CORRECTION OF ERRORS AND

THE SUSPENSE ACCOUNT

• Errors occurring in the preparation of accounts can be
discussed and treated from two perspectives:
• Errors affecting the trial balance.
• Errors not affecting the trial balance
ERRORS NOT AFFECTING THE BALANCE SHEET
• Suppose we correctly entered cash sales GH¢70 to the debit of the Cash Book, but did not
enter the GH¢70 to the credit of the sales account. If this were the only error in the books, the
trial balance totals would differ by GH¢70. However, there are certain kinds of error which
would not affect the agreement of the trial balance totals, and we will now consider these:

• 1 Errors of omission – where a transaction is completely omitted from the books. If we sold
GH¢90 goods to J Brewer, but did not enter it in either the sales or Brewer’s personal account,
the trial balance would still ‘balance’.

• 2 Errors of commission – this type of error occurs when the correct amount is entered but in
the wrong person’s account, e.g. where a sale of GH¢11 to C Green is entered in the account
of K Green. It will be noted that the correct class of account was used, both the accounts
concerned being personal accounts.

• 3 Errors of principle – where an item is entered in the wrong class of account, e.g. if purchase
of a fixed asset, such as a van, is debited to an expenses account, such as motor expenses
account.
• 4 Compensating errors – where errors cancel each other out. If the sales account was added
up to be GH¢10 too much and the purchases account was also added up to be GH¢10 too
much, then these two errors would cancel out in the trial balance. This is because the totals of
both the debit side and the credit side of the trial balance will be GH¢10 too much.

• 5 Errors of original entry – where the original figure is incorrect, yet double entry is still
observed using this incorrect figure. An instance of this could be where there were sales of
GH¢150 goods but an error is made in calculating the sales invoice. If it were calculated as
GH¢130, and GH¢130 were credited as sales and GH¢130 were debited to the personal
account of the customer, the trial balance would still balance.

• 6 Complete reversal of entries – where the correct accounts are used but each item is shown
on the wrong side of the account. Suppose we had paid a cheque to D Williams for GH¢200,
the double entry of which is Cr Bank GH¢200, Dr D Williams GH¢200. In error it is entered as Cr
D Williams GH¢200, Dr Bank GH¢200. The trial balance totals will still agree.

• 7 Transposition errors – where the wrong sequence of the individual characters within a
number was entered. For example, GH¢142 entered instead of GH¢124. This is quite a
common error and is very difficult to spot when the error has occurred in both the debit and
the credit entries, as the trial balance would still balance. (It is more common for this error to
occur on one side of the double entry only.)
 CORRECTION OF ERRORS
• We make corrections to double entry accounts by preparing
journal entries. We should:

• 1 Show the corrections by means of journal entries, then

• 2 Show the corrections in the double entry set of accounts,

by posting these journal entries to the ledger accounts
affected.
ERROR OF OMMISSION
 ERROR OF COMMISSION

A purchase of goods, £44 from C Simons, was entered in error in

C Simpson’s account.
ERROR OF PRINCIPLE
Compensating Error
 Error of original entry

A sale of £38 to A Smailes was entered in the books as £28. It needs another
£10 of sales entering now.
 COMPLETE REVERSAL OF ENTRIES

A payment of cash of £16 to M Dickson was entered on

the receipts side of the Cash Book in error and credited
to M Dickson’s account. This is somewhat more difficult
to adjust. First must come the amount needed to
cancel the error, then comes the actual entry itself.
Because of this, the correcting entry is double the
actual amount first recorded.
TRANSPOSITION ERROR
ERRORS AFFECTING THE TRIAL BALANCE
• Incorrect additions in any account.
• Making an entry on only one side of the accounts, e.g. a debit but no credit; a
credit but no debit.
• Entering a different amount on the debit side from the amount on the credit side.

• We should try very hard to find errors when the trial balance totals are not equal.
When they cannot be found, the trial balance totals can be made to agree with
each other by inserting the amount of the difference between the two sides in a
suspense account.

• A suspense account is an account in the general journal that temporarily carries

any transactions for which there are doubts about the account in which they
should be recorded.
To make the two totals the same, a figure of GH¢40 for the suspense
account has been shown on the credit side of the trial balance. A suspense
account is opened and the GH¢40 difference is also shown there on the
credit side:
 Suspense account and the balance sheet
• If the errors are not found before the financial statements
are prepared, the suspense account balance will be
included in the balance sheet.

• Where the balance is a credit balance, it should be

included on the capital and liabilities side of the balance
sheet.

• When the balance is a debit balance it should be shown on

the assets side of the balance sheet.
 Corrections of errors affecting the trial
balance
• When the errors are found they must be corrected,
using double entry. Each correction must first have an
entry in the journal describing it, and then be posted
to the accounts concerned.
 Example 1
• Assume that the error of £40 as shown in Exhibit
33.1 is found in the following year on 31 March
20X6. The error was that the sales account was
under cast by £40. The action taken to correct
this is:
• Debit suspense account to close it: £40.
• Credit sales account to show item where it should
have been: £40.
 EXAMPLE
• The trial balance on 31 December 20X6 had a difference of
£168. It was a shortage on the debit side.
• A suspense account is opened, and the difference of £168 is
entered on the debit side. On 31 May 20X7 the error was found.
• We had made a payment of £168 to K Leek to close his
account. It was correctly entered in the Cash Book, but was not
entered in K Leek’s account.
 More than one error
• The trial balance at 31 December 20X7 showed a difference of £77, being a
shortage on the debit side. A suspense account is opened, and the difference
of £77 is entered on the debit side of the account.

