PGBF Lecture Notes 2011-2012 Session

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BAYERO UNIVERSITY, KANO

FACULTY OF SOCIAL AND MANAGEMENT SCIENCES

DEPARTMENT OF ECONOMICS

15th October, 2012

COURSE: PBF 7205 Principles of Accounting CLASS: Post Graduate Diploma in Banking and Finance

SESSION/SEMESTER: 2011/2012 Session Second Semester LECTURER: Kabir Tahir Hamid, PhD., M.Sc., MBA, B.Sc., FIFC, CPA, ATMFA and

CONSULTATION: Strictly by Appointment

OFFICE: A8, Department of Accounting, Aminu Alhassan Dantata School of Business, New

Campus, Bayero University, Kano

A. COURSE DESCRIPTION

This course is designed to introduce students to the basic aspects of book-keeping and accounting,

definition and history of accounting, historical development of accounting in Nigeria, keeping of

proper accounting records, and the preparation of final accounts of sole proprietorship.

B. COURSE OBJECTIVES

i) To develop an understanding of the definition and historical evolution of accounting in general and Nigeria, in particular.

ii) To develop an understanding of journal and ledger records and double entry principles. iii) To develop an understanding of preparation of cashbook, bank reconciliation statement and

correction of errors.

iv) To develop an understanding of posting of business transactions, balancing of accounts, extraction of trial balance and the preparation of sole traders final accounts.

C. COURSE CONTENTS

1. Definition and History of Accounting

1.1 Definition of Accounting

1.2 The Origin of Book-keeping and Accounting

1.3 Historical Development of Accounting and Accounting Profession in Nigeria

1.4 Accounting Concepts and Conventions

1.5 Development of Accounting Standards

2. The Ledger and the Double Entry Principle

2.1 The Journal as the Book of Prime Entry

2.2 The Ledger as the Principal Book of Account

2.3 The Rules of Double Entry Book-Keeping

2.4 Recording of Business Transactions in Journals and Ledgers

2.5 Balancing off of Accounts and the Extraction of Trial Balance

3. Suspense Account and Correction of Errors

3.1 Types of Book-keeping Errors

3.2 Errors Not Affecting the Agreement of the Trial Balance

3.3 Errors Affecting the Agreement of the Trial Balance

3.4 Suspense Account

3.5 Entries Required to Correct Errors

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4. Cash Book and Bank Reconciliation Statement

4.1 Two Column Cash Book

4.2 Three Column Cash Book

4.3 Bank Reconciliation Statements

5. Sole Traders Final Accounts 5.1 The Trading, Profit and Loss Account

5.2 The Profit and Loss Appropriation

5.3 Partners Current Account

5.4 The Balance Sheet

5.5 Adjustments to Final Accounts

(a) Accruals and Prepayments

(b) Bad Debts and Provision for Bad Debts

(c) Provision for Depreciation

D. RECOMMENDED TEXT BOOKS

i) Financial Accounting Made Simple by R.O. Igbon.

ii) Business Accounting by F. Wood.

iii) Book-Keeping & Accounts by Spicer and Pedler.

iv) Fundamentals of Financial Accounting by G.A. Welsoh and D.G. Short.

v) Financial Accounting (ICAN) Study Text by Wyse.

vi) Financial Accounting: An Introduction by F.M. Walgemabach.

vii) Carters Advanced Accounts by G. Deuglas. viii) Principles of Accounting by J.G. Helmkamp, L.P. Indieke and R.E. Smith

E. METHODOLOGY

Discussion papers, covering the theoretical aspects of each topic, would be prepared and presented

in the class. Discussion exercises will follow the theory on every topic. Some of the exercises

would be attempted in the class, and the rest would be left to the students to practice on their own.

F. GRADING FORMULA

Continuous Assessment 40%

Semesters Examination 60%

Aggregate 100%

The continuous assessment marks are to be absorbed through snap test (s) to be given without

notice, scheduled test (s) and assignment (s).

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DEFINITION AND HISTORY OF ACCOUNTING

Definition of Accounting

Accounting, like many other subjects, has been defined by many individuals and institutions from

different perspectives. However, what is clear from all those definitions is that accounting involves

the provisior1 of information that guides decision making by various user groups.

The definition of accounting, which has relatively enjoyed greater acceptability among accounting

scholars, perhaps than any other definition, is the one given by the American Accounting

Association-AAA- in 1966, which defined accounting as the process of identifying, measuring and

communicating economic information to permit informed judgments and decisions by the users of

the information. This definition echoes the fact that the fundamental objective of accounting is the

provision of timely, relevant, reliable, adequate, understandable, and comparable information to

guide various decisions (economic. social, developmental and political) by the users of the

information.

In other words, the financial statements are the basis for a wide range of business analysis.

Managers use them to monitor and judge their firms performance relative to competitors, to communicate with external investors, to help judge what financial policies they should pursue, and

evaluate potential new business to acquire as part of their investment strategy. Securities analysts

use financial statements to rate and value companies they recommend to their clients. Barkers use

them in deciding whether to extend a loan to a customer and how to determine the terms of the

loan. Investment bankers use them as a basis for valuing and analyzing prospective buyouts,

mergers and acquisitions. And consultants use them as a basis for competitive analysis for their

clients. Other user groups also require the financial statements and use them for some other

purposes.

This means that, accounting is a service activity. It provides information about economic activity

that is intended to be useful in making economic decisions. Most economic activity involves

decisions on how to allocate available resources effectively among alternatives. Accounting is a

means of communication and involves the flow of information. To be effective, therefore, the

recipient of the information must understand the message that is being conveyed by accounting,

which is often refereed as the language of business. Accounting uses words and symbols, which

may have different meaning from ordinary usage, to communicate financial information to

managers, investors, creditors and other decision makers.

Accounting is used in the business world to describe the transactions entered into by all kinds of

organizations. To understand both corporate and public financial reports, therefore, a reader must

learn the fundamentals of accounting language. Similarly, as in the case with every language, there

are differences of opinion among accountants as to how a given transaction should be recorded,

just as there are differences of opinion among grammarians as to many matters of sentence

structure, punctuation, and choice of words. The information (presented in financial statements)

should therefore be comprehensible to those who have a reasonable understanding of business and

economic activities, and are willing to study the information with reasonable diligence. The

comprehensibility (semantics) of accounting language is enhanced through intervention by the

regulatory authorities and standard setting bodies. For example, in Nigeria, the Nigerian Stock

Exchange demands simplicity of presentation of accounting information in companies annual reports and accounts and prospectus to enhance comprehensibility (semantics) to none accounting

bias backgrounds.

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To provide a better understanding of accounting information by users of the information, items that

do not seem to have clear interpretations are normally explained in the notes to the accounts, so

that the reader can understand what is meant specifically, without any ambiguity. Accounting is

aimed facilitating decision making. The development of accounting information is only part of the

accounting function. A necessary companion aspect of the function is the development of the

communication process so that information can be communicated to the various users, with clear

meanings. Communication is a vital link in accounting activity. It is as important as the preparation

of the information itself.

However, there is the need for a distinction between Book-Keeping and Accounting, as the two

concepts are at times used interchangeably by non-accounting-experts. While Book-Keeping refers

to the actual record making phase of accounting (the keeping of the journals, the ledgers and the

extraction of the trial balance), accounting includes in addition to book-keeping, the preparation of

the final accounts, the uses to which the accounting records are put, their analyses and

interpretations.

The Origin of Book-Keeping and Accounting

Accounting, as a record keeping process, has evolved over many centuries to serve the changing

social and economic needs of society. Book-keeping and accounting started long time ago, though

the exact date is not known, there is evidence to suggest that they originated right from the time

people started having financial dealings among one another. Financial records keeping is thought

to have begun in about 4000 B.C. in the ancient kingdoms of Babylonia, Summeria and Assyria.

Clay tablets were used in the Babylonian Empire to record various facts. Many of these records

contained lists of events as they occurred or lists of goods belonging to an individual or estate.

Similar types of records have also been found describing business activities in ancient Greece,

Egypt, and Rome. All these early records contained mostly lists of inventories of goods and debts,

later records began to reflect a concern for computing profit and loss from the ventures. Although

these early records are interesting, they add little insight in to the development of modern day

accounting, which is based on a double entry method.

