ACC 101 BASIC FINANCIAL ACCOUNTING

Study Session 1: Definition, Meaning and the role of

Accounting,
Introduction
As business activities expands, the needs for accountability emerged, adequate financial
information about a business help people with interest in the business take informed
decisions about the business. Accounting is concerned basically with accountability‟.
The underlying purpose of accounting is to provide financial information about an
economic entity.

The need for accounting is more pronounced in a business where a lot of finance, risk
and energy have been involved. Financial information is needed to plan and control the
finance and operation of a business. Accounting helps stewards to give proper records on
the assets put under their care.

In this study session, you will be learning about the origin and history of accounting,
definition of booking, definition of accounting, branches of accounting and accounting
activities, the various stakeholders (i.e. users) interested in the accounting information
and the regulatory frame work, rules that guides the practice of accounting.

Learning Outcome for Study Session 1

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

1.1 Define accounting

1.2 Discuss the Basic needs for accounting information

1.3 Briefly discuss the history of accounting

1.4 Discuss regulatory framework and Itemized the various regulator.

1.5 Qualities of Good Accounting Information

1.1 Define of accounting

Accounting is define in various way, but all putting out same point which is to gather
information for decision making by the various stakeholders.
Definition 1
Accounting is define by the (ACCOUNTING TECHNICIANS SCHEME WEST
AFRICA, 2009) as the process of recording, classifying, summarizing and

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communicating financial information to users of financial information for decision

making.

Definition 2
According to Boateng, (1884)”accounting is the process of identifying, measuring, and
communicating economic and financial information to permit informed judgment and
decision by the users of the information”.

Definition 3
Accounting is defined as the act of gathering financial information, classification this
information, summarizing and communicating these information to users for decision
making.
From these three process you can see that, this process starts from sorting relevant
transactions and posting them into their ledger accounts by considering the date,
particulars, the page or ledger folio and the amount. After posting, balancing the
accounts is the next exercise which is the bookkeeping activities. When individual
ledger accounts are balanced, then trial balance is drawn up. The act of keeping and
preparing this record is from the source document to the trial balance is referred to as
bookkeeping.
Meaning of Book Keeping:

Bookkeeping is defined as the classification and recording of business transactions in

the books of account, thus Bookkeeping is the recording phase of accounting.
The recording of the transactions is a routine task; therefore it tends to be repetitive.

1.2 Basic needs for accounting information

Accounting is often called the language of business, since all entities prepare and
communicate its financial data to help make better decisions. The groups of people who
are interested in accounting information are often called as users and are classified into
internal users and external users.
Internal users are stakeholders with direct involvement in the management and
operations of the organization. They use these financial information to help improve
the efficiency and effectiveness of an organization in meeting its goals. They includes
the following.
(a) Owners of the business/investors: The owners need accounting information to
assess how efficiently the management is performing – they want to know how
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profitable the business has been.

(b) Management: These are the people who are employed to run the affairs of the
business for the owners. They need accounting information to ascertain the efficiency
of the policy they formulate and to plan and control the resources of the business.
(c) Employees of the entity: They need accounting information to enable them decide
how secure their job is and the ability of the business to pay good salaries and provide
good welfare facilities.
External Users of accounting information are not directly involved in running the
organization, but are interested in the financial information prepared and
communicated in the financial statement. These external users are;
(a) Customers: These are the people who purchase the goods or services provided by
the business.
(b) Tax authority: this is considered the government interest in the business, as every
business must pay tax to the tax authority i.e. the government.
(c) Trade Creditors: These are the people who supply goods to the business on
credit.

1.3 The history of accounting

Modern accounting started with book-keeping in Italy by the Stewards of Commune
of Genoa in Italy in the 14th century, where the double entry system popularly
known as the Italian method then was first used. The system was spread in 1494 by
Luca Pacioli, an Italian monk (priest), in his book titled “Summa de Arithmetical,
Geometrica, proportioni et proportionalita,” published in the 14 century with topics
on Arithmetic, Geometry and Proportion. The principles of the double entry system
was briefly explained in the book. The popularity of this system makes it necessary
for stewards to report financial resources place under their control during specific
period since many businesses were left in the hands of stewards to manage by their
owners. Such report would include mainly the following:
i. How the financial resources of the business have been invested during the
period
ii. The profit earned or loss incurred during the period and
iii. The assets, liabilities and the owners‟ equity at the end of the period under
review.
A lot of changes have been witnessed in accounting since it early days. These
changes were informed by daily businesses challenges and the economical
environments the business operates which placed more responsibilities on
management of business to disclose its financial information.

1.4 Regulatory framework and the various regulator.

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Financial accounting is rules and principle based. Financial accounting is practice by guided
principles known as Generally Accepted Accounting Principles (GAAP) which is
used to prepare and interpret financial statements effectively. GAAP are the bases for
the formulations of accounting Principles, Standards, Concepts, and Assumption
used in accounting. GAAP aims to make information in financial statement reliable,
relevant and comparable. The main statutory document used together with GAAP
for the regulation of business in Nigeria is the;
1. Companies and Allied Matters Act 1990 (CAMA 1990) as amended 2004.
The company laws are enforceable in the court of law.
2. Security and Exchange Commission (SEC) for all quoted company.
3. Banks and Other Financial Institutions Act (BOFIA) 1991-related directly to
the banking industry.
4. Insurance Act 2003-related directly to the Insurance industry.
Other regulations consist of the following accounting standards:
5. Statements of Accounting Standards (SAS) issued by NASB (now Financial
Reporting Standards (FRS) issued by Financial Reporting Council FRC).
6. International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS) issued by IASB from time to time.

Scope of Accounting
Though the main study is financial accounting; others relevant and supporting
branches are cost Accounting, Management Accounting, Auditing, Government
Accounting and Tax Management.
-Cost Accounting
Cost accounting is the process of accumulating financial data to provide information
for managerial decision
-Management
Accounting
Management accounting provides information to management of a business to
help them take better decision and to improve upon the efficiency and
effectiveness of existing operations.

-Auditing
Auditing is the independent examination of the books of accounts and records
of the company. The professional accountant will gather various forms of audit
evidence before he can forms an opinion on the financial statements. To give its
“true and fair view” of the financial statements

-Government Accounting (Public Sector Accounting)

Government a c c o u n t i n g is an aspect of Accounting relating to the Public Sector
where government has executive responsibility. Public sector consists of the
ministries, parastatals and government department. Government accounting is
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concerned with planning, control and appraisal of government activities and in effect,
accountability. The accounting information maintain here is referred to a public sector
accounting or public sector accounting.

-Accounting for Taxation

The accounting profits generated in the financial statements provide the basis for
determining the taxable profits of a company by the tax authority this study is referred
to taxation.

Professional Accounting Bodies

Professional bodies among those listed below plays a vital role in accounting
training an influencing how accountants are training professionally.
1. The Institute of chartered Accountants of Nigeria (ICAN)
2. Association of Chartered Certified Accountants (ACCA)- UK
3. Certified Institute of Management Accountants (CIMA)- UK
4. The Institute of chartered Accountants of England and Wales (ICAEW)-UK
5. The American Institute of Certified Public Accountant (AICPA)-America
6. Association of National Accountants of Nigeria (ANAN) etc

The Need for Accounting Information

The need for accounting information can be summarized as follows:
1. It provides information in form of financial statement useful for making economic
decisions
2. It provides information to users for predicting, comparing and evaluating the
earnings power and financial strength of a business
3. It is used to judge the ability of management to utilize the entity’s resources
effectively in achieving the goal of the entity
4. It provides information to creditors for predicting and evaluating the cash flows of
the entity
5. It provides management with detailed accounting data for use in planning and
controlling the daily operations of the business
6. It provides information to government for determining the tax payable on the
profit and/or other incomes of an individual or company and for formulating fiscal
policies
7. It forms the basis of reporting on the activities of an enterprise as they affect the
society
8. It serves as the basic instruments by which investors decide the securities in which
to invest.

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1.5 Qualities of Good Accounting Information

Accounting information should possess the following qualities before users can rely
on it to make decisions:
(a) Relevance: The accounting information must include enough facts to satisfy the
need of the user. For instance, management accounting information should be
relevant to the decision to be taken with it. Financial accounting information should
disclose enough information to satisfy the various users.
(b) Reliability: The source of information must be verifiable, one source of evidence
must corroborate the other, must be free from all form of bias and can be dependent
upon by users to be representing faithful that which it ought to represent.
(c) Comparability: There should be no change in the basis for the preparation of
the accounting information from period to period so that it will be easy to compare
the result of operations over different accounting periods.
(d) Timeliness: Accounting information must be made available early enough for its
use. For instance, management requires certain information on daily basis or
weekly basis for effective running of the business; if it comes late it would be
useless. Annual reports and accounts must be published not long after the year
end.
(e) Objectivity: There must be no bias, window dressing or subjective judgment in
the presentation of accounting information. Objectivity includes ability to trace
transactions to documentary evidence and complying with required regulations in its
presentation.
(f) Understandability: Accounting information must contain enough details for
good understanding. The details must neither be too little nor too much.

