BAYERO UNIVERSITY, KANO

FACULTY OF SOCIAL AND MANAGEMENT SCIENCES

DEPARTMENT OF ECONOMICS
15th October, 2012
COURSE: PBF 7205 Principles of Accounting
CLASS: Post Graduate Diploma in Banking and Finance
SESSION/SEMESTER: 2011/2012 Session Second Semester
LECTURER: Kabir Tahir Hamid, PhD., M.Sc., MBA, B.Sc., FIFC, CPA, ATMFA and
CONSULTATION: Strictly by Appointment
OFFICE: A8, Department of Accounting, Aminu Alhassan Dantata School of Business, New
Campus, Bayero University, Kano
A. COURSE DESCRIPTION
This course is designed to introduce students to the basic aspects of book-keeping and accounting,
definition and history of accounting, historical development of accounting in Nigeria, keeping of
proper accounting records, and the preparation of final accounts of sole proprietorship.
B. COURSE OBJECTIVES
i) To develop an understanding of the definition and historical evolution of accounting in
general and Nigeria, in particular.
ii) To develop an understanding of journal and ledger records and double entry principles.
iii) To develop an understanding of preparation of cashbook, bank reconciliation statement and
correction of errors.
iv) To develop an understanding of posting of business transactions, balancing of accounts,
extraction of trial balance and the preparation of sole traders final accounts.
C. COURSE CONTENTS
1. Definition and History of Accounting
1.1 Definition of Accounting
1.2 The Origin of Book-keeping and Accounting
1.3 Historical Development of Accounting and Accounting Profession in Nigeria
1.4 Accounting Concepts and Conventions
1.5 Development of Accounting Standards
2. The Ledger and the Double Entry Principle
2.1 The Journal as the Book of Prime Entry
2.2 The Ledger as the Principal Book of Account
2.3 The Rules of Double Entry Book-Keeping
2.4 Recording of Business Transactions in Journals and Ledgers
2.5 Balancing off of Accounts and the Extraction of Trial Balance
3. Suspense Account and Correction of Errors
3.1 Types of Book-keeping Errors
3.2 Errors Not Affecting the Agreement of the Trial Balance
3.3 Errors Affecting the Agreement of the Trial Balance
3.4 Suspense Account
3.5 Entries Required to Correct Errors

4. Cash Book and Bank Reconciliation Statement

4.1 Two Column Cash Book
4.2 Three Column Cash Book
4.3 Bank Reconciliation Statements
5. Sole Traders Final Accounts
5.1 The Trading, Profit and Loss Account
5.2 The Profit and Loss Appropriation
5.3 Partners Current Account
5.4 The Balance Sheet
5.5 Adjustments to Final Accounts
(a) Accruals and Prepayments
(b) Bad Debts and Provision for Bad Debts
(c) Provision for Depreciation
D. RECOMMENDED TEXT BOOKS
i) Financial Accounting Made Simple by R.O. Igbon.
ii) Business Accounting by F. Wood.
iii) Book-Keeping & Accounts by Spicer and Pedler.
iv) Fundamentals of Financial Accounting by G.A. Welsoh and D.G. Short.
v) Financial Accounting (ICAN) Study Text by Wyse.
vi) Financial Accounting: An Introduction by F.M. Walgemabach.
vii) Carters Advanced Accounts by G. Deuglas.
viii) Principles of Accounting by J.G. Helmkamp, L.P. Indieke and R.E. Smith
E. METHODOLOGY
Discussion papers, covering the theoretical aspects of each topic, would be prepared and presented
in the class. Discussion exercises will follow the theory on every topic. Some of the exercises
would be attempted in the class, and the rest would be left to the students to practice on their own.
F. GRADING FORMULA
Continuous Assessment 40%
Semesters Examination 60%
Aggregate 100%
The continuous assessment marks are to be absorbed through snap test (s) to be given without
notice, scheduled test (s) and assignment (s).

DEFINITION AND HISTORY OF ACCOUNTING

Definition of Accounting
Accounting, like many other subjects, has been defined by many individuals and institutions from
different perspectives. However, what is clear from all those definitions is that accounting involves
the provisior1 of information that guides decision making by various user groups.
The definition of accounting, which has relatively enjoyed greater acceptability among accounting
scholars, perhaps than any other definition, is the one given by the American Accounting
Association-AAA- in 1966, which defined accounting as the process of identifying, measuring and
communicating economic information to permit informed judgments and decisions by the users of
the information. This definition echoes the fact that the fundamental objective of accounting is the
provision of timely, relevant, reliable, adequate, understandable, and comparable information to
guide various decisions (economic. social, developmental and political) by the users of the
information.
In other words, the financial statements are the basis for a wide range of business analysis.
Managers use them to monitor and judge their firms performance relative to competitors, to
communicate with external investors, to help judge what financial policies they should pursue, and
evaluate potential new business to acquire as part of their investment strategy. Securities analysts
use financial statements to rate and value companies they recommend to their clients. Barkers use
them in deciding whether to extend a loan to a customer and how to determine the terms of the
loan. Investment bankers use them as a basis for valuing and analyzing prospective buyouts,
mergers and acquisitions. And consultants use them as a basis for competitive analysis for their
clients. Other user groups also require the financial statements and use them for some other
purposes.
This means that, accounting is a service activity. It provides information about economic activity
that is intended to be useful in making economic decisions. Most economic activity involves
decisions on how to allocate available resources effectively among alternatives. Accounting is a
means of communication and involves the flow of information. To be effective, therefore, the
recipient of the information must understand the message that is being conveyed by accounting,
which is often refereed as the language of business. Accounting uses words and symbols, which
may have different meaning from ordinary usage, to communicate financial information to
managers, investors, creditors and other decision makers.
Accounting is used in the business world to describe the transactions entered into by all kinds of
organizations. To understand both corporate and public financial reports, therefore, a reader must
learn the fundamentals of accounting language. Similarly, as in the case with every language, there
are differences of opinion among accountants as to how a given transaction should be recorded,
just as there are differences of opinion among grammarians as to many matters of sentence
structure, punctuation, and choice of words. The information (presented in financial statements)
should therefore be comprehensible to those who have a reasonable understanding of business and
economic activities, and are willing to study the information with reasonable diligence. The
comprehensibility (semantics) of accounting language is enhanced through intervention by the
regulatory authorities and standard setting bodies. For example, in Nigeria, the Nigerian Stock
Exchange demands simplicity of presentation of accounting information in companies annual
reports and accounts and prospectus to enhance comprehensibility (semantics) to none accounting
bias backgrounds.

To provide a better understanding of accounting information by users of the information, items that
do not seem to have clear interpretations are normally explained in the notes to the accounts, so
that the reader can understand what is meant specifically, without any ambiguity. Accounting is
aimed facilitating decision making. The development of accounting information is only part of the
accounting function. A necessary companion aspect of the function is the development of the
communication process so that information can be communicated to the various users, with clear
meanings. Communication is a vital link in accounting activity. It is as important as the preparation
of the information itself.
However, there is the need for a distinction between Book-Keeping and Accounting, as the two
concepts are at times used interchangeably by non-accounting-experts. While Book-Keeping refers
to the actual record making phase of accounting (the keeping of the journals, the ledgers and the
extraction of the trial balance), accounting includes in addition to book-keeping, the preparation of
the final accounts, the uses to which the accounting records are put, their analyses and
interpretations.
The Origin of Book-Keeping and Accounting
Accounting, as a record keeping process, has evolved over many centuries to serve the changing
social and economic needs of society. Book-keeping and accounting started long time ago, though
the exact date is not known, there is evidence to suggest that they originated right from the time
people started having financial dealings among one another. Financial records keeping is thought
to have begun in about 4000 B.C. in the ancient kingdoms of Babylonia, Summeria and Assyria.
Clay tablets were used in the Babylonian Empire to record various facts. Many of these records
contained lists of events as they occurred or lists of goods belonging to an individual or estate.
Similar types of records have also been found describing business activities in ancient Greece,
Egypt, and Rome. All these early records contained mostly lists of inventories of goods and debts,
later records began to reflect a concern for computing profit and loss from the ventures. Although
these early records are interesting, they add little insight in to the development of modern day
accounting, which is based on a double entry method.
The crucial event in accounting history was the introduction of Double Entry Book-Keeping
which consisted of the practices employed by the merchants of the Italian city states during the 15th
century, which began during the 13th and 14th centuries in several trading centres in Northern Italy.
The main principles of the Method of Venice as it was then known were described by a
Franciscan, by name Luca Pacioli, a mathematician, a teacher and a scholar at University for most
of his life. Luca Pacioli published a book entitled Summa de Arithmetica, Geometrica,
Proportioni et Proportionalita (i.e. Everything about Arithmetic, Geometry, Proportions and
Proportionalities) in Venice in 1494. Though the book is essentially on mathematics, it included a
section on double entry book-keeping called particularis de computis et scriptures (i.e. details of
accounting and recording). In the book, Pacioli described three wait books of accounts: the waste
book (rough notes showing transactions), the journal and the ledger. Those who are familiar with
the manual banking operations can recalled the waste book, were all vouchers for a days
transactions are collated in a bank. Pacioli opined that every accounting transaction involves two
things: gaining and losing of value. And, like an algebraic expression (which is solved by
performing the same operation on both sides of the equality sign, accounting transaction is solve
by debiting one account (the receiver of value) and crediting another account (the giver of value).
By tension, this means that the total assets of a business should equal to the sum of its capital and
liabilities.
The introduction of double entry is therefore an important event that marked a turning point in the
history of accounting, which deserves a significant position in the annals of accounting history.
4

