TOPIC 1:

ACCOUNTS OF
MANUFACTURING FIRMS

ACC 102: Intro. to Financial Reporting II

Nature of Manufacturing
firms.
 Manufacturing businesses have a more complex
sequence of operations, whereby raw materials
are purchased and converted into finished goods
and then sold.
 The relevance of manufacturing accounts is in
the analysis of the results of a business in such a
way as to identify the profitable and non-
profitable areas of production.
 This will enable managers responsible for each
area to take appropriate measures where
necessary, to reduce costs and increase
profitability.
The Concept of Cost.
 Cost may be regarded as the amount of
expenditure, whether actual or notional,
incurred or attributable to, a product,
process or operation.
 Cost is made up of two components
namely: quantity used and prices and
they are related thus: Cost =
Quantity*Price.
 When cost expires, it becomes expenses.
Elements of Cost and Their
Classification.

 Basically the elements of cost comprise

material costs, labour costs and
expenses.
 Their classification fall into direct and
indirect costs.
 Thus, we have direct and indirect
material cost, labour cost and expenses.
Direct Costs(Prime
Cost).
 Direct costs are those costs which can be traced to
or identified with a particular product, and
comprise direct materials, direct labour/wages and
direct expenses.

 Direct Material Costs: Consists of all those

materials that can be physically and economically
identified with a specific cost object. They include
raw materials used in a product, bought in parts
and assemblies incorporated into the finished
product. An example is wood that is used in the
manufacture of a furniture desk.
Direct Costs(Prime Cost)
Contd.
 Direct Labour Cost/Wages: These are wages
paid to employees who are directly
engaged in the production process. The
remuneration of the human effort of
workers that can be physically traced to or
identified with a particular cost object.
Examples are: salaries paid to factory
workers, wages of operatives who assemble
parts into finished product or machine
operatives engaged in the manufacturing
process.
Direct Costs(Prime Cost)
Contd.
 Direct Expenses: These are costs other than
materials and wages that can be directly
associated with a production unit. They are
expenses incurred specifically for a
particular product, job, batch or service.
Examples are: royalties paid for the right to
produce the finished product, the cost of
any special drawings and sub-contracted
work, the cost of hiring a plant or a tool for
a particular job, royalties paid for copyright
or patent.
Prime Cost.
 The sum of all direct material, direct
labour and direct expense costs.
 Prime cost = Direct materials + Direct
Labour+ Direct Expenses.
Indirect
Costs(Overheads).
 They are all material costs, labour costs and
expenses which cannot be traced to a cost object or
a particular product. They comprise:
factory/production/manufacturing overheads, selling
and distribution overheads, and administrative
overheads.

 Indirect Material Costs: Items of materials that

cannot be identified with any one product, because
they are used for the benefit of all products rather
than for any one specific product. Examples are
lubricating oil, stationery and consumable materials.
Indirect
Costs(Overheads) contd.
 Indirect Labour Cost: Includes wages of
all employees who do not work on the
product itself but who assist in the
manufacturing operation. Examples are
the salaries of factory supervisor or staff
in the stores departments. Wages paid to
foremen, supervisors, managers,
cleaners, maintenance staff , etc…are all
indirect wages.
Indirect
Costs(Overheads) contd.
 Indirect Expenses: They are cost of services
that cannot be traced to a product, job, or
service. Examples are: rent and rates,
depreciation and insurance of plant and
equipment.

 The sum of all indirect materials cost, indirect

labour costs and indirect expenses is termed
as overheads.
 Overheads=Indirect material cost+ indirect
labour cost+ Indirect expenses.
Further classification of overheads.

 Manufacturing/Production Overheads:
These include indirect material costs,
indirect labour costs and indirect
expenses which relate to the production
process. Examples are lubricants and
supplies of materials for repairs and
maintenance, salaries and wages of
inspectors, time keepers and
supervisors, heating, lighting, power and
depreciation of factory buildings, plant
and equipment.
Further classification of overheads.

 Non- manufacturing overheads: These are costs which

are not included in the cost of manufacturing the
product, and they are not included therefore in the cost
of sales. They are period costs rather than product costs
and can also be classified into:

 Administrative overheads: They are the cost of

formulating policies, directing the organization and
controlling the operations of an undertaking which are
not related directly to production. Also known as cost of
management. Examples are: directors’ salaries,
depreciation of office equipment, stationery, rates and
rent of office building.

 Selling and Distribution Overheads: Those overheads

 Cost of Manufacturing
 The purpose of manufacturing account is :
 To find the cost of goods manufactured
 To ascertain the amount of any profit on
manufacturing process
 The main components of total cost of
manufacturing are classified in the
manufacturing process as Prime Cost and Total
Cost of Production

 Prime cost consist of all direct expenses

 Total cost of production consist of the Prime cost
and the Overhead expenses/factory overheads
Types of Inventory.
 A manufacturing business has a number of different
categories of inventory as follows:
 Inventory of raw materials: composed of raw
materials and components that have been
purchased but not put into production.
 Inventory of work in progress: refers to goods that
are partly completed and would still require further
production to get them completed.
 Inventory of finished goods: consists of goods that
have been produced/purchased. These goods have
gone through the production process and are ready
for sale but which are unsold.
Adjusting for Work in
Progress.
 There are two main methods in use:
 Method 1
a. To find the total production cost of goods completed in the period the
value of work in progress at the beginning must be brought into account
as an addition to the total production cost incurred in the current
period.
b. On the other hand, work in progress at the end of period must be
carried forward to the next period for completion. This value is therefore
shown as deduction from the total production cost ascertained.
Thus,
Production costs xxx
Add work in progress at start xxx
xxx
Less: work in progress at end (xxx)
Production cost of goods completed xxx
 Adjusting for Work in Progress
contd..
 Method 2.
 If the opening inventory of work in progress is greater
than the closing figure the difference is added to the
cost of production to arrive at the production cost of
goods completed. The implication is that costs absorbed
into the total amount of completed goods is more than
costs held back at the period end.
 Where the opening inventory of work in progress is less
than the closing figure, the difference is deducted from
the cost of production to arrive at the production cost of
goods completed. The implication is that more cost is
held back at the period end than were absorbed into the
total amount of completed goods.
Adjusting for Work in Progress
contd..

 Thus:
Production costs
xxx
Add/Less: Net Work in Progress
xxx
Production Cost of goods completed
xxx

The production cost of goods completed is

transferred to the trading account in
Determination of Manufacturing Profit.

 In some businesses, manufactured goods are transferred

from the factory to the warehouse at market prices, or
an approximation thereof in the form of cost plus a given
percentage. This intended to represent the price that the
manufacturer would have to pay if he/ she had
purchased the goods on the market before sales.
 Market value of goods manufactured = Total cost of
production + manufacturing profit

 An unrealized profit is therefore profit on unsold

inventory where the inventory has been valued at
market value.
 To determine the unrealized profit within any market
value of inventory, the markup rate must be changed to
margin.
Provision for unrealized
profit.
 Where there are any quantities of unsold inventory of finished
goods in the business at the end of a financial period, the profit
margin related to them described as unrealized profit should be
ascertained and charged in the firm’s profit and loss account.

 This treatment is intended to set off the amount of unrealized

profit on the goods yet unsold against the credit for profit
loaded on all completed goods manufactured in the financial
period.

 The amount of provision for unrealized profit and unsold

inventory in the first year of operation must be fully charged to
the profit and loss account and credited to the provision
account. In the second and subsequent years appropriate
adjustments required for increases or reduction in inventory
over the previous year must be adjusted accordingly to the
provision account.
 Provision for unrealized profit Cont.

Illustration
 The Opening inventory of finished goods at market

value as at 1st Jan, 2019 is GHS 20,000. Compute

the unrealized profit if goods are transferred to the
warehouse at cost plus 33 1/3%.
 The following information relates to Koo Nsiah

Manufacturing Enterprise.
Opening inventory at market value (1/01/2018)
GHS22,000
Closing inventory at market value (31/12/2018)
GHS36,000
Compute the unrealized profit if goods are transferred to
the warehouse at cost plus 33 1/3%
Illustration.
 The following balances relate to Oti Manufacturing Enterprise as at 31 st December, 2014.
Gh¢
Inventory on 1st January, 2014:
Raw materials at cost 300,000
WIP at factory cost 200,000
Finished goods at factory cost 400,000
Purchase of raw materials 2,150,000
Manufacturing wages 3,250,000
Factory expenses 900,000
Office expenses 450,000
Factory fuel and power 250,000
Depreciation of plant and machinery 350,000
Salesmen’s salaries and commissions 700,000
Salesmen’s expenses 200,000
Advertising 150,000
Rates and Insurance 200,000
Electricity 400,000
Sales 9,500,000

Required: Prepare a manufacturing trading, profit and loss account for the year ended 31 st December, 2014.
END OF TOPIC 1
TOPIC 2:
SINGLE ENTRY AND
INCOMPLETE
RECORDS

ACC 102: Intro. to Financial

Reporting II
LEARNING OBJECTIVES

 Understand the concept of single entry and incomplete

records
 Explain why some accounting records are regarded as
incomplete.
 Appreciate the features and limitations of single entry
and incomplete records.
 Explain and prepare Statement of Affairs.
 Determine profit or loss comparing differences between
capitals of two given periods.
 Determine the set of missing figures in the accounts
especially sales and purchases figures.
 Prepare final accounts from a set of incomplete records
 Nature of Single Entry and Incomplete
Records.