Carrier in accounting
The demand for accountants appears to be growing and outstripping supply. Job
opportunities in today’s business climate are better than ever for accountants. Accounting
has many area of opportunities which can serve as carrier path, these are financial,
managerial, taxation, and other accounting related jobs and can be futher broken into
carriers like;
i. Financial accountants
ii. Financial analyst
iii. Banking and financial services
iv. Educational services
v. Liquidation and litigation services
vi. Taxation and consultancy services
vii. Employment private and government. etc

Summary of study session 1

In Study Session 1, you have learnt that:
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1) Financial accounting is basically aimed at providing financial information about the business
to users both internal and external for decision making. You learnt that this information are
usually in the form financial statement.

2) You also learnt about the history of financial accounting and the Italian method now known
as the double entry system, upon which the double entry principle is developed.

3) Financial accounting is ruled based and principled based, you also learnt about the Generally
Accepted Accounting Principle (GAAP), which is the basic foundations upon which all
accounting principle and regulations are developed. You learnt that GAAP helps accountant
to prepare financial report that is reliable, relevant understandability, comparability and
timely to users of these information.

4) That financial accounting provides a wide range of carriers virtually in all sector of the
economy.

Self-Assessment Questions (SAQs) for Study Session 1

Now, that you have completed this study session, you can assess how well you have achieved
its learning outcomes by answering the following questions. Write your answers in your
study diary and discuss them with your tutor at the next Study contact. You can check your
answers with the Notes on the Self-Assessment Questions at the end of this Module.

SAQ 1.1 (tests learning outcomes 1.1, 1.2 & 1.3)

 Define financial accounting and bookkeeping

 Itemize all users of accounting information under the two basic type
 What is the double entry system first called in Italy

SAQ 1.2 (tests learning outcomes 1.4)

 Explain the concept Generally Accepted Accounting Principle (GAAP)

 Briefly explain other branch of financial accounting

SAQ 1.3 (tests learning outcomes 1.5)

What are the qualities of financial statement prepared based on GAAP

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Study Session 2: Basic Accounting Principles, Assumption, Concepts and

Conventions
Introduction
Given the legal implications guiding financial reporting, Users expect financial statements to
present fairly, and completely the company’s financial operations. Since financial accounting
is based on facts, governed by principles, concepts, assumptions, conventions and constraints
developed from Generally Accepted Accounting Principles (GAAP) already explained above.
(The Institute of Chartered Accountants of Nigeria ICAN , 2010) states that “GAAP aims to
make information in financial statement relevant, reliable, and comparable”, the institute
further assert that;

a. Relevant information affects the decisions of its users.

b. Reliable information is trusted by users.

c. Comparable information is helpful in contrasting organizations.

GAAP are the foundations upon which the four (4) basic accounting principle, four (4)
assumptions, two (2) constraint, and other given conventions and concept.

Learning Outcomes
At the end of this session, you should be able to:

2.1 Explain the four (4) basic accounting principle, the four (4) basic assumptions, the two
(2) constraint, and other given conventions and concept.
2.2 Explain the various terminologies used in the statement of financial position.
2.3 Explain and demonstrate the Accounting Equation by application

Accounting principle, assumptions, conventions and concepts

2.1.1 Principles, these are the four (4) basic principles upon which every financial transaction
must stand upon for it to be deem a full transaction measurable in accounting terms. These
are;
1. The measurement principle, this principle holds that accounting information should be on
actual cost and cost should be measured on a cash or equal-to-cash basis. This means that

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only items or transactions that can be measured or valued in cash term be considered and
items not measurable in terms of money will not be included in the financial statement.
2. The revenue recognition principle stands to explain when revenue should be recognize in
the accounting transection, should be recognized when earned, that is when services are
performed or when a seller transfers ownership of products to the buyer, the principle aimed
at explaining when and what should be allowed as credit transactions.
3. The expense recognition principle, also called the matching principle, holds that for any
accounting period, the earned revenue should be matched with the cost (expenditure) that
earned them and in the same year which the expenditure was incurred.
4. The full disclosure principle states that a company reports full in detail information that
are materials in the financial statements, meaning any information which will affect the
decision of users must be reported.

2.1.2 Assumption, Just like the four (4) basic principles, four (4) assumption which will be assumed
for a valid transactions to be recoreded;
1. The Going-concern assumption is a presumption that the business will continue to
operate for an unforeseeable future without being closed.
2. The Monetary unit assumption simply means that financial transactions are expressed in
monetary terms i.e. money unit such as the Naira in Nigeria, dollar in the United States etc.
3. The Time period assumption it is an assumption that the business operations will be
accounted and reported for a period of 12 months. This concept is also known as periodicity
concept.
4. The Business entity assumption these assumption hold that all business be accounted for
separately from the owners and from other business eg. First bank is different form GT bank
and both companies are different from their owners meaning they can sue and be sued.

2.1.3 Constraint, this places a limitation bound and guide to financial transactions to be recorded
for in the financial statement.

1. The materiality constraint prescribes that only information that would influence the
decisions of a reasonable person need be disclosed. Materiality concept is a relative term in
size and importance since what is material and important for one organization will not be for
another.
2. The cost-benefit constraint holds that only information which benefits of disclosure is
greater than the costs of providing it to users need be disclosed in the financial statement.

2.1.3 Convention and concept general agreed ways to present a fact which will guide in the way a
financial transactions be presented and recorded.
1. Prudence concept requires fairness with sound judgment in reporting financial transaction
details, avoid taking decision without favour to any specific shareholder.

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2. Substance over Form Business transactions should be accounted for and presented in
accordance with their financial substance and reality and not merely by their legal form.
Examples are found in; lease contracts the reality is taken above the legal term
3. The Consistency concept requires that the adoption of a method and a policy in treating
an item should be maintain for a long time and should not be changed but used consistently
from period to period e.g depreciation or bad debt provision.
4. Accrual concept states that revenue should be recognized in the period when they are
earned and not in the period when they are received and expenses should be recorded in the
period when they are incurred and not in the period when they are paid for.
5. Historical Cost Concept hold that, the cost values of an assets are retained throughout the
accounting books and the assets expire by writing off yearly depreciation to get the current
value.
6. Objectivity Concept holds that financial statements should not be influenced by personal
biasness. And that no group of stakeholder/user should be favour over others.
17. Fairness principle requires that accounting reports should be prepared not to favour any
group or segment of society.
18. Realization Concept this concept unlike the accrual concept, is concerned with
determining when revenue is earned, it holds that revenue should be recognized at the time
goods are sold and services are rendered; that is the point at which the customer has incurred
liability.
19. Double entry principle this is the oldest known and indisputable principles of accounting
it is the principle upon which modern accounting is based explained that every transactions
must be recorded in the books at least two times, this also mean that for every receiver there
must be a giver.

The double entry is the beginning point of the accounting equations, with every transaction
having an effect on at least two accounts. As far as double entry principle is concerned, there
must always be two parties to a transaction. Two recording of any transaction two accounting
records to a transaction. Put in accounting terms there must be a debit a credit to every
transaction.

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Terminologies used in the statement of financial position.

-Capital
This is the owners’ equity in the business after all liabilities due outsiders are deducted from
it. In accounting it is the amount of money used to start a business.
-Assets
Assets are the economic resources of a business that are expected to bring immediate
and future benefits to the business. Assets are owned and controlled by the organization.
Assets are classified into non-current and current assets.
i. Non-current assets
These are the economic resources that aid income generation and will remain in the business
for more than one accounting period. They include land and buildings, motor vehicles,
equipment, machinery, furniture etc.
ii. Current Assets
are the economic resources of the business which are easily converted to liquid cash or can
be used up within an accounting period e.g. cash in hand and at bank, all receivables and
inventories of goods

-Liabilities
These are obligation of the business to outsiders and to the owners and usually will become
claims against the assets of the business in the event of a liquidation. They are divided into
current liabilities and non-current liabilities.

i. Current Liabilities
These are the liabilities of the business that are meant to be paid within twelve months. e.g.
payables and all outstanding expenses.

ii. Non-current liabilities: These are liabilities that will take more than one year before
repayment is due. e.g. long-term loans.

Accounting Equation
The accounting equation is a mathematical representation of the statement of financial
position of a business at all-time showing its assets and the claims upon them in form of
liabilities and equity, all accounting entries and posting are demonstrated following the
accounting equation based on the double entry principles. The accounting equation is stated
as ASSETS=LIABILITIES + OWNERS (EQUITY)

Demonstrate the Accounting Equation by application

Let us illustrate the accounting equation
(a) Yagana, a proprietor of Adisco Enterprises started business with cash of N150, 000
The accounting equation is;
Assets = Capital + Liabilities
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i.e. N150, 000 (cash) = N150, 000 + 0

Assuming that in addition to the cash invested, Yagana introduced N25, 000, loan from the
bank into the business. The cash position is now N175, 000, made up of owner’s capital of
N150, 000 and liability to an outsider N25, 000

Assets = Capital + Liability

N175, 000 (Cash) = N150, 000 + N25, 000

Yagana Enterprises spent N120,000 to buy a building to be used as office and bought chairs
and tables for N10,000. He also purchased for cash some inventory for resale at the cost of
N30,000. The accounting equation will remain as in (b) above but the composition of the
assets has changed.

Assets = Capital + Liability

Chairs and tables + Inventories of Goods + Building + Cash = Capital + Liability

N10,000 + N30,000 + N120,000 + N15,000 = N150,000 + N25,000

Given different combinations of assets, liabilities and capital the equation continue to be
same at each side and representing the equality of both side.

