THE PURPOSE OF ACCOUNTING

o Understand and explain the difference between BOOK-KEEPING and ACCOUNTING

 Book-keeping – detailed recording of all financial transactions of a business
 Accounting – preparing the financial statements at regular intervals from the
bookkeeping records
o State the purpose of measuring business’ profit and loss
 To decide whether to continue in business or close the business
 To compare the profit/loss with the previous years
 To compare it with other business
 To measure the performance
 To see the return on investment
 For legal or tax purposes
 To plan for the future/assist decision-making
 To see if he is generating funds for re-investment
 To ensure that drawings do not exceed profits
o Explain the rate of accounting in providing information for monitoring progress and
decision-making
Purpose of Accounting –
 To calculate profit and loss
 To keep a systematic record of business transaction
 To ascertain the financial position of the business
 To provide financial information to different users of this information
o Users of Accounting information –
 Owners
 Manager
 Employees
 Investors
 Suppliers
o When is accounting information relevant?
 When it can be compared with information for other periods.

THE LEDGER
o Prepare ledger accounts
o Post transactions to the ledger accounts
o Balance leger accounts as required and make transfers to final accounts
o Interpret ledger accounts and their balances
Q. Explain why there could be a Cr balance in a bank account, but not the cash account?
 Can withdraw more money from the bank than put in as we can take an
overdraft. However, we cannot take more cash than it is physically present.
Q. State why it is useful for a business to maintain a sales journal?
 To reduce the number of entries in the sales account
 It allows work to be shared between several people
 Provides a list of credit sales
Q. Account which is kept to check for fraud or error in the book-keeper’s work?
 Sales ledger control account
Q. Why would a ledger be divided into different sections?
 To allow division of work
 Allow easier reference
 Reduces the possibility of frauds

THE TRIAL BALANCE

o Understand that a trial balance is a statement of ledger balances on a particular date
o Outline the uses and limitations of a trial balance
 Uses
 It checks the arithmetical accuracy of ledger accounts
 It gives material assist in preparing final accounts
 To have a proof that the double entry of each transaction is made
 Limitations
  Error of omission
 Error of commission
 Error of original entry
 Error of principle
 Error of complete reversal
 Compensating errors
o Why a trial balance might not agree:
 Wrong total
 Omission to post a ledger balance
 Wrong totaling of ledger accounts
 Amount is posted on the wrong side
 Amount is posted on the wrong side in the ledger
 Amount is posted twice
 Omission of an account from posting in the ledger
o Identify and explain these errors which do not affect the trial balance –
 Omission – a transaction is completely omitted from the books
 Commission – a transaction is posted to the wrong account of the same class
(wrong name)
 Principle – a transaction is posted to an account of the wrong class
(wrong account)
 Original entry – an incorrect figure is used when the transaction is first recorded
 Complete reversal – a Dr entry is posted on the Cr side or a Cr entry is posted on
a Dr side
 Compensating – two or more errors cancelling each other out
Q. Purpose of a Trial Balance?
 To check the arithmetical accuracy
 Helps in making a financial statement
o Always check if an error is affecting a trial balance.
o Capital Expenditure relates to the purchase of an asset which will last for more than a
year.
o Revenue Expenditure relates to the day-to-day running costs of a business or the
purchases of a current asset.
o A capital receipt arises when a non-current asset is sold.
o If an item of capital expenditure is wrongly recorded as revenue expenditure, profit will
be understated.
o If an item of revenue expenditure is wrongly recorded as capital expenditure, profit will
be overstated.
o If it is written (omitted from the trial balance), then there is a shortage on only one side.
Open a suspense account.
SOURCES AND RECORDING OF DATA
o Explain the meaning of assets, liabilities and owner’s equity
 ASSETS – something which the business owns or something which is owed to the
business.

 CURRENT ASSETS – items which can be turned into cash quickly, goods
for resale, items having a short life (less than 1 year)
(e.g. cash, bank, inventory, receivables(debtors))
 NON-CURRENT ASSETS – items which cannot be turned into cash, not for
resale, long life items held for more than 1 year
(e.g. furniture, buildings, machinery)

 LIABILITIES – an amount which is owed by the business.