The crucial event in accounting history was the introduction of Double Entry Book-Keeping which consisted of the practices employed by the merchants of the Italian city states during the 15

th

century, which began during the 13th

and 14th

centuries in several trading centres in Northern Italy.

The main principles of the Method of Venice as it was then known were described by a Franciscan, by name Luca Pacioli, a mathematician, a teacher and a scholar at University for most

of his life. Luca Pacioli published a book entitled Summa de Arithmetica, Geometrica, Proportioni et Proportionalita (i.e. Everything about Arithmetic, Geometry, Proportions and Proportionalities) in Venice in 1494. Though the book is essentially on mathematics, it included a

section on double entry book-keeping called particularis de computis et scriptures (i.e. details of accounting and recording). In the book, Pacioli described three wait books of accounts: the waste

book (rough notes showing transactions), the journal and the ledger. Those who are familiar with

the manual banking operations can recalled the waste book, were all vouchers for a days transactions are collated in a bank. Pacioli opined that every accounting transaction involves two

things: gaining and losing of value. And, like an algebraic expression (which is solved by

performing the same operation on both sides of the equality sign, accounting transaction is solve

by debiting one account (the receiver of value) and crediting another account (the giver of value).

By tension, this means that the total assets of a business should equal to the sum of its capital and

liabilities.

The introduction of double entry is therefore an important event that marked a turning point in the

history of accounting, which deserves a significant position in the annals of accounting history.

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However, as a result of the dynamism of accounting, being mostly influenced by the volatility of

its environment, socio-cultural and otherwise, accounting history is a continuous exercise that

seems to have no foreseeable end. The Industrial Revolution in Europe during the eighteenth and

nineteenth centuries produced many significant social and economic changes, including the

automation of production (i.e. a change from the handicraft production to factory system). The

factory system was based on the use of machinery and equipment for mass production. Relatively,

large industrial and commercial outfits developed, requiring large investments of capital, many of

which were incorporated as limited liability companies (i.e. joint stock companies, as they were

then called), given them separate legal personalities, quite distinct and separate from their

shareholders. Large capital requirements by companies necessitated the separations of ownerships

from management. This brought about the need for the periodic reporting of results of operations

and financial positions of companies to their owners as opposed to the venture system. The

stewards (managers of resources) rendered periodic accounts of their stewardship as a

demonstration of accountability. It is this practice that has metamorphosed into the preparation and

presentation of financial statements by companies today.

Financial information was not only then needed by management but also by different categories of

users, including shareholders, creditors and government, among other for their decisions making.

This development also necessitated and brought about the statutory audits of companies by

independent but competent auditors who attest to the truth and fairness of financial statements in

order to lend more credence to them. As a result, accounting gradually began to serve as a

communication process, as well as, a means of keeping records.

Similarly, the emergence of management accounting is associated with the advent of industrial

capitalism as a result of the industrial revolution. The emergence of management accounting was

necessitated by the need to develop an accounting technique that would assist in the management

of companies. Management needed much more detailed and timely accounting information than

the summarized results often found in financial statements. As a result of mass production, it

became imperative for management of corporations to device costing techniques that could be

applied in determining cost of production which would serve as guide in decisions making,

particularly in the areas of pricing and cost control, inventory valuation, determination of cost of

product etc. Management accounting developed further, as a result of the scientific management

movement by Fredrick Winslow Taylor.

Further more, the development of computer and Information and Communication Technology

along with it, marked yet another important point in the history of accounting. Like other social,

environmental or technological changes, the development of computer has also impacted on

accounting profession. The emergence of computers has refined the procedures for applications of

earlier developed accounting principles and has significantly facilitated accounting practice, which

facilitate timely and accurate processing and communication of accounting information to various

user groups.

Historical Development of Accounting in Nigeria

In Nigeria, book-keeping and accounting started long before the coming of the Europeans.

Properly, organized systems of trade and government were in existence in the ancient kingdoms

and empires of Benin, Oyo and Kanem Bornu, which are in the present day Nigeria. The fact

cannot, therefore, be denied that these systems of trade and governance were in need of accounting

information.

The granting of a Royal Charter in 1886 to the National African Company, which later became the

Royal Niger Company of Nigeria, made it compulsory for the company to keep proper accounting

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records. From then, until Nigerias independence in 1960, the laws and regulations governing accounting in Nigeria were almost the same as the ones in Britain, since most of the early

professional accountants were either British or were Nigerians trained in Britain.

The Yaba College of Technology (Yaba Tech.) was the first higher institution of learning in

Nigeria to offer accounting courses. Other institutions, namely the Institute of Administration,

Ahmadu Bello University, Zaria; and the Institute of Management Technology (T.M.T.) Enugu

follow suit. After 1962, accounting degrees and diplomas programmes were started by some

Nigerian universities and polytechnics, namely the University of Nsukka, the University of Lagos,

the University of Ibadan (formerly, College of Art and Science, Ibadan) and the Kaduna

Polytechnic. Year after year, the number of institutions offering courses in accounting continues to

increase. Today, there are an upward of 170 universities, polytechnics, monotechnics and colleges

of education in Nigeria which offer various courses in accounting.

However, the history of professional accountancy bodies in Nigeria can be traced to the late

1960s, when some Nigerians who had some professional training in accounting from different parts of the world (mainly from the Britain), got together and formed an association called the

Association of Accountants of Nigeria (AAN). The Association had three main objectives, as

follows:

1. to provide a platform for accountants (and auditors) in Nigeria to discuss issues relating to their profession;

2. to introduce, maintain and improve professional code of conduct and standards; and 3. to establish training programmes and examinations leading to granting of local professional

accounting qualification.

Membership of the Association was drawn from both Nigerians and foreigners resident in the

country who were already members of the Institute of Chartered Accountants of England and

Wales (ICAEW), the body now known as the Association of Chartered Certified Accountants

(ACCA), and the Institute of Cost and Management Accountants (ICMA) to mention but a few.

The acceptance of the Association by the various sectors of the Nigerian economy led to official

recognition given by the Federal Government on the 28th September, 1965 through the passing

into law the Act of Parliament No. 15 of 1965, establishing the Institute of Chartered Accountants of Nigeria (ICAN).

Until 1980, automatic membership of ICAN was given on application to any person holding

membership certificate of the Institute of Chartered Accountants of England and Wales (ICAEW), the Chartered Association of Certified Accountants, the Institute of Chartered Accountants of

Scotland, the Institute of Chartered Accountants of Ireland, the American Institute of Certified

Public Accountants, the Canadian Institute of Chartered Accountants, the Chartered Institute of

Public Finance and Accountancy, and the Institute of Cost and Management Accountants. From

1981, this automatic membership was modified and those who hold such foreign qualifications are

now expected to pass some papers of the ICAN, before they are eligible for admission into its

membership. Similarly, all those holding local academic qualifications, who want to qualify as

Chartered Accountants, must sit and pass the qualifying examinations of the Institute, subject to

the provision of exemption of some stages and/or subjects, depending on the courses offered by a

candidate while pursuing his/her academic qualification.

The history of professional accounting in Nigeria shows that Akintola Willams was the first

Nigerian to qualify as a Chartered Accountant. In addition, F.C.O. Coker, Kunle Oshindero,

Zaccheus Osasanya, Hamza R. Zayyad, Daniel Easton, William Bond, Aliko Muhammad, just to

mention but a few, were also among the first Nigerians who qualify as professional accountants in

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the country. Similarly, among the pioneer accounting firms in the country were Akintola Williams

& Co. (the first indigenous accountancy firm in Nigeria). Peat Marwick & Co., Casselton Elliot &

Co., Pannell Fitz Patrick & Co., Coopers and Lybrand and Z. Ososany & Co.

By 1979, the Association of National Accountants of Nigeria (ANAN) was formed. During the

Shagari civilian government of October 1979 to December 1983, the Bill recognizing the ANAN

as a professional accountancy body was passed on 8th September, 1981, by the House of

Representatives, but the Bill was rejected by the then Senate, and therefore could see the light of

the day. Consequently, ANAN was registered by the Ministry of Internal Affairs on 28th

September, 1983, under Land (Perpetual Succession) Act of 1958 as a corporate body. However,

during the Babangidas Administration, on 15th August, 1993, ANAN was granted its charter through Decree No. 76 of 1993, thereby becoming the second chartered accountancy body in the

Country. ANAN, at the beginning of its existence grants automatic membership to some deserving

Nigerians holding accounting certificates from different walks of life. Later ANAN established a

college in Jos, which every person wanting to be admitted as its member must attend and pass its

qualifying examination. Today, there are a number of accounting bodies and associations that are

seeking government recognition in Nigeria. In the years to come, there may be more bodies

regulating the practice of accountancy in Nigeria.

