BED 121

PRINCIPLES OF BOOKKEEPING AND

ACCOUNTING
BED 121 Principles of Bookkeeping &
Accounting II

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BED 121 Principles of Bookkeeping &
Accounting II

UNIT 1 FINAL ACCOUNT

INTRODUCTION
This course is designed to acquaint students with what constitutes the final account and
the methods use in determining the items.

WHAT YOU WILL LEARN

You will learn about the trading, profit and loss account and the balance sheet.

OBJECTIVES
By the end of this unit,you should be able to determine:
 All the accounts involved in the adjustment;
 Gross profit; and
 Net profit.

HOW TO STUDY THIS UNIT

Read through and practice to understand the unit. Also periodic lecture contacts,
excursions, tests, and exams are part of the efficient and effective teaching and learning
exercise.

DEFINITION OF FINAL ACCOUNT

The term final account refers to the trading, profit and loss account and the balance sheet.
The main objective of the accounting function is the preparation of these accounts to
determine the profit earned by the business and the general state of affairs of the business.
It’s necessary for the managerial decision-making expansion.

The Components of Final Accounts

The components of final accounts are: trading account, profit and loss accounts and
balance sheet.

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Profit: Profit arises as a result of the product of matching expenses (accrued and prepaid)
against revenue.
Gross Profit: This is earned by selling goods at a higher price than their cost. To
calculate gross profit, the cost must be deducted from the selling price.
Illustration
Ahmad bought stock for N2,000 and sold it for N2,500. Determine the gross profit of
Ahmad.

Solution
Gross profit = selling price – cost price
= N2,500 – N2,000
Gross profit = 500

Net profit
This is what remains of the gross profit after the necessary expenses of running the
business have been deducted. If the expenses exceed the gross profit, then a net loss will
result.

Illustration
Haruna’s gross profit is N4,200 and his expenses is N1,800. What is his net profit?

Solution
Net Profit = Gross profit – Expenses
= N4,200 – N1,800
Net Profit = N2,400

Illustration
Haruna’s gross profit is N2,500 and his expenses amounted to N3,000. Determine
Haruna’s profit/loss.

Profit/loss = N2,500 – N3,000

= (N500)
Net loss = N500

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ADJUSTMENT IN FINAL ACCOUNTS

Accrued Expenses
Accrued expenses are those expenses incurred during the year, but are yet to be paid at
the end of the year. For example, a trader has paid “rent” for eleven months at the rate of
N30 a month and at 31st December, the end of this financial year, he has December
“rent” still,this must then be taken into consideration when preparing the final accounts,
otherwise the net profit will be overstated by N30 or loss understated by the same
amount.

Dr. Rent Account (working) Cr.

Date N Date N
Jan. 1 Cash 330 Dec. 31 Profit and loss A/C 360
Dec. 31 Balance (accrued) c/d 30
360 360
Jan. 1 Balance b/d 30

Dr. Profit and Loss A/C (extract) for the year ended 31/12/08 Cr.
Rent (working 1) 360

Or

Rent 330
Add: Accrual 30 360

Dr. Profit and Loss A/C (extract) for the year ended 31/12/08 Cr.
N
Current Liabilities
Rent Accrued 30

So, when the rent for December is eventually paid in the new period, rent account will be
debited thus cancelling the liability brought forward from the old period.

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Payment in Advance
Prepaid expenses are those expenses that were paid in advance or ahead of time. As profit
and loss reflects current condition, all expenses that go to the P&L Account whether
actually paid or not must be expenses relating to the accounting period under review.
Therefore, prepaid expenses must be adjusted to ensure that only the proportion relating
to the current accounting period is taken into consideration. This is done by crediting the
appropriate expense account with the amount carried forward for the unexpired period
and bringing this down as a debit representing an asset.

It is shown as a deduction from the original figure in the profit and loss account and again
appears under current assets in the Balance Sheet.

Illustration
Included in the Trial Balance at 31st December, 2007 is a debit balance of N120 in
respect of Insurance Premium paid within the year to cover the period 1st May to 30th
April of the following year.

Dr. Insurance (working) Cr.

Date N Date N
May 1 Cash 120 Dec. 31 Profit and loss A/C 80
” 31 Balance prepaid) c/d 40
120 120
Jan. 1 Balance (prepaid) b/d 40

Dr. Profit and Loss A/c (Extract) for the year ended 31/12/07 Cr.
Rent (working 1) 80

Or

Rent 120
Add: Accrual 40 80
Balance Sheet (Extract) as at 31st December, 2007
N
Current Assets
Insurance prepaid 40

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The amount transferred to the Profit and Loss A/C covers the period 1st May to 31st
December (eight months). The balance of N40 carried forward is to be charged against
the following year’s profit.

