SS 3 FIRST TERM LESSON NOTE FINANCIAL ACCOUNTING

 

 

 

 

 

 

 

 

FIRST TERM E-LEARNING NOTE

SUBJECT: FINANCIAL ACCOUNTING CLASS: SS3

SCHEME OF WORK

WEEKS TOPIC
1 Partnership Accounts
2 Final Accounts of a Partnership
3 – 4 Admission of Partners
5 – 6 Dissolution of Partnership
7 Introduction to Company Accounts
8 Final Accounts of Limited Liability Companies
9 – 10 Issue of Shares and Debentures

WEEK ONE
PARTNERSHIP ACCOUNTS
Partnership Agreement
Capital and Current Account
INTRODUCTION
PARTNERSHIP can be defined as the relationship which exists between two or more persons who are carrying on business in common with a view to making profit. The rules governing the conduct of a partnership business is contained in the document known as the Deed of Partnership or Articles of Partnership or Partnership Agreement.

CONTENTS OF THE DEED OF PARTNERSHIP
The partnership Deed contains among others, the following.
Name of the partnership
Names of the partners
Capital contribution
Nature of the partnership business
Profit and loss sharing ratio
Interest on capital contribution
Interest chargeable on drawings
Duration of the partnership
Rules regarding admission or retirement of a partner
Rules on dissolution of the partnership

WHEN THERE IS NO AGREEMENT
Where there is no specific arrangement concerning the partnership agreement, section 24 of the Partnership Act 1890 laid down the rules that should be applied as follows:-
No interest to be paid on capital contributed by each partner
No partner should receive salary or remuneration.
No interest is to be charged on drawings
Profits and losses are to be shared equally.
5% interest should be allowed on any loans made by any partner in excess of the agreed capital contribution.

FIXED CAPITAL ACCOUNT
The capital accounts of partners are usually regarded as fixed so as to provide a permanent evidence of the initial amount with which the partnership is commenced. Where capital is regarded as fixed, a current account must be opened for each of the partners.

PARTNERS CURRENT ACCOUNT
The current account of each partner is prepared to show what such a partner is entitled to withdraw from the business at any point in time. It is credited with salary, commission, share of profits, interest on capital, and debited with drawings, interest on drawings, etc.
EXERCISE 1
Obi and Oba are partners in a firm of chartered accountants with initial capital contributions of N50,000 and N40,000 respectively which are to be kept fixed in the partnership books. You are required to show the cash account, partners’ capital accounts and balance sheet extracts.
SOLUTION
CASH ACCOUNT (EXTRACTS)
N
Capital: Obi 50, 000
Oba 40, 000
PARTNERS CAPITAL ACCOUNT

Obi Oba
NN
Cash A/c 50, 000 40, 000

BALANCE SHEET (EXTRACTS)

Capital A/c N N
Obi 50, 000
Oba 40, 000 Cash in hand 90, 000
FIXED CAPITAL ACCOUNT WITH CURRENT ACCOUNT
As illustrated above where capital account will remain fixed according to agreement, current account must be opened for each partner. It is debited with drawings, interest on drawings and credited with interest on capital, share of profit and partner’s salary.
ILLUSTRATION II
DR FIXED CAPITAL ACCOUNT CR
A B A B
N N
Balance b/d 100, 000 20, 000

CURRENT ACCOUNT
DR CR
A B A B
N N N N
Drawings 4, 000 3, 500 Balance B/f 3,000 6, 000
Interest on drawings 400 350 Int. on capital 10, 000 20, 000
Share of profit 5, 000 6, 000
Balance c/d 14, 600 30, 150 Salary 1, 000 2, 000
19, 000 34, 000 19, 000 34, 000

However, there are instances where the partners in accordance with the partnership deed, maintain floating or fluctuating capital account.

FLOATING CAPITAL WITHOUT CURRENT ACCOUNT
This is simply a combination or mixture of the capital and current accounts of each partner in a capital account hence such a capital account is referred to as “floating” or “fluctuating” because the balance can increase or decrease at any time depending on how much is paid in and how much is withdrawn.
ILLUSTRATION 3
FLUCTUATING CAPITAL ACCOUNT
DR CR
A B A B
N N N N
Drawings 4, 000 3, 500 Bal of capital b/f 100, 000 200, 000
Interest on drawings 400 350 Bal of current b/f 3, 000 6, 000
Balance c/d 114, 600 230,150 Interest in capital 10, 000 20, 000 Share of profit 5, 000 6, 000
Salary 1, 000 2, 000
119, 000 234, 000 119, 000 234, 000

EVALUATION
Define Partnership
List seven items that should be contained in a partnership deed.

READING ASSIGNMENT
Essential Financial Accounting by O.A. Longe Page 249-251.

WEEKEND ASSIGNMENT
Where there is no partnership agreement the Partnership Act 1890 section _______ should be applied (a) 20 (b) 25 (c) 24 (d) 34
Which of the following is not true where there is no laid down agreement for the partnership? (a) Profits and losses to be shared equally (b) No interest on drawings (c) No interest in capital (d) Members of the public can invest in the shares of the business.
Which of the following increases the profit of a partnership? (a) Drawings (b) Interest on capital (c) Interest on drawings (d) Partnership salary
Which of the following statements is NOT true? (a) When we keep fixed capital accounts for partners we open their current accounts (b) When losses are made they are to be shared by the partners (c) When we keep floating capital account no current account is kept (d) A partnership can exist forever.
Which of the following can represent capital contributed by a partner to a partnership? (a) Cash only (b) Cheques only (c) Cash and cheques only (d) Cash, cheque and other assets.

THEORY
List the rules approved by the Partnership Act 1890 to be applied where there is no partnership agreement.
Prepare the capital and current accounts of the following partners:-
N
Capital accounts Obi 50, 000 cr.
Oba 20, 000 cr.
Interest in capital 5% p.a.
Salaries Obi 5, 000
Oba 6, 000
Interest on drawings 5%
Drawings Obi 2, 000
Oba 1, 500
Current accounts balances b/f
Obi 3, 000 cr.
Oba 500 dr.
GENERAL EVALUATION
Differentiate between accounting concepts and convention
Explain four classifications of cost found in manufacturing accounts
State five reasons why a trial balance may not balance
State five limitations of the Receipts and Payments Account
Explain five events that may lead to the dissolution of a partnership

WEEK TWO
FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS
i. Profit & Loss Appropriation Account of a partnership
ii. Balance Sheet of a Partnership
PROFIT AND LOSS APPROPRIATION ACCOUNT OF A PARTNERSHIP
This, as the name implies, is the account where either the profit or loss of the partnership business is shared between or among the partners as stipulated in the partnership agreement. The profit and loss appropriation account marks the beginning of the difference between the final accounts of a sole trader and that of a partnership. This is because while the sole trader does not share his profit with any-body, the profit of the partnership must be shared by the partners.