Practice Questions

1. Give the definition of accounting given by American Accounting Association in 1966 and

analysis its constituent parts.

2. Different between book-keeping and accounting.

3. Accounting is said to be the language of business. How true is this statement?

4. Trace the origin of book-keeping. How could you imagine book-keeping without Luca Paciolis contribution?

5. Discuss the historical development of accounting in Nigeria.

6. Briefly trace the history of ICAN and ANAN. To what extend do they collectively promote the

three main objectives that NAA was set-up to achieve?

Accounting Concepts and Conventions (Principles)

Accounting principles may be defined as those rules of action or conduct, which are adopted by the

Accountants universally while recording accounting transactions. International Accounting

Standard (IAS) 1 defined Accounting principles as a body of doctrines commonly associated with theory and procedures of Accounting, serving as an explanation of current practices and as a guide

for selection of conventions or procedures where alternatives exist. To ensure acceptance, accounting principle must be capable of coping with practical recording problem, it must be

reasonably objective and feasible, it must not be expensive to apply and should lead to similar

answers in the hands of practitioners. Accounting principles can be classified into two categories,

namely, accounting concepts and accounting conventions.

Accounting Concepts

This refers to those basic assumptions or conditions upon which the science of Accounting is

based. They are usually rules and conventions that lay down the way in which activities of a

business are recorded. These concepts are:

1) Business Entity Concept: This concept states that every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having propriety or

economic interest in it. In Accounting, a business organization is considered as a separate

entity from its proprietor(s). This concept is applicable to all forms of business

organizations.

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2) Going-Concern Concept: This is the assumption that a business unit will continue to operate into perpetuity; that is, the business is not expected to liquidate in the foreseeable

future.

3) Periodicity Concept: According to this concept, the life of the business is divided into appropriate periods for the purpose of determining its results of operations. In accounting,

such a segment or time interval is called accounting period, and it is usually a year. Though, a business organization may produce quarterly or half yearly abridge financial

statement, before the end of its financial year, for the purposes of planning, performance

evaluation and control.

4) Realization Concept: This concept states that revenue is recognized when transaction is completed, whether payment is received or not, that is immaterial. For example is

considered complete at the point when the property in goods passes to the buyer and he/she

becomes legally liable to pay.

5) Matching Concept: This concept states that all the revenue earned and all the expenses incurred in generating the revenue should be matched together and reported for the period,

with a view to determining the net financial position of the business. Thus, all expenses

incurred (whether they are actually paid for or not) should be match against the revenue

earned (whether they are actually received or not).

6) Historical Cost Concept: This concept states that the basis for initial accounting recognition of all assets acquisitions, services rendered or received, expenses incurred,

creditors and owners interests is the actual cost for the transaction(s). 7) Money Measurement: This concept states that accounting is only concern with those facts

that can be measured in money terms with fair degree of accuracy and objective.

8) Dual Aspect Concept: This concept states that there are two aspects of accounting; one is represented by the resources owned by a business and the other by the claim against them.

Double entry is therefore meant to uphold this concept.

Accounting Conventions These are approaches which are followed by the Accountant in the application of the accounting

concepts. These include:

1) Conservatism/Prudence: This convention states that greater care should be taken in the recognition of profit and all known expenses, even those that cannot be exactly determined,

should be adequately provided for in the accounts. In other words, when the Accountant is

faced with the problem of choice between alternative courses of action, he should opt for a

method that would understate, rather than overstate the financial position of the business.

2) Materiality: The principle holds that only items of material values are accorded their strict accounting treatment. In other words, materiality may affect the way an item is reported in

the books of account. An item is said to be material if its disclosure or non-disclosure can

affect the judgments to be reached by a user on the financial statements.

3) Consistency Concept: This concept holds that when an enterprise has adopted a method of treating an item or accounting transactions in the books of accounts, it should continue to

use that method in subsequent periods so that comparison of accounting figures overtime

could be possible. Thus, it follows therefore that, where it becomes necessary for any

method to be change, the Accountant should report the reasons for such change and its

implications on the financial statements of the business.

4) Substance over Form: This convention states that business transactions should be accounted for and presented in accordance with their substance and financial reality and not

necessarily with their legal form. In other words, where there is conflict between the

financial reality of a transaction and its legal form, the financial reality (i.e. the substance)

should take precedence over the legal form.

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5) Objectivity/Fairness: According to this convention, data presented on the financial statements should be supported by verifiable evidence and demands the independence of

judgment on the part of the Accountant preparing the financial statements. Similarly, it is

required that accounting reports should be prepared not to favour any group or segment of

society.

Discussion Exercises

(a) Distinguish between accounting concepts and conventions. (b) You received the following letter from your neighbour Mr. Confusion concerning some views

held by his Accountant and needed clarification having learnt that you are now undergoing an

PGDBF programme at Bayero University, Kano, in which you offer some courses in

accounting.

Dear Sir,

Request for Clarification

I write to request for clarifications on the following issues.

(a) I bought a motor van some 2 years ago for N220,000. The van is still in the garage but intend

using it in my business. My friend has just informed me that the van now cost N400,000. In view

of this, I would like the Motor Van to be recorded in the books at the present market value but my

accountant decline insisting that it is the N220,000 that should recorded.

(b) Recently, I acquired a machine on Hire Purchase from Risk International. When my legal

adviser submitted documents for the transactions he stopped me from recording the machine

among my assets until I finished paying for it. This however contradicts my Accountants view, who to my knowledge had already recorded it among my assets.

(c) My Accountant is always insisting on pessimistic ideas by anticipating all forms of losses even

though Jam still hopeful that these amounts can still be realized, I see no justification for this as it

will minimize my profit and undermine my effort.

(d) Mr. Dabo, a customer, had just finished negotiating on some articles which I trade-in, while

preparing my account for this month, My Accountant had already included it as part of sales even

though the customer in question has not paid.

(e) Since I employed him in January this year, he always reports to me, the financial position of

my business on monthly basis. In this month, he said I made a profit of N26,000 out of which he

deducted the sum of N3,000. I collected in order to fuel my personal car. I frowned at this action of

my Accountant because the business is mine.

I will be grateful if you will reply me on the above issues.

Yours sincerely,

Mr. Confusion.

Required: Write a reply to the above letter stating why the Accountant has held the views

mentioned above.

Statutory and Regulatory Framework of Financial Accounting in Nigeria Like any other profession, the accounting profession is practiced within a framework of statutory

and regulatory pronouncements. This is necessary to ensure orderliness, consistency and

uniformity in the practice of the profession.

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Statutory Framework The statutory framework comprises of the statutes enacted by government to govern the conduct of

economic activities, with CAMA 1990 being the main statute, which stipulates the requirements

for the formation/registration of companies, how companies are to conduct their affairs, the type of

accounting records and financial statements required of companies, the requirements for statutory

audit, and how the life of a company may be brought to an end, among others. Other statutes

include: the enabling statutes establishing government parastatals, Investment and Securities Act

1999, Securities and Exchange Commission Act 1988, Insurance Act 1997, Nigerian Accounting

Standard Act (NASB) 2004, Banks and Other Financial Institutions Act (BOFIA) 1991, Central

Bank of Nigeria Act 2007, Nigerian Deposit Insurance Act 2007 and Money Laundering Act 1995,

among others.

Regulatory Framework

This consists of the non-statutory statements, circulars and pronouncements which are expected to

be complied with in the conduct and recording of economic activities. They include accounting

standards and Central Bank of Nigeria (CBN) Monetary Policy Circulars.