Bad Debts
Bad debts are debts that have been proved to be bad, i.e. they cannot be recovered or
rather they are irrecoverable. This may be due to the death of the debtor or has become
bankrupt.
Where a debt is known to be bad, it is always written off to the profit and loss account as
a loss. If such a debt is not written off, the effect is that, the figure of the debt will inflate
the total assets figure and moreover, the profit will be overstated.
The book-keeping entry in respect of a bad debt is a debit to bad debts account and a
credit to the debtor’s account in the ledger.

Illustration
On 30th April, 2007, the end of the trading year, HUAG & Co. decides to write off the
following debts which have been outstanding since the beginning of the year and
consequently considered bad: Babangida N25, Lawal N40. Show the relevant entries in
the books of account to affect this.

SALES LEDGER
Dr. Babangida Account Cr.
Date N Date N
May 1 Balance b/d 25 Apr 30 Bad debts A/C 25

Dr. Lawal Account Cr.

Date N Date N
May 1 Balance b/d 40 Apr 30 Bad debts A/C 40

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GENERAL LEDGER
Dr. Bad Debt Account Cr.
Date N Date N
Apr. 30 Babangida A/C 25 Apr 30 Profit & Loss A/C 65
Apr. 30 Lawal A/C 40 __
65 65

Profit and Loss A/c (Extract) for the year ended 30/4/07
Bad debts 65

FORMAT OF FINAL ACCOUNT

Trading, Profit and Loss Account for the Year Ended 31st Dec. 200Y
Opening stock xxx Sales xxx
Add: Purchases xxx Less: Return inwards (xxx)
Carriage inward xxx
Less: Return outwards (xxx) xxx
Cost of goods available for sales xxx
Less: Closing stock (xxx)
Cost of goods sold xxx
Gross profit c/d xxx
xxx xxx

Less Expenses Gross profit b/d xxx

Insurance xxx Add: Any revenue xxx xxx
Admin. Expenses xxx
General expense xxx
Motor vehicle expenses xxx
Rent & rates expenses etc. xxx xxx
Net profit c/d xxx
xxx xxx

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Balance sheet as at 31st December, 200Y

Fixed Asset Cost Acc. Dep. NBV
Capital xxx Motor vehicle xxx xxx xxx
Add: Net profit xxx Features & fit. xxx xxx xxx
xxx
Less Drawings (xxx) Current Asset
xxx Stock xxx
Liabilities Debtors xxx
Creditors xxx Less: Prov. For Bad Debt (xxx) xxx
Accruals xxx Cash in hand xxx
Bank overdraft etc. xxx Cash at Bank xxx
Prepaid etc. xxx
xxx xxx
If the current liabilities exceed the current assets that means the business must sell its
Fixed Assets to meet up the payments of its debts thereby pointing to the fact that the
business is temporarily insolvent and the size of the business about to reduce.
The fixed assets total is added to the working capital, from this now total, any loan is
deducted to get the network which is equal to the new capital figure.
The net worth is simply what the business now owns or what it is worth after deducting
all liabilities.
This net worth is provided by or as shown in the format financed by the capital employed
adding net profit and deducting drawings.

Illustration 1
HUAG & Co. Enterprises drew up the trial balance below on 30th September 2007
N N
Capital 26,900
Drawings 7,750
Cash at Bank 3,005
Cash in Hand 405
Debtors/Creditors 3,250 15,375

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Stock, October 1, 2007 20,910

Motor Van (at cost) 6,100
Building 11,420
Office furniture (at cost) 5,200
Purchases /sales 92,490 131,850
Returns 460 557
Carriage Inwards 265
Carriage Outwards 337
Motor Expenses 1,602
Rent 2,850
Telephone charges 575
Wages & salaries 12,112
Insurance 691
Sundry Expenses 5,260
194,682 194,682

Stock in trade at 30 September,2007 N27,175

Building Extension of N3,050 on April 2007 is included in the sundry expenses.
Prepaid Insurance N60, Accrued Rent N650. Of the debtors N200 are to be regarded bad,
and 2% of the remaining debtors as provision for bad debt.
Depreciation is to be provided on Motor Van 10% and on furniture 5%.

Required:
A vertical presentation of trading, profit and loss accounts for the year ended 30 Sept.
2007 and a vertical presentation of balance sheet as at that date.

