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POA Book Notes PDF
POA Book Notes PDF
Principles of
Accounts
CSEC
Ms Fergusson
2
PAGE
INTRODUCTION
TO
ACCOUNTING
3
ACCOUNTING
CONCEPTS
AND
CONVENTIONS
4
INTRODUCTION
TO
THE
BALANCE
SHEET
5
SIMPLE
VERTICAL
FORMAT
OF
A
CLASSIFIED
BALANCE
SHEET
9
ACCOUNTING
CYCLE
10
JOURNALS
12
LEDGERS
17
TRIAL
BALANCE
22
CORRECTION
OF
ERRORS
23
ADJUSTING
ENTRIES
24
FINAL
A/CS
OF
SOLE
TRADERS
28
CONTROL
SYSTEMS
30
BANK
RECONCILIATION
STATEMENT
32
CONTROL
A/CS
35
SUSPENSE
A/CS
&
CORRECTION
OF
ERRORS
38
FINAL
A/C
FORMATS
43
RATIO
ANALYSIS
63
3
INTRODUCTION TO ACCOUNTING
Users of Accounting :
The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities
Internal Users
o Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources
o Management: - need to know profitability & liquidity of business - decision-making
o Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.
External Users
o Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment
o The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans
o Suppliers – credit sales
5
INTRODUCTION TO THE BALANCE SHEET
A – Assets
L – Liabilities
I – income / Revenues
C – Capital / Owner’s Equity
E – Expenses
• Assets
Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business. Simply, they are a company’s resources i.e. things the
company owns.
• Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They are
the debts of the business i.e. amounts the business owes.
• Income
Income / revenues are amounts earned during the accounting period from the daily operations of the
business. Simply, they are what the business earns for providing goods and services.
• Expenses
Expenses are the costs incurred by a business in its daily operations in earning income. In other words,
they are the cost of assets used by the business to generate revenues.
N.B. Every business transaction will have an effect on a company’s financial position.
6
INTRODUCTION TO THE BALANCE SHEET
• Assets
Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business.
There are two types of assets:
o Fixed Assets: assets used to carry on the business and generate profit.
They are not purchased for resale but intended to be retained permanently for the purpose of
carrying on the business
e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.
o Current Assets: assets consisting of cash and other assets that would be consumed or easily
converted into cash within one year.
• Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They
are the debts of the business (the money owed by the business).
There are two types of liabilities:
o Long Term Liabilities: These are any debts or obligations owed by the business that are
due more than one year from the current date e.g. Mortgages, Bank Loans etc.
o Current Liabilities: These are any debts or obligations owed by the business that are due
within one year from the current date e.g. Creditors (suppliers, short term loans), bank
overdrafts etc.
Capital is considered a special kind of liability. It is a loan by the owner to the business and is,
therefore, money owed by the business to the owner.
N.B. For accounting purposes, a business is regarded as being a separate entity from its
owner(s).
(the business entity concept)
7
INTRODUCTION TO THE BALANCE SHEET
The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.
Additional Information
The Expanded Accounting Equation :
o The expanded accounting equation includes two components of Closing Capital: Revenue and Expenses
Balance Sheet as at
$ $
Assets X Capital X
Liabilities X
XX XX
Balance Sheet as at
$ $
Fixed Assets X Capital X
Current Assets X Long Term Liabilities X
Current Liabilities X
XX XX
8
INTRODUCTION TO THE BALANCE SHEET
PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life.
ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e.
land first, then buildings, then equipment etc).
Balance Sheet as at
$ $
Fixed Assets X Capital X
Current Assets X Long Term Liabilities X
Current Liabilities X
XX XX
LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss
ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current
assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…).
Balance Sheet as at
$ $
Current Assets X Current Liabilities X
Fixed Assets X Long Term Liabilities X
Capital X
XX XX
FINANCED BY:
CAPITAL: X
Opening Capital
Add: Net Profit OR Less: Net Loss X OR (X)
X
Less: Drawings (X)
Closing Capital X
LONG-TERM LIABILITIES
Mortgage X
Bank Loan (more than 1 year) X
Total Long Term Liabilities X
XX
10
Principles of
Accounts
ACCOUNTING CYCLE
Ms Fergusson
11
Accounting Cycle
The accounting cycle is a series of steps for recording each transaction in the accounting
process, which are repeated every accounting period.
NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the
cycle is done at the end of a period.
C Capital
E Expenses
12
Transactions that are entered in the cash book are also entered in the GJ
Capital: investment by owner General Journal
Purchase / Sale of Fixed Assets for cash or cheque General Journal
Payment of expenses e.g. rent, salaries, insurance, and... General Journal
- Discounts Allowed General Journal
- Carriage Inwards and Outwards General Journal
Receipt of income/revenue e.g. interest received, rent received, and... General Journal
- Discounts Received General Journal
Payment of creditors (suppliers) the amount owed to them General Journal
Drawings: money withdrawn from business for personal use General Journal
13
Name of the Business
Sales Journal
Date Details Invoice # Folio Amount $
Year
dt Debtor e.g. John Smith SL # X
dt Debtor e.g. Jane Doe
SL
X
dt Debtor
SL
X
End of mth Transfer to Sales account GL XX
Purchases Journal
Date Details Invoice # Folio Amount $
Year
dt Creditor e.g. Will Browne PL # X
dt Creditor e.g. Alice Williams
PL
X
dt Creditor
PL
X
End of mth Transfer to Purchases account GL XX
Cash Book
Date Details Folio Discount Cash Bank Date Details Folio Discount Cash Bank
Allowed Received
Year $ $ $ Year $ $ $
dt Balance b/d X X dt Purchases GL X
dt
Capital GL X dt
Motor Vehicle GL X
dt
Sales GL X dt
Creditor PL X X
dt
Debtor SL X X dt
Drawings GL X
dt
Interest received GL X *dt
Cash GL X
dt Loan GL X *dt Bank GL X
*dt Bank GL X dt
Interest on Loan GL X
*dt
Cash GL X dt Balance c/d X X
X XX XX X XX XX
dt Balance b/d X X
The Journal
Date Details Folio DR CR
Year $ $
dt Account debited e.g. Motor Vehicle GL X
Account credited e.g. Bank Account
GL
X
Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
14
TheJournal
The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts)
At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets,
liabilities and capital called an opening journal entry.
Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit
balance, so these are credited in opening journal entry. Capital is credited.
The balances can be taken from the balance sheet of previous year.
To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side.
The Journal
Date Details Folio DR CR
Year $ $
dt Land and Buildings GL X
Plant and machinery GL X
Motor Vehicles GL X
Stock (Inventory) GL X
Debtors GL X
Bank GL X
Cash GL X
Mortgage GL
X
Bank Loan GL X
Creditors GL X
Accrued Expenses GL X
Provision for Depreciation: Motor Vehicles GL X
To record assets, liabilities and capital of business at beginning of period
XX XX
The Journal
Date Details Folio DR CR
Year $ $
dt Account debited e.g. Motor Vehicle GL X
Account credited e.g. Bank Account
GL
X
Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
15
Petty
Cash
Book
Motor Travel Sundry Ledger Ledger
Receipts Folio Date Details Total Postage Cleaning
Expenses Expenses Expenses Folio Accounts
$ 2011 $
$
$
$
$
$
$
X CB Jan 3 Cash
Jan 7
Postage X
X
Jan 10
Motor Exp. X
X
Jan 14
R. King X
PL X
Jan 19
Travel Exp. X
X
Jan 25
Sundry exp. X
X
Jan 26
Cleaning X
X
X X X X X X X
Jan 31 Balance c/d X
X CB X
X Feb 1 Balance b/d
X Feb 1 Cash
Petty
Cash
Book
Motor Travel Sundry Ledger Ledger
Receipts Folio Date Details Total Postage Cleaning
Expenses Expenses Expenses Folio Accounts
$ 2011 $
$
$
$
$
$
$
X CB Jan 3 Cash
Jan 7
Postage X
X
Jan 10
Motor Exp. X
X
Jan 14
R. King X
PL X
Jan 19
Travel Exp. X
X
Jan 25
Sundry exp. X
X
Jan 26
Cleaning X
X
X X X X X X X
X CB Jan 31 Cash
Jan 31 Balance c/d X
XX XX
X Feb 1 Balance b/d
16
Petty
Cash
Book
Motor Travel Sundry Ledger Ledger
Receipts Folio Date Details Total Postage Cleaning
Expenses Expenses Expenses Folio Accounts
$ 2011 $
$
$
$
$
$
$
300 CB Jan 3 Cash
Jan 7
Postage 5
5
Jan 10
Motor Exp. 20
20
Jan 14
R. King 30
PL 30
Jan 19
Travel Exp. 15
15
Jan 25
Sundry exp. 12
12
Jan 26
Cleaning 14
14
96 20 15 5 14 12 30
Jan 31 Balance c/d 204
300 300
204 Feb 1 Balance b/d
96 CB Feb 1 Cash
Petty
Cash
Book
Motor Travel Sundry Ledger Ledger
Receipts Folio Date Details Total Postage Cleaning
Expenses Expenses Expenses Folio Accounts
$ 2011 $
$
$
$
$
$
$
300 CB Jan 3 Cash
Jan 7
Postage 5
5
Jan 10
Motor Exp. 20
20
Jan 14
R. King 30
PL 30
Jan 19
Travel Exp. 15
15
Jan 25
Sundry exp. 12
12
Jan 26
Cleaning 14
14
96 20 15 5 14 12 30
96 Jan 31 Cash
Jan 31 Balance c/d 300
396 CB 396
300 Feb 1 Balance b/d
17
• Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits.
Debit and credit, therefore, indicate on which side of a T account numbers will be recorded.
• For some types of accounts debit means an increase in the account balance, while for others debit
means a decrease in the account balance, as seen below:
LEDGERS are books of final entry containing the T-accounts of the business in which transactions are
posted in the form of debit and credits.
Ledgers
T-Accounts
Sales Ledger Debtor a/cs (personal accounts) e.g. John Smith
General Ledger Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc.
Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received
Account
Ledger
Debtor a/cs (personal accounts) e.g. John Smith Sales Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams Purchases Ledger
Sales , Purchases, Returns Inwards, Returns Outwards a/cs General Ledger
Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. General Ledger
Cash and Bank separate a/cs General Ledger
Liability a/cs e.g. Mortgage General Ledger
Capital a/c and Drawings a/c General Ledger
Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc General Ledger
DOUBLE
ENTRY
requires that for each transaction, the amount entered into the accounting records is
entered in at least two different accounts, with one account being debited and the other credited. All debit
amounts equal all credit amounts provided the double-entry accounting was properly followed.