Include in-text questions and answers

Summary
In Study Session 2, you have learned about:
i. Financial accounting been rule and principle based, and also about the basic
principles, assumptions, constraint, convention and concepts of accounting.
ii. The various terms used in the Accounting Equation, such as assets, liabilities
and capital.
iii. The applications of the Accounting Equation showing its effects on the
statement of financial position.

Self-Assessment Questions (SAQs) for Study Session 2

Now that you are true with this study session, to assess how well you have achieved its
Learning objectives, you may answer the following questions. Write your answers in your
study notes and discuss them with your Tutor at the next study Support meeting.
SAQ 1.1 (Testing Learning outcomes 2.1)
Explain briefly the four (4) basic accounting principles, and four (4) assumptions
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SAQ 1.2 (Testing Learning outcomes 2.2)

State the accounting equation and list and explain each variable in the equation accordingly
Reference
Basic Accounting theory and practice 1 (2014) Dr. A. A. Malgwi, Mr. Victor O. Atabo
Financial Accounting Made Simple Robert Igben

Notes
You are advice to make these principle, assumptions, constraint, conventions and concept part of
you, know and understand them for they are the foundation of accounting when you comes to
application.

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Study Session 3: Accounting Process

Introduction
Accounting as an act consist of process which starts from recording stage to the final stage of
given the report to users of the accounting information for decision making every transaction
recorded in the financial statement goes through this process, the process which starts from
the sources document all through the journal, the ledger, trial balance and the final accounts.
Is diagrammatically shown below.

Source documents

Journal

Ledgers

Trial Balance

Final Accounts

Learning Outcomes
After studying this session, you should be able to:

3.1 Explain the accounting process to record a financial transaction.

3.2 Explain the various terminologies used in the each of these recording stage.
3.3 Demonstrate practically the recording faces from each level to the final accounts

3.1 The Accounting Recording Process

The process of recording accounting transaction and reporting it in the final account is known
as the accounting cycle. Each of this step in the process is explained below.

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3.1.1 Source Documents

The source document as the name implies are the source of financial information for to be
recorded in the books of accounts. Source document are evidence usually paper document
that a transaction has taken place, they are prove for transactions that has taken places,
showing details of parties in the transaction i.e. who is receiving a benefit at what expenses,
details about the amount involved, date, and item of trade.

Importance of source document

1. They serve as evidence of financial transactions
2. They guide against fraud
3. They serve as evidence in audit process
4. They are usually signed by the parties to the transaction therefore they are not usually
denied
Examples of Source Documents
The main source documents that are used for recording in the books of original entry are:
1 Sales Invoice
2 Purchases Invoices
3 Credit notes
4 Debit notes
5 Payment vouchers
6 Bank Pay-in-slips
7 Cheque counterfoils
8 Receipts
9 Purchase order
10 Delivery note
11 Goods Received Note
12 Bin Card
13 Monthly bank statements
14 Petty cash vouchers

Sales Invoices
A sales invoice serves as the source document to record in the sales day book. All credit sale
are recorded in the sales day book. The sales invoices is a document sent by the seller to the
buyer (usually for credit sales) and it used as evidence for credit sales
Purchases Invoice
A purchase invoice serves as the source document to record in the purchases day book. The
purchases invoice is the opposite of the sales invoice sent by the supplier to the customer
usually for credit purchases transactions.
Credit note

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A credit note is a document given to refunds cash to the buyer for either been overcharged or
for goods returned by a customer for any of the following reasons: - Damage to the goods
before delivery- Wrong specification etc.
Debit note
A debit note to a supplier will be used to request for a credit note by the buyer. While at the
same time the seller may issue a buyer a debit showing that his account will be charged.

Payment Vouchers
In an organization every payment must be supported by a payment voucher. Examples are
payment vouchers for salary and wages, and petty cash vouchers etc. usually prepared as
evidence for that expenses.
Bank Pay-in-slips
This serves as evidence of cheque and cash paid into the bank by an organization and
individuals. It is evidence for money deposited in the bank.
Cheque Counterfoils
Cheque counterfoils serve as evidence of payment to creditors through the bank and
withdrawals using the cheque book.
Receipts
Receipts are issued for cash and cheques received from a customer for goods sold or service
rendered to him. It is evidence for cash paid by the customer.
Purchase Order
A purchase order is issued by a customer requesting the seller to supply certain quantities of
goods of specified description. The purchase order will also state the agreed price and the
delivery point and date. An example of a purchase order is the Local Purchase Order (LPO).
Delivery Note
Delivery note accompanies the goods dispatched to the customer. Showing what is receipt by
the customers.
Goods Received Note
The good received note shows the evidence that the goods dispatched to an organization are
received in good condition and meet the specifications. It is used as source document in the
bin stock card.
Bin Card
Bin card records movement of inventories. When inventories are added to the store or
warehouse bin card is debited and when inventories is issued to production, the bin card is
credited.

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3.1.2 Books of Original Entry/Journal

Books of Original Entry are books of prime entry they are also called the journal because the
it is used to record daily business transactions, these are books in which transactions are first
recorded in the accounting cycle and it is the second stage in the recording cycle.
Transactions are first recorded here from all the source document and passed to the ledger.
The journal divided into two types.
1. The subsidiaries journal and
2. General journal
- Subsidiary journals
The subsidiary journal is further divided into five these are
i. Sales day book; used to record all credit sales to customers. The total figure is credited to the
sales/revenue accounts as part of sales but credit sales to customer. While the individual
customer accounts that made up the total credit sales are debited with their individuals figures
only as trade receivables (debtors).
ii. Purchases day book; used to record all credit purchases from suppliers. The total figure is
debited to the purchases accounts as part of purchase but credit purchases from suppliers.
While the individual trade payables/suppliers accounts that made up the total credit purchases
are credited with their individual’s figures only as trade payables (creditors).
iii. Sales returns book/Returns inward book; the sales returns book or returns inward book is
the book of original entry that records any returns on goods sold to customers with the total
debited to the return inward journals and the valued of the returns credited to the individual
customers accounts.
iv. Purchases returns book/Returns outward book; The purchase returns book or returns
outward book is the book of original entry that records returns on goods purchase to the
suppliers or manufacturers. The total balance is credited to the returns outward accounts and
the individuals returns is debited to the
v. Cash book; Cash book records all cash and bank transaction from the source document both
receipt and payment, the cash book is divided into single, two and three Colum cash book and
the petty cash book used to record minor expenses which are many and when recorded in the
cash book will make the transaction cumbersome. The cash book is divided into two equal
part debit (Dr) and credit (Cr) side, usually shown in T format.

- General journal
General journal also known as journal proper is used to record all transaction that cannot be
recorded into the subsidiary journal. The following transaction that cannot be recorded in
the five subsidiary journals are;
1. Opening and closing entries
2. Transfer from one account to the other
3. The purchases or the sales of fixed asset on credit

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4. Adjustments in account
5. Correction of errors.

3.1.3 Ledger
The ledger which is the third stage of the accounting recording cycle contains information’s
from the journal the second time. The type of account maintained in a ledger is what makes it
a debit balance or a credit balance and determine whether the account will be increasing or
decreasing i.e. positive or negative.

DR CR
N N

Accounts
Accounts are the financial transactions posted or recorded from the Journals into the ledgers,
these information’s determine the type of ledger, the financial effect on the ledger and the
either the ledger is increasing or reducing.

Asset account
(Debit) Increase Decrease (Credit)

Liability account
(Debit) Decrease Increase (Credit)

Capital account
(Debit) Decrease Increase (Credit)

Revenue account
(Debit) Decrease Increase (Credit)

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Expenses account
(Debit) Increase Decrease (Credit)

Student should note because a ledger contains an accounting information, they are sometimes
used interchangeable with accounts; this do not implies they mean the same thing.

Importance of the ledger accounts

(i) Keeping permanent records of assets, liabilities, income, expenses and capital.
(ii) Provides information for preparing the trial balance, the income statement and the
statement of financial position.
(iii) They show the details of the movement in each account.