Solution
Keep it up
Trading, Profit and Loss Account for the year Ended 30 September 2007
N N N
Sales 131,850
Less: Return Inwards 460
131,390
Less Cost of Goods sold:
Opening stock 20,910
Add purchases 92,490
Carriage inwards 265
113,665
Less Return Outwards 557

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Cost of Good Available for sale 113,108

Less Closing stock 27,175 85,933
GROSS PROFIT 45,457
LESS EXPENSES:
Carriage Outwards 337
Motor Expenses 1,602
Rent 2,850
Add accruals 650 3,500
Wages and salaries 12,112
Insurance 691
Less prepayment 60 631
Telephone charges 575
Sundry expenses 5,260
Less building extension 3,050 2,210
Depreciation: Motor Van 610
Furniture 260
Bad Debts 200
Provision for Bad debts 61 261 22,098
NET PROFIT 23,359

BALANCE SHEET AS AT 30th SEPTEMBER, 2007

Assets Employed Cost Depreciation Balance
Fixed Assets N N N
Building 11,420
Add Extension 3,050 14,470
Furniture 5,200 260 4,940
Motor Van 6,100 610 5,400
25,770 870 24,900
Current Assets
Stock 27,175
Debtors 3,050
Less provision for bad debt 61 2,989
Insurance prepaid 60
Bank balance 3,005
Cash in hand 405
33,634
Less Current Liabilities
Creditors 15,375
Rent Outstanding 650 16,025
NET CURRENT ASSETS 17,609
42,509

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ACTIVITY/ASSIGNMENT
1. The following Trial balance was extracted from the books of A. L. Salihu at the
close of business on 28 February, 1997.
DR CR
N N
Purchases/sales 11,280 19,740
Cash at bank 1,140
Cash in hand 210
Capital account 1.03.96 9,900
Drawings 2,850
Office furniture 1,440
Rent 1,020
Wages and salaries 2,580
Discounts 690 360
Debtors and creditors 4,920 2,490
Stock (1.03.96) 2,970
Provision for bad and doubtful
debts(1.03.96) 270
Delivery van 2,400
Van running costs 450
Bad debts written off 810
32,760 32,760
Adjustments
a) Stock 28 February 1997 – N3,510
b) Wages and salaries accrued at 28 February 1997 – N90
c) Rent prepaid at 28 February 1997 – N140
d) Van running costs in arrears at 28 February 1997 – N60
e) Provide the depreciation as follows: Office furniture – N180. Delivery van –
N480.

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Required
Draw up the trading and profit and loss accounts for the year ending 28 February, 1997
together with a balance sheet as at that date.

MODEL ANSWERS
1-Trading account-gross profit=#9000+discount received #360=#9360.
2-Net profit=#3080.
3-Balancesheet-debit=#12,770 & credit=#12,770

SUMMARY
In this unit we have discussed and learn about the trading,profit and loss account and
balance sheet and items such as gross profit and net profit.

BIBLIOGRAPHY

Omuya, J. O. Frank wood’s Business Accounting 1(West African Edition)

Omuya, J. O. Frank wood’s Business Accounting 2 (West African Edition)
Adeniyi, S. O.Basic Accounting
Adeniyi, S. O.An Introduction to Bookkeeping and Accounts
Idris, Y. H. Introduction to Basic Accounting
Lecture Note by Salaudeen O. Omotosho Dept of Accounting.
Frank Wood’s Business Accounting 1(Eleventh Edition): FT prentice Hall.

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UNIT 2 DEPRECIATION

INTRODUCTION
This course is designed to equip the student with the knowledge and techniques involved
in determining the value lost by assets in the course of usage.

WHAT YOU WILL LEARN

You will learn about the Depreciation, its causes, its applications, advantages,
disadvantages and different methods that can be usedin determining it.

OBJECTIVES
By the end of this unit,you should be able to:
 explain the term depreciation;
 identify the assets affected; and
 determine the cost involved.

HOW TO STUDY THIS UNIT

Read through and practice to understand the unit.Also periodic lecture contacts,
excursions, tests, assignment, and exams are part of teaching, learning exercise.

DEFINITION
Depreciation is a lost value of a fixed asset due to physical deterioration, obsolescence or
passage of time i.e. a loss or decline or reduction in the value of an Asset.
Depreciation is part of the expenses incurred when conducting a business. It will
therefore reduce the profit like any other form of expenses and reduces the position of the
asset at the balance sheet date. The whole exercise of depreciation is therefore a matter of
estimates based on the experience and knowledge of management rather than of accurate
determination.

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Causes of Depreciation
Several factors individually or jointly are responsible for depreciation of an asset. Among
such are through:
1. Wear and Tear in use as in the case of machinery, furniture, and fittings, loose
tools, motor vans and lories etc.
2. Effluxion or passage of time as in the case leases of factories and other buildings
and patent rights.
3. Obsolescence where, for example, a machine is rendered out of date through the
invention of a more efficient machine.

