- 20 Marks
Question
a) Accountancy is the language of business and the only profession that teaches students about business. A business primarily exists to make a profit, and one of the jobs of an Accountant is to prepare financial statements and determine the profitability of a business.
Required:
What is a business? (4 marks)
b) Identify FOUR users of financial statements and explain their information needs. (6 marks)
c) Mr. Patrick Mensah, a sole trader, has asked you to prepare the receivable and payable control accounts and ensure that the closing balances match with the list of balances. Currently, the closing balances as at 30 October 2017 are as follows:
- Receivables Control Account: GH¢126,845
- Payables Control Account: GH¢103,240
- Receivables list of balances: GH¢123,589
- Payables list of balances: GH¢104,476
On investigation, the following have been discovered:
- A contra entry of GH¢3,250 has not been included in either control account.
- Bad debt of GH¢1,680 has been written off in the list of balances but has not been included in the receivables control account.
- The sales day book has been overstated by GH¢890, and this has not been reflected in the control account.
- Purchase returns to Taifa, a supplier of GH¢256, have not been reflected in the control account.
- An invoice amounting to GH¢981 for Obojo, a customer, has been entered in the sales day book as GH¢891.
- A balance due to Amasaman, a supplier amounting to GH¢1,248, was not included in the list of balances.
- Payment received from Amrahia, a customer for GH¢2,864, was posted to a supplier account Manhia mistakenly. The payment was correctly accounted for in the control account.
- Goods purchased from a supplier Kasoa amounting to GH¢3,126 have been omitted from the relevant control account.
- Bad debt recovered of GH¢300 relating to Tantra has not been updated in the list of balances but has been included in the control account.
Required: i) Based on the information provided above, prepare the Receivables and Payables Control Accounts for the year ended 30 October 2017. (8 marks)
ii) Prepare a statement reconciling the list of balances with the revised control accounts for Receivables and Payables for the year-ended 30 October 2017. (2 marks)
Answer
a)
- A business is a commercial or industrial concern which exists to deal in manufacturing, resale, or supply of goods and services.
- A business is an organization that uses economic resources to create goods and services which customers will buy.
- A business is an organization providing jobs for people.
- A business invests money in resources (e.g., buildings, machinery, employees) to make even more money for its owners.
b) The people who might be interested in financial information about the company may be classified as follows:
- Shareholders in the company. They will be interested in the company’s profitability and its ability to pay dividends. They will also be interested in the company’s long-term prospects.
- Managers of the company. These are people appointed by the company’s owners to supervise the day-to-day activities of the company. They need information about the company’s financial situation as it is currently and as it is expected to be in the future. This is to enable them to manage the business efficiently and to take effective control and planning decisions.
- Trade contacts, including suppliers who provide goods to the company on credit and customers who purchase the goods or services provided by the company. Suppliers will want to know about the company’s ability to pay its debts; customers need to know that the company is a secure source of supply and is in no danger of having to close down.
- Providers of finance to the company. These might include a bank that permits the company to operate an overdraft or provides longer-term finance by granting a loan. The bank will want to ensure that the company can keep up with interest payments and eventually repay the amounts advanced.
- The tax authorities, who will want to know about business profits to assess the tax payable by the company on its profits and any sales taxes.
- Employees of the company. These should have a right to information about the company’s financial situation because their future careers and the size of their wages and salaries depend on it.
c) i) Mr. Mensah Receivables Control Account
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