Topic: Preparation of financial statements of a sole trader

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  • 20 Marks

FA – Mar 2024 – L1 – Q4 – Non-current assets and depreciation | Preparation of financial statements of a sole trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for Kontiba Enterprise, including necessary adjustments.

Kontiba Enterprise

Statement of Profit or Loss for the year ended 30 September 2023

The following information is also available:
1) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for
salaries for each month of the year.
2) As at 30 September 2023, GH¢2,560 had been prepaid for insurance, whilst GH¢328 was
owing for general expenses.
3) GH¢3,680 had been charged to general expenses for the owner’s private holiday.
4) As at 30 September 2023, inventory was valued at GH¢18,000.
5) A customer, owing GH¢4,032 has been declared bankrupt. This amount is to be written
off in full.
6) An allowance for receivables is to be maintained at 3% of the receivables balance.
7) As at 30 September 2023, the business’s land was valued at GH¢80,000. Land is not
depreciated.
8) Depreciation is to be provided as follows:
Buildings: 4% per annum using the straight line method.
Equipment: 25% per annum using the straight line method.
Page 7 of 20

Motor vehicles: 40% per annum using the reducing balance method.
9) There were no additions or disposals of non-current assets during the financial year.

Required:
i) Prepare the statement of profit or loss for the year ended 30 September 2023. (10 marks)
ii) Prepare the statement of financial position as at 30 September 2023. (10 marks)

a) Kontiba Enterprise

Statement of Profit or Loss for the year ended 30 September 2023

b) Kontiba Enterprise

Statement of Financial Position as at 30 September 2023

  • 20 Marks

FA – April 2022 – L1 – Q4 – Accruals and prepayments | Bad and doubtful debt | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the Statement of Profit or Loss and Statement of Financial Position for a sole trader, including adjustments for depreciation, doubtful debts, and prepayments.

The following trial balance was extracted from the books of Nsaa Zolko, a sole trader, on 31 December 2020:

Account Debit (GHȼ) Credit (GHȼ)
Land 251,200
Equipment 202,220
Accumulated depreciation on equipment 62,830
Inventory 49,620
Receivable and Payable 124,200 104,350
Value Added Tax (refund due) 10,320
Deposit on rented premises (security deposit) 17,900
Bank and Cash balances 15,640
Allowance for doubtful debt 11,250
Tax Liability 7,420
Business Rent 30,000
Sales 804,500
Purchases 390,200
Returns 8,300 7,500
Discount 4,300 6,240
Distribution and Advertising 8,900
Power 4,200
Communication 1,540
Insurance 22,500
Wages and Salaries 164,380
Employers Social Security contribution 16,560
4% Long term loan 182,500
Long term loan interest 3,520
Bad debt 2,240
Drawings 10,580
Retained Earnings 44,820
Capital 103,710
Suspense 3,200
Total 1,338,320 1,338,320

Additional Information: i) The inventory count as at 31 December 2020 showed closing inventory value at GHȼ42,390. ii) Nsaa Zolko has agreed an annual rent of GHȼ40,000 with his landlord. iii) Included in insurance above is an amount of GHȼ18,000 paid to insure the equipment. The policy year ends 28 February 2021. iv) Nsaa Zolko has specific concerns over GHȼ5,120 of receivables balance and wishes to set up a specific provision with respect to these balances. The general provision on the remaining receivable balance should be at 5%. v) Depreciation is to be charged as follows:

  • Land: No Provision
  • Equipment: 15% reducing balance method (Depreciation should be calculated to the nearest whole number). vi) The suspense account balance above relates to sales of GHȼ1,600 which was recorded as purchases in error. The receivables and payables balances are correct.

Required:
a) Prepare a Statement of Profit or Loss for the year ended 31 December 2020.
(10 marks)

b) Prepare a Statement of Financial Position as at 31 December 2020.
(10 marks)

  • 20 Marks

FA – Nov 2021 – L1 – Q4 – Bad and doubtful debt | Inventory | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the Statement of Profit or Loss and Statement of Financial Position for a sole trader, including adjustments for depreciation, inventory, and receivables.

