THE UNIVERSITY OF BAMENDA

HIGHER INSTITUDE OF COMMERCE AND MANAGEMENT (HICM)

DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE CODE AND TITLE: ACC4103 (INTERMEDIATE ACCOUTING)

CREDIT VALUE: 4
CORUSE STATUS: CORE COURSE (C)
VENUE OF LECTURES: HITL RI
COURSE INSTRUCTOR: Dr. Mukah Samuel/ Armstrong peace N F

COURSE OBJECTIVE
This course is prepared for students at the intermediate level of accounting at both professional
and university milieus. The focus of intermediate accounting is to reinforce the development of
accounting information for the use of business owners, leaders, managers, customers and other
parties interested in the financial dealing of a business. The main goal therefore, is to assist
students develop skills to construct, interpret and use accounting information intelligently and
effectively and to apply to a variety of new and real world situations.
WEEK TOPICES (CHAPTER, SECTIONS AND ACTIVITY
PARAGRAPHS L T P
WEEK I CHAPTER ONE: BASIC FINANCIAL STATEMENTS
1.1 Introduction
1.1.1 Objectives
1.1.2 Key terms
3.2 Structure of financial statement
1.2.1 Stock control account
1.2.2 Profit and loss account (income statement)
1.2.3 Balance Sheet L
Example 1.1
WEEK 2 CHAPTER 2: ADJUSTMENTS IN THE FINAL L T
ACCOUNTS
2.1 Introduction
2.1.1 Objectives
2.1.2 Key terms:
2.2 Carriage in and carriage out
2.3 Bad debts
1.4 Provision for bad and doubtful debts
2.4.1.1 Debt ageing analysis
2.4.1.2 Percentage of credit sales
2.4.1.3 Percentage of outstanding debtors

WEEK 3 2.5 Bad debts recovered

2.6 Drawings
2.7 Discount received and allowed L T
2.8 Accruals and prepayments
 2.8.1 Accrued income
2.9 Depreciation
WEE 4 CHAPTE 3: THE BANK RECONCILIATION
STATEMENT
3.1 overview and the purpose of bank reconciliation
3.1.1 overview
3.1.2 purpose of bank reconciliation
3.2 causes of the differences between cash and bank L T
balance
3.2.1 timing differences
3.2.2 differences caused by errors and omissions
3.3 the bank reconciliation process
3.3.1 bank overdrafts
3.3.2 dishonoured cheques
WEEK 5 CHAPTER 4: CONTROL ACCOUNTS
4.1 overview L T
4.2 uses of control accounts
4.3 sales ledger control accounts
4.4 purchase ledger control accounts
WEEK 6 CHAPTER 5: THE JOURNAL PROPER L T
5.1 overview of the journal and its records
5.1.1 introduction
5.1.2 journal records
5.2 elements of a general journal
5.3 recording transactions in the journal
5.4 sales and purchases returns journal
5.4.1 return inwards (sales returns)
5.4.2 returns outwards (purchases returns)
WEEK 7 CHAPTER 6: ACCOUNTING FOR ERRORS AND L T
THEIR CORRECTIONS
6.1 introduction
6.2 types of accounting errors
6.2.1 errors affecting the trial balance
6.9.2 errors not affecting the trial balance
6.3 correction of errors
6.3.1 correction of errors affecting the trial balance
6.3.2 correction of errors not affecting the trial balance
WEEK 8 Continuous assessment L T
WEEK 9 CHAPTER 7: PROPERTY, PLANT AND EQUIPMENT
7.1 Introduction
 7.2 Objectives
7.3 Key terms L T
7.4 Classification of long term assets
7.5 Accounting for property, plant and equipment
7.5.1 Revenue expenditure and capital expenditure
7.5.2 Relevant cost of a property, plant and equipment
7.6 Accounting for the use of Property, plant and
equipment

WEEK 10 7.7 Methods of estimating depreciation

7.7.1 The straight line method
7.7.2 Fixed rate reducing balance method
7.7.2.1 Advantages and disadvantages
7.7.2.2 Assets acquired in the middle of the year
7.7.3 Rate of usage method L T
7.7.3.1 Usage in units
7.7.3.2 Usage in hours
7.7.3.3 Advantages and disadvantages
7.7.4 Sum of digits method
7.7.4.1 Advantages and disadvantages
7.7.5 Double-declining balance method
7.7.6 Revaluation method
7.8 Revaluation of property, plant and equipment
7.8.1 Exchanges of assets
7.8.2 Depreciation policy
7.8.3 Disposal of assets
7.8.4 Schedule of property, plant and equipment
7.8.5 Derecognition

WEEK 11 CHAPTER 8: MANUFACTURING ACCOUNTS

8.1 Cost classification and apportionment
8.2 Manufacturing accounts L Y
8.3 Work-in-progress
8.4 manufacturing profit
8.5 Valuation of stock of finished goods
WEE 12 CHAPTER 9: INCOMPLETE RECORDS L T
9.1 Approach to completing records
9.2 Preparing final accounts from incomplete records
WEEK 13 Revision and make up lessons L T
TEACHING METHOD AND APPROACH
 power point presentation, physical and online lectures
 tutorials, which may include individual and or group work
 assignments
ASSESSMENT METHOD
In order to sit in the exams, students are expected to have an attendance record of at least 75%
Students will be assessed at least two times. First of all a CA which can either be in the form of
an assignment or a class test carrying 30% of the final examination carrying 70% of the final
mark of the student
COURSE OUTCOME
At the end of this course
 understand the process the learner should be able to;
 understand the process and objective of accounting
 appreciate transaction documents and their uses,
 record transactions in the various books of original entry,
 prepare basic cashbook, petty cashbook and carryout other accounting entries
 prepare control accounts
 extract and prepare trial balances
 And carry out many other accounting operations.
SELECTED TEXT BOOKS FOR READING
Dabor, L. (2008), basic business accounting. Benin City. DanDiamond Publisher. 1st editions
Kenji Brothers (2013), Financial Accounting. 1st edition
Kohler, E.L. (1970), A Dictionary for Accountants. Englewood. Cliffs New Jersey: prentice hall
Inc, 4th edition.
Mukontso, M. et al (2004), Basic Accounting and Commercial Documents. Bamenda: Mbasso
Publishers. 1st edition.
 CHAPTER ONE

BASIC FINANCIAL STATEMENTS

1.1 Introduction

During your previous study especially in principles of finance, you have drawn books of
accounts and recorded different types of transactions. The process of constructing such books of
accounts is often referred to as book keeping. The next stage involves summarization of
information recorded in a ledger. The accountant will use the book keeping information, which is
summarized in the trial balance to produce the financial statements of the business. The financial
statements can be drawn at any interval but it is customary to draw them on annual basis.