Methods of Calculating Depreciation

1. Straight line/equal installment method
2. Reducing/diminishing method
3. Annuity method
4. Sinking fund method
5. Revaluation method
But for the purpose of this lecture, we shall be considering the first two methods.

Straight line method

This is a situation where equal amount is charged as depreciation each year throughout
the expected life of an asset. The amount of annual depreciation charges can be
determined by this formula:
𝐶−𝑆
DA =
𝑛

Where: DA = Annual depreciation provision

C = Cost of the asset
S = Scrap value (at the end of its useful life)
n = Number of years (i.e. expected life span)

Illustration:
A motor van cost N16,000 with an estimated scrap value of N500 and an expected life of
5 years. Compute depreciation provision per annum.

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𝐶−𝑆
DA =
𝑛

𝑁16,000 –𝑁500
=
5

𝑁15,500
=
5

= N3,100

Equal annual depreciation provision can also be determined through percentage rate, for
example 5% or 10%.

Advantages of straight line method

i. It is very easy to operate.
ii. The assets can be completely written off at the end of a determinable number of
years.

Disadvantages
1. Assets do not usually depreciate by a similar amount each year and so by writing
down the assets in fixed proportion of the cost each year, the amount so charged
may be disproportionate to its real loss in value.
2. There is also the added difficulty of depreciating additional assets particularly
plant and machinery where no detail plant register is kept.

Reducing (Diminishing) Balance Method

By this method a reducing charge for depreciation is apportioned for each year of the
expected use of asset. The computation of annual depreciation under this method is
administered by a fixed percentage rate, say 10% or 20% per annum.

The formula used to calculate the percentage rate (r)is represented by:
1−𝑛 𝑠
r= √
𝑐

Where: r = rate of depreciation to be applied

n = number of years
s = scrap value
c = cost of the asset

Applying the formula to the illustration given under the straight line method above, the
rate is calculated as below:
1−𝑛 𝑠
r= √
𝑐

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Given that n = 5 years, s = N500 and c = N16,000

Therefore,
1−5 500
r = √
16,000
= 1 – 0.5
= 0.5 or50% (if multiply by 100%)

Therefore, the rate to be applied is thus 50%.

After the depreciation rate (r) is known, annual depreciation will be computed thus:
Department per annum (N) = r x (cost – accumulated depreciation to date).

The computation of the depreciation for the 5 years using the percentage rate is shown
below:
1991 January 1 Cost of Asset 16,000
December 31 Depreciation at 50% of N16,000 8,000
1992 January 1 Reducing balance at the end of 1991 8,000
December 31 Depreciation at 50% of N8,000 4,000
1993 January 1 Reducing balance at the end of 1992 4,000
December 31 Depreciation at 50% of N4,000 2,000
1994 January 1 Reducing balance at the end of 1993 2,000
December 31 Depreciation at 50% of N2,000 1,000
1995 January 1 Reducing balance at the end of 1994 1,000
December 31 Depreciation at 50% of N1,000 500
Scrap value after 5 years 500

Summary of Annual Depreciation

1991 Provision for Depreciation 8,000
1992 Provision for Depreciation 4,000
1993 Provision for Depreciation 2,000
1994 Provision for Depreciation 1,000
1995 Provision for Depreciation 500

Advantages of Reducing Balance Method

i. Depreciation charges are high in the initial year and the repair and the
maintenance cost light or low, while in the later year when the repairs and
maintenance cost tend to rise, the depreciation charge decreases.
ii. The Asset losses efficiency as it gets older and the charge for depreciation should
decreases accordingly.
iii. It is simple in operation and is useful as a method of depreciation when the life of
the asset cannot be estimated with reasonable accuracy since the asset is never
written off completely.

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Disadvantages
i. The danger that too low a percentage may be adopted with the result that over the
life of the asset full depreciation will not be provided.
ii. Due to its simplicity assets are grouped in such a way that individual assets are
difficult to identify and residue of each may be left in the asset account even after
the assets have been scrapped.

The following accounts are prepared under each method of depreciation:

a. Asset account
b. Provision for depreciation account for each asset
c. Profit and loss account (extract)
d. Balance sheet (extract)

For examination purpose, the students should note that when an asset is used for only a
short period in a year, the depreciation on that asset should only be calculated bearing
that period of use in mind, unless if you are told otherwise. For example, if an asset is
bought when the accounting year had three months left, only 3/12 of depreciation on that
asset would be charged for the period.