Some Terminologies in profit & Loss Appropriation Account of a partnership
1. Drawings:- Partners can withdraw at regular or irregular intervals, from the sum they are entitled to at the end of the year. The total drawings is credited to the cash book and debited to current accounts.
2. Interest on drawings:-This is the interest charged on drawings made by the partners. In order to discourage or reduce the amount of cash withdrawn, a fixed sum or % will be charged as interest. The interest on drawing will increase net profit and discourage drawings. It can be calculated on monthly basis.
Interest is calculated from the date the amount is withdrawn to the end of the financial year.
3. Partners’ Salary: – The agreement made provision for salary to be paid to active partners. It is desirable to compensate the active partner for the day-to-day running of the business.
4. Interest on Capitals: Partners contribute different amounts as capital. In order to compensate the partners for capital contributed, interest on capital is allowed.

BALANCE SHEET OF A PARTNERSHIP BUSINESS
There is no significant difference between the balance sheet of a sole trader and that of a partnership. The only difference is on the display of capital accounts and current accounts of partners which will be illustrated in the formats below:-

Format 1
Trading, profit and loss of A and B Enterprises for the year ended 31st December 2006
N N N N
Opening stock x Sales x
Add Purchases x less Returns inwards x x
Add Carriage inwards x
X
Less Returns Outwards x x
Cost of goods available for sale x
Less Closing stock x
Cost of goods sold x
Gross profit c/d x
X x
Expenses
Wages and salaries x Gross profit b/d x
Depreciation of assets x Discounts received x
Sundry expenses x
Bad debts x
Interest on loan x
Discount allowed x
Carriage outwards x
Net profit c/d x
X X
Format 2
Profit and Loss Appropriation account A and B
N N N N
Partners salary x Net profit b/d x
Interest on capital: A x Interest on drawings:
B x x A x
Share of profit B x x
A (½ x) x
B (½ x) x x __
X x

Format 3
Balance sheet of A and B Enterprises as at 31st Dec 2006
N N N N
Capital accounts Fixed assets
A x Furniture & fitting x
B x x Less depreciation x x
Current accounts Motor van x
A x
B x x Current assets
Current liabilities Stock x
Loan x Debtor x
Creditors x Bank x
Expenses owing x x Cash in hand x x
X x
Example
O and D are in partnership sharing profit and loss in the ratio 3:2. The following is the Trial Balance as at 31 December 2005
DR CR
Capital O 100,000
D 50,000
Drawings: O 6,000
: D 5,000
Purchases 120,000
Sales 200,000
Sales returns 4,000
Purchases returns 2,000
Stock at 1st January 2005 10,000
Carriage inwards 1,200
Salaries and wages 15,000
Bad debts 1,000
Office expenses 2,400
Loan-Okafor 14,000
Provision for doubtful debts 300
Discounts allowed 1,150
Discounts received 1,100
Building at cost 30,000
Machinery at cost 109,000
Cash at bank 8,000
Motor van at cost 50,000
Electricity 50
Provision for dep. on motor van 10,000
Debtors 20,000
Creditor 10,000
Bills payable 9,000
Bills receivable 17,500
Carriage outwards 500
Currents account: O 1,500
D 3,000
400,900 400,900

Additional Information
i. Stock at close N 15,000
ii. Salaries and wages accrued N 1,000
iii. Electricity prepaid N 20
iv. Interest on capital at 10%
v. Interest on drawings at 5%
vi. Depreciate motor can 10% on cost
vii. Partnership salary: O N 2,000
viii. Provision for doubtful debts to be reduced to N 200
viiii. O withdrew N 7,000 goods for own use

You are required to:
a. Prepare the Trading, Profit and loss account for the year ended 31 Dec, 2006.
b. Partners’ capital account
c. Balance sheet as at 31st Dec. 2006

Solution
Trading, Profit and Loss of O and D for the year ended 31st December 2006.
N N N N
Opening stock 10,000 Sales 200,000
Add purchases 120,000 Less Returns inward s 4,000
Add carriage inwards 1,200
121,200
Less Ret outwards 2,000
119,200
Less Goods withdrawn 7,000 112,200
Cost of Goods available for sale 122,200
Less closing stock 15,000
Cost of goods sold 107,200
Gross profit c/d 88,800
196,000 196,000

Expenses Gross profit bld 88,800
Salaries and wages (wk 1) 16,000 Discount received 1,100
Decrease in provision for
Bad debts 1,000 bad debts (wk 3) 100
Office expenses 2,400
Discount allowed 1,150
Electricity (wk 4) 30
Carriage outwards 500
Depreciation-motor can (wk 2) 5,000
Net profit c/d 63,920
90,000 90,000

Appropriation account
N N N N
Net profit 63,920
Partner salary – O 2,000 Interest on drawings:
Interest on capital: O 300
O 10,000 D 250 550
D 5,000 15,000
Share of profit:
D 18,988
O 28,482 47,470
64,470 64,470

Partnership Columnar current account
O D O D
N N N N
Drawings 6,000 5,000 Balance b/f 1,500 3,000
Int on drawings 300 250 Share of profit 28.482 18,988
Goods withdrawn 7,000 – Interest on capital 10,000 5,000
Balance c/d 28,692 21,738 Salary 2,000 -____
41,982 26,988 41,982 26,988

Bal b/d 28,692 21,738
Balance sheet as at 31st December 2006
N N N NN
Capital: O 100,000
D 50,000 150,000 Fixed assets
Building 30,000 30,000
Current account: Machinery 109,100 109,100
O 28,682 Motor van 50,000 139,100
D 21,738 50,420 Less Depr. 15,000 35,000
174,100
Current liabilities Current assets
Loan Okafor 14,000 Stock 15,000
Creditors 10,000 Bank 8,000
Bills payable 9,000 Debtors 20,000
Wages owing 1,000 34,000 Less provision 200 19,800
Bills receivable 17,500
Electricity prepaid 20 60,320
234,420 234,420

Workings
1. Salaries and wages
Amount paid 15,000
+ Owing 1,000
Profit and loss 16,000
2. Depreciation: Motor van
10% x 50,000
Profit and loss 5,000
Accumulated depreciation = 10,000 + 5,000 = 15,000
3. Provision for bad debts 4. Electricity 50
Old provision 300 Less Prepaid 20
Less New provision 200 Profit and loss 30
Profit and loss 100
5. Interest on capital: 6. Share of profit
O : 10% x 100,000 O = 3/5 x 47,470 = 28,482
= 10,000 D = 2/5 x 47,470 = 18,988
D : 10% x 50,000
= 5,000
7. Interest on drawings:
O : 5% x 6,000
= 300
D : 5% x 5,000
= 250
EVALUATION
1. Explain (a) appropriation account (b) Balance sheet
2. What is interest on capital?