Chat of Accounts
Accounts can be grouped under three main headings these heading are called chats of
accounts
1 Real Account
2 Personal Accounts
2 Nominal Accounts

3.1.4 Trial Balance

Trial Balance is a statement showing list of balances in a double entry form extracted from
the ledgers to test the arithmetical accuracy of the accounts. The totals of the debit and credit
must be in agreement. The trial balance which is the fourth stage of the accounting recording
process provides balances that are used to prepare the final accounts

Nature of Trial Balance

i) It consists of all ledger balances extracted from the accounting books
ii) It is drawn at a particular time.
iii) The credit and debit column total must agree
iv) It must be titled and dated
v) It must be sequentially arranged in the order of credit and debit items

Uses of the Trial Balance

The main uses of the Trial Balance in accounting process are as follows:
i) To check the arithmetical accuracy of entries in the ledge accounts.
ii) To facilitate easy preparation of final accounts
iii) It can be used as evidence and to confirm that proper records have been kept.
iv) It can be used to prepare accounting schedule of the material items in the trial
balance.
v) To detect such errors of posting that can easily be identified by the trial balance.
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 ACC 101 BASIC FINANCIAL ACCOUNTING

Trial balance
DR CR
N N
All assets xx
All expenses xx
Gains/incomes xx
All liabilities xx
Capital/Equity xx
Sales xx
Purchase xx
xxx xxx

3.1.5 Final Account for Sole Trader

The essences of the preparation of the final account is to give the report of the business, the
final account consist of two component namely the Income Statement and the Statement of
Financial Position. The income statement helps to determine the Gross Profit or Gross Loss
and also to determine the Net profit when expenses are deducted. While the Statement of
Financial Position which is simply based on the accounting equations shows the business
position in terms of its assets, liabilities and owners’ equity (capital).
The final account is prepared based on equations as shown below:
i. Income Statement calculated using the equation;
Turnover/Revenue - Cost of Sales = Gross Profit.
i.e. T-COS=GP
The equation above explained, will give us:
T = Turnover (Sales)
COS = Cost of goods sold
GP = Gross profit

ii. Statement of Financial Position is prepared using the accounting equation

Assets=Liabilities + Owners Equity

- Income Statement for the Year Ended 31st September 20xx

N N N
Revenue/Sales xxx
Less Returns inward (xx)
xxx
Less cost of sales:
Opening inventory xxx
Add: Purchases xx
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 ACC 101 BASIC FINANCIAL ACCOUNTING

Carriage inwards (xx) xxx

xxx
Less: Returns Outward (xx)
Cost of good available for sales xxx
Less Closing inventory (xx)
xxx
Add wages xx
Cost of good of sales/cost of sales (xxx)
Gross profit xxx

Other incomes:
Discount received xx
All received (e.g. rent received) xx
Reduction in liabilities xx
xxx
Less Expenses:
All expense (rent paid, bills etc.) xx
Increases in liabilities xx
All losses (e.g. Bad debt) xx
Salaries xx
Discount allowed xx
Depreciation xx xxx
Net profit xxx

- Statement of Financial Position as at 31st September 20xx

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 ACC 101 BASIC FINANCIAL ACCOUNTING

ASSETS: N
Current Assets:
Inventory (Stock) xx
Trade Receivables (Debtors) xx
Less Provision for Bad debt xx
Cash and Cash equivalent xx
Cash at Bank xx
Bill Receivables xx
Prepayment expenses xx
Accrued Income xx
xx(a)

Non-Current Assets (Fixed Assets assets):

Land xx
Building and Premises xx
Plant and machinery xx
Motor van xx
Furniture and Fittings xx

Investment xx
xx(b)
Total assets xxx (a+b)

Equity and Liabilities:

Current Liabilities:
Trade Payables xx
Over draft (short term debts) xx
Bills payables xx
Accrued expenses xx
xx(x)
Non-Current Liabilities:
Long term debts Xx
Debenture Xx
Mortgage loan Xx
xx(y)
Total liabilities xxx(x+y)=xy

Financed by:
Capital (Accumulated surplus) xxx
Add: Net Profit xx
xxx
Less Drawings (xx)
Total equity xxx(z)
Total equity and liabilities xxx (z+xy)

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 ACC 101 BASIC FINANCIAL ACCOUNTING

3.3 Practically demonstration of the recording process from source document to the
final accounts.
Illustration 1
The following are the transaction of Makama Bala whom just started a business trading in general
merchandise in the month of January 2004;
N
January 1: started business with cash 20,000
January 2: paid rent in cash 1,400
January 3: took out of cash till and paid it into the bank 9,500
January 5: bought office furniture paid by cheque 1,270
January 6: cash sales paid direct into the bank by customer 6,960
January 7: Addo paid us by cheque 1,100
January 14: paid wage by cash 770
January 18: Garba Musa paid us in cash 2,900
January 22: paid Mustapha by cheque 1,680
January 24: cash sales 6,600
January 25: paid motor expenses by cheque 950
January 26: A customer name Aki paid us by cheque 1,880
January 27: withdrew from the bank for business use 3,000
January 28: paid carriage inward by cash 300
January 29: withdrew cash from bank for to petty cashier 2,000
January 30: electricity paid by cheque 500
January 30: Pat paid by cash 1,000
January 31: paid Mr. John a creditors by cheque 4,000
You are required to write up the cash book for the month of January 2004 and post the transactions to
their corresponding ledger entries.
Suggested Solution
Makama Bala
Date Particulars f Cash Bank Date Particulars f Cash Amou
nt
N N N N
Jan 1 Capital 20,000 Jan 2 Rent 1,400
3 Cash c 9,500 3 Bank c 9,500
6 Sale 6,960 5 Office furniture 1,270
7 Addo 1,100 14 Wages 770
18 Garuba Musa 2,900 22 Mustapha 1,680
24 Sales 6,600 25 Motor expenses 950
26 Aki 1,880 27 Cash c 3,000
27 Bank c 3,000 28 Carriage inward 300
29 Bank c 2,000 29 Cash (Petty cash) c 2,000
30 Pat 1,000 30 Electricity 500
31 Mr. John 4,000
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 ACC 101 BASIC FINANCIAL ACCOUNTING

31 Balance c/d 23,530 6,040

35,500 19,440 35,500 19,440
Feb 1 Balance b/d 23,530 6,040

Johnson Enterprises maintains an imprest of N40,000. The reimbursement is made as soon as

substantial portion of the float is exhausted. During January 2014, the following petty transactions
took place:
DATE DETAILS N

1-Jan Cash float given to cashier 40,000

2-Jan Bought Postage Stamp 1,250

3-Jan Entertainment of Visitor 750

4-Jan Stationary bought 1,500

5-Jan Travelling expenses 500

6-Jan Repair of Vehicle 1,810

7-Jan Notebook Purchase 300

8-Jan Courier Services 1,725

11-Jan Security Lights 1,575

14-Jan Medical bills for cleaner 1,300

18-Jan Repairs of furniture 1,925

21-Jan Transport expenses 1,750

24-Jan Stationary bought 6,325

27-Jan Entertainment of Visitor 5,125

28-Jan medical bills for driver 1,060

30-Jan Stationary bought 3,750

You are required to prepare showing balance and reimbursement, at 31st January 2011 a petty
cash book with analysis column for all the payments made by the petty cashier on 31st January

Solution:
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 ACC 101 BASIC FINANCIAL ACCOUNTING

Maxwell Enterprises
Analysis Petty Cash Book for January, 2014
N N N N N N
Date Particulars Amount Date Particulars Total Stat/Pos Transp Repairs Entert Medical
1-Jan Cash float 40,000 2-Jan Postage stamp 1,250 1,250
3-Jan Entertainment 750 750
4-Jan Stationary 1,500 1,500
5-Jan Travelling 500 500
6-Jan Repairs 1,810 1,810
7-Jan Notebook 300 300
8-Jan Courier Ser 1,725 1,725
11-Jan Security Lights 1,575 1,575
14-Jan Medical exp. 1,300 1,300
18-Jan Repairs 1,925 1,925
21-Jan Travelling 1,750 1,750
24-Jan Stationary 6,325 6,325
27-Jan Entertainment 5,125 5,125
28-Jan Medical exp. 1,060 1,060
30-Jan Stationary 3,750 3,750
30,645 14,850 2,250 5,310 5,875 2,360
Balance c/d 9,355
40,000 40,000
1-Feb Bal B/d 9,355
1-Feb Reimbursement 30,645

The principles of Double Entry

The double entry principles in cash transaction which will be entered in the cash book is
applied by observing two rules. The rule states that debit all receiver, credit all giver; (i.e.
cash) meaning that, debit the receiving account and credit the giving account. The double
entry system of book keeping will be used for recording transactions in the ledgers.
Summary: Debit= Receiving account
Credit=Giving account
Procedures to be followed:
i. Every transaction must affect two accounts
ii. Give names to the two accounts
iii. Debit – Receiving account (Receiver)
iv. Credit – giving account (Giver)

ILLUSTRATION
Jan. 1 Miss. Faith starts business with N800.00 in bank

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Miss. Faith is the owner of the business therefore her name must not appear in the books.
Entries in the ledger
DR CAPITAL ACCOUNT CR

N
N
Bank 800.00

DR BANK ACCOUNT CR

N N
Capital 800.00

Jan. 2 purchased goods N300.00 by cheque.

DR PURCHASES ACCOUNT CR

N N
Bank 300.00

DR. BANK ACCIOUNT CR

N N
PURCHASES 300.00

Jan. 4 Sold goods N700.00 cash

DR. SALES ACCOUNT CR

N N

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Cash 700.00

DR CASH ACCOUNT CR

N N
Sales 700.00

Jan.7 Paid wages N50.00 cash

DR WAGES ACCOUNT CR

N N
Cash 50.00

DR CASH ACCOUNT CR

N N
Wages 50.00

Jan. 8 bought machinery N500.00 paying by cheque

DR. MACHINERY ACCOUNT CR

N N
Bank 500.00

DR. BANK ACCOUNT CR

N N
Machinery 500.00

Jan. 10 Cash drawings N80.00

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 ACC 101 BASIC FINANCIAL ACCOUNTING

DR CASH ACCOUNT CR

N N
Drawings 80.00

DR DRAWINGS ACCOUNT CR

N N
Cash 80.00

Jan.12 Goods returned to us by Baba N200.00

DR. RETURN INWARD ACCOUNT CR

N N
Jan. 12 Baba 200.00

DR BABA ACCOUNT CR

N N
Jan. 12 Returned inward 200.00

Jan.17 Took cash N2, 400.00 from the bank and put it into cash till.