Illustration
A firm starts trading on 1st January, 2005. Depreciation on its machines is at the rate of
10% per annum by the straight line method, machines being depreciated for each
proportion of a year. The following transaction took place in respect of machines
(payments for machines are by cheques).
2005, 1 January 1 machine costing N1,200
2006, 1 July 1 machine costing N900
2007, 1 September 2 machine costing N750 each
2008, 1 May 1 machine costing N300

Required: Show:
a. The machinery account
b. The provision for depreciation account
c. The profit and loss account and balance sheet extracts.
For each of the four years; 2005, 2006, 2007 and 2008.

Solution
Dr. Machinery Account Cr.
Date N Date N
2005 1,200 2005 ____
Jan. 1 Bank 1,200 Dec. 31 Balance c/d 1,200

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2006 2006
Jan. 1 Balance b/d 1,200 Dec.31 Balance c/d 2,100
July. 1 Bank 900 _____
2,100 2,100

2007 2007 ____

Jan. 1 Balance b/d 2,100 Dec.31 Balance c/d 3,600
Sept.1 Bank 1500
3,600

2008 2008
Jan.1 Balance b/d 3,600 Dec.31 Balance c/d 3,900
May 1 Bank 300 ____
3,900 3,900
2009
Jan.1 3,900

Dr. Provision for Depreciation Account Cr.

Date N Date N
2005 2005
Dec. 1 Balance 120 Dec. 31 Profit & loss A/c 120
120 120
2006 2006
Dec.1 Balance c/d 285 Jan.1 Balance b/d 120
285 Dec.31 Profit & loss A/C 165
285
2007 2007
Dec.1 Balance c/d 545 Jan.1 Balance b/d 285
545 Dec.31 Profit & loss A/C 260
545
2008 2008
Dec.1 Balance c/d 925 Jan.1 Balance b/d 545
925 Dec.31 Profit & loss A/C 380
925
2009
Jan.1 Balance b/d 925

Profit and Loss Account (Extract)

2005 Provision for Depreciation 120
2006 Provision for Depreciation 165
2007 Provision for Depreciation 260
2008 Provision for Depreciation 380

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Balance Sheet (Extracts) as at 31st December

Fixed Assets
Cost (N) Accum.Dep.(N) NBV(N)
2005 Machinery 1,200 120 1,080
2006 Machinery 2,100 285 1815
2007 Machinery 3,600 545 3055
2008 Machinery 3,900 925 2975

N.B. Accum. Dep. is Accumulated Depreciation

NBV is Net Book Value which is total cost less accumulated depreciation to-date.

ACTIVITY
ABC Plc started trading on the 1st of March 200X. Depreciation on its machines is at the
rate of 15% per annum by straight line methods. The following transactions took place in
respect of machines and the payments were effected through the issuance of cheques.
200w March 1st, bought two machines at cost N4,000 each.
200x April 1, bought a machine at cost N6,000.
200y October 1, bought three machines at cost N10,000 each.

Required:Show
i. The machinery account.
ii. The provision for depreciation account.
iii. The profit and loss account.
iv. The balance sheet extract.

MODEL ANSWERS
1- Machinery account balance=#20000 debit
2- Prov. for depreciationaccount balance=#3650
3- Profit and loss account balance-200w=#500,200x=#1275 and 200y=#1875
4- Balance sheet balance-200w=#3500,200x=#8725 and 200y=#16350s

SUMMARY
In this unit we have discussed and learn about depreciation, its causes and some various
methods that can be used in its determination.

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BIBLIOGRAPHY

Omuya, J. O. Frank wood’s Business Accounting 1(West African Edition)

Omuya, J. O. Frank wood’s Business Accounting 2 (West African Edition)
Adeniyi, S. O.Basic Accounting
Adeniyi, S. O.An Introduction to Bookkeeping and Accounts
Idris, Y. H. Introduction to Basic Accounting
Lecture Note by Salaudeen O. OmotoshoDept. of Accounting.
Frank Wood’s Business Accounting 1(Eleventh Edition): FT prentice Hall.

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UNIT 3 DISPOSAL OF ASSETS

INTRODUCTION
This course is designed to equip the student with the knowledge and techniques involved
in recording the value of sold assets.

WHAT YOU WILL LEARN

You will learn about the method that is use in recording and keeping of information about
assets that are bought but later sold by an organization due to one reason or the other.

OBJECTIVES
By the end of this unit you, should be able to:
 explain the term disposal of asset(s); and
 identify the assets affected.

HOW TO STUDY THIS UNIT

Read through and practice to understand the unit.