READING ASSIGNMENT
Essential Financial Accounting by O. A. Longe, Page 249 – 258

WEEKEND ASSIGNMENT
Use the following information to answer questions 1 – 5. A, B, and C are in partnership sharing profits and losses in the ratio 3:2:1 respectively. Their capital accounts are A: N60,000 B. N40,000 and C: N 30,000. Interest on capital is agreed at 5% p.a. interest on drawings is also agreed at 5% p.a. Their drawings for the year are: A: N 6,000 B: N 4,000 and C: N 3,000. The profit for the year before appropriation is N 30,000 C is entitled to a partnership salary of N2,000 p.a
1. What is the total of A and B’s interest on capital? (a) N4,000 (b) N3,000 (c) N5,000
(d) N10,000
2. What is the total of B and C’s interest on drawing? (a) N350 (b) N250, (c) N450
(d) N400
3. Total interest on the partners’ capital for the year is (a) N7,000 (b) N6,000 (c) N6,500 (d) N5,500
4. Total credit entries in the appropriation account is (a) N550 (b) N30,000 (c) N35,500
(d) N30,550
5. Which of the following is not debited to the profit and loss appropriation account?
(a) C’s salary (b) Partner’s interest on capital (c) Share of profit (d) Share of loss

THEORY
1. Write short notes on (a) Interest on capital (b) Interest on drawing
2. Give the double entries for the following in the final account of a partnership. (i) Interest on drawings N500 (ii) Partnership salary N3,000 (iii) Interest on capital N5,000 (iv) Share of profit N10,000

GENERAL EVALUATION
List five items that are debited in the sales ledger control account
List five items that are credited in the purchases ledger control account
List five subsidiary books from which the sales ledger control is compiled
State five contents of the Appropriation Account of a partnership
List five characteristics of depreciable assets

WEEK THREE AND FOUR
ADMISSION OF PARTNERS, GOODWILL AND REVALUATION OF ASSETS
CONTENTS
Admission of a new partner – meaning and reason for admission
Goodwill admission of a new partner (a) meaning of goodwill (b) reasons for paying for goodwill (c) treatment of goodwill (d) example
Revaluation of asset on admission of partnership (a) introduction (b) accounting entries (c) example

ADMISSION OF NEW PARTNERS
This occurs when a new partner is admitted into an existing partnership business. The reasons for such admission usually are: expiration of old partnership agreement, to inject in more fund, bring in a specialist, death of an old partner, etc.
However, it will be unfair to the existing partners for a new person to come in and take part in the established prosperous business without any reward to the old partners. This compensation to the old partners is goodwill.

GOODWILL ON ADMISSION OF A PARTNER
Definition of Goodwill: Goodwill is the benefit and advantage attached to an old established business as a result of its good name, efficient management good connection, good location, etc which make it to earn more profit.

REASONS FOR PAYMENT FOR GOODWILL
Thus, a partner of an existing business or an incoming partner will be induced to pay for goodwill because of:
quality of goods and services (ii) favourable business location (iii) efficient and loyal work force (iv) efficient management (v) possession of monopoly power (vi) patents and trade marks (vii) successful research and development (viii) good public image, etc.

TREATMENT OF GOODWILL
Then goodwill will be brought into the business. This will be dealt with as follows:
Raising and retaining Goodwill account in the books: Here, the value of goodwill is debited to goodwill account and credited to the capital accounts in the partners old profit and loss sharing ratio.

Accounting Entries: Dr. Goodwill A/c
Cr. Partners capital A/c

Any cash introduced by the new partner as capital, Dr Cash A/c; Cr. Capital A/c

Goodwill is written off: If the business does not desire to retain the goodwill in the books, it will be necessary to write it off to the capital account of the partners in their NEW P&L sharing ratio
Accounting Entries – goodwill written off
Dr. Capital A/c; Cr. Goodwill A/c

EXAMPLE:
A and B are Partners who share profit equally. They decide to admit C by agreement, goodwill valued at N60,000 is to be introduced into the books. C is required to provide capital equal to that of B after he has been credited with his share of goodwill. The new profit sharing ratio is to be 4:3:3 to A, B and C respectively.
The partner’s balance sheet before the admission of C is as follows
Balance sheet
Capital: A 80,000 Building 80,000
B 40,000 Motor Vehicle 30,000
Furniture 40,000
Creditors 30,000 Cash 20,000
Other liabilities 20,000
170,000 170,000

Prepare the following:
Journal and Ledger entries for the admission of C if goodwill account is to be retained.
The new balance sheet as a result of admission of C and the retention of goodwill account.
Journal and Ledger entries for the admission of C if goodwill account is not retained.
New balance sheet showing C admission and goodwill not retained.

Solution
Journal entries – goodwill account retained
JOURNAL

Debit Credit
Good will Account 60,000
Capital Account – A 30,000
— B 30,000
Being goodwill introduced and shared based
on old profit sharing ratio
Cash Account 70,000
Capital Account C 70,000
Being capital contributed by C

Note: Since B’s capital was N40,000 before the goodwill of N30,000, then B’s capital will now be N70,000. Hence, C must contribute same amount as stated in the question.
Ledger – goodwill account retained
Goodwill Account
N N
Capital: A 30,000
B 30,000 Bal c/d 60,000
60,000 60,000
Bal b/d 60,000
Capital Account

A
B
C

A
B
C

 

Bal c/d
N

110,000
110,000
N

70,000
70,000
N

70,000
70,000

Bal b/d
Cash
Goodwill

Bal b/d
N
80,000
–
30,000
110,000
110,000
N
40,000
–
30,000
70,000
70,000
N

70,000
–
70,000
70,000

Cash Account
NN
Bal b/d 20,000
capital 70,000 Bal c/d 90,000
90,000 90,000
Bal b/d 90,000
A, B and C
Balance Sheet

 

N
N
N
Goodwill

 

 

60,000
Fixed Assets

 

 

 

Building

 

80,000

Furniture

 

40,000

Motor vehicle

 

30,000
150,000

 

 

 

210,000
Current asset

 

 

 

Cash

 

90,000

Current liabilities

 

 

 

Creditors

30,000

 

Other liabilities

20,000
50,000

Net current asset

 

 

40,000

 

 

 

250,000

Financed by

 

 

 

Capital account

 

 

 

A

 

 

110,000
B

 

 

70,000
C

 

 

70,000

 

 

 

250,000

Journal entries – goodwill account not retained

JOURNAL

Debit
Credit

N
N
Goodwill Account
60,000

Capital – A

30,000
B

30,000
Being creation of goodwill as agreed on

 

Admission of C

 

Cash account
70,000

Capital Account – C

70,000
Being Capital contributed by C

 

Capital Account – A
24,000

B
18,000

C
18,000

Goodwill Account

60,000
Being goodwill written off using new

 

Profit sharing ratio

 

 

Cash Account
N N
Bal b/d 20,000
C’s – Capital 70,000 Bal c/d 90,000
90,000 90,000
Bal b/d 90,000

Goodwill Account
Capital Account – A 30,000 Capital Account – A 24,000
Capital Account – B 30,000 Capital Account – B 18,000
Capital Account – C 18,000
60,000 60,000

Capital Account

A
B
C

A
B
C

N
N
N
N
N
N
N
Goodwill
Bal c/d
24,000
86,000

110,000
18,000
52,000

70,000
18,000
52,000

70,000
Bal b/d
Cash
Goodwill

Bal b/d
80,000
–
30,000
110,000
86,000
40,000
–
30,000
70,000
52,000
–
70,000
–
70,000
52,000

A, B and C
Balance Sheet
Capital Account:

Fixed Assets

 

N

N
A
86,000
Building
80,000
B
52,000
Furniture
40,000
C
52,000
Motor vehicle
30,000

190,000

150,000
Current liabilities

Current asset

Creditors
30,000
Cash
90,000
Other liabilities
20,000

 

 

240,000

240,000

EVALUATION
1. Explain the term Goodwill.
2. List five circumstances that can give rise to the valuation of goodwill in partnership accounts.

