’d)
• Redrafting the statement of financial
position is done by adjusting the affected
assets, liabilities and capital as well as the
corrected profit above to arrive at the
balance that shows the true financial
position of the business as at the given date.

Godfred, Edem, Emmanuel, Edward 6/17/2023 15

 CLASS EXERCISE

Refer to Question 1 of Worksheet 7 (Correction of

Errors)

Godfred, Edem, Emmanuel, Edward 6/17/2023 16

INTRODUCTION TO FINANCIAL
ACCOUNTING (UGBS 208)

Introduction to Analysis of
Financial Statements

College of Humanities, UGBS

2019/2020
 LEARNING OBJECTIVES

• Identify the tools for the interpretation of financial statements

• Explain the types of accounting ratios
• Formulate and calculate the various accounting ratios

Godfred, Edem, Emmanuel, Edward 6/17/2023 2

 TECHNIQUES FOR ANALYSIS

• Common-size Statements/Vertical Analysis

• Common Base Year Financial Statements/Horizontal/Trend Analysis

• Ratio Analysis

Godfred, Edem, Emmanuel, Edward 6/17/2023 3

 COMMON-SIZE FINANCIAL STATEMENTS/VERTICAL
ANALYSIS
• Vertical analysis of a financial statement reveals the relationship of each
statement item to a specified base, which is the 100% figure

• Every other item on the financial statement is then reported as a % of

that base (common-size ratios)

– When an income statement is analyzed vertically, net sales is usually the base
– Vertical analysis of statement of financial position amounts are shown as a
percentage of total assets

Godfred, Edem, Emmanuel, Edward 6/17/2023 4

 Vertical Analysis Tool Illustrated

EPMP COMPANY
Income Statement (Adapted)
Years Ended December 31, 1998 and 1997

Dollar amounts in millions

Net sales $18,284 100.0% $16,701 100.0%

Cost of products sold 4,856 26.6 4,464 26.7
Gross profit 13,428 73.4 12,237 73.3
Operating expenses :
Marketing, selling,
and administrative 4,418 24.2 4,173 25.0
Advertising and products
promotion 2,312 12.6 2,241 13.4
Research and development 1,577 8.6 1,385 8.3
Special charge 800 4.4
Provision for restructuring 201 1.1 225 1.3
Other (148) (0.8) (269) (1.5)
Earnings before income taxes 4,268 23.3 4,482 26.8
Provision for income taxes 6/17/2023 1,127 6.1 1,277 7.6
NetGodfred,
earningsEdem, Emmanuel, Edward $ 3,141 17.2% $ 3,2055 19.2%
 COMMON BASE YEAR FINANCIAL STATEMENTS/HORIZONTAL/TREND
ANALYSIS
Horizontal analysis is the process of computing changes in like items
from one year to another

Horizontal analysis begins with the computation of changes from the

previous year to the current year. The base year is the first year
considered.

Then dividing the cedi amount of change by the base period amount.
Horizontal analysis uses both cedi amounts and percentages.

Godfred, Edem, Emmanuel, Edward 6/17/2023 6

 Increase (Decrease)

1998 1997 Amount Percent

Sales $18,284 $16,701 $1,583 9.5%

Net income 3,141 3,205 (64) (2.0%)

Godfred, Edem, Emmanuel, Edward 6/17/2023 7

 Ratio Analysis
• Financial ratios are relationships determined from a firm’s financial
information.

• Used to compare and investigate relationships between different pieces

of financial information, either over time or between companies.

• Ratios eliminate the size problem.

Godfred, Edem, Emmanuel, Edward 6/17/2023 8

 Categories of Financial Ratios
• Liquidity—measures the firm’s ability to meet short-term debt
obligations or the risk of not meeting current liabilities.
• Solvency—measures the firm’s ability to meet long-term debt obligations
or risk of not meeting long-term debt (financial leverage).
• Asset management/Efficiency—measures the efficiency of asset usage to
generate revenue.
• Profitability—measures the firm’s ability to control expenses and make
profits.
• Investment/shareholder ratios—analyze the company’s shares as an
investment.

Godfred, Edem, Emmanuel, Edward 6/17/2023 9

 Liquidity Ratio
Current Ratio = Current Assets
Current Liabilities

Quick Ratio = Current Assets - Inventory

Current Liabilities

Acid-Test Ratio = Cash + cash Equivalents

Current Liabilities

Godfred, Edem, Emmanuel, Edward 6/17/2023 10

 Long-term Solvency Ratios

Debt to Equity Ratio = Long-term Liabilities

Stockholders’ Equity

Interest Coverage Ratio = Income Before Income Taxes + Interest Expense

Interest Expense

Godfred, Edem, Emmanuel, Edward 6/17/2023 11

 Activity/Asset Management Ratios
Rate of Inventory Turnover = Cost of Sales
Average Inventory

Average Collection Period = Receivables * 360 Days

Credit Sales

Average Payment Period = T. Payables * 360 Days

Credit Purchases

6/17/2023
Godfred, Edem, Emmanuel, Edward 12
 Profitability Ratios

Return on Assets = Net Income (PBIT)

Total Assets

Profit Margin = Net Income

Net Sales

Asset Turnover = Net Sales

Average Total Assets

Return on Equity = Net Income

Stockholders’ Equity

Godfred, Edem, Emmanuel, Edward 6/17/2023

13
 Investment Ratios
• Earnings per share = Net income – preference dividend
number of ordinary shares
• Price to earning ratio = market price of per share
earnings per share
• Dividend per share = Dividend
number of ordinary shares
• Dividend yield = Dividend per share
market price per share

Godfred, Edem, Emmanuel, Edward 6/17/2023 14

 Benchmarks for Comparison
• Ratios are most useful when compared to a benchmark.

• Time-trend analysis—examine how a particular ratio(s) has performed

historically.

• Peer group analysis—using similar firms (competitors) for comparison of

results.

Godfred, Edem, Emmanuel, Edward 6/17/2023 15

 Limitations of Ratio Analysis

• No underlying theory to identify correct ratios to use or appropriate

benchmarks.
• Benchmarking is difficult for diversified firms.
• Firms may use different accounting procedures.
• Firms may have different recording periods making comparison difficult.
• One-off events can severely affect financial performance.
• Effects of inflation
• Window dressing

Godfred, Edem, Emmanuel, Edward 6/17/2023 16