Topic: Double entry bookkeeping

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  • 20 Marks

FA – Mar 2023 – L1 – Q1 – Double entry bookkeeping | Inventory | The IASB’s Conceptual Framework

Explains going concern assumption, inventory valuation, faithful representation, and prepares various day books and cash book.

a) The Conceptual Framework for Financial Reporting is a set of principles which underpin the foundation of financial accounting. The Conceptual Framework sets out the going concern concept as one of the important underlying assumptions for the preparation of financial statements.

Required:
Explain what is meant by ‘the assumption that an entity is operating under the going concern concept’. Support your answer with a suitable example. (3 marks)

b) A trader who trades in Machines commences business on 1 Jan 2021 and buys 200 machines, each costing GH¢50,000. During the year, he sells 150 machines at GH¢60,000 each.

Required:
How should the remaining machines be valued at the end of the year if:
i) He is forced to close down his business at the end of the year and the remaining machines will realise only GH¢30,000 each in a forced sale. (2 marks)
ii) He intends to continue the business into the next year. (2 marks)

c) One of the fundamental qualitative characteristics of useful financial information in the Conceptual Framework for Financial Reporting is ‘faithful representation’.

Required:
Explain what is meant by ‘faithful representation’. (3 marks)

d) Davidco is a trader who commenced business on January 1, 2021. He introduced capital of GH¢50,000. He bought Vehicle worth GH¢30,000 out of the capital introduced. The following transaction took place in the month of January (Jan) 2021:

  • Jan 5: Davidco bought goods on credit from the following:
    • Tradco: GH¢2,500, Trade Discount 10%
    • Vamco: GH¢8,000, Trade Discount 10%
  • Jan 8: Davidco Sold goods on credit to the following:
    • Markcom: GH¢5,000, Trade Discount 20%
    • Kathrine: GH¢2,000, Trade Discount 5%
  • Jan 12: Davidco returned defective goods worth GH¢200 to Tradco.
  • Jan 15: Davidco paid all amounts outstanding to Tradco and Vamco less cash discount of 5%.
  • Jan 22: Kathrine returned spoiled goods worth GH¢300.
  • Jan 24: Davidco received payment from Markcom and Kathrine of all outstanding debt less cash discount of 5%.

Required:
Prepare the following:
i) Sales day book
ii) Purchase day book
iii) Cash book
iv) Purchase returns
v) Sales returns

(10 marks)

a) The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. Example: inventory is valued at the lower of cost or net realizable value.

(3 marks)

b) Machines:

Quantity Price (GH¢) Value (GH¢)
Purchase 200 10,000,000
Sales 150 9,000,000
Closing Inventory 50

i) If the business is forced to close down, the machines will be valued at:

Quantity Price (GH¢) Value (GH¢)
50 30,000 1,500,000

(2 marks)

ii) If the business continues, the machines will be valued at:

Quantity Price (GH¢) Value (GH¢)
50 50,000 2,500,000

(2 marks)

c) Faithful representation:

  • The information gives full details of its effect on the financial statements and is only recognized if its financial effects are certain.
  • Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it purports to represent.
  • To be faithful, financial information must be complete, neutral, and free from error. A complete report must include all information necessary for the user to understand, neutral is without bias, and finally, free from error means there should be no errors or omissions in the report.

(3 marks)

d)
i) Sales Day Book

Date Customer Invoice No. Gross Amount (GH¢) Trade Discount (GH¢) Net Amount (GH¢)
Jan 8 Markcom 5,000 1,000 4,000
Jan 8 Kathrine 2,000 100 1,900

Total Sales: GH¢5,900

  • 20 Marks

FA – Dec 2023 – L1 – Q1 – Bad and doubtful debt | Double entry bookkeeping | The IASB’s Conceptual Framework

Explains the purpose and differences between Financial and Management Accounting, prepares ledger accounts, and links prudence concept to allowance for receivables.

a) Financial Accounting and Management Accounting are similar with regard to the determination of costs, their assignment to different accounting periods, and allocation of costs to different departments and segments. This implies that the concepts and principles that are used in Financial Accounting may be suitable for Management Accounting.