• On 28 February 20X8 all the errors from the previous year were found.

• (A) A cheque of £150 paid to L Kent had been correctly entered in the Cash
Book, but had not been entered in Kent’s account.
• (B) The purchases account had been under cast by £20.
• (C) A cheque of £93 received from K Sand had been correctly entered in the
Cash Book, but had not been entered in Sand’s account.
• These three errors resulted in a net error of £77, shown by a debit of £77 on
the debit side of the suspense account.
 ERRORS AND THE FINANCIAL STATEMENTS

Some of the errors will have meant that original profits calculated will be wrong. Other errors will have no effect
upon profits. We will use Exhibit 33.5 to illustrate the different kinds of errors. Exhibit 33.5 shows a set of
financial statements in which errors have been made.
Errors which do not affect profit calculations
• If an error affects items only in the balance sheet, then the
original calculated profit will not need altering. Example 1
shows this.
• Assume that in Exhibit 33.5 the £80 debit balance on the
suspense account was because of the following error:

• On 1 November 20X5 we paid £80 to a creditor T Monk. It

was correctly entered in the Cash Book. It was not entered
anywhere else. The error was found on 1 June 20X6.
 Errors which affect profit calculations
• If the error is in one of the figures shown in the trading and
profit and loss account, then the original profit will need
altering. Example 2 shows this.

• Assume that in Exhibit 33.5 the £80 debit balance was

because the rent account was added up incorrectly. It should
be shown as £8,480 instead of £8,400. The error was found on
1 June 20X6.
 Where there have been several errors
• If in Exhibit 33.5 there had been four errors in the ledger accounts
of K Davis, found on 31 March 20X6, their correction can now be
seen. Assume that the net difference had also been £80.
• (A) Sales overcast by £90
• (B) Insurance under cast by £40
• (C) Cash received from a debtor entered in the Cash Book only £50
• (D) A purchase of £59 is entered in the books, debit and credit
entries as £95
•Thank you
BANK RECONCILIATION STATEMENT
 Completing entries in the cash book
In the books of a business, funds paid into and out of the bank are entered
into the bank columns of the Cash Book. At the same time, the bank will
also be recording the flows of funds into and out of the business bank
account.

If all the items entered in the Cash Book were the same as those entered in
the records held by the bank, the balance on the business bank account as
shown in the Cash Book and the balance on the account as shown by the
bank’s records would be the same.

Unfortunately, it isn’t usually that simple, particularly in the case of a

current account. There may be items paid into or out of the business bank
account which have not been recorded in the Cash Book.
And there may be items entered in the Cash Book that have not yet been
entered in the bank’s records of the account. To see if any of these things
have happened, the Cash Book entries need to be compared to the record
of the account held by the bank.

Banks usually send a copy of that record, called a bank statement, to

their customers on a regular basis, but a bank statement can be requested
by a customer of the bank at any time.

Bank statements should always be checked against the Cash Book

entries!
Exhibit 30.1
It is now possible to see that the two items not shown in our Cash Book
are:
Bank Giro credit: P Smith £70
Bank charges £50
P Smith had paid £70 but, instead of sending a cheque, he paid the money
by bank giro credit transfer direct into the business bank account. The
business did not know of this until it received the bank statement.

The other item was in respect of bank charges. The bank has charged £50
for keeping the bank account and all the work connected with it. Instead of
sending an invoice, the bank has simply taken the money out of the bank
account.
As we have now identified the items missing from the Cash Book, we can now complete
writing it up by entering the two items we have identified:
 Where closing balances differ

Although a cash book may be kept up to date by a

business, it obviously cannot alter the bank’s own records.
Even after writing up entries in the Cash Book, there may
still be a difference between the Cash Book balance and
the balance on the bank statement. Exhibit 30.2 shows
such a case.
Exhibit 30.2
You can see that two items are in the Cash Book but are not shown on the bank
statement.
These are:
(i) A cheque had been paid to M Peck on January 30. He deposited it in his bank
on January 31 but his bank didn’t collect the money from the business’s bank
until February 2. This is known as an unpresented cheque.

(ii) Although a cheque for £470 was received from J Soames on January 31 and the
business deposited it with the bank on that date, the bank did not receive the funds
from Soames’ bank until February. This is known as a ‘bank lodgement not yet
credited’ to the business bank account.
The cash book balance on January 31 was £600, whereas the
bank statement shows a balance of £330. To prove that
although the balances are different they can be ‘reconciled’ (i.e.
made to agree) with each other, a bank reconciliation statement
is prepared.

It will either start with the bank statement balance and then
reconcile it to the Cash Book balance, or it will start with the
Cash Book balance and then reconcile it to the bank statement
balance. If the second approach is adopted, it would appear as:
Bank Reconciliation Statement as at 31 December 20X8
£
Balance as per cash book 600
Add Unpresented cheque (i) 200
800
Less Bank lodgement not on statement (ii) (470)
Balance per bank statement 330

