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TYPES OF ACCOUNTING

1. Management accounting
2. Financial accounting
Management Accounting
• Is concerned with provision of economic
information for management purposes, that is
planning, leading and controlling and
evaluation. The format and frequency of
reporting is as required by management
therefore varies from company to company
FINANCIAL ACCOUNTING
• Is concerned most with the provision of
economic information to the outsiders. It
gives a general overview of the financial
position and performance of the company
(govt, suppliers, managers, shareholders).
Governed by legislation- company act-
accounting standards- auditors check these.
Reported at least once a year.
Accounting information systems

• The common elements underlying any


accounting system
1. Data collection (invoices, delivery notes)
2. Data recording (book keeping system)
3. Data reporting (financial statements: balance
sheet, profit and loss account (income
statement) and cash flow statement)
4. Data evaluation analysis and interpretation
Qualitative characteristics of financial
statements
• Comparability( assumption is: everything is
the same except for performance)
• Understand ability (from the user point of
view)
• Reliability (to the user)
• Timely (user must be able to make decision
now)
BUSINESS FINANCIAL MODELS
• Sources of funds
Sources of long term finance Accountant’s term

Shareholders Share capital

Lenders Loan capital

Reinvestment of profits Retained profit


BUSINESS FINANCIAL MODELS
• Use of funds:
USE OF FUNDS ON ACCOUNTANT’S TERM

FACILITIES/ PROCESSES FIXED ASSETS

PRODUCTS/SERVICES WORKING CAPITAL


CAPITAL EXPENDITURE
• Capital expenditure is the funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or equipment. This type of outlay is
made by companies to maintain or increase the scope of their operations. These
expenditures can include everything from repairing a roof to building a brand new
factory
• Capital expenditure includes costs incurred on the acquisition of a fixed asset and
any subsequent expenditure that increases the earning capacity of an existing
fixed asset. The cost of acquisition not only includes the cost of purchases but also
any additional costs incurred in bringing the fixed asset into its present location
and condition (e.g. delivery costs).
• The amount of capital expenditures a company is likely to have depends on the
industry it occupies. Some of the most capital intensive industries include oil,
telecom and utilities.
• In terms of accounting, an expense is considered to be a capital expenditure when
the asset is a newly purchased capital asset or an investment that improves the
useful life of an existing capital asset. If an expense is a capital expenditure, it
needs to be capitalized; this requires the company to spread the cost of the
expenditure over the useful life of the asset. If, however, the expense is one that
maintains the asset at its current condition, the cost is deducted fully in the year of
the expense.
CAPITAL EXPENDITURE
• Capital Expenditure may include the following:
• Purchase costs (less any discount received) acquiring fixed,
and in some cases, intangible assets
• Delivery costs Legal charges Installation costs
• repairing an existing asset so as to improve its useful life
• upgrading an existing asset if it results in a superior fixture
• preparing an asset to be used in business
• restoring property or adapting it to a new or different use
• starting or acquiring a new business
• As capital expenditure results in increase in the fixed asset
of the entity, the accounting entry is as follows: Debit Fixed
Assets, Credit Cash/Payable
REVENUE EXPENDITURE
• Revenue expenditure incurred on fixed assets include costs that are
aimed at 'maintaining' rather than enhancing the earning capacity of the
assets. These are costs that are incurred on a regular basis and the benefit
from these costs is obtained over a relatively short period of time.
• For example, a company buys a machine for the production of biscuits.
Whereas the initial purchase and installation costs would be classified as
capital expenditure, any subsequent repair and maintenance charges
incurred in the future will be classified as revenue expenditure. This is so