REVALUATION OF ASSETS ON ADMISSION OF A NEW PARTNER INTO A PARTNERSHIP
The assets of a partnership should be revalued to show their current value in any of the following circumstances: (i) admission of a partner (ii) retirement of a partner (iii) changes occur in P & L sharing ratio of partners.

ACCOUNTING ENTRIES
Open a Revaluation A/c;
Dr. Assets A/c; Cr. Revaluation A/c with increase in value of asset
Cr. Assets A/c; Dr. Revaluation A/c with reduction in value of assets.
Dr. Revaluation A/c; Cr. Liabilities A/c with increase in value of liabilities
Cr. Revaluation A/c; Dr. liabilities with reduction in the value of liabilities
If Goodwill is introduced
Dr. Goodwill A/c; Cr Revaluation A/c with the amount of the Goodwill
Transfer of profit on revaluation to the old partners capital account:
Dr. Revaluation A/c in the old P & L sharing ratio
Cr. Capital A/c in the P & L sharing ratio
Transfer of loss on revaluation
Cr. Revaluation A./c in the P & L sharing ratio
Dr. Capital A/c in the P & L sharing ration
Goodwill to be written off
Cr. Goodwill A/c in the NEW P & L sharing ration
Dr. Capital A/c in the P & L sharing ratio
In revaluation of assets, the following accounts will be prepared.
Revaluation b. Capital accounts of partners c. Balance sheet

Example
S & O are in partnership, sharing profits and losses equally. On 1/1/1995 they decided to admit J, who would be entitled to one quarter of any future profits, the balance being shared equally between S and O.
The financial position of the business before the admission of J was a follows:-
Freehold premises: N75, 000, Fixtures and fittings: N26, 000, Stock in trade: N105, 000 Debtors: N45, 000, Cash in hand: N12, 640, Creditors: N58, 940.
Additional information:
It is agreed to value and retain goodwill at N30,000, b. Revalue the other assets as follows: Freehold premise: N100,000, Fixtures and fittings: N24, 000, Stock: N103, 000, c. Provision for bad debts of N3, 000 is to be made d. Capital is contributed by S and O equally e. J is to bring N80, 000 into the business as capital. You are required to prepare: i. Revaluation account ii. Partners capital accounts in columnar form iii. Opening balance sheet of the new partnership of S, O and J.

Solution
The closing balance sheet of the partnership must be prepared to show the capital contributed by J and S.
Balance Sheet
N N
Capital: S 102,590
O 102,590 205, 180 Freehold premises 75, 000
Fixtures & fittings 26, 000
Creditors 58, 940 Stock 105, 480
Debtors 45, 000
Cash in hand 12, 640
264, 120 264, 120
Note: The question states that capital is contributed equally by S and O.
Dr. Revaluation account Cr
N N
Decrease invalue of assets Increase in value of asset
Fixture and fittings 2,000 Freehold premises 25,000
Stock 2,480 Goodwill 30,000
Provision for bad debts 3,000
Share of profit:
S 23,760
O 23,760 47,520
55,000 55,000

Dr Partners’ capital accounts Cr
S O J S O J

Balance c/d 126,350 126,350 80, 000 Bal. b/f 102,590 102,590 –
Cash – – 80,000
Share of profit 23,760 23,760 –
126,350 126,350 80,000 126,350 126,350 80,000

Share of profit S (1/2 x 47,520)=23,760 O (1/2 x 47, 520)=23,760

Balance Sheet as at 1st January, 1995

 

N

 

N
N
N
Capital:

 

 

Fixed Assets

 

 

 

S
126,350

Goodwill

30,000

 

O
126,350

Freehold Premises

100,000

 

J
80,000
332,700
Fixtures and fittings

24,000
154,000

 

 

 

Current Assets

 

 

Creditors

 

58,940
Stock

103,000

 

 

 

 

Debtors
45,000

 

 

 

 

 

Less Provision
3,000
42,000

 

 

 

 

Cash balance

92,640
237,640

 

 

391,640

 

 

391,640

EVALUTION
1. What is a revaluation account?
2. List five assets that may be revalued in partnership accounts.

READING ASSIGNMENT
Essential Financial Accounting by O.A. Longe, Pages 278-281
Financial Accounting with Ease by OnafowokanYombo, Pages 247-251
Simplified Bookkeeping & Accounting by F.L. Olatunji, Pages 303-307

WEEKEND ASSIGNMENT
1. The double entry for the N5,000 salary paid to partner A is (a) Dr. Appropriation A/c N5,000, Cr A’s current A/c N5,000 (b) Dr. A’s Capital A/c N5,000,
Cr Appropriation A/c N5,000 (c) Cr Revaluation A/c N5,000; Dr. Salary A/c N5,000
(d) None of the above
2. Goodwill is (a) Fixed Asset (b) Current Asset (c) Current Liability (d) Intangible Asset
3. Goodwill can be classified into (a) Liquid (b) tangible (c) intangible (d) Inherent and purchased
4. _________ A/c is credited with increase in values of assets (a) goodwill
(b) capital (c) revaluation (d) current
5. For a reduction in the value of an asset ___ the asset A/c and debit Revaluation A/c (a) debit (b) credit (c) deduct (d) Add

THEORY
1. Explain clearly but briefly the terms goodwill and revaluation of assets. Why and when are they necessary in accounting?
2. Give the journal entries for each of the following transactions:
(a) Goodwill A/c of N50,00 is to be retained in the books of A& B who share profits and losses in ratio 2:1 respectively.
(b) A&B admitted C and the new P & L sharing ratio is 2:2:1 respectively. Write of the goodwill A/c in (a) above
(c) N4,000 provision for bad debt is to be made on revaluation of assets.
(d) Reduction in provision for bad debt of N7,000 on revaluation

[mediator_tech]

GENERAL EVALUATION
List six accounts found in the nominal ledger
State four reasons for the need for a bank reconciliation
Mention six items which must be contained in a partnership agreement
Mention four features of not-for-profit making organizations
Differentiate between adjustments and closing entries

WEEK FIVE AND SIX
DISSOLUTION OF PARTNERSHIP
CONTENT
Meaning of partnership Dissolution
Reasons for Dissolution
Accounting entries
Illustration

Meaning: To dissolve a partnership means to bring an existing partnership business to an end. This entails selling the assets of the business, paying its creditors and other liabilities and sharing the balance of cash left between or among the partners in the agreed ratio.
Reasons for Dissolution
Any of the following reasons can lead to the dissolution of a partnership.
Retirement of partner i.e a partner gives notice of his intention to retire from the partnership
Admission of a new partner
A partner giving notice to other partners of his opinion that the business be dissolved.
Insanity of a partner i.e a partner’s problem of unsound mind.
Bankruptcy or inability of a partner to pay his debt.
Death of a partner
A joint decision by the partners to dissolve the partnership
If any time agreed upon expires
The business can no longer make profit
If it becomes illegal to continue to trade on the main object the business was established.
MAIN ACCOUNTS OPENED: They are:
Cash/Bank A/c: To record the receipt of cash/cheque for assets disposed of, payments to creditors, expenses of dissolution and fund disbursements to the partners.
Realization: To record book value and sales proceeds of assets sold, dissolution expenses, assets taken over by partner and the share of profit or loss on dissolution.
Partner’s Capital A/C: To record share of profit or loss, goodwill, assets taken over, amount paid to partners or amount paid by a partner as a result of deficit, etc.