However, as a result of the dynamism of accounting, being mostly influenced by the volatility of
its environment, socio-cultural and otherwise, accounting history is a continuous exercise that
seems to have no foreseeable end. The Industrial Revolution in Europe during the eighteenth and
nineteenth centuries produced many significant social and economic changes, including the
automation of production (i.e. a change from the handicraft production to factory system). The
factory system was based on the use of machinery and equipment for mass production. Relatively,
large industrial and commercial outfits developed, requiring large investments of capital, many of
which were incorporated as limited liability companies (i.e. joint stock companies, as they were
then called), given them separate legal personalities, quite distinct and separate from their
shareholders. Large capital requirements by companies necessitated the separations of ownerships
from management. This brought about the need for the periodic reporting of results of operations
and financial positions of companies to their owners as opposed to the venture system. The
stewards (managers of resources) rendered periodic accounts of their stewardship as a
demonstration of accountability. It is this practice that has metamorphosed into the preparation and
presentation of financial statements by companies today.
Financial information was not only then needed by management but also by different categories of
users, including shareholders, creditors and government, among other for their decisions making.
This development also necessitated and brought about the statutory audits of companies by
independent but competent auditors who attest to the truth and fairness of financial statements in
order to lend more credence to them. As a result, accounting gradually began to serve as a
communication process, as well as, a means of keeping records.
Similarly, the emergence of management accounting is associated with the advent of industrial
capitalism as a result of the industrial revolution. The emergence of management accounting was
necessitated by the need to develop an accounting technique that would assist in the management
of companies. Management needed much more detailed and timely accounting information than
the summarized results often found in financial statements. As a result of mass production, it
became imperative for management of corporations to device costing techniques that could be
applied in determining cost of production which would serve as guide in decisions making,
particularly in the areas of pricing and cost control, inventory valuation, determination of cost of
product etc. Management accounting developed further, as a result of the scientific management
movement by Fredrick Winslow Taylor.
Further more, the development of computer and Information and Communication Technology
along with it, marked yet another important point in the history of accounting. Like other social,
environmental or technological changes, the development of computer has also impacted on
accounting profession. The emergence of computers has refined the procedures for applications of
earlier developed accounting principles and has significantly facilitated accounting practice, which
facilitate timely and accurate processing and communication of accounting information to various
user groups.
Historical Development of Accounting in Nigeria
In Nigeria, book-keeping and accounting started long before the coming of the Europeans.
Properly, organized systems of trade and government were in existence in the ancient kingdoms
and empires of Benin, Oyo and Kanem Bornu, which are in the present day Nigeria. The fact
cannot, therefore, be denied that these systems of trade and governance were in need of accounting
information.
The granting of a Royal Charter in 1886 to the National African Company, which later became the
Royal Niger Company of Nigeria, made it compulsory for the company to keep proper accounting
5

records. From then, until Nigerias independence in 1960, the laws and regulations governing
accounting in Nigeria were almost the same as the ones in Britain, since most of the early
professional accountants were either British or were Nigerians trained in Britain.
The Yaba College of Technology (Yaba Tech.) was the first higher institution of learning in
Nigeria to offer accounting courses. Other institutions, namely the Institute of Administration,
Ahmadu Bello University, Zaria; and the Institute of Management Technology (T.M.T.) Enugu
follow suit. After 1962, accounting degrees and diplomas programmes were started by some
Nigerian universities and polytechnics, namely the University of Nsukka, the University of Lagos,
the University of Ibadan (formerly, College of Art and Science, Ibadan) and the Kaduna
Polytechnic. Year after year, the number of institutions offering courses in accounting continues to
increase. Today, there are an upward of 170 universities, polytechnics, monotechnics and colleges
of education in Nigeria which offer various courses in accounting.
However, the history of professional accountancy bodies in Nigeria can be traced to the late
1960s, when some Nigerians who had some professional training in accounting from different
parts of the world (mainly from the Britain), got together and formed an association called the
Association of Accountants of Nigeria (AAN). The Association had three main objectives, as
follows:
1.
to provide a platform for accountants (and auditors) in Nigeria to discuss issues relating to
their profession;
2.
to introduce, maintain and improve professional code of conduct and standards; and
3.
to establish training programmes and examinations leading to granting of local professional
accounting qualification.
Membership of the Association was drawn from both Nigerians and foreigners resident in the
country who were already members of the Institute of Chartered Accountants of England and
Wales (ICAEW), the body now known as the Association of Chartered Certified Accountants
(ACCA), and the Institute of Cost and Management Accountants (ICMA) to mention but a few.
The acceptance of the Association by the various sectors of the Nigerian economy led to official
recognition given by the Federal Government on the 28th September, 1965 through the passing
into law the Act of Parliament No. 15 of 1965, establishing the Institute of Chartered Accountants
of Nigeria (ICAN).
Until 1980, automatic membership of ICAN was given on application to any person holding
membership certificate of the Institute of Chartered Accountants of England and Wales (ICAEW),
the Chartered Association of Certified Accountants, the Institute of Chartered Accountants of
Scotland, the Institute of Chartered Accountants of Ireland, the American Institute of Certified
Public Accountants, the Canadian Institute of Chartered Accountants, the Chartered Institute of
Public Finance and Accountancy, and the Institute of Cost and Management Accountants. From
1981, this automatic membership was modified and those who hold such foreign qualifications are
now expected to pass some papers of the ICAN, before they are eligible for admission into its
membership. Similarly, all those holding local academic qualifications, who want to qualify as
Chartered Accountants, must sit and pass the qualifying examinations of the Institute, subject to
the provision of exemption of some stages and/or subjects, depending on the courses offered by a
candidate while pursuing his/her academic qualification.
The history of professional accounting in Nigeria shows that Akintola Willams was the first
Nigerian to qualify as a Chartered Accountant. In addition, F.C.O. Coker, Kunle Oshindero,
Zaccheus Osasanya, Hamza R. Zayyad, Daniel Easton, William Bond, Aliko Muhammad, just to
mention but a few, were also among the first Nigerians who qualify as professional accountants in
6

the country. Similarly, among the pioneer accounting firms in the country were Akintola Williams
& Co. (the first indigenous accountancy firm in Nigeria). Peat Marwick & Co., Casselton Elliot &
Co., Pannell Fitz Patrick & Co., Coopers and Lybrand and Z. Ososany & Co.
By 1979, the Association of National Accountants of Nigeria (ANAN) was formed. During the
Shagari civilian government of October 1979 to December 1983, the Bill recognizing the ANAN
as a professional accountancy body was passed on 8th September, 1981, by the House of
Representatives, but the Bill was rejected by the then Senate, and therefore could see the light of
the day. Consequently, ANAN was registered by the Ministry of Internal Affairs on 28 th
September, 1983, under Land (Perpetual Succession) Act of 1958 as a corporate body. However,
during the Babangidas Administration, on 15th August, 1993, ANAN was granted its charter
through Decree No. 76 of 1993, thereby becoming the second chartered accountancy body in the
Country. ANAN, at the beginning of its existence grants automatic membership to some deserving
Nigerians holding accounting certificates from different walks of life. Later ANAN established a
college in Jos, which every person wanting to be admitted as its member must attend and pass its
qualifying examination. Today, there are a number of accounting bodies and associations that are
seeking government recognition in Nigeria. In the years to come, there may be more bodies
regulating the practice of accountancy in Nigeria.
Practice Questions
1. Give the definition of accounting given by American Accounting Association in 1966 and
analysis its constituent parts.
2. Different between book-keeping and accounting.
3. Accounting is said to be the language of business. How true is this statement?
4. Trace the origin of book-keeping. How could you imagine book-keeping without Luca Paciolis
contribution?
5. Discuss the historical development of accounting in Nigeria.
6. Briefly trace the history of ICAN and ANAN. To what extend do they collectively promote the
three main objectives that NAA was set-up to achieve?
Accounting Concepts and Conventions (Principles)
Accounting principles may be defined as those rules of action or conduct, which are adopted by the
Accountants universally while recording accounting transactions. International Accounting
Standard (IAS) 1 defined Accounting principles as a body of doctrines commonly associated with
theory and procedures of Accounting, serving as an explanation of current practices and as a guide
for selection of conventions or procedures where alternatives exist. To ensure acceptance,
accounting principle must be capable of coping with practical recording problem, it must be
reasonably objective and feasible, it must not be expensive to apply and should lead to similar
answers in the hands of practitioners. Accounting principles can be classified into two categories,
namely, accounting concepts and accounting conventions.
Accounting Concepts
This refers to those basic assumptions or conditions upon which the science of Accounting is
based. They are usually rules and conventions that lay down the way in which activities of a
business are recorded. These concepts are:
1) Business Entity Concept: This concept states that every economic unit, regardless of its
legal form of existence, is treated as a separate entity from parties having propriety or
economic interest in it. In Accounting, a business organization is considered as a separate
entity from its proprietor(s). This concept is applicable to all forms of business
organizations.

2) Going-Concern Concept: This is the assumption that a business unit will continue to
operate into perpetuity; that is, the business is not expected to liquidate in the foreseeable
future.
3) Periodicity Concept: According to this concept, the life of the business is divided into
appropriate periods for the purpose of determining its results of operations. In accounting,
such a segment or time interval is called accounting period, and it is usually a year.
Though, a business organization may produce quarterly or half yearly abridge financial
statement, before the end of its financial year, for the purposes of planning, performance
evaluation and control.
4) Realization Concept: This concept states that revenue is recognized when transaction is
completed, whether payment is received or not, that is immaterial. For example is
considered complete at the point when the property in goods passes to the buyer and he/she
becomes legally liable to pay.
5) Matching Concept: This concept states that all the revenue earned and all the expenses
incurred in generating the revenue should be matched together and reported for the period,
with a view to determining the net financial position of the business. Thus, all expenses
incurred (whether they are actually paid for or not) should be match against the revenue
earned (whether they are actually received or not).
6) Historical Cost Concept: This concept states that the basis for initial accounting
recognition of all assets acquisitions, services rendered or received, expenses incurred,
creditors and owners interests is the actual cost for the transaction(s).
7) Money Measurement: This concept states that accounting is only concern with those facts
that can be measured in money terms with fair degree of accuracy and objective.
8) Dual Aspect Concept: This concept states that there are two aspects of accounting; one is
represented by the resources owned by a business and the other by the claim against them.
Double entry is therefore meant to uphold this concept.
Accounting Conventions
These are approaches which are followed by the Accountant in the application of the accounting
concepts. These include:
1) Conservatism/Prudence: This convention states that greater care should be taken in the
recognition of profit and all known expenses, even those that cannot be exactly determined,
should be adequately provided for in the accounts. In other words, when the Accountant is
faced with the problem of choice between alternative courses of action, he should opt for a
method that would understate, rather than overstate the financial position of the business.
2) Materiality: The principle holds that only items of material values are accorded their strict
accounting treatment. In other words, materiality may affect the way an item is reported in
the books of account. An item is said to be material if its disclosure or non-disclosure can
affect the judgments to be reached by a user on the financial statements.
3) Consistency Concept: This concept holds that when an enterprise has adopted a method of
treating an item or accounting transactions in the books of accounts, it should continue to
use that method in subsequent periods so that comparison of accounting figures overtime
could be possible. Thus, it follows therefore that, where it becomes necessary for any
method to be change, the Accountant should report the reasons for such change and its
implications on the financial statements of the business.
4) Substance over Form: This convention states that business transactions should be
accounted for and presented in accordance with their substance and financial reality and not
necessarily with their legal form. In other words, where there is conflict between the
financial reality of a transaction and its legal form, the financial reality (i.e. the substance)
should take precedence over the legal form.

