BHM 107accg Manual 2

NATIONAL OPEN UNIVERSITY OF NIGERIA
SCHOOL OF BUSINESS AND HUMAN RESOURCE
COURSE CODE:BHM107
COURSE TITLE: GENERAL ACCOUNTING II
BHM107
GENERAL ACCOUNTING II
COURSE
GUIDE
BHM107
Course Team
Professor Kabiru Dandago Isa (Developer/Writer) - BAYERO

Dr. (Mrs.) Rauta Bitrus Jat (Editor) - UNIJOS
Dr. O.J. Onwe (Programme Leader) - NOUN
Mr. Emmanuel U. Abianga (Coordinator) - NOUN
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BHM107
National Open University of Nigeria

Headquarters
14/16 Ahmadu Bello Way
iii
BHM107
Victoria Island
Lagos
Abuja Office
No. 5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria
e-mail: centralinfo@nou.edu.ng
URL:
www.nou.edu.ng
Published By:
First Printed 2010
ISBN:
All Rights Reserved
iv
BHM107
CONTENTS
Introduction
PAGE
What You Will Learn in This Course .

Course Aims ....
Course Objectives
Working through This Course..
Course Materials 4
Study Units 4
Assignment File .
Tutor-Marked Assignment (TMAs) 7

Final Examination and Grading ...
Conclusion ..
Introduction
The course, General Accounting II (BHM107) is a core course which carries two credit
units. It is prepared and made available to the 100 level students of the School of
Business and Human Resource Management. The course is a useful material to the
students in their academic pursuit as well as in their workplace as business and human
resource managers.
BHM107
What You will Learn in this Course
The course is made up of fifteen units, covering areas that have not treated in General
Accounting I. The concepts of Accruals and Prepayments were introduced, highlighting
issues bordering on Prepaid Expenses, Accrued Expenses, Income in Advance and
Income Due. Also introduced are the concepts of Provisions for Bad & Doubtful Debts,
Drawings and treatments of stock. Students would also learn about methods of providing
for depreciation and accounting for depreciation, including its causes and how to record
it.
The technical aspects of accounting for fixed assets, including freehold and leasehold
fixed assets were discussed; how to prepare final accounts from incomplete records;
the concept of partnership and its final accounts preparation; accounting for changes in
partnership business; manufacturing accounts; stock valuation methods, including the provisions
made in Statement of Accounting Standard (SAS)4; branch accounting system;
departmental accounting system; accounting for hire-purchase transactions and installmental
payments; accounting for various dimensions of business combination; and financial ratios
analysis were all extensively discussed with adequate illustrative examples to simply things
for the understanding of the readers
This Course Guide is meant to provide you with the necessary information about the
course, the nature of the materials you will be using and how to make the best use
of the materials towards ensuring adequate success in your programme as well as
appreciating the sensitivity of records keeping and accounting in whatever you do in life.
Also included in this course guide are information on how to make use of your time
and information on how to tackle the Tutor-Marked Assignment (TMA) questions.
There will be tutorial sessions during which your instructional facilitator will take you
through your difficult areas in the Course, and at same time you are expected to have
meaningful interactions with your fellow learners.
Course Aims
The main aim of this Course is to develop and sustain your increasing interest in
accounting to the extent that you might wish to further your study in the discipline to
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BHM107
the highest level possible. The Course also aims at making you have greater
appreciation of the role of accounting in ensuring success in business and human
resource management in both the private and public sector organizations.
Course Objectives
After completing this Course, you should be able to accomplish the aims mentioned
above, which would be possible by achieving the following objectives:
1. Treating Prepaid and accrued expenses

2. Treating Income received in advance and Income due to
accrue
3. Appreciating the type of debtors a business may have in its
accounts.
4. Adjusting for bad and doubtful debtors in the books of
accounts.
5. Adjusting for drawings made by a business proprietor.
6. Treating for stock value in the final accounts.
7. Appreciating various methods of providing for depreciation.
8. Understanding how to compute depreciation on an asset
acquired during the year.
9. Maintaining accounting records for depreciation
10. Explaining causes of depreciation
11. Computing depreciation for different categories of fixed assets
12. Maintaining accounting records for depreciation
13. Appreciating the concept of fixed assets
14. Understanding ways of accounting for fixed assets
15. Differentiating between leased and owned fixed assets
16. Appreciating the need to provide for fixed assets depreciation
17. Defining incomplete records and appreciate their disadvantages
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BHM107
18. Understanding the indication of incomplete records

19. Determining profit of a business from incomplete sets of
records
20. Preparing final accounts from sets of incomplete records
21. Appreciating types of partners and partnership
22. Understanding the likely contents of the partnership
deeds
23. Appreciating the liabilities that attributable to
partners in a partnership business
24. Understanding the advantages of partnership over
sole proprietorship business
25. Learning about the types of accounts to be kept by
a partnership business.
26. Appreciating the accounting treatment on admission of a new
partner.
27. Understanding the accounting treatment on the retirement or
death of a partner.
28. Appreciating reasons why a partnership could be dissolved and
the accounting treatment.
29. Appreciating the logic in the Gerner Vs Murray decided court
case
30. Understanding the business setting in which the preparation of
manufacturing account is required.
31. Understanding the differences between a manufacturing account
and a trading, profit and loss account.
32. Explaining the key terminologies used in a manufacturing
account.
33. Describing the principal adjustments normally being made to a
manufacturing account.
34. Defining Stock and explaining reasons why stock must be kept
35. Knowing the several methods for valuing stock
36. Knowing the recommended methods for valuing stock as
described in SAS 4
37. Preparing store ledger card using FIFO, LIFO and Average
Method
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BHM107
38. Knowing the disclosure requirements on stock as stated in SAS

4
39. Appreciating the meaning of branch account
40. Explaining the pricing method involving local branches
41. Appreciating instances where head office keeps the accounts
and where the branches keep separate accounts
42. Understanding the accounting treatment of transactions involving
local branch
43. Appreciating what Departmental account is and its aim
44. Explaining the advantages of using departmental accounts
45. Observing the principles of departmental account
46. Preparing departmental accounts for incorporation into the final
accounts
47. Understanding what hire purchase is all about
48. Appreciating the difference between hire purchase and credit
sales
49. Observing the accounting treatment with respect
purchase transactions
to hire
50. Knowing how to treat installment payments

51. Appreciating the meaning of business combination.
52. Understanding reason(s) why businesses combine to produce
a stronger entity.
53. Explaining the major types of business combination.
54. Appreciating the accounting entries for business combination.
55. Appreciating the concept of ratio.
56. Understanding how to conduct
accounting ratios.
financial analysis,
using
57. Testing the efficiency and effectiveness of business enterprises
Working through this Course
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BHM107
The Course consists of the accounting and finance issues that have been highlighted in
the set objectives above. More General Accounting aspects are adequately introduced to
encourage business and human resource management students to develop sustained
interest in accounting.
Course Materials
Major components of the Course are:
(i)
Course Guide
(ii)
Study Units
(iii)
Textbooks and Other Reading Materials
(iv)
Assignment Guide
Study Units
There are fifteen units in this course, which should be studied carefully.
They are as follows:
Module 1
Unit 1
Accrual and Prepayments
Unit 2
Provision for Bad and Doubtful Debts
Unit 3
Methods of Providing for Depreciation
Unit 4 Accounting for Depreciation

Unit 5
Accounting for Fixed Assets
BHM107
Module 2
Unit 1
Final Accounts from Incomplete Records
Unit 2
Introduction to Partnership Final Accounts
Unit 3
Accounting for Changes in Partnership
Unit 4
Manufacturing Accounts
Unit 5
Stock valuation Methods
Module 3
Unit 1
Branch Accounts
Unit 2
Departmental Accounts
Unit 3
Hire-Purchase Accounts and Installmental Payments
Unit 4
Sales and Purchases of Business (Business Combination)
Unit 5
Introduction to Financial Ratios Analysis
The first unit presents Accruals and Prepayments, including Prepaid

Expenses, Accrued Expenses, and Income in Advance and Income Due.
These issues are adequately discussed for the student to appreciate their
importance in accounting. In the second unit, Provisions for Bad &
Doubtful Debts are the subjects of discussion, where the accounting
treatments of Bad Debts, Doubtful debts and methods of Provisions for
them were discussed. Also discussed are the accounting treatments of
Drawing and Stock.
The third unit presents Depreciation Methods, emphasizing on Definition of Depreciation and
Methods of Computing Depreciation like: Fixed Installment Method; Diminishing Balance
Method; Sum of the Years Digits Method; and Inventory System of
Depreciation. There is also a discussion on treatment of Depreciation on Assets
Acquired during the Year. The fourth unit treats the area of Depreciation Adjustments,
Causes of Depreciation, Methods of Recording Depreciation, and Disposal of an Asset
The fifth unit is used to discuss the aspects of Accounting for Fixed Assets,
emphasizing on the Relevant Concepts Surrounding Fixed Asset, Valuation of Fixed
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BHM107
Assets, Depreciation Policy of Fixed Assets, Methods of Recognizing Fixed Assets and Liabilities,
Sale and Repurchase Agreement, Finance Lease Arrangement, Cost of Self- Constructed
Fixed Asset, and Components of Fixed Asset Cost. The sixth unit is about Preparation of
Final accounts using Incomplete Records, including discussions on: Meaning of
Incomplete Records, Indication of Incomplete Records, and Determination of Profit and
other Items of Final Accounts.
The seventh unit discusses the Concept of Partnership Final Accounts,

including discussion on: Kinds of Partners, Partnership Deeds/Articles
of Association, Liability of Partners, Advantages of Partnership, Types
of Partnership, and Partnership Accounts. The eighth unit is about
Changes in Partnership, where issues bordering on Admission of New
Partner, .Retirement or Death of a Partner, Dissolution of Partnership,
and Gerner Vs Murray Decided Case were discussed.
The ninth unit presents analysis on Manufacturing Accounts, including Inventories of a
Manufacturing Concern, Types of Costs Relevant in the Manufacturing Accounts, and
why is Cost Information Needed? The tenth unit is used to discuss Stock Valuation
Methods, including discussion on Types of Stock Taking, Valuation Methods, and SAS 4
Disclosure Requirements.
The eleventh unit presents discussions on Branch Accounting System, emphasizing on: Divisions
of Branch Accounting, Where the Head Office Keeps the Accounts, Pricing Method,
Accounting Entries, Double Column Method or Memorandum Method, Branch Adjustment
Accounting Method, and issues pertaining to Where the Branches Keeps Separate
Accounts. The twelfth unit is about Departmental Accounting System,
highlighting The Concept of Departmental Accounting, Advantages of Departmental
Accounts, and the Principles of Departmental Accounting.
The thirteenth unit discusses Accounting for Hire-Purchase Transactions, including The
Concept of Hire-Purchase and Payments under the Arrangement, Accounting Treatments,
and Journal Entries for Hire-Purchase Transactions, Entries in the Book of the Hire
Purchaser, and Entries in the Books of the Vendor. The fourteenth unit is about
Accounting for Business Combination, emphasizing on the accounting treatments of
Amalgamation, Closing the Books of the Discontinuing Companies, Specific Accounts
Needed, Sundry members account (ordinary and preference), Purchase Consideration,
Establishment of the New Company and Accounting Entries, The Balance Sheet of the
New Company, Absorption, Takeover or Purchase of Business, and Accounting Entries
in the Books of Absorbing or Continuing Business.
The last unit (Unit 15) is about Introduction to Financial Ratio Analysis, highlighting
The Concept of Ratio, Comparative Analysis Using Ratios, Users of Accounting
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BHM107
Information and Their Interests, and Types of Ratios and Their Formulae (including
Overall Performance Ratios, Profitability Ratios, Productivity Ratios, Liquidity Ratios, Capital
Structure Ratios, and Investment Ratios).
Assignments File
There are many self-assessment exercises and many tutor marked assignments in this
Course and you are expected to attempt all of them by following the schedule
prescribed for them, by your tutor, in terms of when to attempt them and submit same
for grading.
Tutor-Marked Assignments
In doing
what you
many in
constitute
the tutor-marked assignments,

have learnt in the contents of
number are expected to be
30% of the total score for the
you are to apply your residual knowledge and

the study units. These assignments which are
turned in to your Tutor for grading. They
Course.
Final Examination and Grading
At the end of the Course, you will write the final examination.
remaining 70%. This makes the total final score to be 100%.
It will attract the
Conclusion
The Course, General Accounting II for students of Business and Human Resource Management
(BHM112) exposes you to the general aspects of accounting, including treatment of
miscellaneous accounting issues. The specialized issues on manufacturing accounts, branch
accounts, departmental accounts, accounting for fixed assets, stock valuation methods, etc
are fairly introduced. Also introduced is the important accounting and finance topic of
ratios analysis and interpretation for various decisions making purposes. On successful
completion of the Course, you would be empowered with the necessary knowledge for
efficient and effective functioning as an accountant with any private and public sector
organization.
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BHM107
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BHM107
Course Code
Course Title
BHM107
General Accounting II
Course Team
Professor Kabiru Dandago Isa (Developer/Writer) - BAYERO

Dr. (Mrs.) Rauta Bitrus Jat (Editor) - UNIJOS
Dr. O.J. Onwe (Programme Leader) - NOUN
Mr. Emmanuel .U. Abianga (Coordinator) - NOUN

xv
BHM107

Headquarters
14/16 Ahmadu Bello Way
Victoria Island
Lagos
Abuja Office
No. 5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria
e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng
Published By:
First Printed 2010
ISBN:
All Rights Reserved
xvi
BHM107
CONTENTS
PAGE
Module 1
....
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Accrual and Prepayments .

1
Provision for Bad and Doubtful Debts .
8
17
Accounting for Depreciation . 26
Accounting for Fixed Assets .. 34
Module 2
.. 41
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Final Account from Incomplete Records ..

Accounting for Changes in Partnership ..
Manufacturing Accounts .
Stock valuation Methods .
Module 3
.... 104
Unit 1
Unit 2
Unit 3
Unit 4
Branch Accounts 104

Departmental Accounts .. 119
Hire-Purchase Accounts and Installmental Payments...131
Sales and Purchases of Business
(Business Combination) .. 147
Introduction to Financial Ratios Analysis 170
Unit 5
41
53
69
83
95
xvii
MODULE 1
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Accrual and Prepayments

Provision for Bad and Doubtful Debts
Accounting for Depreciation
Accounting for Fixed Assets
UNIT 1
ACCRUALS AND PREPAYMENTS
CONTENTS
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Introduction
Objectives
Main Content
3.1
Accruals and Prepayments
3.2 Expenses
3.2.1 Prepaid Expenses
3.2.2 Accrued Expenses
3.3
Income
3.3.1 Income in Advance
3.3.2 Income Due
3.4
Illustrative Example
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1.0
INTRODUCTION
There are transactions which take place after the books of accounts have
been closed and trial balance prepared. In order to give the actual
results of the years operations and to ensure that the balance sheet gives
a true and fair view of the financial position, these transactions need to
be adjustably incorporated into the final accounts for them to give a
correct picture of the financial position of the reporting entity, as at the
period ended. This Unit shall discuss these adjustments to be made, why
and how.
2.0
OBJECTIVES
At the end of this unit, you should be able to:

prepaid and accrued expenses
income received in advance and Income due to accrue
other relevant issues.
BHM112
3.0
MAN CONTENT
3.1
Accruals and Prepayments
3.2
Expenses
These are amounts incurred for the purpose of earning an income.

Expenses are written off to the income statement in line with the
principles of cause and effect. However, there are times when such
expenses are either not paid in full or the amount paid for exceeds the
current accounting period of the receiving business. These instances are
discussed below:
3.2.1 Prepaid Expenses

These are payments made in respect of a period beyond the date of
account. It is in the nature of an asset; that is, the benefit of the
expenditure is still to be derived. The portion which relates to the
current period is transferred to the profit and loss and the balance which
relates to the future period is shown under the current asset in the
balance sheet.
3.2.2 Accrued Expenses

This occurs where an expense has been incurred but not brought into the
account as a result of it not being paid for. The amount of expenses
shown in the ledger must be increased to allow for the expenses due but
not yet entered. The accrued expenses are shown in the balance sheet
under current liabilities at the end of the period.
SELF ASSESSMENT EXERCISE 1
1. Why is prepaid expense an asset item?
2. How is an accrued expense treated in the balance sheet?
3.3
Incomes
These are proceeds realized from transacting business. Incomes are the
primary aim of being in business without which survival becomes
difficult. Some incomes are often received in advance such as rental
income while some are paid after being due. The adjustments required in
either of the scenario mentioned are discussed below:
3.3.1 Income in Advance
BHM112
This is where sums have been received during a period in respect of

future services. Only part of such sums which relates to the current
period is transferred to the profit and loss account as earned income,
while the portion relating to future period is shown in the balance sheet
under current liabilities.
3.3.2 Income Due

These are incomes which are due but not yet received at the trial balance
date. The amount of income shown in the ledger must be increased to
allow for income due but not yet entered. The income accrued is shown
in the balance sheet under current asset at the end of the period.
1. Why is income the primary aim of being in business?
2. Differentiate between income due and income in advance.
3.4
Madam Titilayo is a trader whose financial year ends on 31st December.

For the financial year 2004, the following information was obtained
from her records:
a) Motor Expenses: Paid in the year to 31st December, 2004 N4, 275.
b)
c)
d)
e)
Owing as at 31st Dec.2003 N162; owing as at 31st December, 2004,

N338.
Insurance: Paid in 2004 N3, 360. Prepaid at 31st December, 2003,
N200; prepaid at 31 st December, 2004 N280.
Rent and Rates: Paid in the year, N5, 835; Rent owing at 31st
December, 2003 N240; Rent paid in advance at 31 st December, 2004
N375; Rates paid in advance 31st December, 2003; N308; Rates
owing at 31st December, 2004 N540.
Commission Received: Received for the year to 31 st December, 2004
N1,275; owing at 31st December, 2003 N120; owing at 31st
December 2004, N218.
Titilayo sublets parts of the premises. Receives N4, 400 during the
year ended to 31st December, 2004. Tenants had paid in advance at
31st December, 2003, N1,400 and on 31 st December, 2004, N1,680.
Required:
i)
ii)
Prepare all the necessary ledger accounts to reflect the various

adjustments above and amount taken to profit and loss account;
Show an extract of the profit and loss account for the year ended
31 st December, 2004.
BHM112
Show the balance sheet extract as at 31st December, 2004.

SOLUTION
iii)
Motor Expenses Account

2004
N 2004
Dec. 31 Cash
4,275 Jan. 1 Bal. b/d
338 Dec.31 Profit & Loss
Dec. 31 Bal. c/d
4,613
2005
2005
Jan. 1 Bal. b/d
N
162
4,451
4,613
338
Insurance Account
2004
Jan. 1
Bal. b/d
Dec. 31 Cash
2005
Jan. 1
Bal. b/d
N 2004
200 Dec. 31 Profit & Loss
3,360 Dec. 31 Bal. c/d
3,560
2005
280
N
3,280
280
3,560
Rent and Rates Account

2004
Jan. 1
Bal. b/d
Dec. 31 Cash
Dec. 31 Bal. c/d
2005
Jan. 1
Bal. b/d
N
375
5,835
540
6,750
2004
Jan. 1
Bal. b/d
Dec. 31 Profit & Loss
Dec. 31 Bal. c/d
2005
308 Jan. 1
Bal. b/d
Commission Received Account

2004
N 2004
Jan. 1
Bal. b/d
120 Dec. 31 Cash
1,373 Dec. 31 Bal. c/d
1,493
2005
2005
Jan. 1
Bal. b/d
218
Rent Received Account
2004
N 2004
4,120 Jan. 1
Bal. b/d
1,680 Dec. 31 Cash
Dec. 31 Bal. c/d
5,800
2005
2005
Jan. 1
Bal. b/d
N
240
6,202
308
6,750
540
N
1,275
218
1,493
N
1,400
4,400
5,800
1,680
BHM112
Profit and Loss Account Extract

2004
N 2004
Dec. 31 Motor Expenses
4,451 Dec. 31 Commission Received
Dec. 31 Insurance
3,280 Dec. 31 Rent Received
Dec. 31 Rent & Rates
6,202
Balance Sheet Extract As at 31 December 2004
Current Liabilities
N
Current Assets:
Motor Expenses Owed
338
Insurance Prepaid
Rent Due
540
Rates in Advance
Commission Receivable
218
Rent Received in Advance
4.0
N
280
308
1,680
CONCLUSION
We have discussed accruals and prepayments adjustments that may arise

in the course of preparation of final accounts for any form of business.
We have also discussed various methods that may be applicable in the
treatment of an item of expense and income in the final accounts. The
Unit compliments other Units that are about adjustments to final
accounts.
5.0
SUMMARY
In this Unit, we have explained the accounting treatments of prepaid and

accrued expenses, income received in advance and income due. The
Unit demonstrates how these issues are incorporated in the final
accounts of any form of business.
6.0
TUTOR-MARKED ASSIGNMENT
1)
Briefly explain the accounting treatment for the following items:
a)
c)
Prepaid Expenses;
Income in Advance
2)
4)
Differentiate between Insurance Receivable and Insurance

Received, indicating how they are treated in ledger accounts.
Discuss how four different accounts could be created for rent
on paid, received, payable and receivable, and how they are to be
closed to the final accounts.
Differentiate between the following pairs of terms:
a)
b)
Prepayment to and Prepayment by.

Discount received and Discount allowed.
3)
b)
d)
N
1,373
4,120
Accrued Expenses
Income Due
BHM112
c)
5)
Interest payable and Interest accrued.
CHOP-CHOP is one of the easy going traders in Sabon Gari market,

who deals in ladies clothing. Below is his trial balance as at 30th June,
2004.
DR.
N
Directors Loan
Drawings
3,000
Capital
Sales and Purchases
26,100
Carriage
3,000
Returns
450
Land and Building
43,000
Mortgage Loan
Postage and Stationery
700
Creditors and Debtors
18,000
Stock 1st July 2003
3,000
Furniture and Fittings (cost N4, 500)
Rent
4,200
Motor Van (cost N10, 000)
8,500
Wages and Salaries
4,650
Motor Repairs
900
Lighting and Heating
750
Insurance
1,450
Discounts
1,050
Bank
12,000
Provision for doubtful debts
Provision for discount on debtors
Cash
2,250
Provision for depreciation:
Motor Van
1,500
Furniture and Fittings
Suspense Account
139,050
CR.
N
7,500
60,000
42,000
1,200
7,100
12,700
4,050
3,750
1,350
600
400
500
450
139,050
The following additional information is provided:

a.
b.
c.
d.
Stock at 30th June, 2004 was valued at N4,250.

Insurance prepaid amounts to N200.
Of the carriage, N600 is for carriage inwards.
Wages and salaries paid is made up of N1,650 and N3,000
respectively; while N450 salaries is still being owed.
BHM112
A fire incident occurred in the store on 25th June, 2004, stock valued
N4,000 was destroyed, this stock has been insured and the insurance
company accepted the claim in full.
f. 10% of the Debtors is considered bad; while provision on the good
debtors is to be made as follows:
e.
Doubtful debts
Discount
5%
2%
g. Depreciation is to be charged at the rate of 10% on cost and 20% on

reducing balance for Motor van and Furniture and fittings.
h. The suspense account appearing in the books was for the sales of an
item of furniture bought on 1/1/2001 for N1,000 and the cash
account has been debited with the proceeds received.
You are required to prepare:
ii.
A trading, profit and loss Account for the year ended 30th June,
2004; and
A balance sheet as at that date.
7.0
REFERENCES/FURTHER READING
i.
Damagum, Y.M. Introduction to Financial Accounting.

Mashwari, K. Introduction to Financial Accounting.
Dandago, K.I. Financial Accounting Simplified.
Inanga, E.L Principles of Accounting.
Omuya, J.O. Frank Woods Business Accounting 2.
BHM112
UNIT 2
PROVISIONS FOR BAD AND DOUBTFUL

DEBTS
CONTENTS
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Introduction
Objectives
Main Content
3.1
Provisions for Bad & Doubtful Debts
3.2
Bad Debts
3.3
Doubtful Debts
3.4 Provisions
3.5
Drawings
3.6
Stock
3.7
Illustrative Examples
Conclusion
Summary
1.0
INTRODUCTION
Once a business decides to sale its goods or services on credit, it is

bound to have three types of debtors: good, doubtful and bad. Good
debtors are the dream of any business, since they are those debtors that
are guided by their conscience and honor; as they buy on credit, they are
determined to pay back on or before the maturity date. Doubtful debtors
need some incentive/motivation before they effect payment on
purchases made on credit, while bad debtors need to be written off the
accounts when confirmed to be such! This Unit attempts an overview of
these types of debtors and discusses how they are to be treated in the
books of accounts of any serious business organization.
2.0
OBJECTIVES

appreciate the type of debtors a business may have in its accounts
adjust for bad and doubtful debtors in the books of accounts
adjust for drawings made by a business proprietor
treat for stock value in the final accounts.
BHM112
3.0
MAIN CONTENT
3.1
Provisions for Bad and Doubtful Debts
3.2
Bad Debts
These are debts which are found to be irrecoverable. If detected before

drafting the trial balance, they should simply be posted as expenses to
the profit and loss account and no more. But where such losses are
detected after drafting the trial balance, the amount so detected is posted
as an expense to the profit and loss account and deducted from the
debtors balance in the balance sheet.
DR: Bad Debt Account
CR: Debtors Account
The bad debt account is to be closed to the profit and loss account, as an
expense.
Where a debt already written off as bad is recovered in whole or in part
in subsequent period, the entries required are:
DR: Cash/Bank Account
CR: Bad Debt Recovered Account
The bad debt recovered account is to be closed to the profit and loss
account, as a gain.
3.3
Doubtful Debts
These are debts on which the creditor is uncertain as to their

recoverability. The debtor might be willing but unable to pay, or able
but unwilling to pay as on the maturity date. To be prudent, an estimate
is to be made on the percentage value of such debtors and provision
made against them out of the expected profit of the business. The
amount provided is to be deducted from the total value of debtors and
charged to the profit and loss account.
3.3
Provision
This refers to the commitment made out of profit on the likely

diminutions in the value of an asset or for any known liability for which
the amount involved cannot be determined with substantial accuracy.
BHM112
Provisions commonly found in the profit and loss account of a business

are:
i.
ii.
iii.
Provision for doubtful debt;

Provision for discount on debtors; and
Provision for depreciation.
Under this heading we shall discuss I and II only as III would be

adequately discussed in Unit 4.
a)
Provisions for Doubtful Debts
This is provision made out of profit to meet debt which is likely to turn
bad. It is usually provided for after all debt which is known to be
irrecoverable has been written off. A provision for doubtful debt may be
calculated either by:
i)
ii)
Reference to the amount of the specific debt (specific provision

for bad debt);
As a percentage of the total debt outstanding after deducting
irrecoverable one (general provision for doubtful debt).
In practice, the percentage most likely to turn bad is arrived at based on

the debtor(s) history. This percentage therefore constitutes the rate
which shall be used in providing for doubtful debts and those not
fluctuating widely.
The Accounting entries required for recording provisions for doubtful
debts are:
DR: Bad debt account
CR: Provision for doubtful debts account
To create provisions for doubtful debts; bad debt account is to be closed
to the profit and loss account, while provision for doubtful debt account
is to be closed to the balance sheet.
DR: Provision for doubtful debts account
CR: Profit and loss account
With a decrease in the provision for doubtful debts
The provision for doubtful debts (closing balance) is deducted from the
debtors balance in the balance sheet to ascertain the net good debtors.
b)
10
Provision for discount on debtors
BHM112
This provision is allowed on good debtors and it is usually based on a

fixed percentage of good debtors i.e. debtors less bad debt less provision
for doubtful debts. The account is provided in a similar manner as that
of provision for doubtful debts.
1. Discuss the term Provision for Doubtful debt.
2. Describe the entries to be made in Provision for discount account.
3.4
Drawings
The effect of drawings by the owner of a business for personal use is to

decrease the
capital invested in it. Drawings may be made in cash or
in the form of goods and services. Drawings made in cash required a
credit entry in the bank account and debit entry in the drawings account.
If drawings are made in the form of goods purchased by the business for
resale, then Drawings account is debited and sales account credited with
the value of goods withdrawn. The balance of the drawings account is
subsequently closed at the end of the year and deducted from the capital.
1. Discuss the concept of drawings in accounting.
2. Describe two ways through which drawings would decrease capital.
3.5
Stock
The usual practice in accounting is to value the goods at the lower of

cost or current market price (i.e. net realizable value). This means that
the closing stock of goods should not be valued above the original price
paid, but if the current price is lower than original price, the current
price should be taken as the valuation basis.
3.6
Mal. Mamuda Zubair had the following trial balance as at 31 st

December, 2005.
DR.
CR.
N
N
General expenses
2,110
Sales and Purchases
435,860
486,990
Debtors and Creditors
28,380
16,930
Salaries and Wages
17,620
Insurance
1,300
Carriage Inwards
2,860
11
BHM112
Capital
Carriage Outward
590
Bad debts
1,060
Drawings
12,000
Office Equipment at cost 55,000
Sales and Purchases Returns 1,950
Cash in hand
1,270
Provision for Depreciation:
Motor vehicles
Office Equipment
Furniture
Motor Vehicles at cost
72,000
Stock on 1st Jan. 2005
39,720
Lighting and Cooling
1,180
Rent
3,600
Discounts
4,080
Furniture at cost
32,500
Provision for discount allowed
Bank
713,080
172,950
9,870
6,300
4,700
3,400
6,270
2,000
500
3,170
713,080
The following additional information is given:

Additional general expenses of N650 are yet to be paid.
Stock on 31st December, 2005 amounted to N43,860.
A bill of N420 for insurance is still outstanding.
Lighting and Cooling of N270 has been paid in advance.
Rent paid is for 9 months up to 30th September, 2004.
f. A provision should be made as follows:
a.
b.
c.
d.
e.
5% for bad and doubtful debt

2.5% for discount allowed.
g.
Provide for depreciation as follows:

Motor vehicle
5% p.a. on cost
Office Equipment 10%p.a.on cost
Furniture
5% p.a. on cost

i.
ii.
12
A trading, profit and loss account for the year ended 31st
December, 2005; and
A Balance sheet as at that date.
BHM112
SOLUTION
Mal. Mamuda Zubair
Trading, Profits and Loss Account for the year ended 31 st
December, 2005
N
N
Opening Stock
39,720
435,86
Purchases
0
Less: Returns
(9,870)
Add: Carriage Inwards
Cost of goods available for sale
Less: Closing Stock
Cost of goods sold
Gross Profit c/d
N
486,99
0
Sales
Less: Returns
(1,950)
2,110
650
1,300
420
1,180
(270)
3,600
1,200
674
(500)
3,600
5,500
1,625
485,04
0
425,990
2,860
468,570
(43,860)
424,710
60,330
485,040
General expenses
Add: Amount unpaid
Salaries and Wages
Insurance
Add: Amount Outstanding
Carriage Outwards
Bad Debts
Lighting & Cooling
Less: Amount Prepaid
Rent
Add: Amount owing
Discount Allowed
Provision for discount
Less: Old Provision
Provision for Depreciation:
Motor vehicle
Office Equipment
Furniture
Net Profit
2,760
17,620
Gross Profit b/d

Discount Received
2,000
Less: New provision
(1,419)
485,04
0
60,330
6,270
581
1,720
590
1,060
910
4,800
4,080
174
10,725
22,742
67,181
67,181
Balance Sheet As At 31st December 2005

N
N
Fixed Assets:
Capital
172,950 Office Equipment
22,742 Less: Provision for Depreciation
Add: Net Profit
195,692 Motor Vehicles
13
N
55,000
(10,200)
72,000
44,
BHM112
(12,000) Less: Provision for Depreciation

183,692 Furniture
Less: Provision for Depreciation
Less: Drawings
CurrentLiabilities:
Creditors
Bank Overdraft
General Expenses Unpaid
Insurance Outstanding
Rent Owed
Current Assets:
16,93
0
3,170
650
420
1,200
22,370
Stock
Debtors
Less: Provision for doubtful debts
Less: Provision for discount
Lighting & Cooling in advance
Cash in hand
206,062
4.0
CONCLUSION
This Unit is an emphasis on the treatment of customers accounts,

especially those buying goods or services on credit. As they delay
payment of the value given to them on credit, relevant records have to
be maintained to show the relationship between them and the business.
Students have to appreciate, therefore, the various adjustments that may
arise in the course of preparation of final accounts for any form of
business that deals with debtors. The Unit compliments Unit 1, 3 and 4
on the issue of adjustments to final accounts.
5.0
SUMMARY
In this Unit, we have explained the accounting treatments of bad debts,

provisions for bad and doubtful debts, and provision for discount on
debtors, drawings and stock. We have also demonstrated how these
issues are incorporated in the final accounts.
6.0
1.
Briefly explain the accounting treatment for the following items:
a)
c)
Doubtful Debtor
Provision for bad debts
2)
Differentiate between provision for doubtful debt and provision

for discount.
Write good article on the topic: Accounting for Three Types of
Debtors.
The following trial balance has been extracted from the ledgers of
Yaa Tundela Enterprise.
3)
4)
14
b) Good Debtor
d) Stock
BHM112
Trial Balance as at 31 December, 2006

DR
N
Sales
Purchases
Carriage inwards
Rent, rates and insurance
Stationery
Salaries and wages
Bad debts
Provision for doubtful debt
Debtors
Creditors
Cash in hand
Cash at bank
Stocks
Equipment
Motor vehicles
Buildings
Capital
Drawing
CR
N
10,500
4,500
700
1,400
500
1,250
350
145
12,000
18,000
10,000
24,000
720
8,000
9,500
10,000
60,525
6,250
89,170
89,170
The following additional information is relevant:

i)
ii)
iii)
iv)
Rent prepaid at the end of the year is N150

The provision for bad debt is to be increased by N355
Stock at the end of the year was N250
Depreciate all fixed assets at the rate of 15%
You are required to:

Prepare a trading, profit and loss account for the year ended 31st
December 2006 and a balance sheet as at that date.
(Adapted from ICAN/ATSWA, 2008)
5.
Mr. Wala Wala carries on trading business. The trial balance

extracted from his books as on 31st March, 2005 was as follows:
st
Stock at 1 April, 2004
N
3,710
15
BHM112
Purchases
20,480
Wages
4,610
Rent, rates and insurance
770
Salaries
5,120
Discount allowed
200
Carriage inwards
380
General expenses
2,690
Professional charges
320
Carriage outwards
470
Motor vehicles
1,220
Plant and machinery at cost
4,800
Leasehold Factory Premises Purchased 1 st April, 2004 7,000
Capital
10,000
Sales
42,080
Discount received
250
500
Sundry Creditors
2,950
Provision for depreciation:
Plant and machinery
1,340
Motor Vehicles
580
Sundry Debtors
3,950
Balance at bank
1,980
57,700
57,700
You are given the following information:

i.
ii.
iii.
iv.
v.
vi.
vii.
16
The value of stock on the premises at cost on 31 st March, 2005 was

N3,970. The replacement value of such stock was N4, 000.
Insurance paid in advance at 31st March, 2005 amounted to N20 and
there was N50 owing for electricity (included in general expenses) at
that date.
A debt of N50 is to be written off and the provision for doubtful debt
reduced to N400 at the year end.
During the year, a motor vehicle which had cost N600 and which has
been written down to N200 was sold for N480. The amount had been
credited to motor vehicles account. Any profit or loss on this sale is
to be in the profit and loss account.
Mr. Wala wala had drawn N20 a week for his own use. These
amounts have been entered in the salaries account.
Provision for the year for depreciation of motor vehicles and plant
and machinery is to be made in the sums of N190 and N250
respectively.
An amount of N140 in respect of legal charges on the acquisition of
the leasehold premises is included in the professional charges
account.
BHM112
viii.
The total cost of the lease is to be written off by equal installments

over 20 years.

a)
b)
7.0
Trading, Profit and loss account for the year ended 31 st March,
2005 and a
Balance Sheet as at 31 st March, 2005.
(CIBN Exams)

Omuya, J.O. Frank Woods Business Accounting 2.
17
BHM112
UNIT 3
METHODS OF PROVIDING FOR

DEPRECIATION
CONTENTS
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Introduction
Objectives
Main Content
3.1
Depreciation Methods
3.2 Definition of Depreciation
3.3
Methods of Computing Depreciation
3.3.1 Fixed Installment Method
3.2.2 Diminishing Balance Method
3.2.3 Sum of the Years Digits Method
3.2.4 Inventory System of Depreciation
3.3 Depreciation on Assets Acquired During the Year
Conclusion
Summary
1.0
INTRODUCTION
There are capital expenditures that are incurred for the purpose of
generating revenue in the future and, since the benefit will accrue to
more than one accounting period, it is usual to spread the cost over the
expected years when such expenditures are expected to bring benefit.
The process of spreading the cost is referred to as depreciation, which
shall be the focus of our discussion in this Unit. A number of methods of
providing for depreciation would be discussed, giving illustrative
examples.
2.0
OBJECTIVES

define Depreciation
appreciate various methods of providing for depreciation
understand how to compute depreciation on an asset acquired during
the year
maintain accounting records for depreciation.
18
BHM112
3.0 MAIN CONTENT

3.1Depreciation Methods
3.2
Definition of Depreciation
Depreciation may be defined as the permanent and continuing

diminution in the quality, quantity or value of a fixed asset. Depreciation
is therefore the proportion of the cost of an asset that is deducted from
revenue for assets services used in the operation of a business.
Depreciation is simply about decrease in the value of a fixed asset, as a
result of wear and tear, passage of time, heat of sun, etc. However, there
are other terms used in defining depreciation. These terms are
depletion and amortization. Depletion refers to the depreciation of
an available but irreplaceable resource such as extraction of coal from
coal mine or oil out of an oil well. Amortization, on the other hand,
refers to the writing off of an obligation like loan.
The basic differences between depreciation and these other concepts is
that depreciation is used to refer to the process of charging the cost of
man- made fixed assets to operations whereas depletion refers to the
cost allocations of natural resources such as oil and mineral deposits
while amortization relates to cost allocation for intangible assets such as
patents and copyrights.
1. What do you understand by the concept of depreciation?
2. Discuss any two other concepts related to depreciation.
3.3
Methods of Computing Depreciation
There are numerous methods of computing depreciation, broadly

grouped into the following:
1.
Uniform charge methods:
i. Fixed installments method;

ii. Depletion method;
iii. Machine hour rate method.
2.
Declining charge methods:
19
BHM112
i. Diminishing balance method;

ii. Sum of the years digit method;
iii. Double declining method.
3.
Other Methods:
i.
ii.
iii.
iv.
v.
Group depreciation method;

Inventory or revaluation method;
Annuity method;
Sinking fund method; and
Insurance policy method.
For the purpose of this course, we shall restrict our discussion to the
fixed installment, diminishing balance method, sum of the years digit
and inventory methods.
3.2.1 Fixed Installments Method

This is also termed as Straight line method. Under this method,
depreciation is charged evenly every year throughout the effective life of
an asset. Depreciation is calculated as:
Depreciation =
C-S
N
Where C: Original cost of the Asset;
S: Estimated Scrap Value; and
N: Effective life of the Asset.
The depreciation to be charged each year can also be expressed as a
percentage of cost. This percentage can be calculated as follows:
R = D * 100
DV
Where R: Rate of depreciation;
D: Depreciation computed; and
DV: Depreciable Value i.e. cost less scrap value.
Example 1
Baba Yargo acquired a Motor Vehicle for N10, 000. The vehicle was
planned to be used in the business for four years and its scraped value
estimated for N2, 000. Calculate the annual depreciation charge and the
rate.
Solution
Annual Depreciation = C-S
N
20
BHM112
=N0,000N2,000
4
= N2, 000
Depreciation Rate = D * 100
DV
N,000
N8,000
* 100
25%
3.2.2 Diminishing Balance Method

This method is also termed as reducing balance method. Under this
method, depreciation is computed as a fixed percentage of the book
value of an asset. The book value of an asset is the difference between
the cost of the asset and the accumulated depreciation on the asset.
Depreciation is calculated as:
Depreciation = R * NBV
Where R: Rate of depreciation; and
NBV: Net book value.
Depreciation rate (R) =
{1 - n Netresidualvalue} * 100
Cost
Where n: number of expected life of the asset.
Example 2
Alh. Ado purchased an item of office fittings for N1, 296 on 1st Jan.
2001. The balance at 31 st December 2001 was N1, 100. At 31st
December 2002 and 2003, the residual value of the asset was N850 and
N625 respectively. Calculate the depreciation charge for 2001, 2002 &
2003.
Solution:
Depreciation = R* NBV
R=
S = N625,
C = N1, 296 n = 3
R = 3 625
1296
21
BHM112
25 * 100
36
3.2.3 Sum of the Years Digits Method

The amount of depreciation to be charged to the profit and loss account
under this method goes on decreasing every year. The depreciation is
calculated based on the following formula:
RemainingLifeoftheAsset(includingthecurrentyear) * OriginalCost
Sum of all the digits of the life of the asset in years
1
Example 3
Use the above example to calculate the amount of depreciation using the
sum of the years digits method.
Solution:
Depreciation for 2001
3/6 * (N1,296- N625)

2/6 * (N1,296- N625)
1/6 * (N1,296- N625)
= N 336
= N 224
= N 111
3.2.4 Inventory System of Depreciation

This method is mainly used for those assets with relatively small values
such as loose tools or where the life of the assets cannot be ascertained
with certainty e.g. live stock etc. Under this method, depreciation is
calculated using the following basis:
N
Cost of assets purchased at the beginning accounting year
Add: cost of the assets purchased during the accounting
Year
Less: cost of the assets at the end of the accounting year
Depreciation charged
x
x
x
Example 4
Refer to the question in example 2 above. Compute depreciation using
the revaluation method.
Solution:
Depreciation for 2001:
Opening Balance of Office fittings
Less: Closing Balance at 31 December 2001
Depreciation for the year
22
N
1,296
1,100
196
BHM112

Balance at 1st January 2002
Less: Closing Balance at 31 December 2002
Balance at 1st January 2003
Balance at 31 December 2003
1,100
850
250
850
625
225

1. Discuss Straight Line Method of providing for depreciation.
2. Differentiate between the Diminishing Balance Method and the Sum
of the Years Digit Method of providing for depreciation.
3.3
Depreciation on an Asset Acquired during the Year
There are two alternatives available regarding charging of depreciation

on an asset which has been acquired during the course of an accounting
year:
a) Depreciation may be charged for the full year irrespective of the date
of purchase at the given rate.
b) Depreciation may be charged only for the part of the year for which
the asset has been made available for use as a result of it being
acquired during the year.
Students should note that where instruction as to the computation of
depreciation on asset acquired during the year is not clearly given;
assumption made should be stated categorically.
1)
2)
4.0
Differentiate between the two alternatives available regarding

charging of depreciation on a newly acquired fixed asset.
Why must assumption be made categorically on depreciation
accounting treatment?
CONCLUSION
This Unit is basically about the popular methods of computing

depreciation that were emphasized on in the Statement of Accounting
Standard (SAS) 9 issued by the Nigerian Accounting Standard Board
(NASB). Illustrative examples were provided to make students
23
BHM112
understand how the methods are used in computing depreciation to be

charged to the profit and loss account.
5.0
SUMMARY
In this Unit, we have defined depreciation and discussed methods of

providing for depreciation. Alternative ways of charging depreciation on
newly acquired assets were highlighted. All the major SAS 9 methods of
providing for depreciation were discussed and exemplified for the clear
understanding of the students.
6.0
1(a)
(b)
What is depreciation?
Why is it a non-cash expense?
2.
Write a short note on the following concepts:
(a)
(b)
(c)
Amortization
Depletion
Obsolescence.
3)
4)
Discuss any three methods of providing for depreciation.

Discuss the similarities between depreciation expense on an asset
and salary paid to a worker.
Ankara textiles manufacturing company has the following
machines in the factory on 1st January, 2006:
5.
Model
Cost
Machine A
Machine B
Machine C
N
72,000
48,000
60,000
Depreciation
written-off to date
N
28,800
19,200
16,200
During the year ended 31st December, 2006, the following machines
were bought on the dates shown:
24
Model
Date of purchase
Machine D
Machine E
Machine F
Machine G
01/02/2006
31/03/2006
01/08/2006
01/12/2006
Cost
N
84,000
96,000
120,000
144,000
BHM112
On 30 June 2006 Machine C was sold for N36, 000.

Depreciation is written off at the rate of 12% per annum on cost, new
machines being depreciated from the date of purchase and any machine
disposed off is depreciated up to the date of sale.
You are required to:
a)
b)
Prepare a statement showing the depreciation on each machine

for the year ended 31st December, 2006.
Record the above transactions in the relevant ledger account,
using
(i)
(ii)
Provision for depreciation account method.

Depreciation account method.
7.0

25
BHM112
UNIT 4
ACCOUNTING FOR DEPRECIATION
CONTENTS
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Introduction
Objectives
Main Content
3.1
Depreciation Adjustments
3.2
Causes of Depreciation
3.3
Methods of Recording Depreciation
3.4 Disposal of an Asset
3.5
Conclusion
Summary
1.0
INTRODUCTION
In Unit 3, we have learnt about the concept of depreciation and the

various methods of providing for it. In this Unit we shall appreciate the
accounting treatment for depreciation in the relevant books of accounts
and the final accounts. The Unit also discusses causes of depreciation
and how to account for fixed assets disposal in the books of accounts.
2.0
OBJECTIVES

explain causes of depreciation
compute depreciation for different categories of fixed assets
maintain accounting records for depreciation
appreciate how to treat depreciation in the books of accounts.
3.0 MAIN CONTENT

3.1Accounting for Depreciation
3.2
Causes of Depreciation
Assets get depreciated as a result of some factors which are discussed

below:
26
BHM112
1.
2.
3.
4.
5.
Wear and Tear: Constant use of fixed assets gets the asset worn
or torn. Examples of these assets are plant and machinery,
furniture and fixtures, etc.
Exhaustion: An asset may get exhausted through utilization. This
is the case with mineral mines, oil wells, etc.
Obsolescence: Some assets are discarded before they are worn
out as a result of improvement in technology. Such loss as a
result of new innovations is referred to as loss on account of
obsolescence.
Efflux of Time: Certain assets get depreciated in their value with
the passage of time. This is the case with leasehold properties,
patents and copy rights.
Accidents: An asset may meet an accident and, therefore, it may
get depreciated in its value.

1. Define asset in the context of this Unit.
2. Discuss any three causes of depreciation.
3.2
Methods of Recording Depreciation
Depreciation can be recorded in the books of account using two

different methods:
1.
Provision for Depreciation Account Method
Under this method of accounting for depreciation, the amount of

depreciation to be charged is debited to the profit and loss account and
credited to the provision for depreciation account. The asset account
appears at original cost.
2.
Depreciation Account Method
Under this method, the amount of depreciation is debited to the

depreciation account and credited to the assets account. The asset
account thus appears at net book value. The depreciation account is
closed to the profit and loss account like any other item of expense.
1. Why is depreciation account an expense account?
2. Differentiate between the two methods of recording depreciation.
27
BHM112
3.3
Disposal of Fixed Asset
Where a fixed asset is disposed, the amount realized from the sale of the
asset should be credited to the Disposal account (if provision for
depreciation account method is in use) or Asset account (if depreciation
account method is in use). Depreciation for the period for which the
asset has been used should be written off in the usual manner. Any
balance in the Asset Disposal Account representing profit or loss on sale
of the asset should be transferred to the Profit and Loss Account.
1. What is an asset disposal account?
2. Explain the entries to be made in the asset disposal account.
3.4
Chukwu & Son Ltd. started production on 1 January 2004. He

purchased factory plant as follows:
2004
1 January
1 July
Machine A
Machine B
N
80,000
40,000
2006
1 April
Machine C
60,000
Depreciation, at the rate of 10% p.a., is to be provided on a straight line

basis. On 1 July 2005, machine B was sold for N24, 000.
Required:
You are required to write up the relevant Ledger Accounts and Balance
Sheet Extract for the years 2004, 2005 and 2006, using:
(a)
(b)
28
Provision for depreciation account method

Depreciation account method (Adapted from ICAN/ATSWA,
2008).
BHM112
SOLUTION
Provision for Depreciation Account Method
Chukwu & Sons Ltd
Machinery Account
2004
N
2004
1-Jan Bank (Machine A) 80,000 31-Dec
1-Jul Bank (Machine B) 40,000
120,000
2005
2005
1-Jan Balance b/d
120,000
1-Jul
31-Dec
120,000
2006
2006
1-Jan Balance b/d
80,000 31-Dec
1-Apr Bank (Machine C) 60,000
140,000
Balance b/d
140,000
N
120,000
Balance c/d
120,000
Disposal (Machine B)
Balance c/d
40,000
80,000
120,000
Balance c/d
140,000
140,000
Machinery Disposal Account

2005
N 2005
N
1-Jul Machine
40,000 1-Jul Prov. For depreciation 4,000
1-Jul Bank
24,000
1-Jul Profit & Loss
12,000
40,000
40,000
Provision for Depreciation Account
2004
N
2004
N
31-Dec Balance c/d
10,000 31-Dec Profit and loss 10,000
2005
1-Jul Disposal (Machine B) 4,000
31-Dec Balance c/d
16,000
20,000
2006
31-Dec Balance c/d
28,500
28,500
2005
1-Jan Balance b/d
10,000
31-Dec Profit and loss 10,000
20,000
2006
1-Jan Balance b/d
16,000
31-Dec Profit and loss 12,500
28,500
Balance b/d
28,500
29
BHM112
CHUKWU
BALANCE SHEET (EXTRACTS) AS AT 31ST DECEMBER
Fixed Assets
2004
Cost (Machines)
Accumulated depreciation
120,000
(10,000)
2005
Cost (Machines)
80,000
(16,000)
110,000
64,000
2006
Cost (Machines)
140,000
(28,500)
111,500
Workings:
Computation of Depreciation
2004
Machine A = 10% x 80,000

=
6
Machine B = 10% x 40,000 x /12 =
2005
Machine A = 10% x 80,000

=
6
Machine B = 10% x 40,000 x /12 =
1 July
2006
Disposal = 10% x 40,000 x 12/12 =

Machine A 10% x 80,000
=
9
Machine C = 10% x 60,000 x /12 =
N
8,000
2,000
10,000
8,000
2,000
10,000
4,000
8.000
4,500
12,500
b)
Depreciation Account Method

Machinery Account
2004
N
2004
1-Jan Bank (Machine A) 80,000 31-Dec Depreciation
1-Jul Bank (Machine B) 40,000 31-Dec Balance c/d
120,000
2005
2005
1-Jan Balance b/d
110,000
1-Jul Disposal (Machine B)
31-Dec Depreciation
31-Dec Balance c/d
110,000
2006
2006
1-Jan Balance b/d
64,000 31-Dec Depreciation
1-Apr Bank (Machine C) 60,000 31-Dec Balance c/d
124,000
Balance b/d
124,000
30
N
10,000
110,000
120,000
36,000
10,000
64,000
110,000
12,500
111,500
124,000
BHM112
Depreciation Account
2004
N
2004
31-Dec Machinery
10,000 31-Dec Profit & Loss Account
2005
2005
31-Dec Machinery
2006
2006
31-Dec Machinery
Machinery Disposal Account
2005
N
2005
1-Jul Machinery
36,000
1-Jul Bank
31-Dec Profit & Loss
36,000
N
10,000
10,000
12,500
N
24,000
12,000
36,000
Chukwu & Sons Ltd

Balance Sheet as at 31st December
Fixed Asset
N
2004 Machinery
110,000
4.0
2005 Machinery
64,000
2006 Machinery
111,500
CONCLUSION
This Unit has discussed the method of writing off the cost of fixed assets
into the depreciation account of a reporting entity in order to ensure that
correct profit/loss is determined to show the entitys result of operations
for a period ending. Correct amount of profit/loss can only be
ascertained if all expenditures (recurrent and capital) that provide the
income are fully accounted for in the relevant sections of the final
accounts.
5.0
SUMMARY
In this Unit, we have discussed causes of depreciation, methods of

recording depreciation into the books of accounts and the accounting
treatment of disposal fixed asset. Of note is that, depreciation is not
charged for the purpose of replacing fixed asset, but as a means of
charging the fair share of the asset cost to the profit and loss account, to
show its extent of utilization in the course of generating income for the
reporting entity.
31
BHM112
6.0
1(a)
(b)
Describe depreciable asset.

Outline any four causes of depreciation.
2)
Write a short note on the following concepts:
(a)
(b)
(c)
Fixed Asset
Efflux of Time
Wear and Tear
3)
4)
Discuss any two methods of accounting for depreciation.

Write a paper for presentation to newly admitted students of the
Accounting Technicians Scheme of West Africa (ATSWA) on
the topic: Understanding the concepts of Depreciation, Provision
for Depreciation and Assets Disposal.
5)
An extract from the account of XYZ and Sons is shown below:

Plant and Machinery Motor vehicle
N
58,750
26,250
32,500
Cost at 30/9/2004
Depreciation to date
Net book value
N
42,820
23,140
19,680
Total
N
101,570
49,390
52,180
In the year to 30th September 2005 there were additions and disposals as
follows:
Plant and Machinery
N
Cost of disposed Assets
14,200
Depreciation on disposed assets11,100
Sale proceeds
2,000
Cost of additions
12,500
Motor vehicle
N
9,060
5,900
5,400
14,730
Total
N
23,260
17,000
7,400
27,230
The following rates of depreciation apply:

Plant and Machinery:
Motor Vehicles:
10% of cost.
10% of net book value.
Required:
You are required to write-off the various assets, depreciation and
disposal accounts for the year ended 30 th September, 2005.
32
BHM112
7.0

33
BHM112
UNIT 5
ACCOUNTING FOR FIXED ASSETS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Accounting for Fixed Assets
3.2
Relevant Concepts Surrounding Fixed Asset
3.3
Valuation of Fixed Assets
3.4 Depreciation Policy of Fixed Assets
3.5
Methods of Recognizing Fixed Assets and Liabilities
3.5.1 Sale and Repurchase Agreement
3.5.2 Finance Lease Arrangement
3.6
Cost of Self-Constructed Fixed Asset
3.7
Components of Fixed Asset Cost
3.8
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading
1.0INTRODUCTION
According part 1 of the Statement of Accounting Standard (SAS) 3,
property, plant and equipment, generally referred to as fixed assets, are
those tangible resources of an enterprise which are employed in its
operations. In many enterprises, these assets are grouped into various
categories such as land and buildings, plant and machinery, equipment,
furniture, fixtures and fittings, vehicles, etc. This Unit deals with the
introductionary aspects of accounting for fixed assets and related issues.
2.0OBJECTIVES
appreciate the concept of fixed assets understand
ways of accounting for fixed assets differentiate
between leased and owned fixed assets
appreciate the need to provide for fixed assets depreciation.
34
BHM112
3.0MAIN CONTENT
3.1Accounting for Fixed Asset
3.2Relevant Concepts Surrounding Fixed Asset
Fixed assets are tangible assets that have been acquired or constructed
and held for use in the production or supply of goods and services and
may include those held for maintenance or repair of such assets; and are
not intended for sale in the ordinary course of business.
Leasehold rights over assets which meet the above criteria may also be
treated as property, plant and equipment in certain circumstances. The
fair value of a fixed asset is the amount for which an asset could be
exchanged between a knowledgeable willing buyer and a knowledgeable
willing seller in an arms length transaction, while its net book value is
the amount at which an asset is carried in the books less the related
accumulated depreciation.
The useful life of a fixed asset is the shorter of (a) the predetermined
physical life and (b) the economic life during which it could be
profitably employed in the operations of the enterprise. The recoverable
amount of a fixed asset is that part of the net book value of a fixed asset
that an enterprise can recover in the future through depreciation of the
item including its net realizable value on disposal.
1. What do you understand by the term fixed asset?
2. Differentiate between Leasehold and Freehold fixed asset.
3.3
Valuation of Fixed Assets
Fixed assets are stated in the financial statements of reporting entities at

cost (usually historical cost) or valuation less accumulated depreciation.
The cost is normally a combination of purchase price and other
expenses, including installation expense, up to the stage of usage of the
assets. Fixed assets on lease are accounted for strictly in accordance
with their legal form as fixed assets. The relevant assets are purchased in
the name of an enterprise and subsequently leased to customers as
operating leases.
1. Why is fixed asset cost a combination of two or more variables?
2. What is legal form?
35
BHM112
3.4
Depreciation Policy of Fixed Assets
Depreciation charged on fixed assets is usually calculated by most

businesses on the straight-line basis to write off their costs over their
estimated useful lives at different annual rates. For example, the
following annual rates could be applied by an enterprise in providing for
depreciation of its fixed assets:
Freehold buildings
Leasehold buildings and improvements: 50years and over
2%
2%
Below 50 years over the term of the lease Assets on lease over the term
of the lease:
Motor vehicles
Furniture and fittings
Machinery and equipment
Computer equipment
25%
20%
20%
20%
It should be noted that no depreciation is charged on fixed assets until

they are put into use.
1. Describe depreciation policy of an organization.
2. Why are most businesses using straight-line basis of providing for
depreciation?
3.5
Methods of Recognizing Fixed Assets and Liabilities
Assets are resources controlled by the enterprise as a result of past

events and from which future economic benefits are expected to flow to
the enterprise. Liabilities, on the other hand, represent obligations of the
enterprise arising from past events, settlement of which is expected to
result in an outflow from the enterprise of resources embodying
economic benefits.
For the purpose of recognizing assets and liabilities in the balance sheet,
IAS 5 provides recognition:
a) When there is probability that a future inflow or outflow of benefit to
or from the entity will occur; and
b) When the asset or liability can be measured as a monetary amount
with sufficient reliability.
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BHM112
In circumstances where legal principles contradict the financial realities

of a transaction, the substance of the transaction should be accounted for
while its legal principles are ignored. Accountants are often faced with
this conflict in certain transactions such as:
3.5.1 Sale and Repurchase Agreement

These arrangements occur where an asset is sold by the seller to a buyer
on terms that the seller repurchases the asset from the buyer at a future
date. This transaction has two possible interpretation of either a secured
loan or a sale-lease back. If the arrangements provide that the seller
retains right to determine assets use while the buyer only receives
return (secured loan) the asset will only be recognized in the books of
the seller. The transfer of title by way of purchase is ignored.
3.5.2 Finance Lease Arrangement

Where the transaction resembles a finance leasing arrangements i.e. the
ownership title passes to the buyer, the assets shall be recorded as that of
the buyer.
1. What are the IAS 5 provisions for recognizing assets and liabilities?
2. Differentiate between purchase of asset and its lease.
3.6
Cost of Self-Constructed Fixed Asset
Enterprises sometimes self-construct some fixed assets for their own

use, usually to save costs, meet unique specification or utilize idle
capacity.
The cost elements of self-constructed fixed assets are costs of materials,
labor and overheads that are directly attributable to the construction less
any trade discounts, rebates or internal profits. Interest costs which are
attributable to the period of constructing the item of fixed asset are
sometimes added to its cost. Other costs, including cost of inefficiency
in production of self-constructed items of fixed assets such as the idle
capacity, industrial disputes and similar costs, are expensed in the period
in which they arise.
3.7
Components of Fixed Asset Cost

37
BHM112
SAS 3 provides that the cost of an item of fixed asset comprises: its
purchase price, including import and non-recurring levies (e.g.
development levies, consent fee, etc) and any directly attributable costs
of bringing the asset to its location and working condition for its
intended use. Any trade discount and rebates are deducted in arriving at
the purchase price.
1. Discuss the process of determining self-constructed fixed asset cost.
2. Comment on SAS 3 provision on composition of fixed asset cost.
3.8
Illustration One
The elements of cost for Land and its Improvements:
(a) Original purchase price
(b) Brokers or Estate Agents commission
(c) Legal fees for examining, recording and securing title
(d) Cost of survey
(e) Cost of obtaining vacant possession
(f) Payment of non-recurring levies on the land at date of purchase if
payable by the purchaser.
Cost of demolishing any old structure (net of salvage) is sometimes
added to the cost of land and sometimes to the cost of the building on
the site.
Some additional costs may be incurred subsequent to purchase in order
to improve the land for the intended purpose. Such costs, which are
often capitalized, include the following:
(i)
(ii)
(iii)
(iv)
(v)
Filling and draining

Clearing
Landscaping
Grading and sub-dividing
Access road, etc
Illustration Two
38
BHM112
The elements of cost for Buildings:

(a) Original purchase price or cost of construction.
(b) Cost of remodeling, reconditioning, or altering a building to render it
suitable for its intended use.
(c) Cost of excavating or filling of land for the specific building.
(d) Foundation costs such as rock blasting, piling and rechanneling of
canal or underground stream.
(e) Cost of building permits.
(f) Payment of development levies on the building at the date of
purchase if payable by the purchaser.
(g) Professional fees for design, supervision and management of the
construction.
(h) Cost of temporary buildings used during the construction period less
disposal proceeds.
The cost of ancillary building plants such as lifts and air-conditioning
systems, etc, are sometimes recorded separately from the cost of the
building.
Illustration Three
The elements of cost for Plant and Equipment:
(a) Original purchase price or cost of construction.
(b) Freight, import duties and handling charges.
(c) In-transit insurance charges.
(d) Taxes and levies.
(e) Cost of preparation of foundations, insulations, protective and other
special devices.
(f) Commissioning, including testing and running-in costs in preparation
for use.
(g) If the item is a second-hand one, the cost of refurbishing it for the
intended use.
4.0
CONCLUSION
Fixed assets constitute a great percentage of the total assets value of

business enterprises, especially manufacturing businesses. The value of
each item of fixed asset needs to be determined as critically as possible
so that the asset is not over-valued or under-valued. Fixed assets are
subject to wear and tear, passage of time and other reasons why fixed
assets value would depreciate. The depreciation expense has to be
determined and deducted from the book value of the asset with a view to
ascertaining the net book value of the asset at any given time. This Unit
39
BHM112
is an attempt at highlighting all these issues in an introductory way for

the students to achieve the objectives set above.
5.0
SUMMARY
This Unit has discussed the concept of fixed assets and related issues,
valuation of fixed assets, depreciation policy and how it is determined,
components of fixed asset costs and cost of self-constructed fixed assets.
The Unit is strong follow up to the provisions of the Statement of
Accounting Standards (SAS) 3, issued by the Nigerian Accounting
Standard Board (NASB).
6.0
1. Discuss any three important concepts relevant to fixed asset.