ACCOUNTING ENTRIES
Book value of assets to be realized (excluding bank and cash)
Dr. realization A/c
Cr. Assets A/c.
b. Assets sold
Dr. Cash or bank A/c
Cr. Realization A/c with cash proceeds
Assets taken over by a partner
Dr. The capital A/c of partner
Cr. Realization A/c with the value of such an asset(s).
Settlement of liabilities
Dr. liability A/c
Cr. Cash or bank A/c with amount involved
Dissolution expenses
Dr. Realization A/c
Cr. Cash or Bank A/c
Discount received from creditors
Dr. Creditor(s) A/c
Cr. Realization A/c
Settlement of a creditor
Dr. Creditor A/c
Cr. Cash or Bank A/c
Paying off a partner’s loan A/c
Dr. loan A/c
Cr. Cash or Bank A/c
Profit on realization
Dr. Realization a/c
Cr. Partners A/c
Loss on Realization
Dr. Partners’ capital A/c
Cr. Realization A/c
Cash or Cheque paid in by a partner who has a debit balance
Dr. cash or Bank A/c
Cr. The capital a/c of partner concerned
Final settlement of cash to partners
Cr. Cash or Bank A/c
Dr. each partner’s capital A/c

The double entry in item (L) above marks the end of the dissolution process, and the cash or bank balance must be the same as the amount required to be paid to each partner.
FORMATS
Realization A/c
N N
Book Value of Assets Amount from Sales
Business premises x Business premises x
Motor vehicle x Motor vehicle x
Furniture and fittings x Furniture and fittings x
Plant & machinery x Plant & machinery x
Debtors x Debtors x
Stock x Stock x
Dissolution expenses x Discount received x

Share of profit
A x
B x
C _x_
Xxx xxx

Dr Cash Book Cr
N N
Balance b/f x Dissolution cost x
Realization account Creditors x
Plant and machinery x Settlement of loan x
Debtors x Capital:
Motor Vehicle x K x
Stock x O x
Equipment x P _x_ x_
XX XX

Dr Partners Capital Accounts Cr

A
B
C

A
B
C

N
N
N

N
N
N
Cash book
X
X
X
Balance b/f
X
X
X

 

 

 

Share pf profit
X
X
X

xx
xx
xx

xx
xx
xx

Ledger entries

Dr. Plant and machinery account Cr.
N N
Balance b/f x Realization account x

Dr. Motor vehicle account Cr.
N N
Balance b/f x Realization account x

Dr. Furniture account Cr.
N N
Balance b/f x Realization account x

Dr. Stock account Cr.
N N
Balance b/f x Realization account x

Dr. Creditors account Cr.
N N
Bank X Balance b/f x

EVALUATION QUESTION
1. What is the dissolution of partnership?
2. Give five reasons why a partnership may be dissolved.

Example:Ronke and Yetunde are in partnership, sharing profits and losses 3:2 respectively. The balance sheet as at 31st December 2000 when it was dissolved appeared as follows:
Balance Sheet Assets
Capital:
Ronke 5,500 Fixture and fittings 1,050
Yetunde 3,500 Plant and machinery 650
Creditors 1,650 Equipment 1,000
Debtors 900
Bank 7,050
10,650 10,650
a. The following assets were realized:
N
Furniture and fittings 1, 500
Plant and machinery 700
Equipment 1, 900
Debtors 850
b. Dissolution expenses 250
c. The creditors were settled with 1, 500

Required: Prepare the necessary accounts on dissolution
Solution
Dr Realization account Cr.
N N
Book value of assets Amount realized from sales
Furniture and fittings 1,050 Furniture and fitting 1,500
Plant and machinery 650 Plant and machinery 700
Equipment 1,000 Equipment 1,900
Debtors 900 Debtors 850
Dissolution expenses 250 Disc Rec. 150
Share of profit
Ronke (3/5 x 1,250) 750
Yetunde (2/5 x 1,250) 500 1,250
5,100 5, 100

Discount on creditor = N1, 650 – N1, 500 = N150

Dr. Capital account Cr.

Ronke
Yetunde

Ronke
Yetunde

N
N

N
N
Cash
6, 250
4, 000
Balance b/f
5, 500
3, 500

 

 

Share of profit
750
500

6, 250
4, 000

6, 250
4, 000

Dr. Creditor account Cr.
N N
Cash 1,500 Balance b/f 1, 650
Discount 150
1,650 1, 650

Dr. Cash book Cr.
N N
Balance b/f 7,050 Creditors 1,500
Furniture and fittings 1,500 Cost of dissolution 250
Equipment 1,900 Capital:
Debtors 850 Ronke 6,250
Plant and machinery 700 Yetunde 4,000 10,250
12,000 12,000

Dr. Furniture and fittings account Cr.
N N
Balance b/f 1,050 Realization 1,050

Dr. Plant and machinery account Cr.
N N
Balance b/f 650 Realization 650

Dr. Equipment account Cr.
N N
Balance b/f 1,000 Realization 1,000

Dr. Debtor account Cr.
N N
Balance b/f 900 Realization 900

EVALUATION QUESTION
1. What is goodwill?
2. Explain the terms revaluation and realization in partnership accounts

READING ASSIGNMENT
Simplified Bookkeeping and Accounting by F.L Olatunji, Page 315-324.

WEEKEND ASSIGNMENT
The double entry for discount received from creditors on dissolution is (a) Cr. creditor A/c Dr. Cash A/c (b) Cr. Creditors A/c, Dr. Cash (c) Cr. realization A/c; Dr. Creditors (d) Dr. Bank, Cr. Capital A/c
Loss on an asset realized is debited to realization A/c and credited to ________ A/c (a) Cash (b) Asset (c) Realization (d) Revaluation
Assets taken over by partners on dissolution are credited to realization A/c and debited to __________ (a) asset A/c (b) cash A/c (c) Capital A/c (d) all of the above
Discount allowed is debited to ____ A/c (a) capital (b) realization (c) current (d) P & L
For goodwill on dissolution debit _________ A/c and credit _________ A/c respectively (a) cash and capital (b) goodwill and realization (c) realization and goodwill (d) capitasl and cash

THEORY
1. Explain how the proceeds of assets realized is applied in partnership dissolution.
2. Provide the double entries for the following on dissolution of the partnership of XYZ.
(a) Discount allowed to debtors N500
(b) Cars taken over by Z N50, 000
(c) Share of loss by X N1000
(d) Y brings cash to meet his deficit N5000
(e) Discount received N2000