Required:
i) Explain the purpose and scope of financial accounting. (4 marks)
ii) Explain THREE (3) differences between Financial Accounting and Management Accounting. (6 marks)

b) On 1 January 2021, Mankessim Traders had the following entries in its ledger accounts:

  • Insurance: GHȼ600 owing
  • Commission receivable: GHȼ500 owing to Mankessim Traders
  • Allowance for receivables: GHȼ1,600 credit balance

The following information is available for the financial year ended 31 December 2021:

  • Insurance was paid as follows:
    • 26 February 2021 GHȼ2,000
    • 15 October 2021 GHȼ2,600
    • The payment on 15 October 2021 relates to the period 1 October 2021 to 31 March 2022.
  • Commission receivable was as follows:
    • 10 January 2021 GHȼ400
    • 18 January 2021 GHȼ200
    • 13 November 2021 GHȼ3,000
  • On 31 December 2021, GHȼ600 was owing in commission to Mankessim Traders.
  • The trade receivables balance at 31 December 2021 was GHȼ38,400. The allowance for receivables is to be provided as GHȼ600 for a specific debt, plus 2% on the remainder of receivables.

Required:
Prepare the following ledger accounts, including in each case the transfer to the Statement of Profit and Loss, for the year ended 31 December 2021, and the balance carried down to the next financial year.
i) Insurance. (2 marks)
ii) Commission receivable. (2 marks)
iii) Allowance for receivables. (2 marks)

c) Explain why maintaining an allowance for receivables is an application of the prudence concept. (4 marks)

a)
i) The purpose and scope of financial accounting are as follows:

  • Financial Accounting information is prepared by enterprises for external users. It provides information to meet their needs, such as shareholders, potential investors, banks, and suppliers. It is used to inform about the financial performance and position of the company, and it helps in preparing tax accounts.
  • Financial Accounting information is normally regulated by law and accounting standards and is often audited. It requires the presentation of financial statements, including a Statement of Comprehensive Income, Statement of Financial Position, Statement of Cash Flows, Statement of Changes in Equity, and the necessary notes. (2 marks)

ii) Differences between Financial Accounting and Management Accounting:

  • Financial statements from Financial Accounting are intended mainly for external users, while Management Accounting information is for internal use by management.
  • Financial accounts describe the performance of a business over a specific period, whereas Management Accounting helps management record, plan, and control activities and assists in decision-making.
  • Financial Accounting deals mainly with historical data, while Management Accounting can include future information, such as budgets. (6 marks)

b) i) Insurance Account

c) The prudence concept states that profits should be understated rather than overstated, and assets should be understated rather than overstated. Creating an allowance for receivables increases the expenses and reduces the profit, which is a prudent approach. It also reduces the assets, as the allowance is subtracted from receivables, making this an application of the prudence concept.
(4 marks)

  • 20 Marks

FA – May 2020 – L1 – Q1 – Double entry bookkeeping | Non-current assets and depreciation | Preparation of financial statements of a sole trader

This question requires preparing ledger accounts related to depreciation, disposal, and asset balances for Tansah Ltd.

a) Write a short note to a client explaining the following issues:

i) Outline the differences between Cost and Management Accounting and Financial Accounting. (3 marks)

ii) Explain FOUR (4) roles of an Accountant in an organization. (4 marks)

iii) Outline SIX (6) key information provided by a Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position. (3 marks)

b) At 1 July 2017, the following information was extracted from the books of Tansah Ltd:
Non-current assets at cost:

Reference Description Amount (GH¢)
M1 Machinery 25,000
E1 & E2 Equipment 15,400
MV1 Motor Vehicle 18,500

Provision for depreciation:

Reference Description Amount (GH¢)
M1 Machinery 18,500
E1 & E2 Equipment 8,600
MV1 Motor Vehicle 6,500

During the financial year ended 30 June 2018, the following transactions took place:
Purchases:

Date Description Reference Amount (GH¢)
1 April 2018 Machinery M2 M2 10,800
1 January 2018 Equipment E3 E3 6,800

Disposals:

Reference Description Purchase Date Disposal Date Original Cost (GH¢) Sale Proceeds (GH¢)
E2 Equipment 1 January 2015 31 March 2018 7,200 6,400

All transactions took place through the bank account.