Accounting Standards An accounting standard is a statement issued by the appropriate standard-setting body locally or

internationally on a specific area or topic in financial accounting, the acceptance/application of

which is mandatory for preparers and users of financial statements. The standards which are

applicable in Nigeria are Statement of Accounting Standards (SAS) issued by the Nigerian

Accounting Standards Board (NASB), International Accounting Standards (IAS) issued by the

International Accounting Standards Committee (IASC) and the International Financial Reporting

Standards (IFRS) issued by the International Accounting Standards Board (IASB). All the

standards, IAS, IFRS and SAS are applicable in Nigeria except that if an IAS/IFRS is inconsistent

with an SAS, the IAS/IFRS would be inapplicable to the extent of the inconsistency. This implies

that on any matter on which an IAS/IFRS and an SAS make conflicting pronouncements, the SAS

shall supersede the IAS/IFRS in Nigeria. However, with effect from first January 2012, when

Nigeria is to adopt IFRS in financial reporting, the reverse will be the case. In other words, with

effect from fist January, 2012, IAS/IFRS will be adopted in Nigeria, and SAS will only be

applicable where no IAS or IFRS is issued on the same item.

History of IASC, IASB and NASB

In 1973, the IASC was established as an independent, private sector body, with volunteer, part-

time members who meet 3 times a year. IASC was established to set acceptable and applicable

standards for the preparers and users of financial statements around the world. From its inception

to 2001 when it was replaced with IASB, IASC issued IASs forty one (41) IASs, along with

interpretations (by the Standing Interpretations Committee-SIC). During the period from 1997-

1999, a restructuring program was implemented which resulted in the cessation of the operations

of the old IASC on 31st March 2001 and its replacement with IASB with effect from 10th April

2001. IASB is based in London, and has 14 full-time members. Standards issued by IASB are

known as IFRSs with the old IASs (most revised by IASB) remain in force. It also issued

interpretations through IFRS IC (IFRS Interpretation Committee). From its inception in 2001

IASB has issued 13 IFRSs.

The NASB was established on September 9, 1982 to develop and issue accounting standards for

prepares and users of financial statements in Nigeria. In other words, the NASB does for the

Nigerian business community what the IASB does for the international business community.

Compliance with SAS was mandatory by the provision of NASB Act 2004. In May 1992, the

Federal Government of Nigeria inaugurated the NASB as a quasi-parastatal with full autonomy,

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thus entitling the NASB to receive subvention from the Federal Government every year. Up to

1994, there was a board, which was overseeing the operations of the NASB. In 1994, the Federal

Ministry of Commerce dissolved the board and took over the administrative aspect of the NASB.

The membership of the NASB used to consist of 13 organizations and establishments. However, in

the last couple of years, there has been a net increase in the membership of the body bringing the

total to the 14, namely: (i) Institute of Chartered Accountants of Nigeria (ICAN); (ii) Association

of National Accountants of Nigeria (ANAN); (iii) Federal Ministry of Commerce (FMC); (iv)

Federal Ministry of Finance (FMF); (v) Central Bank of Nigeria (CBN); (vi) Corporate Affairs

Commission (CAC); (vii) Federal Inland Revenue Service (FIRS) and;(viii) Nigerian Deposit

Insurance Corporation (NDIC). Others are (ix) Securities and Exchange Commission (SEC); (x)

The Office of the Auditor-General for the Federation; (xi) The Office of the Accountant-General

of the Federation (xii) Chartered Institute of Taxation of Nigeria (CITN); (xiii) Nigeria Accounting

Association (NAA); and (xiv) Nigerian Association of Chambers of Commerce, Industry, Mines

and Agriculture (NACCIMA). Since its establishment in 1982, the NASB has issued thirty (30)

accounting standards, as follows:

SAS 1 Disclosure of Accounting Policies

SAS 2 Information to be Disclosed in Financial Statements

SAS 3 Accounting for Property, Plant and Equipments

SAS 4 Accounting for Stocks

SAS 5 Construction Contract

SAS 6 Extraordinary Items and Prior Year Adjustments

SAS 7 Foreign Currency Conversions and Translations

SAS 8 Accounting for Employees Retirement Benefits

SAS 9 Accounting for Depreciation

SAS 10 Accounting for Banks and Non-Banks Financial Institutions (Part I)

SAS 11 Accounting for Leases

SAS I3 Accounting for Investments

SAS 14 Accounting in the Petroleum Industry: Upstream Activities

SAS 15 Accounting for Non-banks Financial Institutions (Part II)

SAS 16 Accounting for Insurance Companies

SAS 17 Accounting in the Petroleum Industry: Downstream Activities

SAS 18 Statement of Cash flows

SAS I9 Accounting for Deferred Taxes

SAS 20 Abridge Financial Statement

SAS 21 Earnings Per Share

SAS 22 Research and Development Costs

SAS 23 Provisions, Contingent, Liabilities and Contingent Assets

SAS 24 Segment Reporting

SAS 25 Telecommunications Activities

SAS 26 Business Combinations

SAS 27 Consolidated and Separate Financial Statements

SAS 28 Investments in Associates

SAS 29 Interests in Joint Ventures

SAS 30 Interim Financial Reporting

Note: SAS 12 was withdrawn and replaced with a more elaborate standard i.e. SAS 19.

However, with the signing into law the Financial Reporting Council Bill of Nigeria in 2011, NASB

is now to be replaced with the Financial Reporting Council of Nigeria. Similarly, come January

2012, Nigeria is to adopt IFRS. The reasons for such adoption include among others: to enhance

worldwide comparability for investors; enhance the quality of reporting (some national GAAPs are

12

not robust for todays markets, are weak and are outdated); to a lower cost of capital for companies adopting IFRSs; more company-friendly securities market for foreign listings; opportunity for

Nigerian firms to compete and obtain foreign direct investment; and global investment community

will now be able to understand Nigerian financial reports. Other reasons advanced for adopting

IFRS in Nigeria, include: opening of securities markets world-wide to Nigerian firms; to reduced

reporting costs for multinational with subsidiaries applying many GAAPs; no need to develop and

maintain national standards; easier movement of auditors and accountants across borders; to catch

up with smaller African countries like Kenya and Ghana; IFRS adoption is typically rewarded with

a higher valuation correlation of international peers, whereas those companies that have not

adopted the standard typically trade at a discount; facilitate mergers and acquisition; enhance

competitiveness and minimise impediments to trade internationally.

13

THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE

Accounting is about record keeping of financial transactions which are to be summarized at the

end of a period, to show the performance of business for the period and the financial position of

the business. The two means of record-keeping used in accounting are Journal (or Day Book) and

the Ledger. During the data collection phase, relevant details relating to financial transactions are

captured as they occur. The details are captured from source documents, including invoice, bills,

debit notes, receipts, vouchers, credit notes etc. An accounting document will have the following

key information: date of the transaction(s); brief details about or description of the transaction(s);

amount of the transaction in money terms; and the signature of the authorizing /approving officer.

The recording phase immediately follows the data collection phase. During this phase, the

information on the source documents is recorded in the books of accounts. The most important

book of accounts is the Ledger. The ledger is the book that contains all the accounts for the

transactions of a business. An account is a page (or folio) in the ledger divided into two equal

halves with a vertical line and with a horizontal line on top. The left-hand side of an account is the

debit (Dr.) side while the right hand side is the credit (Cr.) side. At the top of an account will be

the name of the account to which the transaction relates e.g. Rent Account, Salaries Account,

Motor Vehicles Account etc. The word account is sometimes abbreviated to A/C.

Double Entry Principle

Transactions are recorded (or posted) to the accounts in line with double-entry principle. This

principle requires the dual effect (i.e. double effect of every transaction) to be recorded by passing

a debit entry to one account and a corresponding credit entry to another account. This is why it is

sometimes said that: for every debit entry, there is a corresponding credit entry and vice versa.

In order to apply the double-entry principle, it is necessary to first identify the two accounts

required. Having done this, the next step is to identify the account which is receiving the value of

the transaction and the account which is giving the value. It should be noted that for every

transaction, one account is receiving value and other giving value. Having identified the receiver

and giver of the value, a debit entry shall be posted to the account which is receiving value, while

credit entry shall be posted to the account which is giving value. This is the double-entry rule

which is sometimes expressed as: debit the receiver and credit the giver. The double entry principles/rules may be broken down into three, as follows:

1. Dr Receiver

Cr Giver

2. Dr Assets

Cr Liabilities and Capital

(Where the value is decreasing with the transaction, reverse is the case)

3. Dr Expenses and Losses

Cr Gains and Income

(Where the value is decreasing with the transaction, reverse is the case)

The Ledger

The ledger is a book in whose pages accounts are kept. An account, therefore, is page in the ledger

in which transactions of a business are recorded. A typical account has two sides, the debit (Dr)

and the credit (Cr). The left hand side is the debit side, while the right hand side is the credit side.