2. Why is depreciation necessarily determined on the value of fixed
assets?
3. Explain one method each for asset and liability recognition.
4. Discuss the justification for three elements of cost summing up to the
cost of building as a fixed asset.
5. Discuss the statement: Fixed assets are stated at cost or valuation
less accumulated depreciation.
7.0
Ajayi, C.A. and Okwuosa, I. (2006). Financial Reporting and Audit

Practice, ICAN PEIII Study Pack, Lagos-Nigeria: VI Publishing
Company Ltd.
Dandago, K.I. (2001). Financial Accounting Simplified (2 nd ed.). Kano:
Adamu Joji Publishers.
Jennings, A. R. (1993). Financial Accounting, London: DP Publications.
Longe, O.A. and Kazeem, R.A (2006). Essentials of Financial
Accounting. Lagos: Tonad Publishers Limited.
Igben, R. O. (2004). Financial Accounting Made Simple (1st ed.). Lagos:
ROI Publishers Ltd.
Nigeria Accounting Standard Board (2008). Statement of Accounting
Standard (SAS) 3.
MODULE 2
40
BHM112
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Final Account from Incomplete Records

Accounting for Changes in Partnership
Stock valuation Methods
UNIT 1
FINAL ACCOUNTS
RECORDS
FROM
INCOMPLETE
CONTENTS
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Introduction
Objectives
Main Content
3.1
Preparation of Final accounts using Incomplete Records
3.1.1 Meaning of Incomplete Records
3.2
Indication of Incomplete Records
3.3
Determination of Profit and other Items of Final Accounts
3.4
Conclusion
Summary
1.0
INTRODUCTION
An incomplete record is a set of accounts in which no full accounting

records are available for the extraction of trial balance, yet the
determination of profit from such records is necessary to show the result
of the business operations and its financial position. This Unit will
enable you to learn the preparation of final accounts from incomplete
records.
2.0
OBJECTIVES

define incomplete records and appreciate their disadvantages
understand the indication of incomplete records
determine profit of a business from incomplete sets of records
prepare final accounts from sets of incomplete records.
3.0
MAIN CONTENT
41
BHM112
3.1
Final Accounts from Incomplete Records
3.1.1 Meaning of Incomplete Records

An incomplete record is any system of records which are kept not in
complete compliance with double entry principles. The level of
incompleteness of the records varies from having double entry in respect
of certain transactions to no entry in respect of certain transactions. The
system, therefore, has the following disadvantages:
i)
ii)
iii)
iv)
Difficulty in ascertaining the arithmetical accuracy of records;

Difficulty in ascertaining the actual profit of a business;
Difficulty in determining the exact financial position of a business;
Difficulty in planning and decision making for the businesss future.
1. What do you understand by Incomplete Record?
2. Discuss any two difficulties in using incomplete records.
3.2
Indication of Incomplete Records
The following are the indications of incomplete records:

a)
Availability of Personal Accounts: In most incomplete records,

personal accounts are usually kept to enable the business know
how much it owes or owed by its customers. The personal
accounts are those of various debtors and creditors.
b)
Reliance on Source Documents: In order to obtain adequate

records of business transactions one has to rely on source
documents such as invoices for purchases and sales, receipts,
credit and debit note, etc.
c)
Availability of Cash Book: Cash book is usually maintained

which takes into account both the personal and business
transactions.

1. Discuss any two indications of incomplete records.
42
BHM112
2. Why is bank statement important in preparing final accounts for a

business that keeps incomplete records?
3.3
Determination of Profit and Other Items of Final

Accounts
In determining the profit or loss of a business, one of the following

approaches can be adopted:
a) Net Worth Method: Under this method, the profit of the business is
deemed to be the difference between the net worth at two different

dates. The date at the beginning and the date at the end of the period.
The net worth is often determined as the difference between assets
and liabilities. Some adjustments might be required when using this
method, as follows:
Drawing: This is considered as part of the closing capital of a business
that was withdrawn for private use. For the purpose of ensuring that a
true profit figure is ascertained, drawing is added back to the closing
capital in the profit statements.
Further Capital: Where in the course of a period, the proprietor
introduced additional capital, this will make the capital at end to be
higher than expected which might imply that a profit has been realized
but it does not reflect profit per se. Such capital is usually deducted from
the closing capital in the profit statement.
b) Conversion Method: This method is applied when single entry
records are maintained for certain transactions. It enables detailed

information of revenue and expenses of a business to be ascertained.
In using this method, certain figures are implied as discussed below:
Sales: This can be determined where the opening and closing debtors
figures are provided as well as receipts from debtors. The balancing
figures can be implied to be the sales value.
Purchases: This can be determined where the opening and closing
figures for creditors are available and payments to suppliers are also
given.
Cash and Bank Balances: These are determined by preparing a cash
book. Total of receipts is compared with the total of payments and the
difference is implied to be cash in hand or at bank.
43
BHM112
Capital: This can be ascertained by comparing the opening assets and

liabilities. The difference, that is the excess of assets over liabilities,
represents capital.
Accounting Ratios: Sometimes one has to rely on past ratios in
determining key financial information. Ratios that are to be used are
mark-up, margin, stock turnover and net profit to sales. These ratios help
in the determination of sales, purchases, stock and expenses.
1. Discuss the Net worth Method of Profit Determination.
2. Illustrate how to determine any three key financial items of
information using accounting ratios.
3.4
Illustration One:
Umar Musa keeps his books of accounts on single entry basis. The
following information relates to his business for the years 2004 and
2005:
Assets and Liabilities
Machinery
Stock
Debtors
Cash in hand
Creditors
Bills Payable
Loan from Abbati
Investment
1/4/2004
N
60,000
30,000
63,000
4,500
52,500
3,000
31/3/2005
N
60,000
37,500
102,000
6,000
57,000
9,000
15,000
30,000
In addition, Umar Musa has withdrawn N15, 000 from his account and
also introduced N6, 000 additional Capital.
Required:
You are required to ascertain his net profit and prepare the balance sheet
as at 31st March, 2005.
SOLUTION
Umar Musa
Statement of Affairs As At:
44
BHM112
1/4/2004
31/3/2005
Assets:
Machinery
Investment
Stock
Debtors
Cash in hand
Total Assets
Less: Liabilities:
Loan from Mr. Abbati
Creditors
Bills payable
Net worth/ Capital
N
60,000
30,000
63,000
4,500
157,500
N
60,000
30,000
37,500
102,000
6,000
235,500
52,500
3,000
15,000
(55,500)
102,000
57,000
9,000
(81,000)
154,500
Statement of Profit or Loss as at 31 st March 2005

N
N
Closing capital
154,500
Add: Drawings
15,000
169,500
Less: Opening capital
102,000
Additional capital
6,000
(108,000)
Profit for the year
61,500
Balance Sheet as at 31st March, 2005

N
N
Capital
102,000 Fixed Assets:
Add: Profit
61,500 Machinery
Add: Additional Capital
6,000 Investment
(15,000)
Less: Drawings
148,500
LongTerm Liabilities:
Loan from Mr. Abbati
Bills payable
N
60,000
30,000
90,000
15,000
Current Assets:
Stock
CurrentLiabilities:
Creditors
57,00
0
9,000
66,000
Debtors
37,500
102,00
0
Cash in hand
6,000
145,50
0
235,50
0
235,500
45
BHM112
Illustration Two:
Double- Man is in business as a painter and decorator. He does not keep
proper accounting records. The following information relates to his
business.
Balance as at 1st January, 2004
Equipments and loose tools

Debtors
Stocks and work in progress
Prepaid rent
Creditors
Accrued electricity bill
N
150,000
17,500
64,500
3,000
12,600
1,200
Enquiries provided the following about the business for the year ended
31 st December 2004.
(a)
(b)
(c)
(d)
He received N258, 400 for decorating work while N9,600 was

still owed to him.
N
He draws cheques for: Suppliers
83,200
Drawings
40,000
Rent and rates
1,800
New decorating equipment
60,000
Sundry business expense
1,700
Electricity
2,400
He owed N5, 600 for decorating materials and N200 for
electricity.
His equipment was valued at N180, 000 and stock at N58, 500 on
31 st December, 2004.
Required:
You are required to prepare his Trading, Profit and Loss Account for the
year ended 31 stDecember, and a balance sheet as at that date.
46
BHM112
SOLUTION
Double- Man
Statement of Affairs as at 1st January, 2004
Fixed Assets:
N
N
Equipment and Loose tools
150,000
CurrentAssets:
Stock and work in progress
Debtors
Prepaid rent
Total Assets
64,500
17,500
3,000
Less: Liabilities:
Creditors
Accrued electricity bill
Capital as at 1st January 2004
12,600
1,200
85,000
235,000
(13,800)
221,200
Bank Account
Debtors
N
N
258,40
0 Suppliers
83,200
Drawings
40,000
New Decorating Equipment 60,000
Rent & Rates
1,800
Sundry business expenses
1,700
Electricity
2,400
Bal. c/d
69,300
258,40
258,40
0
0
Debtors Account
N
Bal. b/d
Sales
Bal. b/d
Bank
Bal. c/d
17,500 Bank
250,50
0 Balance c/d
268,00
0
9,600
Creditors Account
N
83,20
0 Bal. b/d
5,600 Purchases
N
258,00
0
9,600
268,00
0
N
12,60
0
76,20
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BHM112
88,80
0
Bal. b/d
Bank
Bal. c/d
Bal. b/d
Bank
Bal. b/d
Bank
Bal. b/d
Electricity Account
N
2,400 Bal. b/d
200 Profit & Loss
2,600
Bal. b/d
Rent and Rates Account
N
3,000 Profit & Loss
1,800
4,800
0
88,80
0
5,600
N
1,200
1,400
2,600
200
N
4,800
4,800
Equipment and Loose Tools Account

N
N
150,00
0 Depreciation
30,000
180,00
60,000 Bal. c/d
0
210,00
210,00
0
0
180,00
0
Trading, Profit and Loss Account for the year ended 31 December, 2004
N
N
250,50
Opening Stock
64,500 Sales
0
Purchases
76,200
Cost of goods available for sales 140,700
Less: Closing Stock
(58,500)
Cost of goods sold
82,200
Gross Profit c/d
188,300
250,50
250,500
0
188,30
Rent and Rates
4,800 Gross Profit b/d
0
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BHM112
Sundry business expenses

Electricity
Depreciation of Loose tools
Net profit
Capital
1,700
1,400
30,000
130,400
168,300
Balance Sheet as at 31 st December, 2004

Fixed
N
N
Assets:
Equipment and
221,200 Loose tools
Add: Net Profit
130,400
Less: Drawings
(40,000)
168,300
N
180,000
311,600
Current
Assets:
Current
Liabilities:
Creditors
Electricity
accrued
Stock
5,600
200
Debtors
5,800
Cash at bank
58,500
9,600
69,300 137,400
317,400
4.0
317,400
CONCLUSION
This Unit has explained the alternative methods for profit determination
where a business fails to maintain adequate accounting records under the
double entry system of book keeping. However, it is desirable that
adequate records are kept by business since regulatory authorities such
as the Board of inland/ internal revenue may not rely on income
statement prepared under this system.
49
BHM112
5.0
SUMMARY
This Unit concludes our discussion on financial accounting aspect of the

syllabus. It addresses issues relating to ascertainment of profit from an
incomplete records, using either the net worth or conversion methods. It
is clear that despite the difficulties in relying on and using the single
entry and incomplete records, final accounts could still be determined to
show the financial position and result of operations of the reporting
entity.
6.0
1.
Discuss any two methods of profit determination, using

incomplete records.
2.
On 1 January 2005 Henry Chukwuma commenced business. At

that date, he purchased a shop premises for N1, 400,000 and paid
N200, 000 for interior furniture and fittings. He also paid N400,
000 into the business Bank account. On 31 December 2006, he
realized the need for a profit figure for the two years he had been
in business, but his records were completely inadequate. At this
date, the assets he possessed in addition to the premises and
furniture and fittings were:
N
Stock/Inventories
600,000
Debtors/Receivables
104,000
Motor vehicle purchased (30 June 800,000
2006)
Cash at bank
250,000
He owed N140, 000 to trade suppliers and had borrowed N1, 000,000
from a friend. Interest accrued but unpaid on the loan amounted to N20,
000. Henry estimated that he was drawing N30, 000 a month from the
business.
Required:
Compute the Net Profit for the period.
50
(ICAN/ATSWA, 2008)
BHM112
3.
The following is the summarized Cash Book of Danjuma & Sons

for the year ended 31st March, 2005.
CASH BOOK
N
Bal. c/d
2,343
Cash paid to creditors
Cash from debtors 18, 235
Salaries
Additional capital 6,000
Postages and Stationeries
General expenses
Drawings
Rent and Rates
Bal. c/d
26,578
N
11,056
1,080
240
1,234
2,500
570
9,898
26,578
Additional Information:
Stock
Debtors
Creditors
Accrued Salaries
Prepaid Rent
1 st April, 2004
N
560
1,202
980
420
44
31st March, 2005

N
340
988
1,051
75
67
Required:
You are required to prepare a Trading, Profit and Loss Account for the
year ended 31 st March, 2005 and a Balance Sheet as at that date.
4)
Al-Mustapha Trial keeps his books of accounts on single entry

basis. The following information relates to his business for the
year 2004 and 2005:
31/12/2004
N
Buildings
Furniture
Motor Van
Stock
Debtors
Loan
Creditors
Cash in hand
Bank Overdraft
90,000
250,000
150,000
230,000
23,000
120,000
17,000
31/12/2005
N
450,000
150,000
250,000
300,000
40,000
35,000
25,000
51
BHM112
Almustapha Trial withdrew N250 per week. He sold an old motor

vehicle for N10, 000 which proceed was invested in the business during
the year.
Required:
You are required to determine his profit and prepare a balance sheet as
31/12/2005.
5.
Iyabo High keeps a cash book as her only major book keeping
record. The following is a summary of her transactions for the
year ended 30th June, 2003.
Cash book Summary

N
Opening balance
1,642
Cash paid to creditors
Cash received from debtors 48,528 Salaries
Closing balance
2,060
Rent and Rates
General expenses
Drawings
52,230
N
37,248
4,498
1,648
336
3,562
4,938
52,230
Her Assets and Liabilities on the 30th June, 2002 and 2003 were as
follows:
30/6/2002
30/6/2003
N
N
Fixed assets at cost
4,400
4,400
Stock
4,242
5,296
Debtors
6,438
6,776
Rent and Rates prepaid
200
240
Creditors
3,684
3,782
Lighting and Heating accrued
62
84
Fixed assets should be depreciated at 10% on Cost.
Required:
You are required to prepare the trading, profit and loss account of Iyabo
High for the year ended 30th June 2003 and a Balance Sheet as at that
date. (NECO 2006).
7.0
52
BHM112

UNIT 2
INTRODUCTION TO PARTNERSHIP FINAL

ACCOUNTS
CONTENTS
1.0
2.0
3.0
Introduction
Objectives
Main Content
3.1
Partnership Final Accounts
3.1.1 Kinds of Partners
3.1.1.1 Ordinary (or Active) Partner
3.1.1.2 Sleeping (or Dormant) Partner
3.1.1.3 Nominal (Apparent or Quasi) Partner
3.2
Partnership Deeds/Articles of Association
3.3
Liability of Partners
3.4
Advantages of Partnership
3.4.1 Large Capital
3.4.2 Experience and Ability
3.4.3 Share of Ownership
3.3.4 Family Relationship
3.4.5 Continuity
3.5
Types of Partnership
3.5.1 Unlimited partnership
3.5.2 Limited Partnership
3.6
Partnership Accounts
3.6.1 Capital Account
3.6.2 Drawing Account
3.6.3 Current Account
3.6.4 Salary Account
3.6.5 Interest on Capital
3.6.6 Interest on Drawing
53
BHM112
4.0
5.0
6.0
7.0
3.7
Conclusion
Summary
1.0INTRODUCTION
The law governing partnership, which is guided by the partnership Act
of 1890, in Nigeria defined partnership as the relation which subsists
between persons carrying on a business in common with the view of
profit. The number of persons, termed partners, who may form a
partnership, is limited to 20 except (a) in the case of: (i) Solicitors; (ii)
Accountants; (iii) Members of a recognized Stock Exchange, and (b) in
the case of banking business where the limit is ten (10) except that the
number may go up to 20 if each partner has bound of trade
authorization.
This Unit discusses types of partners that could be found in partnership
arrangements, partnership deeds, liabilities of partners, and advantages
of partnership, types of partnership and partnership accounts to be
maintained by a serious partnership business.
2.0OBJECTIVES
appreciate types of partners and partnership
understand the likely contents of the partnership deeds
appreciate the liabilities that attributable to partners in a partnership
business
understand the advantages of partnership over sole proprietorship
business
learn about the types of accounts to be kept by a partnership
business.
3.0
MAIN CONTENT
3.1
Partnership Final Accounts
3.1.1 Kind of Partners

3.1.1.1 Ordinary (or Active) Partner
This is a partner who has capital in the business and
conducting the affairs of the business.
54
takes
part
in
BHM112
3.1.1.2 Sleeping (or Dormant) Partners

This is a partner who has capital in the firm (business). Such a Partner is
responsible for the debts of the firm as if he were an ordinary partner.
His name may or may not appear in the firms name.
3.1.1.3 Nominal (Apparent or Quasi) Partner

This is a person who whilst not a partner in a partnership business,
lends his name to the business. Such a person is said to be holding out
as a partner and is therefore liable as a partner for credit given to the
firm, on the assumption that he was actually a member of the firm.
1. How is a partner in a partnership business?
2. Discuss any two types of partners.
3.2
Partnership Deeds/Article of Association
When a partnership is to be formed, it is usual to draw up a legal

document termed the deeds of partnership; although a partnership might
be carried out by verbal agreement.
Partnership deeds/Article of Association should contain clauses relation
to:
1)
2)
3)
4)
The firms name

The nature of the business.
The address (es) with which the business will be transacted.
The amount of capital to be contributed by each member and interest
thereon (if any).
5) The sharing formula for the profit or loss of the partnership.
6) The commencement and duration of the partnership.
7) Partner (s) salaries or remuneration, if any.
8) Loan by partner(s) to the firm and interest thereon.
9) Drawing and interest thereon.
10)The keeping of proper books, preparation of final accounts and
periodic audits.
11)The adjustment and repayment of capital to a retiring partner.
12)Arbitration, in order that any partnerships dispute may be settled
without litigation (going to law).
Section 24 of the partnership Act (1890) provides that in the absence of
agreement by the partners to the contrary:
55
BHM112
1. Partners are to share profit and loss equally and contribute equal
amount of capital.
2. No interest is payable in respect of capital before the ascertainment
of profit and no interest is to be charged on drawings.
3. 5% is to be paid to a partner who puts more money than the
subscribed capital. The payment will be on the excess.
4. Any partner may take part in the management of the business. But
no partner is entitled to salary for his services.
5. No partner may be introduced into the partnership without the
consent of all the existing partners.
6. The partnership books are to be kept at the place of business and
every partner should have access to them.
Discuss any 5 issues to be covered in a partnership agreement.
2. Highlight any 3 provisions of partnership act.
1.
3.3
Liability of Partners
The partners are liable for all the debts of the firm. In the event of
partners capital not enough to save him or her, he or she has to go for
his or her personal belongings. The only exception to this is where there
is the provision for limited partnership and unlimited partnership.
However, in coming partner is not liable to the debts of the firm but
retiring partner is liable to the extent of the debts of the firm before his
retirement.
3.4Advantages of Partnership
3.4.1 Large Capital
Sole traders may combine resources together to form a partnership if the
amount of capital required for the running of the type of business in
mind cannot be provided by one person. Persons looking for immediate
and large profits might find it impossible because of lack of large
capital. To achieve their business goal; therefore, they have to bring
together their capitals so as to make the large and immediate profit
which they will share among themselves.
3.4.2 Experience and Ability

The experience and ability required for the progress of a business and
the achievement of its goal available with one of more investors should
combined with the health, vitality and wealth available with other
56
BHM112
investor(s) so as to establish a very successful partnership business. A

typical example is where an old man forms partnership with a young
man so that the old mans wealth of experience could be combined with
the young mans health and strength for a successful partnership
business.
3.4.3 Share of Ownership

Many people just prefer to share the care of ownership rather than bear
all the burdens themselves. Such people will therefore decide to form a
partnership instead of operating a sole proprietorship.
3.4.4 Family Relationship

By virtue of being members of same family, some sole traders prefer
coming together and carrying on business activities as a family unit
rather than operating differently. This will strengthen the family
relationship whereas separately operating the business may lead to
competition or opposition between members of the family.
3.4.5 Continuity
The continuity and enhancement of the business is more secured than in
the case of single proprietorship.
1. Describe the liabilities of retiring and incoming partners.
2. Discuss any three advantages of a partnership business over a sole
proprietorship business.
3.5
Types of Partnership
There are basically two (2) types of partnership: Limited and Unlimited.
3.5.1 Unlimited partnership

This is the partnership in which the partners are liable to all the debts of
the business up to the extent of their personal properties. This is when
the partnership is indebted or insolvent. The partners here must pay the
debt even if it means selling their personal belongings like cars, houses,
lands, etc in order to raise money for that purpose.
3.5.2 Limited Partnership
57
BHM112
This is the partnership in which some partners have a limited liability

and other(s) unlimited liability. Those with limited liability are liable
only to the extent of the amount of capital they invested into the
business if the business witnesses a failure. This means that they loss
only what they already invested into the business as nobody will force
them to contribute any further amount for the purpose of repaying the
debt of the partnership.
The unlimited partners, on the other hand, are liable to all the debts of
the partnership up to the extent of their personal belongings when the
business becomes insolvent. A limited partner is registered under the
provisions of the limited partnership Act (1907) and he may not take
part in the management of the partnership business. There must be at
least one general (unlimited) partner in a limited partnership.
1. What are the characteristics of unlimited partnership?
2. How limited is a limited partnership?
3.6
Partnership Accounts
3.6.1 Capital Account

This is the account that records the partners capital contribution to the
business. There are as many capital accounts as there are partners.
There are two (2) ways of keeping the capital account: (1) fixed capital
account and (2) fluctuating capital account. The first method is the most
acceptable one where the capital account is left intact and current
account introduced in which fluctuations in the gains and obligations of
partners in the business will be recorded. The dimension of the account
is like that of other accounts.
3.6.2 Drawing Account

This is the account in which the drawings made by the partners are
recorded. It normally has a debit balance unlike Capital Account that
has a credit balance.
3.6.3 Current Account

This is the account in which the current earnings and drawings of
partners are recorded, leaving capital account fixed. On the right of it
(credit side) are recorded (1) interest on capital, (2) partners salary, (3)
share of profit, and (4) interest on loan. On the left of it (debit side) are
recorded (1) drawings, (2) interest on drawing, and (3) share of loss.
58
BHM112
3.6.4 Salary Account

This is the account that records the salaries paid to active partners for
their management and control of the partnership business and of course
their concentration for the day-day running of the affairs of the business,
sacrificing other activities that can equally fetch them money. This is
credited to the current account and debited to the profit and loss
appropriation account.
3.6.5 Interest on Capital

Interest is sometimes charged on capital if the work to be done by each
partner is of equal value but the capital contributed is unequal. Also, if
profit is to be shared equally, interest on capital has to be paid to
compensate higher capital contributors.
This interest is paid out of the net profit for the year as part of
appropriation. It is, therefore, treated as a deduction prior to the
calculation of the super profit and its distribution to the partners
according to the profit/loss sharing ratio. The rate of the interest is a
matter for agreement between the partners. But, theoretically, it should
be equal to the return which the partners would have received had they
invested the capital elsewhere.
3.6.6 Interest on Drawing

Interest is sometime charged on drawings to deter the partners from
taking out cash and other resources unnecessary. The interest is
calculated from the date of withdrawal to the end of the financial year.
The amount charged helps swell the profit divisible among the partners.
It is obviously in the best interest of the firm if cash is withdrawn by the
partners in accordance with the two (2) basic principles of (a) as little as
possible, and (b) as late as possible. The more cash that is left in the
firm, the more expansion can be financed.
1. Differentiate between current account and capital account in a
partnership business.
2. Differentiate between interest on capital and interest on drawing.
3.7
59
BHM112
Illustration One
Talatu Rabi and Zainab are in retail business contributing =N=100,000,
=N=50,000 and =N=100,000 as capital, respectively, 5% is annually
charged as interest on capital and on drawings. Zainab who is also the
manager of the business is entitled to =N=60,000 as salary per annum.
However, due to deteriorating health Rabi took over as from 1 st July and
is entitled to =N=2,500 salary per month. Rabi resigned from active
partnership on the 31st October and Talatu took over as from November
1st on a salary of =N=3,000 per month.
The partners current account is as follows:
Talatu
Rabi
=N=
=N=
Current Account (Jan. 1 st) 21,000
9,000Dr
Talatu and Zainab made the following drawings:
Talatu
st
January 1
=N=4,500
June 30th
=N=4,500
Zainab
=N=
19,500
Zainab
=N=6,000
=N=10,000
The business made a =N=420,000 profit for the year ended December
31 st, 1980. Profit or loss is to be shared according to the proportion of
the partners capital contribution.
(a)
(b)
(c)
Profit and Loss Appropriation Account

Drawing Account
Partners Current Accounts for the year ended 31/12/1980
Solution
Talatu, Rabi and Zainab Partnership
(a) Profit and Loss Appropriation Account
=N=
=N=
Interest on Capital:
Zainab
5,000
Rabi
2,500
Talatu
5,000
12,500
=N=
Net Profit
=N=
=N=
420,000
Interest on Drawing:
1st Junuary
T
225
Z
300
525
60
BHM112
1st July
T
113
Z
250
Partners Salary:
Zainab
Rabi
Talatu
30,000
10,000
6,000
Hare of Profit:
Z (2/5)
R (i/5)
T (2/5)
144,955
72,478
144,955
(b)
46,000
363 888
362,388
420,888
======
--------420,888
======
Drawings Account
Talatu
N
Jan. 1 Cash
July 1 st Cash
4,500
4,500
---
9,000
Zainab
N
6,000 31/12/80 Bal. c/d

10,000
Zainab
N
9,000 16,000
------------------------9,000 16,000
16,000
=====================
1/1/81 Bal. b/d 9,000
16,000
(C )
Talatu
N
=================
Current Account For the year ended 31/12/80

Talatu
=N=
Rabi
Zainab
Talatu
Rabi
Zainab
=N=
=N=
=N=
=N=
=N=
Bal.B/d 9,000
Bal. b/d 21,000
19,500
Drawings 9,000
16,000
int. on capital 5,000 2,000 5,000
Int on Dr
338
550
Partners salary 6,000 10,000 30,000
Bal. c/d 167,617 75,478 182,905 share of profit 144,955 72,478 144,955
------------------------------------------------------------------------176,955 84,478 199,455
176,955 84,478 199,455
=======================
=====================
Bal. b/d
167,955 75,478 182,905
N:B: the rule of approximation has been applied

Illustration Two
Danwanzan and Golobo are in partnership sharing profit ad loss in the
ratio of 3:2. Golobo was paid a salary of =N=5,000 on 31 st August,
1991 the following balances were extracted from the partnership books:
61
BHM112
=N=
Premises
58,000
Provision for Bad Debts
6,500
Carriage Inwards
1,120
Purchases and Sales
131,650
Motor Vehicles (valued @ 1/9/90) 12,840
Discounts
1,990
st
Stock at 1 September, 1990
24,770
Debtors and Creditors
28,270
Salary Golobo
5,000
Returns
2,880
Office Salaries
25,500
Rates and Insurance
6,420
Electricity
1,390
Drawings Danwanzan
4,950
Golobo
6280
General Expenses
5,700
Loan from SAP-DEY
Cash at bank
7,000
Cash at hand
390
Motor Expenses
4,660
Capital Accounts: Danwanzan
Golobo
Current Accounts: Danwanzan
1,250
Golobo
336,500
======
=N=
1,150
254,430
1,460
15,150
3,430
10,000
30,000
20,000
880
336,500
======
The following information is also available:

1.
2.
3.
4.
5.
6.
7.
Stock on hand at 31 st August, 1001 is =N=25,600.