18
Sales Ledger
Debtor a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year Year
dt Sales SJ X dt Returns Inwards RIJ X
dt Cash/Bank CB X
dt Discounts Allowed CB X
Purchases Ledger
Creditor a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year Year
dt Returns Outwards ROJ X dt Purchases PJ
dt Cash/Bank CB X
dt Discounts Received CB X
19
General Ledger
Sales a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year
dt Cash / Bank CB X
dt Total credit Sales for
the month SJ X
Purchases a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year
dt Cash/Bank CB X
dt Total credit Purchases
for the month PJ X
Capital a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year
dt Bank CB X
Rent a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year
dt Cash / Bank CB X
Bank account
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 1 Balance b/d 12 500 March 14 Purchases CB 1 300
March 13 Sales CB 2 000 March 20 Equipment GJ 1 000
March 25 Loan GJ 1 000 March 27 Drawings GJ 200
March 28 Rent GJ 2 000
Simple steps:
1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below:
Bank account
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 1 Balance b/d 12 500 March 14 Purchases CB 1 300
March 13 Sales CB 2 000 March 20 Equipment GJ 1 000
March 25 Loan GJ 1 000 March 27 Drawings GJ 200
March 28 Rent GJ 2 000
2. Total the side with the larger amount and enter the amount in both total boxes, as seen below:
Bank account
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 1 Balance b/d 12 500 March 14 Purchases CB 1 300
March 13 Sales CB 2 000 March 20 Equipment GJ 1 000
March 25 Loan GJ 1 000 March 27 Drawings GJ 200
March 28 Rent GJ 2 000
15 500 15 500
3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the
difference between the debit and credit amounts (account balance), as seen below:
4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the
account balance.
Bank account
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 1 Balance b/d 12 500 March 14 Purchases CB 1 300
March 13 Sales CB 2 000 March 20 Equipment GJ 1 000
March 25 Loan GJ 1 000 March 27 Drawings GJ 200
March 28 Rent GJ 2 000
March 31 Balance c/d 10 000
15 500 15 500
April 1 Balance b/d 10 000
5. Account balances are entered in the Balance Sheet to show the financial position of the business.
21
Name of Business
The Journal
Date Details Folio DR CR
2010 $ $
March 31 Sales X
Trading a/c X
Sales a/c
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 13 Bank CB 2 000
March 31 Total Credit Sales for
March 31 Transfer to Trading a/c GJ 24 000 the month of March SJ 22 000
24 000 24 000
Purchases a/c
Date Details Folio Dr$ Date Details Folio Cr$
2010 2010
March 14 Bank CB 1 300
March 31 Total Credit Purchases
for the month of March PJ 22 000 March 31 Transfer to Trading a/c GJ 24 000
24 000 24 000
Trial Balance
The Trial Balance is a list of all the debit and credit account balances for a period.
The account balances for a period are entered in the Trial Balance as follows:
Cash X
Bank * X
Stock (Opening Stock) X
Bank Loan X
Debtors X
Creditors X
Sales X
Purchases X
Returns Inwards X
Returns Outwards X
Rent X
Carriage Inwards X
Carriage Outwards X
Commissions received X
Wages and Salaries X
Interest Received X
Discounts Allowed X
Discounts Received X
Interest on Loan X
Motor Vehicles X
Equipment X
Bank Overdraft * X
Capital X
Drawings X
XX XX
All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
23
Correction of Errors
Types of errors
Suspense account
Date Details Dr$ Date Details Cr$
Difference in trial balance X Difference in trial balance X
(DR side of TB less) (CR side of TB less)
A credit balance in the Suspense account is a Current Liability in the Balance Sheet.
A debit balance in the suspense account is a Current Asset in the Balance Sheet.
N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to
the ledger accounts affected by the error, including the suspense account.
$ $
Net Profit per accounts X
Add: Expenses amount overstated X
Income / Revenue amount understated / omitted X
X
Less: Income / Revenue amount overstated X
Expenses amount understated / omitted X
(X)
Corrected Net Profit for the year XX
24
Adjusting Entries
Adjusting entries are entries made at the end of an accounting period to allocate revenue and expenses to
the period in which they belong, as required by the Matching / Accruals Concept.
Expenses to be transferred to the Profit and Loss account is the expenses incurred in the period, whether
they have been paid or not.
Revenue to be transferred to the Profit and Loss account is the revenue earned in the period, whether it has
been received or not.
ADD ACCRUALS
LESS PREPAYMENTS
Bad Debts
Profit and Loss a/c Increase in Provision for Bad Debts (Expense)
Decrease in Provision for Bad Debts (Revenue)
Balance Sheet Total Provision for Bad Debts (Current Assets: Debtors less Provision)
Depreciation
The Journal
Date Details Folio DR CR
Year $ $
dt Expense a/c GL X
Cash / Bank a/c CB X
To record payment of expense during the year
The Journal
Date Details Folio DR CR
Year $ $
dt Cash / Bank a/c CB X
Revenue a/c GL X
To record revenue received during the year
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC.
The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the
Balance sheet as Current assets or Current liabilities.
26
A djusting Entries: Journal entries
The Journal
Date Details Folio DR CR
Year $ $
dt Bad Debts a/c GL X
Debtors a/c SL X
To write off Bad debts and reduce Debtor amount
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off.
At the end of the period, the amount of Bad Debts is transferred to the P & L account like all expenses.
Bad Debts is NOT recorded in the Balance Sheet.
Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet.
It, therefore, has a credit balance.
Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated
as expenses in the P&L a/c while decreases are revenue in the P&L a/c.
Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.
Depreciation
The Journal
Date Details Folio DR CR
Year $ $
End of yr Profit & Loss a/c X
Provision for Depreciation a/c GL X
To transfer annual depreciation to P& L a/c as an expense.
NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the
Balance Sheet. It, therefore, has a credit balance.
Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense.
Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset
to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.
27
A djusting Entries: Ledger entries
Accruals and Prepayments
Expense a/c e.g. Rent a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year Year
Opening Prepaid Expense b/d X Opening Accrued Expense b/d X
dt Cash / Bank CB X End of yr Transfer to P & L a/c GJ X
Closing Accrued Expense c/d X Closing Prepaid Expense c/d X
XX XX
Opening Prepaid Expense b/d X Opening Accrued Expense b/d X
Bad Debts
Bad Debts a/c
Date Details Folio Dr$ Date Details Folio Cr$
Year Year
Dt Debtor X End of yr Transfer to P & L a/c X
(expense)
XX XX
Depreciation
Provision for Depreciation
Date Details Folio Dr$ Date Details Folio Cr$
Year Year
End of yr Balance c/d X End of yr P & L a/c (expense) X
Beginning Balance b/d X
End of yr Balance c/d X End of yr P & L a/c X
XX XX
End of yr Balance c/d X Beginning Balance b/d X
28
Final A ccounts: Income Statement
Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$ $ $
Sales X
Less: Sales Returns (X)
Net Sales X
LESS: COST OF GOODS SOLD:
Opening Stock X
Purchases X
Less: Purchases Returns (X)
X
Add: Carriage In X
Net Purchases X
Cost of Goods Available for sale X
Less: Closing Stock (X)
Cost of Goods Sold (X)
GROSS PROFIT (or GROSS LOSS) X or (X)
**These are a few examples, however the list can be exhaustive in reality
For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out
the net profit amongst the owners and calculate profit retained in business.
For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c
For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit
and Loss a/c.
29
Final A ccounts: Balance Sheet
Owner’s Name
Balance Sheet as at _________
LONG-TERM LIABILITIES
Mortgage X
Bank Loan X
X
XX
For other types of businesses there may be other items like proposed dividends, current a/c
(partnership) etc.
30
Principles of
Accounts
CONTROL SYSTEMS
Ms Fergusson
31
St. Mary’s College
Principles of Accounts
Control Systems
Control Systems are the procedures designed and established to check, record, regulate, supervise,
and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be
accurate, by reducing the incidence of unintentional errors and intentional irregularities.
Control Accounts
Control Accounts are general ledger accounts whose balances reflects the total of balances of related
subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the
most commonly used control accounts, and their balances serve as a crosscheck (control) of the
accuracy of the associated subsidiary records (personal accounts).
Suspense Accounts
A suspense account is an account in the general ledger in which amounts are temporarily recorded
until the correct entry could be determined.
When the proper account / amount is determined, the amount will be moved from the suspense acc.
Suspense accounts are used when accounting for errors to ‘balance” the trial balances until the
bookkeeper finds the errors and finishes recording the transactions.
32
St. Mary’s College Lesson Notes
BANK ACCOUNT
The business records all the bank account’s The bank records all the bank account’s cheque
cheque and cash transactions in the Cash Book. and cash transactions in a Bank Statement, which
is sent to the business periodically.
Main accounting difference between the Cash Book and the Bank Statement:
Differences / Discrepancies
between the Cash Book balance and the Bank Statement balance at the end of a specific period.
• There are usually timing differences between when the transaction information is recorded / entered in
the banks systems and when it is recorded in the business’ cash book.
• Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account
balance and the bank statement account balance at the end of the specific period.
Reasons for the differences between the Cash Book balance and the Bank Statement balance:
Entries recorded in the Bank Statement but not in the Cash Book
• Direct Deposits
- Dividends received
- Credit transfers – receipts from debtors made into the bank account directly through the bank.
• Bank Charges (service charges on the bank account taken directly from the account by the bank)
• Interest Received (interest on the bank account deposited directly into the account by the bank)
Entries recorded in the Cash Book but not in the Bank Statement
These occur because of a time lag between the recording of the receipt or payment in the cash book and the
recording in the bank:
• Unrecorded deposits
- These are mainly cheque deposits to be made in the bank account that have been recorded in the
cash book but not by the bank as they have not received the deposits as yet.
- The business records the cheques as having been received / deposited on one day, while the bank
records the deposit on another day when the cheques are brought in from the business.
The most common types of errors are the overstatements and the understatements of receipts and payments
due to errors in the amounts and receipts being entered as payments and vice versa.
St. Mary’s College Lesson Notes 34
Bank Reconciliation :
It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that
both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash book against those shown
on a bank statement:
• to locate the reasons for the discrepancies,
• adjust cash book with those items which must be included and
• clarify and support any remaining difference between adjusted cash book balance and bank statement balance.
Balance b/d X
3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in
the Bank Statement. There are two methods:
- Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.
Bank Reconciliation Statement
$
Bank Statement Balance X
Add: Unrecorded deposits X
X
Less: Unpresented cheques (X)
Revised Cash Book Balance XX
Control Accounts
A control account is a summary account in the general ledger that shows the totals of transaction amounts
entered in a subsidiary ledger such as sales or purchases ledger during the month.
Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to
control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and
creditors quickly when a trial balance is being prepared.
Control accounts are an important system of control on the reliability of ledger accounts. They indicate that
errors may have occurred in the ledgers they control.
They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and
purchase ledger.
It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make.
- Figures might get transposed while some entries might be omitted altogether, so that an invoice or a
payment transaction does not appear in a personal account as it should.