Both sides are divided by a clear line of demarcation, with each side ruled to show the Date,

14

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

the account.

Name of Account

Date Particulars Folio Amount Date Particulars Folio Amount

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

(ii) Particulars: This is a short description of the transaction, usually the name of the account

containing the corresponding entry.

(iii) Folio: This is the ledger page number of the corresponding account.

(iv) Amount: This is the monetary value of the transaction.

The account is traditionally ruled in T form (however, with the advent of computers, the debit and the credit sides are sometimes brought side-by-side, inside of the T form). Thus, the original or normal ruling of the ledger has been changed by different businesses to suit their needs. Banks,

for example, have the statements of their customers ruled to show the debit, credit and balance

columns all on the right side of the statement. The account is, therefore, balanced up at the end of

each transaction with the bank, to reflect new balance in the account.

In a small business organization, a single ledger book might be kept by the entrepreneur. But, as

the business grows, and transactions increase, it is evident that the business will require many

ledger books to record the numerous transactions that will take place. It is, therefore, usual to find

the ledger in such business being divided into sections. The Sales Ledgers may, for example, be

divided with respect to names alphabetically e.g. A-I, J-R, S-Z.

Sub-Division of the Ledger

In a large business organization, it may not be convenient and practical to maintain a single ledger.

In the situation, the ledger may be divided into the following:

1. Debtors Ledger or Sales Ledger this ledger will contain the accounts of the credit customers i.e. trade debtors.

2. Creditors Ledger or Purchases Ledger this ledger will contain the accounts of the credit supplies i.e. trade creditors.

3. General Ledger- this ledger will contain all other accounts except accounts of trade debtors and trade, creditors. Examples are real accounts (accounts of assets) and nominal

accounts (accounts of expenses, revenue and intangible assets).

Classification of Accounts There are two broad classifications of accounts. These are Personal Accounts and Impersonal

Accounts.

1. Personal accounts are the accounts of persons, natural or corporate, who have business dealings with the organization. The personal accounts comprise debtors accounts, creditors accounts, capital account and bank account.

2. Impersonal accounts are the accounts of non-persons. Impersonal accounts are further subdivided into real accounts and nominal accounts. Real accounts relate to tangible assets

such as buildings, furniture and stock. Nominal accounts relate to revenue/income,

expenses and intangibles assets. Nominal accounts also includes sales account, discount

received account, rent accounts, and goodwill account.

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Subsidiary Books of Account

Transactions are not normally posted directly to the ledger. They are normally recorded first in the

journals before the totals are periodically transferred to the ledger. The use of subsidiary books

(otherwise known as journals or day books) prevents the ledger from containing unnecessary

details. In a trading organization, a very large proportion of transactions relate to credit sales,

credit purchases, returns from customers and returns to suppliers. If these are posted directly to the

ledger as they occur, the sales account, purchases account, returns inwards account and returns

outward account respectively will end up containing too many entries. Apart from the four

transactions mentioned above, another type of transaction that occurs in very large number is the

receipt and payment of money. Again, to prevent the ledger from being cluttered up with too many

details, the bank account and cash account are taken out of the ledger and combined into a

subsidiary book known as the cash book. Other transactions outside the ones mentioned above are

recorded first in Journals before being posted into the ledger. The following subsidiary books are,

therefore, used.

(i) Sales Day Book (ii) Purchases Day Book (iii) Returns Inwards Day Book

(iv) Returns Outwards Day Book (v) Cash Book (vi) Journal Proper

Other names for subsidiary books are books of original entry, books of prime entry and

Journals. Each subsidiary book will now be considered in greater detail.

Sales Day Book

As credit sales occur, they are listed in the sales day book which is ruled up to show, among

others, the date of the sale, the customers name and the amount. The customers personal account is debited while the credit entry to sales account is delayed. At the end of the period (which may be

weekly, monthly, quarterly or any other convenient period), the total of the sales day book shall be

posted to the credit side of sales account in the general ledger. At this point, the double entry for

the credit sales is now complete. The sales day book is not an account and therefore does not from

part of the double-entry records. The use of the sales day book therefore considerably reduces the

number of entries in the sales account. Another name for the sales day book is sales journal.

Sales Journal

Date Details Total Net Amount

Purchases Day Book

The same factors which necessitate the use of sales day book for credit sales also make it necessary

to use purchases day book for credit purchases. The credit purchases are listed in the purchases day

book, the suppliers personal accounts being credited. The debit entry to purchases account is delayed until the end of the period. Then the total of the purchases day book is transferred to the

debit of the purchases account thereby completing the double entry for the credit purchases. The

purchases day book, not being an account, is not part of double-entry records. Its use however

saves the purchases account from containing too much detail. The purchases day book is also

known as purchases journal.

Purchases Journal

Date Details Gross Net Amount

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Returns Inwards Day Book

When customers return goods, credit notes are issued to the customers indicating that their personal accounts are credited by reducing the amount being owed by them. In a typical trading

business, the volume of returns from customers is relatively large. In furtherance of the objective

of preventing the ledger from containing unnecessary details, a returns inwards day book is

maintained in which all the credit notes are listed, personal accounts are credited. At the end of the

period determined, the total is posted to the debit of the returns inwards account in the general

ledger thereby completing the double entry for the returns from customers. As with the two day

books already discussed, returns inwards day book is outside the double-entry system. The returns

inwards book is sometimes called returns inwards journal or sales returns day book.

Returns Inwards Journal


Returns Outwards Day Book

When goods are returned to suppliers, debit notes an issued to them to indicate that the suppliers personal accounts are being debited to reduce the debt being owed to them. These debit notes are listed in the returns outwards day book while the suppliers personal accounts are debited. The double entry shall be completed when, at the end of the period, the total of the returns

outwards day book is posted to the credit of the returns outwards account in the general ledger.

The return outwards day book is not part of the double-entry records. Alternative names for this

day book are returns outwards journal or purchases returns day book.

Returns Outwards Journal


Journal Proper/General Journal

The journal proper (or general Journal) is used to record the following transactions before they are

posted to the ledger:

(i) the purchase and sale of fixed assets on credit; (ii) opening entries; (iii) correction of errors; (iv) transfer from one account to another; and (v) any other item not recorded in any of the other subsidiary books.

The journal proper serves three purposes:

(i) the journal proper is a kind of diary of transactions which fall outside the ones recorded in other subsidiary books;

(ii) it gives the explanation for each entry through the narration attached to each journal entry; and

(iii) it serves as a book of instruction, in that it tells the book-keeper which account to debit and which to credit.

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General Journal

Date Particulars Dr. Cr.

Cash Book

In a business organization, the function of receiving and paying out money (either in the form of

cash or cheque) requires a considerable number of entries. If the transactions are posted directly to

the ledger, the bank account and cash accounts will contain too many entries. The objective of

decongesting the ledger is carried one step further by taking the bank account and cash account out

of the ledger and combining them in one subsidiary book called the cash book.

2 and 3 Column Cash Book

This cash book is so-called because it has two columns, one each for bank and Cash transactions.

The two columns on the debit side record the receipt of money while the two columns on the credit

side record payment of money. The bank column on the debit side records cheque received and

cash paid into bank while the bank column in the credit side records payments by cheques. The

cash column on the debit side records cash received while the cash column on the credit side

records cash paid.

Cash Book (2 Column)

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

When the double entry for a transaction appears on both side of the cash book, this is called a

Contra Entry. Contra entries in the cash book are made when cash is deposited into the bank account out of the cash in hand or when cash is withdrawn from the bank account for office use.

A three-column cash book has a third column (in addition to the two columns for bank and cash)

for recording the cash discounts allowed to debtors and cash discounts received from creditors. A

cash discount is the amount allowed off (i.e. deducted from) debts to encourage settlement of the

debts within a specified period of time.

The discount column on the debit side of the cash book is for discounts allowed to debtors while

the discount column on the credit side records discounts received from creditors. Due to the

relatively large number of discounts allowed and received by a trading organization, the discount

allowed account and discount received account would contain too many entries if an entry is made

to these accounts every time discount is allowed or received. To prevent this, the discounts

columns are used. For example, when a customer is allowed a cash discount, this is listed in the

discount allowed column while the personal account of the customer is credited. At the end of the

period, the total of the discount allowed column is transferred to the debit side of the discount

allowed account in the general ledger. Conversely, when cash discount is received from a creditor,

this is listed in the discount received column while the creditors personal account is debited. At the end of the period, the total of discount received column is transferred to the credit of the

discount received account in the general ledger. The discounts columns are memoranda i.e. they are not part of the double-entry system.