GENERAL EVALUATION
State five differences between cash discount and trade discount
Identify any seven prime books of account and highlight the uses of each of
them where necessary
List five advantages of using the imprest system to record petty cash transactions
Explain the following types of errors (a) omission (b) principle (c) commission
(d) original entry (e) complete reversal of entry (f) compensating error
Explain how the following items are treated in Profit and Loss Account and Balance
Sheet (a) provision for doubtful debts (b) depreciation on fixed assets (c) accrued
income (d) accrued expenses (e) prepaid expenses

WEEK SEVEN
COMPANY ACCOUNTS
CONTENT
Definition of Company
Kinds of company
Formation of Company & its statutory requirement
NOTE:
A Company is a business owned, managed, controlled and financed by association of people which possess legal entity with the usual motive of maximizing owners’ wealth.
KIND OF COMPANIES
There are three kinds of companies. They are:
Company Limited by Share: This is a company whose owners liabilities is limited to the value of share subscribed in the company.
Company Limited by Guarantee: These are companies whose owners liabilities is limited to the value of share subscribed in the company plus additional fund
they undertake to pay into the company in case of liquidation.
Unlimited Company: This is a company whose liabilities of the owner are unlimited.

Characteristics of limited companies
It is a separate legal entity.
The liabilities of the owners are limited
The company enjoys continuity.
The company objective is to maximize owner’s wealth.

Types of Limited Companies
Basically there are two types of limited companies. They are:
Private Limited Company: Section 21 of Companies and Allied Matters Act of 1990 defined it as a company which by its articles.
Restricts the right to transfer its shares.
Limits the number of its members to fifty.
Prohibit invitation to subscribe for its shares.
End the name of the company with the word ‘Limited’
Public Limited Companies: These are companies which can invite the public to subscribe for its shares. The minimum number of shareholders to form the business is seven. There is no restriction on the maximum number of shareholders. The name of the company ends with the word “PLC” or public Limited liability Company.

Formation of Company and its statutory requirement
In the formation of a limited liability Company, the following procedures must be followed.
Get the promoters who have the idea of a company and undertake to fulfill legal requirements of the company.
Having done that, the following documents should be sent to Register of Companies Corporate Affairs Commission (C.A.C), Abuja.
Articles of Association.
Memorandum of Association.
Statement of Nominal share capital.
Directors list and their particulars.
Statement to show that the Company will always obey the rules and regulation of the Commission as amended.
Documents stamped duties paid.
c. If the Registrar of companies perused the documents mentioned above and is satisfied with them, he will issue the Certificate of Incorporation. Meaning that the company is registered.

DEFINITION OF TERMS
Articles of Association: This is a document which states the internal regulations of limited company. It states the regulations which govern the internal management of the company affairs. It contains the following:
The rights and responsibilities of shareholders.
The duties and powers of directors.
The company borrowing power.
How directors and auditors can be appointed.
The voting rights of the shareholders, e.t.c
Memorandum of Association: This is a document which interacts the company with outside world. It contains the following:
The name of the company ending with the words ‘Ltd’ or ‘Plc’.
The address of the registered office of the company.
The object clause of the company.
A declaration that it is a limited liability company.
The amount of authorized share capital.
Prospectus: This is a document issued by limited companies, inviting the public to subscribe to it shares. Its contains the following:
Brief history of the company.
Chairman and director speech.
Names of the directors and their particulars, etc.
Certificate of Incorporation: This is a document which gives legal authority to the company to operate as a legal entity.

EVALUATION
1. What is a Company?
2. Mention and explain three types of companies.

Major accounts kept by company
Trading profit & loss account.
Appropriation account.
Balance sheet.

Format of Trading Profit & Loss account
Trading Profit & Loss account for the year ended 31/12/9x
Opening Stock x Stock x
Add purchases x Less return inward x
Less return outward x x Gross loss x
Cost of goods available x
Less closing stock x
Cost of sales x
Gross profit c/d x
X x
Expenses Gross profit b/d x
Wages & salaries x Income from quoted In. x
Rent & Rate x Rent receivable x
Depreciation of assets x Discount received x
Directors remuneration x Other incomes x
Auditors remuneration x x
Advertising x
Hire of plant x
Debenture interest x
Insurance x
Other expenses x
Net profit x
X x

Appropriation account

Corporate tax x Balance b/f from last year x
General reserve x Net profit b/d x
Revenue reserve x
Dividend interim x
Proposed dividend x
Goodwill written off x
Retained profit c/d x
X x
Balance sheet format
Authorized capital N Fixed asset
Cost Dep. NBN
Ordinary share @ N1 each x Land & build X (x) X
10% Preference Share @ N 1 each x Furniture x (x) x
X Machinery x (x) x
Issued share capital Premises x (x) x
Ordinary share @ N 1 each x Goodwill x
10% preference share @ N 1 each x investments
Reserves Quoted x
Share premium x Unquoted x
General reserve x Current assets x
Retained profit x Stock x
Capital redemption reserve x Debtors x
Long-term liabilities Cash x
10% Debenture x Bank x
Current liabilities Bill receivable x
Bill payable x Prepayment x
Income in advance x Accrued income x x
Corporate tax x Preliminary expenses x
Creditors x
Proposed dividend x
Accruals x x
X x
EVALUATION
List five documents that are used in the formation of companies.
State six contents of the Memorandum of Association.

READING ASSIGNMENT
Essential Financial Accounting pags 299-319.

WEEKEND ASSIGNMENT
When a company can sue in its own name and right, we say it possesses (a) legal entity (b) legal jargons (c) legal portfolio (d) legal value
The company whose liabilities of its owners are limited to the value of share bought in the company is called (a) limited by share (b) limited by guarantee
(c) unlimited by share (d) limited by decree
The amount of capital a company is allowed to raised in the capital market is
authorized capital (b) issue capital (c) called up capital (d) un-issued capital
The name of private limited company ends with (a) Ltd (b) Plc (c) & co (d) Ent.
The name of public limited company ends with (a) Corporation (b) Ltd (c) Plc (d) Authority

THEORY
Mention four documents that must be sent to Corporate Affairs Commission before a company can be register.
What is a prospectus.

GENERAL EVALUATION
State five reasons why organizations separate their operations into different departments
List six errors that will not affect the agreement of the trial balance
Explain four classifications of cost found in the preparation of manufacturing accounts
Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
List five prime books of account used in recording financial transactions

WEEK EIGHT
THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES
The final accounts of limited liability companies comprises the following:
Trading, Profit and Loss Account.
Appropriation Account.
Balance Sheet.