 Incomplete records is a general term

given to a situation where the
transactions of an organization have not
been recorded based on the double
entry principle of accounting, and thus
there is not a full set of records of the
organization’s transactions.
 It is often too expensive for small

businesses to maintain a complete

system of double entry bookkeeping.
Forms of Single Entry and Incomplete Records.

 Where no records are kept at all: This is

where no basic documents or no records
of transactions are kept, or where the
records kept are inadequate. In this
case, it is not possible to prepare a
complete set of financial statements.
However, it may still be possible to
ascertain the profit for the period
provided there is information available
relating to the assets and liabilities at
start and end of relevant period.
Forms of Single Entry and
Incomplete Records.
 Where single entry records are kept:
Refers to a situation where the business
transactions have only been entered in a
book of prime entry, usually a cash book,
and not in the ledger.
 Where records are destroyed: This is a
situation where records are kept on
double entry basis but as a result of a
disaster, part or all of the records are
accidentally destroyed by fire, flood or
any natural disaster.
Reasons for single entry and
incomplete records
 Some business see no need to keep proper
books of accounts.
 High rate of illiteracy is a factor. A business
owner may not be able to read and write and,
therefore, cannot maintain any book of accounts.
 Records might have been destroyed or stolen.
 A business owner may not have the funds to
engage the services of an accountant or an
accounts officer.
 A business owner who is not knowledgeable
enough may keep records in a diary.
Problems of Single Entry/Incomplete
Records.

 A trial balance cannot be drawn up and

this makes it difficult to verify the
arithmetical accuracy of the records of
transactions.
 It becomes difficult to detect or correct
errors.
 The situation facilitates misappropriation
of funds, fraudulent deals among others.
 It could lead to tax evasion and or
overpayment of taxes.
 It makes it difficult to assess the
Advantages to the Owner

 Simpler and easier system of keeping

records
 Less expensive, or at no cost at all
Disadvantages of Single Entry and
Incomplete Records.
 Impossible to extract trial balance-Effect on
arithmetical accuracy of entries and
investigation of errors
 Single entry and incomplete records system
of book keeping is not accepted by the tax
authorities.
 Errors are very difficult to detect when
records are not properly kept.
 As real accounts are not kept, it is difficult to
prepare a statement of financial position.
 It gives room for misappropriation and
 Determining the profit or loss from
single entry and incomplete records.
Statement of profit or loss for the period.
Closing capital xxx
Add drawings xxx
Less: capital introduced xxx
opening capital xxx (xxx)
Net profit/loss xxx

The opening and closing capital are

ascertained by preparing statement of
affairs.
 Statement of Affairs.
 This statement lists the assets and
liabilities at a given date. The difference
between the assets and liabilities
represents capital. This is based on the
accounting equation.
 Capital at the end of a period less capital at
the start of the period equals profit or loss
for the period.
 Adjustments for capital introduced and
drawings made during the period have to
be made in order to ascertain the actual
 Illustration
Mr. Suleman has the following assets and
liabilities as at 1 January, 2015: Machinery
GHS13,500; Inventory GHS2,500; Debtors
GHS4,800; Creditors GHS4,500; Loan
GHS3,800; Bank GHS7,000; Accrued Rent
GHS1,500
Required:
Compute the opening Capital for Mr.
Suleman
Solution
Statement of affairs as at 1 January, 2015
Assets GHS GHS
Machinery 13,500
Inventory 2,500
Debtors 4,800
Bank 7,000
27,800
Less Liabilities:
Loan 3,800
Creditors 4,500
Accrued rent 1,500 (9,800)
Capital 18,000
 Steps used in preparing the final accounts
from a set of incomplete records.

 Determine the credit sales and credit purchases using control

accounts. Alternatively, use mark-up and margin to
determine purchases and sales
 Scrutinize the summarized cash book for expenses.
 Adjust for accruals and prepayments at the end of the period.
 Make provisions for depreciation and bad debts as required.
 Prepare the statement of affairs at the beginning of the
period to determine the opening capital.
 Open T accounts form the opening statement and complete
the double entry from the cash book.
 Any fall in value of the non-current assets should be treated
as depreciation.
 Prepare the income statement and the statement of financial
 Calculation of purchases.
 If the business has no opening and closing creditor’s
figures, then the payments to suppliers of goods can
be taken as the purchases.
 If the business has creditors at start and end of the
period, then the change in the creditor’s figures will
have to be considered. A summary or control
account can be used to calculate the purchases for
the year.
 The cash purchases derived from the cash book will
then be added to the credit purchases determined to
arrive at the total purchases which will be used in
the trading account section of the income statement.
 Calculation of sales.
 To determine credit sales, the opening debtors and
closing debtors will have to be considered in
addition to the receipts from debtors during the
period.
 The debtors account or sales ledger control account
can be used. The receipts from debtors plus the
closing debtors balance less the opening debtors
balance will result in the figure for credit sales.
 The cash sales derived from the cash book will then
be added to the credit sales determined to arrive at
the total sales which will be used in the trading
section of the income statement.
END OF TOPIC
2
TOPIC 3:
ACCOUNTING
FOR NON-
PROFIT MAKING
ORGANIZATIONS

ACC 102: Intro. to Financial Reporting II

LEARNING OBJECTIVES
 Identify and explain the nature and
feature of non profit organization
 Subscription and other source of income
for NPO
 Trading activities of NPO
 Prepare Receipts and payments account
 Prepare final account of NPO
 Accounting for NGOs
 Nature and Purpose of NPOs
 A not-for-profit-making organization is one whose
primary aim is to provide services to its members and
the community within which it operates.
 Examples of this type of organizations are: sport clubs,
churches, social clubs, associations, fellowships,
charitable societies.
 One of its main financial objectives is therefore not to
earn profit but often simply to break even. In the final
accounts of such organizations, the income statement is
replaced with an income and expenditure account
prepared using the matching and accrual of revenues
principles.
 Excess of income over expenditure is termed surplus
while excess of expenditure over income is termed as a
 Nature and Purpose Cont.
 NPOs are quite small and may have few assets liabilities
other than cash
 Capital account is replaced by an Accumulated Fund
 Final account may include Receipt and Payment account
 Funds are usually raised through contributions by
members in the form of Subscriptions or dues
 It is needful to run/manage it on business lines to
ensure effective and efficient use of resources and
accountability, so same accounting principles are
applied
 May engage in other activities to make profit/surplus as
a way of raising additional funds/subsidizing other
functions
 Sources of Income of Non-Profit Making
Organizations.
 The sources of raising funds will depend upon the type
of organization but some of the most common sources
are:
a. Payments for life membership
b. Membership subscriptions or dues for annual membership
in the club(including initial admission fee for new entrants)
c. Receipts from fund-raising activities such as sponsored
walks
d. Profits from social events such as dance and end of year
parties
e. Profit from operation of trading ventures, such as bar and
transport
f. Interest received on investments and bank deposits.
g. Donations and grants from internal and external sources
 Accounting Terminologies of Non-profit
Making Organizations
1. Receipts and Payment account: This is a summary of
the cash and bank balances and the total amount
received and spent over an accounting period. It is
prepared on the cash basis, and therefore only shows
monies received and paid during the year. Therefore it
does not meet the requirements of accrual accounting. No
distinction between capital and revenue items.
2. Accumulated Fund: This is the capital of the club or
society at any given point in time. Where the amount of
this fund at the beginning of the period is not provided, it
can be found in the same manner as opening capital
which is determined by preparing a statement of affairs.
The accumulated fund at start of any year is represented
thus by the value of net asset which is the excess of
assets over liabilities. The surplus at the year end is
 Accounting Terminologies of Non-profit
Making Organizations

3. Statement of affairs: This is just like the statement of

financial position. It is used to ascertain accumulated
fund at a given point in time.

4. Subscription: This is the regular contributions made by

members of the club or society to finance its operations.
It is accounted for based on the accrual basis.

5. Income and expenditure account: This is the income

statement of the club or society. If the income exceeds
expenditure, it is termed as surplus, and if the
expenditure exceeds the income it is termed as deficit.
No item of a capital nature must appear in this account.
 Computation of
Accumulated Fund
 Illustration.
The assets and liabilities at the start of the year,1 st January, 2023
for Friends Club were:
¢
Club house 40,000
Tennis court 5,000
Bar inventory 12,000
Prepaid property rate 1,500
Cash in hand 500
Cash at bank 4,500
Creditors for bar purchases 6,500
Sundry club expenses accrued 1,000

Using the statement of affairs, we will determine the accumulated fund of

 Computation of Accumulated Fund
Contd.