Financial statements may be presented in a vertical format, or a horizontal format. The vertical
format is the most commonly used in modern accounting and as such will be used as a standard
format in this course.

1.1.1 Objectives

After studying this chapter, you should be able to;

- Appreciate the purpose of financial statements

- Understand the link between ledgers and financial statements
- Draw a basic profit and loss account and balance sheet.

1.1.2 Key terms

Financial statements: summary statement of results of business activities for an accounting

period and balances as at the end of that period. They include profit and loss account and balance
sheet.

Profit and Loss account: a summary statement that shows the results of activities (profit or
loss) during an accounting period.

Balance sheet: A statement of balances of accounts, assets, liabilities and capital as at the end of
an accounting period.
3.2 Structure of financial statement

Financial statements are structured financial presentations of the financial position of an entity as
well as the results of its operations. The main objective of financial statement is to provide
information about the financial position and performance of the entity that is useful to the users
in making decisions. For this purpose, financial statements generally provide information about
the entity’s:

a) Income and expenses, including gains and losses

b) Assets;
c) Liabilities;
d) Capital;

A basic set of financial statements includes;

a) Profit and loss account (income statement)

b) Balance sheet;

The trial balance forms the bridge between bookkeeping and preparation of financial statements.
All the items appearing on the trial balance are used in the financial statements. However it must
be noted that the trading account and the profit and loss account are both ‘accounts’ through
which double entry is effected and are maintained in the general ledger. On the other hand, the
balance sheet is not an account, but like the trial balance is a statement of account balances only
that unlike the trial balance it is drawn after the trading, profit and loss accounts have been drawn
and is drawn in a prescribed format so as to present the required information.

1.2.1 Stock control account

The stock control account reflects the total amount or value of all stock items. The balance of
each of the individual stock item list which represents the amounts or value of the individual
stock items obtained from the individual balances in the various subsidiary ledger accounts for
each stock item. The subsidiary ledger is known as the stock item ledger. In the stock ledger, the
transaction details and additional information regarding each stock item such as the cost prices,
selling prices, quantities, and location on the shelves, etc, may be stored. The stock ledger is also
a register of each and every stock transaction, how many items are purchased, sold etc.

Stock control A/C

DEBIT CREDIT
Bal b/f (opening stock Xxx Return outwards xxx
Purchases Xxx Cost of goods sold xxx
Bal c/f (closing stock) xxx
xxx xxx

1.2.2 Profit and loss account (income statement)

Profit and loss account is a summary statement that shows the results of activities during the
accounting period. It includes summary totals of income i.e sales revenues, and cost of those
sales together with expenses incurred to facilitate the operations of the business

Profit (loss) = Sales revenue-Cost of sales – Expenses

Trading profit and loss account for the year ended 20XX

Sales xxx
Cost of sales (xxx)
Gross profit xxx
Expenses
Salaries and wages xxx
Electricity xxx
Others xxx
Total expenses xxx (xxx)
Net profit xxx

Cost of sales is the cost of purchases adjusted for any unsold goods at the beginning and at the
end of the period. It is unlikely for a business to have sold all the goods at any particular date. In
most cases, there would be stock in hand at the end of the trading period. For purposes of
drawing financial statements, this stock is counted and valued at end of the period. The figure
obtained is normally called the closing stock (opening stock in case of stock at beginning of
period brought forward from the previous period) and the details are normally given as a note at
the end of the trial balance (opening stock normally appears as debit in the trial balance).

Cost of sales is obtained as follows;

Opening stock xxx
Purchases xxx
Closing stock (xxx)
Cost of sales xxx
Notice the language and process of accounting introduced here. When figures are listed and
underlined, it means they are added up and if a figure is put in brackets, it is subtracted. The total
of the arithmetic operation is written below the underline.

It is necessary at this point to introduce the concept of stock control account.

In drawing the trading, profit and loss accounts two new concepts have been introduced.

i) Gross profit

This is the difference between sales revenue and cost of sales. It is otherwise known as
trading profit. The part of the statement that derives the gross profit is known as trading
account.

ii) The Net Profit

This is calculated in the profit and loss account and is what remains after all other costs used
up in the period have been deducted from the profit.

It is common for the trading and the profit and loss accounts to be presented as one
statement, the trading account being the upper section.

1.2.3 Balance Sheet

Balance sheet shows the resources that remain at the end of the period and available for use in
the next period(s). It also shows claims to those resources that remain unpaid at the end of the
period and the difference which is capital presented in the various forms it is constituted.

Resources are described as assets. Assets can either be fixed or current. Fixed assets are those
assets that are acquired for use over a long period of time. They are also referred to as non-
current assets. They include; land, buildings, motor vehicles, etc. The balances for such assets
are obtained from the general ledger. Current assets are short term assets such as stock, debtors,
and cash and may be classified as short term assets. Short term (current) liabilities are liabilities
expected to be settled within one financial year such as creditors. Long term liabilities are
payable over a long period of time and include such liabilities as bonds payable.
Balance sheet at a given date
Non-current assets
Land and buildings xxx
Plant and machinery xxx
Motor vehicles xxx
xxx
Current assets
Stock xxx
Debtor’s xxx
Cash xxx xxx
Current liabilities
Creditor’s xxx
 Bank overdraft xxx (xxx)
Net assets xxx

Financed by
Capital xxx
Net profit xxx
Total capital xxx

Notice that capital structure depends on the business organization as well as the various forms of
financing used by the firm. The net assets figure must equal that of the total capital.