If the two balances cannot be reconciled then there will be an error somewhere.
This will have to be located and then corrected.
This reconciliation technique is also used when dealing with other statements
drawn up outside the firm: for example, when reconciling purchase ledger
accounts to suppliers’ statements.
 An alternative approach to bank reconciliations
In order to avoid the confusion that may arise concerning what figure to include
in the balance sheet, many accountants use a slightly different form of bank
reconciliation. In this approach, you take the balance as shown on the bank
statement and the balance in the Cash Book before making any adjustments that
are identified when it is compared to the bank statement. You then reconcile
each of them in turn to arrive at the balance that should appear in the balance
sheet.
Having completed the reconciliation, you then update the Cash Book so that it
balances at the correct amount, i.e. the amount that will be shown in the balance
sheet. An example is shown in Exhibit 30.3.
Exhibit 30.3
You can see that the following are missing from the Cash Book:
(a) A bank giro credit of £24 made on December 30 by A Parkinson.
(b) Bank charges of £40.
And you can see that the following are missing from the bank statement:
(c) A cheque paid to D Barnes for £25 on December 31 has not yet been
presented.
(d) A bank lodgement has not yet been credited – the cheque for £72
received from S Aisbitt on 31 December.
The bank reconciliation statement would be:
Bank Reconciliation Statement as at 31 December 20X8
£
Balance as per cash book 267
Add Bank giro credit not yet entered (a) 24
291
Less Bank lodgement not on balance sheet (b) ( 40)
Balance in balance sheet 251
Add Cheque not yet presented (c) 25
276
Less Bank lodgement not on statement (d) ( 72)
Balance per bank statement 204
When you have adjustments to make to both the Cash Book and the bank
account balances in order to reconcile them, this form of bank
reconciliation statement is more useful than one that simply shows that
you know why their balances are different (which is all the bank
reconciliation statement in Section 30.2 shows).
An alternative approach that is often used in practice is to start with the
balance as per the Cash Book and adjust it to arrive at the balance per the
balance sheet (i.e. the same as in the first half of the bank reconciliation
statement shown above).
You then have a second section that starts with the balance as per the bank
statement and adjust it to once again to arrive at the balance per the
balance sheet. Either of these two approaches is perfectly acceptable and
both provide the same information.
 Other terms used in banking
1 Standing Orders. A firm can instruct its bank to pay regular amounts of money
at stated dates to persons or firms. For instance, you may ask your bank to pay £200
a month to a building society to repay a mortgage.
2 Direct Debits. These are payments which have to be made, such as gas bills,
electricity bills, telephone bills, rates, and insurance premiums. Instead of asking
the bank to pay the money, as with standing orders, you give permission to the
creditor to obtain the money directly from your bank account. This is particularly
useful if the amounts payable may vary from time to time, as it is the creditor who
changes the payments, not you. With standing orders, if the amount is ever to be
changed, you have to inform the bank. With direct debits it is the creditor who
informs the bank. Just as with anything else omitted from the Cash Book, items of
these types need to be included in the reconciliation and entered in the Cash Book
before balancing it off at the end of the period.
 Bank overdrafts
The adjustment needed to reconcile a bank overdraft according to the
firm’s books (shown by a credit balance in the Cash Book) with that
shown in the bank’s records are the same as those needed when the
account is not overdrawn.
Exhibit 30.4
Bank Reconciliation Statement as at 31 December 20X8
£
Overdraft as per cash book (380)
Add Unpresented cheque 63
(317)
Less Bank lodgement not on bank statement (106)
Overdraft per bank statement (423)

Note: You may find it confusing looking at this bank reconciliation

statement because the opening entry is an overdraft, i.e. a negative
number. Don’t be, the adjusting entries are the same as those you make
when it is positive:
• Exhibit 30.4 is of a Cash Book and a bank statement both showing an
overdraft. Only the cheque for G Cumberbatch (A) £106 and the
cheque paid to J Kelly (B) £63 need adjusting. Work through the
reconciliation statement and then see the note after it.
• Because the balance shown by the Cash Book is correct (and,
therefore, the balance that will appear in the balance sheet), you can
use the form of bank reconciliation statement shown in Section 30.2.
 £
Balance/overdraft per cash book xxxx
Adjustments
Unpresented cheque Plus
Bank lodgement not on bank statement Less
Balance/overdraft per bank statement xxxx
 Dishonoured cheques
When a cheque is received from a customer and paid into the bank, it is
recorded on the debit side of the Cash Book. It is also shown on the bank
statement as a deposit increasing the balance on the account.
However, at a later date it may be found that the customer’s bank will not
pay the amount due on the cheque. The customer’s bank has failed to
‘honour’ the cheque. The cheque is described as a dishonoured cheque.
There are several possible reasons for this. Imagine that K King paid a
business with a cheque for £5,000 on 20 May 20X9. The business
deposits it at the bank but, a few days later, the bank contacts the business
and informs it that the cheque has been dishonoured. Typical reasons are:
1. King had put £5,000 in figures on the cheque, but had written it in
words as ‘five thousand five hundred pounds’. A new cheque correctly
completed will need to be provided by King.
2. Normally cheques are considered stale six months after the date on the
cheque. In other words, banks will not honour cheques over six months
old. If King had put the year 20X8 on the cheque instead of 20X9, then
King’s bank would dishonour the cheque and King would need to be
asked for a correctly dated replacement.
3. King simply did not have sufficient funds in her bank account. Suppose
she had previously a balance of only £2,000 and yet she has made out a
cheque for £5,000. Her bank has not allowed her an overdraft in order to
honour the cheque. As a result, the cheque has been dishonoured. The
bank inform the business that this has happened and the business would
have to contact King, explain what has happened and ask for valid
payment of the account.
In all of these cases, the bank would record the original
entry in its records as being reversed. This is shown on
the bank statement, for example, by the entry
‘dishonoured cheque £5,000’. The business then makes
the equivalent credit entry in the Cash Book while, at
the same time, debiting King’s account by the same
amount.
When King originally paid the £5,000 the accounts in
the ledger and Cash Book would have appeared as:
 K King
20X9 £ 20X9 £
May 1 Balance b/d 5,000 May 20 Bank 5,000