Statement of affairs as at 1st January, 2023.

Assets ¢ ¢
Club house 40,000
Tennis court 5,000
Bar Inventory 12,000
Prepaid property rate 1,500
Balance at bank and cash in hand 5,000
63,500
Less:
Creditors for bar purchase 6,500
Sundry club hse exps. accrued1,000 (7,500)
st
 Receipts and Payment Account Format.

Hill Top Club

Receipts and Payments Account for the year ended
31st Dec 2022.
Receipts ¢ Payments ¢
Bank Balance xxx Secretary’s exp xxx
Subscription xxx Committee exp xxx
Proceeds from Travelling exp xxx
fund raising xxx Printing and stat xxx
Clos. Bank bal xxx
xxx
xxx
Income and Expenditure
Format.
New Trend keep Fit Club.
Income and Expenditure Account For The Year Ended 31st March,
2023.
Income: GHS GHS
Subscriptions xxx
Annual Dinner xxx
Less: catering exp (xxx) xxx
Donations xxx
xxx
Less Expenditure:
Receptionist’s wages xxx
Rates xxx
Insurance xxx
Printing and Stationery xxx
Depreciation xxx (xxx)
 Differences Btn Receipts and Payment
and Income and Expenditure Accounts

Receipts and Payments Income and Expenditure

Account Account.
1. It is a real account. 1. It is a nominal account.
2. It is the organization's cash 2. It is the organization's
book income statement.
3. Balance at the beginning 3. Has no opening balance.
represents cash in hand at the
beginning.
4. Contains receipts and 4. Contains income and
payments of both capital and expenditure of revenue
revenue expenditure. nature only.
5. Prepared on cash 5. Prepared on the accrual
accounting basis basis.
 Trading Activities of Non-Profit making
Organizations.

 Clubs may notwithstanding the original

purpose of the organization, engage in a
trading activity for example, operating a bar,
and organizing dinner dances and parties.
 When a trading activity is undertaken, it is
useful to prepare a trading account for each
trading activity in order to ascertain the net
profit made, or loss incurred. This will usually
be shown as a supporting statement to the
income and expenditure account and the net
profit or loss on trading is transferred to that
income and expenditure account.
 Bar Trading Account
If a club operates a bar or restaurant, a separate
trading account will be prepared for its trading
activities. A bar account will consist of:
 Bar takings (sales)

 Cost of bar sales ( reconstruction of opening

stocks, purchases and closing stocks of goods)

 Gross profit

 Deductions for expenses directly relating to

the bar
 Net profit
Bar Trading Account
Note the following when preparing the bar trading account:
 Where sufficient information is not supplied, the bar

purchases and sales may have to be ascertained as

balancing figures through the purchases and sales
control account.
 Any amount owed to suppliers, and by debtors(members

for unpaid supplies) may be determined from control

accounts.
 Care must be taken to include closing stock of supplies in

the statement of financial position. Amounts owed to

suppliers will appear as current liabilities, and amounts
owed by members for supplies yet unpaid will appear as
current asset.
 Bar Trading Account Format.
Susuka Association
Bar Trading Account for the year to 31st December 2023.
¢ ¢
Sales xxx
Less cost of Bar sales:
Opening bar inventory xxx
Add Purchases xxx
Less Closing bar inventory (xxx) (xxx)
Gross Profit xxx
Less:
Barman’s wages xxx
Barman’s commission xxx (xxx)
 The Subscriptions Account
 Many non-profit organizations require their members to pay an annual
subscription or dues towards the funding for the club’s activities. These are
usually accounted for on the accrual basis. Thus, the amount which is credited
to the income and expenditure account in respect of subscriptions is the
amount due for the year, irrespective of whether this has all been received.
 Subscriptions paid in advance by members should be adjusted for in arriving at
total subscriptions for the year.
 Where some members have failed to pay their subscriptions by the due date or
at the end of a given accounting year, these are referred to as subscription in
arrears and the usual practice is to include the amount owing as part of the
total subscriptions for the year and show the amount unpaid as current
asset(receivables) in the SOFP.
 Where some members have paid for their subscriptions in advance, they are
treated as current liability(payables) in the SOFP.
 Sometimes subscriptions are recorded in the I&E account on a strict cash
accounting basis and not on accrual basis. Here, there will be no subscriptions
in arrears or advance in the final accounts. This is said to be the application of
the prudence concept. The use of the cash basis is however not common in
exam questions and should only be applied where specifically required.
 The Subscriptions Account
Format.
Subscriptions Account.
¢
¢
Bal.b/f(arrears at beg.) xxx Bal.b/f(advance at beg.) xxx
Transfer to I&E xxx Subscriptions received xxx
Subscriptions written off xxx
Bal.c/f(advance at end) xxx Bal.c/f(arrears at end) xxx
Treatment of Special Items
 Membership/Entrance fees
 Life membership fees
 Donations, bequests and gifts
 Legacies
 Prize funds/education funds
 Preparing The Final Accounts of Non-
Profit Making Organizations
 The logical steps are outlined as follows:
1. Establish the opening accumulated fund as at start of the current period by
preparing statement of affairs.
2. Open the ledger accounts deemed necessary to determine the amount of
cash payments made or received. Eg: bar total debtors and total creditors
account, petty cash account.
3. Redraft the subscriptions(and other revenue) accounts to ascertain the
amount of cash receipts from members, and of the total income
transferrable to the I&E account.
4. Prepare the receipts and payments account as a summary of the cash and
bank transactions for the period, and ascertain the closing balance for cash
and bank to be included in the SOFP
5. Prepare a trading account for any permanent trading activity engaged in by
the society. Eg: Bar trading account
6. Prepare the income and expenditure account, making the necessary
adjustments for accrued and prepaid expenses, and proceeds of income to
ascertain the surplus of income over expenditure or excess of expenditure
over income.
END OF TOPIC 3
TOPIC 4:
PARTNERSHI
P
ACCOUNTIN
G

ACC 102: Intro. to Financial Reporting II

Nature and Formation of Partnership

 As business grows in size and variety of

activities, there would be the need to bring
other people on board to contribute
resources to meet the level of growth since
the sole proprietor may not be able to
provide all those resources and the
corresponding risk.
 The coming together of these individuals to
do business with the aim of making profit is
known as partnership
 A partnership must have a minimum of two
(2) partners and a maximum of twenty (20)
Definition of Partnership
 The law regulating the operations of
partnerships in Ghana is embodied in the
‘Incorporated Private Partnership Act
(Act 152)’.
 The Act defines partnership as ‘an
association of two or more individuals
carrying on business jointly for the
purpose of making profits.’
 The Act refers to a partnership
registered under it as a ‘firm.’
Definition of Partnership
However the Act does not consider the following as
partnerships:
 A company registered under the Companies Act

2019(Act 992)
 A company, body corporate or unincorporated

association form under any other enactment

 A body corporate formed in accordance with the law

of anr foreign country whether carrying on business

in Ghana or not
 A joint venture without a firm name for one or more

specific operations
 Family ownership or co-ownership of property
Characteristics of
Partnership
 Membership: A partnership business must have a minimum
of two partners and a maximum of twenty partners; but in
the case of professional firms such as accountants and
solicitors, there is no maximum number.

 Mutual Agreement: The partnership firm must be governed

by an agreement which is reached when all partners come
into consensus. In the absence of this agreement, the
provisions of the Partnership Act would be applied.

 Mutual Contribution: All partners are expected to contribute

to the resources of the partnership firm. Therefore, one
cannot be a partner without contributing to the firm.
 Characteristics of
Partnership
 Share of Profit and losses: All partners have a part in the outcome
of the firm, whether profit or loss.

 Co-ownership of contributed assets: All assets contributed by the

individual partners into the partnership are owned by the
partnership. As a result, all partners jointly own the assets and
not just the partner who contributed it.

 Mutual agency: the act of one partner binds the rest of the other
partners if that partner acts within his express or limited
authority.

 Limited life: The duration or span of a partnership is limited

 Unlimited liability: all partners, except limited partners are

personally liable for all debts incurred by the partnership
 Registration of Partnership.
A firm cannot carry on business as a partnership unless it is
registered under the Incorporated private partnership Act 152.
The procedure for registering a partnership is as follows:
A copy of the partnership agreement and a statement on a
prescribed form signed by all the partners, containing the
following particulars is sent to the Registrar.
 The name of the firm or partnership.

 The general nature of the business

 The address and post office box number of

i. The principal place of business of the partnership

ii. All other places in Ghana at which the business is carried on.
 The names and any former names, residential address and

business occupation of the partners.