Depreciation furniture and fittings and motor vehicle at 20% on
reducing balance method.
Provision for bad debts is to increased to =N=1,400
Rates and Insurance include =N=840 rates paid in advance and an
insurance premium of =N=480 paid on 1st June, 1991 for the year
1991.
Interest on outside loan is at the rate of 15% and is not paid.
Owing for electricity at 31st August, 1991 was =N=220.
Relevant sections of 1890 Partnership Act are to be considered.
You are required to prepare for the partnership:
62
BHM112
(a) Trading, Profit and Loss Accounts for the year ended 31st August,
1991
(b) Balance Sheet as at 31st August, 1991.
SOLUTION
DANWANZAN & GOLOBO PARTNERSHIP
Trading, Profit and Loss Account for the year ended 31/08/91
=N=
Opening stock
Add: Purchases
Add: Carriage
Less: Return
=N=
24,770
131,650
1,120
132,770
3,430
--------129,340
---------154,110
25,600
128,510
123,040
251,550
======
C.O.G. Avail. For sales

Less: Closing stock
Cost of Goods sold
Gross Profit c/d
Provision for Bad debts:

New
Less Old
=N=
Sales
254,430
Less: Returns 2,880
251,550
---------251,550
======
G. Profit b/d 123,040
Discount
1,460
1,400
1,150
250
1,990
25,500
Discount Allowed
Office Salaries
Rates & Insurance
Less Rates Prepaid
6,420
840
5,580
Less: Ins. Prepaid (Wk 1)
160
5,420
Electricity
Add: Owings
1,300
220
1,640
63
BHM112
General Expenses
Motor Expenses
Interest on Loan
Depreciation:
F& Fittings
Motor Vehicle
5,740
4,600
1,500
1,300
2,568
3,868
73,962
124,500
==========
---------------124,500
=========
Profit & Loss Appropriation Account for the Year ended 31/08/91
=N=
Partners Salary paid (Golobo) 5,000
Interest on Capital (wk 2):
Danwanzan
Share of Profit:
Danwanzan (3/5)
41,077
Golobo (2/5)
27,385 68,462
78,622
=====
=N=
=N=
Net Profit
73,962
500
--------78,622
=====
Balance Sheet as at 31/08/91

=N=
Capital:
Danwanzan
Golobo
=N=
=N= =N=
=N=
Fixed Assets: Cost Acc Depr. NBV
30,000
20,000
50,000
Premises 58,000
Furn. & Fitts. 6,500 1,300
Motor Vehicle12,840 2,568
58,000
5,200
10,272
-----------------------------77,340 3,868 73,472
===============
Current Account:
Danwanzan 35,377
Golobo
22,085
57,462
Current Assets:
Long-term Liability:
Loan (SAP-DEY)
Current liabilities:
64
25,600
10,000
Stock
Debtors
Less: Prov. For
For B.D
28,270
1,400
--------26,870
BHM112
Creditors
15,150
Ins. On Loan 1,500
Elec. Owing
220
Rates Prepaid
Ins. Prepaid
Cash at Bank
16,870 Cash in Hand
---------134,332
======
840
160
7,000
390 60,860
-- ---134,332
======
Partners Current Account

D/Zan N G/ko N
D/Zan N G/ko N
Balance b/d
Drawings
Balance c/d
1,250
Balance b/d
880
4,950
6,180
interest on Cap 500
35,377 22,085
share of Profit 41,077
27,385
---------------------------------------------------41,577
28,265
41,577
28,265
====================
========================
Bal. b/d
35,377
22,085
Workings
1.
Insurance prepaid was arrived at as follows:
Monthly premium
480
12
= N 40
4 months (Sept Dec., 1991) payment = 40 x 4 = N 160

2.
3.
Interest on capital is based on the provision of Partnership Act

provision that 5% interest, on excess capital, is to be paid to a
partner who contributes amount in excess of the other(s). The
excess is to be treated as loan from the partner.
Partners Salary has been paid already and, so is not to be
included in the current account of the partner since he has
collected the amount.
4.0CONCLUSION
Partnership business is one of the three forms of businesses in any
country of the world. It is more popular among professionals and
vocational men and women. A partnership business is a source of
income and not a unit of income, and so its profit is not taxable until it is
shared amongst the partners. The accounts of a partnership business are
65
BHM112
similar to those of sole proprietorship and companies, in theory and

practice, but there are specialized accounts that are normally kept by
partnership businesses. This Unit highlights all the fundamental issues
students should know about partnership accounting.
5.0SUMMARY
The Unit has introduced partnership business, the type of book keeping
system to be put in place and the way to prepare final accounts of
partnership businesses. Types of partnership and types of partners were
made very clear, as well as liabilities of partnership and advantages of
partnership business over sole proprietorship business. The Unit is a
good introduction to the concept of partnership and its expected
accounting system.
6.0
A. What is a partnership? What are the types of partnership

business?
B. What are the kinds of partners that we can have?
C. What advantage has a partnership form of business over a sole
proprietorship?
1.
2. What is a partnership deed? What are the legal consequences of notdrawing such a deed?
3. Explain the following in relation to partnership accounts:
a)
b)
c)
d)
Partners capital accounts.

Partners drawing accounts.
Partner Salary.
Partners current account.
4. Tuwo and Miya are in partnership sharing profit and losses equally.
Interest is allowed at 5% per annum on capital and 3% is charged as

interest on drawings. The partners account balances as at 31 st
December, 1995 are as follows:
Capital accounts:
Current accounts:
Tuwo
100,000
20,000
Miya
75000
34000
Miya is also entitled to N17, 000 salaries per annum and on 1/1/96
withdraw N12, 000 from the business. For the year ended 31st
December, 1996 the business made N15, 000 profit.
66
BHM112

a) Profit and loss appropriation account
b) Partners current account for the year ended31st December, 1986.
5. Jackson and Mackson are partners, sharing profit and losses in the
ratio of their capital contribution.
The following is the trial balance in the partnership books as at 31 st

December, 1990.
Capital Accounts at January 1
Jackson
Mackson
Current Accounts:
Jackson
Mackson
Drawings:
Jackson
Mackson
Purchase and sales Motor Van at cost
Premises
Fitting at cost
Provision for Depreciation:Van Fittings
Stock
Cash
Office expenses
Discounts
Debtors and creditors
Bank
Insurance
Carriage in ward
Carriage out ward Provision for bad debts
Vehicle expenses -
DR
CR
10,000
20,000
1,250
750
4,000
3,000
33,000
22,300
80,000
11,200
141,940
4,200
900
16,700
200
1,990
850
5,200
230
1,410
640
110
115
120
130
1,165
N 180,700 N180, 700
===================
The following information is relevant:

1.
Stock at hand on 31 st December, 1990 is valued at N22, 500.
67
BHM112
2. Depreciate motor van and fittings at 10% on reducing balance

methods.
3. Bad debts provision is to increase by n120
4. Insurance per annum payable amount to N35
5. 1/5 of the motor vehicle expenses is for Jackson personal use paid by
the business. The amount is to be treated as drawings at 5% interest
rate.
6. Mackson is entitled to N2, 600 Salary.
7. Interest on capital is to be paid at 10% per annum.
8. Interest on drawing is to be charged at 6%
Required: Trading profit and loss account for the year ended 31st
December, 1990 and a balance sheet as at date.
7.0

68
BHM112
UNIT 3
ACCOUNTING FOR CHANGES IN

PARTNERSHIP
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Changes in Partnership
3.1.1 Admission of New Partner
3.2
Retirement or Death of a Partner
3.3
Dissolution of Partnership
3.4
Gerner Vs Murray Decided Case
3.5
4.0 Conclusion
5.0 Summary
1.0
INTRODUCTION
A partnership business is expected to be a going concern, meaning that

it should not be expected to liquidate in any foreseeable future. As it
grows and prospers, it would experiences a lot of changes in its
ownership, structure, financial position, etc. Adjustment has to be made
in the accounts of a partnership business when more person(s) is/are to
be admitted as partners or when some partner(s) died or decided to retire
from the partnership. The Unit would address accounting treatments of
the changes that are bound to occur as a partnership business grows or
decline for whatever reason. Issues bordering on admission, resignation/
retirement, death and conversion are to be subjected to accounting
treatments in a partnership business.
2.0
OBJECTIVES
69
BHM112
appreciate the accounting treatment on admission of a new partner

understand the accounting treatment on the retirement or death of a
partner
appreciate reasons why a partnership could be dissolved and the
accounting treatment
appreciate the logic in the Gerner Vs Murray decided court case.
3.0
MAIN CONTENT
3.1
Changes in Partnership
3.1.1 Admission of New Partner

When it comes to admission into a partnership business, the incoming
partner has to accept the conditions(s) set by the existing partners apart
from any other arrangement provided by the partnership deeds as
regards admission of new partner. The assets of the business are to be
revalued in line with current values and the gain or loss that may arise is
to be shared by the existing partners in accordance with their profit and
loss sharing ratio before the admission. The share of the gain or loss is
to be recorded in the current account of each partner, thereby closing the
revaluation account.
1. What is the process of admitting a new partner?
2. How is revaluation account closed on admission of a new partner?
3.2
Retirement or Death of a Partner
As for death or retirement of a partner, the partnership deeds or

partnership Act 1890s provisions are to be observed in addition to other
conditions that might be set by the retiring partner or the trustee of the
deceased partners assets and accepted by the surviving partners. Again,
revaluation has to be made of the assets of the business at the time of
retirement or death of a partner so as to determine the closing capital of
the retiring partner which is to be treated as agreed: Pay the partner or
retain the amount as loan to the business.
After the changes on admission or death/retirement, the partnership is
expected to continue as strong as possible, with the existing partners
agreeing on the sharing formula of profit and loss, treatment of capital
accounts, current accounts and drawings accounts, issue of partners
salaries for the general/active partners, etc. The financial position of the
70
BHM112
business, through the balance sheet, is to highlight the revaluation made

to assets, the composition of capital contribution and many other
charges caused by the admission or retirement/death of partner(s).
What are the accounting entries on retirement of a partner?
2. Differentiate between the accounting treatments of retirement and
death of partners, if any.
1.
3.3
Dissolution of Partnership
A partnership business can be dissolved at the instance of the partners,

their creditors or when it is to be converted to a company.
Due to disagreement among the partners, by majority will, the
partnership can be dissolved. Due to the insolvency of the business,
which might be originated by some partners, the creditors may appeal
for the dissolution of the partnership so that they can recover their
money. When partners agree to convert the business to a company
business, private or public, the partnership has to be dissolved, in the
first instance, and the process of conversion followed.
Realization account has to be created in which all the assets account
with the exception of cash or bank balance, are to be closed. The value
realized on the assets are to be debited in the cash or bank account and
all the liabilities settled from it or direct form the realization account, as
the case might be. The partners capital and current accounts are to be
settled from the cashbook, which will automatically close itself. At the
end of the process of dissolution, all the accounts of the business are to
be closed down.
Where conversion is to be made to company business, the capital
accounts of the partners are to be closed by debiting them with the
equivalent value of the issued share capital of the new company.
1. Briefly discuss three reasons why a partnership business would be
dissolved.
2. How is conversion of partnership to company business concluded?
3.4
Gerner Vs Murray Decided Case
Sometimes, on dissolution of partnership concern, a partner may not be

able to recover his/her deficiency/insolvency. It was ruled in the Gerner
V. Murray case, a British court decision that any deficiency of an
71
BHM112
insolvent partner on dissolution of a partnership business shall be borne

by the solvent partners in accordance with the ratio of their last agreed
capital before the dissolution. This ruling is widely accepted and is
being applied in Britain and other Commonwealth countries, like
Nigeria.

1. Who is an insolvent partner?
2. How should an insolvent partner be redeemed by solvent partners?
3.5
Illustration One
Aisha, Bilkisu and Hauwa were partners in a fashion design business
sharing profits and Losses in the proportion of one-half, three-tenths and
one-fifth respectively.
It was decided to cease business and wind up at 31 st March, 1995 and
the Balance sheet as that date was as follows:
=N=
Capital:
Aisha
Bilkisu
Hauwa
102,780
43,970
16,760
=N=
=N=
Fixed Assets:
Freehold Properties
Motor Vehicle
=N=
72,560
26,130
163,510
Aisha Loan
Account
20,000
Current Assets:
Sundry Creditors
52,140
Stock
Debtors
Cash
235,650
======
59,680
63,210
14,070 136,960
235,650
======
It was arranged that Aisha should take over the freehold properties at the
agreed price of =N=125,000. The vehicle was sold for =N=15,270. The
stock was sold for =N=49,600 and the debtors realized were =N=61,210.
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The costs of winding-up amounted to =N=2,500.

paid in full.
The liabilities were
Required: Prepare the realization account, the cash account and the
partners capital accounts of the partnership, showing the final
distribution.
SOLUTION
Realization Account
SOLUTION
Realization Account
=N=
Freehold properties
Motor Vehicle
Stock
Debtors
Winding-up Exp
Aisha(1/2)
13,500
Bilkisu (3/10)
8,100
Hauwa(1/5)
5,400
=N=
=N=
72,560
26,130
59,680
63,210
2,500
Aisha (Freehold)
125,000
Cash (Motor Veh)
15,270
Cash (Stock)
49,600
Cash (Debtors)
61,210
Gains on Realization:
27,000
251,080
======
---------251,080
=======
Cash Account
Balance c/d
Realization
Realization
Realization
Aisha
=N=
14,070
15,270
49,600
61,210
8,720
148,870
Realization Exp.
Aisha (Loan)
Creditors
Bilkisu
Hauwa
=N=
2,500
20,000
52,140
52,070
22,160
148,870
Account Closed
Aishas Loan Account
Cash
=N=
20,000
=====
Balance b/d
=N=
20,000
=====
Account Closed
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Sundry Creditors Account
Cash
=N=
52,140
Balance b/d
=====
Account Closed
=N=
52,140
=====
Capital Account
A
B
H
A
B
H
------------------------------------------------------------------------------------=N=
=N=
=N=
=N= =N=
=N=
Real (Fr/Hol) 125,000
Balance b/d 102,780 43,970 16,760
Cash 52,070 22,160
Gain on Real13, 500 8,100
5,400
Cash
8,720
--------------------------------------------------------------------125,000 52,070 22,160
125,000 52,070 22,160
====================
==================
Account Closed
1. As the business has come to an end, the accounts are all closed by
the entries made on winding up.
2. Aisha has to pay =N=8,720 in order to make up the deficit shown by
her capital account on winding up.
3. The gain on realization is to be shared using the profit and loss
sharing formula of the winding up business.
Illustration Two
Kalala and Kalalatu are in partnership business sharing profits and
losses equally. The following is the balance sheet of the business as at
31 st December, 1994:
74
BHM112
Kalala and kalalatu

Balance Sheet as at 31- 12 94
=N=
Capital:
Kalala
Kalalatu
180,000
180,000
=N=
360,000
Current Account:
Kalala
12,000
Kalalatu
7,000
=N=
Fixed Assets:
Freehold property
Motor vehicles
Furniture & Fittings
130,000
4,200
513,200
======
120,000
160,000
60,000
340,000
Current Assets:
19,000
Stock
379,000 Debtor
Bank
64,400
91,800
17,000
Current Liabilities
Creditors
Accruals
=N=
173,200
134,200
----------513,200
=====
Additional information:
(b)
(c)
On 31st December, 1994, Katutu was admitted into the

partnership.
Profits and losses would still be shared equally
Katutu introduced a capital of =N=150,000
(d)
The following assets were revalued:
(a)
Freehold property
Motor vehicles
Furniture and fittings
Stock
(e)
240,000
180,000
30,000
50,000
Goodwill was valued at =N=100,000 and it is to be retained in

the books.
Required:
1.
Record the transactions in the books of the partnership
75
BHM112
2.
Prepare the balance sheet immediately after the admission of

Katutu on 31st December, 1994.
SOLUTION
Revaluation account
Furniture & Fittings
Stock
Profit on revaluation
Kalala
Kalalatu
=N=
30,000
14,400
Freehold prop.
Motor vehicles
Goodwill
97,800
97,800
----------240,000
======
Freehold property account

--------------------------------------------=N=
=N=
Bal. c/d 120,000 Bal. c/d
240,000
Reval. 120,000
---------240,000
240,000
======
======
Motor vehicle account
--------------------------------------------=N=
=N=
Bal. b/d 160,000 Bal. c/d
180,000
Reval.
20,000
---------180,000
180,000
======
======
Furniture & Fittings Account
--------------------------------------------=N=
=N=
Bal. b/d 60,000 Bal. c/d 30,000
Reval.
--------60,000
======
76
30,000
--------60,000
======
=N=
120,000
20,000
100,000
----------240,000
======
BHM112
Stock account
--------------------------------------------=N=
=N=
Bal. b/d 64,400 Bal. c/d
50,000
Reval.
--------64,400
======
14,400
--------64,400
======
Bank account
--------------------------------------------=N=
Bal. b/d
17,000
Bal. c/d
Katutu cap 150,000
--------167,000
======
Bal. b/d
167,000
=N=
167,000
--------167,000
======
Partners Capital Accounts

Kalala Kalalatu Katutu
Kalala Kalalatu Katutu
---------------------------------------------------------------------------------------------=N=
=N=
=N=
=N=
=N=
=N=
Bal. c/d
180,000 180,000 150,000 Bal. b/d 180,000 180,000
Bank
150,000
-----------------------------------------------------------------180,000 150,000 180,000
180,000 150,000 180,000
====================
====================
Bal. b/d 180,000 180,000 150,000
Partners Current Accounts
Kalalatu
Kalala Kalalatu
=N=
=N=
=N=
Bal. c/d
104,800 Bal. b/d
12,000
7,000
Profit on reval 97,8009 7,800
-----------------------------------------------------------------------109,800
104,800
109,800 104,800
========================
==================
Kalala
=N=
109,800
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BHM112
Illustration Three
Abdul, Bola and Chukwu had been partners in business for the past
twenty years. Abdul gave notice of retirement effective from 1st
January, 1994. Bola and Chukwu agreed to take-over Abduls share of
the business on Abduls terms, which were:
(a)
(b)
Cash payments for half of his entitlements; and

Conversion of the remaining entitlement to a loan, at the rate of
10% per annum.
The partners revalued the assets of the business, resulting in the creation
of Goodwill of =N=24,000. The Balance Sheet of Abdul, Bola and
Chukwu as at 31st December, 1993, was as follows:
Capital Accounts:
=N=
Abdul, Bola and Chukwu

Balance Sheet As At 31 December, 1993
Fixed Assets:
=N=
=N=
Abdul 600,000
Land & Buildings
Bola
600,000
Plant & Machinery
Chukwu 600,000
Office Equipment
---------- 1,800,000
Motor Vehicles
Current Accounts:
Abdul
53,400
Bola
103,800
Chukwu
90,600
247,800
Current Assets
Stock
Debtors
Cash
Current Liabilities:
Creditors
541,400
-------------2,589,200
========
78
=N=
603,600
842,800
165,200
315,600
1,927,200
104,600
90,000
467,400
662,000
----------2,589,200
=======
BHM112
The partners were sharing profits and losses equally before and after the
retirement of Abdul.
Required:
1. The necessary journal entries for the transactions.
2. Abduls Capital Account before retirement.
3. Balance Sheet of the new partnership as at 1/1/94.
SOLUTION
(i)
Journal Entries for the Transaction

DR (N)
240,000
CR (N)
Goodwill a/c
Revaluation a/c
240,000
Being Goodwill created due to revaluation
Revaluation
240,000
Abduls Capital a/c
80,000
Bolas Capital a/c
80,000
Chukwus Capital a/c
80,000
BeingtherevaluationprofitsharedbeforeDissolution
Abdus Capital a/c
366,700
Bolas Capital a/c
183,350
Chukwus Capital a/c
183,350
BeingcashpaymentbyBola,ChukwuforhalfofAbdulsEntitlement
Abdus Capital A/c
366,700
10% loan a/c
366,700
Being half of Abduls entitlement converted into loan
Abduls current a/c
53,400
Abduls capital a/c
53,400
BeingAbdulscurrenta/cbalancetransferred tohisCapitala/c
(ii)
Abduls Capital Account Before Retirement

Bal. c/d
=N=
733,400
Bal. b/d
Current Acct Balance
Share of Goodwill (profit)
--------733,400
======
Bal. b/d
=N=
600,000
53,400
80,000
----------733,400
======
733,400
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Notes:
(i) When Abdul issued a notice of retirement, his current account is

closed and the balance transferred to his capital account. His share
of goodwill is also part of his net worth.
(ii)
Abduls total entitlement is therefore =N=733,400.
(iii) Half of Abduls total entitlement is paid by Bola and Chukwu
and this increased their capitals, while half is converted to a loan
for the partnership.
(iii) Balance Sheet of the New Partnership as at 1/1/94
Capital :
Bola
Chukwu
=N=
967,150
953,950
=N=
Fixed Assets:
=N=
Land & Buildings
603,600
Plants & Machinery 842,800
1,921,100
Office Equipment
Motor Vehicles
Long term Liabilities:
10% loan from Abdul
Current Liabilities:
Creditors
366,700
541,400
Fictitious Asset:
Goodwill
Current Assets :
Stock
104,600
Debtors 90,000
Cash
467,400
----------------2,829,200
===========
4.0
165,200
315,600
240,000
662,000
-----------2,829,200
========
CONCLUSION
In the course of the survival and growth of a partnership business, a lot

of changes are bound to take place resulting from the internal and
external influences. These changes have to be subjected to appropriate
accounting treatments for accountability and transparency to be ensured.
Admission of new partners normally brings about expansion or
diversification to a partnership; retirement or death of a partner usually
weakens the capital base of a partnership; and conversion of a
partnership to a company business usually reflects growth and
80
BHM112
development in the operations of the business and the economy as a

whole. This Unit is an attempt at introducing all these issues and their
accounting treatments to the students.
5.0
SUMMARY
This Unit has discussed the major issues that bring about changes in the
structure and financial position of a partnership business. It has
introduced the accounting treatments to be applied as the changes
happen. Adequate illustrative examples were given to shade more light
on the issues. These issues are: admission of new partners, retirement or
death of a partner and conversion of a partnership business to a company
business.
6.0TUTOR-MARKED ASSIGNMENT
1. Discuss three important changes that may necessitate technical
accounting treatments in the accounts of a partnership business.
2. Discuss the process of converting a partnership business to company
business, indicating how accounting would come in.
3. Write short notes on the importance of the following accounts in a
partnership firm:
i)
ii)
iii)
Realization Account
Current Account
Bank Account
4. Malam Dogo and Malam Gajere were equal partners in a retail
bookshop. They decided to retire and dispose of their business as on

31st December. At the close of the year their balance sheet was as
follows:
Dogos capital
Gajeres capital
Sundry Creditors
=N=000
3,050
960
480
-------4,490
=====
Lease
Fixtures
Sundry Debtors
Stock
Cash at Bank
=N=000
1,250
220
840
2,060
120
4,490
====
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The lease and fixtures were disposed of for =N=2,700,000 and cash duly
received. The books debts were collected, and realized =N=752,000.
The stock was sold by auction and produced =N=1,340,000 after
payment of commission and expenses. The sundry creditors were paid
off, =N=38,000 being allowed for discount. The expenses of realization
amounted to =N=87,000.
Required: As a book-keeper to the firm, prepare whatever accounts
may be necessary to show the result of the realization and the amount
received by each partner. (Adopted from Center)
5. Wayo, Lura and Hankali were in equal partnership which was
terminated on 31t March, 1996. Lura and Hankali decided to
continue in a new equal partnership and take over the assets and
liabilities of the old firm and pay out Wayo in cash. The following
was the final Balance Sheet of the old firm:
Liabilities
=N=000
=N=000 Assets
=N=000
Sundry Creditors
4,000 Plan & Machinery
4,000
Capital Accounts:
Stock-in-Trade
14,400
Wayo
10,500
Sundry Debtors
7,600
Lura
7,250
Cash at Bank
3,000
Hankali
7,250
25,000
------29,000
29,000
=====
=====
The assets were taken over at amounts as follows:

Plant and Machinery =N=3,600,000: Stock-in-Trade =N=13,800,000
and the Sundry Debtors at their books value less per cent.
Goodwill was valued at =N=10,800.
Required: You are required to give the realization account of the old
firm and to prepare the balance sheet of the new firm, assuming that the
amount to be paid out to Wayo was borrowed from the bank. (Adopted
from Center)
7.0

82
BHM112
UNIT 4
MANUFACTURING ACCOUNTS
CONTENTS
1.0
2.0
3.0
Introduction
Objectives
Main Content
3.1 Manufacturing Accounts
3.1.1 Inventories of a Manufacturing Concern
3.2 Types of Costs Relevant in the Manufacturing Accounts
3.3 Why is Cost Information Needed?
3.4 Manufacturing Account Format
3.5 Illustrative Examples
4.0 Conclusion
5.0 Summary
1.0
INTRODUCTION
A business entity engaged in the manufacturing of goods for sale will

prepare a manufacturing account in addition to the trading, profit and
loss account. The aim of preparing manufacturing account is to ascertain
the cost of goods produced during the year. It is prepared in a manner to
show the components of the cost of goods produced as analyzed below:
Direct Materials (that is cost of raw materials consumed)
Direct Labor (that is direct wages or manufacturing wages)
Direct Expenses (e. g royalty payable, hire of machine, etc)
Prime Cost
Factory/ Production Overhead Expenses
Cost of goods produced
x
x
x
x
x
x
2.0OBJECTIVES
understand the business setting in which the preparation of
manufacturing account is required
83
BHM112
understand the differences between a manufacturing account and a

trading, profit and loss account
explain the key terminologies used in a manufacturing account
describe the principal adjustments normally being made to a
manufacturing account.
3.0
MAIN CONTENT
3.1
3.1.1 Inventories of a Manufacturing Concern

Manufacturing businesses have three types of inventories (stock). These
are stock-in-trade, work-in progress inventory and raw material stocks.
For a going concern, there is bound to be opening and closing balances
of the three types of stock, two of which are to be considered in the
manufacturing account before arriving at the cost of production.
1. Enumerate any three types of inventory in a manufacturing concern.
2. How should a going concern business report the three types of stock
in its accounts?
3.2
Types of Costs Relevant in the Manufacturing Accounts
A cost can simply be defined as the economic resource used in

production of goods or services. It can be classified into two main
groups: direct costs and indirect costs. Direct costs are those that can be
traced directly to a product or service. These are direct materials and
direct labor costs. All other costs apart from the first two are indirect
costs or manufacturing overheads.
From the above, one can conclude that manufacturing businesses need
three manufacturing cost elements to produce finished products during
the production operation. These are:
1. Direct Materials
2. Direct Labour
3. Manufacturing Overhead
1. What is a cost?
2. How cost is mainly classified?
84
BHM112
3.3
Why is Cost Information Needed?
A manufacturing business must be conscious of cost information

because of the following reasons:
1. Inventory Valuation
The values of inventories have to be determined before arriving at the
cost of sales and the value to be included in the balance sheet in order to
show a true and fair view of the financial position of the business. As
costs vary from time to time, care must be taken in giving a value to the
stock remaining in the store or in process.
2. Income Determination
There is the need for the knowledge of total cost to be deducted from
revenue (sales) before determining the profit or loss of the business for a
period.
3. Determining Selling Price
A good knowledge of the cost helps the manager in fixing the price that
the products should bear as they are sold to customers.
4. Controlling Costs
By keeping the cost of production low, a manufacturer will be in a
position to lower his prices and outsell his competitors. To be able to
keep costs of production low, the manufacturer must first of all know
what his costs are before finding ways of reducing them.
5. Financial Planning
Management requires cost information to plan for the future with
desired financial goals. Cost information is necessary for a good budget
to be prepared.
6. Decision Making
85
BHM112
Management must always evaluate the costs associated with alternative

courses of action before taking decision otherwise it would be putting
the business in trouble. The evaluation would reveal the best option to
be selected for the benefit of the business.

1. What do you understand by cost control?
2. Why should care be exercised in valuing stock?
3.4
Manufacturing Account Format
Manufacturing Account for the year ended.