Bank Account
20X9 £
May 20 K King 5,000

After recording the dishonoured cheque, the accounts would be:

 K King
20X9 £ 20X9 £
May 1 Balance b/d 5,000 May 20 Bank 5,000
May 25 Bank: cheque dishonoured 5,000

Bank Account
20X9 £ 20X9 £
May 20 K King 5,000 May 25 K King: cheque dishonoured 5,000

In other words, King is once again shown as owing the business £5,000.
• You have been preparing the accounts for another client, John Mensah. John has
commented that the bank balance in his accounts is always different from the balance
as per bank statement.
• In your working papers for John, you noted that:
• The reconciled bank balance at his last statement of financial position date was GHS2,573.
• The total value of cheque recorded for the accounting period in the cheque journal was
GHS147,684.
• The total value of lodgments recorded for the accounting period in the cash book was
GHS146,925.
• A cheque has been incorrectly recorded in the cheque journal with a value of GHS1,765. The
correct value of GHS1,675 had been debited on the bank statement.
• Standing orders totaling GHS3,600 had been debited by the bank, but had not been recorded in
the cheque journal.
• During the year, John had a short term surplus of cash and GHS40,000 was transferred to a
deposit account for a period of six weeks. When the deposit had matured, the original amount
of GHS40,000 together with the interest earned (GHS312) was credited by the bank to the
current account. None of these transactions had been recorded in Johns books.
• Bank charges of GHS563 had been debited by the bank, but had not been recorded in John’s
books
• A lodgment of GHS12,386 had been entered in the cash book on the last day of the accounting
period. This had not been credited on the bank statement until the second working day of the
next month.
• The following cheques were issued during the accounting period but
were not debited on the bank statement until after the end of the
accounting period:
• Cheque Number GHS
• 789256 1,425
• 789233 824
• 789241 681
• 789245 2,643
• The closing balance on the bank statement was GHS8,760 overdrawn.
 Activities
1. What might cause the two balances to be different?

2. With the current increase in electronic banking where customers

have access to all their bank account transactions, is the preparation
of the bank reconciliation still necessary?
Slide 37.1

Manufacturing accounts

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.2

Learning objectives
After you have studied this chapter, you
should be able to:
 Calculate prime cost and production cost of
goods manufactured
 Draw up a manufacturing account and
income statement
 Adjust the manufacturing account in
respect of work-in-progress

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.3

Manufacturing accounts
 Manufacturing businesses prepare a
manufacturing account, in addition to the
income statement, that is for internal use
only.
 Instead of a figure for purchases, the trading
account will contain the cost of manufacturing
the goods that were manufactured during the
period.
 The manufacturing account is used to
calculate and show the cost of manufacturing
those goods – the production cost.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.4

Divisions of costs
In a manufacturing business, costs are
divided into two types:

It is the prime and production cost items

that feature in the manufacturing account.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.5

Direct and indirect costs

 Any direct costs can be traced to an item being
manufactured.
 The sum of the direct costs is the prime cost.
 If a cost cannot be directly traced to the
manufactured product, it is considered an
indirect cost.
 Indirect costs are considered factory overheads
 The prime cost plus indirect costs is the
production cost.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.6

Other costs
There are other cost classifications in
manufacturing accounts.
 Administration expenses are any
managerial or office related expenses.
 Selling and distribution expenses are any
sales, marketing or advertising expenses.
 Financial charges are any bank related
charges and the cost of discounts allowed.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.7

The format of the financial statements

 The manufacturing account contains all
direct and indirect costs.
 The trading account follows the usual
format with the inclusion of the production
cost of goods completed.
 The profit and loss account contains all
administration expenses, selling and
distribution expenses and financial
charges.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.8

The financial statements

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.9

Example of a manufacturing
account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.10

Example of a manufacturing
account (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.11

Work-in-progress
 The production cost carried down to the
trading account is that of the production
cost of goods completed during the period.
 If any items have not been completed,
they cannot be sold and so should not
appear in the trading account.
 Therefore a calculation is needed to
decide on the transfer to the trading
account:
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.12

Work-in-progress (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.13

Activity

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.14

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.15

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.16

Apportionment of expenses
 Sometimes expenses will have to be split
between indirect manufacturing costs and
one of the profit and loss account
expenses such as administration or selling
expenses.
 In this situation, a method of
apportionment must be used to split the
expense.
 An example could be rent, which would be
apportioned using floor area.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.17

Learning outcomes
You should have now learnt:

1. Why manufacturing accounts are used

2. How to prepare a manufacturing account
and income statement
3. That the trading account section of the
income statement is used for calculating
the gross profit made by selling the goods
manufactured
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 37.18

Learning outcomes (Continued)

4. That the profit and loss account section of
the income statement shows as net profit
what is left of gross profit after all
administration, selling and distribution and
finance costs incurred have been
deducted
5. That work-in-progress, both at the start
and the close of a period, must be
adjusted so as to identify the production
costs of goods completed in the period
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
CORRECTION OF ERRORS AND
THE SUSPENSE ACCOUNT
• Errors occurring in the preparation of accounts can be
discussed and treated from two perspectives:
• Errors affecting the trial balance.
• Errors not affecting the trial balance
ERRORS NOT AFFECTING THE BALANCE SHEET
• Suppose we correctly entered cash sales GH¢70 to the debit of the Cash Book, but did not
enter the GH¢70 to the credit of the sales account. If this were the only error in the books, the
trial balance totals would differ by GH¢70. However, there are certain kinds of error which
would not affect the agreement of the trial balance totals, and we will now consider these:

• 1 Errors of omission – where a transaction is completely omitted from the books. If we sold
GH¢90 goods to J Brewer, but did not enter it in either the sales or Brewer’s personal account,
the trial balance would still ‘balance’.