 The date of commencement of the partnership- unless the

partnership has commenced more than 12 months prior to the

date of the statement.
Registration of Partnership.
Particulars of any charges requiring
registration under section 25 of Act 152
or statement that there are no such
charges and where particulars of any
charge require registration under section
25 of the act, the statement shall be
accompanied by the documents required
by that section.
 Differences between a Partnership and a
sole proprietorship.
Partnership Sole Proprietorship
Minimum number of members is two Has just one person as member who
and the maximum number is twenty. is the owner.
Profits and losses are shared by all Enjoys all profits and bears the whole
partners. amount of losses the business
sustains.
Capital is provided by the partners Provides his or her own capital to
involved thereby leading to a larger finance the business; thereby
pool of resources. resulting in a relatively smaller
amount of resources.
Decisions are collectively made by all Decisions are made by the sole owner
partners and responsibility and risks without consulting any other person.
are shared by all partners. Any associates risks and
responsibilities are borne solely by
the owner.
The final accounts of a partnership The final accounts of a partnership
business, apart from the income business, apart from the income
statement and SOFP, include profit statement and SOFP, does not
and loss appropriation account, include profit and loss appropriation
 Differences between a Partnership and a
Company.
Partnership Company
Must have a minimum of two partners Minimum number is one and the
and a maximum of twenty partners; maximum number is fifty for a private
but in the case of professional firms company and for a public company
such as accountants and solicitors, the maximum number is infinity.
there is no maximum number. Members are referred to as
Members are known as partners. shareholders.
Does not have a separate legal Has a separate legal identity which
identity unless it is an incorporated allows it to sue and be sued in its own
partnership firm. rights.
The liability of partners for the debts The liability of shareholders is limited
and obligations of the firm is to the amount of shares or guarantee
unlimited. respectively held by them.
Regulated by the Incorporated Private Regulated by the Companies Act 2019
Partnership Act(Act 152). (Act 992)
Ownership is not entirely separate Ownership is entirely separate from
from management because each management because shareholders
partner has a right to take part in the do not directly take part in the
 Advantages of Partnership.
 There is a larger pool of resources, both financial
and otherwise, as compared to a sole
proprietorship. The capital required is provided by
more than one person.
 Allows individuals with diverse skills and expertise
to team up and bring their expertise to bear on
the partnership business.
 Business risks are shared by more than one
person. The risk that the partnership business
may fail does not rest with one person
 The goodwill attached to certain individuals is
enjoyed by the partners in the partnership
business.
 Disadvantages of
Partnership.
 Partners may be engulfed in disputes over some
matters relating to the business of the firm such as
partners drawings, nature of business and secret
profits.
 Capital contributed could be limited compared to the
capital available to a company.
 An action by a partner that leads to the firm being
sued will mean that all the other partners are jointly
and severally liable. In most cases, partnerships
have unlimited liability.
 The death, resignation or retirement of a partner
implies that technically the partnership firm is
dissolved. Partnerships therefore do not have
perpetual succession.
 Kinds of Partners.
 Active Partner: One who actually takes part in
the day to day activities of the partnership
business. He may be entitled to remuneration.
 Inactive Partner: Not actually engaged in the day
to day activities of the partnership business.
Also known as a dormant or sleeping partner. He
only contributes capital.
 Limited Partner: Usually dormant or sleeping
partners. Not liable for the debts of the
partnership business. His liability ends with the
amount of capital he has contributed or
guaranteed to contribute.
Kinds of Partners cont’d
 Unlimited Partner: Liable for the debts of the
partnership firm. His liability for the partnership
debts extends beyond his capital contribution.
Unlimited partners are usually active partners.
He’s also known as a general partner.
 Nominal Partner: This person holds himself out or
has allowed himself to be held out as a partner for
the purposes of his goodwill in the partnership
business. He is not usually entitled to a share of
profit.
 Quasi Partner: A partner who has retired from
active partnership but has left his capital in the
firm.
The Partnership Agreement.
 Otherwise referred to as a partnership
deed.
 The document which contains the terms
and conditions under which a
partnership is to be operated. It spells
out the rules and regulations binding the
partners in the business.
 The general provisions which a
partnership agreement may contain
include the following:
 The Partnership Agreement
contd.
 The name of the firm and the kind of business to
be undertaken.
 The amount of capital to be contributed by each
partner
 The ratio in which profit and losses are to be
shared among the partners.
 Whether any partner is to be paid a salary and if
so, the amount to be paid to him.
 Whether interest is to be allowed on capital and
current account balance, and charged on
drawings. If so, the applicable rates should be
specified.
 The Partnership Agreement
contd.
 The keeping of books of accounts.
 How disputes between partners are to be settled.
 The method to be employed in valuing assets
especially goodwill, on the admission of new
partners, the dissolution of the partnership or the
exit of partners due to retirement, insanity, or
anything that terminates his contractual capacity.
 Whether capitals are to be fixed and drawings,
salaries, and other appropriations of that nature,
and profits and losses are to be adjusted on current
accounts or on the capital accounts if capitals are
fixed.
 The method of determining the amount due to the
 Applicable rules in the absence of an
Agreement
 All partners shall be entitled to share equally the profit and losses of the firm
 All partners shall contribute equal capital
 No partner shall be entitled to interest on capital
 Where interest is to be paid, it shall be paid out of profit
 Any advances (loan) made by partner(s) shall attract an interest of 5% per
annum
 Every partner may take part in the management of the business of the firm
 No partner shall be entitled to remuneration for acting in the firm’s business
 No interest is charged on drawings
 No admission of a partner without his consent and the consent of all existing
partners
 The partnership books and accounts shall be kept ar the principle place of
business of the firm
 Disagreements and disputes may be decided by a majority of the partners
 No change may be made in the nature of the firm’s business without the
consent of all existing members
Accounts of Partnership
Firms.
 The partnership act requires every
partnership firm to keep proper books of
accounts with respect to its financial
position and changes, performance and
control.
 The firm is required to keep at least the
following books and schedules:
 A cash book
 A purchases and sales day book
 Ledger accounts
 An asset schedule.
Final accounts of
Partnership Firms
Usually consist of:
 A manufacturing account(for

manufacturing firms)
 A statement of profit or loss and other

comprehensive income
 A profit and loss appropriation account

 The statement of financial position

Statement of Profit or Loss Appropriation
Account.

 Used to distribute the profit or losses of the

partnership(because there is more than one
owner) to the partners in accordance with the
terms stated in the partnership deed.
 Interest on capital, partners’ salary and

interest on drawings are treated in the

appropriation account
Nb: Interest on partners’ loan is an expense
which is debited to the income statement and
credited to the current account of the partner
who advanced t he loan. It is not an
appropriation item.
 The Capital Accounts of
Partners
 Used to record the amount of initial and additional capital
contributed by each partner. The amount of capital,
whether cash or other assets, contributed by each partner
is credited to his capital account.
 The capital account is debited with any capital withdrawn.
 The capital accounts are of two types:
 Fixed capital
 Fluctuating capital
Fixed: Records only initial and additional capital as well as
capital withdrawals. Where the partners keep fixed
capital account, the partners current accounts have to be
prepared to cater for the fluctuating interest to partners
Fluctuating: A combination of fixed capital account and
current account.
 The Current Account.
 It’s prepared to take care of items of recurring
nature such as drawings , interest on partner’s
loan, interest on capital, partners’ commission,
and share of profit or losses.

 It should be noted that where partners keep fixed

capital accounts, then the partners’ current
account have to be prepared to take care of the
fluctuating interest to partners.

 Where partners maintain a fluctuating capital

account, the current account is not kept.
The Statement of Financial
Position
 The SOFP of a partnership is similar to
that of a sole proprietorship business
except that the capital accounts of each
partner are shown separately in the
SOFP.
 Goodwill in Partnership
Firms.
 Simply the good name a business earns for itself.
 The extra amount paid for the existing business in
case of sale of business.
 The difference between the value of the business as
a whole and the fair value of its net separable
assets.
 The value of a business as a whole and how much it
will be sold for in its entirety as a going concern.
 The fair value of its net separable assets refers to
how much the individual or identifiable assets could
be sold for separately, and if there are liabilities, part
of the proceeds would be used to settle these
liabilities.
Factors contributing to
Goodwill.
 Advantageous location
 Large number of loyal customers
 Reputation of the business owner
 Competent, motivated and dedicated
staff
 Good contacts with suppliers
 Experienced and efficient management
team
 Quality goods and services.
Types of goodwill
 Purchased goodwill: Arises when an existing
business is purchased at a value greater
than the value of its net assets .
 Non-purchased goodwill: Internally
generated in the business when certain
circumstances occur; circumstances such as:
 Changes in partners’ profit and loss sharing
ratio
 Admission of new partner
 Retirement and death of a partner
 Amalgamation of partnerships
Methods of valuing goodwill
 Purchase of number of years’ average
net profit method: Under this method,
goodwill is calculated on the basis of the
average of some agreed number of past
years . The average is then multiplied by
the agreed number of years
 Goodwill= Average net profit x Number
of years of purchase.
 This is the simplest and most commonly
used method of valuation of goodwill.
 Methods of valuing
goodwill.
 Super Profit method: Here, goodwill is computed
as the capital value of an annuity for an agreed
number of years of the super profits of the
business. Super profits are profits earned above
the normal profits. That is, profits in excess of the
amount necessary to pay a fair return upon the
capital invested in the business and reasonable
remuneration for the services of the partners or
the proprietor who work within the business.
 The super profits may therefore be multiplied by
the number of years required to arrive at the
value of goodwill.
 Treatment of goodwill on admission of a
new partner.