 CURRENT LIABILITIES – an amount owed and has to be paid within a year
(e.g. bank overdraft, trade payables(creditors))
 NON-CURRENT LIABILITIES – long term debt (more than a year)

 OWNER’S EQUITY – the owner’s share of the assets of the business (capital)
o Explain and apply the accounting information
ASSETS = LIABILITIES + CAPITAL
o Outline the double-entry system of book-keeping
 A system where all business transactions are entered twice i.e. Dr and Cr side.
o Process accounting data using the double entry system
 Assets increased – Dr
 Assets decreased – Cr
 Liabilities increased – Cr
 Liabilities decreased – Dr
 Capital increased – Cr
 Capital decreased – Dr
 Expenses – Dr
 Revenue – Cr
o Recognize the division of ledger into –
Ledger

Sales Purchases General

(A/c receivable) (A/c payables)
BOOKS OF PRIME(ORIGNIAL) ENTRY
o Explain the advantage of using various books of prime entry
 Reduces the number of entries in the ledger
 Acts as an aid for posting to the ledger
 Helps to gather and summarize accounting information
 Groups together similar types of transactions
 Allows work to be divided among or between several people
o Explain the use of, and process, accounting data in the books of prime entry.
 Books of Prime Entry - Sales Journal
- Cash Book - Purchases Journal
- Petty Cash Book - Sales Return Journal
 - Purchases Return Journal - Sales Invoice
 Source Document - Purchases Invoice
- Cheque/Receipt - Credit note issued
- Voucher/Receipt - Credit note received
- General ledger
o Trade Discount and Cash Discount
 Trade Discount
- bulk-buying
- regular customer/to encourage repeat customer
- in the same trade
 Cash Discount
- prompt payment
- payment before the due date
Q. Reasons for maintaining a petty cash book in addition to a main cash book.
 To record small cash payments
 Removes small cash payments from the main cash book
 Reduces the number of entries in the main cash book
 Reduces the number of entries in the ledger
 Allows the chief cashier to delegate some work
 Provides training for any senior staff members
Q. State one advantage of using the imprest system.
 Can help to reduce fraud
 The cash remaining and the vouchers received should equal the imprest
 Chief cashier knows exactly how much is spent in each month/can control
expenditure of petty cash
Q. Explain what is meant by the imprest system in relation to the petty cash.
 The petty cashier starts each period with the same amount of money
 At the end of the period the chief cashier will make up the cash remaining, so it
is equal to the imprest
POINTS TO REMEMBER FOR CASH BOOKS –
o The left side = Received = Dr side
o The right side = Payments = Cr side
o Any item/transaction where no cash is involved, it is not treated in the cash book. E.g.
credit sales
o Personal expenses = Drawings = Recorded in Cr
o To cancel out a transaction, it is written on the opposite side. E.g. cheque received is Dr
but a dishonored cheque is on the Cr side.
o When the owner uses his own money to bring assets into the business = capital.
o When the owner takes away/draws out money from the business for personal use =
drawings.
o Trade discounts are not written/included in the cash book.
o Issuing a credit note is not written down in the cash book because no cash is involved. It
is only a document being received.
o Closing stock of one week becomes the opening stock for the next week.
o A contra entry is when a transaction effects both cash and bank account at the same
time.
Q. How to encourage customers to pay invoices, when sold on Cr?
 Send a statement of account
 Offer cash discount
 Limit Cr, so there are no more credit sales
 Charge interest on overdue amounts
 Use debt collection method
Q. What is meant by a dishonored cheque?
 The debtor’s bank refused payment due to errors in the cheque.
*Accounts which are posted with the totals from a 3-column cash book are discount allowed
and discount received.
Q. What is meant by a bank overdraft?
  Paying more from the bank account then there is in it. This means that the
business owes money to the bank.
Contra entry E.g.
o Paid cash into the bank.
Bank
increased –
Dr
Cash decreased – Cr

Petty Cash Book

Q. Why is there a difference in the actual amount of cash in the petty cash book and the
amount that should be there?
 Fraud/error
 Stolen or missing money
Q. Explain/Advise about the importance of keeping a record of business expenditure.
 Always get a petty cash voucher with an invoice or receipt for expenditure.
Record all petty cash transactions.
BUSINESS DOCUMENTS
o Recognize and understand the following business documents.
1) INVOICE – when there is a credit sale, the selling business will send a document
to the buyer showing full details of the goods sold. For the buyer, it is the
‘Purchase Invoice’. For the seller, it is the ‘Sales Invoice’ – entered in sales
journal.
*An invoice is sent when goods are sold.
*Recorded in the sales book and the purchases book.
*A sales invoice is recorded in the sales journal.
2) DEBIT NOTE – this document is prepared by the purchaser and is sent to the
supplier to report if any faulty goods have been sent or shortages or overcharges
have been made.
 *A debit note has no entry in books.
3) CREDIT NOTE – when goods are RETURNED or there have been over-charges, a
supplier may issue a credit note to the customer. This reduces the amount owed
by the customer.
*A credit note is issued when goods are returned.
*For the seller it is recorded in ‘Sales Return Journal’.
*For the buyer it is recorded in ‘Purchases Return Journal’.
4) STATEMENT OF ACCOUNT – it is prepared by the supplier and sent to the
customer. It is issued to remind the customer about his due amount. It is
basically a summary of the transaction of a customer during the month, like sales
made, returns or cash received.
*It has no entry in the books of prime entry.
*They are usually sent at the end of the period. E.g. a month
INVENTORY VALUATION
o To calculate the cost of goods sold –
 Opening Stock + Purchases – Closing Stock
o Always compare ‘cost and sale price’ to find the lower value of them to then multiply
the value with the number of units.
o But if ‘selling and distribution costs’ are also given, then calculate ‘net realization value’
using ‘selling price – cost of sales’.
o Understand the basis of the valuation of inventory at lower of cost and net realizable
value.
Q. State the BASIS on which the trader will value his inventory.
 At the lower of cost and net realizable value (NRV)

Net Realizable Value = Selling Price – Expenses

Q. What is meant by ‘COST’?

 Cost is the purchases price of a good plus any additional costs incurred in
bringing the inventory to its present condition and position.
 Q. What is meant by ‘Net Realizable Value’?
 Net Realizable Value is the estimated receipts from the sale of inventory less any
costs of completing or selling the goods.
Cost NRV
$ $
Inventory 1st Jan 6800 7100
Inventory 31st Dec 8200 7800
Q. Explain why the inventory at 31 st Dec was included in the financial statements at NRV
rather than cost.
 Inventory should always be valued at the lower of cost and NRV.
 This is an application of the principle of prudence.
 Overvaluing the inventory causes the profit for the year to be overstated.
 Overvaluing the inventory causes the current assts to be overstated.
Rate of Inventory Turnover = Cost of goods sold (give answer in times)
Average inventory
Rate of Inventory Turnover = Average inventory x 100 (give answer in days)
Cost of goods sold
Q. What can be done to improve the rate of inventory turnover?
 Reduce inventory levels
 Increase sales actively
 Only replace inventory when necessary

RATIO ANALYSIS

Gross Profit Percentage:

GROSS PROFIT
X 100
SALES
This ratio shows how effectively a business has controlled it’s cost of goods
The Gross Profit ratio will change if:
a) The selling price of goods changes
 b) The cost price of goods changes

Net Profit Percentage

NET PROFIT
X 100
SALES
This ratio shows how effectively the expenses of the business are controlled
The Net Profit ratio will change if:
a) The gross profit ratio changes
b) Expenses change

Return on Capital Employed:

NET PROFIT
X 100
CAPITAL EMPLOYED
This ratio shows the net profit made for each $100 invested by the owner into the business. The
higher this percentage the better.
IMPORTANT – often, examiners will take capital employed to mean Average Capital. This means
adding the open and closing balance of capital and divide by 2 to get the average. If you are
only given the closing Capital, then use this figure.

Rate of Stock Turnover

COST OF SALES
AVERAGE STOCK
Average Stock is: Open Stock + Closing Stock
2
This ratio shows how quickly a business sells its stock. The higher the ratio the better.

Current Ratio
CURRENT ASSETS
CURRENT LIABILITIES
This ratio compares the ability to use current assets to pay the current liabilities.
An ideal ratio is 2:1. A ratio too high means that the business has more current assets than it
needs.

Acid test (quick) Ratio

CURRENT ASSETS −STOCK
CURRENT LIABILITIES

This ratio shows if there are enough cash assets to pay current liabilities. Stock is the least cash
– like current asset and so it is subtracted.
An ideal ratio is 1:1.

Debtors to Sales Ratio

DEBTORS
X 365 DAYS ( ¿12 MONTHS )
CREDIT SALES
This ratio shows how long a business takes to collect money in from its Debtors. The higher the
ratio, the worse the business is at getting debtors to pay on time and the more likely it is to
have a high level of bad debts and cash problems.

Creditors to Purchases Ratio

CREDITORS
X 365 DAYS (¿ 12 MONTHS)
CREDIT PURCHASES
This ratio shows how long a business takes to pay its creditors. Taking too long to pay creditors
is not a good thing as discounts for early payment are lost or suppliers could refuse to supply
goods to the business on credit.

Return on equity
Profit after tax ,interest ∧ prefered dividends
X 100
Ordinary share capital +reserves
This ratio measures the return earned on the money provided by the Ordinary Shareholders.
The higher this answer the better. The ROE should be compared to previous years in order to
see if the trend is on the increase or decrease.

Earnings per Share

Profit after tax ,interest ∧ prefered dividends
X 100
Number of ordinary shares issued
This ratio calculates how much of the profits are attributable to each ordinary share bought in
the company. The higher this figure is the happier Ordinary shareholders will be.

Dividend Yield
Dividend per share
X 100
Market price
Shareholders pay the market price for shares. This ratio shoes the return (dividend) each
shareholder receives as a percentage of the price paid for the share. The higher this figure the
better. Shareholders will usually calculate this ratio for several companies they are thinking of
buying shares in, to see which will pay the highest dividend compared to the market price for
the share.
Limitations of Ratios
1. Results do not explain the results, but mere show which areas of the business need
further investigation
2. Ratios do not take seasonal factors into account
3. For ratios to be accurate, the information must be timely to be of use – information may
not be available for a long time after the end of the financial year
4. To be useful, ratios must be accurate – some information may not be shown in the
accounts of the business.
ACCOUNTING PRINCIPLES AND POLICIES
Accounting Principles/concepts
Accruals (Matching) – sales revenue of this period must match against the expense of this
period.
Business Entity and Ownership – know that a distinction is made between the financial
transactions of a business and those of its owners.
Consistency – the same accounting treatment should be applied to similar items at all times.
Duality – every transaction has a 2-fold aspect – debit and credit.
Going concern – accounting assumes that a business will continue to operate indefinitely.
Money measurements – financial statements only include items which can be expressed in
monetary terms.
Prudence – profits and assets should not be overstated and liabilities should not be
understated.
Realization – revenue is recognized as being earned when legal liability to pay is incurred by the
customer (i.e. when ownership of goods passes to the customer)
Historic – costs are only valued at their own original cost.
Accounting Policies
Comparability – recognize that a financial report can only be compared with reports for other
periods of similarities and differences can be identified.
Relevance – financial information is relevant only if it affects the business decisions.
Reliability – financial information is reliable only if it can be depended upon to represent actual
events and is free from error and bias.
Understandability – a financial report must be capable of being understood by the users of that
report.
*Valuing the inventories on the basis of ‘lower of cost and net realizable value’ is an example of
the principle of prudence.
*Credit sales were recorded at the time of sales rather than when payment was received is an
example of realization.
*No entries were made for expenses paid by the owner for running his personal expense is
known as an example of business entity.
*An example of accruals (matching) is when an accrued expense is included in the income
statement.
Q. How does reducing the value of inventory be an accounting principle of prudence?
 It avoids inventory, profits, and current assets to be overstated.
Q. How does reducing the value of inventory be an application of accruals (matching)?
The loss arising from the damage is recorded in the same year as the damage occurred.
DEPRECIATION
Asset A/C Provision for Depreciation A/C Disposal A/C
Asset Dr I/S Dr Disposal Dr
Bank/Cash Cr Provision for Dep Cr Asset Cr

Disposal Dr Provision for Dep Dr Provision for Dep Dr

Asset Cr Disposal Cr Disposal Cr

The value of Disposal is The value of Disposal is Cash Dr

written as the COST of buying written as the accumulated Disposal Cr
the asset which is being depreciation to date.
disposed of. The value on the I/S is only the I/S Dr
depreciation of each year. Disposal Cr
 The transfer to the I/S is done at the end of the month.
Net Operating Profit
ROCE = = Net Profit + Interest + Taxes
Capital Employed
 Always check the date when the asset was bought and sold (years + months)
 A balance on the provision for depreciation account represents:
o Accumulated dep to date
o Amount charged to the I/S to date

CONTROL ACCOUNTS
 Understand the purposes of purchases ledger and sales ledger control account
Q. Why do we need to prepare a purchases ledger control account?
 To assist in the location of errors
 To provide instant total of trade payables
 To prove the arithmetical accuracy of the purchase ledger
  To enable a statement of financial position to be prepared quickly
 To help reduce fraud
 To provide a summary of transactions relating to trade payables
Q. Advantages of preparing the control account.
 Assist in the location of errors
 Provide instant totals of trade receivables (debtors)
 Proves the arithmetical accuracy of the sales/purchase ledgers
 Enable a balance sheet to be prepared quickly
 Provides a summary of the transactions relating to trade receivables (debtors) and trade
payables (creditors)
 Provides an internal check on sales/purchases ledger – may reduce fraud
Q. Why is information in the sales ledger not used to prepare sales ledger control A/C?
 Any error in the sales ledger would not be revealed
 Any fraud would not be revealed
*prepare purchases and sales ledger control accounts to include credit purchases and sales,
receipts and payments, cash discounts, returns, bad debts, dishonored cheques, interest on
overdue accounts, contra-entries, refunds, opening balances + closing.
*If balances on both the Cr and Dr side are mentioned, then write them down accordingly. But
if they aren’t then account receivable (asset) will be on debit side and account payable
(liabilities) on Cr side.
 Account receivable increase = Dr
Account receivable decrease = Cr

 Account payable increase = Cr

Account payable decrease = Dr

 Sales or purchases + receipts are written down in control accounts.

 Credit purchases – Purchases Dr
A/C payable Cr
 Credit sales – A/C receivable Dr
Sales Cr
 Receipts from credit customers – Bank/Cash Dr
A/C receivable Cr
Payments to credit suppliers – A/C payable Dr
Bank/Cash Cr
 Discount allowed – Discount allowed Dr
A/C receivable Cr
Discount received – A/C payable Dr
Discount received Cr
 Returns of credit sales – Sales Return Dr
A/C receivable Cr
Returns of credit purchases – A/C payable Dr
Purchases/Returns Cr
 Bad debts written off – Bad Debts Dr
A/C receivable Cr
 Cheque received was later dishonored – A/C receivable Dr
Dishonored cheque Cr
 Interest charged to credit customer on overdue account – A/C receivable Dr
Interest Cr
 Contra entries in sales ledger control A/C
Dr Cr
Purchases Ledger Contra
This reduces the amount debtors owe to you
 Contra entries in purchases ledger control A/C
Dr Cr
Sales Ledger Contra
This reduces the amount you owe to creditors
PRINCIPLES OF FINANCIAL STATEMENTS
 Calculate the gross profit and net profit based on accounting principles for a specific
period.
 Recognize that profit for the year (net profit) is an increase in the net assets in that
period.
OUTSTANDING EXPENSES + INCOMES ARE ALWAYS
ADDED
 PREPAID EXPENSES + ADVANCED/PREPAID INCOME
ARE ALWAYS SUBTRACTED

 Total of bad debts account is transferred as an EXPENSE to the income statement –

application of prudence.
Bad Debts Written Off – Bad Debts Dr
Trade Receivables Cr
 For Provision of Doubtful Debts, write the calculated amount in the balance sheet.
E.g.
Trial Balance
Trade Receivable 5000
Provision for Doubtful Debts 150

Amount in T.B

Provision is maintained at 4% x trade receivable

So, in income statement

Provision for Doubtful Debts

Calculated (4% x Trade Receivables) 200
Less in trial balance 150
50

Final Provision needed to be written in the I/S

But for Balance Sheet,

Trade Receivable 5000

Less: Provision (calculated) (200)
 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

 Recognize that they are statements of balances of assets and liabilities on a specified
date.
 Recognize and define non-current assets (fixed assets), intangible assets, current assets,
current liabilities, non-current liabilities, working capital, capital employed and capital
owned.
  Intangible Assets – cannot be touched (e.g. goodwill, intelligence)
 Capital Employed – the total amount of capital used for the acquisition of profits.
 Working Capital – the capital which is used in the day-to-day trading operations of the
business.
 Working Capital = Current Assets – Current Liabilities
 Total Assets must equal to Total Capital and Liabilities

CLUBS AND SOCIETIES

Businesses Clubs and Societies
Capital Accumulated Funds
Income Statement Income and Expenditure Account
Profit and Loss for the year Surplus/Deficit
Q. How do clubs and societies receive money/income?
 Donations
 Subscriptions
 Loans
 Fund-raising activities
 Gifts
Receipts and Payments Account (Similar to a Cash Book)
 Opening and closing balances for Cash/Bank
 Purchase of Non-current Assets
 Summary of all Receipts and Payments during the year
Q. What does the Receipts and Payments Account show?
 Whether the club have enough liabilities to pay its debt
 Whether/why/how cash/bank has decreased/increased

Receipts and Payments Account

Receipts Payments
Date $ Date $
Balance b/d xxx Balance b/d xxx
Subscriptions xxx Purchases xxx
 Receipts from open General Expenses
xxx xxx
day
Proceeds of sales of Rent of club
xxx xxx
equipment
Bank charges xxx
Wages xxx
Balance c/d xxx Balance c/d xxx
xxx xxx
Balance b/d xxx Balance b/d xxx

Income and Expenditure Account

 Only revenue receipts and expenditures

Subscriptions Account
Dr Subscriptions Cr
Balance b/d xxx Balance b/d xxx
Income of the year
xxx Cash xxx
(Difference)
Balance c/d xxx Balance c/d xxx
xxx xxx
Balance b/d xxx Balance b/d xxx
 A club and society can own assets and have liabilities.
 However, unlike business owners, members do not invest in their own funds and so
cannot withdraw cash or goods for their own use.
 Net Assets = Total Assets – Total Liabilities = Accumulated Funds

LIMITED COMPANIES
Q. Why do companies make transfer to general reserves?
 To indicate that that part of the profit is for long-term use and is not available for
distribution.
Dividends – Interim – paid during the year owing to good performance
– Final – proposed (declared)
Q. Ways the issue of debentures may affect ordinary shareholders?
 Reduction in profit available for ordinary shareholders
 They take prior claim on the assets of the company in the event of a winding up.
 Interest on debentures is mentioned in both the profit and loss account and profit and
loss appropriation account
STATEMENT OF OWNER’S EQUITY
SHARE GENERAL RETAINED
DETAILS TOTAL
CAPITAL RESERVE EARNINGS
Balance c/d (at start date) xxx xxx xxx xxx
Share Issue xxx - - xxx
Profit for the year - - xxx xxx
Dividends paid (for the
- - (xxx) (xxx)
previous year)
Dividends paid (for the
- - (xxx) (xxx)
current year)
General Reserve - xxx (xxx) -
Balance b/d (at end date) xxx xxx xxx xxx
 ORDINARY PREFERENCE DEBENTURES
Variable rate (%) of dividend Fixed rate (%) of dividend Fixed rate of interest
Members/owners of the Not members of the
Creditors of the company
company company
Not dependent on the
Dividend is a share of the Are paid, even if no profit is
profit. Are paid, even if no
profit earned
profit is earned
Repaid before the
Repaid last in the event of a Repaid after debenture-
shareholders in the event of
winding up holders. Repaid 2nd last.
a winding up. Repaid 1st.
Do not carry voting rights
Carry voting rights Do not carry voting rights
and are long-term loans
Don’t reduce taxable income, so are recorded in profit and Reduce taxable income, so
loss appropriation account is recorded in P&L account
  Proposed Dividends = Current Liability = is paid the next year

MANUFACTURING ACCOUNT

Prime Cost = Material used/Direct Material + Direct Labor + Direct Expenses

Income Statement for a Manufacturing Business

Balance Sheet (contains stock of all 3)

Current Assets: Raw-Materials
Work-in-progress
Finished Goods
Q. Why may it be necessary to purchase finished goods?
 Supply did not meet demand
 It is cheaper to buy goods rather than make them
*Finished goods and other sales and administration costs are not added in the manufacturing
account, since they are related with sales and are included in the income statement. Other
items include: fixtures and fittings
 Distinguish between direct and indirect costs
Direct Costs – A cost which can be linked to a specific unit of production.
e.g. wages, materials, repairs, advertising
Indirect Costs – A cost which cannot be linked to a specific unit of production.
e.g. cost of depreciation, insurance, power, rent
Q. Why is it necessary to prepare a manufacturing account at the end of the financial year.
 To calculate how much it has cost the business to manufacture the goods produce in the
financial year.
Q. Why would a business purchase finished goods? Why does the business purchase the goods
rather than manufacturing them themselves?
 It was cheaper to buy the goods rather than make them
 Production did not meet demand
 Those particular items could not be made by the business
 Distinguish between direct materials, direct labors, prime cost and factory overheads.
Prime Cost – It is the total of the direct materials, direct labor, and direct expenses. Costs which
can be traced to a product.
Factory Overheads – The costs involved in operating the factory/factory indirect expenses. They
cannot be directly linked with/traced to the product being manufactured.
e.g. indirect wages, factory rates, depreciation of factory machinery
*’work-in-progress’ are goods which are partly completed.

PARTNERSHIP ACCOUNTS
 Trading & Profit and Loss A/C/Income Statement
 Profit & Loss appropriation A/C
 Balance Sheet

Dr Capital A/C Cr
Balance c/d xxx Cash xxx
xxx xxx
 Dr Current A/C Cr
Balance b/d xxx Balance b/d xxx
Drawings xxx Interest on Capital xxx
Interest on Drawings xxx Interest on Loans xxx
Share of Loss xxx Salary xxx
Balance c/d xxx Share of Profit xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx Balance b/d xxx

 If the balance on the current account is debit, then subtract it

 If the balance on the current account is credit, then add it
 Add the share of profit
 Subtract the share of loss
 Share
Share of Profit/Loss = x Profit / Loss
Total Profit /Loss
Q. Why do we use an appropriation account?
 It is used to show how net profit/loss is shared
Goodwill – value of a business, over and above its existing value
 A Cr Balance on the current A/C = Current Assets
 A Dr Balance on the current A/C = Current Liabilities
(The partner has excessively drawn from the business, so it is a current liability. They
owe the partnership)
Profit and Loss Appropriation A/C = Profit for the year + Interest on Drawings – Interest on
Capital – Salary = Profit/Loss Share

Net Assets/ Capital Employed = Total Assets – Current Liabilities

Working Capital = Current Assets – Current Liabilities

 Improving working capital

o Injection of capital
o Reduction in Drawings
o Taking a long-term loan
o Sales of Surplus non-current assets
 An interest on drawings is added to discourage partners from making excessive
drawings.
 A partner may be given a salary, for recognition of work done in the business.
 A partnership agreement should be formed to avoid disagreements or
misunderstandings later on.
Q. Advantage of having a capital and current account for each partner?
 Easier to see the profit retained by each partner
 To calculate their interest on capital
 Items in a partnership agreement/ profit and loss appropriation a/c
o Profit-sharing Ratio
o Interest on Capital
o Interest on Drawings
o Partner’s Salaries