because repair and maintenance costs do not increase the earning
capacity of the machine but only maintains it (i.e. machine will produce
the same quantity of biscuits as it did when it was first put to use).
REVENUE EXPENDITURE
• Revenue costs therefore comprise of the following:
• Repair costs
• Maintenance charges
• Repainting costs
• Renewal expenses
• As revenue costs do not form part of the fixed asset
cost, they are expensed in the income statement in the
period in which they are incurred.
• Capital expenditure, as opposed to revenue
expenditure, is generally of a one-off kind and its
benefit is derived over several accounting period
SEQUENCE OF EVENTS IN THE
ACCOUNTING CYCLE
The sequence of events from the time that a
transaction has taken place until the financial
statements are drawn up, are as follows:
1. Transaction: buying or selling of goods etc
2. Source documents: invoice, order form etc
3. Books of prime entries: purchase journal etc
4. General ledger:
5. Trial balance
6. Financial Statement
BOOKS OF PRIME/ ORIGINAL ENTRY
• BOOKKEEPING is concerned with the
classification and recording of monetary
transactions. It records data in a logical format so
that it may be used as part of an accounting
information system to provide information about
the activities of an organisation. Book keeping
procedures have been thoroughly systematized
using manual, mechanical and computer
techniques. Although bookkeeping procedures
support the financial accounting process, they are
only part of the process
BOOKS OF PRIME ENTRY
• The books in which entries are made prior to their
posting to the ledgers are known as subsidiary books or
as books of prime entry. As the number of accounts
increases, we divide the ledger into several sections,
cash book, sales ledger, purchase ledger, and general
ledger. There are basically five books of prime entry:
1. Purchase Journal
2. The Returns Journal
3. Sales Journal
4. Cash book
5. General Journal
THE DOUBLE ENTRY SYSTEM
• Double entry system: accounts for giving away and
receiving. Financial records are incomplete if they do not
disclose
1. Giver
2. Receiver
Every transaction will have two aspects one involving
receiving of the benefit by one or more accounts and the
other giving the benefit by one or more accounts. The
account which receives the benefit is “debited” and the
one which gives the benefit is “credited”
• It follows therefore that we
1. Debit the Receiver, and
2. Credit the Giver
ASSETS AND LIABILITIES
• The fundamental Accounting equation is that assets
must be equal to the sources ie
Assets = Equities
• Assets are things of value the firm possesses. Assets
are things owned by the business eg land and
buildings, machinery, motor vehicles, goods for resale
etc
• Equities-two types of equities: the liabilities are equity
of the creditors and the capital is equity of the owners
• ASSETS = CAPITAL+LIABILITIES
• Therefore, liabilities are debt owed and capital is
amount invested in the business by owners
DEBIT AND CREDIT
• write the word PEARLS
• P = Purchases
• E = Expenses
• A = Assets
• The first three are always debited in the books of prime
entry
• R = Revenues
• L =Liabilities
• S = Sales
• The last three are always credited in the books of
prime entry
DOUBLE ENTRY SYSTEM
• Example
• Mr Dube started a business with $20 000 cash on 01
Jan 2000. His transactions during the first two weeks of
January were as follows:
• 02 Jan, bought delivery van for $5 000 cash
05 Jan, bought goods for resale for $3 000 cash
09 Jan, bought some office furniture for $2 000 cash
12 Jan, bought a stove for $3 000 cash
• You are required to show how these transactions will
be reflected in the books of Mr Dubes business
DOUBLE ENTRY SYSTEM
• Solution:
• We need to open a capital account and a cash
account to account for introduction of money
into the business.
• We will need to open up accounts for each of
the assets bought to account for the buying of
assets
DOUBLE ENTRY SYSTEM
Capital Account
Debit (Dr) Credit (Cr)
01.01.2000 Cash 20,000

Cash Account
Debit (Dr) Credit (Cr)
01.01.2000 Capital 20,000 02.01.2000 Delivery van 5,000
05.01.2000 Goods for resale 3,000
09.01.2000 Furniture & fittings 2,000
12.01.2000 Stove 3,000
DOUBLE ENTRY SYSTEM
Delivery Van Account
Debit (Dr) Credit (Cr)
02.01.2000 Cash 5,000