 When a new partner is admitted, it is

customary for him or her to pay into the firm
a certain amount of money as his or her
contribution towards the capital of the
business.
 Where the new partner pays cash into the
firm, it will normally consist of two elements:
 part in respect of his capital
 partly for his share of goodwill
The total of these two elements will, in the first
place, be credited to his capital account.
Accounting treatment of goodwill on
admission of a new partner.

Two ways can be used to do this:

1) Raise an account for goodwill in the
firm’s books.

Dr. goodwill account with full value of

goodwill
Cr. old partners capital account with
the amount in proportion of their old
profit and loss sharing ratio.
Accounting treatment of goodwill on
admission of a new partner.

2) Write off goodwill immediately after admission.

Dr. goodwill account with full value of goodwill
Cr. old partners capital account with the
amount in proportion of their old
profit and loss sharing ratio.

Dr. capital account of all partners (both old

and new) with the amount proportion of
their new profit and loss sharing ratio.
Cr. goodwill account
Conditions for valuing
goodwill
 Admission of a new partner
 Changes in profit and loss in sharing
ratio
 Retirement of a partner
 Death of a partner
 Amalgamation of partnership firms
 Conversion of a partnership firm to a
company
Revaluation account and admission of a
partner.

 Revaluation is the assessment of the value

of asset s and liabilities of a firm to reflect
its current market value or fair value.
 A revaluation account, in its simplest form is
a miniature profit and loss account in which
all capital profits(increase in assets and
decrease in liabilities) are credited and all
capital losses(increase in liabilities and
decrease in assets) are debited with their
corresponding entries appearing in the
appropriate account.
Revaluation account and admission of a
partner.

 The balance on the revaluation account

if any is shared among partners in their
old profit and loss sharing ratio and
credited or debited to their capital
accounts accordingly.
Conditions for revaluation of assets and
liabilities.

 Admission of a new partner

 Changes in profit and loss in sharing
ratio
 Retirement of a partner
 Death of a partner
 Amalgamation of partnership firms
 Conversion of a partnership firm to a
company
Dissolution of a Partnership
 A partnership is dissolved when the firm ceases
to carry on business or ceases to be in existence.
By the provisions of the Act, a firm may be
dissolved on the occurrence of any of the
following,
 Death of a partner
 Retirement of a partner
 Disagreement among partners
 Insanity on the part of a partner
 Insolvency or bankrupt
 Court order
 Voluntary liquidation
 Dissolution of a Partnership
 The dissolution usually involves the sale of assets
and settlement of liabilities.
 Any profit or loss on realization is transferred to
partners’ capital account
 The remaining cash after paying trade payables is
pad to partners to close all books of accounts

 The realization account is used to record assets sold

and liabilities settled. Accounts to be settled on
realization include the following;
 Monies owed to employees
 Expenses incurred on realization
 Settlement between partners
END OF TOPIC 4
TOPIC 5:
INTRODUCTIO
N TO
COMPANY
ACCOUNTS
ACC 102: Intro. to Financial Reporting II
 Nature and formation of a company

 A company in Ghana, is a body corporate formed

by any one or more persons and registered in
compliance with the provisions of the Companies
Act of 2019 (Act 992).
 The owners of a company are known as its
shareholders. In Ghana, one person can form a
company. In most countries, however, there must
be at least two shareholders.
 All companies must be registered with the
registrar of companies to whom financial reports
must be sent each year. The accounts submitted
are available for inspection by any member of the
public.
Documents required in the registration
process

 Regulations: This refers to the principles

or rules employed in the controlling,
directing or managing the activities of
the company. It is made up of the Article
of Association and the Memorandum of
Association.
 Prospectus: A formal legal document,
which is required by and filed with the
Registrar of companies, that provides
the details about the company.
 Registration of limited liability
companies.

The following procedures need to be

followed:
 Filing of documents with the registrar.

 The Regulations of the company should

be attached to the completed forms. The

promoters must pay stamp duty and
registration fees.
 The registrar scrutinizes the documents.

 The Registrar will issue a certificate

known as Certificate of Incorporation

under his or her signature.
Characteristics of a
company.
 Separate legal Entity
 Limited liability
 Perpetual Existence
 Ownership separate from the
management
 Voting rights
 Types of companies.
 Companies with unlimited liability: may be registered
with or without a share capital. They are so rare that,
bare mention of their existence is enough.

 Companies limited by guarantee: may be registered with

or without a share capital. Each member guarantees in
the event of the company being wound up, to contribute
a stated sum for the purposes of winding up.

 Companies limited by shares: These are companies which

have the liability of their shareholders limited to the
amount of shares respectively held by them. Of these,
there are two kinds. Thus: Private companies and public
companies.
 Differences between private company
and public company.

Private Public
Membership: limits the number of Has unlimited number of members.
its members and debenture It only requires a minimum of one
holders to fifty, excluding existing and a maximum of infinity
employees and former employees.

Transfer of shares: Restriction on There is no restriction on transfer

transfer of shares. A shareholder of shares in a public company. A
cannot transfer shares without the shareholder can easily transfer
consent of the other shareholders. shares without the consent of the
other shareholders.
Invitation to the public for shares It is not prohibited from making
and debentures: A private any invitation to the public to
company is prohibited from making acquire any shares or debentures
any invitation to the public to of the company.
acquire any shares or debentures
of the company.
 Differences between private company
and public company.

Private Public

Invitation to the public to deposit It is not prohibited from making

money: prohibited from making any invitation to the public to
any invitation to the public to deposit money for fixed periods or
deposit money for fixed periods or payable at call, whether bearing
payable at call, whether bearing or not bearing interest.
or not bearing interest.

Publication of accounts: is not Required by the companies Act to

required by the companies Act to publish its accounts.
publish its accounts.
 Advantages of limited liability
companies.

 More capital than partnerships or sole traders.

It is easier to raise capital through share issues
and it is often easier to raise finance from
financial institutions.
 More permanent as it has continuous existence
 Greater specialization or division of labour
because it is possible to employ specialists.
 The company name is protected by law.
 Suppliers feel more confident about trading
with legally established bodies.
 Shareholders have limited liability.
 Disadvantages of limited liability
companies.
 Corporate activities are limited by the regulations of
the company.
 Decision making can be slow and bureaucracy can
be a problem.
 Management and ownership is separate, so there
might be a lack of motivational spirit.
 The financial accountability of a company is less
private than for other forms of organization.
Companies are governed by the Companies Act of
2019(Act 992), which states that financial records
and annual returns must be audited.
 There are a number of legal requirements to fulfill
which can be expensive and cumbersome.
 Nature of a company’s
capital.
 Nominal, Registered or Authorized capital: This is the amount of
capital mentioned in the company’s regulations. It is the
maximum amount of capital that a company is authorized to
issue and the amount on which the capital duty is assessed.

 Issued capital: The nominal value of capital which in fact a

company has offered, either to the public, and / or to vendors as
consideration for property acquired by the company. It is made
out of the authorized capital.

 Subscribed capital: The amount of the issued capital taken up

and subscribed for by prospective shareholders.

 Called-up capital: The amount of the subscribed capital that has

actually been called up by the company for the
shareholders( subscribers) to make payment.
 Nature of a company’s
capital.
 Paid-up Capital: The total amount paid up or credited as
paid up on the issued capital.
 Uncalled capital: The amount of subscribed capital that
has not been called up. That part of issued capital which
has not been demanded by the company from the
shareholders.
 Unissued capital: The amount of the authorized capital
which the company has reserved for issue at some
future time.
 Working capital: Denotes the excess of the cash and
other assets quickly realizable in cash over the current
liabilities of a company.
 Human Capital: The human effort exerted in production
of goods or the rendering of services in an organisation.
Nature of a company’s
capital.
 Stated Capital: The capital of the company that has
been provided by the owners. Same as paid up
capital.
 Loan Capital: Known as debentures or long term loan
to the business
 Shares of no par value: These are shares that do not
have any fixed face value.
 Par Value shares: : These are shares which have
fixed face value. Could be issued at premium or
discount.
 Calls in arrears: The part of called up capital which
has not been paid by the subscribers(shareholders)
Shares.
 Shares represent the interest of
members of a body corporate.
 Signifies part ownership of a company
depicting the proportion of a member’s
interest in a company.
Types of Shares.
The two broad categories of shares are:
 Ordinary (equity) shares