N
Opening Stock: Raw material
Add Raw material Purchased
N
XX
XX
XX
Add Carriage inwards
Less Raw material closing stock
Cost of raw material used
Factory Wages
Prime Cost of Production
Manufacturing Overheads:
Factory Expenses
Factory rent & rents
Factory electricity
Plant Repairs
Depreciation on plant
Factory insurance
Et cetra
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
Less closing work-in-progress

Cost of Production
XX
XX
XX
XX
NOTES:
(1) Work-in-progress difference can be entered into the account as
follows:
Work-in-progress at the beginning
Less Work-in-progress at the end
86
X
X
X
BHM112
If the difference is positive, it is to be added to other costs and where it

is negative, it should be deducted in order to arrive at the cost of
manufacture.
(2) All adjustments as to prepayments, accruals or provisions are to be
taken care of in the account using the same treatments as applicable
to trading and profit and loss accounts.
(3) The cost of production arrived at in the manufacturing account is to
be added to the cost of opening stock in the trading account.
1. How do you determine closing work-in-progress?
2. How do you arrive at prime cost?
3.5
Illustration One
WAZOBIA Company ltd, based in Aba, is a manufacturer of shoes. The
following data relate to the company for the year ended 31 st December,
1992:
N
Sales
800,000
Raw materials purchased
95,000
Selling and Administrative Expenses
106,000
Direct Labor
92,000
Beginning Inventories:
Raw materials
25,000
Work-in-progress
34,000
Finished goods
41,000
Plant depreciation
112,000
Plant utilities
81,000
Indirect labor
8,800
Insurance (plant)
7,200
Plant maintenance
5,500
Ending inventories:
Raw materials
24,000
Work-in-progress
18,000
Finished goods
51,000
Required: Prepare cost of goods manufactured statement and an income
statement for the year ended 31/12/90.
87
BHM112
SOLUTION
WAZOBIA
Manufacturing, Trading, Profit and Loss Accountfor the year ended for the
yearended31/12/90
Opening stock (RM)
25,000
Cost of Production
418,500
95,000
Add purchases
Less Closing stock
Raw materials Consumed
Direct labour
Manufacturing Overhead:
Plant depreciation
Plant utilities
Plant insurance
Indirect labour
Plant maintenance
120,000
(24,000)
96,000
92,000
112,000
81,000
7,200
8,800
5,500
402,500
34,000
Add beginning W-I-P
436,500
Less Ending W-I-P
(18,000)
418,500
Cost of Production
41,000
Opening Stock
418,500
Add Cost of production
459,500
Less closing stock
(51,000)
408,500
Gross profit c/d
391,500
800,000
Selling
and
Admin. 106,000
285,500
Expenses
391,500
Net profit
Sales
418,500
800,000
Gross profit b/d
800,000
391,500
391,000
Illustration Two
CHAKAS Ltd, a Bompai-Kano based manufacturing company had the
following results for the year ended 31 st December, 1985.
88
BHM112
N
1,790,000
600,000
700,000
100,000
30,000
50,000
20,000
20,000
23,000
25,500
11,500
Sales
Purchases of raw materials
Direct labour
Depreciation of equipment
Heating and lighting
Local authority rates
Depreciation of buildings
Telephone
Other manufacturing overheads
Other administration expenses
Other selling expenses
Overhead costs to be appropriated are as follows:
Depreciation of equipment
L. A. Rates
Depreciation of Building
Heating and Lighting
Telephone
MANUFAC
80%
50%
50%
40%
-
ADMIN
5%
30%
35%
35%
40%
SELLING
15%
20%
15%
25%
60%
The values of stocks were as follows:
Raw materials
Work-in-progress
Finished goods
As at 1/1/95
50,000
40,000
160,000
As at 31/12/15
30,000
30,000
180,000
Required: prepare the manufacturing, trading, and profit and loss

account of Chakas Ltd for the year ended 31/12/1995.
SOLUTION
CHAKAS LTD
The apportionment of overhead costs is to be worked out first, as
follows:
MANUFAC ADMIN SELLING TOTAL
Dep. of Equip.
80,000
5,000
15,000
100,000
Heating and Lighting12,000
10,500
7,500
30,000
Local rates
25,000
15,000
10,000
50,000
Dep. of building
10,000
7,000
3,000
20,000
Telephone
8,000
12,000
20,000
127,000
45,500
47,500
220,000
89
BHM112
Manufacturing trading, profit and loss account for the year ended
31/12/1995
50,000
Cost of Production 1,480,000
Opening stock (RM)
600,000
Add purchases
Less Closing stock

Raw materials Consumed
Direct labour
Manufacturing Overheads
Additional Overheads
Add beginning W-I-P
Less Ending W-I-P
Cost of Production
Opening Stock
Add Cost of production
Less closing stock
Cost of goods sold
Gross profit c/d
Admin. Expenses
Additional admin. Exp.
Selling Expenses
Additional Selling Exp.
Net profit
90
650,000
(30,000)
620,
000
700,
000
127,000
23,000
150,
000
40,000
(30,000)
10,
000
1,480,
000
160,000
Sales
1,480,000
1,640,000
(180,000)
1,460,000
330,000
1,790,000
45,500
Gross profit b/d
25,500
71,000
47,500
11,500
59,000
200,0
00
330,0
00
1,480,000
1,790,000
1,790,000
330,000
330,000
BHM112
4.0
CONCLUSION
Businesses that manufacture goods for sale have to add costs of

production to cost of opening stock plus other relevant costs before
arriving at costs of sales. Manufacturing accounts are used to determine
the cost of production of a manufacturing business concern before
preparing its final accounts. This, therefore, means that the final
accounts of a forward integrated business or a manufacturing business
concern start from the level of manufacturing account. This Unit is
introduction to the expected accounting system of a manufacturing
business, including some aspects of cost accounting system to be put in
place.
5.0
SUMMARY
Manufacturing business concerns need to account for three

manufacturing cost elements to produce finished products during the
production process. These are:
1. Direct Materials: These are raw materials that are directly traceable
to the finished goods and, so, serving as integral parts of the finished
products. For example, the cotton used for making cloth is a direct
material.
2. Direct Labor: Compensations paid to employees whose efforts can
be traced to the finished product is classified as a direct labor cost.
For example, wages and salaries paid to maintenance people,
supervisors, etc.
3. Manufacturing Overhead: All manufacturing costs except direct
material cost and direct labor cost are included in the manufacturing
overhead costs. They are also called factory costs or factory burden.
These include such cost items as maintenance, utilities, insurance,
depreciation, glue, bolts, etc.
This Unit discusses the accounting treatments of all the above, including
cost of work in progress, as a manufacturing business make effort to be
prudent, accountable and transparent.
6.0
1.
Write an article suitable for publication in an accountancy journal on
the topic: The Necessity of Manufacturing Account for a
Manufacturing Business.
2. Write Short Notes on the Following concepts:
91
BHM112
i)
ii)
iii)
Direct Labour
Overhead Cost
Work in Progress
3. Discuss five reasons why cost information is needed in a

manufacturing business.
4. Kandoki Plc is a manufacturing company which specializes in the
making of ceramics products. The following balances were
extracted from the books of the company for the manufacturing
period March ending 30th, 1999.
Stocks 1st April, 1999:
Raw materials
Finished goods
Work in Progress
Factory wages
Purchase of Raw Materials
Plant & Machinery
Repairs of plant and Machineries
Factory Insurance
Supervisors fees
Factory light & heating
Office Rent
General expenses
Discount received
Factory rent
Buildings
Factory repairs
Repairs to Buildings
Indirect Manufacturing Expenses
Stationeries
Stocks 1st April
Finished Goods
Raw Materials
Work In Progress
18,770
16,426
22,138
18,700
148,720
726,114
580,000
18,700
28,780
48,620
16,780
22,100
14,780
8,200
17,380
250,000
8,700
20,000
18,700
6,400
25,000
42,300
You are informed that:

(i)
Manufacturing wages accrued amounted to =N=17,840
(ii)
Plant and Machinery is to be depreciated using the reducing

balance method. It is in its third year of use and has 2 more years
to go.
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BHM112
(iii)
(iv)
Goods manufactured are transferred to the trading account at cost

but the company maintains a uniform Gross Profit margin of 20%
on its sales.
10% of the Building running costs are to be charged to the
Manufacturing Account.
Required:
(a)
Manufacturing Account showing:
(i)
(ii)
(iii)
(iv)
Raw Materials consumed

Prime cost
Total Factory Overhead Expenses
Cost of Production
(b)
Trading Account showing:
(i)
(ii)
(iii)
Cost of Goods sold

Gross Profit
Sales
5. Bulawa and sons is a big manufacturing company based in Makurdi,
Nigeria. The following is the Balance of the business as at 31 st

December, 1994:
=N=
Cash
20,200
Accounts Receivables
Inventories: Finished Goods
Work-in-progress
19,000
Raw Materials
35,000
Manufacturing Equipment
62,000
Accumulated Depreciation-Equipment
Accounts Payable
Common Stock (10 per stock)
Retained Earnings
Sales
Raw materials purchased
93,900
Freights in
1,100
Direct Labour
250,000
Manufacturing Rent
17,500
Manufacturing Insurance
10,250
Depreciation Manufacturing
5,000
=N=
71,250
95,000
12,500
22,000
25,000
217,650
629,500
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BHM112
Sales Salaries
Advertising expenses
Administrative salaries
Other Administrative expenses
Finished Goods Purchases
57,500
10,500
70,000
20,300
68,150
--------906,600
=====
--------906,600
======
The ending inventories as on 31st December, 1994 were determined as:
Finished Goods
Work-in-Progress
Raw materials
=N=
98,000
21,600
40,000
Required: Prepare the Manufacturing Trade and Profit and Loss

Account for the year ended 31st December, 1994 and Balance Sheet as at
that date.
Dandago, K. I. (2002). Financial Accounting Simplified. (2nd ed.).KanoNigeria: Adamu Joji Publishers Ltd.
Igben, R.O (1999). Financial Accounting Made Simple, Volume 1,
Lagos-Nigeria: ROI Publishers Ltd.
94
BHM112
UNIT 5
STOCK VALUATION METHODS
CONTENT
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Stock Valuation Methods
3.2 Types of Stock Taking
3.3 Valuation Methods
3.4 SAS 4 Disclosure Requirements
3.5
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assessment
1.0
INTRODUCTION
Stocks (otherwise referred to as Inventories) are items of value held for

use or sale by an enterprise and usually comprise raw materials and
supplies used in production, work-in-progress and finished goods.
Depending on the nature of an enterprise, the value of stocks may be
substantial, surpassing or only second to that of property, plant and
equipment. Appropriate classification and accurate determination of the
quantity and cost of stocks are necessary for proper determination of the
result of the operations of an enterprise and for the presentation of
current assets in its balance sheet.
The use of several methods for valuing and reporting stocks gives rise to
wide differences in the results of the operations of enterprises in the
same line of business. Statement of Accounting Standard (SAS) 4 seeks
to narrow such differences by setting a standard for the valuation and
presentation of items of stock in the context of the historical cost
concept. It also deals with the valuation and presentation of items of
stocks including livestock and agricultural produce. It should be noted
95
BHM112
that SAS 4 does not deal with valuation under the replacement cost
accounting concept; inflation accounting concept; valuation of work-inprogress under long-term contracts; valuation of by-products and
valuation of forest products.
2.0
OBJECTIVES

define Stock and explain reasons why stock must be kept
know the several methods for valuing stock
know the recommended methods for valuing stock as described in
SAS 4
prepare store ledger card using FIFO, LIFO and Average Method
know the disclosure requirements on stock as stated in SAS 4
3.0
MAIN CONTENT
3.1
Stock Valuation Methods
3.1.1 Types of Stock Taking

Like cash, stock can be kept for three purpose; transactionary,
speculative and precautionary motives. Depending on the nature of
items in stock, an organization can choose appropriate type of stock
taking. Two systems of stock-taking are generally in use namely:(i)
Perpetual - under this system, up-to-date records are kept of

quantity and type of items of stock received, issued and on hand.
This system involves continuous physical count.
ii)
Periodic - under this system, records of quantity and type of

items of stock are up-dated periodically after physical count.

1. Describe three reasons for keeping stock.
2. Differentiate between perpetual and periodic system of keeping
stock.
3.2
96
Valuation Methods
BHM112
There is a number of factors to be considered in valuing materials issued

for use in the store. Where purchase price are constant over a long
period and there is no variation in quantities purchased, to any extent,
there would be little difficulty. But in practice, prices fluctuate due to a
number of reasons: due to inflation; changes in the world commodity
prices; buying from different sources; differences in quantity discounts;
etc. it is clear that there may be a number of identical materials in the
store bought at different prices. When one of these materials is issued, it
is necessary to determine the price at which it should be charged.
The following valuation methods facilities the determination of both the
quantity and the value of items of stock:i.
Specific Identification: Under this method, items of stock

specifically identified by particular attributes are assigned their
values.
ii.
Average: Under this method, the closing stock is assigned a

value determined by a weighted average of the cost of opening
stock and all acquisitions during the period. Calculation may be
made on a continuous basis after each acquisition or at fixed
intervals.
iii.
First In, First Out (FIFO): This is a method of computing the

value of closing stock based on the assumption that the first items
in stock or acquired are the first ones used in production or
consumed.
iv.
Last In, first out (LIFO): This is a method of computing the

value of closing stock based on the assumption that the last items
purchased are the first issued or consumed.
v.
Standard Cost: This is a method of computing the value of

closing stock based on a predetermined cost. For this method to
reflect the actual cost, a system of allocation of variances as well
as review of the standard cost must be in constant use.
vi.
Base Stock: Under this method, a minimum level of stock,

carried at the historical cost of acquisition, is held at all times.
However, any additions to or excesses over the base stock are
carried at different bases such as FIFO, LIFO, etc.
vii.
Latest Purchase Price: Under this method, the value of closing

stock is determined by applying the cost of the latest item
purchased to the number of items on hand.
97
BHM112
viii.
Adjusted selling price (retail inventory method): It is a method

of determining the value of closing stock in which the historical
cost of stock is estimated by applying the gross profit margin to
the retail value of items or groups of items in stock. The amount
so determined is then deducted from the retail price to arrive at
the value of the stock.
The selection of each of these methods is usually guided by the principle

of matching of costs with revenue. The LIFO, latest purchase price and
the base stock methods of valuation do not always adequately match
costs with revenue because the value of stocks reported in the balance
sheet is either overstated or understated, and the profit for the period is
similarly distorted. In arriving at the values of stocks, a reporting
enterprise should state its accounting policies with respect to these
items. Generally, stocks should be valued at the lower of cost or net
realizable value.
In determining the cost of stocks under the historical cost concept, one
or more of the following valuation methods should be used where
appropriate:
a)
b)
c)
d)
e)
First In, First Out

Average Cost, where it consistently approximates historical cost
Specific Identification
Standard Cost with the adjustment of cost variances described in
paragraph 15(v) which brings it close to actual cost
The Adjusted Selling price Method where bulk purchases are
made in which the costs of individual items are not readily
ascertainable.
The following stock valuation methods should not be used:-
a)
b)
c)
Latest Purchase Price

Last In, First Out
Base Stock

1. Enumerate seven methods of stock valuation and discuss any two of
them.
2. Attempt an explanation as to why any two of the listed methods are
not to be used.
3.3 SAS 4 Disclosure Requirements
98
BHM112
1.
2.
3.
Where differing methods of valuation have been adopted for

different types of stocks, the amount included in the Financial
Statements and the methods used in respect of each type should
be stated in the notes to the accounts.
Enterprises should classify, in a manner appropriate to their
businesses, items of stocks so as to indicate the amounts held in
each category, for example, raw materials, work-in-progress,
finished goods. Spare parts and stores.
If there is any change in the basis of stock valuation from the one
used in the previous period, the change should be disclosed in
accordance with the provisions of SAS I.
In this Unit, emphasis would be placed on FIFO, LIFO, Moving average

and Weighted average.
1. What is your understanding about the provision of SAS 4?
2. SAS1 is about disclosure of accounting policies. How is it related to
SAS 4?
3.4
ABC Ltd presents the following data obtained from its stock record:
1/1/ opening stock
1/5/ purchases
1/10/ purchases
Issues
10/2/ sales
30/6/ sales
31/10/ sales
1000 units @ N 3/units

800 units @ N3.12/units
1000 units @ N3.26/units
600 units
700 units
800 units
Required: Prepare Store ledger card using FIFO, LIFO moving

Average and weighted average.
SOLUTION
STORE LEDGER CARD (FIFO
METHOD)
RECIEPT
ISSUE
BALANCE
Date
Quantity Price Amount Quantity Price Amount Quantity
Amount
N:K N:K
N:K N:K
N:K
1-Jan
1,000
3,000
10-Feb
600
3
1,800
400
1,200
1-May
800 3.12
2496
1,200
3698
i)
99
BHM112
30-Jun
1-Oct
31-Oct
1,000
3.26
700*
2136
800**
2538
500
1,500
700
3260
*400 x 3 = 1,200
*300 x 3.12 = 936
2,136
** 500 x 3.12 =1,560

** 300 x 3.26 = 978
2,538
STORE LEDGER CARD (LIFO

METHOD)
ii)
Date
RECIEPT
Quantity
Price
N:K
Amount
N:K
1-Jan
10-Feb
1-May
30-Jun
800
1-Oct
31-Oct
1,000
3.12
ISSUE
Quantity
Price
N:K
Amount
N:K
600
1,800
1,000
400
Amount
N:K
3,000
1,200
700
3.12
2,814
1,200
500
3,696
1,512
2,608
1,500
700
4,772
2,164
2496
3.26
3260
800
3.26
STORE LEDGER CARD (MOVING

AVERAGE)
iii)
RECIEPT
Quantity
Date
Price
Amount
N:K
N:K
ISSUE
Quantity
Price
Amount
N:K
N:K
1-Jan
1-May
600
800
3.12
2496
1,000
3.26
3260
30-Jun
1-Oct
BALANCE
Quantity
1,000
10-Feb
700
31-Oct
iv)
BALANCE
Quantity
800
3
3.08
3.2
1,800
2,156
2,560
Price
Amount
N:K
N:K
3
400
1,200
1,200
3.08
3,698
500
3.08
1,540
1,500
3.2
4,800
700
3.2
2,240
WEIGHTED AVERAGE METHOD
Material available 1,000 + 800 + 1,000 = 2,800

Total cost = N( 3,000 + 2,496 +3,260) = 8,756
Quantity sold/issued = 600 + 700 + 800 = 2,100
Closing stock =2,800 2,100 = 700 units
Value of closing stock = 8,756/2,800 x 700 = 2,189
Note. From the above, the closing stock using LIFO Method is the
lowest which is mostly the case in rising price period.
4.0
10
0
CONCLUSION
3,000
BHM112
Stock constitutes one of the most important items of most business

organizations, especially manufacturing organizations. Closing stock
value is deducted from the cost of goods available in order to arrive at
the gross profit; accurate valuation of stock influences the profit level as
higher closing stock value gives higher gross profit, net profit and
current asset. Thus, appropriate and accurate stock valuation is
necessary in presentation of financial statements. This Unit addresses
this issue in a modest way.
5.0
SUMMARY
The Unit gives highlights on the meaning of stock, purpose, types of

stock taking, pricing methods, recommended methods of stock valuation
and the disclosure requirements as stated by the Statement of
Accounting Standard (SAS) 4 issued by the Nigerian Accounting
Standards Board (NASB) in 1986. Four popular methods of valuing
stock (FIFO, LIFO, Moving Average and Weighted Average) are also
demonstrated to enable readers appreciate how those methods work in
the determination of closing stocks values.
6.0
TUTOR-MARKED ASSESSMENT
1.
From the following information you are required to determine the

closing stock as at 30 th April, 1993, as you prepare store ledger
card using:
(i)
(ii)
(iii)
(iv)
FIFO Method
LIFO Method
Moving Average Method
Weighted Average Method
1993
Jan 1
Feb 4
April 21
purchases
2000 units @ N100 each
1500 units @ N125 each
3000 units @ N 150 each
Issues were made from the stores as follows:

Jan 10
Feb 15
March 30
April 30
2.
800 units
1000 units
600 units
200 units
For the six months ended 30 th June 2006, Ramat Ltd that buys a
particular product from Kano and sells to customers in Dutse has
101
BHM112
the following transactions in its records. There was an opening

balance of 500 units valued at N70 each.
Date
Jan
March
May
Quantity Bought (units)

500
450
750
Cost per unit

N74
N77
N79
Date
Feb
April
June
Quantity Sold (units)

700
500
800
Price per unit

N100
N110
N115
Required:
(v)
Record the above transaction on a stores ledger card using each

of the following methods
(a) LIFO (b) FIFO (C) moving average
Without preparing any trading account for the period state by
how much net profit under LIFO will be different from that of
FIFO.
(vii)
Determine the costs of goods sold during the period using period
weighted average and indicate, very briefly, why the closing
stock under periodic weighted average is different from that of
moving average closing stock.
(viii) Determine the gross profit for the period using moving average
method.
(vi)
3)
4)
5)
10
2
If purchase prices were to remain stable. FIFO, LIFO and moving

average methods of determining inventories and cash flows
would produce the same results. Discuss
To what extent can one claim that a firm that uses perpetual
inventory method does not need any annual stock- taking.
A company has opening stock of 10 units at N20 each. Purchases
during a year were made up of 100 units valued at N2, 300. Units
sold during the year amounted to 75 units. A manager just back
from a course accounting for stock valuation came up with the
idea that using moving average, the cost of goods sold during the
same period is 1,705 (to the nearest naira). Do you agree with
him? Explain why.
BHM112
7.0
Dandago, K.I. and Tijjani, B. (2005). Cost and Management

Accounting, (2nd ed.). Kano: Gidan Dabino Publishers Ltd.
Drury, C. (2000). Management and Cost Accounting (5th ed.). London:
Thomson Learning.
Standard (SAS) 4.
103
BHM112
MODULE 3
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Branch Accounts
Departmental Accounts
Hire-Purchase Accounts and Installmental Payments
Sales and Purchases of Business (Business Combination)
Introduction to Financial Ratios Analysis
UNIT 1
BRANCH ACCOUNTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Branch Accounting System

3.1.1 Divisions of Branch Accounting
3.1.2 Where the Head Office Keeps the Accounts
3.1.3 Pricing Method
3.1.3.1 At Cost Price
3.1.3.2 At Selling Price Method
3.1.3.3 At Cost Plus a Percentage
3.1.4 Accounting Entries
3.1.4.1 Sending Goods at Cost Price
3.1.4.2 Sending Goods at selling price
3.1.5 Double Column Method or Memorandum Method
3.1.6 Branch Adjustment Accounting Method
3.2
Where the Branches Keeps Separate Accounts
3.3
4.0 Conclusion
5.0 Summary
1.0
INTRODUCTION
A branch can be defined as a small part of the business operating with

some degree of independence. A company may have the head office in
10
4
BHM112
Lagos with branches in different part of the country, for example: Kano,
Abuja, Enugu, Ibadan, etc branches.
Branch accounts take into consideration the entries of transactions in the
books of an organization with different branches. Since the goods are
brought by the head office and sent to the branches, there must be proper
accountability. The system of accounting to be employed will depend on
the nature of trade, location and degree of control exercise by the head
office. The head office must be duly furnished with the transactions of
the business through the presentation of financial results.
This Unit concentrates on accounting treatments of the transactions
involving companies with local branches only. The local branches are
expected to be keeping proper records of all their transactions with
different parties, not only with the head office. Some companies even
request their local branches to be preparing financial statements which
are to be sent to the head office for absorption. But basically, branches
have to regularly communicate with the head office in respect of sales of
goods, related expenses, etc.
2.0
OBJECTIVES

appreciate the meaning of branch account
explain the pricing method involving local branches
appreciate instances where head office keeps the accounts and where
the branches keep separate accounts
understand the accounting treatment of transactions involving local
branch
3.0
MAIN CONTENT
3.1
Branch Accounting System
3.1.1 Divisions of Branch Accounting

Branch accounting can be divided into two different types namely:
a)
b)
Where the Head Office keeps the accounts

Where the Branches keep separate accounts.
3.1.2 Where the Head Office Keeps the Accounts

The purpose behind the accounts is not merely to record transactions so
that changes in assets, liabilities or capital can be calculated but also to
105
BHM112
attempt, wherever possible, to keep a check by remote control as to

whether or not the firm is being defrauded of goods or cash. For a firm
with different branches this is obviously of utmost importance.
The head office does all the buying and the branch simply does the
selling. Here the accounting for the branches is done by the head office.
This is common in large-retail chain store. The branches will receive
goods from the head office at selling price and the branches, as a matter
of necessity, must produce the stock or cash to cover the value of goods
received. The branch manager should be mandated to forward to head
office at weekly or other intervals giving details of goods received and
return to head office, cash and credit sales, cash received from debtors,
expenses, stock, debtors and cash at the end of the period.
3.1.3 Pricing Method

There are three different pricing methods which are used for charging
goods to branches: (i) at cost price; (ii) at cost plus a percentage; and
(iii) at selling price.
3.1.3.1 At Cost Price

The head office can charge goods out to branches at cost price. This
method is good when the goods are of perishable nature or there are
difficulties in determining the selling price. The exact result of operation
can be ascertained when the cost price is used. It is disadvantageous
because the check imposed by selling price system is not available.
3.1.3.2 At Selling Price Method

Goods can also be charged to the branch at selling price. The price will
be fixed by the head office. The method is usually adopted when the
goods are sold at specific price, for example proprietary articles. This
method is not good for perishable goods. The advantage is that the head
office can keep an effective check on the stock issued to the branch.
3.1.3.3 At Cost Plus a Percentage

This is the most effective method of charging goods to the branch.
Under this pricing method, the goods will be charged to the branches at
cost plus a fixed percentage. This method can provide a reasonably
reliable check upon the cash and stock at the branch and the gross profit
will be disclosed by the accounts. The branch stock account, goods sent
to branch account and branch stock adjustments accounts will be
maintained.
10
6
BHM112
3.1.4 Accounting Entries

Two methods of accounting can be used:
1.
2.
Double column method otherwise called memorandum column

Branch adjustment method
3.1.4.1 Sending Goods at Cost Price

When a company sends goods to its branch (es) for sales using the cost
price method, the accounts to be affected in the head office books and
the accounting entries to be made therein are as follows:
i)
Opening stock:
Dr Branch Account at cost price
ii)
Goods sent to Branch:

Dr Branch Account
Cr Goods to Branch A/c- at cost price.
iii)
Sales (credit or cash) by Branch: Dr cash/Debtors Account

Cr Branch Account, at selling price
iv)
Return of goods unsold by Branch:

Account
Cr branch Account- at cost price.
v)
Return of goods by customer

Dr Branch Account
Cr Debtors Account- at selling price or with the value of returns
vi)
Any allowance by Head office (e.g) Dr Profit and Loss Account

on discount, damages while in transit
Cr Branch Account- with the amount or cash stolen
allowed
vii)
Closing stock:
Cr Branch Account
(Balance c/d)- at cost price
viii)
Goods stolen:
Dr Profit and Loss Account
Cr Branch Account- with the value
Dr
Goods
to
Branch
3.1.4.2 Sending Goods at Selling Price

Using the selling price method, the following entries are to be made in
the relevant accounts:
1)
Opening stock:
Dr Branch Account- at selling price

Cr Branch Adjustment Account-with
the Mark-up
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BHM112
2)
Goods sent to Branch:
Dr Branch account- at selling Price

Cr goods to Branch Account-at Cost
price
Cr Branch adjustment Account- with
the Mark up
3)
Sales by Branch:
Dr Cash or Debtor Account

Cr Branch Account- at selling price
4)
Return by branch:
Dr goods to branch Account-at cost

price
Dr Branch Adjustment Account-with
the Mark-up
Cr Branch Account-at selling price
5)
Return by customer:
Dr Branch Account
Cr Debtors Account-at selling price
6)
Any allowance by the Head office: Dr Branch Adjustment

Account
Cr Branch Account-with the value
7)
Closing stock:
Dr Branch Adjustment Account-with

the Mark up
Cr Branch Account (Bal. c/d)-at
Selling Price
8)
Stock Surplus
Dr Branch account
Cr Branch Adjustment Account- with
the Value
9)
Stock Deficit:
Dr Stock Adjustment Account

10)
Goods stolen:
Dr Branch Adjustment Account

11)
Transfer between Branches: i. Dr Receiving Branch Account

Cr Giving Branch Account- at
selling price
ii. Dr Branch Adjustment Account of
Giving Branch
Cr Branch Adjustment account of
Receiving Branch-with the markup
10
8
BHM112
3.1.5 Double Column Method or Memorandum Method

Under this system, there is no need to prepare separate branch stock
account and branch adjustments account. The two accounts can be
combined into memorandum or double column account. The branch
stock account will be ruled with two columns. One column records
transaction at cost and the other column at invoiced price. The entries in
the invoice price form no part of the double entry, but are memoranda
just for checking of stock. The following accounts are prepared:
a.
b.
c.
Branch stock accounts with double column

Goods sent to branch account
Profit and loss account
3.1.6 Branch Adjustment Account Method

The fully integrated system introduces the idea that gross profit earned
by a firm can be calculated to profit margins. Goods sent to the branch
are shown at cost price in an account for that purpose, while the Branch
Stock Account is shown at selling price. To show one entry at selling
price and the other at cost would mean that debit amounts would not
equal credit amounts, thus violating double entry principles. To rectify
this Branch Adjustment Account is opened and the profit loading on the
goods is recorded to preserve the quality of amounts of debit and credit
entries. The Branch Stock Account by being entirely concerned with the
selling prices acts as a control upon stock deficiencies, while the
Branches Adjustment Accounts shows the amount of gross profit earned
during the period.
1. Discuss any two pricing methods to be used where the Head Office
keeps the accounts of its transactions with the branch.
2. Highlight the entries to be made where the head office send the
goods to the branch at selling price.
3.2
Where the Branches Keep Separate Accounts
It is sometimes convenient that a branch should do its own accounting.