5) Objectivity/Fairness: According to this convention, data presented on the financial

statements should be supported by verifiable evidence and demands the independence of
judgment on the part of the Accountant preparing the financial statements. Similarly, it is
required that accounting reports should be prepared not to favour any group or segment of
society.
Discussion Exercises
(a) Distinguish between accounting concepts and conventions.
(b) You received the following letter from your neighbour Mr. Confusion concerning some views
held by his Accountant and needed clarification having learnt that you are now undergoing an
PGDBF programme at Bayero University, Kano, in which you offer some courses in
accounting.
Dear Sir,
Request for Clarification
I write to request for clarifications on the following issues.
(a) I bought a motor van some 2 years ago for N220,000. The van is still in the garage but intend
using it in my business. My friend has just informed me that the van now cost N400,000. In view
of this, I would like the Motor Van to be recorded in the books at the present market value but my
accountant decline insisting that it is the N220,000 that should recorded.
(b) Recently, I acquired a machine on Hire Purchase from Risk International. When my legal
adviser submitted documents for the transactions he stopped me from recording the machine
among my assets until I finished paying for it. This however contradicts my Accountants view,
who to my knowledge had already recorded it among my assets.
(c) My Accountant is always insisting on pessimistic ideas by anticipating all forms of losses even
though Jam still hopeful that these amounts can still be realized, I see no justification for this as it
will minimize my profit and undermine my effort.
(d) Mr. Dabo, a customer, had just finished negotiating on some articles which I trade-in, while
preparing my account for this month, My Accountant had already included it as part of sales even
though the customer in question has not paid.
(e) Since I employed him in January this year, he always reports to me, the financial position of
my business on monthly basis. In this month, he said I made a profit of N26,000 out of which he
deducted the sum of N3,000. I collected in order to fuel my personal car. I frowned at this action of
my Accountant because the business is mine.
I will be grateful if you will reply me on the above issues.
Yours sincerely,
Mr. Confusion.
Required: Write a reply to the above letter stating why the Accountant has held the views
mentioned above.

Statutory and Regulatory Framework of Financial Accounting in Nigeria

Like any other profession, the accounting profession is practiced within a framework of statutory
and regulatory pronouncements. This is necessary to ensure orderliness, consistency and
uniformity in the practice of the profession.

Statutory Framework
The statutory framework comprises of the statutes enacted by government to govern the conduct of
economic activities, with CAMA 1990 being the main statute, which stipulates the requirements
for the formation/registration of companies, how companies are to conduct their affairs, the type of
accounting records and financial statements required of companies, the requirements for statutory
audit, and how the life of a company may be brought to an end, among others. Other statutes
include: the enabling statutes establishing government parastatals, Investment and Securities Act
1999, Securities and Exchange Commission Act 1988, Insurance Act 1997, Nigerian Accounting
Standard Act (NASB) 2004, Banks and Other Financial Institutions Act (BOFIA) 1991, Central
Bank of Nigeria Act 2007, Nigerian Deposit Insurance Act 2007 and Money Laundering Act 1995,
among others.
Regulatory Framework
This consists of the non-statutory statements, circulars and pronouncements which are expected to
be complied with in the conduct and recording of economic activities. They include accounting
standards and Central Bank of Nigeria (CBN) Monetary Policy Circulars.
Accounting Standards
An accounting standard is a statement issued by the appropriate standard-setting body locally or
internationally on a specific area or topic in financial accounting, the acceptance/application of
which is mandatory for preparers and users of financial statements. The standards which are
applicable in Nigeria are Statement of Accounting Standards (SAS) issued by the Nigerian
Accounting Standards Board (NASB), International Accounting Standards (IAS) issued by the
International Accounting Standards Committee (IASC) and the International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB). All the
standards, IAS, IFRS and SAS are applicable in Nigeria except that if an IAS/IFRS is inconsistent
with an SAS, the IAS/IFRS would be inapplicable to the extent of the inconsistency. This implies
that on any matter on which an IAS/IFRS and an SAS make conflicting pronouncements, the SAS
shall supersede the IAS/IFRS in Nigeria. However, with effect from first January 2012, when
Nigeria is to adopt IFRS in financial reporting, the reverse will be the case. In other words, with
effect from fist January, 2012, IAS/IFRS will be adopted in Nigeria, and SAS will only be
applicable where no IAS or IFRS is issued on the same item.
History of IASC, IASB and NASB
In 1973, the IASC was established as an independent, private sector body, with volunteer, parttime members who meet 3 times a year. IASC was established to set acceptable and applicable
standards for the preparers and users of financial statements around the world. From its inception
to 2001 when it was replaced with IASB, IASC issued IASs forty one (41) IASs, along with
interpretations (by the Standing Interpretations Committee-SIC). During the period from 19971999, a restructuring program was implemented which resulted in the cessation of the operations
of the old IASC on 31st March 2001 and its replacement with IASB with effect from 10th April
2001. IASB is based in London, and has 14 full-time members. Standards issued by IASB are
known as IFRSs with the old IASs (most revised by IASB) remain in force. It also issued
interpretations through IFRS IC (IFRS Interpretation Committee). From its inception in 2001
IASB has issued 13 IFRSs.
The NASB was established on September 9, 1982 to develop and issue accounting standards for
prepares and users of financial statements in Nigeria. In other words, the NASB does for the
Nigerian business community what the IASB does for the international business community.
Compliance with SAS was mandatory by the provision of NASB Act 2004. In May 1992, the
Federal Government of Nigeria inaugurated the NASB as a quasi-parastatal with full autonomy,
10

thus entitling the NASB to receive subvention from the Federal Government every year. Up to
1994, there was a board, which was overseeing the operations of the NASB. In 1994, the Federal
Ministry of Commerce dissolved the board and took over the administrative aspect of the NASB.
The membership of the NASB used to consist of 13 organizations and establishments. However, in
the last couple of years, there has been a net increase in the membership of the body bringing the
total to the 14, namely: (i) Institute of Chartered Accountants of Nigeria (ICAN); (ii) Association
of National Accountants of Nigeria (ANAN); (iii) Federal Ministry of Commerce (FMC); (iv)
Federal Ministry of Finance (FMF); (v) Central Bank of Nigeria (CBN); (vi) Corporate Affairs
Commission (CAC); (vii) Federal Inland Revenue Service (FIRS) and;(viii) Nigerian Deposit
Insurance Corporation (NDIC). Others are (ix) Securities and Exchange Commission (SEC); (x)
The Office of the Auditor-General for the Federation; (xi) The Office of the Accountant-General
of the Federation (xii) Chartered Institute of Taxation of Nigeria (CITN); (xiii) Nigeria Accounting
Association (NAA); and (xiv) Nigerian Association of Chambers of Commerce, Industry, Mines
and Agriculture (NACCIMA). Since its establishment in 1982, the NASB has issued thirty (30)
accounting standards, as follows:
SAS 1
Disclosure of Accounting Policies
SAS 2
Information to be Disclosed in Financial Statements
SAS 3
Accounting for Property, Plant and Equipments
SAS 4
Accounting for Stocks
SAS 5
Construction Contract
SAS 6
Extraordinary Items and Prior Year Adjustments
SAS 7
Foreign Currency Conversions and Translations
SAS 8
Accounting for Employees Retirement Benefits
SAS 9
Accounting for Depreciation
SAS 10
Accounting for Banks and Non-Banks Financial Institutions (Part I)
SAS 11
Accounting for Leases
SAS I3
Accounting for Investments
SAS 14
Accounting in the Petroleum Industry: Upstream Activities
SAS 15
Accounting for Non-banks Financial Institutions (Part II)
SAS 16
Accounting for Insurance Companies
SAS 17
Accounting in the Petroleum Industry: Downstream Activities
SAS 18
Statement of Cash flows
SAS I9
Accounting for Deferred Taxes
SAS 20
Abridge Financial Statement
SAS 21
Earnings Per Share
SAS 22
Research and Development Costs
SAS 23
Provisions, Contingent, Liabilities and Contingent Assets
SAS 24
Segment Reporting
SAS 25
Telecommunications Activities
SAS 26
Business Combinations
SAS 27
Consolidated and Separate Financial Statements
SAS 28
Investments in Associates
SAS 29
Interests in Joint Ventures
SAS 30
Interim Financial Reporting
Note: SAS 12 was withdrawn and replaced with a more elaborate standard i.e. SAS 19.
However, with the signing into law the Financial Reporting Council Bill of Nigeria in 2011, NASB
is now to be replaced with the Financial Reporting Council of Nigeria. Similarly, come January
2012, Nigeria is to adopt IFRS. The reasons for such adoption include among others: to enhance
worldwide comparability for investors; enhance the quality of reporting (some national GAAPs are
11

not robust for todays markets, are weak and are outdated); to a lower cost of capital for companies
adopting IFRSs; more company-friendly securities market for foreign listings; opportunity for
Nigerian firms to compete and obtain foreign direct investment; and global investment community
will now be able to understand Nigerian financial reports. Other reasons advanced for adopting
IFRS in Nigeria, include: opening of securities markets world-wide to Nigerian firms; to reduced
reporting costs for multinational with subsidiaries applying many GAAPs; no need to develop and
maintain national standards; easier movement of auditors and accountants across borders; to catch
up with smaller African countries like Kenya and Ghana; IFRS adoption is typically rewarded with
a higher valuation correlation of international peers, whereas those companies that have not
adopted the standard typically trade at a discount; facilitate mergers and acquisition; enhance
competitiveness and minimise impediments to trade internationally.