Example 1.1

The trial balance of Daybreak Ltd as at 31 December 2019 is as follows;

ELEMENTS DEBIT(FCFA) CREDIT(FCFA)
Sales 252,500
Purchases 148,800
Advertising 5,400
Telephone 3,700
Stock 1stJan 2019 12,350
Salaries and wages 46,000
Electricity 3,000
Rents 2,000
General expenses 4,700
Land and buildings 100,000
Furniture 30,000
Motor vehicles 21,500
Debtors 23,850
Cash 125
Creditors 12,041
Capital 136,884
401,425 401,425

The stock as at 31 December 2019 was valued at 16,300,000 FCF.

Work Required: Prepare the trading profit and loss account and the balance sheet for the year
ended 31st December 2019.
 CHAPTER 2

ADJUSTMENTS IN THE FINAL ACCOUNTS

2.1 Introduction

The presentation of financial statements may require several adjustments to the book of accounts
balances. The basic financial statements covered in the previous chapter were grossly simplified
to illustrate the accounting framework. The real business world is a lot more complex and several
adjustments are required. These adjustments are the subject of this chapter.

2.1.1 Objectives

After studying this chapter, you should be able to

- Identify the need for adjustments of accounts.

- Make various adjustments in conformity with the accruals concept of accounting
- Adjust accounts for carriage, discounts, bad debts and drawings.
- Undertake basic accounting for depreciation expense
- Draw more complex profit and loss account and a balance sheet of a sole proprietor.

2.1.2 Key terms:

Carriage: cost of transporting goods to the business premises or to customers

Cash discount: allowance given in the form of debt reduction as a result of prompt payment.

Bad debt: A debt owed to a business that is not expected to be received.

Returns inwards: Goods sold but returned by customers. Also known as sales returns.

Returns out: goods bought but returned to suppliers. Also known as purchase returns.

Drawings: cash or goods taken out of business by the owner for personal use.

Accruals: expenses incurred but not paid for by the end of the accounting period.

Prepayments: expenses paid for in advance of the period in which they will be incurred.

Depreciation: amount charged to the profit and loss account to reflect the wearing out of a fixed
asset over its useful life as a result of its usage, obsolescence or passage of time. The purpose of
depreciation is to comply with the accruals concept in the allocation of the cost of long-term
asset.

Net book value: Cost of a fixed asset less the cumulative amount of depreciation at the balance
sheet date. Fixed assets are stated in the balance sheet at their net book value (or written down
value)
2.2 Carriage in and carriage out

A business may incur cost of bringing goods bought to its premises (or warehouse). This is a
separate cost from other transport cost and is described as carriage in-wards (expenses).
Carriage-inwards is associated with the purchase of goods, therefore it is added to the purchases
in the computation of cost of sales. Notice that the cost of transporting goods to the premises
from the supplier can be incurred by the supplier who in turn charges the business a bill inclusive
of that transport cost. Alternatively the business may make its own transport arrangements and
buy the goods from the supplier net of transport cost. In either case, the transport cost is part of
the cost of the goods bought. The purpose is to ensure comparability.

Businesses may also incur transport expenses for distributing goods sold to its customers. The
cost is separated from other transport cost. It is described as carriage outwards. Carriage
outwards, unlike carriage-inwards is charged directly to the profit and loss account.

Trading, profit and loss a/c

Sales xxx

Sales returns (xxx)

xxx
Opening stock xxx
Purchases xxx
Carriage in xxx
Purchase returns (xxx)
Closing stock (xxx) (xxx)
Gross profit xxx
Expenses
Other expenses xxx
Carriage out xxx (xxx)

Net profit xxx

2.3 Bad debts

Goods sold on credit may or may not be paid for. Some of the customers may fail to pay because
of several reasons such as bankruptcy. When the goods were sold, the entire credit sale had been
recognized as sales revenue. If any of the customers fails to pay, then the revenue recognized
will not be realized. This will be the bad debt. Bad debts are written off against profits as an
expense.

Examples of instances in which debts are declared bad (uncollectible) are:

- The customer in question dies and there’s nothing to recover from his estate.
- If the customer is declared bankrupt and nothing is recovered from any of his property
- If the customer becomes insane and no property can be attached.

The book entry for bad debts is as follows:

Debtor’s a/c

Bal b/f xxx sales return xxx

Sales xxx cash xxx

Bad debts xxx

Bal c/f xxx

xxx xxx

Bad debts a/c

Debtor’s account xxx profit and loss xxx

xxx xxx

1.4 Provision for bad and doubtful debts

Bad debts are those debts that a business is not able to collect. These are written off as an
expense. Some debtors may not qualify to be bad but their collection may be in doubt. These
may include debtors that have taken longer than the normal/agreed credit period. It may also
include debts held by people whose ability to pay is in doubt. Prudence requires that such debts
be set aside as doubtful. A provision for bad and doubtful debts is set, at the end of the period. It
is compared with the amount of provision set in the previous period. If there is an increase in the
provision, then such an increase is charged to profit and loss account as an expense. If it is a
decrease, then the decrease amount is a credit to the profit and loss account. In the balance sheet,
provision for bad and doubtful debts at the end of the year is deducted from the debtors’ figure.

Provision for bad and doubtful debts a/c

Bal b/f xxx

 Bal c/f xxx profit and loss a/c xxx (increase)

xxx xxx

2.4.1 Determination of the amount of provision for bad and doubtful debts

The determination of the amount of provision for bad and doubtful debts is a matter of policy
and may vary from one firm to the other. Some of the methods that may be used are;

i) Debt ageing analysis

ii) Percentage of credit sales
iii) Percentage of debt outstanding

2.4.1.1 Debt ageing analysis

According to this method an analysis of outstanding debtors account balances is carried out
according to periods of time that each of these debts are outstanding. For this purpose an ageing
schedule or an age analysis report is developed. An age analysis report is simply a list of
outstanding debts, which originated in a specific period. The business may set a policy that those
debts outstanding beyond a specified period are deemed to be doubtful.

For example, Kanjo had the following debt aging analysis as at 31st December 2019.