The reasons may be the branch is situated far from the headquarters: the
nature of the activities of the branch or that the size of the branch is such
that it is economical for it to prepare its own accounts.
A branch cannot operate on its own without funds, as it is the parent
firm that provides these in the first instance. The firm will want to know
how much money it has invested in each branch and from this the idea
109
BHM112
of Branch and Head Office Current Accounts would come up! The
relationship between the branch and the head office is seen as that of a
debtor/creditor identity. The current accounts are Media where the
branch is shown as debtor in the head office records, while the head
office is shown as a creditor in the branch records. This is purely for
expediency, because as the branch and the head office both belong to the
same firm it is apparent that a firm cannot owe money to itself.
The current accounts are used for those transactions that are concerned
with supplying resources to the branch or in retrieving resources from
there. For such transactions full double entry records are needed both in
the branch records and also in the head office records, i.e. each item will
be recorded twice in each set of records. Some transactions will,
however, concern the branch only, and these will merely need two
entries in the branch records and none in the head office records.
1.
Give any three reasons why a branch should be encouraged to

operate its separate accounting system.
2. Why should a branch be treated as a debtor to its head office?
3.3
Illustration One
MAI Enterprises operates a head office in Lagos and a branch in Ibadan.
All goods are purchased by the head office and sent to Ibadan at cost
plus 25%.
The following information were given for the year ended 31st December,
2008
N
Goods sent to branch at cost
50,000
Sales on credit
35,000
Return to head office at cost
500
Cash takings remitted to head office
10,000
Stock at close at cost price
12,500
Cash takings stolen
150
Sundry expenses paid out of takings
950
Goods stolen at cost
40
Allowances off selling price
100
a. Branch account in the head office books including other necessary
accounts.
b. The profit and loss account for the year ended 31st December, 2008.
11
0
BHM112
SOLUTION
The system of accounting the head office uses is the memorandum
column method.
Step1. Calculate the selling price (invoiced price) using the mark-up of
25% on cost
Selling price of goods sent to branch:
Profit = Mark-up x Cost price
Profit = 25/100 x 150,000 = N12,500
Selling price = Cost price + Profit
N50,000 + 12,500 =N62,500
Selling price of returns to head office:
Mark-up x Cost price
=25/100 x500 = 125
=N500 + N125 = 625
Selling price of stock to close:
=25/100 x 12,500 = N3,125
=N12,500 + N3,125 =N15,625
Selling price of goods:
=25/100 x40 =N10
= N40 + 10 = N50
Step II. Prepare the branch stock account using memorandum column
Goods sent
branch
Gross Profit
Memorandum Branch Account

Invoice Cost
price
price
N
N
to
Return to head
62,500 50,000 office
9,140 Credit sales
Cash remitted to
H/)
Cash taken stolen
Sundry expenses
Invoice Cost
price
price
N
N
625
35,000
500
35,000
10,000
150
950
10,000
150
950
111
BHM112
Goods stolen
50
Allow off selling
price
100
Stock at close
15,625
62,500 59,140
62,500
Goods sent to branch Account (cost price)
N
Return to head office
Branch stock account
Transfer to H/O trading A/c
50,000
49,500
50,000
40
12,500
59,140
N
500
50,000
Profit and Loss Account

Sundry expenses
Cash stolen
Goods stolen at cost
Net profit
950 Gross Profit

150
40
8,000
9,140
9,140
9,140
Illustration Two
Kudi Emphasis limited has a head office in Onitsha and a branch in Jos,
where all sales are on credit basis. All goods are purchased by the Head
Office and invoiced to branch at cost price plus 33 1/3 %.
For the year ended 31/12/2007, the following information is available
N
Goods sent to Jos branch (at cost to Head Office)
262,500
Sales as shown by branch reports
368,000
Goods return to Head office (at invoiced price to branch) 12,000
Cash received from branch debtors and banked for credit
of head office account in Jos
315,000
Discount allowed to branch debtors
8,590
Debtors balances at branch written off
3,390
Branch Debtors on 31/12/2006
13,890
Stock of goods 31/12/2006 (at invoiced price to branch)
70,000
Stock of goods 31/12/2007 (at invoiced price to branch)
84,000
Required
11
2
BHM112
Show the appropriate accounts in the books of the head Office, showing
the branch gross profit for the year ended 31/12/2007. Use both cost
price and selling price methods.
SOLUTION
i)
Selling Price method

Kudi Emphasis Limited
Jos Branch Account
Opening Stock
Goods to Branch
Stock Surplus
Balance b/d
N
70,000 Sales
350,000
Goods Returned
44,000
Balance c/d
464,000
84,000
N
368,000
12,000
84,000
464,000
Goods to Jos Branch Account
Jos Branch (Returns)

Purchases or C.O.P
N
9,000
253,500
262,500
Jos Branch
N
262,500
262,500
Branch Adjustment Account

N
Jos Branch (returns)
3,000
Balance c/d (mark-up) 21,000
Gross profit
125,000
149,000
Jos Branch (Mark-up)

Opening Stock
Stock surplus
Balance b/d
N
87,500
17,500
44,000
149,000
21,000
Debtors Account
Balance b/d
Sales
N
13,890
368,000
381,890
Cash
Discount
Bad debts
Balance c/d
N
315,000
8,590
3,390
54,910
381,890
113
BHM112
Balance c/d
ii)
54,910
Cost Price Method

Jos branch Account
Opening stock
Goods to branch
Gross profit
Balance b/d
N
52,500
262,500
125,000
440,000
63,000
N
Sales
368,000
Goods returned
9,000
Balance c/d 63,000
440,000
Goods to Jos Branch Account

N
Jos Branch (Returns) 9,000
Purchase or (C.O.P) 253,500
262,500
Jos Branch
N
262,500
262,500
Debtors Account
Balance b/d
Sales
N
13,890
368,000
Balance c/d
381,890
54,910
Cash
Discount
Bad debts
Balance c/d
N
315,000
8,590
3,390
54,910
381,890
Notes:
1.
The cost price for opening and closing stocks, and goods returned
to Head Office were arrived at by dividing the figures by 133
1/3%. Cost price of opening stock for example:
N70,000 = N52,500
1.3333333
2.
11
4
The invoice price (selling price) of goods sent to Jos Branch was
arrived at by adding the cost price to 33 1/3% of the cost price.
BHM112
N350, 000 = N262, 500 + 0.3333333 x N262,500

=N262, 500 + N87,500
3.
Cash discount and bad debts accounts were not shown simply
because they are not very appropriate to branch accounting, as
they are not restricted to it, and it is assumed that the
corresponding accounts have been suggested by the first entries
shown in Debtors accounts.
4.
The gross profit determined from the Branch Accounting will go

to the credit of the Head Office Profit and Loss Account: the
purchase or Cost of production figure may form part of the total
purchases of the company; the closing stock on the Branch
account will be added to the other closing stock of the company
and appear as an additional information to its trial balance: the
branch Debtors balance will form part of the total debtors of the
company and the sales made by the Branch may be added to the
companys total sales.
5.
Branch Accounting is a good instrument of testing the

performance of Branch(es) in order to take decision as to whether
to continue with the Branch(es) or not. Any branch that s not
assisting towards the achievement of the objective(s) of the
company should be closed down.
Illustration Three
The following transactions were recorded between JB enterprises of Port
Harcourt and its branch at Maiduguri up to December, 2005:
a) Goods sent by head office to branch N60,000 of this amount, goods
to the value of N4,000 had not been received by the year end
b) A sum of N15,000 had been remitted at the opening of the branch on
1/1/2005 to provide imprest
c) Cash to the amount of N42,000 had been remitted by the branch to
the head office but N3,000 of this had not been received by 31st
December, 2005
d) Goods returned during the year from branch to head office
amounting to N2,500
i)
ii)
Maiduguri branch account in the books of the head office

Head office current account in the books of Maiduguri account
115
BHM112
SOLUTION
Head office book
Maiduguri Branch Current Account
N
Cash
15,000
Returns
Goods sent
60,000
Cash
Cash in transit
Goods in transit
Balance c/d
75,000
Balance b/d
26,500
N
2,500
39,000
3,000
4,000
26,500
75,000
Note1: Cash N39, 000 (42,000 3,000)
ii)
Maiduguri Branch Books
Head Office Current Account
Cash
Returns
Balance c/d
N
42,000
2,500
26,500
71,000
Cash
Goods received
N
15,000
56,000
71,000
Note: In the branch book, the value of goods received is N56, 000
because N4, 000 worth of goods are still in transit.
4.0
CONCLUSION
Growth and development is one of the objectives that almost all

businesses in the world are out to achieve. As businesses expand and
grow the need to keep proper record and track of transactions becomes
necessary; branch account helps in achieving such objective. The need
to have the knowledge of branch accounting is justified by the provision
of information relating to the businesses with branches which ultimately
assist in the preparation of financial statements of those entities. The
book keepers and accountants of those entities should demonstrate
adequate practical knowledge of branch accounting system and
procedures.
11
6
BHM112
5.0
SUMMARY
In this Unit, readers have been taken through the meaning of branch
accounting, emphasizing on local branch where transactions take place
within the same country. The divisions of branch accounting and the
pricing methods are also highlighted to enable the reader understand
branch accounting system and how to prepare branch accounts for
proper records keeping and financial statements preparation for
businesses that have local branches.
6.0
1.
Sauki Limited opens a new branch on January 1, 1997. All goods

are supplied by the Head Office, and the branch remits all cash
received, after deductions forwages and petty expenses, to head
office. Goods are invoiced to branches at cost.
The following are the transactions relating to the new branch in January:
Goods sent to branch

Cash sales
Credit sales
Branch stock 31/1/97
Cash received on account of credit sales
Discount
Sundry Expenses (paid by branch)
Branch rent (paid by Head Office)
Wages (paid by the branch)
N
50,000
40,000
20,000
10,000
14,000
500
100
400
3,300
Required: Prepare relevant accounts in the Head office books.

2)
3)
4)
5)
What is branch account? How are branch accounts divided?

What differences are there in the book-keeping systems where
branches keep their own books and where head office take care of
the records keeping?
What purpose does branch adjustment account serve?
Dadi Limited is a Lagos based company with a branch at Yola.
Goods are sold by the branch on both cash and credit sales. All
goods are, however, purchased by the head-office and sent to
Branch at cost plus 25%.
For the year ended 31/12/2000, the following information is made

available:
N
Goods sent to Yola (at cost of Head office)
721,000
117
BHM112
Sales by Branch (cash)

2,000,000
Goods returned to Head office (invoice price)
120,000
Credit sales by Branch
550,000
Cash received from Debtor
450,000
Discount allowed to Branch debtors
25,000
Bad debt written off
15,000
Stocks (at invoice price)
1:1:2000
145,000
31:12:2000
200,000
Required: Record the above in the books of Dadi limited using:
a) Cost price method
b) Sales price method
7.0
Aborode, R. (2004). A Practical Approach to Advanced Financial

Accounting. Lagos: El-Toda Ventures.
Dandago, K.I. (2001). Financial Accounting Simplified (2nd ed.). Kano:
Jennings, A. R. (1993). Financial Accounting. London: DP Publications.
Gee, P. (1988). Spicers & Peglers Book Keeping and Accounts.
London-Great Britain: Butterworth & Co Publishers.
Igben, R. O. (2004), Financial Accounting Made Simple (1st ed.).
Lagos: ROI Publishers Ltd.
Wood, F. and Omuya, J. (1983). Business Accounting 2, West African
Edition. Lagos: Longman Group Limited.
11
8
BHM112
UNIT 2
DEPARTMENTAL ACCOUNTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Departmental Accounting System
3.1.1 The Concept of Departmental Accounting
3.2 Advantages of Departmental Accounts
3.3 Principles of Departmental Accounting
3.4 Illustrative Examples
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assessment
1.0
INTRODUCTION
Big businesses, more especially those in the distributive activities,

usually departmentalize themselves for efficiency and effectiveness of
operations. Some may divide themselves into units known as
subsidiaries or just branches. This Unit discusses the concept,
advantages and principles of departmental accounting.
2.0
OBJECTIVES

appreciate what Departmental account is and its aim
explain the advantages of using departmental accounts
observe the principles of departmental account
prepare departmental accounts for incorporation into the final
accounts.
3.0
MAIN CONTENT
3.1
Departmental Accounting System
3.1.1 The Concept of Departmental Accounting
119
BHM112
Departmentalization enables big firms to determine clearly the areas

needing special attention for the achievement of overall objectives. The
units or departments needing more funds and more attention than others
and the one(s) contributing more toward goal attainment could be
identified with good departmentalization. The purpose is basically to
find out the performance and capability of the units or departments with
a view to making adjustments for the achievement of the firms
objectives.
Each unit, department or subsidiary is given the free usage of some of
the assets of the firm and some responsibilities which can be profit
making, revenue generation or cost control. As expenses are incurred by
the firm on behalf of all its departments, indirect expenses are to be
apportioned to the departments, if each department is to present
financial statement or if the statement is to be prepared by the company
on departmental basis.
Departmental accounting is about the preparation of final accounts
taking into consideration divisional performance before the overall
performance. With that system of accounting, companies that
departmentalize can easily reach conclusion as to their very well
performing units, averagely or moderately performing units.
Departmental accounting aims at separating the several activities of a
business in order to compare results and to assist the proprietors/owners
in formulating policies. For example, laundry, catering, can be
required to prepare their accounts separately to deal with each
department separately as departmental performance is evaluated.
1. What are do you understand by departmental account?
2. What are the principles and procedures of departmental accounting?
3.2
Advantages of Departmental Accounts
Some of the advantages of departmental accounts are:

1. The gross profit of each department can be ascertained.
2. Unprofitable departments will be revealed
3. The result of operations can be used to determine the remuneration
of managers of each department.
4. The progress of each department can be monitored for appropriate
actions to be taken.
12
0
BHM112
1. Discuss any three advantages of departmental accounts.

2. What is the main difference between departmental accounting and
branch accounting?
3.3
Principles of Departmental Accounting
Preparation of final accounts of a departmentalized business requires the

following:
(1)
that the gross profit or loss and the net profit or loss of each
department be determined separately before taking the total to the
appropriate account or the balance sheet of the business; and (2)
that there should be some bases of apportioning gains and
expenses to the departments or units of the business and that
should be done as fair and equitable as possible.
Sometimes control accounts have to be resorted to in order to determine

the creditors or debtors value to the business.
In any case, as the departmental values are shown, the total figures, for
the business as a whole are to be summed up.
Discuss the two main issues to be taken care of in preparing final
accounts of a departmentalized business.
2. Why should total figures still be shown after departmentalization?
1.
3.4
Illustration one
From the following Trial balance of ABG and sons prepare, in a two
sided form, Departmental Trading Profit and Loss Account for the year
ended 31st December, 2008, and Balance sheet as at that date.
Trial balance as at 31st December, 2008
N
Stock at 1st January, 2008
A Dept
B Dept
Purchases:
A Dept
B Dept
Sales: A Dept.
B Dept.
17,000
14,500
35,400
30,200
90,800
81,250
121
BHM112
Wages: A Dept.
B Dept.
Rent, Rate and Insurance
Sundry Expenses
Salaries
Discount Allowed
Discount Received
Advertising
Carriage Inwards
Plant and Machinery
Sundry Debtors
Sundry Creditors
A Capital
A Drawings
Cash at Bank
Cash in Hand
18,200
12,700
9,390
3,600
33,000
2,100
2,220
650
3,680
2,340
3,000
21,000
6,060
18,600
47,660
14,500
9,900
170
238,960
238,960
The following information is also provided by ABG and sons:

1. Internal transfer of goods from A Department to B Department,
N420
2. The items: Rent, Rates and Insurance: Sundry Expenses; Lighting
and Heating; Salaries and Carriage inwards to be apportioned 2/3 to
Department A and 1/3 to Department B
3. Advertising to be apportioned equally
4. Discount allowed and received are apportioned on the basis of
Departmental sales and purchases (excluding transfers)
5. Depreciation at 10 per cent per annum on Furniture and Fittings and
on plant and machinery to be charged to Department A and to B
Department
6. Services rendered by B Department to A Department included
wages, N500
7. The stock at 31st December,2008
Department A
Department B
N16, 740
N12, 050
There has been no addition to or sales of plant or furniture
12
2
BHM112
SOLUTION
ABG and Sons
Trading, Profit and Loss Account for the Year ended 31/12/2008
A
B
Total
A
B
N
N
N
N
N
Opening stock
17,000 14,500 31,500 Sales 90,800 81,250
Add: Purchases 35,400 30,200 65,600 transfers 420
500
Wages
18,200 12,700 30,900
Carriage Inwards 1,560
780
2,340
Transfers
500
420
920
72,660
58,600 131,260
Less closing
Stock
16,740
12,050
28,790
COGS
55,920
46,550
102,470
Gross Profit c/d35,300
35,200 70,500
91,220
81,750
172,970
91,220 81,750
R R & Insur. 6,260
3,130
9,390 GP b/d 35,300 35,200
Sundry Exp. 2,400
1,200
3,600Disc Rec 351
299
Salaries
22,000
11,000
33,000Net Loss 1,221 1,221
Lighting & H. 1,400
700
Disc.Allowed 1,172
1,048
2,220
Advertisement 1,840
1,840
3,680
Depreciation 1,800
600
2,400
Net Profit
15,981
15,981
36,872
35,499
72,371
36,872 35,499
Total
N
72,050
920
72,970
70,500
650
72,371
Note: the net profit of the business is the sum of N15,981 positive
profit from Dept B and n1,220 negative profit from Dept A Net Profit =
15,981-1,221=14,760. This suggests s that Dept B has performed better
during the year.
ABG and Sons
Balance sheet as at 31st December, 2008
N
Capital- A
7,660
Fixed Assets
Cost
Less: Drawings A 14,500
Acc Depr
NBV
N
33,160
Fixture & F
3,000
300
2,700
Add: Net Profit
14,760
Plant & Mach.21,000
2,100
18,900
Closing Capital
47,920
2,400
21,600
24,000
123
BHM112
Creditors
18,600
Current Assets:
Stock: A
16,740
12.050
28,790
Debtors
6,060
Bank
9,900
Cash
170
44,920
66,520
66,520
Workings
1. Item 2 in the additional information has been complied with as
follows:
Rent, Rent & Insurance (for example) = N9,390
Apportionment:
Dept A (2/3) =
N6,260
Dept B (1/3)=
N3,130
N9,390
2. Discount Allowed
Sales: A=90,800
B=81,250
172,050
Dept As Share
Dept Bs Share
2,220
= N90,800
172,050
X 2,220
= 1,172
= N81,250
172,050
X 2,220
= 1,048
2,220
3. Discount Received
Purchases:
= 650
A=
B=
Dept As Share=
Dept As Share
35,400
30,200
65,600
35,400
65,600
=
X 650 =
30,200 X 650=
65,600
N
351
299
650
12
4
BHM112
4. Depreciation:
F & Fitting 10% of 3,000=
P & Mach. 10% of 21,00=
Dept As Share= 3/4X2,400
Dept Bs Share= 1/4X2,400
5.
300
2,100
2,400
1,800
600
2,400
For the internal transfers, the giving Department is to be credited
and the receiving Department is to be debited with the value
transferred. Items 1 and 6 are about internal transfer.
Illustration Two
From the following balances of DBT Limited you are required to
prepare a departmental trading, profit and loss account for the year
ended 31st December, 2007
Sales: K Dept.
L Dept.
Stock at 1st January, 2007
K Dept
L Dept
Purchases:
K Dept
L Dept
Commission
General office salaries
Rates
Insurance
Lighting
Repairs
Internal telephone
Cleaning
Sundry expenses
Discount allowed
Discount received
Advertising
Stationery
Electricity
30,000
20,000
500
400
23,600
16,400
700
1,000
300
250
600
240
120
20
70
60
50
230
150
820
125
BHM112
Stock at 31st December, 2007

K Dept
600
L Dept
300
The total floor area occupied by each department was:
Department K (2/5)
Department L(3/5)
The following basis of apportionment should be used for the
departments. Commission, advertising, discount allowed- Proportionate
to sales
Discount received- proportionate to purchases
Cleaning, electricity, internal telephone, insurance- on the basis of total
floor rate
All other expenses should be apportioned equally between the
departments.
SOLUTION
DBT Limited
Trading, Profit and Loss Account for the Year ended 31/12/2007
K
opening stock
Purchases
less Closing Stock
gross Profit
Expenses
Commission (WK1)
General office
Salaries (WK 14)
Rates (WK 13)
Insurance (WK 7)
Lighting (WK 12)
Repairs (WK 11)
Internal telephone
(WK 6)
Cleaning (WK 4)
Sundry expenses(WK
10)
Advertising (WK 2)
12
6
L
Total
500
400
900 Sales
23,600 16400 40000
24,100 16,800 40900
600
300
900
23,500 16,500 40000
6,500 3,500 10000
30,000 20,000 50000
GP b/d
Discount
Received
420
280
700
500
150
100
300
120
500
150
150
300
120
1000
300
250
600
240
48
8
72
12
120
20
35
138
35
92
70
230
K
L
Total
30,000 20,000 50,000
30,000 20,000 50,000

6,500 3,500 10,000
30
20
50
BHM112
Discount allowed
(WK 3)
Stationery (WK 9)
Electricity (WK 5)
Net profit
36
75
328
4,272
6,530
24
60
75
150
492
820
1,218 5490
3,520 10050
Workings
1. Commission- Proportionate to sale
K
=
30,000X 700 =
50,000
L
=
20,000X 700 =
50,000
2. Advertising
K
3. Discount Allowed
K
=
L
3,520 10,050
N420
N280
30,000X 230 =
50,000
20,000X 230 =
50,000
N138
30,000X 60 =
50,000
20,000X 60 =
50,000
N36
N92
N24
Basis of Floor Area

4. Cleaning
K
=
2/5 X
20
= N8
L
=
3/5 X
20
= N12
5. Electricity
K
=
2/5 X
820 = N328
L
=
3/5 X
820 = N492
6. Internal Telephone
K
=
2/5 X
120 = N48
L
=
3/5 X
120 = N72
7. Insurance
K
=
2/5 X
250 = N100
L
=
3/5 X
250 = N150
8. Discount received: Proportionate to purchases
K
=
23,600X 50 =
N30
40,000
L
=
16,400X 50 =
N20
40,000
Equality basis:
9. Stationery
K
X
150 =
N75
L
X
150 =
N75
127
BHM112
10. Sundry expenses

K
11. Repairs
K
12.Lighting
K
13.Rates
K
14. General office salaries

K
4.0
X
X
70
70
=
=
N35
N35
X
X
240
240
=
=
N120
N120
X
X
600
600
=
=
N300
N300
X
X
300
300
=
=
N150
N150
X
X
1,000 =
1,000 =
N500
N500
CONCLUSION
Departmental account helps in knowing the performance of each

department by comparing results of the relevant departments/units
within a departmentalized company; this assists the proprietors/owners
to know which of the departments/units perform better than others and
also helps in deciding whether or not to continue operating some
departments by the company.
5.0
SUMMARY
In this Unit, students are sensitized on what departmental accounting

system is all about, highlighting its concept, advantages, and principles
and the procedures of departmental accounting. Departmental account
helps in performance evaluation particularly in organizations having
decentralized system.
6.0
1)
The following balances were extracted from the books of Jonah

enterprises for the year ended 31st December, 2000.
Sales:
Department A
Department B
Department C
Purchases:
Department A
Department B
Department C
12
8
N
52,000
68,000
30,000
30,000
45,000
25,000
150,000
150,000
BHM112
Insurance
Commission paid
Rent and rates
Delivery expenses
Administrative expenses
Discounts received
Salaries
Advertising
Depreciation
Opening stock:
Department A
Department B
Department C
Closing stock:
Department A
Department B
Department C
800
3,500
2,460
700
4,560
770
18,300
1,210
2,100
7,000
12,000
3,000
22,000
10,500
15,000
5,000
30,500
Additional information:
Expenses are to be apportioned on the following
a)
b)
c)
d)
Salaries, depreciation, rents and rates, administration expensesequally

Discount received- Purchases
Advertising, commission and delivery expenses- Sales
Insurance- ratio 5:3:2 to A, B and C respectively.
Required: You are required to prepare trading, profit and loss account
for the year ended 31st December, 2000.
2)
HAZ and Brothers commenced business 0n 01/01/2004 with:
Stock:
Department X
Department Y
Fixtures
Cash
The transactions for the year were:
Purchases:
Department X
Department Y
Receipt from debtors
Discount allowed to debtors
Payment to creditors
Cash sales:
Department X
Department Y
Credit sales:
Department X
Department Y
3,000
5,000
4,000
6,000
31,000
29,000
52,000
2,000
47,200
3,800
9,200
32,000
29,000
129
BHM112
General expenses:
Unallocated expenses
Drawings
Cash in hand
Selling expenses
Cartons, etc purchases
Creditors outstanding
Stock 31/12/04:
Department X
Department Y
Department X
Department Y
Cartons on hand 31/12/04
3,000
4,200
4,800
4,000
5,800
2,000
3,200
16,000
4,200
5,800
1,100
Unallocated general expenses are to be apportioned on the basis of floor

space occupied, which is in the ratio of 5:3. Selling expenses and
discounts are to be apportioned on the basis of cartons sold, that is X=
N60, 000, Y=N45,000
Required: Prepare:
i)
ii)
Departmental Trading, Profit and Loss account

Balance Sheet as at 31/12/04
3)
Explain what is meant by Departmental account, and justify the

need for the account.
Discuss, briefly, the advantages to be derived from a system of
departmental accounts in developing economies.
Are Departmental accounts adopted with a view to ascertaining
the gross or net profit of each department? Give reason(s) for
your answer.
4)
5)
7.0

Dandago, K.I. (2001). Financial Accounting Simplified (2 nd
ed). Kano:

Igben, R. O. (2004). Financial Accounting Made Simple (1 st ed.). .
13
0
BHM112

Edition Lagos: Longman Group Limited.
UNIT 3
HIRE PURCHASE ACCOUNTS AND

INSTALMENTAL PAYMENTS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0
4.0
5.0
6.0
7.0
Main Content
3.1
Accounting for Hire-Purchase Transactions
3.1.1 The Concept of Hire-Purchase and Payments under
the Arrangement
3.2
Accounting Treatment
3.3
Journal Entries for Hire-Purchase Transactions
3.3.1 Entries in the Book of the Hire Purchaser
3.3.2 Entries in the Books of the Vendor
3.4
Conclusion
Summary
1.0
INTRODUCTION
Transfer of goods or assets from the owner to a user lead to various

financial arrangements. The goods or assets can be transferred to the
user with the arrangement that he/she would be paying rental charges
monthly or annually and the ownership remains with the vendor. That is
hire arrangement. The goods or assets can be sold to the user (customer)
with the customer paying cash immediately. That is for cash sales (for
the owner) or cash purchases (for the customer). But where the sales of
the goods or assets to the customer is for other reasons than immediate
cash payments, various arrangements have to be considered for the
payment, which will definitely be in the future.
Payment can be made within an agreed period of time or by the
acceptance of bill of exchange after which the ownership would be
transferred. Secondly, the transaction may be under a credit sales
arrangement whereby the goods become the property of the customer
(buyer) immediately but payment for them takes place over a stipulated
period. To the customer, it is called credit purchases. Thirdly, the
payment can be subjected to Hire-purchase agreement.
131
BHM112
This Unit discusses accounting treatments of hire-purchase arrangement

and the payments that are to follow the various transactions under the
arrangement.
2.0
OBJECTIVES

understand what hire purchase is all about
appreciate the difference between hire purchase and credit sales
Observe the accounting treatment with respect to hire purchase
transactions
know how to treat installment payments.
3.0
MAIN CONTENT
3.1
Accounting for Hire-Purchase Transactions
3.1.1 The Concept of Hire-Purchase and Payments under the

Arrangement
When goods are bought under a hire purchase agreement, the legal title
to the goods does not pass to the purchaser until every installment has
been paid and a small amount, usually included in the last payment, is
paid which legally exercises an option to buy the goods. Thus to buy any
asset on hire purchase arrangement is legally to hire the goods until
certain time, when the option can be exercised to take over the legal title
to the goods. Normally the hire purchaser is not compelled to complete
the transaction. If he so wishes he may return the asset without making
any further installmental payment. He will, however, forfeit the right to
have any of his previous installments repaid to him. On default the seller
can reclaim the goods, subject to certain provisions of the Hire Purchase
Acts. The repossessed items taken back into stock are not new and have
to be revalued accordingly.
A variation of this procedure is that the vendor sells the goods outright
to another party (e.g. finance company) which then follows the
procedure above and enters into a hire purchase contract with the hirepurchaser.
1. What do you understand by the concept of hire-purchase?
2. How is installmental payment made in a hire-purchase arrangement?
13
2
BHM112
3.2
Accounting Treatment
Under the hire purchase arrangement, the hire purchaser obtains

possession of the goods at the outset, but the ownership remains with the
vendor until the end of the hiring period. On strict legal interpretation of
the facts, the vendor should not take credit for any profit and the hirepurchaser should not debit the cost of the items until the hiring period
has ended.
Accounting, however, looks at the substance of the transactions rather
than at its legal form. Consequently, the vendor recognizes profit as
arising over the period of hire-purchase instead of at the end. Similarly,
the hire-purchaser makes the necessary entry in purchases or fixed assets
account at the beginning of the period and not after the option fee has
been paid.
Under a hire purchase arrangement, the selling price consists of cost
plus gross profit (thus giving cash price) plus a further sum of hire
purchase interest by way of compensation to the vendor for the delay in
receiving full payment and for the attendant risks. This is reasonable
imposition because the vendor may have had to borrow money from
other sources to finance the deal, on which he would pay interest.
Another justification is that the money tied up in the deal might have
been earning a return by being invested inside or outside the business of
the vendor.
Items of hire purchase dealt with in the accounts of the businesses are
invariably fixed assets. This is because acquiring trading stock and other
short-term items on hire purchase would require so short a hiring period
as to nullify the advantages of hire-purchase arrangement.
From the point of view of the buyer, under a hire purchases contract, the
purchase price consists of two elements- the cash cost price and the
hire purchase interest- which together makes up the hire purchase price
but which must be accounted for separately. It should be noted that
installmental payment can be equal or unequal and the buyer is expected
to pay as at when due, failure to do so can lead to repossession of the
good/item. In the balance sheet the cash price paid is treated as an asset
while the cash price not paid is regarded as liability. Also future interest
not paid is not regarded as liability because interest is charged to profit
and loss account as it accrues.
From the point of the view of the seller under hire purchase contract, the
selling price consists of three elements: (i) the purchase price and (ii) the
133
BHM112
gross profit, which together give the cash selling price, and (iii) the
hire purchase interest which makes the latter up to the hire purchase
selling price.
1. Discuss the accounting treatments on the relationship between the
vendor and hire-purchaser.
2. From the point of view of the seller in a hire-purchase contract, the
selling price consists of three elements. Explain them.
3.3
Journal Entries for Hire-Purchase Transactions
Different accounting journal entries apply to the vendor and to the hirepurchaser of goods, as follows:
3.3.1 Entries in the Book of the Hire Purchaser

a) Dr Assets Account
To Hire purchase
XX
XX
To record the selling price of the assets hire- purchased

b) Dr Hire Purchase vendor A/c
To bank/Cash Account
XX
XX
To record the deposit and installment payment

c) Dr Hire Purchase Interest A/c
To Hire Purchase Vendor A/c
XX
XX
To record the interest payable to the vendor

Notes:
1.
2.
3.
4.
13
4
Hire purchase vendor Account is to be closed at the end of the

hiring period.
Assets Accounts will continue to show the historical cost of the
asset hire-purchased.
Hire purchased Interest Account is to be closed, periodically, to
the profit and loss account of the hire-purchaser making the
interest to form part of his business running expenses.
Provision for depreciation account is to be accumulating up to the
end of the hiring period, and it is the accumulated depreciation
that is to be taken to the balance sheet as a deductible expense out
of the assets value, at the end of each accounting period.
BHM112
5.
6.
The depreciation account is to be closed, periodically, to the

profit and loss account of the hire purchaser.
The balance sheet is to show the written down value (WDV) of
the asset at the end of each accounting period and is to show the
value in the hire purchase account as a liability.
3.3.2 Entries in the Books of the Vendor

a) Dr Hire purchase Trading Account
To general Trading account
XX
XX
To record the cost price of the asset on hire purchase contract.

b) Dr Hire purchase Debtor Account
To Hire Purchase Trading A/c
XX
XX
To record the selling price of the asset, resulting to profit

c) Dr Cash/Bank Account
To Hire Purchase Debtor A/c
XX
XX
To record deposit and installment payments in respect of the agreement

d) Dr hire Purchase Debtor Account
To H.P interest Receivable A/c
XX
XX
To record the interest due to the hire purchase contract

Notes:
1.
2.
The vendor is to show neither the assets hire-purchased nor the

depreciation on the asset in his balance sheet.
Hire Purchase Trading Account
Cost Price XX hire Purchase Debtor

XX
*Gross Profit XX
XX
XX
*The Gross profit from the contract is to be credited to the profit and
loss account of the vendor.
1. What are the entries to be made to record deposit and installmental
payment in respect of hire-purchase agreement?
2. Why should the Vendor avoid recording the value of the assets hirepurchased in his balance sheet?
135
BHM112
3.4
Illustration One
A taxi-hire concern purchased vehicle on hire purchase system (from
Mr. Risk) over a period of three years paying N846 down on 1st January,
1993 and 3 installments of N2,000 each on 31/12/93, 31/12/94 and
31/12/95.
The cash price of the vehicle was N6, 000, the vendor company
charging interest at 8 percent per annum on outstanding balances.
Required:
Show the appropriate ledger accounts in the hire purchasers books for
the three years and how the items would appear in the balance sheet as
at 31st December, 1993. Depreciation is to be at the rate of 10% per
annum on the written down value of the vehicle and interest is to be
calculated to the nearest naira.
SOLUTION
Five ledger accounts are to be shown: Hire Purchase Vendor Account,
Asset Account, Hire Purchase Interest Account, Depreciation Account
and Accumulated (or Provision For) depreciation Account. The balance
sheet too is to be shown, covering the areas related to the contract.
Asset (Motor Vehicle) Account
1993
1/1/ HPV
1994
1/1/ Bal. b/d
1995
1/1/ Bal.b/d
1996
1/1/96 Bal. b/d
N
6,000
6,000
6,000
1993
31/12/ Bal.c/d
1994
31/12/ Bal.c/d
1995
31/12/ Bal.c/d
1996
6,000
6,000
6000
Hire Purchase Vendor (HPV) Account

