BUAD 803-PRINCIPLE OF ACCOUNTING

Module 1
Study Session 1 Accounting Concepts.
✓ Definition: Accounting is a discipline which records, classifies, summarizes and interpret financial information
about the activities of a concern so that intelligent decisions can be made about the concern.
✓ Attributes Of Accounting:
o (i) Recording: It is concerned with the recording of financial transactions in an orderly manner, soon
after their occurrence in the proper books of accounts.
o (ii) Classifying: It is concerned with the systematic analysis of the recorded data so as to accumulate
the transactions of similar type at one place. This function is performed by maintaining the ledger in
which different accounts are opened to which related transactions are posted.
o (iii) Summarizing: It is concerned with the preparation and presentation of the classified data in a
manner useful to the users like preparation of financial statements such as Income Statement, Balance
Sheet, and Statement of Changes in Financial Position, Statement of Cash Flow, and Statement of
Value Added.
o (iv) Interpreting: Nowadays, the aforesaid three functions are performed by electronic data processing
devices and the accountant has to concentrate mainly on the interpretation aspects of accounting. The
accountants should interpret the statements in a manner useful to action. The accountant should
explain not only what has happened but also (a) why it happened, and (b) what is likely to happen
under specified conditions.
✓ Nature of Accounting:
o Accounting as a service activity: service activity that provides qualitative financial info for making
economic decisions.
o (ii) Accounting as a profession: e.g. ICAN, FCA
o (iii) Accounting as a social force: The accounting information/data is to be used to solve the problems of
the public at large such as determination and controlling of prices.
o (iv) Accounting as a language: It is one means of reporting and communicating information about a
business.
o (v) Accounting as Science or Art: Accounting is science bcos it had laid down rules and principles like
double entry system, Accounting is an art as it also requires knowledge, interest and experience to
maintain the books of accounts in a systematic manner
o (vi) Accounting as an information system:
✓ ITQ: What is the nature of accounting?
✓ ITA: i) Accounting as a service activity (ii) Accounting as a profession (iii) Accounting as a social force (iv)
Accounting as a language (v) Accounting as science or art
(vi) Accounting as an information system
✓ Key objectives of accounting
o To keep systematic records,
o To protect business properties,
o To ascertain the operational profit or loss,
o To ascertain the financial position of the business,
o To facilitate rational decision making and Information System
✓ ITQ: What are the key accounting concepts?
✓ ITA:
o Money measurement concept. Accounting only records transactions that can be measure in terms of
money
o Cost concept or exchange price. According to this concept an asset is ordinarily entered on the
accounting records at the price paid to acquire it.
o Going-concern (continuity) concept: Accountants assume that the business entity will continue
operations into the indefinite future unless there is good evidence to the contrary.
 o Periodicity (time periods) concept: It requires that the life of the business should be divided into
appropriate segments for studying the financial results shown by the enterprise after each segment.
o Separate Business Entity Concept: In accounting we make a distinction between business and the
owner. When a person invests ₦10.00 into a business, it will be treated that the business has borrowed
that much money from the owner and it will be shown as a ‘liability’ in the books of accounts of
business.
o Dual Aspect Concept. Total amount debited always equals the total amount credited.
▪ Assets = Liabilities + Owners Equity............... (1)
▪ Owner’s Equity = Assets - Liabilities............... (2) (Accounting Equation)
o The Matching concept. In other words, income made by the enterprise during a period can be
measured only when the revenue earned during a period is compared with the expenditure incurred for
earning that revenue.
o Accrual Concept: The accrual concept in accounting means that expenses and revenues are recorded in
the period they occur, whether or not cash is involved. The benefit of the accrual approach is that
financial statements reflect all the expenses associated with the reported revenues for an accounting
period.
o Realization Concept. The realization principle is the concept that revenue can only be recognized once
the underlying goods or services associated with the revenue have been delivered or rendered,
respectively. Thus, revenue can only be recognized after it has been earned

✓ ITQ: Who are the external users of accounting information?

✓ ITA: 1. Investors2. Creditors 3. Members of Non-profit Organizations 4. Government 5. Consumers 6. Research
Scholars.
✓ ITQ: Who are the internal users of the accounting information?
✓ ITA: 1.Owners 2. Management 3.Employees
✓ The Accounting Process
o Identification of Transaction: Identify line items that are transactions; transactions change financial
positions of a business.
o Recording the transaction: Journal is the first book of original entry in which all transactions are
recorded event-wise and date-wise and presents a historical record of all monetary transactions.
Journals can be broken down into sub-journals as follows:
▪ Classifying: Similar transactions relating to a person, a thing, expense, or any other subject are
grouped together under appropriate heads of accounts.
▪ Summarizing: Summarization helps in the preparation of Profit and Loss Account and Balance
sheet for a particular financial year.
▪ Analysis and Interpretation: Analysis of accounting information will help the management to
assess in the performance of business operation and forming future plans also.
▪ Presentation or reporting of financial information: Shareholders and stake-holders need to
understand the financial stance of the enterprise.
✓ ITQ: What is a financial transaction?
✓ ITA: A financial transaction is an event which can be expressed in terms of money and which brings change in
the financial position of a business enterprise.

Study Session 2 The Accounting Equation and its Component.

✓ Accounting Equation: Dual concept states that 'for every debit, there is a credit'. Every transaction should have
two-sided effect to the extent of same amount. This concept has resulted in accounting equation which states
that at any point of time assets of any entity must be equal (in monetary terms) to the total of owner's equity
and outsider's liabilities.
✓ An asset can be defined as a tangible or intangible resource that is owned or controlled by an accounting entity,
and which is expected to generate future economic benefits. E.g. tangibles like land and buildings, motor
vehicles, plant and machinery, tools, office furniture. or intangible e.g. patent rights, trade marks, goodwill etc.
✓ An accounting entity may be viewed as a set of assets and liabilities.
✓ As an equation, this would appear as follows:
✓ Proprietor's ownership interest in the business = Net resources of the business.
✓ Assets = Liabilities + Capital => Assets = Liabilities + Owner's equity
✓ To further explain the transaction of revenues, expenses, losses and gains, the equation can be expanded thus:
✓ Assets + Expenses = Liabilities + Revenue + Owner's equity
✓ or Assets = Liabilities + (Revenue – Expenses) + Owner's equity
✓ or Assets = Liabilities + Owner's equity + Owner's equity (income)
✓ which ultimately becomes:
✓ Assets = Liabilities + Owner's equity
✓ An account is a summary of the relevant transactions at one place relating to a particular head. It records not
only the amount of transaction but also their effect and direction.
✓ Nature Of Account:
o A real account in a business is a record of the amount of asset, liability, or owners' equity at a precise
moment in time.
o Nominal accounts summarize a business's revenue and expenses over a period of time, such as a year.
✓ The accounting period concept (sometimes called periodicity concept) is a means of dividing up the life of an
accounting entity into discrete periods for the purpose of reporting performance for a period of time (in a
statement of profit and loss) and showing its financial position at a point in time (in a statement of financial
position).
✓ The word 'capital' is associated with items that appear in the statement of financial position (e.g. owners'
capital),
✓ Whereas the word 'revenue' involve items that appear in the statement of profit and loss (comprehensive
income).
✓ A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of
the current accounting period. Routine repairs are revenue expenditures because they are charged directly to
an account such as Repairs and Maintenance Expense.
✓ Capital Expenditure: Money spent by a business or organization on acquiring or maintaining fixed assets, such
as land, buildings, and equipment.

Study Session 3 Basic Documentation

✓ Source documents are original documents from which accounting records are kept. Data from the documents
are first assembled and classified before being entered in the ledger.
✓ The books in which the data are first assembled and classified before they are posted to the ledger are called
subsidiary books.
✓ Source Documents:
✓ An Invoice- An invoice is a business document prepaid when goods are sold and is normally sent by the seller
to the buyer. It gives details of the goods and value of the transaction.
✓ A debit note is sent by the seller if the buyer has been undercharged on the invoice. It has basically the same
layout and information as the invoice except that instead of details of the goods, it shows details of the
undercharge. It is recorded in the books of the seller and buyer in the same way as an invoice.
✓ A credit note credits and accordingly reduces the customer’s indebtedness. This can happen if:
o The customer has by mistake, been overcharged on the sales invoice,
o The customer returns some of the goods previously sold to him or
o Some allowance is to be made to the amount by which the customer’s account has been credited.
o A credit note has basically the same layout and information as an invoice, except that instead of the
details of the goods, it will show the reason why it has been issued.
✓ Cheque: It is defined in the Bills of Exchange Act 1882 as a bill of exchange drawn on a banker, payable on
demand.
✓ Bill of exchange: A written, unconditional order by one party (the drawer) to another (the drawee) to pay a
certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or
 services received. The drawee accepts the bill by signing it, thus converting it into a post-dated check and a
binding contract.
✓ Receipt- This is a written document issued to acknowledge that money or valuable property has been
received. The date and details of the transaction as well as the receipt number must be stated on the
document.
✓ Voucher: a voucher is a document that shows goods have bought or services have been rendered
✓ ITQ: Mention the source documents that you know
✓ ITA: Invoice, Debit Note, Credit Note, Cheque, Receipt and Voucher.
✓ Subsidiary books are books into which transactions are recorded on a daily basis from the source documents
and from which postings are made periodically to the relevant accounts in the ledger. This practice prevents
the ledger from containing too many details. The subsidiary books are:
✓ The sales day book: Another name for the sales day book is the sales journal. It is written up from copies of
sales invoices and debit notes retained by the seller.
✓ The purchases day book: A.K.A purchase journal. It is written up from the invoices and debit notes received
from suppliers.
✓ The sales returns day book: in which is recorded the goods sold on credit that are returned by customers.
Drawn from credit notes retained by the seller.
✓ The purchases returns day book: in which is recorded the goods purchased on credit that are returned to
suppliers. Drawn from purchase invoices and credit notes received from suppliers.
✓ The petty cash book: Used is recording cash received and cash paid. Drawn from receipts or petty cash,
vouchers where employees are reimbursed expenses.
✓ The cash book: Book in which are recorded cheques received (and cash paid into the bank) and payments
made by cheque (and cash withdrawn from the bank)
✓ The Journal: Journal is a historical record of business transactions or events. It is a book of original or prime
entry written up from the various source documents. Journal is a primary book for recording the day to day
transactions in a chronological order i.e. in the order in which they occur.
✓ ITQ: Subsidiary books are books into which transactions are recorded on a daily basis from the source
documents and from which postings are made periodically to the relevant accounts in the ledger. What are
those books?
✓ ITA: The sales day book, The purchases day book, The sales returns day book, The purchases returns day
book, The petty cash book, The cash book and The Journal.

Study Session 4 Prime Books, General Ledgers and the Journal

✓ Meaning of Journalizing: The process of recording a transaction in the journal is called journalizing.
✓ Advantages of Journal
o The transactions are recorded in journal as and when they occur so the chances of errors are
minimized.
o It helps in preparation of ledger.
o Any transfer from one account to another account is made through Journal.
o The entry recorded in journals are self- explanatory as it includes narration also.
o It can record any such transaction which cannot be entered in any other books of account.
o Every transaction is recorded in chronological order (date wise) so the chances of manipulations are
reduced.
o Journal shows all information in respect of a transaction at one place.
o The closing balances of previous year of accounts related to assets and liabilities can be brought
forward to the next year by passing journal entry in journal.
✓ Goods Account
✓ The goods account is not opened in accounting books. In place of goods account the following accounts are
opened:
o Purchases account: This is opened for goods purchased on cash and credit.
o Sales account: This account is opened for the goods sold on cash and credit.
 o Purchase returns account or return outward Account: This account is opened for the goods returned to
suppliers.
o Sales returns account or return inward account: This account is opened for the goods returned by
customers.

✓ Important Considerations for Recording the Business Transactions:

✓ Trade Discount: It is not recorded in the books of account and entry is made only with the net amount paid or
received.
✓ Cash discount is a concession allowed by seller to buyer to encourage him to make early cash payment.
o To the seller, it is called "Discount Allowed" and treated as debit or expense.; posted in Discount
Allowed Account
o To the buyer, it is called "Discount received" and treated as credit or income; posted in Discount
Received Account
✓ Goods distributed as free samples: Sometimes business distribute goods as free samples for the purpose of
advertisement. In this case, Advertisement Account is debited and Purchases Account is credited.
✓ Interest paid on capital is an expense. Therefore interest account should be debited. On the other hand the
capital of the business increases. So the capital account should be credited.
✓ ITQ: Mention some of the Important Considerations for Recording the Business Transactions
✓ ITA: 1. Trade Discount 2. Cash Discount 3. Goods distributed as free samples 4. Interest on capital 5. Interest
charged on Drawings 6. Depreciation charged on Fixed Assets 7. Bad Debts 8. Bad Debts Recovered 9. Purchase
and Sale of investment 10. Loss of Goods by Fire/Accident/theft.
✓ A ledger is a collection of accounts and may be defined as a summary statement of all the transactions relating
to a person, asset, expense or income which have taken place during a given period of time and shows their net
effect.
Ledger contains the various personal, real and nominal accounts in which all business transactions of the entity
are recorded.
✓ Relationship Between Journal and Ledger
✓ Journal and Ledger are the most useful books kept by a business entity. The points of distinction between the
two are given below:
o 1. The journal is a book of original entry whereas the ledger is the main book of account.
o 2. In the journal business transactions are recorded as and when they occur i.e. date wise. Posting to
Ledger is done periodically, may be weekly, fortnightly as per the convenience of the business.
o 3. The journal does not disclose the complete position of an account. The ledger indicates the position
of each account debit wise or credit wise, as the case may be. In this way, the net position of each
account is known immediately.
o 4. The record of transactions in the journal is in the form of journal entries whereas the record in the
ledger is in the form of an account.
✓ Utility of a ledger: The main utilities of a ledger are summarized as under:
o It provides complete information about all accounts in one book.
o It enables the ascertainment of the main items of revenues and expenses
o It enables the ascertainment of the value of assets and liabilities.
o It facilitates the preparation of Final Accounts.
✓ Compound journal entries: When more than two accounts are involved in a transaction and the transaction is
recorded by means of a single journal entry instead of passing several journal entries, such single journal entry
is termed as 'Compound Journal Entry'.

✓ SAMPLE JOUNNAL ENTRY

 DATE Particular LF Debit Credit
Jan 1 Cash Account Dr. 80000
To Morgan Capital Account 80000
(Startup capital)
Jan 6 Purchase Account Dr. 30000
To RAM’s Account 30000
(Purchased goods on credit)
Jan 8 Cash Account Dr. 6000
To Sales Account 6000
(Goods sold on cash)
Jan 15 Furniture Account Dr. 8000
To Cash Account 8000
(Furniture bought on cash)
Jan 18 Salary Account Dr. 6500
To Cash Account 6500
(Salary paid on cash)
Jan 20 Rent Account Dr. 1000
To Cash Account 1000
(Rent paid to landlord on cash)

✓ Balancing An Account:
✓ The process of finding out the difference between the totals of the two sides of a Ledger account is known as
balancing and the difference of the total debits and the total credits of accounts is known as balance
✓ If the total of the credit side is bigger than the total of the debit side, the difference is known as credit balance.
✓ In the reverse case, it is called debit balance.
✓ Steps for balancing ledger account
o 1. Make the total of both sides of an account in a worksheet.
o 2. Write down the higher amount on the side obtained i.e. the side that has highest figure
o 3. Also write down the higher figure as total on both sides
o 4. Find out the difference between the two sides of the account.
o 5. If the debit side is more than credit side; therefore, there is a debit balance of ₦500.
o 6. If the credit side is more than debit side; therefore, there is a credit balance of ₦500.
o 5. This debit balance of ₦500 is to be shown as "By Balance c/d" in the account on the credit side.
o 6. Finally, the amount of the closing balance should be brought down as the opening balance at the
beginning of the next day.
✓ Personal accounts are balanced regularly to know the amounts due to the persons or due from the persons.
✓ Real accounts are generally balanced at the end of the accounting year.
✓ Nominal accounts are not balanced, as they are to be closed by transferring them to the final accounts
✓ Prime Books
o Sales day book
o Sales Returns Day Book
o Purchases Day Book
o Purchase returns sales book

Module 2
Study Session 5 Double Entry and the General Ledger.
✓ The Principles of Double-Entry: Each page of the ledger is split into two halves: the left half is called the debit
side and the right half is called the credit side.
✓ The ledger is divided into sections called accounts. In practice, each of these accounts is on a separate page.
There is usually an 'account' for every class of expenditure, income, asset, and liability.
 ✓ The general rule of double entry is to debit the account that receives value and credit the account which gives
value with the amount involved.
✓ The actual process of placing the bookkeeping entry in each account is called 'posting the transaction'

MOTOR VEHICLE ACCOUNT

DR CR
DATE PARTICULAR AMOUNT(N) DATE PARTICULAR AMOUNT
Jan 1 Cash Account 10,000

CASH ACCOUNT
DR CR
DATE PARTICULAR AMOUNT(N) DATE PARTICULAR AMOUNT
Jan 1 Vehicle Account 10,000

✓ A 'T' account leaves out some of the detail that is given in ledger accounts, such as the reference to the folio
page and contains less lines. A typical 'T' account looks like the following:
DR MOTOR VEHICLE ACCOUNT CR
Date Particular Amount Date Particular Amount
Jan 1 Cash Account 10000

DR CASH ACCOUNT CR
Date Particular Amount Date Particular Amount
Jan 1 Vehicle Account 10,000

✓ Ledger Entries for Credit Transactions

✓ Postings to the purchases and sales returns ledger accounts will always be on the debit side and these accounts
will always have a debit balance, and
✓ postings to the sales and purchase returns ledger accounts will always be on the credit side and these accounts
will always have a credit balance
✓ Adjustments for drawings and capital introduced
✓ Drawings may take a number of forms in addition to cash. For example, it is common for the owner to take
goods out of the business for his or her personal consumption. This requires an adjustment that may be done
by either of two entries:
o debit drawings and credit purchases with the cost of the goods to the business; or
o debit drawings and credit sales where the goods are deemed to be taken at some other value such as
the normal selling price.

Study Session 6 The Balancing of Accounts and the Trial Balance.

✓ The Nature of Balancing of Accounts
✓ Personal accounts are balanced regularly to know the amounts due to the persons or due from the persons.
✓ The procedure for balancing an account is as follows:
✓ 1. Leave one blank line under the last entry in the ledger account and draw parallel lines on the top and bottom
of the next line in the amounts column on each side.
✓ 2. Add up each side of the ledger account (the debit and credit sides) and calculate the difference.
✓ 3. If the amount of the debit side > credit side, enter the difference on the credit side immediately after the last
entry on that side in the blank line
✓ 4. Enter the total of each side of the ledger account between the parallel lines. These two figures should now
be the same.
✓ 5. There are three descriptions used to close off accounts. These descriptions identify where the closing balance
will end up in the new period:
✓ a. When the ledger account is a statement of financial position account (an asset, capital or liability account),
the closing balance should be labelled (Bal. C/D).
✓ Enter the same figure on the opposite side below the parallel lines. This should be described as the 'balance
brought down' (Bal. b/d).
✓ b. When the account is a statement of profit and loss account (income or expense accounts for example sales,
wages, etc.) the closing balance transfers to the statement of profit and loss (P/L) account and should be
described as such. This is a T account that is set up to determine the profit or loss made in the period.
✓ c. Finally, any account that represents a movement in owners' capital (drawings, capital introduced and the
statement of profit and loss account) will be balanced off to the owners' capital account. Therefore, the
description showing the destination of the closing balance on these accounts will be 'owners' 'capital: The
owners' capital account is a statement of financial position account.
✓ A Trial Balance is a two-column schedule listing the titles and balances of all the accounts in the order in which
they appear in the ledger. The debit balances are listed in the left-hand column and the credit balances in the
right-hand column. In the case of the General Ledger, the totals of the two columns should agree.
✓ The purpose of trial balance is to provide:
✓ 1. A test of the arithmetical accuracy of entries made in the different accounts.
✓ 2. The trial balance is also used for the preparation of final financial statements.
✓ 3. To serve as an aid to the management
✓ Limitation Of Trial Balance:
✓ Only compatible with double entry system of accounting.
✓ There are certain errors, which are not disclosed by the trial balance.
✓ Erroneous trial balance invalidates final accounts
✓ Methods of preparation of trial balance
✓ A trial balance can be prepared by the following two methods:
✓ a. Total method: In this method, the debit and credit totals of each account are shown in the two amount
columns (one for the debit total and the other for the credit total).
✓ b. Balance method: In this method, the difference of each amount is extracted.
✓ If debit side of an account is bigger in amount than the credit side, the difference is put in the debit column of
the Trial Balance
✓ If the credit side is bigger, the difference is written in the credit column of the Trial Balance.
✓ An error is an innocent and non-deliberate act or lapse on the part of the persons involved in recording
business transactions. It might occur in journals or when posting ledgers.
✓ These errors can be classified as follows:
✓ 1. Clerical errors: Error during recording or posting
o Errors of omission : When certain transactions are omitted while posting
o Errors of commission : When transactions are wrongly posted or posted to wrong account
o Compensating errors: When one side is over posted and have counter effect on the other side. It
doesn't affect balance but the accuracy of balance is wrong.
o Errors of duplication: When business transactions are recorded more than once in a prime book
✓ 2. Errors of Principle: When a business transaction is recorded in the books of original entries by violating the
basic/fundamental principles of accountancy called an error of principle
✓ Correcting errors in a trial balance
✓ 1. Recast the trial balance.
✓ 2. Check that no ledger account has been omitted from the trial balance.
✓ 3. Check that each amount entered in the trial balance is on the correct side.
✓ 4. Check to see that the amounts entered in the trial balance are the same as those shown in the ledger
accounts.
✓ 5. If the error has still not been found, it will then be necessary to check all the entries in the general ledger.
✓ 6. If the difference between the totals of the trial balance is divisible by nine, then it is likely that a ledger
account balance or a transaction has been transposed incorrectly
Study Session 7 The Cash Book.
✓ The cash book is both a book of original entry and a ledger account for all cash and bank transactions involving
receipts and payments whether in cash or by cheque.
✓ The cash book is regularly reconciled with the bank statement as an internal control check.
✓ Cash transactions not made through the bank are generally recorded in a petty-cash book.
✓ Contra entry:
✓ An accounting transaction involves two accounts and there may be a transaction where both cash account and
bank account are involved.
✓ This is an accounting entry, which is recorded on the both the sides of the cash book. In order to give hint for
the purpose the word ‘C’ is written in the ledger folio.
✓ The entry involving the payment of cash into the bank is called a contra-entry and is denoted by “c” in the folio
column.
✓ Forms Of Cashbook
✓ The cash book is both a journal and a ledger
✓ The general cash book which is made up of:
✓ The two column cash book (one for recording cash transactions and the other for bank transactions.)
✓ All payments in cash are recorded by crediting the cash column of the book
✓ All payment in cheque are recorded by crediting the bank column is credited.
✓ When cash is withdrawn from the bank, the cash column is debited and the bank column is credited with the
amount involved. This is another contra-entry.
✓ Example: Record the following in a two column cash book. Balance the cash book and bring down the
balances of cash in hand and cash at bank at the end of the period.
o 20x12
o April 2 Introduced₦2,900 cash into the business as capital
o April 4 Paid ₦1,850 of the capital into bank
o April 10 Cash purchases ₦300
o April 15 Cash sales ₦450
o April 20 Purchases by cheque₦700
o April 25 Cash sales ₦650
o April 28 Office expenses paid for in cash ₦30
o April 29 Cash paid into bank ₦1,000
o April 30 Wages paid by cheque ₦75