Debt aging analysis report (000 FCFA)

Customer Total Less than 30 days 60 days 90 days More

name debt 30 days old old old than 90
old days old

Enusa 21,800 4,000 4,000 8,000 5,000 800

Nehwah 10,500 2,000 1,000 3,000 4,000 500

Beri 11,600 4,000 3,000 2,500 1,500 600

Ebua 9,000 5,000 - 2,000 1,000 1,000

Ndam 7,000 5,000 - 2,000 - -

Total 59,900 20,000 8,000 17,500 11,500 2,900

If it is the business policy to take all debts outstanding for more than 90 days as doubtful, then
the amount of doubtful debts as at 31st December 20019 is FCFFA 2,900,000.

2.4.1.2 Percentage of credit sales

This method is normally used if a trend of bad debts in relation to credit sales is identified. For
example, a business may observe that out of experience (statistical analysis) that an average of
2% of the total credit sales turns out to be bad debts. If the total credit sales for a specific
financial year are FCFA 10,000,000, the provision for bad debts is FCFA 200,000 (calculated as
2% of FCFA 10,000,000). This is a very simple method for estimating the provision for bad
debts. However, it may bear no relationship to the amount owing by the debtors.

2.4.1.3 Percentage of outstanding debtors

This method relates doubtful debts to the outstanding debts. It is used for a trend of bad debts in
relation to outstanding debtors. For example if Kanjo’s business above had observed that an
average of 5% of the outstanding debtors turn out to be bad debts, then the provision for bad and
doubtful debts for the period to 31st December 2019 is 2,995,000, obtained as 5%*59,900,000.

Example 2.1

MIYANUI balance of debtors as at 31st December 2019 is 2,000,000 FCFA. MIYANUI

observed that 5% of the debtors are doubtful. At the close of the previous accounting year, on the
31st of December 20018, the debtors stood a t 1.500.000 FCFA and the bad and doubtful debts
were believed to be 3%.

Work required:

Draw the provisions for bad and doubtful debts account

Solution 2.1

Provision for bad and doubtful debts at 31 December 20018 = 3% * 1,500,000 = 45,000

Provision for bad and doubtful debts at 31 December 20019 = 5% * 2,000,000 = 100,000

Increase in provisions for bad and doubtful debts = 100,000 – 45,000 = 55,000

Provision for bad and doubtful debts a/c

Bal b/f 45,000

Bal c/f 100,000 profit and loss a/c 55,000 (increase)

100,000 100,000

Therefore, 55,000 FCFA will be charged (debited) to the profit and loss account as increase in
provisions for bad and doubtful debts.

Example 2.2

MAYA’s balance of debtors as at 31 st December 2020 is 5,000,000 FCFA. MAYA observed that
2% of the debtors are doubtful. At the close of the previous accounting year, on the 31 st of
December 20019, the debtors stood a t 3,000,000 FCFA and the bad and doubtful debts were
believed to be 5%.

Work required:

Draw the provisions for bad and doubtful debts account

Solution to example 2.2

Provision for bad and doubtful debts at 31 December 20019 = 5% * 3,000,000 = 150,000

Provision for bad and doubtful debts at 31 December 20020 = 2% * 5,000,000 = 100,000

Decrease in provisions for bad and doubtful debts = 150,000 – 100,000 = 50,000

Provision for bad and doubtful debts a/c

Bal b/f 150,000

Profit and loss a/c(decrease) 50,000

Bal c/f 100,000

150,000 150,000

Therefore, 50,000 FCFA will be credited to the profit and loss account as decrease in provisions
for bad and doubtful debts.

2.5 Bad debts recovered

It may happen that the debts, which were previously written-off as bad debts or irrecoverable
debts, may be recovered. The receipt is a bad debt recovered and is recognized as an income in
period of recovery. This is an amount not generated from normal business activities and should
be credited to a bad debts recovered account with a corresponding debit in the debtors accounts
to restore the debt, the cash receipt for the same is debited in cash account and credited to the
debtors account and either credited to profit and loss account or to bad debts accounts. The
effects on the profit is the same.

2.6 Drawings

The business owner may take home part of the cash from the business or any assets such as stock
for personal use. This is known as drawings. Drawings will also include private expenses paid
for by the business. Drawings is a reduction of the amount of capital. Notice that profit earned in
the business increases the capital of the business, but drawings reduce it. The stock drawings are
deducted from the goods available for sale in the trading account to get cost of sales. The capital
adjustment with respect to drawings is normally adjusted in the balance sheet as follows;
 Capital balance b/f xxx

Add: Net profit for the year xxx

Less: Drawings (xxx)

Capital balance c/f xxx

Example 2.3

APNF runs an agricultural distribution firm in Menchum valey. His trial balance for the year
ended 31/12/2020 is as follows;
ELEMENTS DEBIT(FCFA000) CREDIT(FCFA000)
Land and building 9,000
Motor vehicles 8,000
Sales 40,000
Returns outwards 500
Fixtures 2,000
Stock 1stJan 2020 3,000
Purchases 24,000
Returns inwards 1,000
Carriage in 2,000
Carriage out 1,500
Bad debts 1,000
Provision for bad debts 1,000
Debtors 6,000
Creditors 5,000
Cash 2,000
Electricity 1,000
Salaries and wages 2,000
Water 1,000
Telephone 1,000
Drawings 3,000
Capital 21,000
TOTAL 67,500 67,500

Additional information:

1. Provision for bad and doubtful debts is to be set at 20% of debtors

2. Stock as at 31/12/2020 amounts to 4,000,000

Work Required:
Present APNF’s trading profit and loss account for the year ended 31/12/2020
Present the balance sheet as at 31/12/2020
SOLUTION TO Example 2.3

Preliminary calculations:
Provision for bad and doubtful debts at 31 December 20019 = 1,000
Provision for bad and doubtful debts at 31 December 20020 = 20% * 6,000 = 1,200
Increase in provisions for bad and doubtful debts = 1,200 – 1,000 = 200

Provision for bad and doubtful debts a/c

Bal b/f 1,000

Bal c/f 1,200 profit and loss a/c 200 (increase)

1,200 1,200

Therefore, 200 FCFA will be charged (debited) to the profit and loss account as increase in
provisions for bad and doubtful debts.

APNF’s Business trading, profit and loss account for year ended 31/12/2020
ELEMENTS DEBIT(FCF CREDIT(FCFA000)
A000)
Sales 40,000
Returns inwards (1,000)
Net sales 39,000
Cost of goods sold
Opening stock 3,000
Add purchases 24,000
Add carriage in 2,000
Less returns outwards (500)
Less closing stock (4,000) (24,500)
Gross profit 14,500
Less expenses
Carriage out 1,500
Bad debts 1,000
Provision for bad debts (increase) 200
Electricity 1,000
Salaries and wages 2,000
Water 1,000
 Telephone 1,000 (7,700)
NET PROFIT 6,800

APNF’s Business trading, profit and loss account for year ended 31/12/2020
ELEMENTS FCFA (000) FCFA (000) FCFA (000)
Noncurrent Assets
Land and building 9,000
Motor vehicles 8,000
Fixtures 2,000
Total noncurrent Assets 19,000
Current Assets
Stock 4,000
Debtors (net) 4,800
Cash 2,000
Total Current Assets 10,800
Current liabilities
Creditors 5,000 (5,000)
Working Capital 5,800
Net Assets 24,800
Financed by:
Capital 21,000
Net profit 6,800
Drawings (3,000)
Total capital 24,800

2.7 Discount received and allowed

Discount is an incentive given to a customer by the supplier either for bulk purchases (trade
discount) or for prompt payment (cash discount). Trade discount is negotiated before the
transaction and therefore it does not form part of the book entries. Sales and purchases are
recorded net of trade discount.

Cash discount is granted after the transaction and normally gives option to pay within a specified
time to earn it. It is therefore recorded in the books of accounts because it is awarded after the
sale or purchase as the case may be. Accordingly, there are two types of cash discounts; discount
received and discount allowed.
Discount allowed is the incentive granted to the business debtors for prompt payment. It reduces
amount of debtors and therefore is an expense charged to profit and loss account. The book
entries for discount allowed are as follows;
Dr. Debtors a/c Cr.
Balance b/f xxx bad debts xxx
Sales xxx sales return xxx
Cash/bank xxx
Discounts allowed xxx
xxx xxx
Dr. Discount allowed a/c Cr.
Debtors xxx P L a/c xxx
xxx xxx
Discount received is an allowance granted by the supplier/creditor to the business for prompt
payment. It reduces the obligation to pay and therefore is an income credited to the profit and
loss account. The book entries for discount received are as follows;

Dr. Creditors a/c Cr.

Purchase returns xxx balance b/f xxx
Cash xxx
Discounts received xxx purchases xxx
Balance c/f xxx
xxx xxx

Dr. Discount received a/c Cr.

P&L xxx Credtiors xxx
xxx xxx

Example 2.4

HANDWRITING an electronics business in Bamenda. His trial balance for the year ended
31/12/2015 is as follows;
ELEMENTS DEBIT(FCFA000) CREDIT(FCFA000)
Land and building 8,000
Motor vehicles 6,000
Stock 1stJan 2015 3,000
Sales 50,000
Purchases 28,000
Returns outwards 2,000
Returns out 1,000
Discount received 2,000
 Discount allowed 1,500
Fixtures 4,000
Debtors 5,000
Creditors 4,000
Provision for bad debts 3,000
Bad debts 2,000
General expenses 3,000
Salaries and wages 4,000
Drawings 2,000
Capital 8,500
TOTAL 68,500 68,500

Additional information:

1. Provision for bad and doubtful debts is to be set at 30% of debtors

2. Stock as at 31/12/2015 amounts to 2,000,000

Work Required:
Present HANDWRITING’s trading profit and loss account for the year ended 31/12/2015
Present the balance sheet as at 31/12/2015

SOLUTION TO Example 2.4

Preliminary calculations:
Provision for bad and doubtful debts at 31 December 20015 = 3,000
Provision for bad and doubtful debts at 31 December 20020 = 30% * 5,000 = 1,500
Increase in provisions for bad and doubtful debts = 3,000 – 1,500 = 1,500

Provision for bad and doubtful debts a/c

Bal b/f 3,000
profit and loss a/c (decrease) 1,500
Bal c/f 1,500
3,000 3,000

Therefore, 1,500 FCFA will be credited to the profit and loss account as decrease in provisions
for bad and doubtful debts.

HANDWRITING’s Business trading, profit and loss account for year ended 31/12/2015
ELEMENTS DEBIT(FCF CREDIT(FCFA000)
A000)
Sales 50,000
Returns inwards (2,000)
Net sales 48,000
Cost of goods sold
 Opening stock 3,000
Add purchases 28,000
Less returns outwards (1,000)
Less closing stock (2,000) (28,000)
Gross profit 20,000
Discount received 2,000
Provision for bad debts (decrease) 1,500
Less expenses
Discount allowed 1,500
Bad debts 2,000
General expenses 3,000
Salaries and wages 4,000 (10,500)
NET PROFIT 13,000

HANDWRITING’s Business trading, profit and loss account for year ended 31/12/2015
ELEMENTS FCFA (000) FCFA (000) FCFA (000)
Noncurrent Assets
Land and building 8,000
Motor vehicles 6,000
Fixtures 4,000
Total noncurrent Assets 18,000
Current Assets
Stock 2,000
Debtors (net) 3,500
Total Current Assets 5,500
Current liabilities
Creditors 4,000 (4,000)
Working Capital 1,500
Net Assets 19,500
Financed by:
Capital 8,500
Net profit 13,000
Drawings (2,000)
Total capital 19,500

2.8 Accruals and prepayments

Business accounting is based on the accruals concept, which requires that revenues be
recognized when incurred, not when received and expenses are recognized when incurred, not
when paid for. It is this concept that leads to accruals and prepayment. An accrual is an expense
incurred in a given period but not paid for by the end of the period. According to the accrual
concept of accounting, expenses recognized and charged to the profit and loss account is the
amount incurred. If the amount paid is less than amount incurred; the difference is the accrued
expense i.e accruals. Accruals appear in the balance sheet as a current liability.

Dr. Expense (name) a/c Cr.

Cash xxx Balb/f xxx(accruals)
Bal c/f xxx P&L xxx
xxx xxx

Example 2.5

247 rent amounts to 1,200,000 FCFA, annually. 247 pays rents quarterly and at the end of the
year, the rent paid was 900,000 CFA.