DR BANK ACCOUNT CR

N N
Jan. 17 cash 2,400.00

DR CASH ACCOUNT CR

N N

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Jan. 17 Bank 2,400.00

Jan. 20 we returned goods worth N100.00 to Jasper

DR RETURNED OUTWARD A/C CR

N N
Jan. 20 Jasper 100.00

DR JASPER ACCOUNT CR

N N
Jan. 20 Returned outward 100.00

Jan. 22 received commission in Cash N350.00

DR COMMISSION ACCOUNT CR

N N
Jan. 22 Cash 350.00

DR CASH ACCOUNT CR

N N
Jan. 22 commission 350.00

Jan. 23 took loan from Mark by cheque N750.00

DR LOAN ACCOUNT CR

N
N
Jan. 23 Bank 750.00

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 ACC 101 BASIC FINANCIAL ACCOUNTING

DR BANK ACCOUNT CR

N N
Jan. 23 loan 750.00

Jan. 25 sold car on credit to Ojo N220.00

DR CAR ACCOUNT CR

N N
Jan. 25 Ojo 220.00

DR OJO ACCOUNT CR

N N
Jan. 25 car 220.00

Jan. 27 paid cash for repairs of Motor Vehicle N1, 500.00

DR MOTOR VEHICLE ACCOUNT CR

N N
Jan 27 Cash 1,500.00

DR CASH ACCOUNT CR

N N
Jan. 27 Motor Vehicle 1,500.00

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Jan 30 withdraw N1, 000 cash for personal use

DR DRAWINGS ACCOUNT CR

N N
Jan. 30 Cash 1,00.00

DR CASH ACCOUNT CR

N N
Jan. 30 Drawings 1,000.00

Error and Suspense Account

Errors can simply be referred to as mistakes made in the preparation of accounts. Where the
Trial Balance which purpose is to show the arithmetical accuracy of the entries in the ledgers
by the equality of Dr and Cr sides do not agree, there must definitely be an indication of
error. In some situations, some errors may not be disclosed by the Trial Balance, these errors
are referred to as errors that do not affect the Trial Balance because with the presence of the
error the trial balance debit and credit totals will be the same. At the same time certain errors
may occur where the trial balance debit and credit totals will refuse to balance. The two types
of errors can be categorized into two:
1. Errors that do not affect the totals of the Trial Balance.
2. Errors that affect the totals of the Trial Balance
Errors that do not affect the Trial Balance:
Despite the fact that the trial balance may balance it may contain some errors not disclosed,
these errors are referred to as those that do not affect the trial balance, namely:
i. Error of omission
ii. Error of commission
iii. Error of original entry
iv. Error of principle
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 ACC 101 BASIC FINANCIAL ACCOUNTING

v. Compensating errors
vi. Completes reversal of entry
- Error of Omission: This is an error whereby a transaction is completely omitted from the
books of account i.e. from both the debit and credit sides of the account related. This error is
corrected by entering the omitted amount in the journal and posting in the right way.
- Error of Commission: This is a situation whereby an item of transaction with an individual
is recorded correctly observing double entry but in the wrong person’s account. Usually a
Trade receivables or a Trade payables with similar names can be erroneously taken for the
other for example Mohammed account mistaken as Muhammad account were both persons
trade with the business, It will only affect the names of individuals and not the figure in the
trial balance or the double entry process. Example: Good worth N5, 000 sold to Ajaka on
credit has been entered in Ajala’s account in error.
- Error of Original Entry: This is where a wrong amount is entered on the debit and credit
sides of different accounts at the same time i.e. observing the double entry with the wrong
figure in the correct account. Therefore, the difference between the original amount and the
wrong figure is passed through the double entry system to correct the error. Example:
Purchase of goods for N5, 290 has been entered in the accounts as N5, 920.
The error will be corrected by crediting the difference between the two figures i.e. N630 to
the purchase account, at the same time debiting the cash account by the same N630. And
reverse the case where the figure has been reduced by sill debiting the difference to still to
purchase account and credit the cash account.
- Error of Principle: Here wrong classes of accounts are involved. It occurs where a
transaction belonging to a class of account is posted to another class of account observing
correct double entry but in the wrong account. Example a real account item is entered in a
nominal account or vice-versa. Example: purchase of furniture N10, 000 is posted in the
purchase account.
- Compensating Errors: This occurs when errors of the same amount occurred in different
sides of different ledgers therefore, they cancelled out each other. The two sides may be
overcast or under cast by the same amount. Example: an error of N2, 000 in the Sales account
is cancelled by an error of N2, 000 in motor expenses. Since the error occurred in both debit
and credit sides of different account the trial balance stills balanced. This can be corrected by
correcting the two ledgers separately at the same time in order not to creates another error
- Completes Reversal of Entry: This type of error occurs when an item is posted to the
correct account but in the wrong side of the accounts. To correct the error in the account the
figure is doubled to cancel the error in the reversal side first then the double entry is made in
the correct side. Example: Cash payment for wages N5, 500 was credited in wages account
instead of a debit entry.

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 ACC 101 BASIC FINANCIAL ACCOUNTING

The error above can be corrected by posting the figure N11,000 on the debit side of the wages
account to first cancel the error on the credit side and then maintain the correct figure on the
debit side.
Errors that Affect the Totals of the Trial Balance
These are errors which will affect the totals of the trial balance by preventing the trial balance
debit and credit totals from agreeing. These errors are
- Casting errors: these occur as a result of wrong addition of figures, resulting to
overcast or under cast i.e. wrongly adding up the figures or reducing the figures
respectively.
- Not observing the double entry: when transactions are posted not following these
principles, the trial balance will not balance.
- Errors of transposition: these occur when the correct figure is posted in one
account but a wrong figure is posted when double entry is being made example: Cash
payment for wages N5, 400 which will be posted to both cash and wages account is
posted correctly as N5, 400 in cash account but the amount transposed as N4, 500 in
wages account or vice versa.
- Wrong balance: this occurs where the balance brought down do not correspond with
the balance carried down of vice versa.

Illustration showing accounting entry from source document to final accounts

Don Bell opens a computer business called Technology Consultants and completes the
following transactions in the months of April.
April 1: Bell invested N150, 000 and N24, 000 in office equipment in the company
April 2: The Company paid N7, 200 cash for twelve months rent for an office.
April 3: The Company made purchases of goods for N12, 000 from Rose ltd and bought
office equipment for N2, 400 from Mohammed, Both transactions on credit.
April 6: The Company sold goods to a client immediately receiving cash N2, 000
April 9: The Company made an N8, 000 sales for a client Ali, who will pay within 30 days.
April 13: the company paid N14, 400 cash to settle the account payable on created on April 3.
To Rose and Mohammed ltd respectively (amount paid separately)
April 19: The Company paid N6, 000 cash for insurance premium on a 12-month insurance
policy April 22: The Company received N6, 400 cash as Partial payment for the sales on
April 9.
April 25: Sales made to another client named People for N2, 640 on credit.
April 28: Bell withdrew N6, 200 cash from the company for personnel use.
April 29: The Company bought additional office equipment for N800 on credit from
Mohammed ltd
April 30: Paid utility bills for N700

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 ACC 101 BASIC FINANCIAL ACCOUNTING

You are required

1. To journalize the transaction
2. Prepare the trial balance as at end of April 2013

Suggested Solution
In the books of Technology Consultants
Cash Book
Date Details fl Cash Date Details fl Cash
N N
Jan 1 Capital 150,000 Jan 2 Rent 86,400
6 Sales 2,000 13 Rose 12,000
22 Ali 6,400 13 Mohammed 2,400
19 Insurance 6,000
28 Drawing 6,200
30 Utility bill 700
30 Balance c/d 44,700
158,000 158,400
Feb 1 Balance b/d 44,700

Journal proper
Date Details DR CR
N N
Jan 1 Office equipment 24,000
Capital 24,000
Being personal equipment introduced into the business.