Goods for Resale Account


Debit (Dr) Credit (Cr)
05.01.2000 Cash 3,000

Furniture & Fittings Account


Debit (Dr) Credit (Cr)
09.01.2000 Cash 2,000
Stove Account
Debit (Dr) Credit (Cr)
12.01.2000 Cash 3,000
EXAMPLE BOOKS OF PRIME ENTRY
MR DUBE
• Mr Dube when he got his retrenchment package of $40,000.00 on
31 Dec 1999, decided to go into business. His transactions for the
month of January 2000 are as follows
• Jan 02 Bought a car for $20,000.00 pays cash immediately
05 Bought a stove for $3,000.00 paying for cash on delivery
06 Bought planks for shelves $400.00 paying cash
07 Paid for rent building for month of January $500.00 cash
10 Bought $10,000.00 worth of goods for cash from Makro
wholesalers
15 Sold goods and received a total of $15,000.00 cash
31 Paid wages $500.00 cash
You are required to show how the above entries should be shown
in the books of Mr Dube accounting for each transaction in
Double entry form
SOLUTION
• Capital account
• Debit (Dr) Credit (Cr)
• 01.01.2000 Cash 40,000
• Cash account
• Debit (Dr) Credit (Cr)
• 01.01.2000 Capital 40,000 02.01.2000 Motor vehicle 20,000
• 05.01.2000 Stove 3,000
• 15.01.2000 Sales 15,000 06.01.2000 Shelves 400
• 07.01.2000 Rent 500
• 10.01.2000 Goods for resale 10,000
• 31.01.2000 Wages 500
• Motor Vehicle Account
• Debit (Dr) Credit (Cr)
• 02.01.2000 Cash 20,000