Additional Information:
i) The inventory count on 30 June 2019 showed closing inventory valued at GHȼ34,380.
ii) A review of receivables as at 30 June 2019 showed that a further GHȼ2,300 was to be written off as an irrecoverable debt. Therefore, it was decided that the closing allowance for receivables was 10% of the outstanding receivables balance as at 30 June 2019.
iii) On 30 June 2019, Sintim received a cheque of GHȼ1,680 in relation to an irrecoverable debt previously written off.
iv) A supplier of Sintim has charged an interest of GHȼ1,490 on a payable balance that has been outstanding for over 200 days.
v) GHȼ16,000 of insurance in the trial balance above relates to 1 January 2019 to 31 December 2019.
vi) Allowance to be made for depreciation is as follows:

  • Land: Not depreciated.
  • Delivery van: 10% straight line basis.
    vii) Upon investigation, it was revealed that the balance in the suspense account relates to a cash receipt from a customer of GHȼ800 that was credited to the bank account in error.

Required:
a) Prepare the statement of Profit or Loss for the year ended 30 June 2019.
(12 marks)
b) Prepare the statement of Financial Position as at that date.
(8 marks)

a) Sintim
Statement of Profit or Loss for the year ended 30 June 2019

b) Sintim
Statement of Financial Position as at 30 June 2019

  • 20 Marks

FA – Nov 2020 – L1 – Q4 – Accruals and prepayments | Inventory | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the income statement and statement of financial position for a sole trader with adjustments for inventory, accruals, prepayments, depreciation, and other relevant adjustments.

Kofi Badu, a sole trader, extracted the following Trial Balance from the business books as of 30 April 2019:

The following information is also relevant:
i) The closing inventory as at 30 April 2019 was valued at GH¢8,010.
ii) As at 30 April 2019, accrued rent income for the year amounted to GH¢420; heat and light accrued was GH¢260; whilst salaries of GH¢720 was paid in advance.
iii) During the year, Kofi Badu had withdrawn goods costing GH¢720 for his personal use. This had not been recorded in the accounts.
iv) New equipment costing GH¢2,650 was purchased during the year but had been mistakenly included in purchases. This is yet to be corrected.
v) A cheque for GH¢440 received from a customer in full settlement of a debt of GH¢450 has not yet been entered in the accounts.
vi) Allowance for doubtful debt is to be maintained at 2% of receivables.
vii) Depreciation is to be provided for as follows:

  • Equipment- 20% per annum using the straight-line method. A full year’s depreciation is provided on all equipment held at 30 April 2019, regardless of the date of purchase.
  • Motor vehicles- 40% per annum using the reducing balance method.

Required:
a) Prepare a statement of profit or loss for Kofi Badu for the year ended 30 April 2019.
(12 marks)

b) Prepare a statement of financial position for Kofi Badu as at 30 April 2019.

a)
Statement of Profit or Loss for Kofi Badu for the Year Ended 30 April 2019

b)
Statement of Financial Position for Kofi Badu as at 30 April 2019

  • 20 Marks

FA – May 2020 – L1 – Q4 – Preparations of accounts from Incomplete Records | Preparation of financial statements of a sole trader

This question involves preparing a statement of profit or loss and a statement of financial position for a sole trader from incomplete records.

On 30 June 2019, the accounting records of Kofi, a sole trader, were partly destroyed by fire. The following list of assets, liabilities, and equity as at 30 June 2018 is available:

Assets, Liabilities, and Equity Amount (GH¢)
Plant and equipment – cost 200,000
– Accumulated depreciation 72,000
Office fixtures– cost 50,000
– Accumulated depreciation 5,000
Inventory 30,500
Trade receivables and prepayments – Note (iv) 35,000
Trade payables and accrued expenses – Note (iv) 17,600
Bank overdraft 8,850
Loan (10% interest per annum) 95,000
Capital 117,050

The following summary of receipts and payments for the year to 30 June 2019 has been extracted from the bank statements:

Receipts Amount (GH¢)
Capital introduced 22,000
From credit customers 427,500
Payments Amount (GH¢)
Cash drawings – Note (v) 22,450
Loan repayments – Note (vii) 20,000
To credit suppliers 175,600
Rent 22,000
Wages 90,000
Office expenses 12,500

In preparing the statement of profit or loss and statement of financial position at 30 June 2019, the following further information is relevant:

Notes
i) Inventory at 30 June 2019 was GH¢27,850.
ii) Depreciation is to be provided as follows:

  • Plant and equipment 20% per annum, reducing balance basis
  • Office equipment 10% per annum on cost
    iii) During the year, Kofi introduced a motor vehicle valued at GH¢5,000 into the business. It is to be depreciated over 4 years on the straight-line basis with a full year’s depreciation charge in the year of acquisition.
    iv) Prepayments and accrued expenses as at 30 June 2018 were:
  • Rent paid in advance GH¢2,500
  • Accrued wages GH¢4,300
    v) Cash drawings during the year included GH¢6,750 for wages, GH¢4,200 for cash payments to suppliers, and GH¢2,600 for advertising leaflets (of which half are yet to be distributed). The remainder was Kofi’s personal expenditure.
    vi) The bank balance per the bank statement as at 30 June 2019 after adjusting for unpresented cheques was GH¢106,700. Any difference is assumed to be cash takings (i.e., in respect of cash sales).
    vii) Loan repayments include interest amounting to GH¢9,500.
    viii) At 30 June 2019 the following assets and liabilities existed:
  • Rent paid in advance GH¢2,700
  • Accrued wages GH¢5,250
  • Amounts due to suppliers GH¢12,200
  • Amounts due from customers GH¢22,300
    ix) On 3 July 2019, Kofi’s major customer, Yaw, went into liquidation owing GH¢16,000. A statement from the customer’s liquidator indicates that Kofi should expect to recover 20 pesewas for every GH¢1 owing.

Required:
Prepare Kofi’s statement of profit or loss for the year ended 30 June 2019 and a statement of financial position as at that date. Ignore taxation. (20 marks)

a) Statement of Profit or Loss for the year ended 30 June 2019

 

  • 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

 

  • 20 Marks

FA – Nov 2018 – L1 – Q7 – Preparation of financial statements of a sole trader | Preparation of limited liability company financial statements

Explain the advantages of a limited liability company over a sole proprietorship and describe different types of shares and debentures.

a) State FOUR (4) advantages a Limited Liability Company has over a Sole Proprietorship.
(6 marks)

b) Explain the following:
i) Issued Shares
ii) Preference Shares
iii) Ordinary Shares
iv) Debentures
(14 marks)

a) Advantages of a Limited Liability Company over a Sole Proprietorship

  • Distinct Entity: A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
  • Limited Liability: Running your business as a limited company means you have the reassurance of ‘limited liability’. Assuming no fraud has taken place, your ‘limited liability’ means you will not be personally liable for any financial losses made by your business.
  • Funding: Because a limited company is a distinct entity from its owners, it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
  • Naming: Once you register your company with the registrar generals department, your company name is protected by law. No one else can use the same name as you, or anything deemed to be too similar.
    (6 marks)

b) Explanation of Terms
i) Issued Shares: Represents the actual number of shares that have been issued to shareholders. The number of issued shares cannot exceed the number of authorized shares.
(3 marks)

ii) Preference Shares: Preference shares are shares that confer certain preferential rights on their holder. It can be classified into Redeemable and Irredeemable preference shares. Redeemable preference shares mean the company will redeem (repay) the nominal value of those shares at a later date, while Irredeemable preference shares are treated just like other shares. They form part of the equity and their dividends are treated as an appropriation of profit.
(4 marks)

iii) Ordinary Shares: Ordinary shares are shares that carry no right to a fixed dividend but are entitled to all profits left after payments of any preference dividends. Thus, a holder only receives a dividend after fixed dividends have been paid to preference shareholders. The amount of ordinary dividends normally fluctuates, although it is often expected that it will increase from year to year.
(3 marks)

iv) Debentures: A debenture is a long-term security yielding a fixed rate of interest, issued by a company. A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
(4 marks)

  • 20 Marks

FA – Nov 2017 – L1 – Q6 – Preparation of financial statements of a sole trader

Prepare the Bar Trading Account, Income and Expenditure Account, and Statement of Financial Position for Sun City Social Club for the year ended December 31, 2015.

The following details are available from the books of Sun City Social Club.

Summary of Bank Account for 31 December 2015

Additional Information:

i) Equipment is to be depreciated at 20%.
ii) One-tenth of life membership fees is to be credited to the Income and Expenditure Account each year.
iii) The bar keeper who had handled bar sales all for cash had disappeared, taking with him some monies. It was not known how much money he had stolen, but all bar sales were sold at a profit of 33 1/3 % on cost price.
iv) The cash stolen should be credited to the Bar Trading Account and debited to the Income and Expenditure Account.

Required:

a) Prepare a Bar Trading Account for the year ended 2015. (7 marks)
b) Prepare an Income and Expenditure Account for the year ended 31 December 2015. (7 marks)
c) Prepare a Statement of Financial Position as at 31 December 2015. (6 marks)

 

a) Sun City Social Club
Bar Trading Account for the year ended 2015

 

  • 20 Marks

FA – May 2017 – L1 – Q3 – Bank reconciliations | Preparation of financial statements of a sole trader

Preparation of adjusted cash book, bank reconciliation, and corrected net profit statement for Unity Trading Enterprise.

The Income Statement of Unity Trading Enterprise (UTE) for the year ended 31 December 2016 as prepared by an Accounts Assistant indicated a net profit of GH¢49,360,000. However, the cash book on 31 December 2016 showed a balance at bank to be GH¢6,440,000. Your attention is however drawn to the following:

i) Cheques from customers totaling GH¢4,980,000 which were recorded in the cash book on 20 December 2016 were actually not credited by the bank until 2 January 2017.

ii) Cheques issued on 13 December 2016 totaling GH¢7,420,000 in favour of suppliers were actually not paid by the bank until after the end of the year (that is after 31 December 2016).

iii) On 22 November 2016, the bank paid an amount of GH¢3,600,000 with respect to a standing order from UTE for rent of business premises for the three months to 31 January 2017 but unfortunately, no entry for this payment had been made in the cash book. Additionally, no provision of this outstanding rent had been made in the income statement for the period.

iv) On 31 December 2016, a customer known as Mr. Abuusu had paid GH¢2,340,000 into UTE bank account through a standing order to his bankers in full settlement of a debit balance of GH¢2,400,000 in UTE sale ledger, but no entry had been made in the books.

v) On 30 December 2016, a cheque for GH¢480,000 was received from a customer in settlement of sales invoice for the same amount. The cheques were lodged into UTE bank account. Both sale of goods and the cheque were entered in UTE’s books. However, on 31 December 2016, the customer returned the goods and also instructed her bankers not to pay the cheque (This instruction was carried out the same day) but no entries in respect of these latter developments have been made in UTE’s books. The cost of these goods amounting to GH¢320,000 were not actually included in the closing inventories.

vi) A cheque for GH¢840,000 from an insurance company in settlement of claim for fire damage to inventory had been paid into the bank and credited by the bank on 21 December 2016, but an estimated amount of GH¢800,000 had been entered in UTE’s income statement.

Required:
a) Prepare a statement on 31 December 2016, indicating clearly the cash book balance. (5 marks)

b) Prepare the bank reconciliation statement for UTE. (5 marks)

c) Prepare a statement of corrected net profit of UTE on 31 December 2016. (5 marks)

d) Explain TWO reasons for carrying out bank reconciliation. (2 marks)

e) Explain why the bank statement is usually taken as being more accurate than the details that appear in the company’s own records. (2 marks)

f) Indicate how the bank balance will be reported in UTE’s final accounts. (1 mark)

d) Reasons for carrying out bank reconciliation:

  1. Accuracy Check: To confirm the accuracy of entries in the cash book and bank statement.
  2. Error Detection: To uncover any errors or discrepancies between the company’s records and the bank’s records.

(2 marks)

e) Accuracy of Bank Statement:

The bank statement is considered more accurate as it is prepared by the bank, which is an independent entity and less prone to internal errors or manipulation compared to the company’s internal records.

(2 marks)

f) Reporting Bank Balance in Final Accounts:

The bank balance will be reported as a current asset if it is positive or as a current liability if it is negative in the statement of financial position.

(1 mark)

 

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