Jan 3 Office equipment 2,400

Mohammed 2,400
Being purchase of office equipment on credit
Jan 29 Office equipment 800 80
Mohammed 0
Being purchase of additional office equipment on credit

Purchase Journal
Date Details fl Amount Total
N N
Jan 3 Rose 12,000
DR. Purchase account (credit purchase) 12,000
Sale Journal
Date Details fl Amount Total
N N
Jan 9 Ali 8,000
Jan 25 People 2,640
CR. sales account (creditPage 34 of 56
sales) 10,640
 ACC 101 BASIC FINANCIAL ACCOUNTING

Capital account
N N
Cash 150,000
Balance c/d 174,000 Office equipment 24,000
174,000 174,000
Balance c/d 174,000

Office equipment account

N N
Capital 24,000
Mohammed 2,400
Mohammed 800 Balance c/d 27,200
27,200 27,200
Balance b/d 27,200

Sales account
N N
Cash 2,000
Balance c/d 12,640 Credit sales (SJ) 10,640
12,640 2,640
Balance b/d 12,640

Ali account (debtor)

N N
Cash 6,400
Sales 8,000 Balance c/d 1,600
8,000 8,000
Balance b/d 1,600

Rent account
N N
Cash 86,400 Balance c/d 86,400
86,400 86,400
Balance b/d 86,400

Rose account
N N
Cash 12,000 Purchas (PJ) 12,000
12,000 12,000

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Mohammed account
N N
Cash 2,400 Office equipment 2,400
Balance c/d 800 Credit sales (SJ) 800
12,640 3,200
Balance b/d 800

Insurance account
N N
Cash 6,000 Balance c/d 6,000
6,000 6,000
Balance b/d 6,000

Utility bill account

N N
Cash 700 Balance c/d 700
700 700
Balance b/d 700

Drawings account
N N
Cash 6,200 Balance c/d 700
6,200 700
Balance b/d 6,200

Purchase account
N N
Rose (PJ) 12,000 Balance c/d 12,000
12,000 12,000
Balance b/d 12,000

People account
N N
Rose (SJ) 2,640 Balance c/d 2,640
2,640 2,640
Balance b/d 2,640

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Trial Balance
DR CR
N N
Capital 174,000
Sales 12,640
Debtor (Ali & People) 4,240
Mohammed (non-stock creditor) 800
Insurance 6,000
Drawings 6,200
Rent 86,400
Utility bill 700
Office equipment 27,200
Purchase 12,000
Cash 44,700
187,440 187,440

Illustration final accounts

Mekiniya Enterprise runs business in general merchandise and have the following trial
balance for the year ended December 2011.

Trial Balance
Dr Cr
N N
Capital 92,000
Bank 7,500
Drawings 6,460
Cash in hand 2,880
Inventory (1st Jan. 2014.) 8,700
Loan 20,500
Building 80,000
Motor vehicle 40,000
Furniture and Fittings 24,000
Prov. for Dep. On motor vehicle 12,000
Prov. for Dep. On Furniture and Fittings 4,800
Provision for Doubtful debts 560
Sales/Purchases 68,700 124,000
Trade payables /Trade receivables 16,400 16,000
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 ACC 101 BASIC FINANCIAL ACCOUNTING

Bills Payable 160

Bills Receivable 2,300
Returns inward/Return outward 5,000 4,280
Electricity 6,400
Bad debts 300
Motor Repairs 12,500
Wages 4,000
Advertising 5,840
Rent Received 13,700
Salaries 1,220
Discount allowed 800
Commission Received 6,000
Discount Received 4,000
Carriage inward 2,500
Entertainment 2,500
Insurance 2,000
Receipt from disposal of motor vehicle 2,000
300,000 300,000

Given the Closing inventory at N7, 600, you are required to prepare;
1. The Income Statement
2. The Statement of Financial Position as at 31st December 2011.

Suggested solution in
Mekiniya Enterprise
Income Statement for the Year Ended 31st December 2011
N N N
Sales 124,700
Less Returns inward (5,000)
119,000
Less Cost of Sales:
Opening inventory 8,700
Add: Purchases 68,700
Carriage inwards 2,500 71,200
79,900
Less: Returns Outward (4,280)
Cost of good available for sales 75,620
Less Closing inventory (7, 600)

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 ACC 101 BASIC FINANCIAL ACCOUNTING

68,020
Add wages 4,000
Cost of good of sales/cost of sales (72,020)
Gross profit 46,980

Other Incomes:
Commissioned Received 6,000
Discount received 4,000
Rent received 13,700
Receipt from disposal of motor vehicle 2,000
72,680
Less Expenses:
Electricity 6,400
Motor repairs 12,500
Bad debt 300
Advertisement 5,840
Salaries 1,220
Entertainment 2,500
Discount allowed 800
Insurance 2,000 (31,560)
Net profit 41,120

Statement of Financial Position as at 31st December 2011

Assets: N N
Current Assets:
Stock 7, 600
Trade Receivables 16,400
Less Provision for Bad debt (560) 15,840
Cash and cash equivalent 2,880
Cash at Bank 7,500
Bill Receivables 2,300
36,120
Non-Current assets:
Building 80,000
Motor van 28,000
Furniture and Fittings 19,200
127,200

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 ACC 101 BASIC FINANCIAL ACCOUNTING

Total assets 163,320

Equity and Liabilities :

Current liabilities:
Trade Payables 16,000
Bills payables 160
16,160
Non-Current liabilities:
Long term loan 20,500
Total liabilities 36,600

Financed by:
Capital 92,000
Add: Net Profit 41,120
133,120
Less Drawings (6,460)
Total equity 126,660
Total equity and liabilities 163,320

Workings;
Assets Schedule
Cost Accu- Dep NBV
N N N
Non-Current assets:
Building 80,000 - 80,000
Motor van 40,000 (12,000) 28,000
Furniture and Fittings 24,000 (4,800) 19,200
144,000 (16,800) 127,200

Note; from the above question the item provision for bad debt and provision for depreciation
were not carried to the trial balance because they have no balance as at the end of the period

Summary
In Study Session 3, you have learned about:
i. The accounting process starting from the source document to the journal to the ledger to the
trial balance and finally to the final accounting.
ii. About the meaning and the terms used in all accounting processes i.e. accounting cycle.

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 ACC 101 BASIC FINANCIAL ACCOUNTING

iii. Practical demonstrations of the process i.e. cash book. Sales journal, purchases journal,
returns inward and returns outward journals, ledger entries, trial balance and the final
accounts
Self-Assessment Questions (SAQs) for Study Session 3
Now that you are true with this study session, to assess how well you have achieved its
Learning objectives, you may answer the following questions. Write your answers in your
study notes and discuss them with your Tutor at the next contact.
SAQ 3.1 (Testing Learning outcomes 3.1)
i. Explain the accounting process and diagrammatically showing the first step to the final step.
ii. Differentiate between a ledger and an account
iii. What is an error and differentiate between
iv. Write up a two column cash book of EL-Toda venture for the month of February, 2014
February 1: Cash balance b/d 3,000
February 2: Paid rent 2,300
February 3: G. Broad lend us by cheque 2,000
February 4: Paid J fine by cheque 9,600
February 5: Cash sales 10,900
February 7: F.love paid us by cheque 3,400
February 9: Paid D. Moore 920
February 11: Cash paid into bank 15,100
February 15: P. Hoot paid us in cash 9,600
February 16: Withdrew from bank account and paid it into cash till 1,000
February 19: Paid R. Evans by cheque 5,500
February 22: Cash sales and paid into bank 1,220
February 26: Paid motor expenses by cheque 750
February 30: Took cash for personal use 200
February 30: paid wages for office worker 4,000
February 31: Paid insurance by cheque 320

You are required to write up the cash book for the month of February 2014 and post the
transactions to their corresponding ledger entries assumed all figures are in Naira.

v. Record the following transaction in the relevant columns of the petty cash book of ICAN , a
sole proprietor for the month of November 2011
N
Nov 1. Petty cashier received an Imprest amount of N2000
2 Paid for bus fare N200
4 Paid for postage N150
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 ACC 101 BASIC FINANCIAL ACCOUNTING

8 Paid for duplicating paper N300

12 Bought envelops N250
16 Paid for customers soft drinks N500
25 Bought office pins N100
26 Bought stamps N100
30 Paid taxi fare N200

SAQ 3.2 (Testing Learning outcomes 3.2)

i. State the accounting equation and explain how it affect the statement of financial
position
ii. The following trial balance has be extracted from the books of Hero as at close of
business on31/12/2012

N N
Inventory as at Jan 1st 2012 20000
Carriage Inward 7000
Trade Receivables 59200
Trade Payables 31600
Capital as at 1st 2012 82000
Drawings 24000
Bills Receivable 15400
Bad Debts Written Off 3800
Provision for Bad and Doubtful Debts 3200
Bills Payable 9400
Wages 8400
Salaries 30000
Purchase 131600
Revenue 213400
Returns Outwards 5600

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Returns Inwards 8200

Bank 11600
Cash 800
Rent and Rates 4600
Insurance 2000
Furniture and Fittings 11000
General Expenses 4000
Discount Received 7400
Discount Allowed 10400
Transport 600
352600 352600

Additional information as at 31 December 2012 are given as follows

Inventory at 31 December 2012 N28,400

Illustration:
Below is a trial balance as at close 31/09/2005 Brown enterprises a sole trader in Benin city.
N N
Inventory as at Jan 1st 2005 6000
Furniture and Fittings 9400
Rent Received 7000
Motor Van at Cost (N20,000) 16000
Rent Receivable 7500
Wages 3000
Provision for Depreciation Furniture & Fittings 1200
Motor Repairs 2800
Provision for Bad and Doubtful Debts 600
Electricity Bills 1600
Salaries 5000
Insurance 1200
Discount 2400 2800
Bank Balance 14000
Bad Debt 200
Returns 2900 2400
Rent Paid 8400
Cash Balance 14000
Trade payables & Trade receivables 36000 25000
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Long Term Loan 16000

Drawings 6000
Capitals 4000 120000
Revenue & Purchases 52200 100000
Carriage Outward 6000
Mortgage Loan 6000
Land & Building 108000
293800 293800
Additional information;
1. Inventory at 31/9/2005 was valued at N8,500
2. Insurance paid covered the period to 31/12/2005
3. Of the carriage paid N1,200 is for carriage inward

You are required to prepare in accordance with IFRS terms the trading, profit and loss
account for the year ended 30th September, 2005 and a balance sheet as at that date.