✓ The three column cash book

 This is similar to the two-column cash book except that the discount column is added to both the debit and the
credit side.
✓ The debit side, records receipts while the credit side records payments.
✓ All cash receipts, deposits into bank and discount allowed are recorded on receipt side
✓ All cash payments, withdrawals from bank and discount received are recorded on the payment side.
✓ Example
✓ Record the following in a three-column cash book. Balance the cash book and bring down the balances of
cash in hand and cash at bank at the end of the period.
o 20x12
o March 2 Cash sales, ₦136
o March 3 Received cheque from Amadin & Co ₦285
o March 5 Purchased goods for cash, ₦120
o March 6 Cash sales, ₦184
o March 7 Paid to E. Nelson ₦65 discount received ₦3
o March 9 Paid cash into bank, ₦100
o March 11 Paid E. Faith cheque ₦156 received ₦4 discount
o March 12 Received from A. Osarobo cash ₦98 discount allowed ₦2
o March 13 Received from E. Oluwaseun ₦97 discount allowed ₦3
o March 15 Sold goods and received cheque, ₦330
o March 16 Withdrew cash from bank, ₦108
o March 17 Purchased goods for cash, ₦88
o March 19 Received cheque from B. Olumide ₦237
o March 21 Sold goods for cash ₦119
o March 22 Paid cash into bank ₦300
o March 25 Paid Aminu cheque ₦86 received discount ₦2
o March 26 Paid cheque to Chinedu Obimma ₦216
o March 26 Purchased goods and paid cheque N816
o March 27 Cheque received from B. Olumide was dishonoured by bankers
o March 28 Paid vehicle insurance by cheque ₦46
 Study Session 8 The Petty Cash Book.
✓ Definition of Petty Cash Book: Like the bank cash book, the petty cash book is both a book of original entry and
a ledger account. The method of recording cash in both is similar.
✓ Cash receipts are debited and payments are credited.
✓ The basic difference is in the source of cash receipts.
✓ The petty cash account includes office expenses, postage and small items of stationary.
✓ The petty cash book is written up from receipts and petty cash vouchers (where employees are reimbursed
expenses).
✓ This book is used for the purpose of recording the petty expenses so that the main cash book is relieved of the
detailed records of these petty expenses.
✓ Petty Cashier: Someone who is handed certain amounts to meet petty needs
✓ Imprest (float): The amount of money handed over to Petty Cashier; usually daily. fortnight, monthly etc.
✓ Petty cash Book: Book where the petty transactions are recorded.
✓ The Imprest System:
✓ The petty cashier has a fixed amount of cash referred to as a float.
✓ At the end of each period, the petty cashier is reimbursed the exact amount spent during the period, thus
making the float up to its original amount.
✓ The reimbursement usually takes the form of a cheque drawn for cash.
✓ The amount of the petty cash float is determined by reference to the normal level of petty cash expenditure in
each period.
✓ The purpose of the imprest system is to exercise effective control over the petty cash disbursements.
✓ Advantages:
o It facilitates control of the total petty cash expenditure.
o It deters theft of cash by the petty' cashier.
o The entries in the petty cash book are kept up to date.
o It discourages the practice of loans from petty cash
✓ Example
✓ Record the following in the petty cash book having the following separate columns. (a) Office Expenses (b)
Postages (c) Transport and Travelling (d) Stationary. The petty cash book is kept under the imprest system
and the imprest amount is N50.
o 20x12
o April 1 Received imprest from main cashier ₦50
o April 2 paid travelling expenses ₦10
o Repaired filling cabinet ₦5
o Bought typing papers ₦2, 50
o April 3 Bought envelops ₦1, 50
o Paid office sundry expenses ₦5.00
o April 5 Paid parcel post charges ₦4.00
o April 5 Paid taxi fare ₦2.00
o April 7 Miscellaneous office expenses ₦10.00
o Paid S. Edo, a creditor, the balance of his account of ₦6.00
✓ The Bank Cash Book: The bank cash book is used in businesses where all receipts are paid into the bank and all
payments are made by cheque.
✓ Where this is the practice, all receipts of cash whether in currency notes, cheques or coins, are paid directly
into the bank.
✓ Cheques can then be drawn on the bank for cash needed for sundry expenses.
✓ A cash book called a petty cash book is maintained for this purpose.
✓ A separate book called the bank cash book is kept for recording details of receipts and payments.
✓ The only difference between the bank cash book and the three-column cash book is the replacement of a case
column with a details column on both the debit and credit sides.
Module 3
Study Session 9 Depreciation and Non-Current Assets.
✓ The Nature and Types of Non-Current Assets
✓ An asset is a resource controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise' (the Framework) (IASC, 1989).
✓ Assets are categorized as being either current or non-current OR cash or near cash in the near future -usually in
a period of less than one year.
✓ Current assets include assets whose useful economic lives do not exceed one year before they are transformed
into other kinds of assets. e.g. inventories, trade, receivables, short-term financial assets (investments), bank
and cash.
✓ Non-current assets are items not specifically bought for resale but to be used in the production or distribution
of those goods normally sold by the business.
✓ The Accounting Standards Committee (ASC) defines a non-current asset as an asset that:
o Is held by an enterprise for use in the production or supply of goods and services, for rental to others,
or for administrative purposes and may include items held for the maintenance or repair of such assets;
o Has been acquired or constructed with the intention of being used on a continuing basis; and is not
intended for sale in the ordinary course of business.
✓ Money spent on non-current assets is referred to as capital expenditure.
✓ Non-current assets are either be:
o Tangible (motor vehicle, inventory) or
o In-tangible (goodwill, patents, trademarks, copyrights, fishing licenses)
✓ The Recognition and Valuation of Non-Current Assets
✓ The term 'valuation' refers to the amount at which assets are shown in the statement of financial position. IAS
16 allows non-current tangible assets to be valued using
✓ Historical cost => Original Historical Cost - (accumulated depreciation from the date of acquisition to the date
of the statement of financial position)
The resulting figure is known as written down value (WDV), net book value (NBV) or net carrying amount
✓ Re-valued amount: The Companies Act 2006 and IAS 16 allow companies to revalue their tangible noncurrent
assets and show them in the statement of financial position at fair value rather than historical cost. This is
known as the alternative treatment.
The carrying amount for a re-valued asset is its fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.
✓ ITQ: What do you understand by valuation?
✓ ITA: The term 'valuation' refers to the amount at which assets are shown in the statement of financial position.
✓ ITQ: IAS 16 allows non-current tangible assets to be valued using two approaches, what are they?
✓ ITA: Historical cost and Re-valued amount.
✓ The Nature of Depreciation
✓ The useful life of an asset is defined as 'the period over which an asset is expected to be available for use by an
entity; or the number of production or similar units expected to be obtained from the asset by an entity'.
✓ Depreciation is the permanent and continuous decrease in the book value of a fixed asset due to use,
obsolescence, expiration of legal rights or any other cause.
✓ That part of the cost of a non-current asset, which is 'used up' or 'consumed' during an accounting period, is
referred to as 'depreciation'
✓ Characteristics of depreciation as follows:
o (a) It is related to fixed assets only.
o (b) It is a fall in the book value of an asset.
o (c) The fall in the book value of an asset is due to the use of the asset in business operations,
obsolescence, expiration of legal rights or any other cause.
o (d) It is a permanent decrease in the book value of an asset.
o (e) It is a continuous decrease in the book value of an asset.
✓ Depletion: This term is applied to the process of removing an available but irreplaceable resource such as
extracting coal from a coal miner or oil out of an oil well. Depletion differs from depreciation in that the former
implies removal of a natural resource, while the latter implies a reduction in the service capacity of an asset.
✓ Amortization: The process of writing off intangible assets is termed as amortisation. The intangible assets like
patents, copyrights, leaseholds and goodwill are recorded at cost in the books of account, many of these assets
have a limited useful life and are, therefore, written off.
✓ Obsolescence: It refers to the decline in the useful life of an asset cos of factors like:
o Technological advancements
 o Changes in the market demand of the product
o Legal or other restrictions
o Improvement in production process.
✓ Depreciation Accounting is a system of accounting which aims to distribute cost or the basic value of tangible
capital assets less salvage (if any), over the estimated useful life of the unit (which may be group of assets) in
a systematic and rational manner. It is a process of allocation and not of valuation.
✓ Causes of depreciation
✓ (a) Physical wear and tear, (b) With the passage of time, (c) Changes in economic environment, (d) Expiration of
legal rights
✓ Need For Providing Depreciation: (a) To ascertain true results of operations, (b) To present true and fair view of
the financial position, (c) To ascertain the true cost of production (d) To comply with legal requirements, (e) To
accumulate funds for replacement of assets.
✓ Basic Elements of Depreciation
o 1. Cost of the asset.
o 2. Estimated life of the asset
o 3. Scrap. Value of the Asset: estimated amount to be realised on account of the sale of the asset at the
end of its useful life.
✓ Methods of Calculating Depreciation
✓ The following are various methods of allocating depreciation in use:
✓ 1. Fixed installment method or straight line method
o Amount of annual Depreciation = (Original Cost of Asset –Residual Value)/(Estimated Life in years)
o More applicable on account of expire of period e.g. lease hold properties, patents, etc.
✓ 2. Machine hour rate method.
o Amount of annual Depreciation = (Original Cost of Asset –Residual Value)/(Estimated Life in hours)
o Measured in Amount per hour
✓ 3. Diminishing Balance method.
✓ Depreciation is charged at fixed rate on the reducing balance (i.e., cost less depreciation) every year
✓ Uses Diminishing Balance or reducing balance; depreciation reduces down the line
✓ 4. Sum of years digits method
✓ 5. Annuity method
✓ 6. Depreciation Fund Method
✓ 7. Insurance Policy Method
✓ 8. Depletion Method.

Study Session 10 Bad Debts and Provisions for Bad Debts.

✓ The Nature and Ledger Entries for Bad Debts
✓ When goods are sold on credit, it sometimes transpires that the customer is unwilling or unable to pay the
amount owed. This is referred to as a bad or irrecoverable debt.
✓ The decision to treat a debt as bad is a matter of judgement
✓ When a debt is regarded as irrecoverable the entries in the ledger are as follows:
o Debit: Bad debts ledger account
o Credit: Trade receivables ledger account (the individual credit customer's account would also be
amended in the sales ledger)
✓ Occasionally, debts previously written off as bad are subsequently paid. When this happens, the ledger entries
are the reverse of the above, and the trade receivables ledger account is credited with the money received in
the normal way.
o Debit: Trade receivables ledger account (the individual credit customer's account would be amended in
the sales ledger)
o Credit: Bad debts ledger account
✓ ITQ: What is a bad or irrevocable debt?
✓ ITA: When goods are sold on credit, it sometimes transpires that the customer is unwilling or unable to pay the
amount owed, it is then referred to as a bad or irrecoverable debt.
✓ The Nature and Ledger Entries for Provisions for Bad Debts
✓ The need for a provision for bad/doubtful debts essentially arises because goods sold and recognized as sales
revenue in one accounting year may not become known to be a bad debt until the following accounting year.
Thus, the profit of the year in which the goods are sold would be overstated by the amount of the bad debt. In
order to adjust for this, a provision in respect of probable bad debts is created in the year of sale (matching
concept).
✓ The accounting entries in respect of a provision for bad debts are made after the trial balance has been
extracted when the statement of profit and loss is being prepared.
✓ An increase in a provision always consists of:
o Debit: Profit and loss account (increase in provision for bad debts)
o Credit: Provision for bad debts account
✓ A decrease in a provision is entered:
o Debit: Provision for bad debts account
o Credit: Profit and loss account (decrease in provision for bad debts)
Study Session 11 Financial Ratios.
✓ Financial ratios are also simply referred to as accounting ratios. It is a powerful tool in that it reveals to the
company a picture capable of company’s resuscitation and sustainability.
✓ The interpretation of ratios is an important factor. Interpretation needs skills, intelligence and foresightedness.
The interpretation of the ratios can be done in the following ways:
o Single Absolute Ratio: Generally speaking one cannot draw meaningful conclusions when a single ratio
is considered in isolation.
o Groups of Ratio: Ratios may be interpreted by calculating a group of related ratios.
o Historical Comparisons: One of the easiest and most popular ways of evaluating the performance of the
firm is to compare its present ratios with the past ratios called comparison over time.
o Projected Ratios: Ratios can also be calculated for future standard based upon the projected financial
statements.
o Inter-firm Comparison: Ratios of one firm can also be compared with the ratios
✓ Managerial Uses of Ratio Analysis
o The following are the important managerial uses of ratio analysis –
o Helps in Financial Forecasting
o Helps in Comparison: comparing a firm's progress and performance.
o Financial Solvency of the Firm
o Evaluation of Operating Efficiency
o Communication Value: Different financial ratios communicate the strength and financial standing of the
firm to the internal and external parties.
o Others Uses: Financial ratios are very helpful in the diagnosis of financial health of a firm. They highlight
the liquidity, solvency, profitability and capital gearing etc.
✓ Draw Backs of Ratio Analysis
o Limited use of a single ratio
o Effect of inherent limitations of accounting
o Lack of proper standards
o Past is not indicator of future
o No allowance for change in price level
o Difference in definitions
o Window Dressing(fake figures)
o Personal Bias
✓ Classification Of Ratio
▪ Liquidity ratios
▪ Activity ratios
 ▪ Leverage/Capital structure ratios
▪ Coverage ratios
▪ Profitability ratios.
Study Session 12 Cash Flow Statements.
✓ Funds has been defined in a popular sense to mean working capital, i.e., the excess of current assets over
current liabilities.
✓ In a narrow sense, it means cash and a Funds Flow Statement prepared on this basis is called a cash flow
statement.
✓ In a broader sense, the term 'funds' refers to money values in whatever form it may exist.
✓ In a popular sense, the term 'funds' means working capital, i.e., the excess of current assets over current
liabilities.
✓ Cash Equivalents: These are short term highly liquid investments which are readily convertible into known
amounts of cash without notice and which were within three months of maturity when acquired less advances
from banks repayable within three months from the date of the advance.
✓ Cash flow: This is an increase or decrease in the amount of cash or cash equivalents resulting from a
transaction.
✓ Cash Flow Statement: A cash flow statement provides information on the sources of cash flows into the
company and the utilization of the cash by the company.
✓ Flow of funds is said to have taken place when any transaction makes changes in the amount of funds available
before happening of the transaction.
✓ If the effect of transaction results in the increase of funds, it is called a source of funds and
✓ If it results in the decrease of funds, it is known as an application of
✓ ITQ: What sort of information does a cash flow statement provides?
✓ ITA: A cash flow statement provides information on the sources of cash flows into the company and the
utilization of the cash by the company.
✓ Classification of Cash Flows: A statement of cash flow, present cash flows according to the activities, which give
rise to them. The classification is as stated below:
o Operating activities: These include normal trading activities of an enterprise e.g. production and
delivery of goods and services and other supporting activities included in determining operating profit.
o Investing activities: These relates to acquisition and disposal of fixed assets, statement of properties
and other productive assets held for use in producing the usual goods and services other than stock
held for processing or resale.
o Financial activities: These include resources obtained from lenders and awareness of enterprises and
reporting the amount obtained either as they become due or when there is surplus for the needs of the
enterprise. They also include the payment of returns to providers of such financing in form of interest
and dividends as well as expenses directly related to obtaining the finance.
✓ ITQ: What are the classifications of cash flows?
✓ ITA: Operating Activities, Investing Activities and Financial Activities
✓ Working Capital: Working capital is a term used to represent the excess of current assets over current liabilities
✓ The Objectives of a Cash Flow Statement
o To evaluate an entity’s ability to generate cash and cash equivalents and the timing and certainty of
their generation,
o To evaluate an entity’s financial structure which affects its liquidity and solvency and its ability to meet
its obligations and to pay dividends
o To understand the difference between profit and loss for the period and net cash flow from operating
activities,
o To compare the operating performance of different entities
o To enable users develop models to assess and compare the present value of future cash flows of
different entities.
o To help understand the changes in assets and asset sources which are not readily evident in the Income
Statement or the financial position statement.
 o To inform as at how the loans to the business have been used, and
o To point out the financial strengths and weaknesses of the business.

✓ ITQ: What is a fund flow statement?

✓ ITA: Funds flow statement is a method by which we study changes in the financial position of a business
enterprise between beginning and ending financial statements dates.
✓ Procedure for preparing a funds flow statement
✓ The preparation of a Funds Flow Statement consists of the following two parts:
o Statement or Schedule of Changes in Working Capital
o Statement of Sources and Application of Funds

✓ Uses of Funds Flow Statement

✓ The various uses of Funds Flow Statement are summarised:
o As a tool of historical analysis, it provides an answer to some of the important financial analytic
questions
o As a tool of planning, the Projected Fund Flow Statement enables the management to plan its future
investments, operating and financial activities such as the repayment of long-term loans and interest
thereon, modernisation or expansion of plant, payment of cash dividend etc.
o Along with a Schedule of Changes in Working Capital, the Funds Flow Statement helps in managing and
utilizing the working capital.
✓ Limitations of funds flow statement
o The major limitations of Funds Flow Statement are summarised below:
o It ignores the non-fund transactions. In other words, it does not take into consideration those
transactions which do not affect the working capital e.g., issue of shares against the purchase of fixed
assets, conversion of debentures into equity shares.
o It is a secondary data based statement. It merely rearranges the primary data already appearing in
other statements viz. Income Statement and Balance Sheet.
o It is basically historical in nature, unless Projected Funds Flow Statements are prepared to plan for the
future.