It is possible to identify the fact that errors have been made by comparing:
• The total balance on the debtors account with the total of individual balances on the personal
accounts in the sales ledger.
• The total balance on the creditors account with the total of individual balances on the personal
accounts in the purchase ledger.
2. To locate errors
By using the control account, a comparison with the individual balances in the sales or purchase ledger
can be made for every week or day of the month, and the error found much more quickly than if
accounts did not exist.
3. To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet.
A single balance on a control account is obviously simpler and quicker than many individual balances in
the sales or purchase ledger.
This means also that the number of accounts in the double entry bookkeeping system can be kept down
to a manageable size.
36
St. Mary’s College
Principles of Accounts
CONTROL ACCOUNTS
There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate
accounts are kept to record the relevant transactions.
Instead of making a payment by cheque for the full amount owed to him as a creditor, his accounts can be
settled by “setting off” the amount owed to him by the company and the amount owed by him to the company.
A contra entry which is recorded in the personal accounts in the Sales and Purchases Ledger needs to be
reflected in both Control accounts to ensure that they balance with the sum of the balances in the ledger
accounts. The amount that is set off in the accounts would be the smaller amount.
37
CONTROL ACCOUNTS - FORMAT
Examples:
A cash payment of $450 is entered in the Cash Book as $540.
This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB.
(A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit.
This would result in the Trial balance Debit balance being more by $2000!!!!!
Examples:
Errors of Commission (correct amount, wrong personal account)
e.g. Goods sold to M. Smith on credit is entered in N. Smith’s account in error.
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error.
As a result, the incorrect amount of $457 was posted to the ledger accounts: T. Tall and Purchases.
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger accounts as
$300 (DR: J. Bond CR: Sales).
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent
N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the
ledger accounts affected by the error.
39
St. Mary’s College
Principles of Accounts
When these errors are discovered, correcting the errors require double entry journal entries which will
be posted to the accounts affected by errors.
Correction
of
Errors
NOT
affecting
the
Trial
Balance
Errors of Commission (correct amount, wrong personal account)
Correcting the error requires journal entries to be posted to:
• The account incorrectly posted to - DR if the account was credited / CR if the account was debited
• The correct account – post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
1. Identify whether the correct incorrect amount entered was overstated or understated.
2. Calculate the amount by which the entry was understated or overstated i.e. the difference.
3. Prepare the journal entry to correct the error:
If the amount was understated:
DR: the account debited
CR: the account credited
With the difference calculated to increase the amount to the correct amount
If the amount was overstated:
DR: the account credited
CR: the account debited
With the difference calculated to decrease the amount to the correct amount
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
Correcting these errors require the same steps as correcting Errors of Original entry.
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
The journal entry to correct the error:
DR: the account credited
CR: the account debited
With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)
NB.
There
must
be
a
double
entry
to
correct
the
errors.
40
St. Mary’s College
Principles of Accounts
Suspense Account
A Suspense account is a temporary ‘holding’ account in the General ledger that is opened to place the
difference in the trial balance to make it balance when the causes of the difference cannot immediately be
found and corrected.
General Ledger
Suspense account
Date Details Dr$ Date Details Cr$
Difference in trial balance X
(DR side of TB less)
Suspense account
Date Details Dr$ Date Details Cr$
Difference in trial balance X
(CR side of TB less)
Example:
S. James
st
Trial Balance as at 31 December 2009
DR CR
$ $
Totals (sum of all balances) 100 000 99 960
Suspense a/c 40
100 000 100 000
Suspense account
Date Details Dr$ Date Details Cr$
31 Dec Difference in Trial Balance 40
Examples:
A Creditor for $95 was posted as $68 in the personal a/c.
The credit side would have been less by $27 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR: Creditor’s personal a/c $27
Discounts Received $70 had been posted to the Purchases ledger but NOT to the Discounts Received.
The credit side would have been less by $90 so the Suspense account would have been credited.
The journal entry to correct the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70
Rent expense of $200 was recorded twice on the same side of the cash account, but entered correctly in
the Rent expense a/c
The credit side would have been more (debit side less) by $200 so the Suspense account would have been
debited. The journal entry to correct the error is: DR: Cash a/c $200 CR: Suspense a/c $200
A cheque for $225 received from Jays Co had been posted to the debit side of their account.
As the entry was made on the wrong side of the account, the credit side would have been less (debit side more)
by $248, so the Suspense account would have been credited with $450.
The journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450
Some errors do not affect the double entry and would, therefore, be corrected with a single entry in
the Suspense account. These errors include:
- account balance entered incorrectly in the Trial Balance e.g. $248 entered as $284
- account balance placed on the wrong side in the Trial balance (double the amount)
Examples:
The total of the Sales a/c of $1500 had been omitted from the Trial Balance.
The credit side of the TB would have been less by $1500 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error: DR: Suspense a/c $1500
The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200.
The debit side of the TB would have been less by $200 so the Suspense account would have been debited.
The journal entry to correct the error: CR: Suspense a/c $200
The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance.
As the entry was made on the wrong side of the account, the credit side would have been less by $3000 so the
Suspense account would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500
N.B.
THE
BALANCE
IN
THE
SUSPENSE
ACCOUNT
MAY
BE
CAUSED
BY
MORE
THAN
ONE
ERROR
• Enter each journal entry to correct the error separately.
• Post each entry to the Suspense account and close off.
42
St. Mary’s College
Principles of Accounts
To correct Net Profit, amounts resulting in Net profit being understated have to be added, and
amounts resulting in Net Profit being overstated have to be lessened. This is done using a
“Statement of Corrected Net Profit”.