• 2 Errors of commission – this type of error occurs when the correct amount is entered but in
the wrong person’s account, e.g. where a sale of GH¢11 to C Green is entered in the account
of K Green. It will be noted that the correct class of account was used, both the accounts
concerned being personal accounts.

• 3 Errors of principle – where an item is entered in the wrong class of account, e.g. if purchase
of a fixed asset, such as a van, is debited to an expenses account, such as motor expenses
account.
• 4 Compensating errors – where errors cancel each other out. If the sales account was added
up to be GH¢10 too much and the purchases account was also added up to be GH¢10 too
much, then these two errors would cancel out in the trial balance. This is because the totals of
both the debit side and the credit side of the trial balance will be GH¢10 too much.

• 5 Errors of original entry – where the original figure is incorrect, yet double entry is still
observed using this incorrect figure. An instance of this could be where there were sales of
GH¢150 goods but an error is made in calculating the sales invoice. If it were calculated as
GH¢130, and GH¢130 were credited as sales and GH¢130 were debited to the personal
account of the customer, the trial balance would still balance.

• 6 Complete reversal of entries – where the correct accounts are used but each item is shown
on the wrong side of the account. Suppose we had paid a cheque to D Williams for GH¢200,
the double entry of which is Cr Bank GH¢200, Dr D Williams GH¢200. In error it is entered as Cr
D Williams GH¢200, Dr Bank GH¢200. The trial balance totals will still agree.

• 7 Transposition errors – where the wrong sequence of the individual characters within a
number was entered. For example, GH¢142 entered instead of GH¢124. This is quite a
common error and is very difficult to spot when the error has occurred in both the debit and
the credit entries, as the trial balance would still balance. (It is more common for this error to
occur on one side of the double entry only.)
 CORRECTION OF ERRORS
• We make corrections to double entry accounts by preparing
journal entries. We should:

• 1 Show the corrections by means of journal entries, then

• 2 Show the corrections in the double entry set of accounts,

by posting these journal entries to the ledger accounts
affected.
ERROR OF OMMISSION
 ERROR OF COMMISSION

A purchase of goods, £44 from C Simons, was entered in error in

C Simpson’s account.
ERROR OF PRINCIPLE
Compensating Error
 Error of original entry

A sale of £38 to A Smailes was entered in the books as £28. It needs another
£10 of sales entering now.
 COMPLETE REVERSAL OF ENTRIES

A payment of cash of £16 to M Dickson was entered on

the receipts side of the Cash Book in error and credited
to M Dickson’s account. This is somewhat more difficult
to adjust. First must come the amount needed to
cancel the error, then comes the actual entry itself.
Because of this, the correcting entry is double the
actual amount first recorded.
TRANSPOSITION ERROR
ERRORS AFFECTING THE TRIAL BALANCE
• Incorrect additions in any account.
• Making an entry on only one side of the accounts, e.g. a debit but no credit; a
credit but no debit.
• Entering a different amount on the debit side from the amount on the credit side.

• We should try very hard to find errors when the trial balance totals are not equal.
When they cannot be found, the trial balance totals can be made to agree with
each other by inserting the amount of the difference between the two sides in a
suspense account.

• A suspense account is an account in the general journal that temporarily carries

any transactions for which there are doubts about the account in which they
should be recorded.
To make the two totals the same, a figure of GH¢40 for the suspense
account has been shown on the credit side of the trial balance. A suspense
account is opened and the GH¢40 difference is also shown there on the
credit side:
 Suspense account and the balance sheet
• If the errors are not found before the financial statements
are prepared, the suspense account balance will be
included in the balance sheet.

• Where the balance is a credit balance, it should be

included on the capital and liabilities side of the balance
sheet.

• When the balance is a debit balance it should be shown on

the assets side of the balance sheet.
 Corrections of errors affecting the trial
balance
• When the errors are found they must be corrected,
using double entry. Each correction must first have an
entry in the journal describing it, and then be posted
to the accounts concerned.
 Example 1
• Assume that the error of £40 as shown in Exhibit
33.1 is found in the following year on 31 March
20X6. The error was that the sales account was
under cast by £40. The action taken to correct
this is:
• Debit suspense account to close it: £40.
• Credit sales account to show item where it should
have been: £40.
 EXAMPLE
• The trial balance on 31 December 20X6 had a difference of
£168. It was a shortage on the debit side.
• A suspense account is opened, and the difference of £168 is
entered on the debit side. On 31 May 20X7 the error was found.
• We had made a payment of £168 to K Leek to close his
account. It was correctly entered in the Cash Book, but was not
entered in K Leek’s account.
 More than one error
• The trial balance at 31 December 20X7 showed a difference of £77, being a
shortage on the debit side. A suspense account is opened, and the difference
of £77 is entered on the debit side of the account.

• On 28 February 20X8 all the errors from the previous year were found.