EXPLANATION
Whenever an asset is sold or disposed, a disposal account is opened in the ledger to
remove the asset from the books. The cost of the asset is transferred from the Asset
Account to the assets Disposal Account (debited) and the depreciation provided in respect
of the asset sold from the date of acquisition to date of disposal is also transferred from
the provision for Depreciation Account to the Assets Disposal Account (credited). The
balance left in the two accounts – i.e. the Assets Account and Provision for Depreciation
Account will now represent the cost and the depreciation of the asset actually owned and
left (remained), the asset sold being eliminated from them. The amount received from
scrap is entered in the Assets Disposal Account (credited) and the difference in the
Disposal Account will either be a debit or credit i.e. profit or loss on disposal respectively
which is to be transferred to the profits and loss account.

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Illustration
Babakudu Transporters & Co. purchased three luxuries buses for N30,000 each and two
Peugeot for N25,000 each on January 1st 2006 when it started business, by cheque. They
keep only one account for these vehicles as “Motor Vehicles” Account.
On February 27th 2006 three buses were bought for N15,000 each by cheque. On 23rd
December, 2007, a driver had an accident with a bus purchased on February, 2006 and it
was damaged beyond repairs. The scrap was sold for N4,500 cash.
You are required to show:
a. Motor vehicle account
b. Provision for depreciation account – motor vehicles
c. Disposal account
d. Profit and loss account and balance sheet (extracts) for the years 2006 and 2007.
Note:
i. The company uses a reducing balance method of depreciation at the rate of 10%
per annum on all vehicles.
ii. Depreciation is on the basis of actual period of use rounded off to the nearest
month.

Solution
Dr. Motor Vehicles Account Cr.
Date N Date N
2006 2006
Jan.1 Bank 90,000 Dec.31 Balance c/d 185,000
Jan.1 Bank 50,000
Feb.27 Bank 45,000
185,000 ______
185,000
2007 2007
Jan.1 Balance b/d 185,000 Dec.23 Disposal A/C 15,000
______ Dec.31 Balance c/d 170,000
185,000 185,000
2008
Jan.1 Balance b/d 170,00

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Dr. Provision for Depreciation A/C - Motor Vehicles Account Cr.

Date N Date N
2006 2006
Dec.1 Balance c/d 17,750 Dec.31 Profit & Loss A/C 17,750
17,750 17,750

2007 2007
Dec.23 Disposal 2,625 Jan.1 Balance b/d 17,750
Dec.31 Balance c/d 31,850 Dec.31 Profit & loss A/C 16,725
34,475 34,475
2008
Jan.1 Balance b/d 31,850

Dr. Disposal Account Cr.

Date N Date N
2007 2007
Dec.23 Motor vehicle A/C 15,000 Dec.23 Provision for dep. 2,625
Dec.23 Cash 4,500
_____ Dec.23 Profit & loss (loss) 7,875
15,000 15,000

Profit and Loss Account (Extract)

2006 Provision for Depreciation 17,750
2007 Provision for Depreciation 16,725
Loss on disposal of damaged vehicle 7,875

Balance Sheet (Extracts) as at 31st December

Fixed Assets
Cost (N) Accum.Dep.(N) NBV(N)
2006 Machinery 185,000 17,750 167,250
2007 Machinery 170,000 31,850 138,150

ACTIVITY
ABB Plc purchased two buses for N25,000 each and two wagon cars for N20,000 each
on January 1st,200w when it started business. Thecompany keeps only one account for
these vehicles as “motor vehicles” account.

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On March 31st, 200x two saloon cars were bought for N12,000 each. On 20th December
200y a driver had an accident with a wagon car which was purchased on March 200x and
it was damaged beyond repairs. The scrap was sold for N1,920 cash.

Required: Show
a. Motor vehicle account
b. Provision for depreciation account
c. Disposal account
d. Profit and loss account
e. Balance sheet extract.

Additional information:-
i. The company uses a reducing balance method of depreciation at the rate of 10%
per annum on all vehicles.
ii. Depreciation is on the basis of actual period of use rounded off to the nearest
month.

MODEL ANSWERS:-
1- Machinery account balance=#102,000 debit
2- Prov. for depreciation account balance=#26400
3- Disposal account=#8070(loss)
4- Profit and loss account balance-200w=#9000,200x=#9900 and 200y=#9510
5- Balance sheet balance-200w=#81000,200x=#95100 and 200y=#75600

SUMMARY
In this unit we have discussed and learnt about disposal of an asset by an organization
using any factor deemed favorable to them as a determinant.