1993
N
1993
1/1/ Cash
846
1/1/ Motor Vehicle
31/12 Cash
2,000
31/12 HP Interest
31/12 Bal. c/d
3,566
6,412
1994
1994
31/12 Cash
2000
1/1/ Balance b/d
13
6
N
6,000
N
6,000
412
6,412
3,566
BHM112
31/12 Bal, c/d
1995
31/12 Cash
1851
285
3,851
2,000
31/12 HP Interest
3,851
1995
1/1 Balance b/d
31/12 HP Interest
2,000
1993
31/12 HPV
1994
31/12 HPV
1995
31/12 HPV
Hire Purchase Interest Account

N
1993
412
31/12 P&L
1994
285
31/12 P&L
1995
149
31/12 P &L
Depreciation Account
1993
N
1993
31/12 Prov. For Depr 600
31/12 P & L
1994
1994
31/12 Prov. For Depr. 540
31/12 P & L
1995
1995
31/12 Prov. for Depr. 486
31/12 P &L
N
1993
600
31/12 Depr
1994
1,140
1/1/ Bal b/d
31/12/ Depr.
1,140
1995
1995
31/12 Bal. c/d 1,626
1/1 Bal. b/d
31/12/ Depr.
486
1,626
1996 1/1 Bal b/d
1993
31/12 Bal c/d
1994
31/12 Bal c/d
1,851
149
2,000
N
412
285
149
N
600
540
486
N
600
600
540
1,140
1,140
1,626
1,626
137
BHM112
Balance Sheet (not only as at 31/12/1993

At 31/12 93:
N
Motor Vehicle
Less Prov for depr
N
6,000
600
At 31/12 94:
Motor Vehicle
Less Acc. depr
6,000
1,140
5,400
Long term liabilities
At 31/12/93
H.P vendor
3,566
4,860
At 31/12 95:
N
At 31/12/94
H.P. vendor
As at 31/12/95:
H.P Vendor
1,851
4,374
Motor Vehicle
Less Acc depr
6,000
1,626
Notes:
1.
The HP interests were computed as follows:
1993: 8% 0f (N6,000 N846) = N412

1994: 8% of N3,566 = N285
1995: 8% of 1,851 = N149 approximately.
Since we are to calculate the interest to the nearest naira, the decimal
places for the three years interest .32, .28 and .08 are to be summed up
and approximated to one naira to be added to the interest payable in the
last year of the agreement.
2.
The depreciation charges were on the written down value except

for the first year which was on the historical cost of the asset.
3.
At the end of the hiring period, the vendor account was closed.
The hire purchase interest and the depreciation accounts were
closed, annually to the profit and loss account. The balance sheet
has shown how the relevant items (assets, provision for
depreciation and vendor accounts) would appear in it for the three
years of contract.
Illustration Two
Refer to example One, if Mr. Risk himself bought the vehicle at N5,
445. Show the appropriate ledger accounts in his books being the
vendor.
13
8
BHM112
SOLUTION
Hire Purchase debtor Account
N
1/1 93 HP Trading
6,000
1/1/ 93
Cash
31/12/93 HP Interest
412
31/12/93 Cash
31/12/93 Bal. c/d
6,412
1/1/94 Balance b/d
3,566
31/12/94 Cash
31/12/94 HP Interest
285
31/12/94 Bal. c/d
3,851
1/1/95 Bal b/d
1,851
31/12/95 Cash
31/12/95 HP interest
149
2,000
N
846
2,000
3,566
6,412
2,000
1,851
3,851
2,000
2,000
Hire Purchase Trading Account

N
1/1/93
Gen Trading
N
5,445
6,000
31/12/93 Gross Profit
1/1/93 HP Debtor
555
6,000
6,000
31/12/93 P & L
31/12/93 P & L
31/12/93 P & L
Hire Purchase Interest receivable Account

N
412
31/12/93 HP Debtor
285
31/12/94 HP Debtor
149
31/12/95 HP Debtor
N
412
285
149
Illustration Three
IAS Hotel and Catering PLC acquired two Lorries under hire purchase
agreement, details of which are as follows:
Registration Number
NOL 999
Date of Purchase
31 st May, 2006
Cash Price
N1, 800
Deposit
N312
Interest deemed to accrue
Evenly over the period of the
Agreement
N192
NOM 767
31st Oct, 2006
N2, 400
N480
N240
Both agreements provided for the payment to be made in 24 monthly

installments commencing on the last day of the month following
purchase.
139
BHM112
On 1st September, 2007, vehicle NOL 999 becomes total loss. In full
settlement on 20th September, 2007:
i)
ii)
An insurance company paid N1, 250 under a comprehensive

policy and
The hire purchase company accepted N600 for the termination of
the agreement.
The firm prepared accounts annually to 31st December, and to provide

depreciation on a straight line basis at arate of 20 per cent per annum for
motor vehicles, apportioned as from the date of purchase and up to the
date of disposal. All installments were paid on the due dates. The
balance on the Hire Purchase Company Account in respect of vehicle
NOL 999 is to be written off.
Required:
Record these transactions in the following accounts, carrying down the
balances as on 31st December, 2006 and 31st December, 2007:
a)
b)
c)
d)
Motor Vehicles on Hire Purchase Account

Motor Vehicle Disposal Account
Hire Purchase Company (Vendor) Account
SOLUTION
a)
Motor Vehicle on Hire Purchase-Account
NOL NOM
NOL
NOM
Particular 999
767
Date
Particular 999
767
N
N
N
N
HP
31/5/06 Vendor
1,800
31/12/06 Bal. c/d
1,800
2,400
HP
31/10/06 Vendor
2,400
1,800
2,400
1,800
2,400
1/1/2007 Bal. b/d
1,800
2,400 20/9/07 Disposal
1,800
Date
31/12/07 Bal c/d

1/1/2008 Bal b/d
b)
14
0
2,400
2,400
2,400
2,400
BHM112
NOL NOM
Date
Particular 999
767
N
N
31/12/07 Bal c/d
210
80
1/9/2007 Disposal
450
31/12/07 Bal c/d
560
450
c)
NOL
NOM
Date
Particular 999
767
N
N
31/12/06 Depr
210
80
1/1/2007 Bal. b/d
210
80
1/9/2007 Depr
240
31/12/07 Depr
480
560
450
560
1/1/2008 Bal. b/d
560
Motor Vehicle Account (NOL 999)
HP Motor vehicle
HP vendor
1,250
N
1,800
42
N
450
Prov for Deprec.

Cash (Insurance)
P&L
142
1,842
1,842
d)

NOL NOM
Date
Particular
999
767
Date
N
N
31/12/06 Cash
312
31/5/06
31/10/06 Cash
480 31/10/06
31/12/06 Cash (70x7)
490
31/12/06
31/12/06 Cash(90x2)
180
31/12/06 Bal. c/d
1,054 1,760
1,856 2,420
1/9/2007 Cash (70x8)
1/1/2007
560
20/9/07 Cash(term)
1/9/2007
600
31/12/07 Cash(90x12)
1,080 1/9/2007
31/12/07 Bal. c/d
800 31/12/07
1,160
Particular
M/Veh.
M/Veh.
HP Int
(7x8)(10x2)
Bal.b/d
HP Int(8x8)
Disposal
HP Int.
(10x12)
1,880
NOL
NOM
999
767
N
N
1,800
2,400
56
20
1,856
1054
64
42
2,420
1,760
1,160
1/1/2008 Bal.b/d
Notes:
1.
The Hire purchase interest, the installment payments, and the

depreciation charges were calculated for the number of months to
the end of the accounting year.
3. The Hire purchase interest on NOL 999 was
calculated as follows:
141
120
1,880
800
BHM112
4. N192/24
= N8 per month
On NOM 767 = N240/24 = N10
3)
The monthly installmental payments were calculated as follows:
NOL 999 = 1,800+192-312

24
= 1,680/24 = N70
NOM 999 = 2,400+240-480
24
= 2,160/24 = N90
4.
The depreciation accounts of the two types of Lorries are to be

debited with the charges credited to the provision for depreciation
account. The depreciation accounts are to be closed, annually to
the profit and loss account while the provision for depreciation
accounts is to be reflected in the balance sheet as deduction to the
values of the Lorries.
5.
The depreciation charges were calculated as follows:
NOL 999
7 months to 31/12/06: 20% of 1,800 x 7/12=N210
8 months to 31/1207: 20% of 1,800 x 8/12=N240
NOM 767
2 months to 31/12/06: 20% of 2,400 x 2/12= N80
12 months to 31/12/07: 20% of 2,400 = N480
4.0
CONCLUSION
Hire purchase is one of the methods which businesses can use to acquire
assets which may either be impossible or very difficult to acquire by
cash. The method is flexible as it allows the hire purchaser to pay
installmentally for the hire purchase price which covers the cost price
profit margin and the interest. Hire purchase, therefore, helps in
improving the return of businesses since the hire purchaser uses the
assets before even acquiring them.
5.0
SUMMARY
This Unit highlights on the major issues relating to hire purchase.

Readers are informed on the concept of hire purchase differentiating it
from cash sales and credit sales. The accounting entries in the book of
14
2
BHM112
both hire purchaser and vendor are also demonstrated with a view to
assisting in recording entries in the books.
6.0
1a)
b)
c)
What do you understand by the term hire-purchase?

Differentiate between hire-purchase and credit sales.
Differentiate between Deposit payment and installment payment.
2)
Hamdala Hotel Limited acquired a bus on Hire-purchase from

Suppliers PLC on 1 st January, 2009. The cash price of the tractor
was N80, 000. The Hire purchase agreement provided for the
payment to be made in three equal installments on 31st December
of each year, at an annual interest rate of 25% per annum.
Depreciation of the tractor is at the rate of 15% per annum on
cost.
Required:
Record the above transactions in the books of Hamdala Hotel Limited,
showing the following accounts:
a)
b)
c)
d)
Suppliers PLC Account

Hire-purchase interest account
Profit and loss Account
Balance Sheet (extract)
3)
HAZUB Catering are makers of delicious city cake. They

acquired a new flour mixing machine from MIXERS PLC on 1 st
January, 2004. The hire purchase interest was agreed to be 20%
per annum. Interest is to be paid as it accrues. An initial deposit
of 30% of the N200, 000 cash price is to be made. Payment is to
be completed on 31 st December, 2008. HAZUB PLC depreciates
its assets using the reducing balance method only and estimated
that the mixing machine will have a scrap value of N8, 000 at the
end of the useful years. HAZUB company, however, defaulted in
paying the last installment and the machine was repossessed on
31 st December, 2008 by MIXERS.
Required: You are required to record the above transactions in the

books of:
a)
HAZUB Company, showing the following accounts:
i)
ii)
Mixers PLC Account

Hire Purchase Interest Account
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ii)
iv)
v)
Profit and Loss Account

Machine Disposal Account
Balance Sheet abstract for the years 2004 to 2007
b)
MIXERS PLC, showing the following accounts:
i)
ii)
HAZUB Company
Cash
4)
NIIMA Hotel and Catering PLC acquired two Lorries under hire
purchase agreement, details of which are as follows:
Registration Number
KMC 555
st
Date of Purchase
31 May, 2007
Cash Price
N3, 600
Deposit
N624
Interest deemed to accrue
Evenly over the period of the
Agreement
N384
UGG 701
31 Oct, 2007
N4, 800
N960
st
N480
Both agreements provided for the payment to be made in 24 monthly

installments commencing on the last day of the month following
purchase.
On 1 st September, 2008, vehicle KMC 555 becomes total loss. In full
settlement on 20th September, 2008:
i)
ii)
An insurance company paid N2, 500 under a comprehensive

policy and
The hire purchase company accepted N1, 200 for the termination
of the agreement.
The firm prepared accounts annually to 31 st December, and to provide

depreciation on a straight line basis at a rate of 20 per cent per annum
for motor vehicles, apportioned as from the date of purchase and up to
the date of disposal. All installments were paid on the due dates. The
balance on the Hire Purchase Company Account in respect of vehicle
KMC 555 is to be written off.
Required:
Record these transactions in the following accounts, carrying down the
balances as on 31st December, 2007 and 31st December, 2008:
a)
b)
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Motor Vehicles on Hire Purchase Account

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c)
d)
Motor Vehicle Disposal Account

5)
On 1 st January, 2002, NIIMA Hotel and Catering PLC purchased

a lorry for N218,000, and entered into a hire purchase agreement
with a finance company under which he paid N44,000 as deposit,
the balance, plus hire purchase charges of n24,000 being payable
by equal monthly installments over a period of 3 years
commencing 1 st January, 2002.
Provision for depreciation is made at 20% of the cost of the lorry each
year by means of depreciation Account, the Asset Account for the lorry
showing the cost only.
The Hire Purchase charges are to be regarded as having accrued in equal
monthly installments over the period of the agreement.
Required: You are required to prepare a schedule showing the figures
appearing in NIIMA Hotel and Catering PLCs Balance Sheet as at 31 st
March, 2002, 2003, 2004, 2005, 2006, and 2007 for:
a)
b)
c)
d)
The Lorry Account

Lorry Depreciation Account
Hire Purchase Account
Hire Purchase Interest charged in the Profit and Loss Account for
the year ending on those dates.
7.0

Practice, ICAN PEIII Study Pack. Lagos-Nigeria: VI Publishing
Company Ltd
Igben, R. O. (2004). Financial Accounting Made Simple (1st ed.).
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UNIT 4
SALES AND PURCHASE OF BUSINESSES

(BUSINESS COMBINATION)
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Mai Content
3.1
Accounting for Business Combination
3.1.1 Amalgamation
3.1.1.1Closing the Books of the Discontinuing
Companies
3.1.1.2 Realization Account
3.1.1.3 New Company Account
3.2 Specific Accounts Needed
3.2.1 Sundry members account (ordinary and preference)
3.2.2 Liability Accounts
3.3
Purchase Consideration
3.4
Establishment of the New Company and Accounting
Entries
3.4.1 Amalgamation Journal
3.4.2 The Balance Sheet of the New Company
3.5
Absorption, Takeover or Purchase of Business
3.5.1 Closing the Books of the Discontinuing Company
3.5.2 Accounting Entries in the Books of Absorbing or
Continuing Business
3.5.3 The Absorption Journal
3.5.4
Recording Items from the Absorption Journal to the
Ledger Accounts
3.6
4.0 Conclusion
5.0 Summary
1.0
INTRODUCTION
The term business combination is used to describe an arrangement

where two or more businesses owned are operated as separate entities
join together to become a single entity under a single ownership. The
implication of this is that the separate businesses will discontinue their
ownership and come under a single ownership. Business combination
can be found in sole- proprietorship, partnership and in companies
business arrangements. The scope of this unit covers companies
amalgamation and absorption. Business combination can, therefore, take
two forms: i) Amalgamation and ii) Absorption.
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Sometimes companies are dissolved due to financial problems and after

several adjustments re-register to carry on normal business. This process
is called reconstruction or reorganization. This exercise is undertaken by
those companies which incur heavy losses for long time and where
unable to write off such losses, or companies having substantial
fictitious assets such as goodwill, preliminary expenses, profit and loss
account debit balances, etc.
This Unit discusses the accounting treatments of the issues raised here
with a view to demonstrating the accounting presence in all types of
transactions.
2.0
OBJECTIVES

appreciate the meaning of business combination
understand reason(s) why businesses combine to produce a stronger
entity
explain the major types of business combination
appreciate the accounting entries for business combination.
3.0
MAIN CONTENT
3.1
Accounting for Business Combination
3.1.1 Amalgamation
This refers to a situation where companies that exist separately under
different ownership combine to form a new one. The major feature of
this arrangement is that the two businesses that amalgamate will no
longer exist, that is, they are liquidated. For example, Company A may
combine with company B to form Company AB which is expected to be
larger and more viable. Ideally suited to this method are similar sized
businesses operating on a relatively small scale.
Reasons/benefits of amalgamation include:
The desire to gain larger share of the market.
The desire to attain synergy.
The desire to establish a solid capital base.
The desire to provide efficient customer service.
The desire to acquire a base adequately for raw materials sourcing in
the case of a manufacturing firm.
f) The desire to be able to challenge a major competition.
g) In order to meet legal and statutory requirements.
h) To enjoy political policies during a period.
a)
b)
c)
d)
e)
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When businesses amalgamate, two major accounting problems arise,

namely: i) those concerned with closing the books of the discontinuing
businesses which are being wound up; and ii) those concerned with the
establishment of new business.
3.1.1.1 Closing the Books of the Discontinuing Companies

To close the books of the discontinuing companies, the following ledger
accounts are necessary:
i)
ii)
iii)
iv)
v)
vi)
Realization account
New company account
Sundry members account
Each liability account, e.g creditors, liquidation expenses
payable/creditors for dissolution expenses, loan or debenture
account
Bank account
Component of purchase consideration, e.g ordinary shares issued,
preference share issued, debenture stock issued and cash paid.
3.1.1.2 Realization Account

This is the account in which profit or loss on the dissolution of a
discontinuing company is determined. It is usually prepared in a
columnar form. The number of columns will depend on the number of
companies amalgamating.
The following transactions or events are usually accounted for in the
realization account:
a. Debit all assets at book value to realization account
b. Determine the purchase consideration and credit it to the realization
account
c. Amalgamation, dissolution or liquidation expenses should be debited
to realization account. This will in effect reduce the profit on
realization or increase the loss on realization
d. Profit or loss on realization is determined, that is, the balance on
realization account is transferred to the sundry members account
(ordinary).
3.1.1.3 New Company Account

This is the account where the purchase consideration and related
transactions are treated. The purchase consideration, when agreed, is
debited to this account (remember that the credit entry goes to
realization account) while transaction relating to the purchase
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consideration are credited to the account when settlement of the agreed

purchase consideration is made. The account can, therefore, be regarded
as a self balancing account.
1. Discuss any four benefits of amalgamation in business combination
process.
2. Mention six accounts to be created on closing the books of
discontinuing businesses, and explain any two.
3.2Specific Accounts Needed

3.2.1 Sundry Members Account (Ordinary and Preference)
The following accounting transactions are affected in the sundry
members account:
a.
b.
c.
Transfer the components of the shareholders fund (e.g. ordinary

shares, preference shares, and reserves) to the account by debiting
each of the components of the shareholders fund and credit
sundry members account
The profit/loss on realization is also transferred to this account.
Each of the components of purchase consideration, when
settlement is effected as agreed, including cash, are transferred to
this account and the account will automatically balance.
This account is similar to the partners account in the amalgamation of

partnership.
It should be noted, however, that if there is more than one class of
preference shares, the classes must be separated and different ledger
accounts opened for each class. For example, if in the balance sheet
there are 10% preference shares, 8% cumulative preference shares and
5% redeemable preference shares, these are three different classes of
preference shares, therefore, three different sundry members preference
accounts must be opened to present each of them separately.
3.2.2 Liability Accounts

Balances on each liability account such as trade creditors and long term
loans/debentures should be brought down in their respective ledger
accounts. It should be noted that each liability is either settled by the
discontinuing business or taken over by the new business.
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Where the liability is settled by the discontinuing business, the liability

account is debited and cash/bank account credited. However, where the
liability is taken over by the new business, it becomes part of the
purchase consideration and is treated as follows:
Dr.
Cr.
Cr.
Dr.
Cr.
Liability account
New Company account
Discount Received from Creditors, where the liability has been
settled at less than the book value and this is regarded as full and
final settlement. It means the discount has been received from
creditors. The accounting entries are:
Liability account
Realization Account
Liabilities settled above the book value

Where a liability has been settled above its book value, the difference
between the book value and the takeover value is debited to realization
account. This implies that a loss was incurred in settlement of liability.
The accounting entries will be:
Dr Realization account with the difference
Cr- liability account and amount paid
1.
Discuss any two transactions that are related to sundry members

accounts.
2. How are liabilities accounts treated in the books of a discontinuing
business?
3.3
This is the aggregate amount, which the new company is to pay the
owners (that is the stakeholders) of the discontinuing business and
creditors.
The components of purchase consideration in amalgamation of
companies may be some or all of the following:
i)
ii)
iii)
iv)
v)
Ordinary shares issued by new company

Preference shares issued by new company
Debenture stock issued by new company
Cash given by the new company
Liabilities of the old companies taken over by the new company
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Where liabilities are taken over, they form part of the purchase
consideration. Such liabilities are debited to the liabilities account and
credited to the new company account.
Ledger accounts are opened for each of the components of purchase
consideration.
On settlement of the purchase consideration as agreed, each of the
components of the purchase consideration is debited while the new
company account is credited.
On distribution to the owners of discontinuing businesses, the sundry
members account is debited and each of the components of purchase
consideration credited.
The accounting entries necessary to close the book of discontinuing
businesses being liquidated are summarized below:
Dr- Realization Account
Cr-individual assets Account
Event: the book value of the asset taken over by the company at the date
of cessation
Dr- Individual Liability Account
Cr- New Company Account
Event: liabilities taken over by the new company at the date of
cessation. (If part of purchase consideration)
Dr-New companys Account
Cr- Realization Account
Event: Agreed purchase consideration (including liabilities taken over)
Dr- Realization Account
Cr-Realization expenses payable account/creditors account for
realization expenses
Event: Realization expenses.
Dr - Liquidation expenses payable account
Cr-Bank account
Event: portion of the realization expenses paid by the company being
discontinued
Dr- Creditors account
Cr- Realization account
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Event: Discount received from creditors

Dr-Realization account
Cr-Sundry shareholders and debenture holders account.
Event: Profit on realization (this is to be derived)
Dr-Share capital reserves and debenture account
Cr-Sundry shareholders and debenture holders account
Event: Transfer of balances on share capital, reserves and debentures
account
Dr-Bank and/or shares and/or debentures in new company account
Cr-New companys account
Event: settlement of the agreed purchase consideration by the new
company
Dr-Creditors account
Cr-Bank account
Event: Settlement of liabilities not taken over by the new company
Dr-bank account
Cr creditors account
.
Dr- bank and/ or shares and/ or debentures in the New Company
Account
Cr-Sundry shareholders and debenture holders account
Event: distribution of balances
Dr- Preference dividends in arrears
Cr-Sundry members preference
Event: Arrears of pref. dividend included in the balance sheet as a
liability
Dr- Retained profit or any other revenue reserve
Cr-Sundry members preference account
Event: Cumulative preference dividend in arrears but not included in
the balance sheet and not to be forfeited.
Dr-Retained profit or any
Cr- Debenture stock
Event: Arrears of debenture interest if any
Dr-Proposed dividend account
Cr-Sundry members shares account
Event: Ordinary dividend included in the balance sheet.
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1.
Describe any four components of purchase consideration in

amalgamation of companies.
2. What are the necessary entries for closing the fixed assets and
liabilities accounts of a liquidating business?
3.4
Establishment of the New Company and Accounting

Entries
The accounting entries in the books of the new company can be divided
into two:
i)
ii)
The amalgamation journal

The balance sheet after amalgamation.
3.4.1 Amalgamation Journal

This is a composite journal which is prepared to reflect the assets and
liabilities taken over as well as goodwill or capital reserve on
amalgamation.
On the debit side of the journal are all tangible assets taken over at
revaluation value or taken over value. However, if the takeover values
are not given, it is assumed that the assets are taken over at book values.
The takeover value will only be used when such assets are not revalued.
If revalued, the revaluation value will be used instead of the takeover
value.
On the credit side of the journal, are all the components of purchase
consideration (including liabilities taken over) as contained on the credit
side of the new company account in the book of discontinuing
businesses.
The difference between the debit and the credit entries made in the
journal represents goodwill or capital reserve. If the balancing figure on
the journal is an asset (i.e debit balance), it is referred to as goodwill. If
it is a claim over the assets (i.e. credit balance), it is referred to as capital
reserve.
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Proforma of the Amalgamation Journal

Dr
N
Land & Building
Plant & Machinery
X
Furniture & Fitting
X
Motor Vehicles
X
Stocks
X
Debtors
X
Goodwill (balancing figure) X
Creditors
Bank overdraft
3% debenture
Ordinary shares
Preference shares
X
Cr
N
X
X
X
X
X
X
X
Being assets and liabilities taken over on amalgamation of A ltd and B

ltd to form AB Ltd.
NOTE:
It is instructive that the amounts of each of the assets mentioned above
are combined amount of the takeover values of all the companies that
amalgamated. Also, the amounts on the credit side of the journal are
combined figures of each item on the new company account as they
appeared in the book of the discontinuing company.
It should also be noted that the journal is a composite journal. The
corresponding debit and credit entry is the purchase of business account
or vendor account.
All transactions after amalgamation in the book of the new company
must be journalized by using a simple journal. Such transactions may
include fresh issue at or above the nominal value.
Where fresh issues of shares are made for cash, the accounting entries
will be:
Dr-Bank/Cash account
Cr-ordinary share capital account with the nominal value
Cr-share premium account with the premium
After this, the balance sheet of the new company can be prepared.
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3.4.2 The Balance Sheet of the New Company

The balance sheet of the new company, after amalgamation is prepared
using the figures from the opening journal subject to adjustments for
transactions after amalgamation as enumerated above.
1. Differentiate between goodwill and capital reserve.
2. What are the accounting entries to be made where fresh issues of
shares are made for cash?
3.5
Absorption, Takeover or Purchase of Business
Absorption involves a situation whereby a company takes over another

company. The company that is taken over (i.e. absorbed company) will
lose its identity (i.e. wound up) while the assets and liabilities of the
absorbing company will increase after the absorption. For example, A
ltd can purchase or take over B ltd to form a bigger A ltd.
This means that unlike amalgamation in which all the amalgamating
businesses lose their identities, only one (i.e the absorbed company)
loses its identity in the case of absorption.
The amalgamation method is employed where relatively small scaled
businesses are concerned. Where this is not the case and large, complex
businesses are involved, a holding company is usually established to
acquire all, or majority holding, of voting shares of those companies
which then continue in existence. But as subsidiaries of the holding
company .the acquisition of controlling interest can also arise without
the establishment of a holding company for the purpose, when an
existing dominant company acquires a controlling interest in one or
more other companies.
When a business takes over another business, two major problems arise.
These are:
i)
ii)
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6
Those concern with the closing the books of the discontinuing

business which is being wound up.
Those concern with the updating the records of the continuing
business.
BHM112
3.5.1
Closing the Books of the Discontinuing Company
To close the books of the discontinuing company, the following ledger

accounts are necessary:
i)
ii)
iii)
iv)
v)
vi)
Realization account
Absorbing companys account
Sundry members account
Each liability account
Bank account
Account for each component of purchase consideration
The operation of each of the ledger accounts mentioned above are

similar to those of amalgamation except that all entries that are passed
into new companys account in amalgamation go to absorbing company
account.
On essence, profit or loss on realization is determined on realization
account and transferred to sundry members ordinary account.
All liabilities are either paid off by the absorbed company or taken over
by the absorbing company.
Each component of purchase consideration is transferred to sundry
members ordinary or preference account.
All adjustments are made to bank account before the balance is
transferred to realization account (i.e. bank/cash taken over by absorbing
company).
It should be noted that where bank is not taken over, the balance should
be debited to sundry members or ordinary account.
3.5.2 Accounting Entries in the Books of Absorbing or

Continuing Business
The continuing business has been in existence before it took over the
absorbed business. Therefore, its assets and liabilities will increase in
proportion to the assets and liabilities taken over.
The account of its assets, liabilities and shareholders fund must be
brought down in their respective ledger accounts. The records to
incorporate the activities of the business taken over will be divided into
two, as follows:
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a) The absorbing journal

b) Recording from the absorbing journal to the existing relevant ledger
account.
3.5.3 The Absorption Journal

The journal is a composite journal which is prepared to reflect the assets
and liabilities taken over and determine the goodwill or capital reserve.
On the debit side of the journals are all tangible assets taken over at
revaluation value or takeover value when such assets are not revalued.
On the credit side of the journal are all the purchase considerations
(including liabilities taken over) as stated on the credit side of the
absorbing company account in the book of the discontinuing business.
The difference between the debit and credit sides of the journal represent
goodwill or capital reserve.
In essence, the journal is not different from the amalgamation journal
except that in amalgamation, the amounts on the journals are combined
amounts of the companies involved I the amalgamation, while in
absorption it is only the amounts of the dissolved (absorbed) company.
The formats of the two journals are similar.
3.5.4 Recording Items from the Absorption Journal to the

Ledger Account
The ledger accounts opened for assets and claims over assets are
scrutinized. Items in the absorbing journal and other journals are then
transferred to the relevant ledger accounts with each of them having the
narration vendor. Assets from the journal will be posted to the debit
side of the relevant asset account while liabilities and claims over the
assets from the journal will be posted to the credit side of each relevant
ledger account.
After this, the ledger accounts are balanced and the balance sheet for the
continuing business can be prepared.
58. What do you understand by the term absorption in business
combination process?
59. Discuss the process of recording items from the absorption journal to
the relevant ledger accounts.
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3.6
Illustration one
The Moon Company limited and the rising star company Limited have
agreed to amalgamate. A new company Sunshine Company Limited has
been formed to take over the combined concerns on 31st January, 2006.
The Balance sheets of the two companies as at 31 st December, 2005
were as follows:
The Moon Company Limited
N
Liabilities
Issued and paid capital:
100,000 ordinary shares
20,000 of N1 each 100,000
15% Debentures
2,000
Creditors
6,000
Unappropriated profit
5,000
113,000
N
Assets:
Buildings
Machinery
Stock
Debtors
Cash
The Rising Star Company Limited

N
Liabilities:
Assets:
Issued and paid up capital:
Buildings
Machinery
of N10 each
50,000
Goodwill
Creditors
3,000
Stock
Bill payable
2,000
Debtors
General reserves
5,000
Retained Earnings
5,000
65,000
50,000
26,000
12,000
5,000
113,000
N
30,000
25,000
5,000
3,000
2,000
65,000
The new company (Sunshine) will take over the assets and liabilities as
follows:
Moon
All assets on book value, except cash: buildings and machinery to be
depreciated at the rate of 10%. Debentures will be redeemed by the
Moon Company Limited
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Rising Star
All assets at book value except goodwill, and stock and all liabilities,
except creditors will be satisfied by paying in the form of stock-in-trade
by the Rising Star Company.
The new company will pay purchase consideration as follows:
1. To the Moon Company Limited:
a) 7,000 ordinary shares of N10 each
b) 2,000 preference shares of N10 each
2. To the Rising Star Company Limited:
a) 5,000 ordinary shares of N10 each
b) 2,000 preference shares of N10 each
Required:
1.
2.
3.
4.
Realization Accounts of moon and Rising Star Companies.