• (A) A cheque of £150 paid to L Kent had been correctly entered in the Cash
Book, but had not been entered in Kent’s account.
• (B) The purchases account had been under cast by £20.
• (C) A cheque of £93 received from K Sand had been correctly entered in the
Cash Book, but had not been entered in Sand’s account.
• These three errors resulted in a net error of £77, shown by a debit of £77 on
the debit side of the suspense account.
 ERRORS AND THE FINANCIAL STATEMENTS

Some of the errors will have meant that original profits calculated will be wrong. Other errors will have no effect
upon profits. We will use Exhibit 33.5 to illustrate the different kinds of errors. Exhibit 33.5 shows a set of
financial statements in which errors have been made.
Errors which do not affect profit calculations
• If an error affects items only in the balance sheet, then the
original calculated profit will not need altering. Example 1
shows this.
• Assume that in Exhibit 33.5 the £80 debit balance on the
suspense account was because of the following error:

• On 1 November 20X5 we paid £80 to a creditor T Monk. It

was correctly entered in the Cash Book. It was not entered
anywhere else. The error was found on 1 June 20X6.
 Errors which affect profit calculations
• If the error is in one of the figures shown in the trading and
profit and loss account, then the original profit will need
altering. Example 2 shows this.

• Assume that in Exhibit 33.5 the £80 debit balance was

because the rent account was added up incorrectly. It should
be shown as £8,480 instead of £8,400. The error was found on
1 June 20X6.
 Where there have been several errors
• If in Exhibit 33.5 there had been four errors in the ledger accounts
of K Davis, found on 31 March 20X6, their correction can now be
seen. Assume that the net difference had also been £80.
• (A) Sales overcast by £90
• (B) Insurance under cast by £40
• (C) Cash received from a debtor entered in the Cash Book only £50
• (D) A purchase of £59 is entered in the books, debit and credit
entries as £95
•Thank you
Slide 35.1

Single entry and incomplete

records

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.2

Learning objectives
After you have studied this chapter, you
should be able to:
 Deduce the figure of profits where only the
increase in capital and details of drawings
are known
 Draw up an income statement and
statement of financial position from
records not kept on a double entry system

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.3

Learning objectives (Continued)

 Deduce the figure for cash drawings when
all other cash receipts and cash payments
are known
 Deduce the figures of sales and purchases
from incomplete records

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.4

Why double entry is not used

 Many small business owners keep their
records by using a single entry system
comprising a cash book and a list of
debtors and creditors.
 This may be because they simply do not
know double entry bookkeeping.
 However, they will have to prepare their
financial statements each year.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.5

Profit as an increase in capital

 If you know the capital figure at the start
and end of a period, you can work out the
profit figure for the year:
Net profit = This year’s capital − Last year’s capital

 If there are drawings, this would be worked

out as:
Last year’s capital + profits − drawings = This year’s
capital

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.6

Activity

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.7

Activity (Continued)
Stage 1

Draw up a Statement of Affairs on the

closing day of the earlier accounting
period.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.8

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.9

Activity (Continued)
Stage 2

Prepare a cash and bank summary,

showing the totals of each separate item,
plus opening and closing balances.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.10

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.11

Activity (Continued)
Stage 3

Calculate the figures for purchases and

sales to be shown in the trading account.
Remember that the figures needed are the
same as those which would have been
found if double entry records had been
kept.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.12

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.13

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.14

Activity (Continued)
Stage 4

Where there are no accruals or

prepayments either at the beginning or
end of the period, then the expenses paid
will be the income statement figure.
However, where accruals or prepayments
exist, an expense account should be
drawn up for that particular item.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.15

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.16

Activity (Continued)
Stage 5

Now draw up the financial statements.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.17

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.18

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.19

Dealing with missing figures

 Often there is missing information relating
to cash receipts or payments.
 If the missing information is one type of
payment, then it is normal to assume that
the missing figure is the amount required
to make both totals agree in the cash
column of the cash book.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.20

Activity

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.21

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.22

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.23

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.24

Learning outcomes
You should have now learnt:

1. The difference between a single entry

system and a double entry system.
2. How to calculate net profit for a small
trader when you know the changes in
capital over a period and the amount of
drawings during the period.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 35.25

Learning outcomes (Continued)

3. How to prepare an income statement and
statement of financial position from
records not kept on a double entry system.
4. How to deduce the figures for purchases
and sales from a total accounts payable
account and a total accounts receivable
account.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 36.1

Receipts and payments accounts

and income and expenditure
accounts

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.2

Learning objectives
After you have studied this chapter, you
should be able to:

 Explain the main differences between the

financial statements of non-profit-oriented
organisations and those of profit-oriented
organisations

 Prepare receipts and payments account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.3

Learning objectives (Continued)

 Prepare income and expenditure accounts
and statements of financial position for
non-profit-oriented organisations
 Calculate profits and losses from special
activities and incorporate them into the
financial statements
 Make appropriate entries relating to
subscriptions, life membership and
donations
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.4

Non-profit-oriented organisations
 When an accountant talks about non-profit-
oriented organisations, they mean charities,
clubs and associations.

 These are organisations run for the benefit of

their members.

 Rather than producing income statements, they

prepare receipts and payments accounts.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.5

Receipts and payments accounts

 Receipts and payments accounts are a
summary of the cash book for the period.

 They can reveal everything that has

happened financially during the period.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.6

A receipts and payments account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.7

Income and expenditure accounts

Where there are assets and/or liabilities within the
organisation, the following statements are also
required:

 A statement of financial position detailing the

assets, liabilities and accumulated fund (capital).

 An income and expenditure account shows either

a surplus of income over expenditure (profit), or a
deficit of income over expenditure (loss), and
may include other trading accounts for activities
designed to make a profit.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.8

Terms used
 An income and expenditure account follows
the same rules as a trading and profit and
loss account.

 The only differences are the terms used

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.9

Activity

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.10

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.11

Activity (Continued)
Stage 1

Draw up a Statement of Affairs at the end

of the previous period in order to identify
the balance on the Accumulated Fund
brought forward.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.12

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.13

Activity (Continued)
Stage 2

Draw up a bar trading account.