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BIBLIOGRAPHY

Omuya, J. O. Frank wood’s Business Accounting 1(West African Edition)

Omuya, J. O. Frank wood’s Business Accounting 2 (West African Edition)
Adeniyi, S. O.Basic Accounting
Adeniyi, S. O.An Introduction to Bookkeeping and Accounts
Idris, Y. H. Introduction to Basic Accounting
Lecture Note by Salaudeen O. Omotosho Dept. of Accounting.
Frank Wood’s Business Accounting 1(Eleventh Edition): FT prentice Hall.

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BED 121 Principles of Bookkeeping &
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UNIT 4 BANK RECONCILIATION STATEMENT

INTRODUCTION
This course is designed to equip the student with the knowledge and techniques involved
in reconciling transactions between the customer and his banker.

OBJECTIVES
By the end of this unit,you should be able to:
1. explain the term bank reconciliation statement;
2. identify the items involved; and
3. treat the items in the appropriate books.

HOW TO STUDY THIS UNIT

Read through and practice to understand the unit.

EXPLANATION
Bank reconciliation statement is a statement prepared at the end of every month
reconciling the cash book (bank column) balance with the bank statement balance. The
bank account is being maintained by the firm through the use of either two or three
columns cash book. When the firm pays cash or cheques received from customers to the
bank, the cash book is debited and cheques issued for payment or for cash withdrawn are
credited to the cash book accordingly.
In the same vein, the bank opens an account in the name of the firm (their customer) and
keeps a record of the firm in their own books. When the firm pays money into the bank,
the firm’s account is credited in the bank book and when the bank pays the firm or on
behalf of the firm, it will debit the firm’s account to reduce the credit balance. This record
of the bank is called Bank Statement.

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The format of the bank statement is shown below:

Date Particulars Dr. Cr. Balance
N N N

It is however, clear from the above that whatever appears on the debit (Dr.) column of the
cash book should be on the credit(Cr.)column in the bank statement and vice versa. It
will, therefore, appear that whenever one cross-check the balance in both the Cash Book
and Bank Statement received from the bank, it should be equal or tally. But in practice
this is not so.
The full explanationsfordiscrepancies or differences in records of the bank and cash book
of the firm are itemized below:
i. Entries on the bank statement but not in the cash book: such transactions are:
a. Standing Order: These are fixed amounts a business owner(s) has instructed or
ordered the bank to pay on their behalf at a stated interval, say the 25th of every
month. The discrepancy usually occurs where the business owner(s) forgot to
record such standing order before receiving the bank statement.
b. Direct Payments: These can either bepaid into the bank or from the bank account.
Where a customer transferred money directly into the business account without
informing the business owner(s) usually cause disagreement between the Cash
Book and Bank Statement balances.
c. Bank Charges: Bank charges are in form of commission and interest on
overdrafts. Such charges are known after receiving the bank statement, since it is
not possible for the business to accurately determine such charges in advance as
record in the bank account cash book before the end of the month.
d. Dividends: Dividends are profits paid to shareholders on their investments in a
company. The company will pay the dividend to its bank account by instruction.
When dividend is received by the bank this will increase the firm’s balance in the
Bank Statement but will not be reflected in the Cash Book until the receipt of the
bank statement.

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e. Dishonoured Cheques: These are customers’ cheques received which were

earlier paid into the bank but latter dishonoured either due to lack of sufficient
fund, irregular signature, difference between amount in words and figures, etc. But
if the information about the dishonoured cheques does not reach the customer in
time for him to reverse the entry in his cash book, there is bound to be a
discrepancy since such dishonoured cheques can only be shown in the bank
statement and not in the cash book.
2. Entries appearing in the Cash Book and not on the Bank Statement
a. Unpresented cheques: These are cheques paid out by the firm to their creditors
but not yet presented to the firm’s bank for payment, but which had been entered
in the Cash Book. This results in bank statement balance exceeding the cash book
balance, hence causing discrepancy.
b. Uncredited Lodgments: These are cash or cheques lodged by the firm to it bank
account but not yet recorded i.e. credited to the firm’s account by the bank at the
end of the month. Such uncredited lodgements tend to increase cash book balance
compared to bank statement balance.

As a result of the above mentioned points it is obvious that when the bank statement is
collected, it will disagree with the cash book record.
A bank reconciliation statement which is prepared on a given date meant to bring the
balances on the bank statement and cash book into agreement will be drawn up stating
why there are differences.
It is a common practice that before the bank reconciliation statement is drawn up.There
should be adjustment of the cash book balance by updating the cash book with all the
entries in the bank statement. This will mean bringing into the cash book all the items
discussed (No.1 a-e) as reasons for discrepancies.
After the adjustments of the cash book, a reconciliation statement is prepared based on
items discussed (No.2 a – b) as reasons for disagreement.