Work Required: Present the rent account

SOLUTION Example 2.5

Dr. Rent a/c Cr.

Cash 900,000 P&L 1,200,000
Bal c/f 300,000
1,200,000 1,200,000

Example 2.6

The unpaid electricity for 247 as at 1/12018 was 200,000 FCFA. The bills for electricity for the
year ended 31/12/2018 amount to 1,000,000 FCFA. The amount paid for electricity amount to
900,000 FCFA.

Work Required: Present the electricity account

SOLUTION Example 2.6

Dr. Electricity a/c Cr.
Cash 900,000 Bal B/F 200,000
Bal c/f 300,000 P&L 1,000,000
1,200,000 1,200,000

A prepayment is the amount by which an expense is overpaid for in a given period. i.e amount by
which the payment for an expense exceeds the actual amount incurred. It is a current asset in the
balance sheet.
Dr. Telephone a/c Cr.
Balb/f (prepayment) xxx P&L xxx
Cash xxx Bal c/f(prepayment) xxx
xxx xxx

Example 2.7

The telephone bills for the year ended 31/12/2017 amount to 800,000 FCFA. At the beginning of
the year, telephone was overpaid by 100,000 FCFA. Total amount paid this year amounts to
1,000,000 FCFA.

Work Required: Present the telephone bills account

SOLUTION Example 2.7

Dr. Telephone a/c Cr.
Bal B/F 100,000 P&L 800,000
Cash 1,000,000 Bal C/F 300,000
1,100,000 1,100,000

Information about accruals and prepayments is normally provided after the trial balance is
extracted. Therefore, the charge to profit and loss account is the expenses as per adjusted trial
balance for the accruals and/or prepayments accordingly.
2.8.1 Accrued income
The above discussions deals only with expenses accrued or prepaid. The same situation can
occur with respect to income such as investment incomes. Income received in advance needs to
be deferred until the next period (thus not credited to profit and loss but rather recognized in the
balance sheet as a liability). Income earned but not yet received (i.e accrued income) is
recognized in the current period as part of the profit and carried in the balance sheet as current
asset.

Example 2.8

MoonCandle is a real estate business with rental charges per year amounting to 300,000 FCFA.
The amount of rents received for the current year is 240,000 FCFA.

Work Required: Prepare the rent income account of MoonCandle.

SOLUTION TO Example 2.8

Dr. Rents Income a/c Cr.
Profit and loss account 300,000 Cash 240,000
 Bal C/F 60,000
300,000 300,000

2.9 Depreciation
Depreciation expense is the amount of resource consumed in the running of business activities in
a given period. Long-term assets like motor vehicles are used over a number of accounting
periods. The full cost incurred in acquiring such assets should not be charged to the year of
acquisition or one specific year. The cost of long-term assets should be allocated to all the years
that the asset is used. This process of allocation is known as depreciation. The amount allocated
to a given year is known as depreciation expense. The aggregate amount of cost allocated to the
various years is known as accumulated depreciation. Depreciation allocations are largely an
estimate and thus may vary from one business to the other. The methods of depreciation will be
covered in Accounting for Fixed Assets.
The depreciation expense is charged to profit and loss account and credited to accumulated
depreciation account. The accumulated depreciation is deducted from the value of the respective
assets in the balance sheet.

Example 2.9

A vehicle was acquired by MoonCandle for 600,000 FCFA cash on 1st January 2020.The vehicle
is depreciated at the rate of 10% on a yearly basis. .

Work Required:

1. Determine the depreciation

2. Present the depreciation expense account and the accumulated depreciation account

SOLUTION TO Example 2.8

1. Determination of the depreciation

Depreciation expense = 10% * 600,000 = 60,000

2. Presentation of the depreciation expense account

Dr. Depreciation expense a/c Cr.

Accumulated depreciation 60,000 Profit and loss account 60,000
60,000
60,000

Presentation of the accumulated depreciation account

Dr. Accumulated depreciation expense a/c Cr.
Balance C/F 60,000 Depreciation expense 60,000
60,000
60,000

Example 2.10

4G Poultry Farm, operates a business with the production and sale of egg. The total balances for
the year ended 31/12/2020 are presented below;
ELEMENTS DEBIT(FCFA000) CREDIT(FCFA000)
Motor vehicles 3,000
Fixtures 2,000
Stock 1stJan 2020 1,000
Sales 15,000
Purchases 7,000
Rents 1,000
Salaries and wages 1,000
Electricity 500
Telephone 400
Motor vehicle expenses 500
Discounts 600 500
Returns 1,000 500
Debtors 4,000
Creditors 3,000
Cash 2,000
Bad debts 500
Provision for bad and doubtful debts 500
Drawings 1,000
Capital 6,000
TOTAL 25,500 25,500

Additional information:

1. Rents outstanding at the end of the year amounts to 200,000 FCFA

2. Salaries and wages paid in advance amount to 100,000 FCFA
3. Accrued electricity is 50,000 FCFA
4. Prepaid telephone bills is 100,000 FCFA
 5. Stock as at 31/12/2020 amount to 3,000,000 FCFA
6. Provision for bad and doubtful debts is to be set at 10% of debtors
7. Depreciation is provided on motor vehicles and fixtures at 10 and 20% respectively on
cost.

Work Required:
Prepare the trading profit and loss account for the year ended 31/12/2020
Present the balance sheet as at 31/12/2020

CHAPTER 3

THE BANK RECONCILIATION STATEMENT

3.1 Introduction
You have learnt how to balance the cashbook and to find the balance of the bank account. In this
chapter, we look at the way in which a business deals with any differences between the balance of
the bank account in the cashbook and the closing balance of the bank account shown by the bank
statement for the same period. These differences are explained by a document known as bank
reconciliation statement. The bank reconciliation statement lists the items which are in the
cashbook but not on the bank statement and items which are on the bank statement but not in the
cashbook. This process enables the business to update its cashbook and also helps to prove the
accuracy of the bookkeeping of the business and the bank.