Name of business
st
Statement of corrected Net Profit for the year ended 31 March 2007
$ $
Example:
th
• On January 17 2010, an error was found where an invoice of $100 had been credited to the
supplier’s a/c but had not been debited to the purchases account.
If Purchases was understated, then Net Profit was overstated and has to be corrected as follows:
st
Statement of Corrected Net profit for the year ended 31 December 2009
$ $
Net Profit per accounts 2 120
Less: Purchases undercast (100)
43
Principles of
Accounts
FINAL ACCOUNTS
Ms Fergusson
44
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER
Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$ $ $
Sales X
Less: Sales Returns (X)
Net Sales X
**Less: EXPENSES
Wages/salaries X
Utilities X
Increase in provision for bad debts X
Depreciation X
Bad debts expense X
Carriage Outwards X
Discount allowed X
Total expenses (X)
NET PROFIT (or NET LOSS) X or (X)
**These are a few examples, however the list can be exhaustive in reality
45
LONG-TERM LIABILITIES
Mortgage X
Bank Loan X
Total Long Term Liabilities X
XX
46
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP
Partnership
Trading & Profit & Loss Appropriation A/c for the _______ ended ________
$ $ $
Sales X
Less: Sales Returns (X)
Net Sales X
LESS: COST OF GOODS SOLD:
Opening Stock X
Purchases X
Add: Carriage In X
X
Less: Purchases Returns (X)
Net Purchases X
Cost of Goods Available for sale X
Less: Closing Stock (X)
Cost of Goods Sold (X)
GROSS PROFIT (or GROSS LOSS) X / (X)
Add: Revenue
Rent Received; Discount Rec. etc X
Decrease in Provision for bad debts X X
Less: Expenses
Carriage Outwards; Discount allowed etc. X
Wages/salaries etc X
Increase in Provision for Bad Debts X
Depreciation X
(X)
NET PROFIT (or NET LOSS) X / (X)
Add: Interest on drawings
Partner 1 X
Partner 2 X
X
Less: Interest on Capital
Partner 1 X
Partner 2 X
X
Salary: Partner 1 X
(X)
XX
Share in Profits:
Partner 1 X
Partner 2 X
XX
* The last section (starting from Net Profit) is called the Approriation A/C
47
PROFIT SHARING
Profits or Losses may be shared according to a stated Profit Sharing ration or in
proportion to Partners’ Capital (Partnership Deed). If it is not stated how to share profits,
share equally according to the Partnership Act.
Partnership Co.
Capital Account
Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2
2010 $ $ 2010 S $
Jan 1 Balance b/d X X
Dec 31 Balance c/d X X Feb 1 Bank X
XX XX XX XX
2011
Jan 1 Balance b/d X X
Current Account
Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2
2010 $ $ 2010 S $
Dec 31 Drawings X X Jan 1 Balance b/d X X
Dec 31 P&L Appropriation: Dec 31 P&L Appropriation:
Interest on drawings X X Interest on Capital X X
Salary X -
Share of profits X X
Dec 31 Balance c/d X X
XX XX XX XX
2011
Jan 1 Balance b/d X X
48
CURRENT ASSETS:
Stock X
Debtors X
Less: provision for bad debts (X)
Net debtors X
Prepaid expenses X
Accrued revenue X
Bank X
Cash X
Total Current Assets X
FINANCED BY:
CAPITAL ACCOUNTS
Partner 1 X
Partner 2 X
X
CURRENT ACCOUNTS
Partner 1 X
Partner 2 X
X
LONG-TERM LIABILITIES
Mortgage X
XX
49
FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS
Partnership
Balance Sheet as at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
FINANCED BY:
LONG-TERM LIABILITIES
Mortgage X
XX
50
When forming a partnership by merging two sole traders, an opening journal is prepared
as follows:
• State partnership name
• Draw Journal with DR and CR columns, as seen below
• List the assets and liabilities of the new partnership.
- Combine / Add each asset and liability of the sole traders forming the
partnership
- * Bank and Bank overdrafts are combined into one net figure which is
EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability)
- *The Capital of EACH partner (former sole traders) must be stated separately.
The Capital of each partner is calculated using C = A-L, using the individual
sole trader figures.
• Narrative for formation of partnership
• DR and CR Totals must balance (Accounting equation)
Partnership
The Journal
Date Details DR CR
$ $
Buildings X
Motor Vehicles X
Stock X
Debtors X
Bank * X*
Cash X
Mortgage X
Bank Loan X
Creditors X
Bank Overdraft * X*
*Capital: Partner 1 X
Partner 2 X
To record assets and liabilities at formation of partnership
XX XX
51
• Associations
• Clubs
• Societies
• Unions
• Charities
• Universities
• Churches
Non-profit making organizations belong to their members. Members pay subcriptions.
The Cash book is called the Receipts and Payments Account and the Trading and Profit and Loss
Account is called the Income and Expenditure Account.
_________________________________________________________________________________________
The Subscription account must account for any Accruals and Prepayments, like all revenue accounts,
as follows:
**The amount for “Income & Expenditure” is entered in the Income & Expenditure account for
Subscriptions in the Income section.
___________________________________________________________________________________
LIFE MEMBERSHIP
Many clubs and societies have life membership schemes where members can pay a relatively large
amount at the beginning and then never pay any more membership fees.
The payment of a life membership fee should be spread over the estimated / expected membership period.