 Preference shares
 Ordinary Shares.
 Also known as common stock.
 Holders of these types of shares have
voting rights and are the risk bearers of
the company.
 The type of share that carries no fixed
rate of dividend.
 Dividend payment depends on available
profits. Ordinary shareholders are only
paid dividends after preference
shareholders have been paid their
dividends(including any arrears).
Preference Shares.
 Shares which entitle the holder to a fixed
amount of dividend on the shares before
any dividend is paid to other classes of
shares.
 A holder of preference shares is not
entitled to any right to participate
beyond a specified amount in any
distribution whether by way of dividend,
or on redemption in a winding up or
otherwise.
 Issue of Shares.
 The main source of capital of companies is through the
issue of shares. A share represents part ownership in a
company.
 All shares issued in Ghana should be shares of no par
value. Thus, they do not have nominal value
 This means, whatever the shareholder pays in
exchange for the shares is in no way an indication of
the degree of ownership.
 The extent of ownership is determined by the number
of shares held.
 When a company is being registered it is required to
indicate the total number of shares authorized by its
regulations out of which the company can issue to the
public for subscription.
Issue of Shares.
 Capitalization Issue
This is another way a company can issue
shares.
A company may, by special resolution, issue
shares and credit them to existing
shareholders as fully paid.
Such an issue of shares, called capitalization
issue or bonus issue, is considered as a
payment for shares otherwise than in cash,
and is effected by a transfer from the income
surplus account to the stated capital account.
Issue of Shares.
 Right Issue
This is where a company issues shares
to its existing shareholders in proportion
to the amount of shares already held by
the respective shareholders. Unlike
capitalization issue, with the right issue,
the shareholders will have to pay for the
shares in cash or other form.
 Accounting for issue of
shares.
 Shares could be issued in a number of ways.
There could be a public invitation to apply for
shares , offer for sale, issue by prospectus,
issue by tender, a placing, rights issue, an
introduction, and/or a bonus issue.
 Accounting for the issue of shares involves the
making of the necessary entries in the
accounts needed to record the issues of shares
in respect of the following: receipt of monies for
applications, the allotment of shares to
successful applicants and the making of calls
for the unpaid balance of the consideration .
Accounting for issue of
shares.
The accounts necessary to record the
issue of shares are the following:
 Application Account

 Allotment Account

 Calls Account

 Cash book

 Stated Capital Account

 Share Deals Account.

 Illustrations.
 1.Glogeo Limited invited applications for 500,000 ordinary
shares at 3 cedis per share. The issue was fully subscribed
and all monies were paid on application. Write the journal
entries in the books of the company recording the above
transaction.

 The Directors of ABC ltd issued 100,000 ordinary shares of

10 cedis each payable as follows:
On application: 3cedis per share
On allotment: 5cedis per share
On call: 2cedis per share
Required: Write the necessary ledger accounts recording the
above transactions and extract a statement of
financial position immediately after the issue assuming no
other transaction took place.
Oversubscription of shares.
 `When a company’s shares are
oversubscribed, it may:
 Reject the excess applications and the
amount involved refunded to the
unsuccessful applicants or
 Allot the shares on pro rata basis or
 Set it against allotment and future calls.
(such amount should not be transferred
to the share capital account until the
calls(amount) become due.)
Oversubscription of shares.
Illustration:
 The directors of Ataram Ltd. Issued 50,000 ordinary shares, at
10cedis each payable as follows:
 On application: 2 cedis

 On allotment: 3 cedis

 First Call: 4 cedis

 Second and final Call: 1 cedi

75000 shares were applied for,

The directors decided to allot the shares on pro rata basis among the
applicants
The excess application monies were held against allotment. All
installments were met when due.
Required: Write down the relevant ledger accounts recording the
above transactions.
Issue of shares at a
premium.
 When a share is issued at a premium, it means it
has been issued for an amount which is higher than
its face, nominal or par value.
 The premium paid for the share is credited to an
account called share premium account.
 The premium is normally paid with the installment
due on allotment. The entries are:
 Dr. allotment account
 Cr. share premium account with the premium on
issue of shares.
 Nb: The share premium account is a capital reserve
account.
Issue of shares at a
premium.
Illustration.
 XYZ Ltd. issued 50,000 ordinary shares of 20 cedis
each at 25 cedis per share payable as follows:
 5 cedis per share on application

 10 cedis per share on allotment(including premium)

 10 cedis per share on the first and final call.

 All monies were received on the due dates.

Required: Write up the necessary ledger accounts

and show the relevant part of the company’s
statement of financial position.
 Shares issued at a discount.
 Shares are said to be issued at a discount if issued below
the nominal or face or par value.
 The discount must appear as a fictitious asset in every

statement of financial position.

The entries are:
 Dr. Discount on shares account(with the amount of

discount)
 Dr. Application and Allotment account(with amount

received from subscribers)

 Cr. Share capital account( with the full value of

shares[nominal])
 Dr. Discount on shares account

 Credit Application and Allotment account with the

discount on issue.
 Shares issued at a discount.
Illustration
 On 31/12/2014, ABC Ltd had the following balances in its statement of
financial position:
Issued ordinary shares of 1cedi each 80,000
Reserves 25,000
Debentures 15,000
Current liabilities 10,000
Fixed assets 60,000
Bank 5,000
Other current assets 65,000
On 1/1/2015, the director decided to issue 20,000 ordinary shares of 1 cedi at
0.90cedis payable as follows:
0.40cedis on application
0.30 cedis on allotment and
0.20cedis on first call.
The shares were fully subscribed and subsequently alloted.
Required: Show the ledger entries and the sofp immediately after the issue.
 Calls in Arrears
 It is possible for some allottees to default in the
payment of some of the calls made on shares
allotted to them when due. The amount
outstanding is referred to as calls in arrears.
 Calls in arrears should be credited to the call
account and debited to the calls in arrears account.
 The balance in the calls in arrears account is
subtracted from the issued share capital balance
on the statement of financial position.
 When the shareholder pays the call, calls in arrears
account will be credited and cash account debited.
 Calls in Arrears.
Illustration
 The directors of CUA Ltd. Issued 25,000 5% preference shares of
40cedis each at par payable as follows:
 On application: 10 cedis per share

 On allotment: 12 cedis per share

 On first call: 9 cedis per share

 On second and final call: 9cedis per share

 Applications were received for 32,000 shares and the directors decided

to:
a. Refuse allotment for 2,000 shares
b. Allot the remaining on pro rata basis
c. To carry over to allotment excess application fees.
All installments were met when due except Kofi Babone who refused to
pay the first, and second and final call fees on 800 shares allotted to
him.
Required: Write up the relevant ledger accounts to record the above
transactions.
 Calls in Advance.
 Sometimes a shareholder may pay for calls before
they are due. The amount so paid is referred to as
calls in advance.
 In this instance, the first call account is debited
and call in advance account is credited with the
amount prepaid.
 When the subsequent calls fall due, the call in
advance account is debited and call account
concerned is credited with the amount involved.
 On the statement of financial position, the balance
on the calls in advance will be grouped together
with the issued capital on the liability side.
Calls in Advance.
Illustration.
 Using the previous illustration, assuming

Kofi Babone paid for the 800 shares

allotted to him in advance when the first
call was made,
Required: Write up the necessary ledger
accounts recording the transactions and
show the statement of financial position.
 Forfeiture of Shares.
 The directors of a company may be empowered to forfeit the shares of
a shareholder when a share subscriber fails to pay for calls due after
persistent warnings.
 Until forfeited shares are reissued, the balance on forfeited shares

account should appear in the statement of financial position as a

separate item under the heading reserves.
 The following are the entries for forfeited shares:

a. Dr. Share Capital account

Cr. Forfeited Shares Account with the total nominal amount
payable on the shares forfeited on the day of forfeiture.
b. Dr. Forfeited Shares account
Cr. Calls in Arrears account with the nominal value unpaid on the
shares forfeited.
c. Dr. Share premium Account
Cr. Calls in arrears account with unpaid premium
d. Dr. Forfeited shares account
Forfeiture of Shares.
Illustration.
 A company issued 5,000 ordinary shares of

10 cedis each issued at 12.50 cedis payable

at 4.50 cedis on application, 8 cedis on
allotment inclusive of premium. 5,200 shares
were applied for and the excess application
monies held against allotment fees. Manu,
who was allotted 1,000 shares, failed to pay
the allotment fees and the shares were
forfeited.
 Required: Show the relevant ledger entries.
Final Accounts of Limited liability
companies.

 The final accounts comprise:

 The income statement and income
surplus account( statement of retained
earnings)
 The statement of final position
 The cash flow statement.
Final Accounts of Limited liability
companies.

Format for income statement. ¢

Revenue x
Cost of Sales (x)
Gross Profit x
Other income x
Administrative expenses (x)
Distribution costs (x)
Other expenses (x)
Profit before tax x
Income tax expense (x)
Profit after tax x
Final Accounts of Limited liability
companies.
Format for Income Surplus Account ¢
Balance b/d x
Net profit after tax x
x
Less: Dividends paid x
Transfers x (x)
Balance c/d x
 Final Accounts of Limited liability
companies.