Note – you will need to draft T-accounts to

calculate the figure for creditors and the
figure for bar expenses.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.14

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.15

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.16

Activity (Continued)
Stage 3

Draw up the financial statements.

Note – you will have to draft T-accounts to

calculate the figures for subscriptions
received and transport costs.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.17

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.18

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.19

Activity (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.20

Accounting for subscriptions

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.21

Accounting for subscriptions (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.22

Dealing with subscriptions

 Many subscriptions owing are never paid, so
many clubs do not include unpaid subs as an
asset in the statement of financial position.
 Many clubs accept a life membership charge
which entails a one-off payment. This payment
is credited to a life membership account and
transferred into the income and expenditure
account over a suitable period.
 Donations and entrance fees for new members
are shown as income in the year that they are
received.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.23

Learning outcomes
You should have now learnt:
1. That a receipts and payments account does
not show the full financial position of an
organisation, except for one where the only
asset is cash and there are no liabilities
2. That an income and expenditure account is
drawn up to show either the surplus of
income over expenditure or the excess of
expenditure over income. These are the
same as ‘profit’ or ‘loss’ in a profit-oriented
organisation

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.24

Learning outcomes (Continued)

3. That the accumulated fund is basically the
same as a capital account
4. That although the main object of the
organisation is non-profit-oriented, certain
activities may be run at a profit (or lose
money) in order to help finance the main
objectives of the organisation
5. That in an examination you should treat
subscriptions owing at the end of a period
in the same way as accounts receivable,
unless told otherwise
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
Slide 36.25

Learning outcomes (Continued)

6. That donations are usually treated as
income in the period in which they are
received
7. That entrance fees are usually treated as
income in the year in which they are
received
8. That the treatment of life membership fees
is purely at the discretion of the
organisation, but that they are usually
amortised over an appropriate period
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012
 Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana

ACF 255 PRINCIPLES OF ACCOUNTING 1

INTRODUCTION TO PARTNERSHIP ACCOUNTING

AKUA PEPRAH-YEBOAH
([email protected])

DEPARTMENT OF ACCOUNTING AND FINANCE

KNUST SCHOOL OF BUSINESS
 THE NEED FOR PARTNERSHIPS
Two or more people may form themselves into a
partnership. This is a long-term commitment to operate in
business together. The people who own a partnership are
called partners.

They do not have to be based or work in the same place,

though most do. However, they maintain one set of
accounting records and share the profits and losses.. By
forming a partenership, the level of risk is reduced. Firstly,
any loss can be shared by all the partners and, secondly, by
involving more than one person’s expertise, the chances of
failure are reduced.

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DEFINITION OF PARTNERSHIPS
According to the INCORPORATED PRIVATE PARTNERSHIPS ACT, 1962 (ACT 152)
of Ghana,
(1) Partnership means the association of two or more individuals carrying on
business jointly for the purpose of making profits except

(a) a company registered under the Companies Ordinance, (Cap. 193), or any
statutory re-enactment thereof, unless it is re-registered hereunder in
accordance with section 59 of this Act and the Second Schedule hereto;

(b) a company, body corporate, or unincorporated association formed under any

other enactment;

(c) a body corporate formed in accordance with the law of any foreign country
whether or not carrying on business in Ghana; or

(d) a joint venture without a firm name for one or more specific operations, shall
not be a partnership within the meaning of this Act.

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DEFINITION OF PARTNERSHIPS
(2) Family ownership or co-ownership of property shall not
of itself create a partnership whether or not the family or
co-owners share any profits made by the use of that
property.

(3) Subject as aforesaid, the sharing of the net profits of a

business shall, prima facie, be evidence of a partnership,
but,

(a)the remuneration of a servant or agent of a person

engaged in business by a share of profits of the
business shall not of itself make the servant or agent
a partner; and
(b) a person shall not be deemed to be a partner if it is
shown that he did not participate in the carrying on
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of the business and was not authorised so to do.

 LIMITED PARTNERSHIPS
Limited partnerships are partnerships containing one or more
limited partners.

Limited partnerships must be registered with the Registrar of

Companies. Limited partners are not liable for the debts as in
Section 41.2 (4) above.
Limited partners have the following characteristics and
restrictions on their role in the partnership:

1 Their liability for the debts of the partnership is limited to

the capital they have put in. They can lose that capital, but
they cannot be asked for any more money to pay the debts
unless
they contravene the regulations relating to their involvement
in the partnership
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 LIMITED PARTNERSHIPS
2 They are not allowed to take out or receive back any part
of their contribution to the partnership during its lifetime.

3 They are not allowed to take part in the management of

the partnership or to have the power to make the
partnership take a decision. If they do, they become liable
for all the debts and obligations of the partnership up to the
amount taken out or received back or incurred while
taking part in the management of the partnership.

4 All the partners cannot be limited partners, so there must

be at least one general partner with unlimited liability.

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PARTNERSHIP AGREEMENTS
Agreements in writing are not necessary.
However, it is better if a written agreement is
drawn up by a lawyer or an accountant. Where
there is a proper written agreement there will
be fewer problems between partners. A written
agreement means less confusion about what
has been agreed.

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 CONTENTS OF PARTNERSHIP AGREEMENTS
The written agreement can contain as much, or as little, as the partners
want. The law does not say what it must contain. The usual accounting
contents are:

1 The capital to be contributed by each partner.

2 The ratio in which profits (or losses) are to be shared.
3 The rate of interest, if any, to be paid on capital before the profits are
shared.
4 The rate of interest, if any, to be charged on partners’ drawings.
5 Salaries to be paid to partners.
6 Arrangements for the admission of new partners.
7 Procedures to be carried out when a partner retires or dies.