Shareholders Accounts of Moon and Rising star Companies.
Cash account of moon Company.
Goodwill Account of Rising Star Company.
5. Balance Sheet of Sunshine Company Limited as at 31st January,
2006.
SOLUTION
Workings
The net assets and the purchase consideration of the two old companies
have to be determined and compared for identification of goodwill or
capital reserve.
Moon Company
N
Assets
Buildings
Machinery
Stock
Debtors
50,000-5,000(depreciation)
20,000-2000(depreciation)
Less Creditors
Net Assets
16
0
45,000
18,000
26,000
12,000
101,000
6,000
95,000
BHM112
Less purchase consideration (shares issued):

N10 = 70,000
2,000 pref. share
N10= 20,000
90,000
Capital Reserve
5,000
Rising Star Company
Assets:
Buildings
30,000
Machinery
25,000
Debtors
2,000
57,000
Less bills payable
2,000
Net Assets
55,000
Less purchase consideration (shares issued):
N10 = 50,000
2,000 pref. shares
N10 =20,000
70,000
Goodwill
15,000
Accounts for Moon Company
Realization Account
N
50,000
Creditors
20,000
Sunshine (P.C)
26,000 S/holders A/c (loss)
12,000
108,000
108,000
Realization
Sunshine Company
N
90,000
Shareholders (shares)
N
90,000
Realization (loss)
Sunshine (shares)
Cash
Shareholders Account
N
12,000
Ordinary shares
90,000
Profit and loss
3,000
Buildings
Machinery
Stock
Debtors
N
6,000
90,000
12,000
N
100,000
5,000
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BHM112
105,000
105,000
Cash Account
Opening balance
N
5,000
Debentures (15%)
Shareholders
5,000
N
2,000
3,000
5,000
Accounts for Rising Star Company

Realization Account
N
Building
30,000
Bills payable
Machinery
25,000
Sunshine (P.C)
Debtors
2,000
Shareholders (profit)
15,000
72,000
Sunshine Company Account
N
Realization
70,000
N
2,000
70,000
72,000
N
70,000
Shareholders
Shareholders Account
Sunshine (shares)
Goodwill
N
70,000
5,000
N
50,000
5,000
5,000
15,000
75,000
Ordinary shares
General Reserves
Retained Earnings
Realization (profit)
75,000
Balance Sheet of Sunshine Company Limited as at 31st January, 2006

N
Liabilities
Fixed Assets:
Issued Capital:
12,000 ord. shares of N10 each 120,000 Buildings:
4,000 pref. shares of N10 each 40,000 Moon
45,000
Star
30,000
Reserve:
Capital Reserve (Moon)
5,000
Machinery:
Current Liabilities
Moon
18,000
Creditors (Moon)
6,000
Star
25,000
Bill payable (Star)
2,000
Current Assets:
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2
75,000
43,000
BHM112
Stock (Moon)
Debtors:
Moon
Star
26,000
12,000
2,000
14,000
Fictitious Asset:
Goodwill (Star)
15,000
173,000
173,000
Notes:
1. Goodwill (Star) N15, 000 less Capital Reserve (Moon) N5, 000 =
N10,000 can be reflected as starting goodwill value for Sunshine. If
that is done, the Balance Sheet totals would be N168, 000.
2. Total figures for individual liabilities and assets can be shown
without any mention of the old companies in the above balance
sheet.
Illustration Two
The Middle Belt Chemical Company Limited sells its business to the
Northern Chemical Company Limited as on 31st December, 2008. It
balance sheet on that date was as under.
N
Liabilities
Issued and paid up capital:
2,000 ord. shares of N100 each 200,000
10% Debentures
100,000
Creditors
30,000
Reserve Fund
50,000
P & L Account
20,000
400,000
N
Assets
Goodwill
Buildings
Stock
Bill Receivable
Debtors
Cash
50,000
233,000
35,000
4,500
27,500
50,000
400,000
The Northern Chemical Company agreed to take over the assets at 10%
less than the book values (excluding cash and goodwill): to pay N75,000
for goodwill and to take over debentures. The purchase consideration
was to be discharge by the allotment to the Middle Belt Chemical
Company Limited of 1,500 shares of N100 each at a premium of N10
per share and the balance in cash. The cost of liquidation amounted to
N3, 000 paid by Middle Belt Company.
Required:
Show ledger accounts in the books of Middle Belt
Company Limited, and journal entries in the books of Northern
Chemical Company.
SOLUTION
The purchase consideration will be determined as follows:
Assets
163
BHM112
Goodwill
Buildings 233,000- 10% of 233,000
Stock
Bill
Receivable
Debtors
27,500-10% of 27,500
35,000-
4,500-
Less Liabilities (Debentures)

Purchase consideration
Realization Account
N
Goodwill
50,000 Debentures
Buildings
233,000 N.C.C Ltd (P.C)
Stock
35,000 S/holders
Bill Receivable
4,500
Debtors
27,500
Cash (Liquidation cost)
3,000
353,000
10%
75,000
209,700
10% of 35,000
31,500
of
4,500
4,050
24,750
345,000
100,000
245,000
N
100,000
245,000
8,000
353,000
Northern Chemical Company Limited Account
Realization
N
245,000
Shareholders (shares)
Cash
245,000
N
165,000
80,000
245,000
Note: The shares allotable to shareholders of Middle Belt Company

were arrived as follows:
N
1,500 shares of N100 each 150,000
Share premium 1,500 x N10
15,000
165,000
Cash
80,000
245,000
Cash Account
Balance b/d
N.C.C. Ltd
N
50,000
80,000
130,000
N
Realization (expenses)
3,000
Creditors
30,000
M.B.C. Shareholders
97,000
130,000
Middle Belt Company Shareholders Account

N
Realization (Loss)
8,000
Share Capital
16
4
N
200,000
BHM112
Shares (of N.C.C)

165,000 Reserve Fund
Cash (balance transferred) 97,000 P & L Account
270,000
50,000
20,000
270,000
B.
Journal Entries in the books of Northern Chemical Company

Limited
N
DR
CR
N
N
245,000
Middle Belt Chemical
245,000
To record the agreed purchase consideration
Goodwill
75,000
Buildings
209,700
Stock
31,500
Bill Receivable
4,050
Debtors
24,750
Debentures
100,000
245,000
To record the taking over of assets and liabilities
Middle belt Company
Share Capital
Share Premium
Cash
245,000
150,000
15,000
80,000
To record the settlement of purchase consideration

Notes:
It should be noted that all undistributed profits and reserve funds should
be distributed amongst the shareholders of the selling company and
should not be brought into the new companys book. However,
employees fund like provident fund, Superannuation fund, Gratuities,
etc are to be brought to the new companys books as it is expected that
the new company will absorb the employees of the selling company.
4.0
CONCLUSION
165
BHM112
Business combination is the bringing together of separate entities or

business into one reporting entity. The result of nearly all business
combinations is that one entity, the acquirer, obtains control of one or
more other businesses, the acquirees. All business combinations are
accounted for by applying the acquisition method; the acquirer shall,
therefore, disclose information that enables users of its financial
statements to evaluate the nature and financial effect of business
combination that were made during the period.
5.0
SUMMARY
In this Unit, readers are informed on what business combination is; and
reasons that may lead to business combination which can be in form of
either amalgamation or absorption. The readers were also taken through
the various accounting entries with respect to amalgamation and
absorption. The Unit is a demonstration of the fact that accounting
treatments are very clear on the issues of purchase consideration
determination, amalgamation processes, absorptions and takeovers.
6.0
1.
The Super Nigeria Limited takes over the following assets and
liabilities standing in the books of a private business on 1st
January, 2001.
Balance Sheet
Capital
Creditors
N
16,100
1,200
17,300
Freehold premises
Plant and Machinery
Stock
Furniture
Debtors
Cash
N
6,000
2,000
7,600
200
1,000
500
17,300
The purchase consideration is N20, 000 and it is to be discharge by the

issue to the vendor of 10,000 ordinary shares of N1 each fully paid,
1,000 5% preference shares of n5 each fully paid and the balance in
cash.
The company valued the freehold premises at 5,500 and the stock at N7,
000 and created a provision of bad debts equal to 5% of debtors. The
cash balance of N500 is not taken over.
16
6
BHM112
Required: Show the Journal entries in the books of Super Nigeria

limited on 1st January, 2001.
2)
Consider the Balance Sheets of WAZO PLC and BIA Company

limited as at 31st December, 2008 as follows:
Balance Sheets on 31/12/2008

WAZO PJC
BIA Company Ltd
N
N
Assets:
Fixed Assets:
Freehold Premises
Plant & Machinery
Fixtures
Goodwill
Current Assets:
Investments
Cash
Debtors
Stocks
Bank
Current Liabilities
Creditors
Accrued expenses
Corporate Tax
Financed By:
Share capital
Share premium
Profit & Loss
8% Debentures
146,312
200,000
120,000
40,000
506,312
486,000
156,000
390,000
1,032,000
50,000
46,700
184,300
192,000
86,000
559,000
124,200
256,000
144,000
25,000
549,200
98,000
46,000
44,000
188,000
46,000
120,000
166,000
450,000
127,312
577,312
300,000
877,312
600,000
215,000
175,200
990,200
425,000
1,415,200
The shareholders of both WAZO PLC and BIA Company limited

decided to amalgamate the two companies with effect from 1st January,
2008. It was therefore agreed that:
167
BHM112
a) A new company WAZOBIA PLC is to be formed and should take
over the assets and liabilities except where reservations are made.
b) The purchase consideration of WAZO PLC is agreed to be
N1,400,000 and should be satisfied by an issue of 1,000,000 ordinary
shares of 50k each and the balance to be paid in cash.
c) The assets and liabilities of WAZO PLC are to be taken over at their
balance sheets values except investments which are to be taken over
at their market value of N65,000 and debtors after making provision
for bad debts of 1.5%.
d) The assets of BIA limited are to be taken over at their book values
except the following which are to be taken over at the valuation
shown:
N
Freehold premises
800,000
Plant and Machineries
250,000
Goodwill
600,000
Debtors
250,000
The purchase of BIA limited is to be made by an issue of sufficient
number of ordinary shares necessary to give it 45% ownership plus a
cash payment of N842, 000.
f) Dala PLC and Kurna PLC should each subscribe for 600,000
ordinary shares of 50k each at a premium of 1.50k per share.
e)
The whole money should be paid for on application.

You are required to show the above transactions in the books of:
a) WAZO PLC
b) BIA Company Limited
c) WAZOBIA PLC.
3a)
b)
What do you understand by the term Purchase Consideration?

How is purchase consideration determined?
4a)
b)
How is the vendor in a takeover bid usually paid?

In what ways may limited companies amalgamate their
businesses?
5a)
b)
Describe a scheme of amalgamation by absorption.

How is a controlling interest in a company acquired?
7.0

Accounting. Lagos: El-TodaVentures.
16
8
BHM112

Practice, ICAN PEIII Study Pack, Lagos-Nigeria: VI Publishing
Company Ltd.
Dandago, K.I. (2001). Financial Accounting Simplified (2 nd ed.). Kano:
Accounting, Lagos: Tonad Publishers Limited.
Standard (SAS) 26.
169
BHM112
UNIT 5
INTRODUCTION TO FINANCIAL RATIO

ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Financial Ratio Analysis
3.1.1 The Concept of Ratio
3.2
Comparative Analysis Using Ratios
3.3
Users of Accounting Information and Their Interests
3.4
Types of Ratios and Their Formulae
3.4.1 Overall Performance Ratios
3.4.2 Profitability Ratios
3.4.3 Productivity Ratios
3.4.4 Liquidity Ratios
3.4.5 Capital Structure Ratios
3.4.6 Investment Ratios
4.0 Conclusion
5.0 Summary
1.0
INTRODUCTION
Financial analysis is clearly the most important criterion for evaluating

management performance, in particular, and the enterprise as a whole.
The management of an enterprise and its outside suppliers of capitalcreditors and investors- would want to undertake financial analysis in
order to make rational economic, political or social decisions. This Unit
introduces the concepts of ratio and financial analysis, emphasizing on
the use of accounting ratios for effective financial analysis by business
organizations.
2.0
17
0
OBJECTIVES
BHM112

appreciate the concept of ratio
understand how to conduct financial analysis, using accounting
ratios
test the efficiency and effectiveness of business enterprises
3.0
MAIN CONTENT
3.1
Financial Ratio Analysis
3.1.1 The Concept of Ratio

To evaluate the financial condition and performance of a business entity,
the financial analyst needs certain yardsticks. The yardstick frequently
used is a ratio, or index, relating two pieces of financial data to each
other. A ratio is one number expressed in terms of another and is found
by dividing one number, the base, into another. Its analysis facilities
evaluation of accounting information by reducing complicated data into
a smaller set. The use of ratios in accounting and finance provides the
means of testing the efficiency of key features of a business as
represented in the final accounts.
Define the term ratio.
2. What is ratio use for in accounting?
1.
3.2
Comparative Analysis Using Ratios
The analysis of financial ratios involves two types of comparison. First,

the analyst can compare a present ratio with past and expected future
ratios for the same company. The acid-test ratio for the present year-end
could be compared with the acid-test ratio for the preceding year-end.
Using the computed financial ratios for a number of years, an analyst
can study the composition of changes in financial condition and
performance of a business over time. In the comparison over time, it is
best to compare not only the financial ratios but also the raw figures.
The second method of comparison involves comparing the ratios of the
one business with those of similar businesses or with industry average at
the same point in time. Such a comparison gives insight into the relative
financial condition and performance of a business. It is only when
171
BHM112
comparing the financial ratios of one business with those of similar

businesses or industry average that one can make realistic judgments.
1. Discuss the two type of comparison in ratio analysis.
2. Why is it important to compare raw figures apart from the ratios
computed from them?
3.3
Users of Accounting Information and Their Interests
The type of financial ratio analysis varies according to the specific

interests of the party involved. A trade creditor is interested primarily in
the liquidity position of a business. His claim is short-term, and the
ability of a business to pay this claim is best judged by means of a
thorough analysis of its liquidity position, and so financial ratios to be
analyzed must be liquidity-testing in nature.
The claim of a bondholder, on the other hand, is long term.
Accordingly, he would be more interested in the cash flow ability of the
business to service debt over the long run. The bondholder may
evaluate this ability by analyzing the capital structure of the business,
the major sources and uses of funds, its profitability over times and
projections of future profitability. Ratio-wise, he would concentrate on
debt and profitability ratios.
An investor in a companys common stock is concerned principally with
present and expected future earnings and the stability of these earnings
about a trend. As a result, the investor might concentrate his analysis on
the profitability of the business. He would be concerned with its
financial condition in so far as this condition affects the stability of
future earnings. In his analysis, therefore, investments and profitability
ratios would be concentrated on.
In order to bargain more effectively for outside funds, the management
of a business should be interested in all aspects of financial analysis that
outside suppliers of capital use in evaluating the business. In addition,
management employs financial analysis for purposes of internal control.
In particular, it is concerned with profitability on investment in the
various assets of the business and in the efficiency of assets
management. Management, therefore, should use all types of ratios in
order to adequately analyze or test its performance.
Other interested groups in financial statement of businesses, who
conduct financial ratio analysis, in one way or the other, are government
17
2
BHM112
and its agencies, potential buyers of business, actual and potential

customers and present and aspiring employees.
1.
Discuss any three users of accounting information and their

information needs.
2. Why should management of a business be interested in all aspects of
financial analysis?
3.4
Types of Ratios and Their Formulae
Ratios can be categorized in different ways. But for the purpose of our
studies, financial ratios can be divided into six types: Overall
Performance, Profitability, Productivity, Liquidity, Capital Structure and
Investment ratios. Some of the ratios are computed from the Balance
Sheet, some from the Income Statement and others from both the
Balance Sheet and the Income Statement. It is important to recognize
from the outset that no one ratio gives us sufficient information by
which to judge the financial condition and performance of a business. It
is only when we analyze a group of ratios that we will be able to make
reasonable judgments.
3.4.1 Overall Performance Ratios

These ratios are used to test the general performance of a business and
its management. Some of the ratio here are:
(i) Return On Investment (ROI) given by:
NetProfitaftertax
Total Assets
x 100
The ratio relates the profit earned, after tax and interest, to the total of
the financial structure (total assets) of the business. It is used as the best
test of the efficiency of management in the use of the resources of the
business. It is sometimes called Earning Power Ratio. The higher the
earning power, the more profitable the business is.
(ii) Return On Capital Employed (ROCE) given by:
NetProfitbeforetaxandinterest
Capital Employed
x 100
The ratio relates the profit earned before tax and interest to the amount
of long term capital invested in the business. Capital employed means:
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BHM112
Total Assets less Current Liabilities (or just owners equity plus longterm liabilities). It is a test of the ability of a business to earn profit,
making effective use of capital under its dispensation. The higher the
ROCE, all things being equal, the more profitable the business would
be.
(iii) Returns On Equity (ROE) given by:
NetProfitaftertax x 100
Owners Equity
OR
NPaftertaxPref.Div. x 100
Net Worth Pref. Share
This ratio shows the actual return to the shareholders only, as the
payment of interest to long term lenders, and, of course, taxes to
government have been deducted. Comparison should be made with the
returns in other investment, e.g. bank deposit interest, for a better
assessment of a business that is apart from the inter-firm comparison
and comparison over time.
3.4.2 Profitability Ratios

These ratios are used to test the profitability of a business in relation to
turnover (sales). Some of the ratios are:
(i)
Gross Profit Margin (GPM) given by:
Sales-Costofgoodssold x 100
Sales
OR
GrossProfit x 100
Sales
This ratio is a good measure of the efficiency of a business operations.
Increase in the ratio indicates increase in efficiency or performance.
(ii)
Mark-up on Cost (MOC) given by:
GrossProfit x 100
Cost of Goods sold
17
4
BHM112
This ratio serves the same purpose as (i) above. The two ratios are used
to analyze the trading profitability of a business. A fall in these ratios
below expectation may be due to (a) reduction in selling price, (b) Poor
buying or (iii) Poor stock control.
(iii) Net Profit Margin (NPM) given by:
NetProfitbefore tax x 100
Sale
This ratio measures the final profit made on sales after all of the running
expenses have been deducted from the gross profit. If this ratio is
falling whilst gross profit margin remains constant, then increases in
running costs (selling, administrative costs) should be investigated and
efforts made to reduce them.
3.4.3 Productivity Ratios

These ratios are used to test the level of sales (turnover) obtained from
the assets employed by the business. The higher the ratios, the better the
performance of the reporting entity.
(i)
Sales Per Employee (SPE) given by:
Sales
Number of Employees
This ratio is used to measure the productivity of the employees of a
business. The effective use of labor is one of the key tasks of the
management of a business and, so, this ratio is very important in that
test. It is also relevant to the employees as it reflects their efforts during
an accounting period; it shows increase or decrease in the employee
effectiveness. The ratio is expressed in Naira (=N=) term.
(ii)
Assets Turnover Ratio (ATR) given by:
Sales
Total Assets
This ratio expresses the number of times the value of assets utilized by a
business has been generated into sales. The ratio is expresses in times.
(iii)
Stock Turnover Ratio (STR) given by:
CostofGoodsSold
Average Stock
OR
Sales
Stock or Average Stock
175
BHM112
This ratio is an important measure of the effective use of stock by a

business. The adequacy of the ratio will depend on the type of industry.
For example, a supermarket is likely to turnover its stock much more
quickly than a furniture-making shop or jewelry. If the turnover is
declining then the reasons should be investigated. Possible factors
would include: (a) a large amount of slow moving or obsolete stock, (b)
high levels of stock being held, (c) a wide range of products being
stocked and (d) lack of control over purchasing.
iv(a) Debtors Turnover Ratio(DTR) given by:
Sales
Debtors
(b)
Average Collection Period (ACP) Ratio given by:
DebtorsorReceivablesx 365days
Credit Sales
3.4.4 Liquidity Ratios

Liquidity ratio is the term used to describe the extent to which a
business can pay its debts as they fall due. Insolvency is the state of
being unable to pay debts as they fall due. Insolvency may lead to
bankruptcy and collapse of the business
Investors are unwilling to buy shares in, or lend money to, a company
which is insolvent and traders are unwilling to supply goods on credit to
companies that are or are likely to become insolvent. Some of these
ratios are:
(i)
Current Ratio (CR) given by:
CurrentAssets
Current Liabilities
This ratio compares all short-term resources with all short-term
obligations and indicates the ability of a company to meet its short-term
debts using short-term sources of finance. As a guide, most businesses
will require a ratio of 2:1. Too high the ratio will suggest too much
money tied up in current assets; whilst too law the ratio could be
dangerous if the creditors press for a quick payment.
(ii)
Acid-Test Ratio (AR) or Quick Ratio (QR) given by:
CurrentAssetsStock
17
6
BHM112
Current Liabilities
This ratio takes tougher view as it excludes stock from the numerator.
This is done because in some businesses it takes a long time to turn
inventory into cash. As it is rare for trade creditors to ask for payment at
the same time, time is normally allowed for money to be obtained from
debtors good debtors. A reasonable quick ratio is 1:1.
(iii)
Average Payment Period (APP) given by:
TotalCreditorsx365days
Credit Purchases
NB: Some analysts use 360 days for a year. The period can be
expressed in terms of months in which case 12 months would be
multiplied with instead of 360 days.
This ratio reveals the average number of days taken by a business in
making payment to trade creditors. A higher (than average credit period
granted by creditors) ratio will indicate a high degree of insolvency. A
low ratio indicates an efficient credit payment system.
3.4.5 Capital Structure Ratios

Companies are usually financed by (a) short-term loans like trade credit
and bank overdraft; (b) Long-term loans like debentures or loan stocks;
(c) Money deposited by persons or institutions who become
shareholders or (d) Retained Earnings or Undistributed profit which
belong to shareholders. The funds obtained through (a) and (b) are
known as DEBT while those obtained through (c) and (d) are called
EQUITY or shareholders funds. Capital structure is about the longterm capitalization of a business which is given by the equity plus the
long-term debt. Some of the ratios here are:
(i)
Gearing (Debt) Ratio (GR) given by:

TotalDebts x 100
Total Assets
The ratio measures the extent to which a business is financed by debt.

Prospective lenders may wish to see the shareholders contribution
constituting at least 50% of the overall assets value of the business
before lending their money to it, they may not be prepared to lend if
further lending would push gearing ratio too high.
177
BHM112
(ii)
Debt-to-Net-Worth Ratio (DNWR) given by:

TotalDebts x 100
Net Worth
This ratio relates total debts (including current liabilities) to net worth
(Equity). Depending upon the purpose for which the ratio is used stock
sometimes is included as debt rather than as net worth, when analyzing a
business. This is because preferred stock represents a prior claim from
the standpoint of the investor in common stock. The ratio is a very good
test of the long-term liquidity of a business, that is, its ability to meet
long-term obligations.
(c)
Long-term Debt to Capitalization(LDCR) given by:

Long-termDebts
x 100
Total Capitalization
This ratio indicates the relative importance of long-term debts in the

capital structure or total capitalization of a business. Capitalization is
usually defined to be invested capital (i.e. non-current liabilities) plus
owners equity. It is about the capital structure of a business or its
financial structure (total assets) less current liabilities. Debt ratios tell us
the relative proportions of capital contributed by creditors and by
owners. They are strong means of measuring the financial risk of a
business.
(d)
Interest Cover Ratio(ICR) given by:

EarningsBeforeInterestandTax(EBIT)
Interest Charged
An important factor affecting lending decisions is the ability of a

business to satisfactorily meet its interest payments. If the gearing ratio
is very high, a business will have large interest expenses to meet out of
profit.
Interest cover ratio indicates the level of cover which the business has
achieved. It shows the number of times the profit before interest and tax
will cover the interest charged on the debt, at any given period of time.
3.4.6 Investment Ratios

The financial statement of quoted companies are used by prospective
and existing investors and their advisers in order to make investment
17
8
BHM112
decisions like buying more shares, holding on shares or selling out

shares. The investors are anxious to be reasonably assured that the
security (share or stock) which they acquired or intend to acquire will
offer a positive flow of future income or that its value will be
appreciating. It is this assurance that encourages investors to commit
their savings or, sometimes, borrowed funds.
Decisions on investment are assisted by investment ratios to be
calculated from the financial statements of the target businesses or to be
obtained from the published analysis on the pages of financial dailies or
weeklies. Some of these ratios are:
(i)
Earning Per Share (EPS) Ratio given by:

Profitbeforetax
Number of Shares (Common Stock)
This ratio is used to measure the success of a business in terms of profit

attributable to each share held in the company. Success may result from
improved performance in the use of assets. Growth resulting from
improved performance is the real measure of a business success.
(ii)
Price Earning (P/E) Ratio given by:

QuotedPrice(Marketprice)ofoneshare(ifany)
Profit attributable to one share (EPS)
This ratio shows the confidence a shareholder can place in the profit
growth of a business. A high P/E ratio suggests strong shareholders
confidence in the business and its future, and a low P/E ratio suggests
low confidence. It is the most important ratio that influences price
movement on most Stock Exchanges.
(iii)
Earning Yield Ratio given by:

EPS
Market Price
x 100
This ratio is the reciprocal of price earnings ratio. It shows the return on
current market price.
iv)
Divided Per Share (DRS) Ratio given by:

DividendPaid(orProposed)
Number of Shares
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BHM112
This ratio indicates the dividend payable per share held in company.
(e)
Dividend Yield, given by:
DPSx 100
Market Price
This is relates the income from shares (the dividend) to the value of the
investment in the business. The result can be compared with interest
rates from other types of investments.
(vi)
Dividend Cover Rover Ratio, given by:

ProfitavailabletoOrdinaryShareholders
Dividend Declared
Or
Earnings
Dividend
The ratio shows the number of times dividend is covered by earnings.
The ratio indicates dividend and retention policy of a business, which is
about amount to be paid as dividend to shareholders, out of the profit
realized, and the amount to be retained in the business to finance future
growth and expansion.
NB: Comparison has to be made with ratios of similar businesses or
with the ratios of the business over time before reaching conclusion on
the favorableness or otherwise of any of the twenty-three ratios
discussed above, or any selection there from for meeting the
requirements of an interested analyst.
1. Discuss the importance of Overall Performance Ratios.
2. Compare the relevance of Liquidity Ratios and Productivity Ratios
in testing the performance of a business.
4.0
CONCLUSION
The financial reports of enterprises are useless if they are not subjected
to critical analysis and interpretation. The analysis is to be as
comparative as possible, employing an objective tool/yardstick. The tool
normally used by financial analysts to test the health, productivity and
profitability of a business is ratio. This Unit presents an in-depth
18
0
BHM112
introductory discussion on the concept of ratio and how to employ it in

the conduct of effective financial analysis with a view to making a lot of
revelation about the performance of a reporting entity.
5.0
SUMMARY
This Unit has discussed the concept of ratio, use of ratios in financial
statements analysis and interpretation, users of financial ratios and their
interest and different classifications of financial ratios. The formulae for
these ratios and how to use the ratios in taking informed decisions were
discussed to guide students as to what they should be looking out for as
they study financial statements of enterprises for various decision
making purposes.
6.0
1.
What do you understand by the term Ratio Analysis and in

what ways is it useful to an understanding of a business financial
statement?
2.
Discuss the limitations of Ratio Analysis as a means of

appraising business performance.
3.
Enumerate five users of accounting information and discuss the

information needs of any three of them, explaining how the needs
are to be satisfied through ratio analysis.
4.
Explain the following classifications of ratios, giving TWO

example(s) of each:
(a)
(b)
(c)
(d)
(e)
(f)
Profitability ratios
Liquidity ratios
Gearing (capital structure) ratios
Investment ratios
Productivity ratios
Overall Performance ratios
2.
Differentiate between the following:
(a)
(b)
(c)
Capital structure and Financial structure

Balance Sheet items and off-balance sheet items
Financial Analyst and Financial Adviser
181
BHM112
7.0

Jennings, A. R. (1993). Financial Accounting (16 th ed.).London: DP
Publications.
Accounting, Lagos: Tonad Publishers Limited.
18
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NATIONAL OPEN UNIVERSITY OF NIGERIA

SCHOOL OF BUSINESS AND HUMAN RESOURCE

COURSE TITLE: GENERAL ACCOUNTING II

Professor Kabiru Dandago Isa (Developer/Writer) - BAYERO

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

First Printed 2010

All Rights Reserved

What You Will Learn in This Course .

Working through This Course..

Tutor-Marked Assignment (TMAs) 7

What You will Learn in this Course

1. Treating Prepaid and accrued expenses

18. Understanding the indication of incomplete records

38. Knowing the disclosure requirements on stock as stated in SAS

50. Knowing how to treat installment payments

57. Testing the efficiency and effectiveness of business enterprises

Working through this Course

Major components of the Course are:

Textbooks and Other Reading Materials

They are as follows:

Accrual and Prepayments

Provision for Bad and Doubtful Debts

Methods of Providing for Depreciation

Unit 4 Accounting for Depreciation

Accounting for Fixed Assets

Final Accounts from Incomplete Records

Introduction to Partnership Final Accounts

Accounting for Changes in Partnership

Stock valuation Methods

Hire-Purchase Accounts and Installmental Payments

Sales and Purchases of Business (Business Combination)

Introduction to Financial Ratios Analysis

The first unit presents Accruals and Prepayments, including Prepaid

The seventh unit discusses the Concept of Partnership Final Accounts,

the tutor-marked assignments,

you are to apply your residual knowledge and

Final Examination and Grading

It will attract the

Professor Kabiru Dandago Isa (Developer/Writer) - BAYERO

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

Accrual and Prepayments .

Final Account from Incomplete Records ..

Branch Accounts 104

Accrual and Prepayments

ACCRUALS AND PREPAYMENTS

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

Accruals and Prepayments

These are amounts incurred for the purpose of earning an income.

3.2.1 Prepaid Expenses

3.2.2 Accrued Expenses

3.3.1 Income in Advance

This is where sums have been received during a period in respect of

3.3.2 Income Due

Madam Titilayo is a trader whose financial year ends on 31st December.

Owing as at 31st Dec.2003 N162; owing as at 31st December, 2004,

Prepare all the necessary ledger accounts to reflect the various

Show the balance sheet extract as at 31st December, 2004.