An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the
remainder would be entered in the Balance Sheet as a long-term liability.
Example:
A member paid $20 000 life membership at age 20 and expected to be a member until 40 years old.
Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be
$20 000 / 20 years which is $1 000.
In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability.
In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability.
…
53
The Trading a/c is prepared to calculate whether the non profit organization made a profit or a loss on its
fundraising activities e.g. bar, disco, dances, etc.
The Income & Expenditure shows whether the accumulated fund (capital) has increased or decreased
over the period.
**If Expenditure exceeds Income, the difference is Excess of expenditure over income
N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments.
Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.
54
Bar Stock X
Prepaid Expenses X
Accrued Revenues e.g. Accrued Subscriptions * X
Bank X
Cash X
Total Current Assets X
Creditors X
Accrued expenses X
Advanced revenues e.g. Advanced Subscriptions * X
Total Current Liabilities (X)
WORKING CAPITAL X
XX
FINANCED BY:
ACCUMULATED FUND
LONG-TERM LIABILITIES
Mortgage X
Life Membership Fee** X
Total Long Term Liabilities X
XX
55
$ $ $
Income
Membership dues X
Interest and Dividends X
Other X
X
Expenditure
Telephone X
Stationary & Office Supplies X
Traveling X
Repairs and Maintenance X
Motor Vehicle expense X
Bank Charges X
Interest on members deposits X
Interest on Loans X
Application: Subscriptions and dues X
Annual General Meeting (AGM) expenses X
Auditors’ fees/remuneration X
Provision for Depreciation X
(X)
Surplus/Deficit for the year X
Add: Undistributed surplus at the beginning of year b/f X
X
Less: Appropriations
Transfer to reserves:
Statutory reserve X
Special reserve X
X
Honoraria X
Proposed dividend X
(X)
Note:
• Statutory Reserves – by law / statute a minimum percentage of net income should be transferred
to this reserve.
• Special Reserve – a reserve for any specific named purpose e.g. Investment reserve; Building
reserve
• Honoraria – voluntary payments to members of the committee of management as appreciation for
services performed.
• Proposed Dividends – dividends fixed at the AGM.
56
Name of Business
$ $ $
Employment of Capital Cost Accumulated Net Book
Fixed Assets Depreciation Value
Premises X -- X
Equipment X (X) X
Motor Vehicles X (X) X
X X X
Current Assets
Stock X
Receivables: Membership dues X
Prepayments X
Bank X
Cash X
X
Less: Current Liabilities
Honoraria Owing X
Proposed Dividends * X
(X)
Working Capital X
Net Assets XX
Capital Employed
Share Capital X
Reserves:
Statutory reserve X
Special reserve X
Undistributed surplus income X
X
XX
Note:
Add: Revenue
Rent Received; Discount Rec. etc X
Decrease in Provision for bad debts X
Total revenue X
Less: Expenses
Carriage Outwards X
Utilities ; Wages/salaries etc X
Discount allowed X
Increase in provision for bad debts X
Bad debts expense X
Depreciation X
*Directors’ Remuneration X
*Debenture Interest X
Total expenses (X)
NET PROFIT (or NET LOSS) X / (X)
Add Retained Earnings b/f X
X
Less: Appropriations
Transfer to General reserves X
Proposed dividends:
Preference share dividends X
Ordinary Share Dividends X
(X)
Retained Earnings for the year X
* The last section (starting from Net Profit) is called the Approriation A/C
58
VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY
Limited Liability Company
Balance Sheet as at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
Land & Buildings X (X) X
Plant & Machinery X (X) X
Motor Vehicles X (X) X
X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Less: provision for bad debts (X)
Net debtors X
Prepaid expenses X
Accrued revenue X
Bank X
Cash X
Total Current Assets X
LESS: CURRENT LIABILITIES
Creditors X
*Debenture Interest Payable X
Accrued expenses X
Advanced revenues X
*Proposed Dividends:
Ordinary X
Preference X
Bank overdraft X
Total Current Liabilities (X)
WORKING CAPITAL X
XX
FINANCED BY:
Authorized Share Capital
Ordinary Shares @ $ par value X
% Preference Shares @ $ par value X
X
Issued Share capital
Ordinary Shares @ $ par value X
% Preference Shares @ $ par value X
X
Reserves
General Reserves X
Retained Earnings X
X
X
LONG-TERM LIABILITIES
Mortgage X
* % Debentures X
X
XX
59
FORMAT OF THE MANUFACTURING ACCOUNT
Manufacturing Business
Manufacturing Account for the _______ ended ________
$ $ $
Opening Stock of Raw Materials X
Add: Purchases of Raw Materials X
Carriage Inwards (Raw Materials) X
X
Less: Closing Stock of Raw Materials (X)
Cost of Raw Materials consumed (Direct Materials) X
Direct Labour X
Direct expenses X
PRIME COST X
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers) X
General Factory expenses / Indirect expenses X
Fuel and Power X
Factory rent; Factory Insurance… X
Depreciation of Plant and machinery X
Lubricants X
X
PRODUCTION COST X
Add: Opening Work-in-Progress X
X
Less: Closing Work-in-Progress (X)
PRODUCTION COST OF GOODS COMPLETED C/D* X
Trading and Profit and Loss Account for the ________ended ________
$ $ $
Sales X
Less: Sales Returns (Finished Goods) X
NET SALES X
Less: Cost of Goods Sold
Opening Stock of Finished Goods X
Add: Purchases of Finished Goods (if any) X
Less: Purchases Returns of Finished Goods (if any) X .