• Stove Account
• Debit (Dr) Credit (Cr)
• 05.01.2000 Cash 3,000
• Goods for resale account
• Debit (Dr) Credit (Cr)
• 10.01.2000 Cash 10,000
SOLUTION
• Shelves account
• Debit (Dr) Credit (Cr)
• 06.01.2000 Cash 400
• Rent Account
• Debit (Dr) Credit (Cr)
• 07.01.2000 Cash 500
• Sales Account
• Debit (Dr) Credit (Cr)
• 15.01.2000 Cash 15,000
• Wages Account
• Debit (Dr) Credit (Cr)
• 31.01.2000 Cash 500
EXAMPLE IS MPOFU BOOK OF PRIME
ENTRY
• P Mhofu , commenced business on 1ST January as a radio
dealer with $50 000 cash as capital. He then conducted the
following transactions;
• JAN 2 Bought radio for cash $30 000
• 10 Sold radios for cash 61 000
• 15 Bought furniture for office for cash 5 000
• 20 Sold more radios for cash 6 000
• 25 Bought stationery for cash 150
• 30 Paid rent in cash 4 000
• 31 Paid salaries in cash 8 000
• Post the above transactions in the books of P Mhofu.
Balance the Cash and Capital accounts
MPOFU BOOKS OF PRIME ENTRY
Capital Account
Debit (Dr) Credit (Cr)
bal c/d 50 000 01.01 Cash 50 000
b/d 50 000
Cash Account
Debit (Dr) Credit (Cr)
01.01 Capital 50 000 02.01 Purchases 30 000
10.01 Sales 61 000 15.01 Furniture 5 000
20.01 Sales 6 000 25.01 Stationery 150
30.01 Rent 4 000
31.01 Salaries 8 000
bal c/d 69 850
117 000 117 000
b/d 69 850
MPOFU BOOK OF PRIME ENTRY
• Purchases a/c
• Debit Dr Credit Cr
• 02.01 cash 30 000 bal c/d 30 000
• b/d 30 000
• Furniture a/c
• Debit Dr Credit Cr
• 15.01 Cash 5 000 bal c/d 5 000
• b/d 5 000
• Sales a/c
• Debit Dr Credit Cr
• bal c/d 67 000 10.01 Cash 61 000
• 20.01 Cash 6 000
• b/d 67 000
MPOFU BOOK OF PRIME ENTRY
• Stationery a/c
• Debit Dr Credit Cr
• 25.01 Cash 150 bal c/d 150
• b/d 150
• Rent a/c
• Debit Dr Credit Cr
• 30.01 Cash 4 000 bal c/d 4 000
• b/d 4 000
• Salaries a/c
• Debit Dr Credit Cr
• 31.01 Cash 8 000 bal c/d 8 000
• b/d 8 000
MPOFU TRIAL BALANCE
• Trial Balance of P Mhofu on 01.02
• Name of account Dr Cr
• Capital 50 000
• Cash 69 850
• Purchases 30 000
• Furniture 5 000
• Sales 67 000
• Stationery 150
• Rent 4 000
• Salary 8 000
• 117 000 117 000
CLASS WORK 1
• Post the transactions below in the books of prime entry of ABC ltd
and balance the books
• ABC ltd had the following transactions during the first week of july
year 2000.
• 1ST Bought goods on credit from JB cost $1000
Sold goods on credit to JSA & Co for $600
2nd Sold goods on credit to PB ltd for $50
Returned goods to JB because they were faulty $70
3rd Bought goods from AL ltd cost $500
6th Sold goods to CAL fro $400
7th CAL returned goods as unsuitable $120
Sold goods to BC for $240
• List the different books of prime entry and their importance.
Trial Balance
• The Double Entry Principle is an accounting way
of testing the books. If for every transaction,
there is a giver and a receiver, then it follows that
the total given must be equal to the total
received. Thus the debit entry must equal in
value to the credit entry value.
• The actual process of balancing the accounts
takes place on the last day of the accounting
period . The closing balance of the previous
period becomes the opening balance for the next
period
Trial Balance
• After determining the balance of each
account, a trial balance is taken.
• A trial balance is simply a list of the accounts
names and the balances in each account as of
a given moment of time, with debt balance
shown in one column and credit balance in
the other column
Trial Balance
Mr Dube
Trial Balance for the month ending 31 January 2000
DR CR
$ $
Capital 20,000
Cash 7,000
Motor Vehicle 5,000
Purchases 3,000
Furniture & fittings 2,000
Stove 3,000
20,000 20,000
FRED’S TRIAL BALANCE
• The following balances have been extracted from Fred’s Ledger account as at 31 August 2000
• $
• Bank 15 000
• Cash 3 000
• Capital 18 000
• Debtors 10 000
• Creditors 4 000
• Drawings 5 000
• Electricity 4 000
• Furniture 7 000
• Office expenses 3 000
• Purchases 50 000
• Sales 100 000
• Salaries & wages 25 000
• Required
• Complie Fred’s Trial Balance as at 31 AUGUST 2000
FRED’S TRIAL BALANCE
• Trial balance for Fred on 31st August 2000
• Name of Account Dr Cr
• Bank 15 000
• Cash 3 000
• Capital 18 000
• Debtors 10 000
• Creditors 4 000
• Drawings 5 000
• Electricity 4 000
• Furniture 7 000
• Office expenses 3 000
• Purchases 50 000
• Sales 100 000
• Salaries & wages 25 000
• 122 000 122 000
CLASS WORK 2
• Enter up the books from the following details for the month of
March and extract a trial balance as at 31 March 2017
• March 1. Started with $800 in the bank
• March 2. Bought goods on credit from the following persons K
Heyworth $76; M Hill $27; T Buckley $56
• March 3. Cash sales $87
• March 4. Paid wages in cash $14
• March 5. Sold goods on credit to: H Elliot $35; L Lane$42; J
Coy$72
• March 6. Bought goods for cash $46
• March 7. Bought goods on credit from: M Hill $57; T Buckley
$98
CLASS WORK 2
• March 8. Paid wages in cash $14
• March 9. Sold goods on credit to: L Lane $32; J Coy$23
• March 10. Bought shop fixtures on credit from Betty LTD
$50
• March 11. Paid M Hill by cheque $84
• March 12. We returned goods T Buckley $20
• March 13. Paid Betty ltd. A cheque for $50
• March 14. J Coy paid us his account by cheque $95
• March 15. We returned goods to K Heyworth $24