Reference
Basic Accounting theory and practice 1 (2014) Dr. A. A. Malgwi, Mr. Victor O. Atabo
Financial Accounting Made Simple Robert Igben

Study Session 4: Bank Reconciliation Statement

Introduction
As business grows many of its transactions such as receipts and payment will be done in the
bank the cash book prepared in the business will now contain an extra column for bank cash
transactions such as deposit, withdrawal, receipts from customers and payment to suppliers
can be carried through a bank, the bank maintains an account for the business. At the end of
the month the business receives a statement from the bank showing all its transactions for the
month. When the company receives its bank statement, it verifies that the amounts on the
bank statement is the same with the amounts in the company's Cash account. This process is
referred to as reconciling the bank statement, bank statement reconciliation, bank
reconciliation, or doing a "bank rec." Reasons why the bank statement and the cash book will
not agree are stated below with detail explanations under explanations of the process in step 1
and step 2.

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Learning Outcomes
At the end of this session, you should be able to:

4.1 Explain the concept of bank statement and the cashbook.

4.2 Explain the importance of bank reconciliation.
4.3 Demonstrate the bank reconciliation statement by application

4.1 Concept of Bank Statement and the Cashbook

i. Bank charges are deduction on the bank statement for the bank's handling and processing of the
account activities such as deposits, posting checks, mailing the bank statement, printing new cheques,
Sms charges etc. When this occurs the company will only see these the amounts after receiving its
bank statement. These charges reduces the amount in the bank and all these charges will appear on the
Dr side of the bank statement. But will not be found on the cash book since the company is not aware
of it.
ii. Interest earned will appear on the bank statement on the credit side, when a bank gives a company
interest on its account. Interest earned will increase the balance in the company's Cash account on its
books (debit entry). But the customers will not be aware usually so such amount will be absent on the
cash book at the company.
iii. Notes receivable are assets of a company. When notes come due, the company might ask its bank to
collect the notes receivable. For this service the bank will charge a fee. The bank will increase the
company's checking account for the amount it collected (principal and interest) and will decrease the
account by the collection fee it charges. Since these amounts are already on the bank statement, the
company must be certain that the amounts appear on the company's books in its Cash account (debit
entry).
iv. Errors in the company's Cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that should be in
the account. Since the company made these errors, the correction of the error will be either an increase
or a decrease (overcast and under cast) to the balance in the Cash account on the company's books.
v. Standing order: this is an instruction giving by the owner of the account to the bank to make periodic
payment on his behalf. The bank will make the payment and debit the bank statement but no entry in
the cash book examples. Insurance and bills etc.

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vi. Dishonoured Cheques: these are cheques presented for payment or deposited into a bank but were
rejected by the bank due to certain irregularities. The possible reasons why bank dishonours cheques
are:
a. Irregular and consistence in signature
b. Insufficient fund in the account
c. Alteration of the cheque and its writing
d. Disparity between amount in words and figure
e. Post-dated cheque i.e. must be within 6 months after its signature dated
f. Stale cheque are expired cheques i.e. beyond six (6) months after its signature dated Credit
vii. Transfer: These are cheques or cash received by the bank on behalf of the company, without
notifying the company until they receives the bank statement seeing it as a credit entry implying that
it’s a payment on behalf of the owners.

viii. Direct Debit: This is an arrangement whereby a person’s account is debited with a sum of money at
the instance of supplier with the account owner prior permission examples buying recharge card using
Automated Teller Machines to pay.
ix. Dividend: This is part of profit distributed to shareholder of an organization. This will be paid into the
account of the owner directly as a credit entry thus will be absent on the debit side of the cashbook thus
debiting the company’s account.
x. Uncredited cheque: these are cheques received and entered on the debit side of the cash book but
have not been entered in the credit in the customer’s bank account as at the date of preparing the bank
statement. They are amounts already received and recorded by the company’s cash book, but are yet to
be recorded in the bank account by the bank. For example, a retail store deposits its cash receipts on 31 st
September by 3:00 pm while the bank has already printed the bank statement by 10am same day. This
is a deposit in transit since the bank has not yet received the amount when it produced the bank
statement. Because deposits in transit are already included in the company's Cash account, there is no
need to adjust the company's records. However, deposits in transit (Uncredited cheque) are not yet on
the bank statement. Therefore, they need to be listed on the bank reconciliation as an increase to the
balance as per bank in order to report the true amount of cash.
xi. Unpresented Cheques: are cheques outstanding, cheques drawn or issued out in favour of somebody
but have not been drawn from the bank at the time of preparation of the bank statement though they
have been written and recorded (credited) in the company's Cash account, but not yet presented at the

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bank for payment. cheques written during the last few days of the month plus a few older cheques are
likely to be among the outstanding cheques. Because all cheques that have been written are
immediately recorded in the company's Cash account, there is no need to adjust the company's records
for the outstanding cheques. However, the outstanding cheques have not yet reached the bank and the
bank statement. Therefore, outstanding cheques are listed on the bank reconciliation as a decrease in the
balance as per bank.
xii. Bank errors are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting
an amount from a company's bank statement. The company should notify the bank of its errors.
Depending on the error, the correction could increase or decrease the balance shown on the bank
statement. (Since the company did not make the error, the company's records are not changed.)
xiii. The bank statement: this is a statement prepared at the bank to show all the customers
transactions for the month, showing how much was deposited at the bank by the customer,
what amount was withdrawn at the same time and the balance at each withdrawal and at each
deposit. The bank statement shows a column for what comes in, a column for what goes out
and a column for the balance remaining in the bank account.

Using fictitious figures a bank statement is presented below.

Bank statement sent E.Kaka on 31st June, 2013

DATE PARTICULARS DR CR BALANCE
N N N
June. 1 Balnceb/f 5,000
7 J. Mama 3,000 2,000
11 Jack .B 1,200 3,200
24 Matins.D 2,000 1,200
31 Abu .H 2,200 (1,000)
31 Bat. J 900 (100)
31 Bank charges 50 (150)
31 Jack.B(chequeDishonoured) 1,200 (1,350)

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You should note that the bank statement is the reversal of the cash book where you debit (Dr)
when you receive cash and credit (Cr) when you give out cash, but for the bank statement you
will be Debited (Dr) by the bank when you withdraw cash at the bank and Credited (Cr)
when you deposited in the bank.
xiv. The cashbook: this a record of all cash transactions at the business and the bank. The cash
book serves as a journal to record since all cash transactions are first recorded and at the same
time it’s a ledger because it is divided into two equal side the Dr side and the Credit side, also
it’s the first leg entry of all cash transaction.
Using fictitious figures
Cash book
Date Particulars Fol Bank Date Particulars Fol Bank
N N
Jun 1 Balance .b/f 10,000 Jun.2 Brush B. 8,000
7 Uche 6,200 9 Ojochide 7,500
18 Baba 5,900 15 Bala 5,500
24 Okpanachi 6,200 21 Dan. 7,000
29 Ufedo 8,200 30 Abuja 7,200
31 Balance c/d 5,700 31 John 7,000
42,200 42,200
Balance b/d 5,700

4.2 Explain the importance of bank reconciliation.

The importance of the preparation of Bank Reconciliation Statement to the business are:

i) It enables the business to satisfy that there is no fraud or error in its account with the bank.

ii) It enables the business to update its cash book with new information reflected in the bank
statement.

iii) It enables the business to confirm that the cash book was recorded correctly.

iv) It authenticates the business records as it provides corroborative evidence of transactions.

v) It is a deterrent to fraud as cashiers and accountants are aware that any fraudulent activity
shall be exposed during the bank reconciliation.

vii) It enables the business account to be up to date as it is prepared regularly (monthly).

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4.3 Demonstrate the bank reconciliation statement by application

The following steps are often necessary while preparing a bank reconciliation statement:
i) Compare the cash book entries with the bank statement entries: You will observe that
the entries in the debit side of the cash book are actually reflected in the credit side of the
bank statement and vice versa. This is so because while the business records the transactions
from its own perspective, the bank also records the same transactions from the bank‘s own
perspective from which it issues out the bank statement. While comparing the cash book with
the bank statement it will be noticed that some items in the cash book are not in the bank
statement and that some items in the bank statement are not reflected in the cash book. The
procedure is to update the cash book with new information revealed by the bank statement
which the business are in agreement with and to correct errors committed in cash book which
was unveiled during reconciliation. The rest of the discrepancies should be used to prepare a
bank reconciliation statement.
ii) Update the cash book with “Difference”: those differences that are not self-reversal
with time. These are discrepancies that would continue to exist over periods of time if the
business does not recognize it in the cash book. It is the duty of the business to update its cash
book with permanent difference whenever this is discovered. Some examples could include
new information reflected in the bank statement which were not known by the business until
bank statement was received eg bank charges, correction of errors committed by the accounts
clerk and dishonoured cheques.
iii) Prepare a bank reconciliation statement with “Timing Difference”: Timing
differences are items which are automatically reversible in accounts. These are discrepancies
arising out of time lag or delay in recognition by the bank. It is just a matter of time surely in
a short period; the timing difference will be recognised by the bank. Examples include:
unpresented, uncredited cheques, and bank errors and frauds.
The format of the adjusted cashbook which will be prepared from the cashbook.