12

THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE

Accounting is about record keeping of financial transactions which are to be summarized at the
end of a period, to show the performance of business for the period and the financial position of
the business. The two means of record-keeping used in accounting are Journal (or Day Book) and
the Ledger. During the data collection phase, relevant details relating to financial transactions are
captured as they occur. The details are captured from source documents, including invoice, bills,
debit notes, receipts, vouchers, credit notes etc. An accounting document will have the following
key information: date of the transaction(s); brief details about or description of the transaction(s);
amount of the transaction in money terms; and the signature of the authorizing /approving officer.
The recording phase immediately follows the data collection phase. During this phase, the
information on the source documents is recorded in the books of accounts. The most important
book of accounts is the Ledger. The ledger is the book that contains all the accounts for the
transactions of a business. An account is a page (or folio) in the ledger divided into two equal
halves with a vertical line and with a horizontal line on top. The left-hand side of an account is the
debit (Dr.) side while the right hand side is the credit (Cr.) side. At the top of an account will be
the name of the account to which the transaction relates e.g. Rent Account, Salaries Account,
Motor Vehicles Account etc. The word account is sometimes abbreviated to A/C.
Double Entry Principle
Transactions are recorded (or posted) to the accounts in line with double-entry principle. This
principle requires the dual effect (i.e. double effect of every transaction) to be recorded by passing
a debit entry to one account and a corresponding credit entry to another account. This is why it is
sometimes said that: for every debit entry, there is a corresponding credit entry and vice versa.
In order to apply the double-entry principle, it is necessary to first identify the two accounts
required. Having done this, the next step is to identify the account which is receiving the value of
the transaction and the account which is giving the value. It should be noted that for every
transaction, one account is receiving value and other giving value. Having identified the receiver
and giver of the value, a debit entry shall be posted to the account which is receiving value, while
credit entry shall be posted to the account which is giving value. This is the double-entry rule
which is sometimes expressed as: debit the receiver and credit the giver. The double entry
principles/rules may be broken down into three, as follows:
1. Dr Receiver
Cr Giver
2. Dr Assets
Cr Liabilities and Capital
(Where the value is decreasing with the transaction, reverse is the case)
3. Dr Expenses and Losses
Cr Gains and Income
(Where the value is decreasing with the transaction, reverse is the case)
The Ledger
The ledger is a book in whose pages accounts are kept. An account, therefore, is page in the ledger
in which transactions of a business are recorded. A typical account has two sides, the debit (Dr)
and the credit (Cr). The left hand side is the debit side, while the right hand side is the credit side.
Both sides are divided by a clear line of demarcation, with each side ruled to show the Date,
13

Particulars, Folio, and Amount. And, the name of the account is clearly written at the top middle of
the account.

Date

Particulars

Name of Account
Folio Amount
Date

Particulars

Folio Amount

(i) Date: This is the date of the transaction.

(ii) Particulars: This is a short description of the transaction, usually the name of the account
containing the corresponding entry.
(iii) Folio: This is the ledger page number of the corresponding account.
(iv) Amount: This is the monetary value of the transaction.
The account is traditionally ruled in T form (however, with the advent of computers, the debit
and the credit sides are sometimes brought side-by-side, inside of the T form). Thus, the original
or normal ruling of the ledger has been changed by different businesses to suit their needs. Banks,
for example, have the statements of their customers ruled to show the debit, credit and balance
columns all on the right side of the statement. The account is, therefore, balanced up at the end of
each transaction with the bank, to reflect new balance in the account.
In a small business organization, a single ledger book might be kept by the entrepreneur. But, as
the business grows, and transactions increase, it is evident that the business will require many
ledger books to record the numerous transactions that will take place. It is, therefore, usual to find
the ledger in such business being divided into sections. The Sales Ledgers may, for example, be
divided with respect to names alphabetically e.g. A-I, J-R, S-Z.
Sub-Division of the Ledger
In a large business organization, it may not be convenient and practical to maintain a single ledger.
In the situation, the ledger may be divided into the following:
1. Debtors Ledger or Sales Ledger this ledger will contain the accounts of the credit
customers i.e. trade debtors.
2. Creditors Ledger or Purchases Ledger this ledger will contain the accounts of the
credit supplies i.e. trade creditors.
3. General Ledger- this ledger will contain all other accounts except accounts of trade
debtors and trade, creditors. Examples are real accounts (accounts of assets) and nominal
accounts (accounts of expenses, revenue and intangible assets).
Classification of Accounts
There are two broad classifications of accounts. These are Personal Accounts and Impersonal
Accounts.
1. Personal accounts are the accounts of persons, natural or corporate, who have business
dealings with the organization. The personal accounts comprise debtors accounts,
creditors accounts, capital account and bank account.
2. Impersonal accounts are the accounts of non-persons. Impersonal accounts are further
subdivided into real accounts and nominal accounts. Real accounts relate to tangible assets
such as buildings, furniture and stock. Nominal accounts relate to revenue/income,
expenses and intangibles assets. Nominal accounts also includes sales account, discount
received account, rent accounts, and goodwill account.

14

Subsidiary Books of Account

Transactions are not normally posted directly to the ledger. They are normally recorded first in the
journals before the totals are periodically transferred to the ledger. The use of subsidiary books
(otherwise known as journals or day books) prevents the ledger from containing unnecessary
details. In a trading organization, a very large proportion of transactions relate to credit sales,
credit purchases, returns from customers and returns to suppliers. If these are posted directly to the
ledger as they occur, the sales account, purchases account, returns inwards account and returns
outward account respectively will end up containing too many entries. Apart from the four
transactions mentioned above, another type of transaction that occurs in very large number is the
receipt and payment of money. Again, to prevent the ledger from being cluttered up with too many
details, the bank account and cash account are taken out of the ledger and combined into a
subsidiary book known as the cash book. Other transactions outside the ones mentioned above are
recorded first in Journals before being posted into the ledger. The following subsidiary books are,
therefore, used.
(i) Sales Day Book
(ii) Purchases Day Book
(iii) Returns Inwards Day Book
(iv) Returns Outwards Day Book
(v) Cash Book
(vi) Journal Proper
Other names for subsidiary books are books of original entry, books of prime entry and
Journals. Each subsidiary book will now be considered in greater detail.
Sales Day Book
As credit sales occur, they are listed in the sales day book which is ruled up to show, among
others, the date of the sale, the customers name and the amount. The customers personal account
is debited while the credit entry to sales account is delayed. At the end of the period (which may be
weekly, monthly, quarterly or any other convenient period), the total of the sales day book shall be
posted to the credit side of sales account in the general ledger. At this point, the double entry for
the credit sales is now complete. The sales day book is not an account and therefore does not from
part of the double-entry records. The use of the sales day book therefore considerably reduces the
number of entries in the sales account. Another name for the sales day book is sales journal.
Sales Journal
Date
Details
Total
Net Amount

Purchases Day Book

The same factors which necessitate the use of sales day book for credit sales also make it necessary
to use purchases day book for credit purchases. The credit purchases are listed in the purchases day
book, the suppliers personal accounts being credited. The debit entry to purchases account is
delayed until the end of the period. Then the total of the purchases day book is transferred to the
debit of the purchases account thereby completing the double entry for the credit purchases. The
purchases day book, not being an account, is not part of double-entry records. Its use however
saves the purchases account from containing too much detail. The purchases day book is also
known as purchases journal.
Purchases Journal
Date
Details
Gross
Net Amount

15

Returns Inwards Day Book

When customers return goods, credit notes are issued to the customers indicating that their
personal accounts are credited by reducing the amount being owed by them. In a typical trading
business, the volume of returns from customers is relatively large. In furtherance of the objective
of preventing the ledger from containing unnecessary details, a returns inwards day book is
maintained in which all the credit notes are listed, personal accounts are credited. At the end of the
period determined, the total is posted to the debit of the returns inwards account in the general
ledger thereby completing the double entry for the returns from customers. As with the two day
books already discussed, returns inwards day book is outside the double-entry system. The returns
inwards book is sometimes called returns inwards journal or sales returns day book.

Date

Returns Inwards Journal

Details
Gross
Net Amount

Returns Outwards Day Book

When goods are returned to suppliers, debit notes an issued to them to indicate that the
suppliers personal accounts are being debited to reduce the debt being owed to them. These debit
notes are listed in the returns outwards day book while the suppliers personal accounts are
debited. The double entry shall be completed when, at the end of the period, the total of the returns
outwards day book is posted to the credit of the returns outwards account in the general ledger.
The return outwards day book is not part of the double-entry records. Alternative names for this
day book are returns outwards journal or purchases returns day book.

Date

Returns Outwards Journal

Details
Gross
Net Amount

Journal Proper/General Journal

The journal proper (or general Journal) is used to record the following transactions before they are
posted to the ledger:
(i)
the purchase and sale of fixed assets on credit;
(ii)
opening entries;
(iii) correction of errors;
(iv)
transfer from one account to another; and
(v)
any other item not recorded in any of the other subsidiary books.
The journal proper serves three purposes:
(i)
the journal proper is a kind of diary of transactions which fall outside the ones recorded
in other subsidiary books;
(ii)
it gives the explanation for each entry through the narration attached to each journal
entry; and
(iii) it serves as a book of instruction, in that it tells the book-keeper which account to debit
and which to credit.

16

Date

General Journal
Particulars
Dr.

Cr.

Cash Book
In a business organization, the function of receiving and paying out money (either in the form of
cash or cheque) requires a considerable number of entries. If the transactions are posted directly to
the ledger, the bank account and cash accounts will contain too many entries. The objective of
decongesting the ledger is carried one step further by taking the bank account and cash account out
of the ledger and combining them in one subsidiary book called the cash book.
2 and 3 Column Cash Book
This cash book is so-called because it has two columns, one each for bank and Cash transactions.
The two columns on the debit side record the receipt of money while the two columns on the credit
side record payment of money. The bank column on the debit side records cheque received and
cash paid into bank while the bank column in the credit side records payments by cheques. The
cash column on the debit side records cash received while the cash column on the credit side
records cash paid.
Cash Book (2 Column)
Date
Particulars
Folio Cash Bank Date Particulars
Folio Cash
Bank

When the double entry for a transaction appears on both side of the cash book, this is called a
Contra Entry. Contra entries in the cash book are made when cash is deposited into the bank
account out of the cash in hand or when cash is withdrawn from the bank account for office use.
A three-column cash book has a third column (in addition to the two columns for bank and cash)
for recording the cash discounts allowed to debtors and cash discounts received from creditors. A
cash discount is the amount allowed off (i.e. deducted from) debts to encourage settlement of the
debts within a specified period of time.
The discount column on the debit side of the cash book is for discounts allowed to debtors while
the discount column on the credit side records discounts received from creditors. Due to the
relatively large number of discounts allowed and received by a trading organization, the discount
allowed account and discount received account would contain too many entries if an entry is made
to these accounts every time discount is allowed or received. To prevent this, the discounts
columns are used. For example, when a customer is allowed a cash discount, this is listed in the
discount allowed column while the personal account of the customer is credited. At the end of the
period, the total of the discount allowed column is transferred to the debit side of the discount
allowed account in the general ledger. Conversely, when cash discount is received from a creditor,
this is listed in the discount received column while the creditors personal account is debited. At
the end of the period, the total of discount received column is transferred to the credit of the
discount received account in the general ledger. The discounts columns are memoranda i.e. they
are not part of the double-entry system.
Cash Book (3 Column)
Date

Particulars

Folio

Discount

Cash

Bank

Date

17

Particulars

Folio

Discount

Cash

Bank

Trial Balance
If the double-entry principle have been completely and correctly applied, it is obvious that the total
of all the debit entries will be equal to the total of all the credit entries. By extension, the total of
the debit balances should equal to the total of the credit balances. The list drawn up showing the
balances extracted from the accounts in the ledger is known as a trial balance. The debit balances
are shown under the debit column and the credit balances are shown in the credit column. As has
been mentioned, the total of the debit balances should agree with the total of the credit balances if
the double-entry principle have been correctly applied. The failure of the totals to agree is
therefore an indication of error(s) in the entries.