• March 16. J King lent us $60 by cash
• March 17. Bought a motor vehicle paying by cheque $400
CLASS WORK 3
• Complete the entries for the following transactions and extract a trial balance as at 31st May
2017
• May 1. BR starts business as a sole proprietor with $20,000 in cash
• May 2. Pays $15,000 cash into the business bank account
• May 4. Purchases goods on credit from JM for $2,000
• May 6. Purchases goods from ERD on credit for $3,000
• May 7. Pays wages in cash $60
• May 10. Pays rent by cheque $80
• May 12. Sales goods for cash $210
• May 16. Buys furniture for $1,500 paying by cheque
• May 19. Sells goods on credit to SP for $580
• May 22. Buys goods for cash $3,900
• May24. Buys fittings for cash $600
• May 25. Pays wages by cash $110
• Sells goods for cash $430
• May 27. Receives part payment from SP of $330 by cheque
• May 28. Pays advertising by cheque $25
• Sells goods for cash $890
• May 29. Sells remaining stock of goods on credit to KM for $8,090
CLASS WORK 4
• Mutekwa commenced business on September 1, 2000. The following transactions took place
during his first month in business:
• Sept 1. Mutekwa started business with $12,000 in cash
• Sept 3. He paid $10,000 of the cash inot a business bank account
• Sept 5. He bought office furniture on credit from Jaggers whole salers for $3,000
• Sept 6. Mutekwa rented shop premises for $1,000 per quarter; he paid for his first quarter
immediately by cheque
• Sept 8. He bought goods on credit from station furniture's for $4,000
• Sept 11. He paid shop expanses amounting to $1,500 by cheque
• Sept 13. He sold goods on credit to Saratoga enterprises for $3000
• Sept 25. He settled Jaggers wholesalers account by cheque
• Sept 26. He received a cheque from Saratoga Enterperise $2,000; this cheque was paid
immediately into the bank
• Sept 27. Mutekwa sent a cheque to station furnitures for $500
• Sept 28. Goods costing $3,000 were purchased from station furnitures on credit
• Sept 30. Cash sales for the month amounted to $2,000
• REQUIRED: Enter the above transactions in appropriate ledger accounts, balance/close off each
account as at Spetember 30, 2000 and bring down the balances as at that date and
• Extract a trial balance as at September 30, 2000
CLASS WORK 5
• Explain the following type of errors that the trial
balance does not reveal. Illustrate with
examples.
• Errors of transposition
• Errors of omission
• Errors of principle
• Errors of commission
• Compensation error
• Error of original entry
FINANCIAL STATEMENTS
1. Income statement (Profit and Loss Account)
2. Balance Sheet
3. Cash flow statement
INCOME STATEMENT/PROFIT AND
LOSS ACCOUNT
• The difference between revenues and
expenses will give either a profit or a loss
(though at times can break even)
• Revenues are event arising from trading
which have effect of increasing capital
• Expenses are events arising from trading
which have effect in decreasing capital.
Example; cost of goods sold or services
rendered, salary expense, fire/loss etc
Basic Content of the Income
Statement
• Sales Revenue – Expenses = Net Income
• Sales revenue; from the sales of products and
services to the customers
• Expenses; which include a wide variety of costs
paid by the business, including the cost of the
products sold to the customers, wages and
benefits paid to the employees, occupancy costs,
administrative costs and income tax.
• Net Income; means the final profit after all the
expenses are deducted from the sales revenue.
Profit and loss account/ Income
statement
• Example
• Trading account for year ended 31 December 2000
• Amount $ Amount $
Sales 5,000
Less Purchases 2,500
Gross Profit 2,500
Less Operating expenses
Advertising 100
Rent 1,000
Wages 900
2,000
Net Profit/ (Loss) 500
CLASS WORK 6
• Draw up Andrew’s Trading and Profit and Loss account for the month ending 30th Sept 2015 for the
trial balance below
• $
• Purchases 2,600
• Purchases returns 60
• Stock- 1 Sept 2015 1,900
• Sales 7,700
• Sales returns 100
• Wages 1,720
• Electricity and water 85
• Telephone 50
• Advertising 155
• Cash 50
• General expenses 115
• Repairs & maintenance-vehicle 230
• Discounts received 15
• Stock -30 Sept 2015 1,250
CLASS WORK 7
XYZ TRIAL BALANCE AS AT 31 December 1993
• DR CR
• $ $
• Sales 106,5 00
• Purchases 99,850
• Premises at cost 75,000
• Plant at cost 15,700
• Wages and salaries 8,900
• Rent and rates 7,500
• Stock at 1 January 1993 5,000
• Capital at 1 January 1993 45,000
• Carriage inwards 4,000
• Debtors 27,500
• Creditors 16,000
• Bad debt written off 5,000
• Rent receivable 2,000
• Bank balance 18,950
• Mortgage 60,000
• 248,450 248,450
• Prepare profit and loss account and balance sheet
• Note: closing stock of $8 500 as at 31 December 1993
DUBE’s trial balance
Mr Dube
Trial balance for the month ending 31 December 2000
DR CR
$ $
Capital, 1 January 1999 20,000
Cash in hand 1,000
Cash at bank 5,000
Motor vehicle 15,000
Debtors 4 ,500
Creditors 6,600
Sales 35,500
Purchases 23, 550
Wages 1,550
Drawings 1,250
Rent and rates 2,30 0
Interest on cash at bank 550
Stock, 1 January 2000 4,500
Insurance 1,2 20
Fuel Expenses 1,68 0
Advertising 1, 100
62,650 62,650
The closing stock is valued at $8,500
DUBE’S FINANCIAL STATEMENTS