Non-Current Assets: ¢ ¢

PPE x
Intangible Assets x
Investment Properties x
Long term investments x
Current Assets:
Inventories x
Receivables x
Prepayments x
Current Asset investments x
Bank and cash balances x
 Final Accounts of Limited liability
companies.
Current Liabilities
Trade payables x
Accrued expenses x
Bank Overdrafts x
Taxation liability x (x)
Net Current Asset x
Non Current Liabilities
Debentures x
Other long term liabilities x (x)
Net Assets xx
Financed by:
Stated Capital x
Capital Surplus x
Share Deals x
Income Surplus(Retained Earnings) x
Shareholders Fund/Net Worth xx
Terminologies.
 Stated Capital: It consists of the sum of
the total amount received from the issue
of shares for cash including amounts
received from calls made on shares
issued with an unpaid liability, without
any deductions for expense or
commissions; total value received in kind
for the issue of shares; total amount
transferred from surplus including the
credit balance on the share deals
account.
Terminologies.
 Share Deals Account: The account prescribed by
section 63 of the Companies Code for companies
with shares to utilize in redeeming or purchasing
their own shares, and for reissuing treasury shares.
 Surplus: Section 69 of the Companies Code defines
the surplus of a company with shares as the
amount by which its assets other than unpaid calls
and other sums payable in respect of its shares,
and not including treasury shares, less its
liabilities, as shown in its audited accounts, exceed
its stated capital. Simply put, surplus is the excess
of the book value of net assets over stated capital .
Terminologies.
 Income Surplus: This is the retained
earnings of a company. It is simply the
undistributed profits of a company.
Income surplus is also the total of the
accumulated profits, including the profits
for the year in perspective less all
distributions in the form of dividends,
capitalization issues, transfers to share
deals account and transfer to stated
capital.
Terminologies.
 Capital Surplus: The surplus that arises
from revaluations of the value of non-
current assets. It is also known as
revaluation reserve account.
 Treasury Shares: Shares, which were
once issued but have been recalled
through forfeiture, purchase, acquisition,
or redemption, may be reissued by the
company unless they are cancelled. Until
such shares are reissued or cancelled,
they are referred to as treasury shares.
Purchase of a sole proprietorship business
by a company.

 The process of transferring ownership of a

business from a person or a group of people to
another for a consideration(return/reward) is
known as acquisition.
 In most acquisitions, the acquiring entity takes
control over the net assets of the acquired
company.
 The transfer of control from one group of owners
to another affects the economic interest of many
people including the owners, employees, trade
creditors and customers of both the acquiring
entity and the acquired entity.
Mode of Payment for
Acquisitions.
 There are two methods namely:
 An acquisition of net assets for cash
 Acquisition of net assets for shares
Reasons for acquisition.
 To utilize efficient business methods
 To gain access to new technology
 To gain access to new clients
 To gain access to new markets
 To raise more capital or access cheaper
financing that will lead to a bigger company
 Hire more experts or specialists to manage
the business
 Ensure continuity in business generation
Acquisition of net assets for
cash.
 This is where the acquisition of the net
assets of the acquiree entity is effected
in cash by the acquirer entity.
 The acquiring company records the
detailed assets and liabilities acquired to
reflect the cash paid.
 Excess payment for net assets will be
considered as goodwill and will be
recognized in the acquirer's books as
such.
Acquisition of net assets for shares

 This is where the acquisition of the net

assets of the acquiree entity is effected
in shares by the acquirer entity .
 In this case, the acquirer entity issues
shares to the owners of the acquiree
entity.
 After the acquisition process, the owners
of the acquired entity become
shareholders of the acquirer entity.
Accounting Entries for Purchase of Business.(in
the books of the acquired entity)
 The book values of the assets transferred to the acquirer
entity are debited to a realization account and credited to
the respective assets account to close them.
 The carrying values of liabilities transferred to the
acquirer entity are credited to the realization account and
debited to the respective liabilities accounts to close
them.
 Expenses relating to the acquisition or purchase are
debited to the realization account and credited to the
cash book(if paid) or expense creditor(if unpaid).
 The agreed transfer value which represents the purchase
consideration is credited to the realisation account and
debited to an account titled ‘the acquirer entity account’
Accounting Entries for Purchase of
Business.

 The balance on the realization account

represents profit or loss on the
acquisition and is transferred to the
capital account.
 Where some assets were revalued as
part of the acquisition process, the
resultant revaluation surplus or deficit is
transferred to the capital account.
 If the purchase consideration is paid by
shares, the owner of the sole
proprietorship business will own shares
Accounting entries in the books of the
acquirer entity. (the company)

 The acquirer entity would take over the assets and

liabilities at agreed values by crediting the
purchase of business account with the assets and
debiting it with liabilities and/or the purchase
consideration.
 The difference in the purchase of business account
represents ‘capital surplus’ (credit balance) or
goodwill (debit balance).
 The assets and liabilities, as taken over from the
sole proprietorship business, plus the balancing
figure in the purchase of business account are
represented in the statement of financial position.
 TOPIC 6:
INTRO. TO
DEPARTMEN
TAL AND
BRANCH
ACCOUNTS

ACC 102: Intro. to Financial Reporting II

Nature of Departmental
Accounts.
 A departmental organization is a large
business organization with separate
sections, known as departments, that
deals in different product line like
stationery, groceries, clothing, and
cosmetics.
 Departmentalization calls for preparation
of separate accounts for each
department.
 A departmental account is a separate
final account for each unit of a business
Reasons for preparing Departmental
Accounts.

 To know the performance of each

department.
 To give a fair share of common expenses
to each department of the organization.
 To appraise the efficiency of respective
managers for each department.
 To enable management take useful
decision in terms of shutting down a
department or not.
Presentation of departmental final
accounts.

Income Statement for the period ended

31/12/14
Dept.A Dept.B
Total
Sales xxx xxx
xxx
Less Cost of Sales (xxx) (xxx)
(xxx)
Gross Profit xxx xxx
xxx
 Allocation of Expenses
 One of the most significant features of
departmentalization of accounts is the
allocation of expenses. The two most
common methods are:
 To apportion the expenses between the
departments in proportion to the area or floor
space taken up by the departments
concerned.
 To apportion the expenses in proportion to
the sales(turnover)
Allocation of Expenses
Other acceptable bases of apportionment of expenses
include:
 Number of persons in each department. This basis

is relevant when apportioning canteen costs.

 Number of vehicles or machinery in each

department. This basis is relevant when

apportioning depreciation charges of motor
vehicles, plant and machinery.
 Expenses that relate exclusively to particular

departments must be fully allocated to the

departments concerned. Examples are salaries and
commission of departmental managers.
 Allocation of Expenses
 It is also important to note that since
expenses in the income statement now
have to be allocated to departments, any
item requiring adjustments must be
adjusted accordingly before allocation to
the departments concerned, to ensure
that the correct amount is charged in that
account.
 Managers’ Commission.
 There are two typical bases for the
calculation of managers’ commission on the
profit:

 Commission based on profit before deducting

the commission: Involves the direct
application of the rate of commission on the
profit figure. Thus, if the rate is 5% of the
profit before deduction is made of the
commission and the pre-commission profit
figure is 20,000, the manager’s commission is
determined as (10,000x5%)=500
 Managers’ Commission
 Commission based on profit after deducting the
commission: Requires the calculation of the
manager’s commission with a percentage rate that
is to be applied on the profits before any deduction
is made of the manager’s commission. Therefore,
the given percentage rate must be converted to a
pre-commission rate that can be applied directly on
the related pre-commission profit given, or
ascertained from the profit and loss account.
 Formula to determine the correct commission is:
 (Percentage commission)/(100+percentage
commission)x Profits before commission.
 Illustration.
 nocraM ventures runs a business which has two departments. The
following balances were extracted from his books on 30/6/14.
Dept.A Dept.B Total
Op. Inv.(1/7/13) 12000 13000 25000
Comm. Payable 1500
Purchases 24520 36544 61064
Salaries 15100
Sales 86030 89070 175100
Advert 2500
Clos. Inv. 12100 13300 25400
Rates 1450
Wages 22800 21200 44000
Insurance 400
Returns inwards 1030 4070 5100
Repairs 800
Returns outwards 520 544 1064
Light and heat 2000
 Illustration.
 You are required to set out a departmental trading
profit and loss account for the year ended 30/6/14
after taking into account the following
information:
 Salaries of 400cedis are due but haven’t been
paid
 Rates of 250cedis have been paid in advance
 Insurance of 80cedis is prepaid
 Commission, salaries and advert are to be
charged to the departments in proportion to net
turnover; all other expenses are to be apportioned
¼ to dept. A and ¾ to dept.B
Procedures for recording inter-departmental
transfer of goods and services.

 Purchases made for one department may

be subsequently sold in another
department.
 In such a case, the items should be
deducted from the figure for purchases of
the original purchasing department,
 And added to the figure for the purchases
for the subsequent selling department.
Statement of financial
position.
 The statement does not usually show
assets and liabilities split between
different departments.
 Assets, liabilities and capital are
combined into one unit.
 Nature and Preparation of Branch
Accounts.

