Monday, March 4, 2019

PILOT ON ACC 111-PRINCIPLES OF ACCOUNTING 1



ILLUSTRATION 1

Efura started a photographic business under the business name Efura Special Photos in

August, 2017. The following transactions relate to the first month of operation.
2017:
August 1         Paid N200,000 into bank.
August 5         Withdrew cash N90,000 from bank.
August 7         Bought two brand new cameras for N30,000 cash.
August 9         Paid cash for supplies N45,000
August 11       Purchased office equipment with cheque N25,000.
August            13       Received cash for work done N56,000.
August 15       Bought supplies with cash N10,000
August 18       Paid cash for repair of equipment N15,000.
August 21       Withdrew cash for personal use N12,000.
August 23       Paid telephone bills for the month N6,600 by
.
August 25       Delivered 100 pieces of pictures at N200 on credit to customers.
August 27       Received N18,000 cash from customers.
August 28       Bought supplies with cash N5,000.
You are required to prepare the two-column cash book for Efura for the month of August, 2017.

SUGGESTED SOLUTION





ILLUSTRATION 2
Each  major  heading  in  the  financial  statements  might  be  given  a  range  of  codes fromwhich  codes  can  be  selected  for  individual  general  ledger  accounts.
As a student, state a chart of accounts for a company of your choice.

SUGGESTED SOLUTION
GBOTEMI NIGERIA LIMITED
CHART OF ACCOUNTS

1000-1999       Non-Current Assets
2000-2999       Current Assets
3000-3999       Non-Current Liabilities
4000-4999       Current Liabilities
5000-5999       Equity
6000-6999       Income
7000-7999       Expenses
Individual ledgers accounts within the above range for Non-Current Assets
1200                Land
1300                Office building
1400                Warehouse
1500                Factory


ILLUSTRATION 3

(a)  Classify the under listed ledger accounts into capital and recurrent.

i.  Depreciation Account                     vi. Interest Paid Account
ii. Salaries and Wages Account          vii. Discount Received
iii. Furniture and Fittings Account     viii. Patent and Trade Marks Account
iv. Rent of Warehouse Account         ix. Goodwill Account
v. Office Building Account                x. Purchase Account
(b) Explain the accounting concepts you known
(c ) List three types of accounting convention.

SUGGESTED SOLUTION
(a) 
S/N
CAPITAL
RECURRENT
i.

Depreciation Account
ii.

Salaries and wages Account
iii.
Furniture and Fittings Account

iv.

Rent of Warehouse
v.
Office Building Account

vi.

Interest Paid Account
vii.

Discount Received
viii.
Patent and Trade Marks account

ix.
Goodwill Account

x.

Purchase Account


(b)   i. Entity Concept: Every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having proprietary or economic interest in it.
ii. Going Concern Concept: The assumption is that the business unit will operate in perpetuity that is the business is not expected to be liquidated in the foreseeable future.
iii.  Periodicity:  Although, the results of a business unit cannot be determined with precision until its final liquidation, the business community and users of financial statements require that the business be divided into accounting periods usually one year and that changes in position be measured over these periods.
iv.  Realisation: The concept establishes the rule for the periodic recognition of revenue as soon as it is capable of  objective measurement, and the value of asset received or receivable is reasonably certain.
v.  Matching Concept:  The concept hold that for any accounting period, the earned revenue and all the incurred cost that generated that revenue must be matched and reported for the period.
vi. Consistency: The concept of consistency holds that when a company selects a method it should continue to use that method in subsequent periods so that comparison of accounting figures overtime is meaningful.
vii. Historical Cost Concept: The historical cost concept holds that cost is the appropriate basis for initial accounting recognition of all asset acquisition, services rendered or received, expenses incurred, creditors and owners interest. It also holds that subsequent to acquisition, cost value are retained through out the accounting process.
viii. Money Measurement Concept: The concept that financial accounting information relates only to those activities which can be expressed in monetary terms.
ix.  Materiality:  The principle that financial statement should separately disclose items which are significant enough to affect evaluation or decisions.

(c ) The three types of accounting convention are as follows:
i.  Materiality
ii. Conservation or Prudence
iii. Consistency

ILLUSTRATION 4
The following balances were extracted from the books of Fesojaiye and Son on 31st August 2017.
                                                                        N`000
Purchases                                                     100,250
Capital                                                             41,000
Returns Outwards                                               340
Land and Building                                         14,000
Loan                                                               32,000
Stationery                                                        1,260
Drawings                                                             180
Insurance                                                             940
Advertisement                                                                420
Debtors                                                          10,000
Carriage Outwards                                              220
Motor Van                                                      2,050
Machinery                                                      24,280
Creditors                                                        14,000
Fixtures and Fittings                                      39,830
Returns Inwards                                                 730
Discounts Allowed                                             160
Rent                                                                    260
Commission Receivable                                  1,400
General Expenses                                            2,260
Sales                                                             141,000
Equipment                                                      32,000
Discount Received                                              600
Salaries                                                             1,500
Required: Prepare a trial balance as at 31st August, 2017 for Fesojaiye and Sons.