• Prepare only the Trading and profit and loss


Account for the year ended 31 December
2000 for Mr Dube’s trial balance given above
DUBE’S FINANCIAL STATEMENTS

• Prepare a balance sheet as at the date from


Mr Dube’s trial balance given above
DUBE’S P&L ACCOUNT
• Mr Dube
• Trading and Profit and Loss Account for the year ended 31 Dec 2000
• Amount ($) Amount ($)
• Sales 35,000
• Opening stock 4,500
• Add: Purchases 23,550
• 28,050
• Less: Closing stock 8,500
• 19.500
• Gross Profit 15,950
• Interest recieved 550
• Less: Operating Expenses
• Advertising 1,100
• Feul 1,680
• Insurance 1,220
• Rent and rates 2,300
• Wages 1,550
• 7.850
• Net Profit 8,650
DUBE’S BALANCE SHEET
• Mr Dube
• Balance Sheet as at 31 Dec 2000
• Amount($) Amount ($)
• Capital employed
• Capital 20,000
• Less: Drawings 1,250
• 18,750
• Net Profit 8,650
• 27,400
• Represented by:
• Fixed Assets
• Motor Vehicle 15,000
• Current Assets
• Stock 8,500
• Debtors 4,500
• Cash at hand 1,000
• Cash at BANK 5,000
• 19,000
• Current Liabilities
• Creditors 6,600
• Net Current Assets 12,400
• 27,400
MIRIAM’S TRIAL BALANCE
• Miriam has for several years traded as a supplier of office stationery. Her trial balance as at 31 December 2012 was as follows:
• Miriam trial balance as at 31 December 2012
• Debit Credit
• $ $
• Motor vehicle 12,500
• Trade receivables 5,250
• Bank overdraft 1,200
• Inventory at 1st Jan 2012 4,800
• Sales 56,500
• Purchases 22,500
• Wages 12,000
• Office expenses 5,500
• Light & heat 1,800
• Sundry expenses 1,850
• Capital account at 1st Jan 2012 20,500
• Drawings 12,000
• 78,200 78,200
• Closing inventories at 31 Dec 2012 were valued at $5,200
• Required
• Prepare the income statement for the year ended 31 Dec 2012

• Prepare a balance sheet as at the date from Mirriam’s trial balance given above
MIRIAM’S P&L ACCOUNT
• Income statement for year ended 31 Dec 2012
• $ $
• Sales 56,500
• Less cost of sales
• Opening inventory 4,800
• Purchases 22,500
• 27,300
• Less closing inventory 5,200
• 22,100
• Gross profit 34,400
• Less expenses
• Wages 12,000
• Office expenses 5,500
• Light & heat 1,800
• Sundry expenses 1,850
• 21,150
• Net profit 13,250