Date

Trial Balance as at
Particulars
Dr.

Cr.

The trial balance serves two purposes:

(i)
it serves as a check on the arithmetical accuracy of the entries in the ledger; and
(ii)
it serves as the basis for the preparation of Trading, Profit and Loss Account and
Balance Sheet.
It must be emphasized, however, that the agreement of the trial balance does not mean that there
are no errors in the ledger entries. There are some errors which will not prevent the trial balance
from agreement, and so therefore, the trial balance does not have the power to disclose them. These
are: error of principle; error of omission; error of commission; error of complete reversal of
entry; error of original entry/transposition; and compensating error.
Discussion Exercises
Question One
(a) Briefly discuss the different ledgers that a business enterprise may have to create for the
complete record of all its transactions.
(b) List and explain any two errors each that affect and that do not affect the agreement of the Trial
Balance.
(c) List and explain any three (3) types of journals you know.
(d) What is a journal? List and explain four uses of a general journal.
(e) What is a Trial Balance? When is a suspense account required?
(f) Distinguish between trade discounts and cash discounts describe briefly the accounting
treatment of each one of them.

18

Question Two
Ahmads financial position as at 1st August, 2010 was as follows:
Cash in hand
N 6,300
Cash at bank
N 24,000
Stock
N 3,600
You are required to open Ahmads books by means of the journal, enter the following
transactions and extract a trial balance:
2010
N
August 2 Purchased goods in cash
4,000
5 Bought goods from Kamal on credit
17,500
7 Bought shop fittings and paid by cheque
2,400
11 Cash sales
2,800
12 Sold goods to Kasimu on credit
850
15 Paid Kamal by cheque on account
10,000
18 Cash Sales
4,700
19 Paid cash into bank
800
20 Paid carriage in cash
200
23 Bought goods from Mantau in cash
640
27 Sold goods to Kenneth on credit
1,300
28 Bought new bicycle and paid by cheque
4,000
31 Paid rent of premises by cheque
2,500
General Journal
Particulars
Cash in hand
Cash bank
Stock
Capital
Being opening balances
as at 1st August, 2010

1/8/10 bal. b/d

11/8/10 Sales
18/8/10 Sales

1/9/10 bal. b/d

Dr
N
6,300
24,000
3,600

N
33,900
33,900

Capital Account
N

33,900

Cash Account
N
6,300 2/8/10 Purchases
2,800 19/8/10 Bank (c)
4,700 20/8/10 Carriage
23/8/10 Purchases
31/8/10 c/d
13,800
8160

Capital Account
N
31/8/10 bal. c/d
33,900 1/8/10 bal. b/d
1/9/10 bal. b/d

Cr
N

31/8/10 bal. c/d

N
4,000
800
200
640
8160
13,800

19

33,900 1/8/10 bal. b/d

33,900
1/9/10 bal. b/d 33,900
Kamal Account
N
N
15/8/10 Bank
10,000 5/8/10 Purchases 17,500
31/8/10 c/d
7,500
17,500
17,500
1/9/10 bal. b/d
7,500
Shop Fittings Account
N
7/8/10 Bank
2,400 31/8/10 bal. c/d
1/9/10 bal. b/d
2,400

N
2,400

Bank Account
N
1/8/10 bal. b/d
24,000 7/8/10 S/Fittings
19/8/10 Cash (c)
800 15/8/10 Kamal
18/8/10 sales
28/8/10 Bicycle
31/8/10 Rent
31/8/10 c/d

N
2,400
10,000
4,000
2,500
5,900
24,800

Purchases Journal
Date
Particulars
5/8/2010
Kamal

Sales Journal
Date
12/8/2010
27/8/2010

Particulars
Kasimu
Kenneth

Amount
17,500

Amount
850
1,300
2,150

24,800
1/9/10 bal. b/d
5900
Purchases Account
N
2/8/10 Cash
4,000 31/8/10 bal. c/d
23/8/10 Cash
640
31/1/10 Sundry
17,500
22,140
1/9/10 bal. b/d
22,140

N
22,140

Kasimu Account
N
12/8/10 Sales
850 31/8/10 bal. c/d
1/9/10 bal. b/d
850

N
850

Carriage Account
N
20/8/10 Cash
200 31/8/10 bal. c/d
1/9/10 bal. b/d
200

N
200

Kenneth Account
N
27/8/10 Sales
1,300 31/8/10 bal. c/d
1/9/10 bal. b/d
1,300

N
1,300

Bicycle Account
N
28/8/10 Bank
4,000 31/8/10 bal. c/d
1/9/10 bal. b/d
4,000

N
4,000

Rent Account
N
31/8/10 Bank
2,500 31/8/10 bal. c/d
1/9/10 bal. b/d
2,500

N
2,500

22,140

Trial Balance As At 31st August, 2010

Particulars
Dr
Cr
N
N
Cash in hand
8,160
Kamal
7,500
Capital
33,900
Stock
3,600
Bank
5,900
Shop Fittings
2,400
Purchases
22,140
Kasimu
850
Kenneth
1,300
Sales
9,650
Carriage
200
Bicycle
4,000
Rent
2,500
51,050
51,050

20

Sales Account
N
31/8/10 bal. c/d
9,650 11/8/10 Cash
18/8/10 Cash
31/1/10 Sundry
9,650
1/9/10 bal. b/d

N
2,800
4,700
2,150
9,650
9,650

Question Three
Write up the following transactions in the records of Malam Abdullahi and extract a trial balance.
Feb. 1 Started business with N30,000 in the bank and N5,000 in cash
2 Bought goods on credit from: I. Umar N2,500; C. Chindo N1 ,900; and P. Taiye N 1,800
3 Bought goods in cash N2,300
4 Paid rent in cash N100
5 Bought stationery paying by cheque N490
6 Sold goods on credit to: C. Jamil N1,400; R. Sani N1,000; B. Aromire N2,400
7 Paid wages in cash N500
10 Returned goods to C. Chindo N600
11 Paid rent in cash N100
I3 R. Sani returned back goods worth N200
16 Paid electricity by cheque N1,300
18 Paid insurance premium in cash N400
23 Bought motor van on credit from C. Aliyu N6,000
21 Paid motor expenses in cash N60
23 Paid wages in cash N900
24 Received part of amount owing from B. Aromire by cheque N2,090
28 Received refund of electricity N100 by cheque
28 Paid the following by cheque: I. Umar N2,500; C. Chindo N1,300;and C. Aliyu N6,000
Question Four
Ahmed Umar has the following credit purchases and sales for the month of June 2011.
March 3 Sold on credit to Dudu the following: 4 tins of paint at N30 per tin, N20 paint brushes at
N40 each, 10 percent trade discount allowed on both items.
March 7 Purchased on credit from Bello: 10 ladders at N100 each, 4 hammers at N20 each, less 25
percent trade discount on both items.
March 10 Bought on credit from Aliyu: 40 screw drivers at N30 each, 10 hammers at N120 each,
less 331/3 percent trade discount on both items.
March 20 Sold on credit to Taye: 6 ladder at Nl00 each, 2 hammers at Nl20 each and 1 tin of paint
at N360. No trade discount.
March 28 sold on credit to Garba: 8 paint brushes at N50 each less 5 percent trade discount.
You are required to enter the above transactions in the appropriate journal of Ahmed Umar and
post the items to the personal accounts in the ledger. In addition, the journal totals are to
be posted to the appropriate accounts in the ledger.

21

SUSPENSE ACCOUNT AND CORRECTION OF ERRORS

Due to the imperfection of human beings, it is inevitable that errors would exist in the accounting
records. Although it may be difficult to eliminate errors completed, however they can be reduced
to the barest minimum. To reduce errors in accounting records, what should be done, among other
measures, is to engage the services of well trained personnel to maintain accounting records.
3.1 Types of Book-keeping Errors
There are two types of book-keeping errors, namely:
(a) errors that do not affect the agreement of the Trial Balance; and
(b) errors that affect the agreement of the Trial Balance.
3.2 Errors Not Affecting the Agreement of the Trial Balance
These are errors that despite the existence, the trial balance would still agree. They consist of the
following:
(i) Error of Original Entry
This is an error in which a wrong figure (amount) is used to observe correct double- entry. For
example, a sum of N25,000 received from a Debtor may be written as N52,000 which is
subsequently debited to the cash book and credited to the Debtors account. This example is an
error of transposition.
(ii) Error of Complete Omission
This is an error involving failure to post a transaction completely into the relevant accounts, that is,
no account is debited and no account credited. This may be due to the loss of the source document.
For example, a purchase invoice may be misplaced as a result of which it was not recorded in the
purchases day book causing the transaction not to be debited to purchases account nor credited to
the suppliers account.
(iii) Error of Principle
This is an error whereby a transaction is posted to the wrong class of accounts. For example, the
cost of office furniture may be wrongly debited to office expenses account (an account belonging
to the class of nominal accounts) instead of office furniture account (an account belonging to the
class of real accounts).
(iv) Error of Commission
This is an error involving the posting of a transaction to a wrong account within correct class of
accounts. For example, payment to a creditor named Auwal may be wrongly debited to the account
of another creditor named Awwal. Both names are almost identical in spelling and both accounts,
of course, belong to the class of Creditors accounts.
(v) Error of Complete Reversal of Entry
This is an error involving the complete reversal of the normal double-entry for a transaction. For
example the payment by cheque for salaries may be wrongly debited to bank account, as well as,
wrongly credited to salaries account.
(vi) Compensating Errors
This is a situation in which errors occurred in such a way that by coincidence they cancel one
another. For example, the undercast of the debit side of cash book by, say N25,500 would be
cancelled out if, sales account is understated by the same amount, i.e. N25,500.
3.3 Errors Affecting the Agreement of the Trial Balance
These are errors the existence of which would cause the Trial balance not to agree. They consist of
the following:

22

(i) Error of Over or Under Cast

This is an error involving wrong addition of figures. For example if the sales day book is wrong
casted, the total of credit sales posted to the credit side of sales accounts in the ledger will be
greater than or less than the actual figure, thereby affecting the agreement of the Trial Balance.
(ii) Error of partial reversal of entry (Error of Misplacement)
This is an error involving reversal of one leg of the double- entry for a transaction. For example,
the double-entry for the payment of wages in cash is: debit wages account, credit cash account. If
wages account is correctly debited but cash account is also debited, this amounts to an error of
partial reversal of entry the reversal of the credit entry of the cash account. This error always
results in the two legs of a double-entry appearing on the same side, either both entries will be on
the credit side or both on the debit side, as in the case of this example. To correct this error, the
amount involved would be doubled, and the correct entry observed in the account in which the
entry was reserved.
(iii) Error of Omission or Misstatement of Old Account Balance
This is the omission or misstatement of old account(s) balances, i.e. balance b/d from the previous
period, thereby leading to less than the correct amount in the account and consequently affecting
the agreement of the Trial Balance.
(iv) Error of Partial Omission
This is an error whereby one aspect of the double-entry for a transaction is posted without posting
the corresponding entry. For example, where rents is paid in cash, and rent account was credited
but cash account entry was omitted, leading to one leg in, one leg out. This type of error will affect
the agreement of the trial balance.
(v) Error of Omitting Journal Totals
If the totals in the journals (purchases, sales, return outwards or return inwards) are not posted to
the relevant accounts, the balancing figures in the affected accounts would be wrong, resulting in
the disagreement of the trial balance. For example if the total sales from the sales journal is
N55,000 and that has not been posted to sales account, the sales account figure will be less by the
same amount, thereby leading to the disagreement of the Trial Balance.
(vi) Error of Extraction
This is an error which results, as book-keepers extract (draw) trial balance from the ledger account
balances. The balances may be correct but, but on extracting them to the trial balance, error may be
committed. For example cash account balance of N35, 000 was taken to the Trial Balance as but
N53,000. This error would cause the debit side of the trial balance to be greater than the credit
side. Extraction error is usually an error of transposition leading to overcast or undercast of the
amount involved.
(vii) Error of Slide
Error of slide mostly results to overcast or undercast. For example crediting a suppliers account
with N54,000 instead of N45,000 is an error of slide or specifically error of overcast and debiting
machinery account with N26,000 instead of N62,000 is an error of slide or specifically error of
undercast. These types of errors affect the agreement of the Trial Balance.
(viii) Error of Misplacing Ledger Balance
After balancing off ledger accounts, the balances are to he taken to the relevant sides of trial
Balance. While taking the balances to the trial balance, the book-keeper might record a debit
balance on the credit column of the trial balance and vice versa. For example sales balance of
N7,000 might be recorded on the debit column instead of the credit column of the Trial Balance.

3.4 Suspense Account

When a Trial balance does not balance and there is no time or it is inconvenient to immediately
locate and correct the errors because the final accounts are urgently required, the Trial balance can
be made to balance by inserting the balancing figure and describing it as Suspense Account. In
23

other words, a Suspense Account is an account created in order to make a disagreed trial balance
agree, by showing the difference in the disagreed trial balance. For example, if the total of the
debit balances is greater than the total of the credit balances, a suspense account is to be created
and credited with the difference in order to force the trial balance to agree.
If the Suspense account balance is a debit, it shall be classified as a current asset in the balance
sheet while it shall be classified as a current liability if it is a credit balance. Suspense account
must however not be carried in the books for an unreasonable length of time. The creation of
suspense account is just a temporary measure taken by a bookkeeper pending the discovery of the
mistake(s) or error(s) that led to the disagreement in the trial balance. As soon as the book-keeping
errors causing the disagreement of the trial balance totals are discovered and corrected, the
suspense account would automatically close itself. In other words, the only way Suspense Account
can be eliminated is to locate and correct the errors that necessitated its creation in the first place.
In closing the suspense account all the errors whose second entries are not known are to be
recorded in it, debit or credit side. The errors that are corrected through suspense account are errors
affecting the agreement of the Trial Balance. As all the errors are corrected, the two sides of the
account, inclusive of the sundry error, would be equal, thereby closing the Suspense Account.
Suspense account is not relevant while correcting book-keeping errors that do not affect the
agreement of the trial balance. It is however, necessary while correcting errors affecting the
agreement of the trial balance. This is because, in correcting those errors, it would be clear as to
where the first entry will go but, it would not be clear as to where the second entry will go and, for
that reason, suspense account is to stand for the unknown account, receiving the second entry.

3.5 Entries Required to Correct Errors

As mentioned above, with respect to the first type of errors (i.e. those that do not affect the
agreement of the Trial balance), they do not necessitate the creation of Suspense Account because
they do not cause the Trial balance not to balance. For this reason, the double- entries needed to
correct these errors are not passed through the Suspense Account.
On the other hand, the second types of errors cause the Trial balance not to agree and therefore
necessitate the creation of Suspense Account. Therefore, double-entries made to correct such
errors are passed through Suspense Account so that after all such errors have been corrected, the
Suspense Account balance disappears.
3.5.1 Correction of Errors after Final Accounts Had Been Drawn Up
Where final accounts had already been prepared before effecting correction of errors, it would be
necessary, in addition to the entries to correct the errors, to;
(a) reverse the values of the balance sheet items affected by the errors; and
(b) recalculate the net profit obtained in the Profit and Loss Account.

24

Discussion Exercises
Question One
The Trial Balance of Muhsin as at 31/12/08 failed to balance, the debit side being greater than the
credit side by N7,440. It was later discovered that the following errors have given rise to the
difference between the two sides of the Trial Balance.
1. Bank account was debited with sales made of N6,200 and sales account was credited with the
same amount, whereas N3,790 was cash sales and N2,410 was sales on credit.
2. Rent received from tenants N1,200 was debited to the rent account. The amount was also
debited to the bank account, as well.
3. Interest received N700 was debited to interest on loan account and no other entry was made.
4. A cheque of N 1,480 issued by a debtor was dishonoured and in restoring the debt, his
account was debited with N 1,480 and the bank account was credited with N1,840.
5. The discount received account was overcast by N550.
6. Sales made on credit to a customer for N620 were not recorded.
7. Office equipment purchased for N5,700 was debited to office equipment account but no
other entry was made, because payment had not been made.
8. Insurance premium paid by cheque N450 was credited to both bank account and cash account
and then debited to insurance account.
9. Motor van repairs N860 was debited to motor van account and credited to bank account.
Required:
(a) Show the journal entries necessary to correct the above errors.
(b) Prepare suspense account to show the correction.
Question Two
(a) The Trial balance of a firm showed a difference of N 11,100 and this has been carried to
the credit side of a Suspense Account. Further information revealed the following errors.
(i) Sales day book was overcast by N 2,500
(ii) An invoice for N 2,750 received from a supplier was correctly entered in the purchases
day book but was posted to the debit side of the suppliers account.
(iii) A debtor who owed a sum of N 1,200 died without leaving anything behind. This
amount was written off his account as a bad debt but no other entry was made in the books.
(iv) A machine was bought for N 7,500 and the payment was made by cheque. This fact
was recorded only in the machinery account.
(vii) A payment of N 1,300 for wages was entered correctly in the cash book but was
recorded as N 3,100 in the wages account.
You are required to: Show journal entries necessary to correct these errors and a Suspense
Account.
General Journal
Particulars
Dr.
Cr.
N
N
Sales Account
2,500
Suspense Account
2,500
Being correction of error of overstatement
Suspense Account
5,500
Supplier's Account
5,500
Being correction of error of misplacement
Bad debt Account
1,200
Suspense Account
1,200
25

Being bad debt written off

Suspense Account
Bank Account
Being correction of error of partial omission
Suspense Account
Wages Account
Being correction of error of transposition (Over
statement)

Supplier
Bank
Wages

SUSPENSE ACCOUNT
N
5,500 Balance b/d
7,500 Sales
1,800 Bad debt
14,800

7,500
7,500
1,800
1,800

N
11,100
2,500
1,200
14,800

26

Question Three

(b) The Suspense account, indicating the difference on the Trial Balance prior to the
correction of the errors
(c) A statement of adjusted net profit.