Cash Book (3 Column) Date Particulars Folio Discount Cash Bank Date Particulars Folio Discount Cash Bank

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Trial Balance If the double-entry principle have been completely and correctly applied, it is obvious that the total

of all the debit entries will be equal to the total of all the credit entries. By extension, the total of

the debit balances should equal to the total of the credit balances. The list drawn up showing the

balances extracted from the accounts in the ledger is known as a trial balance. The debit balances

are shown under the debit column and the credit balances are shown in the credit column. As has

been mentioned, the total of the debit balances should agree with the total of the credit balances if

the double-entry principle have been correctly applied. The failure of the totals to agree is

therefore an indication of error(s) in the entries.

Trial Balance as at

Date Particulars Dr. Cr.

The trial balance serves two purposes:

(i) it serves as a check on the arithmetical accuracy of the entries in the ledger; and (ii) it serves as the basis for the preparation of Trading, Profit and Loss Account and

Balance Sheet.

It must be emphasized, however, that the agreement of the trial balance does not mean that there

are no errors in the ledger entries. There are some errors which will not prevent the trial balance

from agreement, and so therefore, the trial balance does not have the power to disclose them. These

are: error of principle; error of omission; error of commission; error of complete reversal of

entry; error of original entry/transposition; and compensating error.


Question One

(a) Briefly discuss the different ledgers that a business enterprise may have to create for the complete record of all its transactions.

(b) List and explain any two errors each that affect and that do not affect the agreement of the Trial Balance.

(c) List and explain any three (3) types of journals you know. (d) What is a journal? List and explain four uses of a general journal. (e) What is a Trial Balance? When is a suspense account required? (f) Distinguish between trade discounts and cash discounts describe briefly the accounting treatment of each one of them.

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Question Two Ahmads financial position as at 1st August, 2010 was as follows: Cash in hand N 6,300

Cash at bank N 24,000

Stock N 3,600

You are required to open Ahmads books by means of the journal, enter the following transactions and extract a trial balance:

2010 N

August 2 Purchased goods in cash 4,000

5 Bought goods from Kamal on credit 17,500

7 Bought shop fittings and paid by cheque 2,400

11 Cash sales 2,800

12 Sold goods to Kasimu on credit 850

15 Paid Kamal by cheque on account 10,000

18 Cash Sales 4,700

19 Paid cash into bank 800

20 Paid carriage in cash 200

23 Bought goods from Mantau in cash 640

27 Sold goods to Kenneth on credit 1,300

28 Bought new bicycle and paid by cheque 4,000

31 Paid rent of premises by cheque 2,500

General Journal Capital Account

Particulars Dr Cr N N

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

Cash in hand 6,300 1/9/10 bal. b/d 33,900

Cash bank 24,000

Stock 3,600 Capital Account

Capital 33,900 N N

Being opening balances

as at 1st August, 2010 31/8/10 bal. c/d 33,900 1/8/10 bal. b/d 33,900

1/9/10 bal. b/d 33,900

Cash Account Kamal Account

N N N N

1/8/10 bal. b/d 6,300 2/8/10 Purchases 4,000 15/8/10 Bank 10,000 5/8/10 Purchases 17,500

11/8/10 Sales 2,800 19/8/10 Bank (c) 800 31/8/10 c/d 7,500

18/8/10 Sales 4,700 20/8/10 Carriage 200 17,500 17,500

23/8/10 Purchases 640 1/9/10 bal. b/d 7,500

31/8/10 c/d 8160

Shop Fittings Account

13,800 13,800 N N

1/9/10 bal. b/d 8160 7/8/10 Bank 2,400 31/8/10 bal. c/d 2,400

1/9/10 bal. b/d 2,400

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Bank Account Purchases Journal

N N Date Particulars Amount

1/8/10 bal. b/d 24,000 7/8/10 S/Fittings 2,400 5/8/2010 Kamal 17,500

19/8/10 Cash (c) 800 15/8/10 Kamal 10,000

18/8/10 sales 28/8/10 Bicycle 4,000

31/8/10 Rent 2,500 Sales Journal

31/8/10 c/d 5,900 Date Particulars Amount

12/8/2010 Kasimu 850

24,800 24,800 27/8/2010 Kenneth 1,300

1/9/10 bal. b/d 5900 2,150

Purchases Account Sales Account

N N N N

2/8/10 Cash 4,000 31/8/10 bal. c/d 22,140 31/8/10 bal. c/d 9,650 11/8/10 Cash 2,800

23/8/10 Cash 640 18/8/10 Cash 4,700

31/1/10 Sundry 17,500 31/1/10 Sundry 2,150

22,140 22,140 9,650 9,650

1/9/10 bal. b/d 22,140 1/9/10 bal. b/d 9,650

Kasimu Account Carriage Account

N N N N

12/8/10 Sales 850 31/8/10 bal. c/d 850 20/8/10 Cash 200 31/8/10 bal. c/d 200

1/9/10 bal. b/d 850 1/9/10 bal. b/d 200

Kenneth Account Bicycle Account

N N N N

27/8/10 Sales 1,300 31/8/10 bal. c/d 1,300 28/8/10 Bank 4,000 31/8/10 bal. c/d 4,000

1/9/10 bal. b/d 1,300 1/9/10 bal. b/d 4,000

Rent Account

N N

31/8/10 Bank 2,500 31/8/10 bal. c/d 2,500

1/9/10 bal. b/d 2,500

Trial Balance As At 31st August, 2010

Particulars Dr Cr

N N

Cash in hand 8,160

Kamal 7,500

Capital 33,900

Stock 3,600

Bank 5,900

Shop Fittings 2,400

Purchases 22,140

Kasimu 850

Kenneth 1,300

Sales 9,650

Carriage 200

Bicycle 4,000

Rent 2,500

51,050 51,050

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Question Three

Write up the following transactions in the records of Malam Abdullahi and extract a trial balance.

Feb. 1 Started business with N30,000 in the bank and N5,000 in cash

2 Bought goods on credit from: I. Umar N2,500; C. Chindo N1 ,900; and P. Taiye N 1,800

3 Bought goods in cash N2,300

4 Paid rent in cash N100

5 Bought stationery paying by cheque N490

6 Sold goods on credit to: C. Jamil N1,400; R. Sani N1,000; B. Aromire N2,400

7 Paid wages in cash N500

10 Returned goods to C. Chindo N600

11 Paid rent in cash N100

I3 R. Sani returned back goods worth N200

16 Paid electricity by cheque N1,300

18 Paid insurance premium in cash N400

23 Bought motor van on credit from C. Aliyu N6,000

21 Paid motor expenses in cash N60

23 Paid wages in cash N900

24 Received part of amount owing from B. Aromire by cheque N2,090

28 Received refund of electricity N100 by cheque

28 Paid the following by cheque: I. Umar N2,500; C. Chindo N1,300;and C. Aliyu N6,000

Question Four

Ahmed Umar has the following credit purchases and sales for the month of June 2011.

March 3 Sold on credit to Dudu the following: 4 tins of paint at N30 per tin, N20 paint brushes at

N40 each, 10 percent trade discount allowed on both items.

March 7 Purchased on credit from Bello: 10 ladders at N100 each, 4 hammers at N20 each, less 25

percent trade discount on both items.

March 10 Bought on credit from Aliyu: 40 screw drivers at N30 each, 10 hammers at N120 each,

less 331/3 percent trade discount on both items.

March 20 Sold on credit to Taye: 6 ladder at Nl00 each, 2 hammers at Nl20 each and 1 tin of paint

at N360. No trade discount.

March 28 sold on credit to Garba: 8 paint brushes at N50 each less 5 percent trade discount.

You are required to enter the above transactions in the appropriate journal of Ahmed Umar and

post the items to the personal accounts in the ledger. In addition, the journal totals are to

be posted to the appropriate accounts in the ledger.

22

SUSPENSE ACCOUNT AND CORRECTION OF ERRORS

Due to the imperfection of human beings, it is inevitable that errors would exist in the accounting

records. Although it may be difficult to eliminate errors completed, however they can be reduced

to the barest minimum. To reduce errors in accounting records, what should be done, among other

measures, is to engage the services of well trained personnel to maintain accounting records.