MIRIAM’S BALANCE SHEET
• Mirriam
• Balance Sheet as at 31 Dec 2012
• Amount($) Amount ($)
• Capital employed
• Capital 20,500
• Less: Drawings 12,000
• 8,500
• Net Profit 13.250
• 21,750
• Represented by:
• Fixed Assets
• Motor Vehicle 12,500
• Current Assets
• Trade receivables 5.250
• Stock 5,200
• 10,450
• Current Liabilities
• Bank overdraft 1,200
• Net Current Assets 9,250
• 21,750
THE BALANCE SHEET
• The balance sheet is a listing of an entity’s
assets, liabilities, and owners equity at a point
in time . It is a snap shoot of the organisations
financial position, frozen at a specific point in
time. It represents a snap shoot of an entity’s
financing and investing activities at that
specific point in time. The snap shoot is
normally taken on the last day of an entity’s
accounting period.
THE BALANCE SHEET
• Represent information about the financial
position of an entity in terms of its economic
resources, capital structure , liquidity, solvency
and its ability to adopt to changes in its
environment.
• Assets arise from investing activities. They are
economic resources with the ability and
potential to provide future economic benefits
to the firm eg inventory and equipment
BALANCE SHEET COMPOSITION
• Assets Liabilities
motor vehicles creditors
plant & equipment lenders
land & buildings shareholders equity/ capital
stocks taxation
Debtors overdraft
cash and bank
BALANCE SHEET
• CHECK WHAT THESE TERMS MEAN:
• Carriage inward
• Carriage outward
• Returns inward
• Returns outward
• Creditors
• Debtors
• Interest at bank
• Depreciation
• Trade receivable
• Trade payable
• Drawings
• Inventory
The structure of a Balance Sheet
(Horizontal format)
• The traditional balance sheet is divided into two sides, the assets
and liabilities side. All assets are listed on the assets side and
• liabilities on the liabilities side
Mr Dube
BALANCE SHEET AS AT 30 JANUARY 2000
ASSETS LIABILITIES
Amount $ Amount $
Motor Vehicle 5,000 Capital 20,000
Furniture & Fittings 2,000
Stove 3,000
Stock 3,000
Cash 7,000
20,000 20,000
BALANCE SHEET (horizontal format)
• Chitani Travel agency
• Balance sheet as at 30th June 2000
• Liabillities & Owners Equity Assets
$ $
Liabilities
Notes payable 35000 Cash 22500
Accounts receivable 25000 Receivables 18200
Salaries payable 5000 Supplies 2000
Total liabilities 65000 Buildings 60000
Land 100000
Office
Equipment 62300
Owners Equity
Jonh Chitani, Capital 200000
Total 265000 265000
BALANCE SHEET VERTICAL FORMAT
• Miriam’s Balance Sheet as at 31 Dec 2012
• Amount($) Amount ($)
• Capital employed
• Capital 20,500
• Less: Drawings 12,000
• 8,500
• Net Profit 13.250
• 21,750
• Represented by:
• Fixed Assets
• Motor Vehicle 12,500
• Current Assets
• Trade receivables 5.250
• Stock 5,200
• 10,450
• Current Liabilities
• Bank overdraft 1,200
• Net Current Assets 9,250
• 21,750
BALANCE SHEET CONT.
• The above example gives an outline of a balance
sheet. It gives the name of the business entity,
the name of the financial statement and the
balance of the assets at a specific date.
• NB all major items are listed separately
• Body of balance sheet consist of three sections
1. Assets
2. Owner’s equity
3. Liabilities
CLASS WORK 8
• Explain the meaning of the following terms
• Going concern
• Consistency
• The accruals concept
• Prudence
• The concept of duality
• The realisation concept
• The matching concept
CLASS WORK 9
• Explain the following ratio analysis technique used by accountants. Illustrate their importance
• Profitability ratios: Return on capital employed RATIO (ROCE)
• Gross profit ratio
• Mark up ratio
• Net profit ratio
• Liquidity ratios: Current asset (working capita) ratio
• Quick assets(acid test) ratio
• Efficiency ratios: Stock turn over ratio
• Fixed asset turnover ratio
• Trade debtor collection period
• Trade creditor payment period
• Investments ratios: Dividend yield ratio
• Dividend cover ratio
• Earning per ordinary share ratio
• Price earning ratio
• Capital gearing ratio
RATIOS
• The main ratios we consider here fall under
four categories:
1.Profitability ratios
2.Liquidity ratios
3.Efficiency ratios
4.Investment ratios
Profitability ratios
• 1. Return on capital employed RATIO (ROCE)
= profit/Capital*100=x%
2. Gross profit ratio
=Gross profit/Total sales revenue*100=x%
3. Mark-up ratio
=Cost of goods sold/Gross profit*100=x%
4. Net profit ratio
= Net profit before taxation/Total sales revenue*100=x%
Liquidity ratios
• Current assets (working capital) ratio
=current assets/current liabilities
• Quick assets (acid test) ratio
=Current assets-stock/current liabilities
Efficiency Ratios
1. Stock turn over ratio
=Cost of goods sold/average stock*=X times
*the average stock is usually calculated as:
½(opening stock + closing stock)
2. Fixed assets turnover ratio
= Total sales revenue/Fixed assets at net book
value= X
Efficiency Ratios
3.Trade debtor collection period
= Average trade debtors*/Total credit sales x
365=X days
*Average trade debtors=1/2(opening trade debtors + closing trade
debtors)
4. Trade creditors payment period
=Average trade creditors*/Total credit purchases
x 365= X days
*Average trade creditors=1/2(opening trade creditors + closing trade
creditors)
Investments ratios
1. Dividend yield ratio
= Dividend per share/Market price per share x 100= X%
2.Dividend cover ratio
= Net profit for the year after taxation-preference dividend = X times
Dividend on ordinary shares(paid and proposed)
3 Earnings per ordinary share ratio
= Net profit for the year after taxation-preference dividend = Act/share
Number of ordinary shares in issue during the year
4. Price/Earnings ratio
=Market price per share/Earnings per share= X