Format of Trading Profit & Loss account
Trading Profit & Loss account for the year ended 31/12/9x
Opening Stock x Stock x
Add purchases x Less return inward x
Less return outward x x Gross loss x
Cost of goods available x
Less closing stock x
Cost of sales x
Gross profit c/d x
X x
Expenses Gross profit b/d x
Wages & salaries x Income from quoted In. x
Rent & Rate x Rent receivable x
Depreciation of assets x Discount received x
Directors remuneration x Other incomes x
Auditors remuneration x x
Advertising x
Hire of plant x
Debenture interest x
Insurance x
Other expenses x
Net profit x
X x

Appropriation account
Corporate tax x Balance b/f from last year x
General reserve x Net profit b/d x
Revenue reserve x
Dividend interim x
Proposed dividend x
Goodwill written off x
Retained profit c/d x
X x
Balance sheet format
Authorized capital N Fixed asset
Cost Dep. NBN
Ordinary share @ N1 each x Land & build X (x) X
10% Preference Share @ N 1 each x Furniture x (x) x
X Machinery x (x) x
Issued share capital Premises x (x) x
Ordinary share @ N 1 each x Goodwill x
10% preference share @ N 1 each x investments
Reserves Quoted x
Share premium x Unquoted x
General reserve x Current assets x
Retained profit x Stock x
Capital redemption reserve x Debtors x
Long-term liabilities Cash x
10% Debenture x Bank x
Current liabilities Bill receivable x
Bill payable x Prepayment x
Income in advance x Accrued income x x
Corporate tax x Preliminary expenses x
Creditors x
Proposed dividend x
Accruals x x
X x
EVALUATION
1. List five items that features in the Appropriation Account of a limited liability company.
2. Explain the following terms:
a. Debentures
b. Authorised share capital
c. Issued capital
d. Proposed dividend
e. Revenue reserve

ILLUSTRATION
The following Trial Balance was extracted from the books of Johnson Nigeria Limited as at 31st December,1990.

Dr
Cr
Issued and fully paid 20,000 shares of ₦1 each

20,000
Share premium

10,000
General reserve

8,000
Profit and loss account

3,000
Stock 1/1/90
8,000

Salaries and wages
5,000

Discount
200
400
Carriage inwards
160

Loans

24,000
Interest on loan
1,000

Carriage outwards
560

Provision for bad depth

2,000
Preliminary expenses
12,000

Motor vehicle expenses
1,800

Director’s salaries
6,000

Repairs to premises
250

Rates
1,600

Premises at cost
20,000

Motor vehicle at cost
23,000

Plants and machinery cost
25,000

Purchases and sales
45,000
91,740
Provisions for depreciation

 

Plants and machinery

2,500
Debtors & creditors
12,390
8,000
Sundry expenses
3,500

Cash in hand
300

Cash in bank
4,000

Returns
240

 

170.000
170,000

Additional information
Stock at close ₦12,500
Expense unpaid: motor expenses – ₦ 20
Insurance – ₦ 450
Sundry experiences – ₦400
Prepaid expenses: Rate – ₦ 320
Sundry expenses – ₦ 250
Provision for bad debts to be increased to – ₦2,800
Part of the premises is sublet at ₦2,400 per annum
Bad debts at 31st December, ₦600
Monthly salaries and wages bill ₦400
Loan interest is 5% per annum
Provide for depreciation on a straight line method: premises 2% ,plant & machinery 25%,motor vehicle 10%
Write off preliminary expenses
Transfer to general reserves ₦5,000 and ₦5,000 to revenue reserve.
Prepare :
Trading, Profit and Loss and Appropriation Account of the year ended 31st December ,1990
a Balance Sheet as at that date.

Solution:
Johnson Nigeria Limited
Trading,profit and loss for the year ended 31st December ,1990

 

₦

₦
Opening stock

8,000
Sales
91,740
Add purchases
45,000

Less return inward
(240)
Add carriage inwards
160

 

91,500

45,160

 

 

Less returns outward
(360)
44,800

 

Costs of goods available

52,800

 

Less closing stock

(12,500)

 

Cost of good sold

40,300

 

Gross profit c/d

51,200

 

 

 

91,500

91,500
Operational expenses

 

Gross profit b/d
51,200
Discount allowed

200
Discount received
400
Salaries and wages(400×12)

4,800
Rental income
2,400
Carriage outwards

560

 

Interest on loan(0.05×24,000)

1,200

 

Motor on vehicle exp.(1,800+200)

2,000

 

Director’s salaries

6,000

 

Repairs to premises

250

 

Rates (1,600-320)

1,280

 

Provision of depreciation

 

 

 

Premises (0.02×20,000)

400

 

Plant and machinery(0.25×25,000)

6,250

 

Motor vehicle (0.1×23,000)

2,300

 

Sundry expenses(3,500 + 400)=

 

 

 

3,900 – 250

3,650

 

Insurance

450

 

Bad debts

600

 

Provision for bad debts

800

 

Net profit c/d

23,260

 

 

 

26,260

26,260
General reserves

5,000
Net profit b/d
23,260
Revenue reserves

5,000
Profit brought forward
3,000
Preliminary expenses written off

12,000

 

Undistributed profit c/d

4,260

 

 

 

26,260

26,260

Balance sheet as at 31st December ,1990
Authorized share capital ₦

Fixed assets ₦
20,000 ordinary shares of ₦1 each
20,000

Cost
Dep.
NBC
Issued share capital
Premises
20.000
(400)
19,600
20,000 ordinary shares for ₦1 each
20,000
Motor vehicle
23,000
(2,300)
20,700

Plant and machinery
25,000
(8,750)
16,250
Reserves
Current Assets
General reserves(5000+8,000)
13,000
Cash in hand
300
Revenue reserves
5,000
Debtors (12,390 – 600)=

 

Share premium
10,000

11,790 – 2,800
8,990
Retained profit
4,260
Stock
12,500
Long term liabilities

Bank
4,000
Loans
24,000
Rent receivable
2,400
Current liabilities

Prepaid :
Rates
320
Creditors
8,000

Sundry expense
250
Loan interest owing
200

Wages and salaries
200
Motor expenses owing
200

 

 

Insurance accrued
450

 

 

Sundry expenses owing
400

 

 

 

85,510

 

85,510

[mediator_tech]

EVALUATION
What is fixed assets and give five examples of fixed assets.
Define intangible assets and mention three examples

READING ASSIGNMENT
Essential Financial Accounting page 265-282

WEEKEND ASSIGNMENT
Net purchase in trading account is —————- (a)purchases –return outwards (b) purchases – return inward (c)purchases – carriage inwards (d) purchases – sales
Net sales in trading account is ————– (a)purchases – sales (b)sales – return inwards (c)sales – return outwards (d) sales + purchases
Working capital is ————— (a)current assets – current liabilities ( b) current liabilities – current assets (c) total current assets (d) current assets + stock
Capital owned is ————— (a)current assets – total liabilities (b) total assets – total liabilities (c) total assets + total capital (d) current assets + stock
Capital employed is ———– (a)total assets – current liabilities (b)total assets – total liabilities (c ) total liabilities + all assets (d) current assets + current liabilities

THEORY
What is bonus issue?
Enumerate five features of private limited company.
GENERAL EVALUATION
List five methods of providing for depreciation of fixed assets.
State five reasons for making provision for depreciation of fixed assets.
List eight errors that will affect the agreement of the trial balance.
Give five reasons for preparing departmental accounts.
List and explain five classifications of the Ledger.

WEEK NINE AND TEN
ISSUE OF SHARES
CONTENT
Definition of shares
Classes of shares
Issue of shares
Explanation of issue of shares
Shares payable in full on application at par
Shares issued at a premium
Shares issued at a discount

Definition of shares
Shares can be defined as units of capital of ownership of a limited company. It is an ownership right in a company. A company cannot commence business until it raises capital by selling shares to the public for subscription.

CLASSES OF SHARES
There are three classes of shares in a limited liability company, they are:
Ordinary shares
Preference shares
Founder’s shares
ORDINARY SHARES: The shareholders of these are entitled to dividend after preference shareholders have settled. They are the owner’s of the company because they bear company risk and their dividend is not fixed. No wonder during the period of prosperity, they receive more dividends. They are often known as equities.
PREFERENCE SHARES: The shareholders of these shares are entitled to fixed dividend and they are treated preferentially. They received dividend before any other class of shares. A company can issue redeemable or irredeemable, participating or non-participating, cumulative or non- cumulative preference shares.
FOUNDER’S SHARE: These are also called deferred shares. These are shares issued to promoters of the company to compensate them for job well done. And they are entitled to dividend.

ISSUE OF SHARES
Shares can be issued in the following terms:
Shares issued at a discount
Shares issued at a premium
Shares issued at par

EXPLANATION OF ISSUE OF SHARES
Shares issued at a discount: Shares of limited liability companies are said to be issued at a discount, when the company share is issued at a price value less than the nominal value of the company share. For example if XYZ plc’s share nominal value is ₦1 but the company share is issued for subscription at 50k per share, the share is said to be issued at discount. The discount is 50k
Shares issued at a premium: shares of limited liability companies are said to be issued at a premium, when the company share is issued at a price value above the nominal value of the company’s share. For example if XYZ plc’s share nominal share value is ₦1 but the company share is issued for subscription at ₦2 per share, the share is said to be issued at a premium. The premium is ₦1.00
Shares issued at par: Shares of limited liability companies are said to be issued at par, when the company’s share is issued for subscription at the shares nominal value i.e issued at a price value equal to the nominal value. For example XYZ plc shares nominal nominal value is ₦1, and the company issue the share for subscription at ₦1 per share, the share is said to be issued at par.

EVALUATION
Define the term shares.
Explain the following: Cummulative and non cumulative preference share.

ISSUE OF SHARES
NOTE
Shares issued at par, payable in full on application.

ACCOUNTING ENTRIES:
On receipt of application of money
DEBIT: Bank Account
CREDIT: Application Account
On allotment:
Debit Application Account
Credit Ordinary Share CapitalAccount
Example: On the 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of ₦2 each at par Application together with total amount received for exactly 13,000 shares and the shares were allotted to the applicants. Show the journal entries and ledger accounts

Solution:
JOURNAL
Bank Account
Application Account

Being money collected on application

Dr
26,000

 

26,000
Cr

26,000

 

26,000
Application Account

Share capital account

Allotment 13,000 ordinary shares at ₦2

Ledger accounts:
₦
Application 26,000

 

Bank account

 

 

Application Account

₦
Share capital 26,000
₦
Bank 26,000

 

₦
Application 26,000

Ordinary Share Capital Account

 

Shares issued at a premium payable in full on application: Share can be issued at apremium and paid in full application. This will necessitate the opening of share premium account. The value of the share premium is credited to the share premium account.

Accounting entries:
On receipt of application money:
Debit Bank Account
Credit Application Account
On allotment:
Debit Application Account
Credit Share Premium Account
Credit Ordinary Share Capital Account

Example 2: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 13,000 ordinary share.Show the journal entries and the ledger account.
Solution:
JOURNAL

Dr
Cr

Bank account
Application account
Being ₦3 collected on 13,000 shares

Application account
Share premium account
Ordinary share capital account
Allotment of 13,000 ordinary shares at a premium
₦
39,000

 

39,000
₦

39,000

 

13,000
26,000

 

 

 

 

 

 

 

 

Ledger Accounts:
₦
application 39,000

 

 

 

 

Bank Account

 

 

 

 

₦
Share premium 13,000
Ordinary share capital 26,000
39,000
₦
Bank 39,000

39,000

Application Account

 

 

 

SharePremium Account

 

₦
Application and allotment a/c 13,000

Ordinary Share Capital Account

₦
Application 26,000

Share issued at a discount payable in full on application: Here, the share is issued at a discount. The difference is debited to discount account opened.
Accounting entries:
On receipt of application money:
Debit Bank Account
Credit Application Account
On allotment:
Debit Application Account
Credit Ordinary Share Capital Account
Example 3: On 1st January 1980 XYZ plc made an issue of 13,000 ordinary shares of nominal value of ₦2 at ₦1 each. Application money was received in full,show the journal and ledger account entries.

Solution:
JOURNAL

Dr
Cr

Bank Account
Application Account
Being money collected on 13,000 shares

Application Account
Share discount account
Ordinary share capital account
Allotment of 13,000 shares at a discount
₦
13,000

 

13,000
13,000
₦

13,000

 

26,000

Ledger accounts:
Bank Account
₦
Application 13,000

 

 

Application Account
Ordinary Share Capital 26,000

26,000
Bank 13,000
Share discount 13,000
26,000

Ordinary Share Capital Account

₦
Application 13,000

Under subscription: this is where fewer shares are applied for than available for sale e.g A company issued out 300 shares but only 250 shares were applied for.
Over subscription: This is when the number of shares applied for are more than that number actually offered for subscription.

EVALUATION
What is meant by over-subscription
Explain the term under subscription

READING ASSIGNMENT
Essential Financial Accounting page 321-332

GENERAL EVALUATION
What is the effect of understatement of closing stock on : (a) cost of sales (b) gross
profit (c) net profit
State five causes of a decline in the net profit of a business
Differentiate between ‘‘Discount Allowed” and ‘’Discount Received”
State five characteristics of the imprest system of keeping petty cash records
List four characteristics of each of the following (a) fixed assets (b) current assets
(c) intangible assets
WEEKEND ASSIGNMENT
When a company received application for shares fewer than available for sale, the share is said to be a) oversubscribed b) under-subscribed c)subscription at par (d) forfeited
When a company received application for more than available shares for sales, the share is said to be (a) ever-subscribed (b) under- subscribed (c) over- subscribed (d) cancelled
On shares issued at par on application and fully paid, the accounting entries on receipts of money are (a) debit bank and credit application (b)debit application and credit bank (c) debit premium and credit bank (d) debit ordinary shares credit bank
Based on question 3 above ,the accounting entries on allotment of shares are (a) debit ordinary share capital account and credit application account (b)debit application account and credit ordinary shares capital account (c) debit premium and credit application account(d) debit ordinary shares credit bank
A share issued below the nominal value is said to be issued at (a) discount (b) premium (c) at par (d) loss

THEORY
On 1st February 1989 ABC plc makes an issue of 15,000 ordinary shares of nominal value of ₦2 at ₦3. Application money were received for exactly 15,000 shares.
Show:
a. Journal entries
b. Ledger accounts

 

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