3.1 Types of Book-keeping Errors

There are two types of book-keeping errors, namely:

(a) errors that do not affect the agreement of the Trial Balance; and

(b) errors that affect the agreement of the Trial Balance.

3.2 Errors Not Affecting the Agreement of the Trial Balance

These are errors that despite the existence, the trial balance would still agree. They consist of the

following:

(i) Error of Original Entry This is an error in which a wrong figure (amount) is used to observe correct double- entry. For

example, a sum of N25,000 received from a Debtor may be written as N52,000 which is

subsequently debited to the cash book and credited to the Debtors account. This example is an error of transposition.

(ii) Error of Complete Omission This is an error involving failure to post a transaction completely into the relevant accounts, that is,

no account is debited and no account credited. This may be due to the loss of the source document.

For example, a purchase invoice may be misplaced as a result of which it was not recorded in the

purchases day book causing the transaction not to be debited to purchases account nor credited to

the suppliers account. (iii) Error of Principle This is an error whereby a transaction is posted to the wrong class of accounts. For example, the

cost of office furniture may be wrongly debited to office expenses account (an account belonging

to the class of nominal accounts) instead of office furniture account (an account belonging to the

class of real accounts).

(iv) Error of Commission This is an error involving the posting of a transaction to a wrong account within correct class of

accounts. For example, payment to a creditor named Auwal may be wrongly debited to the account

of another creditor named Awwal. Both names are almost identical in spelling and both accounts,

of course, belong to the class of Creditors accounts.

(v) Error of Complete Reversal of Entry This is an error involving the complete reversal of the normal double-entry for a transaction. For

example the payment by cheque for salaries may be wrongly debited to bank account, as well as,

wrongly credited to salaries account.

(vi) Compensating Errors This is a situation in which errors occurred in such a way that by coincidence they cancel one

another. For example, the undercast of the debit side of cash book by, say N25,500 would be

cancelled out if, sales account is understated by the same amount, i.e. N25,500.

3.3 Errors Affecting the Agreement of the Trial Balance

These are errors the existence of which would cause the Trial balance not to agree. They consist of

the following:

23

(i) Error of Over or Under Cast This is an error involving wrong addition of figures. For example if the sales day book is wrong

casted, the total of credit sales posted to the credit side of sales accounts in the ledger will be

greater than or less than the actual figure, thereby affecting the agreement of the Trial Balance.

(ii) Error of partial reversal of entry (Error of Misplacement) This is an error involving reversal of one leg of the double- entry for a transaction. For example,

the double-entry for the payment of wages in cash is: debit wages account, credit cash account. If

wages account is correctly debited but cash account is also debited, this amounts to an error of

partial reversal of entry the reversal of the credit entry of the cash account. This error always results in the two legs of a double-entry appearing on the same side, either both entries will be on

the credit side or both on the debit side, as in the case of this example. To correct this error, the

amount involved would be doubled, and the correct entry observed in the account in which the

entry was reserved.

(iii) Error of Omission or Misstatement of Old Account Balance

This is the omission or misstatement of old account(s) balances, i.e. balance b/d from the previous

period, thereby leading to less than the correct amount in the account and consequently affecting

the agreement of the Trial Balance.

(iv) Error of Partial Omission This is an error whereby one aspect of the double-entry for a transaction is posted without posting

the corresponding entry. For example, where rents is paid in cash, and rent account was credited

but cash account entry was omitted, leading to one leg in, one leg out. This type of error will affect

the agreement of the trial balance.

(v) Error of Omitting Journal Totals If the totals in the journals (purchases, sales, return outwards or return inwards) are not posted to

the relevant accounts, the balancing figures in the affected accounts would be wrong, resulting in

the disagreement of the trial balance. For example if the total sales from the sales journal is

N55,000 and that has not been posted to sales account, the sales account figure will be less by the

same amount, thereby leading to the disagreement of the Trial Balance.

(vi) Error of Extraction This is an error which results, as book-keepers extract (draw) trial balance from the ledger account

balances. The balances may be correct but, but on extracting them to the trial balance, error may be

committed. For example cash account balance of N35, 000 was taken to the Trial Balance as but

N53,000. This error would cause the debit side of the trial balance to be greater than the credit

side. Extraction error is usually an error of transposition leading to overcast or undercast of the

amount involved.

(vii) Error of Slide Error of slide mostly results to overcast or undercast. For example crediting a suppliers account with N54,000 instead of N45,000 is an error of slide or specifically error of overcast and debiting

machinery account with N26,000 instead of N62,000 is an error of slide or specifically error of

undercast. These types of errors affect the agreement of the Trial Balance.

(viii) Error of Misplacing Ledger Balance After balancing off ledger accounts, the balances are to he taken to the relevant sides of trial

Balance. While taking the balances to the trial balance, the book-keeper might record a debit

balance on the credit column of the trial balance and vice versa. For example sales balance of

N7,000 might be recorded on the debit column instead of the credit column of the Trial Balance.

3.4 Suspense Account When a Trial balance does not balance and there is no time or it is inconvenient to immediately

locate and correct the errors because the final accounts are urgently required, the Trial balance can

be made to balance by inserting the balancing figure and describing it as Suspense Account. In

24

other words, a Suspense Account is an account created in order to make a disagreed trial balance

agree, by showing the difference in the disagreed trial balance. For example, if the total of the

debit balances is greater than the total of the credit balances, a suspense account is to be created

and credited with the difference in order to force the trial balance to agree.

If the Suspense account balance is a debit, it shall be classified as a current asset in the balance

sheet while it shall be classified as a current liability if it is a credit balance. Suspense account

must however not be carried in the books for an unreasonable length of time. The creation of

suspense account is just a temporary measure taken by a bookkeeper pending the discovery of the

mistake(s) or error(s) that led to the disagreement in the trial balance. As soon as the book-keeping

errors causing the disagreement of the trial balance totals are discovered and corrected, the

suspense account would automatically close itself. In other words, the only way Suspense Account

can be eliminated is to locate and correct the errors that necessitated its creation in the first place.

In closing the suspense account all the errors whose second entries are not known are to be

recorded in it, debit or credit side. The errors that are corrected through suspense account are errors

affecting the agreement of the Trial Balance. As all the errors are corrected, the two sides of the

account, inclusive of the sundry error, would be equal, thereby closing the Suspense Account.

Suspense account is not relevant while correcting book-keeping errors that do not affect the

agreement of the trial balance. It is however, necessary while correcting errors affecting the

agreement of the trial balance. This is because, in correcting those errors, it would be clear as to

where the first entry will go but, it would not be clear as to where the second entry will go and, for

that reason, suspense account is to stand for the unknown account, receiving the second entry.

3.5 Entries Required to Correct Errors

As mentioned above, with respect to the first type of errors (i.e. those that do not affect the

agreement of the Trial balance), they do not necessitate the creation of Suspense Account because

they do not cause the Trial balance not to balance. For this reason, the double- entries needed to

correct these errors are not passed through the Suspense Account.

On the other hand, the second types of errors cause the Trial balance not to agree and therefore

necessitate the creation of Suspense Account. Therefore, double-entries made to correct such

errors are passed through Suspense Account so that after all such errors have been corrected, the

Suspense Account balance disappears.

3.5.1 Correction of Errors after Final Accounts Had Been Drawn Up

Where final accounts had already been prepared before effecting correction of errors, it would be

necessary, in addition to the entries to correct the errors, to;

(a) reverse the values of the balance sheet items affected by the errors; and

(b) recalculate the net profit obtained in the Profit and Loss Account.

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Question One

The Trial Balance of Muhsin as at 31/12/08 failed to balance, the debit side being greater than the

credit side by N7,440. It was later discovered that the following errors have given rise to the

difference between the two sides of the Trial Balance.

1. Bank account was debited with sales made of N6,200 and sales account was credited with the same amount, whereas N3,790 was cash sales and N2,410 was sales on credit.

2. Rent received from tenants N1,200 was debited to the rent account. The amount was also debited to the bank account, as well.

3. Interest received N700 was debited to interest on loan account and no other entry was made. 4. A cheque of N 1,480 issued by a debtor was dishonoured and in restoring the debt, his

account was debited with N 1,480 and the bank account was credited with N1,840.