SUGGESTED SOLUTION
FESOJAIYE AND SON
TRIAL BALANCE
AS AT 31ST AUGUST, 2017
                                                                         DR                 CR      
N`000              N`000
Purchases                                                     100,250
Capital                                                                                     41,000
Returns Outwards                                                                        340
Land and Building                                         14,000
Loan                                                                                        32,000
Stationery                                                        1,260
Drawings                                                             180
Insurance                                                             940
Advertisement                                                                420
Debtors                                                          10,000
Carriage Outwards                                              220
Motor Van                                                      2,050
Machinery                                                      24,280
Creditors                                                                                  14,000
Fixtures and Fittings                                      39,830
Returns Inwards                                                 730
Discounts Allowed                                             160
Rent                                                                    260
Commission Receivable                                                             1,400
General Expenses                                            2,260
Sales                                                                                        141,000
Equipment                                                      32,000
Discount Received                                                                         600
Salaries                                                             1,500
                                                                     ______                ______
                                                                     230,340              230,340

ILLUSTRATION 5
(a)  Define depreciation and state five causes for depreciation.
(b) State six methods of depreciation.
( c) The following information has been given to you about factory plant and machinery of
Motirigbo Nigeria Limited.
Cost                             N1 million
Scrap value                  N50,000
Useful life                   4 years
As a student, you are required to calculate the annual depreciation charges for each year using:
(i)  Straight-line Method                            
(ii) Reducing Balance Method
(iii)  Sum of the year Digit Method   

SUGGESTED SOLUTION  
(a)  Depreciation is defined as the allocation of the depreciable amount of an asset over its estimated useful life.
The five causes for depreciation are as follows:
i.  Wear and Tear
ii. Obsolescence- machinery rendered out of date by later inventions.
iii. Passage of time
iv.  Evaporation e.g. chemical
v.  Physical Factors e.g. flood, excessive heat.

(b)  The six methods of depreciation are as follows:
i. Straight Line Method or Fixed Instalment Method
ii. Diminishing or Reducing Balance Method
iii. Sum of the year Digit Method
iv.  Annuity Method
v.   Revaluation Method
vi.  Depletion or Production Method

(c)   Cost                                 N1 million
       Scrap value                       N50,000
       Useful life                        4 years
i.                    Straight Line Method:
Depreciation  =  Cost of Fixed Asset – Residual or Scrap Value
Estimated Useful Life                                   
Depreciation =  1,000,000 -  50,000
                                    4
Depreciation = 950,000          =  N237,500
                              4
Annual depreciation charged for the first year       = N237,500
Annual depreciation charged for the second year  = N237,500
Annual depreciation charged for the third year     = N237,500
Annual depreciation charged for the fourth year   = N237,500
ii.                  Reducing Balance Method
R =  1 - N√S/C
R= 1- 4√50,000
              1,000,000
R = 1- 4√0.05
R= 1 – 0.47     = 0.53 or 53%
                                                                        N
Cost                                                                 1,000,000
1st Year Depreciation (1,000,000 X 0.53)         530,000
Net Book Value                                                 470,000
2nd Year Depreciation (470,000 X 0.53)          249,100
Net Book Value                                                 220,900
3rd Year Depreciation (220,900 X 0.53)           117,077
Net Book Value                                                 103,823
4th Year Depreciation (103,823 X 0.53)             55,026
Net Book Value                                                   48,797
iii.                Sum of the Year Digit Method
Year                Allocation of sum of the year             Depreciation Charged
                        Ratio X ( Cost- Scrap Value)                  N
1          4          4/10 X ( 1,000,000-50,000)                380,000
2          3          3/10 X ( 1,000,000-50,000)                285,000
3          2          2/10 X ( 1,000,000-50,000)                190,000
4          1          1/10 X ( 1,000,000-50,000)                  95,000

ILLUSTRATION 6
Define source documents and explain source documents that are known to you.