27

CASH BOOK AND BANK RECONCILIATION STATEMENT

4.1 Cash Book

In a business organization, the function of receiving and paying out money (either in the form of
cash or cheque) requires a considerable number of entries. If the transactions are posted directly to
the ledger, the bank account and cash accounts will contain too many entries. The objective of
decongesting the ledger is carried one step further by taking the bank account and cash account out
of the ledger and combining them in one subsidiary book called the cash book.
4.2 2 and 3 Column Cash Book
This cash book is so-called because it has two columns, one each for bank and Cash transactions.
The two columns on the debit side record the receipt of money while the two columns on the credit
side record payment of money. The bank column on the debit side records cheque received and
cash paid into bank while the bank column in the credit side records payments by cheques. The
cash column on the debit side records cash received while the cash column on the credit side
records cash paid.
Cash Book (2 Column)
Date
Particulars
Folio Cash Bank Date Particulars
Folio Cash
Bank

When the double entry for a transaction appears on both side of the cash book, this is called a
Contra Entry. Contra entries in the cash book are made when cash is deposited into the bank
account out of the cash in hand or when cash is withdrawn from the bank account for office use.
A three-column cash book has a third column (in addition to the two columns for bank and cash)
for recording the cash discounts allowed to debtors and cash discounts received from creditors. A
cash discount is the amount allowed off (i.e. deducted from) debts to encourage settlement of the
debts within a specified period of time.
The discount column on the debit side of the cash book is for discounts allowed to debtors while
the discount column on the credit side records discounts received from creditors. Due to the
relatively large number of discounts allowed and received by a trading organization, the discount
allowed account and discount received account would contain too many entries if an entry is made
to these accounts every time discount is allowed or received. To prevent this, the discounts
columns are used. For example, when a customer is allowed a cash discount, this is listed in the
discount allowed column while the personal account of the customer is credited. At the end of the
period, the total of the discount allowed column is transferred to the debit side of the discount
allowed account in the general ledger. Conversely, when cash discount is received from a creditor,
this is listed in the discount received column while the creditors personal account is debited. At
the end of the period, the total of discount received column is transferred to the credit of the
discount received account in the general ledger. The discounts columns are memoranda i.e. they
are not part of the double-entry system.
Cash Book (3 Column)
Date

Particulars

Folio

Discount

Cash

Bank

Date

28

Particulars

Folio

Discount

Cash

Bank

Discussion Exercises
Question One
Write up a two-column cash book from the following details, balance off at the end of the month
and show the relevant discount accounts as they would appear in the general ledger:
October 2011
Balances brought forward: Cash in hand N780
Cash at the bank N12,560
2 The following persons paid their accounts by cheque: Musa N800; M. Kamal
N600; Kaka N200; and H. Jibril Nl,200
3 Paid rent in cash N120
4 Paid T. Musa his account of N670 by cheque.
5 Cash sales paid direct into the bank N750
6 Paid the following accounts by cheque: Nasir N200; Mansur N600; Saleh N3,600;
and Gambo N800
10 Cash drawings N400
11 K. Faruk paid his account of N890 by cheque.
I7 Cash withdrawn from the bank N 1,000 for business use.
19 Salaries paid in cash N800
20 The following persons paid their accounts by cheque: J. MaryamNl,400; M.
Mgbenwelu Nl,000; and D. Bayo N3,800
25 Internet browsing paid in cash N300
28 The proprietor pays a further N10,000 capital into the bank from his private monies
30 Balarabe paid N760 in cash.
31 The proprietor bank all the money in the office except N150.
You are required to enter up the transactions in the cash book and show the relevant transfer of
the discounts amounts into their respective accounts in the ledger.
Question Two
Write up a three-column cash book from the following details, balance off at the end of the month
and show the relevant discount accounts as they would appear in the general ledger:
October 2011
Balances brought forward: Cash in hand N780
Cash at the bank N12,560
7 The following persons paid their accounts by cheque, in each case deducting 5 per
cent cash discount; Accounts: Musa N800; M. Kamal N600; Kaka N200; and H.
Jibril Nl,200
8 Paid rent in cash N120
9 Paid T. Musa his account of N670 by cheque, no discount being deducted.
10 Cash sales paid direct into the bank N750
11 Paid the following accounts by cheque, in each case deducting a 5 per cent cash
discount: Accounts: Nasir N200; Mansur N600; Saleh N3,600; and Gambo N800
12 Cash drawings N400
13 K. Faruk paid his account of N890 by cheque N850, deducting N40 cash discount.
I7 Cash withdrawn from the bank N 1,000 for business use.
21 Salaries paid in cash N800
22 The following persons paid their accounts by cheque, in each case deducting a 5
per cent cash discount; Accounts: J. MaryamNl,400; M. Mgbenwelu Nl,000; and
D. Bayo N3,800
26 Internet browsing in cash N300
29

29 The proprietor pays a further N10,000 capital into the bank from his private monies
32 Balarabe paid N760 in cash.
33 The proprietor bank all the money in the office except N150.
You are required to enter up the transactions in the cash book and show the relevant transfer of
the discounts amounts into their respective accounts in the ledger.

4.3 Bank Reconciliation

In modern times, nearly all firms maintain current accounts with banks for their operations. Sums
of money, cash and cheques received by, or on behalf of the firm are paid into the bank account.
Conversely, payments are made from the bank account, usually by way of cheques issued by the
firm, or by some other means.
The firm maintains records of receipts into and payments out of the bank account in a book known
as Cash Book (bank column). From time to time or as often as required by the account holder,
details of the transactions on the bank account are sent to the account holder in a document known
as bank statement.
4.3.1 Cash Book (Bank Column) and Bank Statement
The account holder posts receipts to the debit side of the cash book. These are the same items that
appear on the credit side of the bank statement, while credits posted to the cash book appear on the
debit side of the bank statement. Cash at bank is indicated in the cash book as a debit balance but
as a credit balance on the bank statement. Conversely, bank overdraft balance is indicated on the
cash book as a credit balance but as a debit balance on the bank statement. This is because the
customers account is seen as a liability account in the books of the bank. In summary, like items
are treated in opposite sides in the cash book and in the bank statement.
If all items have been accurately and promptly recorded in both the cash book and the bank
statement, both would show the same balance but, of course, on opposite sides. In such a case,
there would be no need for reconciliation. In reality, however, the cash book balance at any given
date is not usually the same as the bank statement balance at the same date. This would make
reconciliation necessary. The statement reconciling the cash book balance with the bank statement
balance is known as bank reconciliation statement.
4.3.2 Causes of Differences between Cash Book and Bank Statement Balances
(a) Unpresented Cheques
These are cheques already issued by the account holder and recorded as payments in the cash book
but are yet to be presented to the bank for payment for which reason, they only appear in the cash
book but they do not appear in the bank statement.
(b) Uncredited Cheques
These are cheques received and lodged into the bank account but are yet to be credited in the bank
statement. A common reason for uncredited cheques is the delay caused by the inter-bank clearing
system.
(c) Bank Charges
These are charges -such as commission on turnover and commission on drafts- made by the bank
and debited in the bank statement. The account holder may not be aware of these charges until he
receives the bank statement, and so therefore may not have credited his bank account.

30

(d) Interest on Loans/Overdrafts

These are interests charged on loan and bank overdraft balances which the account holder is not
aware of until he receives the bank statement, and so therefore may not have credited his bank
account.
(e) Bank Standing Order/Direct Debits
Some businesses give standing orders to their banks to be making some regular payments from
their accounts on their behalf, for example payment to utility suppliers such as gas, electricity and
water. In other words, standing orders are instruction to a banker to make regular payments on the
basis of a prior order made by the account holder. They are, therefore, debits in the bank statement
representing payments made by the bank-on the instruction of the account holder-to third parties or
in settlement of incidental charges, which the account holder is not aware of until he receives the
bank statement, because the order will only be executed on the availability of funds or unutilized
overdraft limit in the holders account. However, since s standing order is a written instruction to a
bank to pay a specified person a regular amount of money on a periodic but recurring basis (for
example including mortgage repayments, rental and life insurance payments), the standing orders
remain valid until cancelled. The order stands (i.e. remains effective) until it is modified or
withdrawn by the account holder.
(f) Dishonoured Cheques
These are cheques received and lodged into the bank account but were subsequently dishonoured
by the paying banker(s) for reasons such as insufficient funds, irregular signature, etc. The
cashbook bank balance would therefore be greater than the balance on the bank statement.
(g) Direct Credit (Direct Payment to Bank)
The firm may direct its customers and other parties making payment to it to do that direct to its
bank account. The bank, on receiving such payments on behalf of the firm, will credit its account
at the bank. Examples of the use of direct credits include the payment of salaries, pensions,
dividend, commission, interest earned, and social security payments, etc. If at the time of receiving
the bank statement the firm is not aware of such direct payment, the bank statement balance is
bound to be greater than the cash book balance.
(h) Interest on Deposits
This is interest due to the account holder on the term deposit(s) he maintains at the bank. The
account holder may not be aware of these credits until he receives the bank statement.
(i) Book-keeping Errors/ Fraud
Errors and frauds either from the side of the account holder or from the side of the bank is bound
to create disagreement between the balances.
4.3.3 Procedure for Preparing Bank Reconciliation Statement
Step One
There are basically three ways of preparing the statement.
(i) Start with the balance shown by the bank statement and arrive at the balance shown by the cash
book (this can be done by adding one leg credits and subtracting one leg debits); or
(ii) Start with the balance shown by the cash book and arrive at the balance shown by the bank
statement (this can be done by adding one leg debits and subtracting one leg credits); or
(iii) Adjust the balance shown by the cashbook first, and then use either method (i) or (ii) to
prepare the reconciliation statement. The cash book can be updated by doing the following:
(1) items (c) to (f) above, being payments not yet in cash book, should be credited to the cash
book; (2) items (g) to (h), being receipts not yet in cash book, should be debited to the cash
book; (3) errors committed by the account holder under item (i) should be corrected by
debiting or crediting the cash book as appropriate. After doing these, a revised balance-known
as adjusted cash book balance or balance per adjusted cash book would be obtained on the
cash book.
31

Step Two
Use items (a), (b) and the remaining (i) to draw up a bank reconciliation statement. The statement
could begin with balance per adjusted cash book and end with balance per bank statement.
Alternatively, the statement could start with balance per bank statement and end with balance per
adjusted cash book. The formats of the bank reconciliation statement, under all the three methods
are shown below:
Method One: Starting with the balance shown by the bank statement to arrive at the balance
shown by the cash book
Bank Reconciliation Statement As At...
N
Balance per Cash Book
Add: Unpresented cheques
Direct payment to bank
Interest, commission etc received

xx
xx
xx

Less: Uncredited cheques

Dishonoured cheques
Bank standing order
Bank charges/Direct debits

xx
xx
xx
xx

N
xx

xx
xx

xx
xx
xx
xx

Add/Deduct: Error by bank

Balance per Bank Statement

Method Two: Starting with the balance shown by the cash book to arrive at the balance shown by
the bank statement
Bank Reconciliation Statement As At...
N
Balance per Bank Statement
Add: Uncredited cheques
Dishonoured cheques
Bank standing order
Bank charges/Direct debits

xx
xx
xx
xx

Less: Unpresented cheques

Direct payment to bank
Interest, commission etc received

xx
xx
xx

N
xx

xx
xx

xx
xx
xx
xx

Add/Deduct: Error by bank

Balance per Cash Book

32

Method Three: Adjust the balance shown by the cashbook first, and then use either method (i) or
(ii) to prepare the reconciliation statement
Stating with Balance as per Adjusted Cashbook
Bank Reconciliation Statement As At...
N
Balance per adjusted cash book
xx
Add: Unpresented cheques
xx
xx
Less: Uncredited cheques
xx
xx
Add/Deduct: Error by bank
xx
Balance per Bank Statement
xx
Stating with Balance as per Bank Statement
Bank Reconciliation Statement As At...
N
Balance per Bank Statement
xx
Add: Uncredited cheques
xx
xx
Less: Unpresented cheques
xx
xx
Add/Deduct: Error by bank
xx
Balance per adjusted cash book
xx
Where Balances Reflect Overdraft
Where balances reflect overdraft, the reverse would be adopted for method 1 and 2, i.e. overdraft
as per cash book would be given the treating of balance as per bank statement and overdraft as per
bank statement would be given the treatment of balance as per cashbook. Alternatively, the
overdraft should be shown in brackets.
Step Three
Investigate the reconciling items appearing on the bank reconciliation statement and take
appropriate actions. Here are some recommendations.
Unpresented cheques
The list of unpresented cheques may include:
(a) cheques which have remained Unpresented for a length of time considered to be unreasonable;
or
(b) cheques which have gone stale (that is, cheques which are more than 6 months old counting
from the date of the cheques).
This fact should be taken up with the beneficiaries of the cheques. In the case of stale cheques, the
solution is to issue replacement cheques.
Uncredited Cheques
If the cheques have remained uncredited for an unreasonable length of time, this should be taken
up with the bank for appropriate action.
Errors by the Firm or the Bank
The bank should be promptly notified to correct the errors made by it, while the firm should
immediately correct its own errors (if any).