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 CAPITAL CONTRIBUTIONS
Partners need not contribute equal amounts of capital.
What matters is how much capital each partneragrees to
contribute. It is not unusual for partners to increase the
amount of capital they have invested in the partnership.

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 PROFIT (OR LOSS) SHARING RATIOS
Partners can agree to share profits/losses in any ratio or any way that they
may wish. However, it is often thought that profits should be shared in the
same ratio as that in which capital is contributed. For example, suppose the
capitals were Allen £40,000 and Beet £20,000.
Some would assume that the partners would share the profits in the ratio of
two-thirds to one-third, even though the work to be done by each partner is
similar. The division of the first few years’ profits on such a basis might be:

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Overall, Allen would receive £184,000, i.e. £92,000 more than
Beet. As the duties of the partners are the same, in order to
treat each partner fairly, the difference between the two
shares of profit should be adequate to compensate Allen for
putting extra capital into the firm. It should not be excessive.
It is obvious that £92,000 extra profits is excessive, as Allen
only put in an extra £20,000 as capital. Consider too the
position of capital ratio sharing of profits if one partner puts
in £99,000 and the other puts in £1,000 as capital. To
overcome the difficulty of compensating fairly for the
investment of extra capital, the concept of interest on
capital was devised.

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 INTEREST ON CAPITAL
If the work to be done by each partner is of equal value but
the capital contributed is unequal, it is reasonable to pay
interest on the partners’ capitals out of partnership profits.
This interest is treated as a deduction prior to the
calculation of profits and their distribution among the
partners
according to the profit sharing ratio.
The rate of interest is a matter of agreement between the
partners, but it should equal the return which they would
have received if they had invested the capital elsewhere.
Taking Allen and Beet’s firm again, but sharing the profits
equally after charging 5 per cent per annum interest on
capital, the division of profits would become:

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Allen has thus received £5,000 more than Beet, this being
adequate return (in the partners’ estimation) for having
invested an extra £20,000 in the firm for five years.

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 INTEREST ON DRAWINGS
It is obviously in the best interests of the firm if cash is withdrawn from
the firm by the partners in accordance with the two basic principles of:
(a ) as little as possible, and
(b ) as late as possible.

The more cash that is left in the firm the more expansion can be financed,
the greater the economies of having ample cash to take advantage of
bargains and of not missing cash discounts because cash is not available
and so on.
To deter the partners from taking out cash unnecessarily the concept can
be used of charging the partners interest on each withdrawal, calculated
from the date of withdrawal to the end of the financial year. The amount
charged to them helps to swell the profits divisible between the partners.
The rate of interest should be sufficient to achieve this without being too
harsh.

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Suppose that Allen and Beet have decided to charge interest on drawings at 5
per cent per annum, and that their year end was 31 December. The following
drawings are made:

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 Partnership salaries
One partner may have more responsibility or tasks than the
others. As a reward for this, rather than change the profit
and loss sharing ratio, the partner may have a partnership
salary which is deducted before sharing the balance of
profits.

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 Performance-related payments
to partners
Partners may agree that commission or performance-
related bonuses be payable to some or all the partners
linked to their individual performance. As with salaries,
these would be deducted before sharing the balance of
profits.

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 An example of the distribution
of profits
Taylor and Clarke have been in partnership for one
year sharing profits and losses in the ratio of Taylor
3/5, Clarke 2/5. They are entitled to 5 per cent per
annum interest on capitals, Taylor having £20,000
capital and Clarke £60,000. Clarke is to have a salary
of £15,000. They charge interest on drawings, Taylor
being charged £500 and Clarke £1,000. The net
profit, before any distributions to the partners,
amounted to £50,000 for the year ended 31
December 20X7.
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www.knust.edu.gh
 THE FINANCIAL STATEMENTS
If the sales, stock and expenses of a partnership were exactly
the same as that of a sole trader, then the trading and profit
and loss account would be identical with that as prepared for
the sole trader. However, a partnership would have an extra
section shown under the profit and loss account. This section
is called the profit and loss appropriation account, and it is in
this account that the distribution of profits is shown. The
heading to the trading and profit and loss account
for a partnership does not normally include the words
‘appropriation account’. It is purely an accounting custom not
to include it in the heading.

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The profit and loss appropriation account of Taylor and
Clarke from the details given would be

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 FIXED AND FLUCTUATING CAPITAL
ACCOUNTS
The capital account for each partner remains year by year at
the figure of capital put into the firm by the partners. The
profits, interest on capital and the salaries to which the
partner may be entitled are then credited to a separate
current account for the partner, and the drawings and the
interest on drawings are debited to it. The balance of the
current account at the end of each financial year will then
represent the amount of undrawn (or withdrawn) profits. A
credit balance will be undrawn profits, while a debit balance
will be drawings in excess of the profits to which the partner
was entitled.
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For Taylor and Clarke, capital and current accounts,
assuming drawings of £15,000 for Taylor and £26,
000 for Clarke will be:

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CURRENT ACCOUNTS

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COLUMNAR ACCOUNTS

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 FLUCTUATING CAPITAL
ACCOUNTS
The distribution of profits would be credited
to the capital account, and the drawings
and interest on drawings debited. Therefore
the balance on the capital account will
change each year, i.e. it will fluctuate.
41.9

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If fluctuating capital accounts had been kept for Taylor and
Clarke they would have appeared

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 THE BALANCE SHEET
For the partnership, the capital part of the balance sheet will appear:

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THE END

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