 A business producing and selling certain

kinds of goods at a certain main place
may locate the same type of business
some distance away to which it may
totally or partially supply materials or
goods for production or sale.
 Such a location set up is referred to as a
branch of the original business.
 The original business which sets up the
branch is also known as the head office of
the branch.
The need for branch
accounts.
Branch accounts are prepared in order to:
1. Know the performance of each branch
2. Enable management to make decisions

3. Control the operations of each branch

4. Know the avenues for further

expansions due to the performance of
branches.
Accounting for branch
operations.
 Where the accounting records of the
branch are kept at the office:
 Centralising the accounting function
allows the head office to exercise a
greater control over the operations of
the branch creating lesser room for fraud
by branch employees.
 Centralisation may allow economies of
scale in terms of number of accounting
staff required.
Accounting for branch
operations
 Controls: Where there is centralising of the
accounting function, one would expect the head
office to implement the following control:
 There should be a rule to the effect that all cash
takings are banked intact on a daily basis. All
wages and other expenses should be paid by the
head office. Each branch should be expected to
maintain the imprest system to cater for minor
expenses.
 The policy to allow credit facilities should be spelt
out by the head office. A sales ledger should be
maintained at the office where a large proportion of
sales are on credit. Each branch can be responsible
for its own sales ledger where the credit sales are
Accounts to prepare for non-autonomous
branches.

 Branch Stock Account

 Goods Sent To Branch Account
 Branch Stock Adjustment Account
 Branch Profit and loss Account
 Branch Debtors Account
 Branch Expenses Account
 Defalcation Account
Mode of transferring goods to the branch
by the head office.

 There are three methods and these are:

 Cost Price: Allows very little control by
the head office. It is therefore only
suitable for businesses trading in
perishable goods or where selling prices
are susceptible to severe fluctuations.
Mode of transferring goods to the branch
by the head office.

 Cost Plus Percentage: If the head office

mark up goods sent to branches, then
effectively the branch staff are being set
a target for performance. Failure to
achieve this target gross profit figure
would be an indicator of pilferage or
excessive wastage. This method prevents
branch staff from handling the cost of
goods being sold and preserve secretly
with regards to profit.
Mode of transferring goods to the branch
by the head office.

 Selling Price: All transfers are also valued

at selling price. It is therefore possible to
calculate the selling price of the stock at
any branch at any moment in time. This
makes it possible to exercise total
control over each branch by comparing
the ‘book stock figures’ for each branch
with those recorded from the stock
counts.
 Transfer of goods to the branch at cost
price by the head office.

 Explanation of major accounts kept under

this method.
 Branch Stock Account: Records the goods
received from the head office and the
sales made by the branch. This account is
a nominal account because it records
income and expenditure
 Transfer of goods to the branch at cost
price by the head office.

 Goods Sent To Branch Account: Records all

transactions involving goods sent between the
head office and the branch. Any outstanding
balance in this account at the end of the year must
be transferred to either the purchases account or
the trading accounts of the head office.
 Defalcation Account: Records all the abnormal
losses incurred by the branch. If the loss incurred
has been insured, this account is credited with the
sum paid as indemnity. Any outstanding balance is
transferred to the head office profit and loss
account.
Transfer of goods to the branch at cost
price by the head office.

 Sales Ledger Control Account: Sales on credit are

debited to this account and the corresponding
entry would be found at the credit side of the
branch stock account. In sum, all transactions
involving credit sales, sales returns by branch
customers, discount allowed to branch customers,
bad debt, etc. must be recorded in this account.
 Branch Expenses Account: All expenses incurred
by the branch must be recorded in this account. At
the end of the financial year, the total amount is
transferred to the profit and loss account of the
head office.
Transfer of goods at cost plus
percentage.

 In this case, there are two ways of

treating branch transactions in the books
of the head office. These are:
 Branch stock adjustment method
 Memorandum column method
Branch Stock Adjustment
Method
 The major accounts under this method are branch
stock adjustment account, goods sent to branch
account, branch debtors account and branch profit
and loss account.
a. Branch Stock Account: This account is prepared
by using the invoiced price (cost plus percentage)
of the goods sent to branch. It acts as a control
and any differences existing in this account must
be transferred to branch stock adjustment
account. It is also based on the principle that the
goods sent to branch at cost plus percentage must
be equal to sales plus closing stock.
Branch Stock Adjustment
Method
b. Branch Stock Adjustment Account: This
account records the profit element on
the opening stock and goods sent to
branch at the credit side and any
transaction that reduces the profit is
debited to it. Transactions such as profit
on goods returned to the head office by
branch, returns to head office by branch
debtors, returns to branch by debtors,
closing stock are all catered for here.
 Branch Stock Adjustment
Method
c. Goods Sent to Branch Account: All transactions must be
entered in this account at their cost price.
Inter-branch transfer of goods require the following entries:
1. Debit the transferee’s branch stock account
Credit transferor’s branch stock account
With the invoiced price of the goods transferred.
2. Debit the transferor’s G.S.T.B account
Credit the transferee’s G.S.T.B account
With the cost price of the goods transferred
3. Debit the transferor’s Branch Stock Adjustment
Credit the transferee’s Branch Stock Adjustment
With the profit loading on goods transferred
 Treatment of adjustments (deficiency)

 Any deficiency in branch stock account may be due to factors

such as goods lost or stolen or it may be cash stolen or lost.
The treatment of the deficiency would depend on whether it
is normal or abnormal.
 Normal Deficiency: Any deficiency expected by management,
therefore uncontrollable. It should be credited to branch
stock account and debited to branch stock adjustment
account. Eg: allowance off selling price.
 Abnormal Deficiency: The treatment would depend on
whether the deficiency is in the form of goods and cash.

i. Cash stolen or lost: The implication is that the profit has

been made on the goods as a result of sales. Thus, credit
branch stock account and debit defalcation account with
the value of the cash stolen or lost.
 Treatment of adjustments (deficiency)

 Goods Stolen: The implication is that the anticipated

profit was never made. In that case, credit branch stock
account with the invoiced price of the goods and debit
defalcation account with the cost price of the goods and
debit Branch Stock Adjustment Account with the profit
element on the goods stolen.

 The amount to be transferred from the defalcation

account to the profit and loss account would depend on
whether the cash or goods were insured or uninsured.
 If they were insured, the business would be indemnified
by the insurance company. Any difference existing in the
defalcation account after the insertion of the indemnified
value must be transferred to the profit and loss account.
 Illustration
Lafia Baamu Alla, a dealer in bicycles has a branch in Salaga and the head office is
situated in Takoradi.
All purchases are made by the head office and the goods sent to branch are invoiced
at cost plus 20% which is the selling price. All sales are on credit terms and branch
expenses are paid by the head office and all cash received by branch is remitted to
the head office. All branch transactions are recorded in the head office books. The
following balances were in the head office ledger as at 1/1/2014.
Branch stock at invoiced price 3600
Branch stock adjustment 600
Branch Debtors 33780
Transactions during the year to 31/12/14
Goods sent to branch 32460
Returns from branch to head office 642
Branch credit sales 33780
Returns from customers to branch 354
Cash Received from branch debtors 32848
Branch stock at December 31, 2014 1962

Show the account relating to the branch in the ledger of the Lafia for the year ended
31/12/14
Memorandum Column
Method
 This method uses double columns. The
two columns are selling price column
and cost price column. The memo
column does not form part of the double
entry system.
 Branch Stock Account
The Selling Price Method
 Under this method, the head office sends
the goods to the branch(es) at the
selling price fixed by the head office. No
percentage margin or mark-up is given.
 The main objective of this method is to
ascertain the sales during the year by
the branch. The sales figure is in the
Goods sent to branch account.
 Accounting Entries.
1. Debit branch stock
Credit goods sent to branch with selling price of the goods sent to branch
2. Debit goods sent to branch
Credit branch stock with amount of goods returned directly to the head
office by the branch debtors
3. Debit goods sent to branch
Credit branch debtors with amount of goods returned directly to the head
office by the branch debtors
4. Debit Branch Stock
Credit branch debtors with amount of goods returned to branch by branch
debtors
5. Debit cash
Credit branch stock with amount of cash sales
6. Debit branch debtors
Credit branch stock with amount of credit sales
7. Debit goods sent to branch
Credit branch stock with the selling price of closing stock.
Adjustments.
 The treatment of adjustments depends
on whether the goods had been sold or
not since the main objective of this
method is to ascertain the sales made
by the branch.
 Goods stolen: The amount of goods stolen
is credited to branch stock account and
debited to the goods sent to branch
account at the selling price. Allowances off
selling price is credited to branch stock and
debited to the goods sent to branch
 Adjustments.
 Cash sales stolen: Since the goods had already been sold, it must not
debited to the goods sent to branch but branch stock is credited and
defalcation account debited.

 Stock Difference: At the end of the financial year, the physical stock is
counted and valued at invoiced price and this is used in place of the
book value of the closing stock.

If there is any difference between the debit and the credit side of
the branch stock after the closing stock had been credited, that
difference must be transferred to goods sent to branch.
Any outstanding balance in the goods sent to branch after the
closing stock had been debited is the sales of branch for the
period and this is transferred to the credit of the general trading
account.
NB: The selling price method does not reveal profit but sales of the
branch.
END OF COURSE