SUGGESTED SOLUTION
Source documents are business documents evidencing business transactions and forming the basis of entries in the subsidiary books. For example, invoice, debit note, credit note, receipt, cheques, pay-in-slips, bank statement, payment vouchers, statement of account and so on. 
i. Invoice: An invoice is a document that establishes indebtedness to the effect that money has not been paid or received for goods and/ or services bought or sold. It evidences credit transactions which consist of credit sales and credit purchases. It is recorded in the sales day book or in the purchases day book. It shows the following particulars:
a. Date of transaction                               b. Name and address of the seller 
c. Name and address of the buyer           d. Invoice number
e. Description of the goods bought or services rendered       f. Unit price
g. Total amount                    h. Due date for payment
i. Rate of cash discount if any     j. Signature of the seller
k. Signature of the buyer
ii. Debit Note: A debit note is a document that serves as a form of supplementary invoice to increase the indebtedness of the recipient. It is document sent by the seller to the buyer to correct an undercharge or when goods are not charged on invoices due to omissions or arithmetic errors. The buyer can also use it to claim an overcharge or for items returned to a seller. It supports adjusting entries made in the journal proper.
iii. Credit Note: A credit note is a document sent by a supplier to his debtors stating that the debtors account has been credited thus reducing his or her indebtedness. It is recorded in any of return inwards book, return outwards book or journal proper, depending on the purpose for which the credit note has been issued.
To avoid confusion it must be printed in red. It can be viewed from two perspectives:
a.       Credit note received from suppliers will be entered in the returns outwards book and then debited to the suppliers account.
b.      Credit note issued to customers will be entered in the returns inwards book and then credited to the customer’s account.
Credit notes are issued to:
i.        Correct an overcharge on the invoice    
ii.   Grant refund on goods returned. 
iv.    Receipt: A receipt is a document that shows that money has been paid for goods and/ or services sold or bought. It evidences cash transactions which is the receipt and payment of cash.  It is recorded in the cash book.
v.      Cheques: Cheques are used to withdraw money from the bank. It is used to support entries in the bank account column of the cash book maintained by the account holder.
vi.    Pay-In-Slips: Pay-In-Slips are banking documents used in the operation of accounts with the bank. For a current account, Pay-In-Slips or Tellers are used to lodge money into the account. It is used to support entries in the bank account column of the cash book maintained by the account holder.
vii. Bank Statement: These are statement received by a business or individuals that operate current accounts from its bank on a periodic basis usually at the end of each month. It shows all the lodgements made, withdrawals, bank charges and the balance on the account.
viii. Payment Vouchers: These are document that provides evidence of authorize to make payment for service received, goods bought, settlement made and asset acquires by a business.
ix.  Statement of Account: This is a document sent by the seller at the end of each month to the buyer who owes money on the last day of each month. It is really a copy of his or her account in the seller’s book. It should show the followings:
a.  Date                            b. Details
c.Debit                            d. Credit
e. Balance                       f. Amount owing at beginning of the month.
g.  Amount of each sales invoice sent to him or her during the month.
h. Credit notes sent to him or her in the month.
i. Cash and cheques received from him or her during the month.
j. Amount due from him at the end of the month.

ILLUSTRATION 7
(a)  Define a Journal and state its components.
(b)  What are the uses of Journal Proper?
(c)  List advantages of the Journal.

SUGGESTED SOLUTION
(a)  The Journal is also referred to as General Journal or Principal Journal or Journal Proper. The Journal Proper is the subsidiary book in which entries which might not fit into any of the day books so far considered in the previous chapters are recorded.
The Journal can also be defined as a book of original entries or prime entries in which transactions are recorded in chronological order (i.e. the day-to-day recording of transactions are arranged according to when they occur).
The Journal refers to daily record into which transactions are entered and classified as debit (Dr.) and credit (Cr.) before they are posted to the ledgers. The entries are recorded and explanation will be given to show the nature of the transactions.
The Journal will contain for each transaction:
i.        The date of each transaction
ii.      The name of the account(s) to be debited and the amount(s).
iii.    The name of the account(s) to be credited and the amount(s).
iv.    The narrative (i.e. a description of the transaction)
v.      A reference number should be given for the documents giving proof of the transaction.
(b) The uses of journal proper can be examined as follows:
i.                    Opening Entries
ii.                  Entries for the Purchase of Fixed Assets on Credit
iii.                 Entries for the Sale of Fixed Assets on Credit
iv.                Entries for other credit transactions other than the purchase and sale of goods on credit.
v.                  Transfers between Accounts
vi.                Writing Off Bad Debts
vii.              To answer questions on Double-Entry Principle.
viii.            Correction of Errors
ix.                Closing Entries
(c)    The following are the advantages of Journal.
i.      It provides a convenient record of transactions in chronological order.
ii.    It provides a summarized narration of each transaction.
iii.  It provides in one place a complete picture of each transaction.
iv.  It serves as a source of future reference to the accounting transactions of an
 enterprise.
v.   It makes fraud more difficult.
vi.   It reduces the risk of omission of transactions.
vii.  It reduces the risk of entering the item once only instead of having double entry.
viii. It makes tracing of errors easier when errors arise.