33

Discussion Exercises
Question One
On 31 December 2011, Jamils cash book showed a debit balance of N29,520. His bank statement
showed a credit balance of N 26,500. The reasons for the difference were as follows:
(i) A cheque for N 1, 960 was received and entered in the cash book but was not recorded in the
bank statement.
(ii) Unpresented cheques totalled N 3, 740.
(iii) The payment side of the cash book had been undercast by N 2, 000.
(iv) Standing order for N 1, 260 appearing in the bank statement is yet to be posted in the cash
book.
(v) A bill of exchange of N 1, 340 had matured and the bank had paid on Jamils behalf but it
had not been recorded in his cash book.
(vi) Dividends credited to his account by the bank for N l, 240 had not been recorded in the cash
book.
(vii) A withdrawal of N 1,440 by Jamila (another customer of the bank) had been charged in error
to Jamils account.
You are required to:
(i)
Update the cash book and, using the two possible formats, prepare the bank
reconciliation statement as at 31 December 2011.
(ii)
Using the two possible formats, prepare the bank reconciliation statement as at 31
December 2011 (without updating the cashbook)

34

SOLE TRADERS FINAL ACCOUNTS

Probably the main objective of the accounting function is the calculation of the profits earned by a
business or the losses suffered by it. The earning of profit is after all usually the main reason why
the business was set up in the first place, and the proprietor will want to know for various reasons
how much profit has earned or loss he has suffered. First he will want to know how the actual
profits compare with the profits he had hoped to make. He may also want to know his profits for
such diverse reasons as: to assist him to plan ahead, to help him to obtain a loan from a bank or
from a private individual, to show to a prospective partner or to a person to whom he hopes to sell
the business, or maybe he will need to know his profits for income tax purposes.
In the case of a trader, i.e. one man business, who is mainly concerned with buying and selling, the
profits are calculated by drawing up a special account called a Trading, Profit and Loss Account.
For a manufacturer it is also useful to prepare Manufacturing Accounts as well, but this will not be
dealt with in this topic. Undoubtedly one of the most important uses of the trading, profit and loss
account is comparing the results obtained with the results expected. Many businesses attach a great
deal of importance to their gross profit percentage. This is the amount of Profit made, before
deducting expenses for every N1 of sales. In order that this may easily be deduced from the profit
calculations, the account in which profit is computed is split into two sections- one in which the
Gross Profit is calculated, and the next section in which the Net profit is calculated. Where the
cost of goods sold is greater than the sales the result would be a Gross Loss, but this is a relatively
rare occurrence. Where the expenses incurred exceed the gross profit plus other revenue then the
result is said to be a Net Loss. By taking the figure of sales less the cost of goods sold, it can be
seen that the accounting custom is to calculate a traders profits only when the goods have been
disposed of and not before. Gross Profit is defined as the excess of sales over costs of goods sold
in the Trading Account) period. While, Net Profit is what remains after all other overhead
expenses incurred in the period have been deducted. While the Trading Account is used for the
determination of Gross Profit (or Gross Loss), the Profit and Loss Account section is used for
determination of Net Profit (or Net Loss). While net profit increases the capital of the proprietor,
net loss, on the other hand decreases his capital.
After the trading, profit and loss accounts have been completed a statement is drawn up in which
the remaining balances in the books are arranged according to whether they are asset balances or
liability or capital balances. This statement is called a balance sheet. The assets are shown on the
right-hand side and the capital and liabilities on the left-hand side. It is very important to know that
the balance sheet is not part of the double-entry system, and therefore it is not an account. This
contrasts with the Trading and Profit and Loss Account which is part of double-entry. The use of
the word account indicates that it is part of double-entry.
It is important to note that when preparing the final accounts (i.e. Trading, Profit and Loss Account
and Balance sheet) a Trial Balance is required, with some additional information (at least the value
of closing stock). This is because the value of closing stock is not obtain directly from an account,
but through a process known as stock taking, i.e. counting the left over of items in the shop and
using calculator or computer to value them. However, while all items appearing on the trial
balance are to treated once, either in the Trading Account, Profit and Loss Account or the Balance
sheet, all other items appearing in the additional information is to be treated twice, either in the
Trading Account and the Balance Sheet or in the Profit and Loss Account and the Balance sheet.

35

QUESTION ONE
The following trial balance was extracted from the books of Muhammad at the close of
business on 3I July, 2010
Trial Balance As At 31st July, 2010
Particulars
Purchases and Sales
Stock 1st August 2009
Capital 1st August 2009
Bank Overdraft
Cash
Discounts
Returns inwards
Returns outwards
Carriage outwards
Rent and insurance
Provision for Bad and Doubtful debts
Fixtures and Fittings
Delivery Van
Debtors and Creditors
Drawings
Wages and salaries
Office expenses

Dr
Cr
22,860 41,970
5,160
7,200
4,350
90
1,440
930
810
570
2,160
1,740
660
1,200
2,100
11,910 6,060
2,880
8,940
450
61,740 61,740
You are required to prepare a Trading, Profit and Loss Account for the year ended 31
July 2010, and a Balance Sheet as at that date. Give effect to the following adjustments:
(i) Stock 31 July 2010 N4, 290.
(ii) Wages and salaries accrued at 31 July 2010 N 2l0, Office expenses owing N 810.
(iii) Rent prepaid at 31 July 2010 N 180
(iv) Increase provision for Bad and Doubtful Debts by N I50 to N 810.
(v) Provide for depreciation as follows: Fixtures and fittings N 120, Delivery van N 500.
(15 Marks)
Muhammad
Trading, Profit and Loss Account for the Year Ended 31 July, 2010
N
N
N
Opening stock
5,160 Sales
Add: Purchases
22,860 Less returns inwards
28,020 Net sales
Less Returns outward
570
COGAS
27,450
Less: Closing stock
4,290
Cost of Goods Sold
23,160
Gross Profit c/d
18,000
41,160

Wages and Salaries

Add: Accrued

8,940
210

Gross profit b/d

9,150 Discount received
36

N
41,970
810
41,160

41,160

18,000
930

Office expenses
Add: Accrued
Rent & Insurance
Less prepaid
Discount allowed
Increase in PBDD:
New provision
Less old provision
Depreciation:
Furniture and Fittings
Delivery van
Carriage outwards
Net profit c/d

Opening capital
Add: Net profit
Less drawings
Closing capital
Current Liabilities
Creditors
Accrued wages &
salaries
Accrued office
expenses
Bank overdraft

450
810
1,740
180

810
660
120
500

1,260
1,560
1,440

150

620
2,160
2,590
18,930

18,930

Balance Sheet as at 31 July, 2010

N
N
7,200
Fixed Assets
2,590
9,790
Fixtures & Fittings
2,880
Furt. & Equipt.
6,910

Cost
A.Dep. NBV
N
N
N
1,200
120 1,080
2,100
500 1,600
3,300
620 2,680

Current Assets
Stock

6,060
210

Debtors

810
Less BD
4,350 11,430 Prepaid rent
Cash

4,290
11,910
810

11,100
180
90
15,660
18,340

18,340

37

QUESTION TWO
The following trial balance was extracted from the books of Auwal Enterprises as at 31st
December, 2010
Particulars
Purchases
Sales
Drawings
Returns inwards
Returns outwards
Discounts allowed
Discounts received
Debtors
Creditors
Stock
Freehold premises at cost
Motor vehicles at cost
Furniture at cost
Provision for depreciation on motor vehicles
Provision for depreciation on furniture
Cash at bank
Cash in hand
Salaries
Carriage inwards
Carriage outwards
Printing and stationery
Electricity and water
Insurance
General expenses
Provision for bad debt
Bad debt written off
Capital
Rent received
Commission received

Dr
N
368,400

Cr.
N
517,900

14,100
7,300
6,200
10,200
8,400
45,000
57,100
34,300
46,000
12,000
2,500
4,500
1,000
5,000
1,900
40,600
22,200
10,300
3,600
14,900
6,800
34,800
200
400

680,300

70,000
3,800
11,200
680,300

The following information should be taken into account:

(i) Stock at 31st December 2010 was valued at N 31, 800.
(ii) Accrued expenses at 3l/12/2010 were salaries N 1,800 and electricity N 80.
(iii) Prepaid expenses at 31/12/2010 were insurance N400 and general expenses N 500.
(iv) Adjust provision for bad debt to 2% of debtors and create provision for discount allowable at
1% of debtors.
(v) Commission due but yet to be received at 31/12/2010 amounted to N 800.
(vi) Charge depreciation on fixed assets as follows: Furniture 20% on cost
Motor vehicles : 10% on cost
(vii) Rent received in advance at 31/12/2010 amounted to 4200.
(viii) Goods costing N1,200 were taken by the owner for private use. This was yet
to be recorded in the books.
You are required to prepare the Trading, Profit & Loss Account for the year ended 31st December
2010 and Balance Sheet as at that date.

38