Adjusted cashbook
N N
b
Balance /d (DR) xxx Balance b/d (CR) xxx
Interest earned xxx Bank charges xxx
Add/less errors in cash book xxx Sms charges xxx
Dividend xxx Add /less error in cash book xxx
Standing orders xxx
Dishonoured cheque xxx
Balance c/d xxx
xxx xxx
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Balance b/d xxx

The items necessary for the bank reconciliation statement are listed in the following format:

Bank Reconciliation Statement

N N
th
Balance as per Bank Statement as at 30 September xxx
Add uncredited cheques xxx
Add bank error of under cast xx xxx
xxx
Less unpresented cheques xxx
Less bank error of overcast xx xxx
Balance as per adjusted cashbook xxx

OR

Bank Reconciliation Statement

N N
Balance as per adjusted cashbook xxx
Add unpresented cheques xxx
Add bank error of overcast xx xxx
xxx
Add uncredited cheques xxx
Add bank error of under cast xx xxx
xxx

Illustration
Using fictitious figures provided in the format for both cash book and statement of bank
account presented above we will the adjusted cash book and the bank reconcialation
statement for Goodness ltd for the month of 31STJune, 2013.
Cashbook
Date Particulars Fol Cash Date Particulars Fol Cash
N N
Jun 1 Balance .b/f 10,000 Jun.2 Brush B. 8,000
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7 Uche 6,200 9 Ojochide 7,500

18 Baba 5,900 15 Bala 5,500
24 Okpanachi 6,200 21 Dan. 7,000
29 Ufedo 8,200 30 Abuja 7,200
31 Balance c/d 5,700 31 John 7,000
42,200 42,200
Balance b/d 5,700

Bank Statement Sent Goodness ltd on 31st June, 2013

DATE PARTICULARS DR CR BALANCE
N N
June. 1 Balnce b/f 10,000
7 Brush B. 8,000 2,000
11 Uche 6,200 8,200
24 Dan 7,000 1,200
31 Abuja 7,200 (6,000)
31 Baba 5,900 (,100)
31 Bank charges 5,050 (5,150)
31 Ali (Dishonoured) 6,200 (11,350)

Suggested Solution:
In the books of Goodness ltd
Adjusted Cash Book (Bank Column only) 31st June, 2013
N N
Balance b/f 5,700
Bank charges 5,050
Balance c/d 16,950 Ali (Dishonoured Cheques) 6,200
16,950 16,950
Balance b/d 16,950

Bank Reconciliation Statement (31st June, 2013)

N N
Balance as per adjusted cash book(Cr) (16,950)
Add: Unpresented Cheques:
Ojochide
7,500
Bala 5,500

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John 7,000 20,000

3,050
Less: Uncredited Cheques:
Okpanachi 6,200
Ufedo 8,200 (14,400)
Balance as per Bank Statement (11,350)

Note: the reconciliation can be represented below using the second format.

Bank Reconciliation Statement (31st June, 2013)

N N
Balance as per Bank Statement (11,350)
Add : Uncredited Cheques:
Okpanachi 6,200
Ufedo 8,200 14,400
3050
less: Unpresented Cheques:
Ojochide 7,500
Bala 5,500
John 7,000 20,000
Balance as per adjusted cash book (16,950)

Illustrations 2
On 31st December 2008, Jerry‘s cash book showed a debit balance of N29, 520. His bank
statement
showed a credited balance of N26, 500. The reason for the difference were as follows

a) A cheque for N1960 was received and entered in the cash book but was not recorded
in the bank statement
b) Un-presented cheques total N3740
c) The payments side of the cashbook had been under cast by N2000
d) Standing order for N1260 appearing in the bank statement yet to be posted in the cash
book
e) A bill of exchange of N1340 had matured and the bank had paid on Jerry‘s behalf
but it had not been recorded in the cashbook.
f) Dividends credited to his account of N1240 had not been recorded in the cash book
g) A withdrawal of N1440 by Jeremiah and other customer of the bank had been charged
error to
Jerry‘s account
You are required:-
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1. Identify and label the causes of these differences.

2. Prepare an updated cash book
3. Prepare the bank reconciliation statement as at 31st December 2008.

Suggested Solution:
1. The following are the causes of the differences
i Uncredited cheques
ii. Unpresented cheques
iii. Error by the account holder in his cash book
iv. Standing order
v. Direct credit
vi. Dividend received
vii Error by the bank.

2.
Jerry‘s book
Adjusted Cash Book
N N
Balance B/d 29,520 Correction of under cast 2,000
Dividend 1,240 Standing order 1,260
Bill of exchange 1,340
Balance c/d 26,160
30,760 30,760
Bal b/d 26,160

3. Bank Reconciliation Statement as at 31 December, 2008

N
Balance as per Adjusted cash book 26,160
Add: Un-presented cheque 3,740
29,900
Less: Un-credited cheque (1,960)
27,940
Less Bank Error (1,440)
Balance as per Bank Statement 26,500

Note: when preparing the bank reconciliation statement and you are using balance as per
adjusted cash book first, you are trying to find the same balance as the bank statement has
and vice –versa.
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 ACC 101 BASIC FINANCIAL ACCOUNTING

Jerry‘s Bank reconciliation Statement as at 31 December, 2008

N
Balance as per Bank Statement 26,500
less: Un-presented cheque (3,740)
22,760
Add: Un-credited cheque 1,960
24,720
Add: Bank Error 1,440
Balance as per Adjusted cash book 26,160

Summary
In Study Session 2, you have learned about:
i. The concept of bank statement, the cashbook and associated terminology
ii. Explain the importance of bank reconciliation.
iii. Demonstrate the bank reconciliation statement by application to real life situation

Self-Assessment Questions (SAQs) for Study Session 2

Now that you are true with this study session, to assess how well you have achieved its
Learning objectives, you may answer the following questions. Write your answers in your
study notes and discuss them with your Tutor at the next study Support meeting.
SAQ 1.1 (Testing Learning outcomes 2.1)
i. Define the following term
a. Cashbook and adjusted cashbook
b. Bank statement
c. Bank reconciliation statement
ii. Explain briefly the reasons why the bank statement and the cash book will always not agree
iii. What are the steps to the preparations of a bank reconciliation statement?
SAQ 1.2 (Testing Learning outcomes 2.2)
1. On 30th June 2011 the bank reconciliation of Benue stores & co showed that firms
account with one of its bankers has an overdrawn balance of N17,650. But the cash
book balance showed a much better position, investigation reviewed that the source
of this discrepancy were due to the following items of transactions;
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a. Cash lodgement on 30/6/2011 amounting to N14200 was no credited by the bank until
1/7/2011.
b. A half year payment of N500 to the Nigerian institute of managers was made under
a banker order. This amount had not entered in the cash book.
c. Unknown to Benue stores & Co, a debtor whose debt has being written off as
irrecoverable, had paid the sum of N1550 direct to the company‘s bank account and
the cash book is yet to reflect this.
d. A cheque of N850 paid into the bank had been dishonoured but no entry of
dishonour has being made in the cash book.
e. Also Benue stores cheque settlement of one of its customers ‘was returned for
irregular signature amounting to N2500. The cashbook is yet to show this.
f. A n o t h e r of the banks customer issued a cheque for N2500 on the bank but this
was erroneously debited to the firms account.
g. Commission and C.O.T charged by the bank to 30 June 2011 amount to N600
and N400 respectively, but not been entered in the cash book.
h. Cheques drawn before 3/6/2011 and not yet cleared by the bank were as follows;
Bama & Co
Bauchi Brokers and Yobe Ass for N800, N2900 and N8100 respectively.
i. C h e q u e s lodged on 29/6/2011 which has not been credited by the bank are N5000
from Adamu and N2500 from Okafor and sons.
You are required to

(i) Show the adjusted cash book

(ii) Prepare a bank reconciliation statement note that the cash book showed an overdrawn balance
of N6950 as at 30/6/2011.
(iii) Explain to the management of Benue Stores & co. the usefulness of the statement you
prepared in (2) above.

2. The following is the cash book (bank column) of Fayemi for December 2011
N N
6-Dec J. Hall 155 1-Dec Bal b/d 3,726
20-Dec C. Walter 189 10-Dec D. Wood 234
31-Dec P. Miller 211 19-Dec M. Roberts 312
31-Dec Bal c/f 3,922 29-Dec P. Philips 200
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4,472 4,472

The bank statement for the month is:

Dr Cr Balance
Date Particulars N N N
1-Dec Balance 3,872
6-Dec Cheque 155 3,717
13-Dec P. Woods 206 3,923
20-Dec Cheque 180 3,734
22-Dec M Roberts 315 4,049
30-Dec Standing order 200 4,249
31-Dec K. Sanders: Trade creditor 180 4,069
31-Dec Bank Cheque 65 4,134

You are required to:

(a) Write the cash book up to date to take the necessary entries into account, and
(b) Draw up a bank reconciliation statement as on 31 December, 2011.

Reference
A. A. Malgwi and V. O. Atabo (2014) Basic Accounting theory and practice 1 Comput Ray
Publishers Kaduna
R.O. Igben(2004) Financial Accounting Made Simple, 1st edition, ROI publishers, Lagos.
E. Ene and U Enjiwa Accounting Foundation volume 1 (2014).

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