5. Capital gearing ratio


=Borrowings/shareholders’ funds

NB The above investments ratios are not part of your


syllabus.
CASH FLOW STATEMENT
Definition:
Cash flow statement shows the money coming
into the business from sales and other receipts
going out of business in the form of cash
payment to suppliers, workers etc. Cash receipts
and cash payment in a trading period are not
necessarily the same as the accounting revenues
and cost applicable to that same period because
customers need to pay cash for goods sold until
the time afterwards while the firm may not pay
for material and services used until afterwards
Cash flow statement
• A cash flow statement throws light on the
current cash position and how this has been
arrived at. It indicates whether the cash flow
has been kept within the limits set by the
budget and it assists in planning for the future
period.
CASH FLOW STATEMENT
Details July 00 Aug 00 Sept 00
Receipts $ $ $
Cash sales 1 000 3 000 8 000
Debtors 35 000 6 000 22 000
36 000 9 000 30 000
Payments
Creditors 16 500 12 500 15 000
Wages 12 000 12 000 12 000
Income tax 0 0 0
Dividends 0 0 1 000
28 500 24 500 28 000
Net Cash Inflows/(Outflows) 7 500 (15 500) 2 000
Balance b/f 20 000 27 500 12 000

Balance c/f 27 500 12 000 14 000


PURPOSE OF THE CASHFLOW
STATEMENT
This helps users to :
• Assess the organisation’s ability to generate
positive future net Cash flow
• Assess the firms ability to meet its obligation
• Assess the difference between the firm’s net
income and its receipts and payments
• Useful for forecasting /projections
Sources and uses of funds statement
• Remember that the balance sheet describes the investments
(assets) and financing (capital) of an organisation at a specific point
in time.
• The income statement describes the operations of the business
during a period of time, from one balance sheet to another
• The sources and uses of funds statement is also concerned with the
period of time. Whereas the Income statement focuses on
operations (i.e how the profit was made), the sources and uses of
funds statement focuses on the investment and financing decisions
of that particular period of time
• What was the flow of funds?
• How were certain activities financed?
Sources of working capital
1. Funds generated from operation: cash sales,
debtors
2. Sales of fixed assets
3. Long term borrowing
4. Issue of shares
Uses of cash
1. Purchase of fixed assets
2. Redemption of loans and interests
3. Payment of dividends
4. Salaries and wages
5. Payments to creditors
Sections of Cash Flow Statement
1. Cash flows from operating activities
This is cash from profit making operations. It is free
cash flow where the business is free to do whatever it
wants with cash, to acquire buildings and equipment,
pay dividend, retire long-term debts. This mirrors
activities bringing about profit or loss for the period
reported. Deals with cash movement during the
period anything else is ignored. There is little point in
company having profit but no cash, its long term
survival is likely difficult to manage. Equally there is
no advantage , apart from short term survival in
having cash but no profit.
Sections of Cash Flow Statement
2. Cash flow from Investing activities
This section shows cash used to acquire non-current assets
and cash in flows from sales of non current assets. Non
current assets includes investments from other companies
3. Cash from financing activities
This shows the amount of cash the firm obtains from short
and long term borrowing and from issue of ordinary or
preference shares. Shows firm has used dividend to
shareholders, to repay short and long term borrowing .
Raising finance from external sources increases risk
PRESENTATION FORMAT OF CASH
FLOW FROM OPERATING ACTIVITIES
Cash flow from operating activities:
Cash collected from customers XXX
Interest received XXX
Dividend received XXX
Other cash operating receipts XXX
Cash paid to suppliers (XXX)
Cash paid to and on behalf of employees (XXX)
Interest paid (XXX)
Income taxes paid (XXX)
Other operating cash payments (XXX)
Net cash generated (used ) by operating activities XXXX
CLASS WORK 10
• Briefly state the purposes of a statement of
cash flows.
• Does a statement of cash flows or an income
statement best measure the profitability of a
financially sound business? Explain
Solution to CLASS WORK
• Purpose of cash flow statement
1. To provide information about cash receipts and
payments during a period
2. Explains in some details the change in cash on the
balance sheet
3. Provide insight on an enterprise’s investing and
financing activities, enabling investors and creditors
to project future cash flows
4. Reports the effect of operating , investing and
financing activities on the cash flow of an enterprise
5. Provides a link between income statement and
balance sheet