3.1.1 Objectives
By the end of this topic, the student should be able to;
 Compare transactions that appear on both cash book and bank statement;
 Identify causes of difference between cashbook and bank statement balance;
 Update cashbook from details of transactions appearing on the bank statement;
 Identify unpresented and uncredited cheques;
 Prepare a bank reconciliation statement

3.1.2 Definition of key terms

3.1.2.1 Bank reconciliation statement

It is statement prepared to link the bank balance shown in the cashbook with the balance shown
on the bank statement.

3.1.2.2 Timing differences

This is the difference between the bank statement and the cashbook that will be corrected over
time, such as unpresented cheques and outstanding lodgments.

3.1.2.3 Uncredited cheques

 These are amounts that have been paid into the bank but not yet recorded on the bank
statement

3.1.2.4 Unpresented cheques

These are cheques that have been issued but have not yet been paid in and deducted from the
account of the business.

3.2 Purpose of bank reconciliation

One tool used to maintain proper record discipline is to ensure that all receipts are banked into the
bank account intact. Banks send to their customers a record of the transactions made through that
account in the form of a bank statement. It shows money lodged into the accounts (described in
bank statement as credits) and money paid out (described in the bank statement as debits). The
business also records bank transactions in the cashbook, bank column. It is possible that some of the
entries in the cashbook differ from those of the bank due to a time lag in receipt of information or
due to errors. Often, when a comparison is made between the bank balances as shown in the firm’s
cashbook, with that shown on the bank statement, the two balances will be different. It is for this
reason that a bank reconciliation statement is prepared to reconcile the two balances. The
reconciliation may identify errors that may have been made in either the firm’s cashbook or in the
bank’s records.

A bank statement is a copy of the business bank account transactions as recorded by the bank. Bank
statements are regularly sent out to customers usually on a monthly basis. This enables the
customer to check their funds in the bank regularly and to update their records accordingly. Bank
reconciliation between the cashbook balance and the bank statement balance simply means an
explanation of the differences, which takes the form of a written calculation.

3.3 Causes of differences between cash and bank balance

The difference between the cashbook and the bank statement balance, results from two factors;
timing difference in recording of transactions, and errors made by either the business or by the bank
in recording transactions.

3.3.1 Timing differences

These are differences caused by time lag in the receipt of information or recording of a
transaction between the bank and the business for example;

3.3.1.1 Unpresented cheques

Unpresented cheques, are cheques paid out by the business but the recipients have not
presented them to the bank for payment. For instance, the business may send out cheques to
suppliers, some of whom may pay in the cheque at the bank immediately while others may keep
the cheque for several days before paying it in. when this happens, the accountant will have
recorded all the payments in the cashbook. However, the bank records will only show the
cheques that have actually been paid in by the suppliers and deducted from the business bank
account. While the unpresented cheques appear as a payment in the cashbook, they would not
appear in the bank statement.
3.3.1.2 Uncredited cheques
These are cheques received by the business but not credited into the bank account. For instance
the firm records a receipt in the cashbook from the bank paying in slip. However, the bank may
not record the receipt for a day or so, particularly if it is paid in late during the day, or if it is paid
in at a bank branch other than the one in which the enterprise account is maintained.

3.3.1.3 Direct credits

Another timing difference may occur when the bank has received a direct payment for the
business. In this instance, the bank will have recorded the receipt in the business’s account at
the bank but the business will be unaware of the payment and will therefore not have recorded
the receipt in the cashbook for example;
 Standing order for incoming payments received on the business account which may
include payments from debtors or customers, when the payment has not been advised
to the business,
 Interests and refunds credited by the bank.

3.3.1.4 Bank charges

These are fees charged by the bank for maintaining the account and for executing transactions.
They include ledger fees, commission and other levies. The business would not know the
charges until they receive the bank statement. Such charges will appear in the bank statement
but not in the cashbook.

3.3.1.5 Payment of standing order

Payment standing orders are instructions to the bank to execute payment on behalf of the
business. Normally periodic payments like insurance are best executed by way of standing
order. The business would not know about the execution of the payment until the receipt of
bank statement. The standing order will appear in the bank statement but not in the cashbook.

3.3.1.6 Unpaid cheques

These are cheques paid to or out of the business account but which are either stopped by the
drawer or are returned as dishonoured (bounced cheques).

3.3.2 Differences caused by errors

The difference between the cashbook and bank balances may be caused by error on the part of
the bank or in the cashbook entries. Frequent bank reconciliation is advisable so as to identify
and rectify errors as soon as possible. It is good business practice to prepare a bank
reconciliation statement each time a bank statement is received. This will ensure that any
queries either with the bank statement or in the firm’s cashbook can be resolved.

3.4 The bank reconciliation process

When a bank statement has been received, any errors and queries are first identified and dealt with
before the reconciliation. Once all errors are corrected, then the reconciliation of the difference
between the cashbook balance and the bank balance is carried out as follows;
First step: Identify the differences by ticking off the items that appear in both the cashbook and the
bank statement.

Second step: Enter the unticked items on the bank statement which include; bank charges, direct
credits, and payment standing orders, into the bank column of the cashbook to bring it up to date.
In other words, the cashbook balance is adjusted to reflect these items.

Third step: The unticked items from the cashbook are as a result of timing differences and are used
to prepare the bank reconciliation statement as shown below.

Cashbook adjustments

DESCRIPTIONS AMOUNT
Balance as per cashbook XXX
Bank charges (XXX)
Standing order (XXX)
Direct credits XXX
Adjusted cashbook balance XXX

Bank Reconciliation statement as at …

DESCRIPTIONS AMOUNT
Adjusted cashbook balance XXX
Add unpresented cheques XXX
Less uncredited cheques (XXX)
Balance as per bank statement XXX

Example 3.1
The balance in the cashbook of Chi joker enterprise as at 31/12/2019 was 300,000 FCFA. On the
same date, the balance as per the bank statement was 500,000 FCFA.
On examining the bank statement and the cashbook, the following differences were observed;
 Cheques totaling 80,000 FCFA had been paid into the bank on the 31/12/2019 but were not
credited by the bank until 1/1/2020.
 Bank charges amounted to 6,000 FCFA
 A standing order to KKC enterprise of 8,000 FCFA had been paid by the bank but not entered
in the cashbook.
 Interest income, amounting to 130,000 FCFA collected by the bank did not appear in the
cashbook.
 Amounts paid to suppliers but not presented for payment to the bank amounted to 164,000
FCFA.