Net Purchases X
*Add: Production cost of goods completed b/d* X
X
Less: Closing Stock of Finished goods (X)
(X)
GROSS PROFIT X
The Cost of Production may include the cost of the packaging of the finished goods e.g. boxes, bottles,
cases etc. This Cost has to be included in the Manufacturing Account in addition to the cost of Raw Materials.
This can be done after Cost of Raw Materials Consumed is calculated, or in columnar format as seen below:
Manufacturing Business
$ $ $
Raw Packaging
Materials e.g Boxes Total
Opening Stock X X
Add: Purchases X X
Carriage Inwards X X
X X
Less: Closing Stock of Raw Materials (X) (X)
Cost of Direct Materials & Boxes consumed X X XX
Direct Labour X
Direct expenses X
PRIME COST X
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers) X
General Factory expenses / Indirect expenses X
Fuel and Power X
Factory rent; Factory Insurance… X
Depreciation of Plant and machinery X
Lubricants X
X
PRODUCTION COST X
Add: Opening Work-in-Progress X
X
Less: Closing Work-in-Progress (X)
* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even
though it appears to be under the “Boxes” Column.
61
The following format is the long way of including the Cost of Packaging in the Manufacturing Account. The
Packaging cost is calculated after the “Cost of Raw Materials consumed” as follows:
Manufacturing Business
PRIME COST X
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers) X
General Factory expenses / Indirect expenses X
Fuel and Power X
Factory rent; Factory Insurance… X
Depreciation of Plant and machinery X
Lubricants X
X
PRODUCTION COST X
Add: Opening Work-in-Progress X
X
Less: Closing Work-in-Progress (X)
PRODUCTION COST OF GOODS COMPLETED C/D* X
62
The Current Asset Section is the only section that differs in the Balance Sheet for a
Manufacturing Account as Stock is now divided into THREE types:
1. Raw Materials
2. Work-in-Progress
3. Finished Goods
Manufacturing business
Balance Sheet as at ________________
Stock*
Raw materials X
Work in progress X
Finished Goods X
X
Debtors X
Less: provision for bad debts (X)
Net debtors X
Prepaid expenses X
Revenues owing X
Bank * X
Cash X
Total Current Assets X
Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft * X
Total Current Liabilities (X)
WORKING CAPITAL X
XX
FINANCED BY:
Opening Capital X
Add: Net Profit OR Less: Net Loss X OR (X)
X
Less: Drawings (X)
Closing Capital X
LONG-TERM LIABILITIES
Mortgage X
Bank Loan X
Total Long Term Liabilities X
XX
63
Principles of
Accounts
RATIO ANALYSIS
Ms Fergusson
64
St. Mary’s College Lesson Notes
Accounting Ratios:
A ratio that expresses the relationship between one accounting result and another, intended to provide a useful comparisons.
Liquidity Ratios: assesses the business’ ability to cover its short-term debt as they become due.
Example: Current Assets = $12 500 = 2.5:1 2.5 Current assets cover 1 Current liability
Current Liabilities $5 000
Example: Current Assets - Stock = $12 500 - $2 500 = 2:1 2 Quick Assets cover 1 C. Liability
Current Liabilities $5 000
Example: Debtors = $3 600 x 12mths = 1.35 months Debtors take 1.35 months on average to
Sales $32 000 pay business amounts owed.
Example: Creditors = $2400 x 12mths = 1.04 months The business takes 1.04 months on
Purchases $27 700 average to pay creditors amounts owed.
Example: Debtors = $3 600 = 1.5:1 …for every $1.50 owed by a debtor, the business owes $1 to a
Creditors $2 400 creditor.
St. Mary’s College Lesson Notes 65
Profitability Ratios: assesses the business’ overall efficiency and performance during a specific period.
Expressed as a %
Gross Profit as a Percentage of Sales = Gross Profit x 100
Amount of Sales that result in
Net Sales Gross Profit
Example: Gross Profit x 100 = $12 900 x 100 = 40.3% The business made a Gross profit of $0.40
Net Sales $32 000 for every $1 of Sales.
Expressed as a %
Net Profit as a Percentage of Sales = Net Profit x 100
Amt of Sales that business keeps as
Net Sales profits after cost of sales & expenses
Example: Net Profit x 100 = $7 200 x 100 = 22.5% The business made a profit of $0.22 for every $1
Net Sales $32 000 of Sales after deducting all costs & expenses.
This ratio measures the amount of returns a business receives from resources made available to them
from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are
included in capital employed as well.
There are different Formulas for Capital Employed. Most popular for CSEC:
Capital Employed = Opening Capital + Closing Capital
2
Example: Net Profit x 100 = $7 200 x 100 = 33.3% The business earned $0.33 for every $1
Capital Employed $21 600 of Capital Employed.
Rate of Turnover or Stock turnover = Cost of Goods Sold . Expressed as the no. of times per
Average Stock annum stock is sold or turned over.
Rate of Turnover or Stock turnover = Average Stock x 12mths / 365dys Expressed as the average
Cost of Goods Sold no. of months or days the
stock is sold or turned over.
Example1: $19 100 = 8.3 times Example2: $2 300 x 12mths = 1.45 months
$2 300 $19 100
66
FORMULAS:
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can be calculated as follows:
Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($)
Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up)
MARGIN: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
NB: If Margin % is given and Sales Revenue, Gross Profit and Cost of Goods Sold can be calculated as follows:
Gross Profit ($) = Margin (%) x Sales ($)
Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin)
RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary)