Accounting Errors
Definition, types of errors (Book-keeping errors and extraction errors)
Errors the trial balance cannot disclose
Errors the trial balance can disclose
Suspense Account
Corrections of errors with journal proper, working exercises on corrections of errors with journal proper
Effects of errors on profit declared
Control Account and sel-balance ledger
Reasons for control account
Limitations of control account
Sales ledger of control account
Meaning, uses/purpose, definitions of terminologies of contra settlement
Format and working exercises
Purchases ledger control account
Meaning, uses/purpose, definition of terms format and working exercise
Manufacturing account – reasons, terminologies, format and working exercise
Manufacturing account – trading, profit and loss account and balance sheet with working exercises
Manufacturing account – treatment of manufacturing profit (market value) with trading, profit and loss account and balance sheet
Introduction to partnership accounts – meaning, types of partners and partnership, format, partnership deeds/agreement and types of account and terminologies
Partnership accounts – working exercises on appropriation account, current account, capital account and balance sheet



This category of error does not prevent the trial balance to talk from balancing, meaning that inspite of their existence in the trial balance (if any), the trial balance totals will agree. The errors are as follows:
Error of omission
Error of commission
Error of original entry
Error of transposition
Error of reversal of entry
Error of principle
Compensating error
ERROR OF OMISSION: This error when there is a complete omission of a transaction from the ledger. It therefore, means that both the debit and the credit entries of a transaction were not recorded in the books. A common reason for this is the loss or misplacement of the source document for the transaction involved.
ERROR OF COMMISSION: This error occurs when a transaction is entered in the wrong account within the correct class of accounts. Put simply, the error occurs through the entry made in the correct class of account but affecting a person different from the person intended. An instance is when an amount received from X is wrongly credited to the personal account of Y instead that of X.
ERROR OF ORIGINAL ENTRY: this error occurs whenever the double entry of a transaction is correctly made, but the original account amount of the transaction is wrongly recorded. It means a wrong amount entirely different from the correct amount is debited and credited to the appropriate accounts. An example is when a credit sale is recorded in the sales day book at a wrong amount and the wrong amount debited to the buyers account and credited to the sales account.
ERROR OF TRANSPOSITION: This is the error committed whenever a mistake is made by changing the arrangement of a transaction. For example, if the amount #556 and posted wrongly taken as #565 and posted into the ledger as such.
ERROR OF REVERSAL OF ENTRY: This error occurs when entry for a transaction resulting in situation where an account that should have been debited is credited and another account that should have been credited is debited. For instance, if cash paid to creditor is debited in cash account and the same amount is credited to the creditor’s account.
COMPENSATING ERROR: This type of error occurs when an error of error occurs when an error in one account is cancelled out by another error in another account. It may occur in the form of overstatement or understatement of amounts in accounts. For example, if sales account is understated by #1000 and rent and rates account is also understated by #1000.

This is the category of errors that cause disagreement between the totals of the two sides of the trial balance. Some of these errors are as follows:
Arithmetic errors committed in balancing ledger accounts
One sided omission
Errors in transfers of totals of subsidiary book
Two entries on the same side
Under-casting or overcasting of balances
Mis-posting of figures to the account
Trial balance errors
There are two approaches available to correct errors in the accounts. The approach to use at any particular time depends on the effect of the error on the trial balance.
For those errors that do not affect the agreement of the total of the two sides of the trial balance, there will always be two affected accounts and on which the errors will be corrected and for those errors that affect the agreement of the two sides of the trial balance, only one ledger account will be affected thereby requiring another account for the correction of the error(s).
This other necessary account is called the suspense account. The suspense account is an account created for the correction of errors to be effected. It is used to record the net difference in trial balance totals pending the rotation and correction of the errors causing a difference in the trial balance. Errors are corrected through the use of journal.
Generally, errors not affecting the agreement of the trial balance are usually detected through complaints from affected third parties such as customers, suppliers, while those that affect the trial balance totals are more easily discovered. However, the following steps should be taken to locate and correct either type of balance.
Re – compute the addition of the trial balance
Check for any omission in the trial balance
Ensure that the ledger balances are appearing on the correct side of the trial balance, that is assets, expenses, purchases and drawing should be on debit side, while income, capital, sales and liabilities should appear on the credit sale.
Check for any omission in the trial balance
Check the arithmetical calculation in the ledger
Check the double entries needed in the ledger
Carefully observe the entries in the ledger to see if a figure close to the difference in the trial balance can be found.

Illustration I
The trial balance of IGI Nigeria Limited on 31st Dec., 201x showed a difference of #3,090. A thorough review of the ledger revealed the following errors.
A debit note of #1,260 received from a customer had posted to the wrong side of his account
The sum of #360 in a creditor’s account was omitted from the balance of creditors
The payment side of the cash account had been undercast by #1,950
An item if asset purchased for #2,880 had been debited to repairs.
Mr. Munir, whose debt of #1,560 had been written off paid during the year. His personal account credited but no corresponding entry was made.
The total of the sales day book had been carried forward as #6,462, whereas the corrected amount was #7,542.
You are required to show the following:
Journal entries necessary to correct the errors
Suspense account duty balanced




Suspense account dr.
Cr. Debtor’s account
Being correction of a debit note wrongly posted to the wrong side of a customer’s account


Suspense account dr.
Cr. Creditor’s account
Being entry in respect of omitted creditor’s balance


Suspense account dr.
Cr. Cash account
Being correction of the undercasting of cash book payment

Asset account dr.
Cr. Repair account
Being correction of the purchase of assets wrongly debited to repair account

Cash account dr.
Cr. Suspense account
Being entry of recovered debt omitted from cash account

Suspense account dr.
Cr. Sales account
Being correction of wrong amount carried forward on page of sales day book


Trial balance differences 3090
Creditors 360 Cash 1560
Cash 1950
Sales 1080
Debtors 1260

4,650 4,650

CFAO Enterprises book-keeping extracted a trial balance on June 30, 2009.He discounted the total of the debit side balance to be more than the credit side by #756.25 and transferred this figure to a suspense account.
However, the cause of this disagreement of the two sides were discovered to be because of the following:
A credit note sent to JK Ogun for#206.25 had been entered in the returns inward book at #195 and posted to his account as #195.
Commission received account amounting to #1,136.80 had been omitted from trial balance even though it was duly recorded in the cash book and posted into the ledger
Equipment sold for #1,250 had been credited to the sales account
The purchases day book had been overcast by #250
Goods of about #250 sold to Omot had been credited to his account
Goods with the value of #130.63 returned by Desuola had been duly credited to his personal account but no entry was made in the returns inward account.
You are required to:
Prepare the journal entries necessary to correct these errors
Prepare the suspense account





Dr. returns inwards account
Cr. J.K Ogun account
Being correction of compensating error


Dr. suspense account
Cr. Commission received account
Being correction of error of extraction from ledger to the trial balance


Dr. Sales account
Cr. Equipment account
Being correction of error of principle

Dr. suspense account
Cr. Purchases account
Being correction of the overcast in the purchase book

DR. Omot account
Cr. Suspense account
Bing correction of error of posting of items to the wrong side

Dr. Returns inward account
Cr. Suspense account
Being correction of partial error on the posting of returns inward items


Commission received 1136.68 Bal b/f 756.25
purchases 250 Omot 500
Returns Inward 130.63


When errors are discounted after the final account have been prepared a statement of corrected profit and revised balance sheet must be prepared to show the adjusted profit.


Format of statement of profit
Profit per account x
Add: Sales undercast x
Returns inwards overcast x
Returns outwards undercast x
Purchases overcast x
Expenses overcast x
Income undercast x
Less: purchases undercast x
Expenses undercast x
Income overcast x
Sales overcast x xx
Corrected net profit xx

Illustration 3
An inexperienced book-keeper has produced the following balance sheet at 31st Dec., 2000 for a Retailer, Ojola Enterprises.
Fixed assets 108,312
Capital 75,336 Current assets
12% loan: Bola 30,000 Stock 28,239
Creditors 39,423 Debtors 39.924
Bank overdraft 12,951 Drawings 12,390
Profit and loss 27,600 Suspense a/c 1,050 85,998
194,310 194,310

Mr. Olojo is surprised at the balance sheet and asks you to revise it.
Your investigation show:
The suspense account balance represents the difference in trial balance
Stock sheets were overcast by N3000
Cash in hand should be N165
The purchase day book totals for November of N12,360 was posted to purchase account as N12,630
Fixture and fittings account balance of N6,900 has been omitted from the balance sheet
An invoice for N750 had been included in stock and purchases but not posted to the personal account.
Interest for half a year on the loan account had not been paid and no provision made for it.
A sales return of N300 had been entered on the debit side of the account of Ade
You are required to:
Write the suspense accounts
ii. Drawing up a revised balance sheet as at 31st Dec., 2000

Bal b/f 4395 Furniture and fittings 6900
Purchase (12,630-12,360) 270
Cash (1,050 – 165) 885
Creditor 750
Ade (300 x 2) 600
6,900 6,900

Statement of Profit
Net profit 27,600
Purchase overcast (12630 – 12360) 270
Less: Interest due 1,800
Stock overcast 3,000 4,800
Corrected Net profit 23,070

Workings: Interest = 12% x 30,000 x ½ ( ½ yrs)
Interest paid = N1,800
Interest owing = N1,800( ½ yearly)


DR Balance sheet as at 31st Dec. 2000 CR
Fixed asset (wk 1) 115,212
Capital 75,336 Current asset
Net profit 23,070 Stock (wk2) 25,239
98,406 Debtors 39,324
Less: Drawings 12,390 Cash (wk4) 165
Current liabilities
Creditor (wk3) 40,173
Bank overdraft 12,951
Account interest 1,800
Loan 30,000
179,940 179,940

Fixed asset 108,321
Add furniture 6,900

Stock: N28,239 – N3000 = 25,239
Creditors: N39, 423 + N750 = N40,173
Debtors: N39,924 – N600 = N39,324
PAGE 159 question 4







a. A control account is an account which records in total what has been entered in detail in the ledger account to which it relates.
b. A control account is a special account put in place to reflect the aggregate balances of many related subsidiary account that are part of the double entry system. It is a mere memorandum account only. It does not form part of the double entry system of accounting.
Control accounts can be kept for the following ledgers
Sales ledger ———————– customers
Bought / purchases ledger —————— suppliers
Inventory ledger ——————– stocks
Fixed assets ledger control ———————— fixed assets
Location of errors
Prevention of fraud
Aids management control
Internal check on ledgers clerk
Easy detection of omissing figures
Ascertainment of debtors and creditors balances
Preparation of inform final account
Saves time
Grouping of account
Sales ledger control account
Purchases ledger control account
1. SALES LEDGER CONTROL ACCOUNT: The sales ledger control account is sometimes called total debtors control account. It is the control account for sales or debtors ledger. This will represent all the entries posted to the sales ledger as if only one debtor existed.
DR Sales ledger control account CR
Balance b/f x
Sales (credit) x Cash received from debtor x
Interest charges x Cheque from customer x
Dishonoured bill x Discount allowed x
Carriage outwards x Bill receivable x
Allowances x
Discount disallowed x Bad debt x
Debit note issued x Return inwards x
Payment to debtors for claim x Credit not issued x
Service charges x Contral settlement/entry x
Bal c/d xx
xx xx
2. PURCHASES LEDGER CONTROL ACCOUNT; The purchases ledger control account is referred to as total creditor control account. It is the control account for purchases or creditors ledger. This will represent all the entries posted to the ledger as if only one creditor existed.

DR Purchases ledger control account CR
Cheque to creditors x Bal b/f x
Cash to suppliers x Purchases (credit) x
Discount received x Cash refunds x
Bill payable x Discount withdrawn x
Credit not received x
Returns outwards x
Contra entry/ set off x
Bal c/d x

xx xx

Extract from the books of JKO Ltd, show the following balances for the month of June.
Sales ledger balance – 1 June 19×3 47,020
Purchases ledger balance – I June 19×3 27,570
Purchases journal balances – 30 June 19×3 374,370
Purchases journal balance – 30 June 19×3 408,000
Returns inwards 9,100
Returns outwards 7,490
Receipts from customers – cash 385, 290
Discount allowed 13,450
Payment to customers 354,150
Discount received 7460
Bad debt written off 1150
Sales ledger set – off 2090
Purchases ledger set – off 1100
On 30th June 19×3, it was discovered that a supplier was paid twice in error for N1,570. The amount was refunded on that date.
You are required to determine the sales and purchases ledger balances at 1 July 19×3.


DR Sales ledger control account CR
1/6 Bal b/d 47,020 30/6 Cash receipts 385,290
30/6 Sales 374,370 30/6 Returns inwards 9,100
30/6 Discount allowed 13,450
Bad debt 1150
Set – off 2090
Bal c/d 10,310

421,390 421,390


DR Purchase ledger control account CR
Bal b/d 27,570
Returns outwards 7,490 Purchases 408,000
Cash payment 354,150 Cash refund 1,570
Discount received 7,460
Set – off 1,100
Bal c/d 66,940

437,140 437,140
Bal b/d 66,940

Illustration 2
Bethings Enterprises maintains self balancing ledgers. From the details given below you are required to prepare the control accounts for purchases and sales ledgers for the year ended 31st December, 19×5.
Purchases 15,327
Bad debts written off 220
Bills payable accepted 2,170
Bills receivable drawn 5,020
Interest charged to customers 7
Purchases returns 89
Payment to creditors 12,538
Receipts from debtors 14,308
Bills receivable dishonoured 575
Discount allowed 528
Discount receivable 327
Sales returns 301
Cash refund to debtors 75
Cheque from debtors returned unpaid 25
Sales and purchases ledger control 1017
Bills payable returned for non-payment 150
Sales 20,051
Bad debts recovered (individual in cash from debtors) 8
Creditors ledger balance as at 31st Dec., 19×5 5086
Debtors ledger balance as at 31st Dec., 19×5 6818
Purchase ledger control balance at Jan 19×5 5,750
Sales ledger control account at 1 Jan. 19×5 7,471


Bettings Enterprises
DR Sales ledger control account CR
Bal b/d 7,471 Bad debts 220
Dishonoured bills 575 Bills receivable 5,020
Cash refund 75 Receipts from debtors 14,308
Returned cheques 25 Discount allowed 528
Sales 20051 Sales returns 301
Bad debts recovered 8 Purchases ledger contra 1017
Interest charge 7 Bal c/d 6818

28212 28212
Bal b/d 6,818

Bettings Enterprises
DR Purchases ledger control account CR
Bills payable 2170
Purchases return 89 Bal b/d 5,750
Payment to creditor 12,538 Purchases 15,327
Discount received 327 Bills repayable returns 150
Sales ledger control 1,017
Bal c/d 5,086

21,227 21,227

NOTE: Bills receivable discounted has nothing to do with the control account because the company can as well wait till the bill is matured for payment instead of discounting it, provisions of any kind should not also be posted into the control account, even when it is given in the question.
Page 247 question 7




The manufacturing account is an account that is prepared so as to identity all the manufacturing costs incurred in bringing the product to a marketable state.
Manufacturing is the process of making goods by hand or by machine. The costs involved in manufacturing process are principally in two main divisions.
The cost of raw materials; and
The cost of coverting raw materials into finished goods and this cost is in two main categories
Manufacturing costs and
Non – manufacturing costs

MANUFACTURING COSTS: Manufacturing costs are of two main types
Direct costs; and
Indirect costs (also called factory overheads)
Direct costs applies to these costs which can be readily tractor to the products and is further broken down into:
Direct material cost
Direct labour cost
Direct expenses
DIRECT MATERIAL COST: Direct materials are basic substances or raw materials form which a product is made. Examples Soya beans for vegetable oil, palm oil for soaps, animals skin for shoe etc.
Cost that are directly associated with these raw materials in the finished product is called the direct material cost.
DIRECT LABOUR COST: It will take human effort to change the form on direct materials into finished goods. the wages of those employees (factory workers who perform this task is considered as a direct labour cost). Example of a direct labour cost is the wage of a machine operator.
DIRECT EXPENSES: There are expenses other than direct materials cost and direct labour cost that are incurred solely in producing the goods. They include the cost of special designs and line of specialised equipment for a particular job.
INDIRECT COSTS: These are costs which cannot be traced directly to the product but which all the same are part of the cost of the product. In determining which costs to treat as direct costs materiality of such items must be taken into cognisance.
Manufacturing overhead cost include indirect material costs such as give used in furniture making, lubricate and supplies of materials for repairs and maintenance. Indirect labour costs such as the wages of factory foremen and supervisors.

NON – MANUFACTURING COSTS: These are administrative and marketing costs and are not included in the cost of manufacturing the product. These costs are not relevant in the manufacturing section of the account but are approximately treated in the profit and loss section.
PRIME COST: This is the total cost of direct materials direct wages and direct expenses.
Total factory cost (cost of production): This represent prime cost plus indirect factory costs (manufacturing overheads)
Inventory: This refers to stock. A manufacturing concern has three categories of inventories:
Stock of raw materials: This is the quantity of unused portion of raw materials bought.
Stock of work-in-progress: These are partly finished goods, semi-manufactured goods and incomplete work at the end of a financial period. They are goods that have not been completed in the factory at the time of preparing the final accounts. there could be opening work-in-progress and or closing work-in-progress. This is valued at start and at the end of the trading period
Stock of finished goods: This is the quality of completed goods. it is also valued at the beginning and at the end of the trading period.
Consumables: These are supplies and components purchased for incorporation into the final products and maintenance of machines.
Financial charges: These are expenses and interest incurred in servicing loans e.g. interest on overdraft, discount allowed and interest on loan
Total cost: This represents all the costs involved in bringing the finished goods down to the consumers which include prime costs, factory overheads, administrative, selling and distribution expenses and financial charges.

The costs involved can be summarised as follows:
Direct materials
Direct labour Prime cost Total cost
Direct expenses
Factory overheads
Administrative expenses
Selling and distribution expenses
Financial charges

The following items are included in manufacturing or factory overheads
Indirect wages
Heat and power
General factory expenses
Rent and rates on factory
Depreciation of plant and machinery
Depreciation of factory buildings and tools
First and expenses
Factory consumable or supplies
Indirect materials
Small tools used
Grease and oil
Other utilities

The accounting divisions of manufacturing concerns are in three main segments which are:
Manufacturing account or production account section: Under this section the three main components of cost of goods manufactured can be seen at a glance. It is therefore used in ascertaining the cost of production for the period.
Trading account section: This is principally used for determining the gross profit resulting from trading operations during the period.
Profit and loss account section: This is prepared mainly for ascertaining the net profit of the enterprises for the given period.
Manufacturing, trading, profit and loss account for the year ended 31st March
Raw materials (RM) Cost of production b/d xx
Opening stock xx
Add: Purchases xx
Carriage inwards xx
Less: returns outwards (xx)
Rm available for used xx
Less closing stock RM xx
Cost of R.M consumed xx
Direct wages xx
Royalties xx
Direct expenses xx
Factory overheads (Nite) xx
Add: Opening in. I. P xx
Cost of production xx xx
Finished goods Sales xx
Opening stock xx les: Returns inwards xx
Add cost of production xx xx
Goods available for sale xx
Less closing stock xx
Cost of sales xx
Gross profit c/d xx
xx xx
Gross profit b/d xx
Administrative Expenses
Admin salaries xx
Maintenance of building xx
Depreciation of accounting machine xx
Manager salaries xx
Legal charges xx
Accounting charges xx
Selling and distribution expenses
Commission on sales xx
Advertising xx
Salaries of salesmen xx
Depreciation on delivery van xx
Carriage outwards xx
Bad debts xx
Provision for doubtful debts xx
Financial charges xx
Interest on loan xx
Bank charges xx
Discount allowed xx xx
Net profit xx
xx xx
Illustration 1: The following shows the figures extracted from the books of Ojolo, a manufacturer for the year ended 31st December, 1999.
Stock of finished goods #
January 1st 2,532
December 31st 3,569
Stock of raw materials
January 1st 1,608
December 31st 1,432
Sales 92,800
Office rent 525
Office rates 200
Purchases of raw materials 19,000
Carriage inward on raw materials 471
Manufacturing wages 26,430
Factory expenses 1,828
Plant and machinery 3250
Delivery vans 625
Stock of work in progress
January 1st 874
December 31st 947
Factory fuel 1,835
Advertising 517
Van running expenses 2,315
Sales men’s commission 713
Maintenance of factory equipment 10,800
Lighting (3/5 factory)
(2/5 office) 8,000
Salaries (factory 1,500) 5,000
Insurance (factory 3,200) 4,480
You are required to prepare the manufacturing, trading, profit and loss account for the year ended 31st December 1999.

The usual practice is to transfer the goods produced to the trading account at cost price. But the firms may decide to transfer to the trading account at current market price irrespective of cost. The manufacturing account will show a balance (profit or loss) which will be transferred to profit and loss account. The goods may also be transferred to trading account at cost price plus a fixed percentage.

Illustration 2
BODMAS LTD is a manufacturing firm of kitchen furniture. The following information was extracted from the books of the company for the year ended 31st Dec., 1998.

Plant and Machinery 72,000
Capital 148,800
Motor vehicle 36,000
Loose tools at cost (office) 10,800
Sales 204,000
Purchases of raw materials 51,000
Factory wages 48,800
Light and power 6,000
Machinery repairs 9,120
Motor vehicles running expenses 14,400
Rent and insurance 13,920
Administrative expenses 10,800
Debtors 19,800
Creditors 13,440
Distribution staff salaries 15, 600
Cash in hand 15,000
Drawings 7,200
Stock of raw materials 600
366,240 366,240
Additional information
Light and power charges accrued at 31st Dec., 1998 amounted to #1000 and insurance prepared at the same date totalled #960.
Stocks were valued at cost on 31st Dec., 1998 as follows
Raw materials #8,400
Finished goods #12,000
Goods manufactured during the year are to be transferred to the trading account at #114,000
Motor vehicle expenses are to be allocated equally to factory expenses and general and general administrative expenses.
Plant and machinery and motor vehicle are to be depreciated at the rate of 10% and 25% respectively
You are to prepare:
Manufacturing, trading, profit and loss account for the year ended 31st Dec., 1998
Balance sheet as at that date
Manufacturing, trading, profit and loss account for the year ended 31st Dec. 1998
Opening stock of R.M 600 Goods transferred to trading 114000
Add: purchases of R.M 51,000
Less: closing stock R.M 8,400
Cost of RM consumed 43,200
Add: Factory wages 46,800
Factory Overhead
Machine repairs 9,120
Motor running exp. 7,200
Plant and machinery 7,200
Cost of production 113,520
Profits on goods manufactured 480
114,000 114000
Goods transferred sales 204,000
Less: closing stock F.G 12,000
Cost of goods sold 102,000
Gross profit 102,000
204,000 204000
Expenses Gross profit b/d 102000
Light & power 7000 Profit on manufacture 480
Motor running expenses 7200 Net loss 2080
Rent and insurance 12,960
Administrative staff salaries 37,200
Administrative expenses 10,800
Distributive staff salaries 15,600
Motor vehicle 9,000
Loose tools 4,800
104,500 104500






Balance sheet as at 31st December, 1998
Capital 148,800 Fixed Assets
Less: Net loss 2080 Motor Vehicle (36,000 – 7,200) 27,000
Less: drawings 7,200 P & M (72,000 – 7,200) 64800
Current liabilities
Creditors 13,440 Loose tools (10,800 – 4,800 6000 97800
Light and power accrued 1,000
Current Assets
Stocks: R.M 8400 , Furnished goods 12000 Debtors 19800 Cash in hand 15000 Insurance 960
153,960 153960
Light and power = 6000 + 1000 = #7000
Insurance = 13,920 – 960 = #12,760
Motor expenses = factory = ½ x 14440 = #7,200
General Administrative expenses
½ x 14,440 = #7,200
Loose tools cost 10,800
Depreciation 4,800
Loose tools in hand 6,000
Depreciation: plant and machinery = 10% x 72,000 = 7,200
Motor vehicle = 25% x 36,000 = #9000
Page 310 question 2x