5. The discount received account was overcast by N550. 6. Sales made on credit to a customer for N620 were not recorded. 7. Office equipment purchased for N5,700 was debited to office equipment account but no

other entry was made, because payment had not been made.

8. Insurance premium paid by cheque N450 was credited to both bank account and cash account and then debited to insurance account.

9. Motor van repairs N860 was debited to motor van account and credited to bank account.

Required:

(a) Show the journal entries necessary to correct the above errors.

(b) Prepare suspense account to show the correction.

Question Two

(a) The Trial balance of a firm showed a difference of N 11,100 and this has been carried to the credit side of a Suspense Account. Further information revealed the following errors.

(i) Sales day book was overcast by N 2,500

(ii) An invoice for N 2,750 received from a supplier was correctly entered in the purchases

day book but was posted to the debit side of the suppliers account.

(iii) A debtor who owed a sum of N 1,200 died without leaving anything behind. This

amount was written off his account as a bad debt but no other entry was made in the books.

(iv) A machine was bought for N 7,500 and the payment was made by cheque. This fact

was recorded only in the machinery account.

(vii) A payment of N 1,300 for wages was entered correctly in the cash book but was

recorded as N 3,100 in the wages account.

You are required to: Show journal entries necessary to correct these errors and a Suspense

Account.

General Journal

Particulars Dr. Cr.

N N

Sales Account 2,500

Suspense Account 2,500

Being correction of error of overstatement


Supplier's Account 5,500

Being correction of error of misplacement

Bad debt Account 1,200


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Being bad debt written off


Bank Account 7,500

Being correction of error of partial omission


Wages Account 1,800

Being correction of error of transposition (Over

statement)

SUSPENSE ACCOUNT

N N

Supplier 5,500 Balance b/d 11,100

Bank 7,500 Sales 2,500

Wages 1,800 Bad debt 1,200

14,800 14,800

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Question Three

(b) The Suspense account, indicating the difference on the Trial Balance prior to the

correction of the errors

(c) A statement of adjusted net profit.

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CASH BOOK AND BANK RECONCILIATION STATEMENT

4.1 Cash Book

In a business organization, the function of receiving and paying out money (either in the form of

cash or cheque) requires a considerable number of entries. If the transactions are posted directly to

the ledger, the bank account and cash accounts will contain too many entries. The objective of

decongesting the ledger is carried one step further by taking the bank account and cash account out

of the ledger and combining them in one subsidiary book called the cash book.

4.2 2 and 3 Column Cash Book

This cash book is so-called because it has two columns, one each for bank and Cash transactions.

The two columns on the debit side record the receipt of money while the two columns on the credit

side record payment of money. The bank column on the debit side records cheque received and

cash paid into bank while the bank column in the credit side records payments by cheques. The

cash column on the debit side records cash received while the cash column on the credit side

records cash paid.

Cash Book (2 Column)

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

When the double entry for a transaction appears on both side of the cash book, this is called a

Contra Entry. Contra entries in the cash book are made when cash is deposited into the bank account out of the cash in hand or when cash is withdrawn from the bank account for office use.

A three-column cash book has a third column (in addition to the two columns for bank and cash)

for recording the cash discounts allowed to debtors and cash discounts received from creditors. A

cash discount is the amount allowed off (i.e. deducted from) debts to encourage settlement of the

debts within a specified period of time.

The discount column on the debit side of the cash book is for discounts allowed to debtors while

the discount column on the credit side records discounts received from creditors. Due to the

relatively large number of discounts allowed and received by a trading organization, the discount

allowed account and discount received account would contain too many entries if an entry is made

to these accounts every time discount is allowed or received. To prevent this, the discounts

columns are used. For example, when a customer is allowed a cash discount, this is listed in the

discount allowed column while the personal account of the customer is credited. At the end of the

period, the total of the discount allowed column is transferred to the debit side of the discount

allowed account in the general ledger. Conversely, when cash discount is received from a creditor,

this is listed in the discount received column while the creditors personal account is debited. At the end of the period, the total of discount received column is transferred to the credit of the

discount received account in the general ledger. The discounts columns are memoranda i.e. they are not part of the double-entry system.

Cash Book (3 Column) Date Particulars Folio Discount Cash Bank Date Particulars Folio Discount Cash Bank

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Question One

Write up a two-column cash book from the following details, balance off at the end of the month

and show the relevant discount accounts as they would appear in the general ledger:

October 2011

Balances brought forward: Cash in hand N780

Cash at the bank N12,560

2 The following persons paid their accounts by cheque: Musa N800; M. Kamal N600; Kaka N200; and H. Jibril Nl,200

3 Paid rent in cash N120 4 Paid T. Musa his account of N670 by cheque. 5 Cash sales paid direct into the bank N750 6 Paid the following accounts by cheque: Nasir N200; Mansur N600; Saleh N3,600;

and Gambo N800

10 Cash drawings N400 11 K. Faruk paid his account of N890 by cheque. I7 Cash withdrawn from the bank N 1,000 for business use.

19 Salaries paid in cash N800 20 The following persons paid their accounts by cheque: J. MaryamNl,400; M.

Mgbenwelu Nl,000; and D. Bayo N3,800

25 Internet browsing paid in cash N300 28 The proprietor pays a further N10,000 capital into the bank from his private monies 30 Balarabe paid N760 in cash. 31 The proprietor bank all the money in the office except N150.

You are required to enter up the transactions in the cash book and show the relevant transfer of

the discounts amounts into their respective accounts in the ledger.

Question Two

Write up a three-column cash book from the following details, balance off at the end of the month

and show the relevant discount accounts as they would appear in the general ledger:

October 2011

Balances brought forward: Cash in hand N780

Cash at the bank N12,560

7 The following persons paid their accounts by cheque, in each case deducting 5 per cent cash discount; Accounts: Musa N800; M. Kamal N600; Kaka N200; and H.

Jibril Nl,200

8 Paid rent in cash N120 9 Paid T. Musa his account of N670 by cheque, no discount being deducted. 10 Cash sales paid direct into the bank N750 11 Paid the following accounts by cheque, in each case deducting a 5 per cent cash

discount: Accounts: Nasir N200; Mansur N600; Saleh N3,600; and Gambo N800

12 Cash drawings N400 13 K. Faruk paid his account of N890 by cheque N850, deducting N40 cash discount. I7 Cash withdrawn from the bank N 1,000 for business use.

21 Salaries paid in cash N800 22 The following persons paid their accounts by cheque, in each case deducting a 5

per cent cash discount; Accounts: J. MaryamNl,400; M. Mgbenwelu Nl,000; and

D. Bayo N3,800

26 Internet browsing in cash N300

30

29 The proprietor pays a further N10,000 capital into the bank from his private monies 32 Balarabe paid N760 in cash. 33 The proprietor bank all the money in the office except N150.

You are required to enter up the transactions in the cash book and show the relevant transfer of

the discounts amounts into their respective accounts in the ledger.

4.3 Bank Reconciliation

In modern times, nearly all firms maintain current accounts with banks for their operations. Sums

of money, cash and cheques received by, or on behalf of the firm are paid into the bank account.

Conversely, payments are made from the bank account, usually by way of cheques issued by the

firm, or by some other means.

The firm maintains records of receipts into and payments out of the bank account in a book known

as Cash Book (bank column). From time to time or as often as required by the account holder,

details of the transactions on the bank account are sent to the account holder in a document known

as bank statement.

4.3.1 Cash Book (Bank Column) and Bank Statement

The account holder posts receipts to the debit side of the cash book. These are the same items that

appear on the credit side of the bank statement, while credits posted to the cash book appear on the

debit side of the bank statement. Cash at bank is indicated in the cash book as a debit balance but

as a credit balance on the bank statement. Conversely, bank overdraft balance is indicated on the

cash book as a credit balance but as a debit balance on the bank statement. This is because the

customers account is seen as a liability account in the books of the bank. In summary, like items are treated in opposite sides in the cash book and in the bank statement.

If all items have been accurately and promptly recorded in both the cash book and the bank

statement, both would show the same balance but, of course, on opposite sides. In such a case,

there would be no need for reconciliation. In reality, however, the cash book balance at any given

d

PGBF Lecture Notes 2011-2012 Session

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Transcript of PGBF Lecture Notes 2011-2012 Session