ILLUSTRATION 8
Explain five ways in which each of the subsidiary books is posted to the ledger.

SUGGESTED SOLUTION
The followings are ways in which each of the subsidiary books is posted to the ledger.
(a) Sales Day Book or Sales Journal
    Debit (Dr.) Individual debtor’s account with the amount of credit sales made to each
    debtor.
    Credit (Cr.) Sales account with total credit sales for the period.
(b)  Purchases Day Book or Purchases Journal
    Debit (Dr.) Purchases account with total credit purchases for the period.
    Credit (Cr.) Individual creditor’s account with the amount of credit purchases made
    from each creditor.
(c) Returns Inwards Day Book or Journal
    Debit (Dr.) Returns Inwards account with total sales returns for the period.
    Credit (Cr.) Individual debtor’s account with the amount of sales returns from each
    debtor.
(d)  Returns Outwards Day Book or Journal
    Debit (Dr.) Individual creditor’s account with the amount of purchases returns made
    to them.
    Credit (Cr.) Returns Outwards account with total purchases returns for the period.
(e) Cash Book
   Here, the two sides of the cash book needs to be analyzed for better understanding.
   The debit side of the cash book contains capital, sales, debtor’s collections, and loan
   received, cash lodgement as contra entry and so on.

ILLUSTRATION 9
“Book-Keeping is to Accounting, what Nursing is to Medicine”. Discuss

SUGGESTED SOLUTION
Book-Keeping is to Accounting. Without Book-Keeping, we would not be talking about Accounting.
So, what is Book-Keeping as well as Accounting?
Book-Keeping is an integral part of accounting.
It is defined as the art of recording financial transaction in such a manner that the financial position of a business can be known at any time. What we are saying here, is that whenever a financial transaction takes place, there must be a proper recording of such transaction in order to reflect the dual aspect of a transaction i.e. the giving aspect and the receiving aspect. It is the recording aspect of a transaction that is referred to a double entry book-keeping.
Accounting is both a profession and an academic discipline. It is defined by different people in different ways from different perspectives.
American Institute of Certified Public Accountants defined accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character, and interpreting the result thereof ”.
Frank Wood (1995: 181) defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”.
The definition of accounting, therefore, is the process of identifying; recording, analysing, classifying, summarizing, interpreting and communicating financial data of an organization to enable users make assessments and decision.
Accounting acts as the language of business. It communicates in accounting terms, what should be paid to a supplier or by a customer, the prices for a product or service the value of an asset. It looks back at the past to record, analyze and report as a steward and also looks into future and assists management with decision making and control.
Having shed light on what is Book-Keeping and Accounting? Let us look at their importance.
The following are the importance of accounting and book-keeping:
  1. It helps to determine the profitability of a business concern.
  2. The assets and liabilities of a business are shown.
  3. The records show the income and expenditure.
  4. The records are used by the tax department for tax assessments.
  5. The records provide a means by which the finances of a business are controlled.
  6. Book-Keeping provides permanent records for all financial transactions.
Based on the above analysis, conclusively, Book-keeping is to Accounting, what nursing is to medicine?


ILLUSTRATION 10
Explain what is meant by:
 i. Nominal Accounts             ii. Real Accounts       iii. Personal Accounts
Give examples of each

SUGGESTED SOLUTION
i.   Nominal Accounts: These are accounts for recording items of expenses incurred, income received, losses made and gains effected. Examples are rent account, discount received account, discount allowed account, interest account and so on.
ii.  Real Accounts: These are accounts in which tangible things (such as cash, stock, building, machinery, fixtures and fittings) are recorded. The rule is to debit what comes in and credit what goes out.
iii. Personal Accounts: These are accounts for recording names of individuals, firms or business enterprises. The rule is to debit receiver and credit supplier. Examples of personal accounts are Debtors Accounts, Creditors Accounts, T-Money Account, Brain Drain Nigeria Limited and so on.

ILLUSTRATION 11
List the users of Financial Statement.

SUGGESTED SOLUTION
The users of Accounting information include these among others.
  i.      Owners i.e. managers, shareholders and directors           
ii.   Employees
iii.  Suppliers                                        
iv. Trade creditor and loan providers
v. Government                                   
vi. Potential buyers of the business
vii.  Customers                       
viii. Financial / Economic Analyst
ix.  Supervisory and Regulatory bodies         
x. Competitors
xi. General public

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