Under the partnership Act of 1890, partnership is defined as the relationship which exists between persons carrying on a business in common with a view of profit.
It is an association between two and twenty persons who have agreed to share the profits who have agreed to share the profits of a business carrying on by all or any of them for benefit of all of them.
There are three principal types of partners namely:
Active partner: This type of partner participates actively in management of the partnership’s business
Sleeping or Dormant partner: this type of partner does not take any active part in the management of the partnership business. All he does is to contribute money into the partnership and then wait to receive his share of profit
Nominal partner: This is a partner that has not capital contribution into the business but partners in the share of the profit. This is because, he has allowed his name to be used by other partners as a result of his good image,
There are several reasons that make people opt for partnership business and some of them are:
Where the capital need of the business cannot be adequately supplied or make available by a person.
Where the experience and knowledge needed to carry on the business cannot be provided by an individual singlehandedly
Where people are afraid of bearing all the risks associated with the business alone
Where they want to make it a family business.
Capital is from members contribution
Unlimited liabilities for partners
Not a legal entity
Limited membership
Motive is profit
Common participation in management
Each partner is an agent of the business
No special formalities in formation.
This is a document drawn up by the partners which will clarify the respective positions and duties of the partners in a business.
Name of the partners and other particulars
Name of the business
Signatories to the account
Duration of the partnership
Amount of capital to be contributed
Right of each partner
Duties of each partner
Amount of salary to be paid
The nature of the business
Method of admission of a new partner
Dissolution of partnership
Registered office
Partnership account procedures
Terms and conditions
Profit and loss sharing ratio
Rate of interest on capital
Rate of interest on drawings
Valuation of goodwill
CAPITAL ACCOUNT: The amount contributed by each partner into the business will be credited to his capital account. The firm can maintain or use either a fixed capital or fluctuating capital.
(i) FLUCTUATING CAPITAL ACCOUNT: The partners can maintain a fluctuating capital account, profit, interest on capital and salaries will be credited to the capital account and drawings and interest on drawings debited. In short, the balance of this account will change each year.


Drawings x x x Bal b/f x x x
Int. on drawings x x x Current bal x x x
Share of profit x x x
Int on capital x x x
Bal c/d x x x Salary x x x
x x x x x x
Bal b/d x x x

(ii) Fixed Capital account and current account: The balance of capital will remain at the same figure during the partnership profit, interest on capital and salaries will be credited to a separate current account. Drawings and interest on drawings are debited.
NOTE: Examiners often ask for separate current and capital account.

Capital Account
Bala b/f x x x

Drawings x x x Bal b/f x x x
Int. on drawings x x x Int. on capital x x x
Bal c/d x x x Int. on salary x x x
Share of profit x x x

xx xx xx xx xx xx

Partners Loan: A partner may introduce cash by way of loan to the partnership. Any cash introduced will be credited to a loan account,
Partners Salaries: The agreement may provide that any of the partners who devote his time to the running of the business shall receive a fixed salary in addition to a share in the profits. Salary will be credited to the current account.
Interest on Capital: The partner may be paid interest on capital when they have contributed unequal amount. This is debited to profit and loss appropriation account and credited to current account.
Drawings: This is the amount withdrawn or taken out of the business by partners during the year. The drawings can be in cash or kind. It must be debited to the current account.
Interest on Drawings: Interest on drawings is introduced to prevent the partners from withdrawing cash unnecessarily from the business. This is calculated from the date of withdrawal to the end of the financial year. This is debited to the current account.
The trading, profit and loss account are exactly the same as that of a Sole trader. But a partnership would have an extra section called “Appropriation account”

Partnership, Trading, Profit and loss account for the year ended 31st Dec. 1967
Sales x
Opening stock x less: Sales returns x
Add: purchases x
x x
less: closing stock x
cost of goods sold x
Gross profit x
xx xx
Gross profit b/d x
Discount received x
Rent x
Salaries and wages x
Depreciation x
Motor expenses x
Stationery x
Bad debts x
Interest on loans x
Sundry expenses x
Net Profit x

xx xx

Profit and loss appropriation account
Interest on capital Net profit b/d x
Ojo x Interest on drawings
Ajayi x x Ojo x
Salary Ajayi x
Ojo x
Ajayi x x
Share of profit
Ojo 2/3 x
Ajayi 1/3 x

xx xx

Balance sheet
Fixed Assets
Capital Motor van x
Ojo x sF & F x
Ajayi x x Land & building x
Premises x x
Current Account Current Assets
Ojo x Stock x
Ajayi x x Debtors x
Current Liabilities Bills receivable x
Bills payable x
Loan x x Bank x
Creditors x Cash in hand x
Income in advance x Income in arrears x
Expenses accrued x Expenses are paid x x
xx xx

Page 363 question 4




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