Depreciation rates per annum:

  • Machinery: 10% straight line on cost
  • Equipment: 12.5% straight line on cost
  • Motor Vehicle: 15% reducing balance

Depreciation for new assets commences in the month in which the asset is acquired.

Required:
For Tansah Ltd, prepare the following ledger accounts for the year ended 30 June 2018:

i) Provision for Depreciation of Machinery (2 marks)
ii) Provision for Depreciation of Equipment (4 marks)
iii) Disposal of Equipment (3 marks)
iv) Motor vehicle (1 mark)

a) i) Cost and Management Accounting
This is the process of providing detailed information to management on current and
planned events. This information assists managers in their roles of planning,
controlling and making decisions. Usually management accounts are only available
to internal users of accounting information. Management accounting will contain
information such as department budgets, product profitability, information on
production costs etc.
Financial Accounting
This is the process of summarising financial information in order to prepare the
company’s financial statements. The financial statements of an organisation are the
Income Statement, Statement of Financial Position, Statement of Cash Flow and
Explanatory Notes. These statements are primarily of interest to external users of
accounting information. Financial statements are historical in nature in that they are
prepared on a semi-annual/annual basis and are concerned primarily with the
financial performance of the company in the income statement and the financial
position of the company reported in the statement of financial position. Therefore
from the perspective of management the information contained therein is not timely
being six months or a year out of date by the time it is reported. Financial accounting
is thus the manner in which an organisation communicates financial information,
namely performance, position and cash flow to the outside world. It represents a
report on the directors’ stewardship of the funds entrusted to them by the
shareholders. The financial statements are public documents they are easily
accessible. A copy of the financial statements must also be filed with the Registrar
General where they can be publicly accessed. Therefore they would not reveal
details about, for example, an individual products’ profitability. That information
would be contained in the management accounts of the business. (3 marks)
ii) The accountant’s role in the organisation can be analysed as follows:
 Preparation and presentation of timely accurate financial/management accounts to
management to help management interpret the financial information.
 Identification of areas of inefficiency and wastages of resources in the business.
 Treasury functions: The accountant also plays the role of treasury functions in such
a way that they raise finance, cash management, etc.
 Setting up an effective system of internal and accounting controls.
 Preparation of feasibility reports: These reports assist management in assessing the
viability/profitability or otherwise proposed capital expenditure such as the
opening of a new factory or branch.
 Investigation of the performance/operations of competing business organisations to
assist management in policy formulation.
 Investigation of fraud within the organisation, this is a key role of the accountant in
preparation of an audit at year-end.

iii) Information provided by the Income Statement
 The income statement is fundamentally a listing of all income and all expenses for
the year. Taking expenses from income gives the profit that the business earned for
the year. Therefore the income statement is year specific – just looking at the
accounting year or period in question.
 By examining income statements year on year a business can gain information about
whether sales and expenses are increasing or decreasing and how they are moving
in relation to each other. For example in any year if sales were to fall while at the
same time expenses increase – the information would be captured in the income
statement and action could be taken.
 Also the income statement divides the cost of producing/purchasing a good/service
from the cost of administration and selling expenses within the business. The
information can be useful when businesses are examining costs. (3 marks)
Information provided by the Statement of Financial Position
 The statement of financial position is fundamentally a listing of all the assets of a
business and all the liabilities of a business. By subtracting these assets from
liabilities we arrive at the net worth of the business. The statement of financial
position is a snap shot pictures of a business at a point in time – usually the end of
the financial year. It is different to the income statement in this regard – the income
statement spans the full financial year.
(3 marks)

Depreciation workings:

  • Disposal:
    • E2: 7,200 @ 12.5% x 3 = 2,700
    • E2: 7,200 @ 12.5% x 3/12 = 225
    • Total Disposal Depreciation = 2,925
  • Profit & Loss:
    • E1: 8,200 @ 12.5% = 1,025
    • E2: 7,200 @ 12.5% x 9/12 = 675
    • E3: 6,800 @ 12.5% x 6/12 = 425
    • Total Profit & Loss Depreciation = 2,125

 

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