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Illustration 1
An extract from the bank column of the cash book of O. Jomo and the Bank Statement
received from his bank are shown below:

Dr. Cash Book (Bank column only) Cr.

Date Particular Amount Date Particular Amount
N N
May 21 Balance b/f 213 May 23 P.Aaron 50
” 24 Daudu 41 ” 27 Cash 20
” 31 A.Ali 53 ” 29 Welfare council 26
” 31 Success traders 24
” 31 Balance c/d 187
307 307
Jun. 1 Balance b/d 187

Bank Statement – O.Jomo

Date Particulars Dr. Cr. Balance
N N N
May 21 Balance 213 Cr
” 26 Cheque – Daudu 41 254
” 27 Cash 20 234
” 30 P.Aaron 50 184
” 31 Charges 5 179
” 31 Dividends – H.A. Limited 10 189

Required:
a. Write the cash book up to date stating the new balances on 31st May.
b. Prepare a bank reconciliation statement

Solution
a. Adjusted Cash book
Date Particular Amount Date Particular Amount
N N
May31 Balance b/d 187 May31 Bank charges 5
” 31 Dividend – H.A. Ltd 10 ” 31 Balance c/d 192
197 197
Jun. 1 Balance b/d 192

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b. Bank Reconciliation Statement as on 31st May

N N
Balance as per adjusted cash book 192
Add: Unpresented cheques;
Welfare council 26
Success traders 24 50
242
Less; Uncredited cheque
A.Ali (53)
Balance as per Bank Statement (Cr) 189

Or
N N
Balance as per Bank Statement 189
Add: Uncredited cheque
A. Ali 53
242
Less; Unpresented cheques;
Welfare council 26
Success traders 24 (50)
192
Illustration2:
The cash book of F. Fari at 30th September showed a debit balance of N1,713 while the
bank statement showed N2,714 on the same date. On comparing the two documents, the
following differences were revealed:
a. Bank charges not entered in the cash book N32
b. Dividends received by the bank but not entered in the cash book N83
c. Unpresented cheques amounted to N1,156
d. A cheque paid to a creditor – M. Hassan for N325 was entered in cash book as
N235.
e. Dishonoured cheque of N19 previously deposited not adjusted in the cash book.
f. A standing order for rates not entered in the cash book N6
g. Bank deposits not credited by the bank N91.

Required:
Prepare the Bank Reconciliation Statement, after adjusting the cash book.

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Solution
a. Adjusted Cash Book
Date Particular Amount Date Particular Amount
N N
Sept30 Balance b/d 1,713 Sept30 Bank charges 32
” ” Dividend 83 ” ” Undercast correction 90
” ” Standing order 6
” ” Dishonoured cheque 19
_____ ” ” Balanced c/d 1,649
1,796 197
Oct.1 Balance b/d 1,649

b. Bank Reconciliation Statement as on 31st May

N N
Balance as per adjusted cash book 1,649
Add: Unpresented cheques; 1,156
Less; Uncredited cheque (deposits) 2,805
(19)
2,714
ACTIVITY
Huag Plc. Cash book on June 30 gave a balance of N1,360 overdrawn at the bank. The
bank statement as at this date showed a debit of N1,020. You are informed that:
i. Unpresented cheques amounted to N700.
ii. Deposit not credited in the bank statement amounted to N420
iii. Bank charges not entered in the cash book amounted to N50
iv. A bank transfer from a customer amounting to N150 had been credited to the
statement but not entered in the cash book.
v. A standing order amounting to N40 had not been entered in the cash book.

Required
i. Indicate the appropriate adjustment in the cash book.
ii. Prepare a statement reconciling the amended balance with that shown in the bank
statement.

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MODEL ANSWERS:-
1- Adjusted cashbook-credit balance=#1300
2- Bank Reconciliation statement balance=#1,020

SUMMARY
In this unit, we have discussed and learned about Bank Reconciliation statement and
methods used indetermining it.

BIBLIOGRAPHY

Omuya, J. O. Frank wood’s Business Accounting 1(West African Edition)

Omuya, J. O. Frank wood’s Business Accounting 2 (West African Edition)
Adeniyi, S. O.Basic Accounting
Adeniyi, S. O.An Introduction to Bookkeeping and Accounts
Idris, Y. H. Introduction to Basic Accounting
Lecture Note by Salaudeen O. Omotosho Dept. of Accounting.
Frank Wood’s Business Accounting 1(Eleventh Edition): FT prentice Hall.

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