WORK Required:

 Adjust the cashbook balance

  Prepare the bank reconciliation statement.

Solution to example 3.1

1. Cashbook adjustment

DESCRIPTIONS AMOUNT
(FCFA)
Balance as per cashbook 300,000
Bank charges (6,000)
Standing order (8,000)
Direct credits 130,000
Adjusted cashbook balance 416,000

2. Preparation of the bank reconciliation statement

DESCRIPTIONS AMOUNT
(FCFA)
Adjusted cashbook balance 416,000
Add unpresented cheques 164,000
Less uncredited cheques (80,000)
Balance as per bank statement 500,000

3.5 Bank overdraft

A business may overdraw their bank account. An overdraft is a negative bank balance. It is a
situation where the business has borrowed from the bank on its current account. This is shown in
the cashbook as a credit balance brought or carried forward/down while on the bank statement
where the balance is followed by Dr, sometimes by OD which means that there is an overdraft. The
bank reconciliation process is the same as that stated above except that it starts with a negative
cash balance.

Example 3.2
The balance in the cashbook of SABGA United as at 31/01/2019 stood at 100,000 FCFA (credit). On
the same date, the balance as per the bank statement was 300,000 FCFA. On examining the
cashbook and bank statement, the following differences where observed;
 Cheques amounting to 120,000 FCFA had been paid into the bank on the 31/01/2019, but
where not credited by the bank until 1/2/2019.
 Bank charges amounted to 15,000 FCFA.
 A standing order to Nkambe United of 22,000 FCFA had been paid by the bank but not
entered I the cahbook.
 Dividend income amounting to 110,000 FCFA collected by the bank did not appear in the
cashbook.
 Cheques totaling 447,000 FCFA had been paid to suppliers but not presented to the bank.

Work Required:
  Adjust the cashbook balance
 Prepare the bank reconciliation statement.

Solution to example 3.2

Cashbook adjustment

DESCRIPTIONS AMOUNT
(FCFA)
Balance as per cashbook (100,000)
Bank charges (15,000)
Standing order (22,000)
Direct credits 110,000
Adjusted cashbook balance (27,000)

Preparation of the bank reconciliation statement

DESCRIPTIONS AMOUNT
(FCFA)
Adjusted cashbook balance (27,000)
Add unpresented cheques 447,000
Less uncredited cheques (120,000)
Balance as per bank statement 300,000

3.6 Dishonoured cheques

A business may receive cheques which eventually are not honoured by the bank. It is important to note
that a cheque is an instruction by a person to his or her bank to pay another person from the bank
account. The bank may fail to honour the instruction if for some reason the instructions are defective or
if there is no money in the account. The person paying may also intercept the cheque before it clears.
The dishonoured or cancelled cheques should be corrected together with any errors before the
reconciliation. The cashbook balance is adjusted to remove the effects of the dishonoured cheques.

Example 3.3

You have just been employed as a trainee accountant in Angel Gabriel Ltd and your first assignment is to
check the transactions in the company’s cashbook, check the entries on receipt of the bank statement,
update the cashbook and make any amendments as necessary after which you will prepare a bank
reconciliation statement at the end of the month. The company’s cashbook and bank statement for the
month of December 2019 are provided below;

Angel Gabriel Ltd’s Cashbook

 RECEIPTS PAYMENTS
DATE DETAILS BANK (FCFA) DATE DETAILS BANK
(FCFA)
1/12/2019 Bal B/F 1,946,000 2/12/2019 Nyos Exchange 75,000
1/12/2019 Rangers Plc 249,000 2/12/2019 Housing Insurance 234100 206,000
5 Banso Ltd 188,000 4 HighLand Ltd 234101 315,000
8 Linking gold Ltd 150,000 7 Menchum Fall Plc 234102 211,000
10 Ndonga Plc 440,000 9 Nsongwa Star Ltd 120,000
18 Ngemba Ltd 65,000 13 Manjong Ltd 234103 22,000
27 Mantung Ltd 520,000 20 Final D Plc 234104 137,000
30 Belo & partners 82,000 27 TapTap Ltd 234105 270,000
Bal C/F 2,284,000
TOTAL 3,640,000 TOAL 3,640,000

Mezam Bank Plc: Bank statement

Bank Account: Angel Gabriel Ltd Account number: 18301015

Date: 31/12/2019 Statement No: 12

DATE DETAILS DEBIT CREDIT BALANCE

1/12/2019 Bal B/F 1,946,000CR
2/12/2019 Cheques 249,000 2,195,000CR
4 Housing Insurance 75,000 2,120,000CR
4 234101 315,000 1,805,000CR
5 Banso Ltd 188,000 1,993,000CR
8 Cheques 150,000 2,143,000CR
9 234102 211,000 1,932,000CR
12 Cheques 440,000 2,372,000CR
12 Nsongwa Star Ltd 120,000 2,252,000CR
20 Cheques 65,000 2,317,000
27 TapTap Ltd 234105 270,000 2,047,000CR
30 Cho & bros Ltd 92,000 2,139,000CR
31 Bank charges 55,000 2,084,000CR
31 One family Ltd 1,000,000 1,084,000CR

Work Required:

Present the bank reconciliation statement

Solution to example 3.3

Preliminary calculations:
 Unpresented cheques
234100 = 206,000
234103 = 22,000
234104 = 137,000
Total unpresented cheques = 365,000
Uncredited cheques = 520,000 + 82,000 = 602,000 FCFA
Adjusted Cashbook

DESCRIPTIONS AMOUNT
(FCFA)
Balance as per cashbook 2,284,000
Bank charges (55,000)
Standing order (1,000,000)
Direct credits 92,000
Adjusted cashbook balance (1,321,000)
Preparation of the bank reconciliation statement as at 31/12/2019

DESCRIPTIONS AMOUNT
(FCFA)
Adjusted cashbook balance 1,321,000
Add unpresented cheques 365,000
Less uncredited cheques (602,000)
Balance as per bank statement 1,084,000