NATIONAL OPEN UNIVERSITY OF NIGERIA

SCHOOL OF SCIENCE AND TECHNOLOGY

COURSE CODE:AEC 306
COURSE TITLE:FARM RECORDS AND ACCOUNTING
1
Course Code: AEC 306
Course Title: Farm Records and Accounting
Course Developer Dr Joseph lumide seni
!riter Department o" Agricultural Economics and E#tension$
Federal %niversit& o" Technolog&
'() *0+$ A,ure
ndo -tate.
Course Editor:
'rogramme /eader:
Course Coordinator:
0AT10A/ 'E0 %012ER-1T3 F 014ER1A
5
CONTENTS PAGE
1ntroduction66666666666666666666...3
!hat &ou 7ill /earn in this course66666666666666...3
Course Aim6666666666666666666666..6.3
Course 89ectives666666666666666666666.+
!or,ing through this course66666666666666666.+
The Course (aterial66666666666666666666..:
-tud& %nits6666666666666666666666666
'resentation -chedule6666666666666666666...6
Assessment6666666666666666666666666
Tutor;(ar,ed Assignment666666666666666666.*
Final E#amination and 4rading6666666666666666.*
Course (ar,ing -cheme6666666666666666666<
Facilitators=Tutors and Tutorials6666666666666666<
-ummar&666666666666666666666666...>

3
1.0 INTRODUCTION
The "arming environment is d&namic ? al7a&s changing. 1t "aces changes in
technolog&$ prices$ climate and institutions. These changes a""ect the per"ormance o" an
enterprise or enterprises in a "arm.
Records are essential in an& management operation. A good record ,eeping
s&stem 7ill allo7 managers to monitor and evaluate the per"ormance o" their production
s&stem. 1t 7ill help them identit& pro8lem area in the production plan$ and to ma,e the
necessar& corrective measures. -imilarl& complete records are use"ul to the manager and
technical advisors in assessing an& pro8lems in determining "actors that contri8ute to
these pro8lems$ and in deciding 7hat to do to control these pro8lems.
Farm Records and Accounting a t7o credit degree course is one o" the
"undamental courses "or )achelor Degree 'rograme in Agriculture @).-cA and
Agricultural Education @).-c.EdA in an& %niversit& in the 7orld at large.
There are three modules consisting 1: units altogether. The "irst module starts
7ith "arm records. This gives a "ocus on T&pes and uses o" "arm records$ anal&Bing "arm
records and computering "arm records.
The second module "ocuses on )oo,,eeping and Accounting 7hich 7ill ena8le
&ou to get acCuainted 7ith the various 8oo,s used in ,eeping "arm accounts as 7ell as
ho7 to use computer so"t7are in accounting.
The third module discusses Trial 8alance and "inal accounts. Dere &ou 7ill learn
a8out the limitations and common errors o" the trial 8alance. 1n addition$ &ou 7ill also
learn the various ad9ustments that needed to 8e male in the "inal account o" a "arm "irm
i. What !" #i$$ $%a&' i' thi( )!"&(%
3ou 7ill learn a8out Farm records$ )oo,,eeping and Accounting$ Trial 8alance
and "inal Accounts.
3.0 C!"&(% Ai*(
The aim o" this course is to create an indepth ,no7ledge o" "arm records and
Accounting. This 7ill ena8le "arm managers and other 7or,ers on the "arm to appreciate
the role o" up;to;date "arm records and e""icient accounting in sustaina8le agricultural
development. Thus$ the aim o" "arm records and accounting is to:
+
i. E#plain the meaning and scope o" "arm records.
ii. Discuss )oo,,eeping and Accounting
iii. Discuss Trial )alance and "inal Accounts.
+.0 C!"&(% !,-%)ti.%(
1n order to achieve the course aims$ there are some overall o89ectives set "or the
course. )esides$ each module and each unit has their respective o89ectives 7hich &ou
and &our "acilitator must constantl& re"er to$ so that no o89ective is s,ipped. All the
modules and unit o89ectives are speci"ics o" the course o89ectives. The course o89ectives
are stated as "ollo7s:
i. 1denti"& the t&pes and uses o" "arm records.
ii. -tate the strategies and techniCues "or computering "arm records.
iii. E#plain the concept o" 8oo,,eeping
iv. Discuss the various 8oo,s used "or 8oo,,eeping.
v. 'repare 8alance sheet$ 'ro"it and loss account and the cash"lo7 statement.
vi. E#plain the necessar& ad9ustment in the "inal accounts.
vii. 'repare "inal accounts o" a "arm "irm
1.0 W!&/i'0 th&!"0h thi( )!"&(%
This course contains some pac,ages that &ou 7ill 8e given at the 8eginning o" the
semester: one o" them is the course material. 3our "ull participation in 8oth the
continuous assessment and the "inal 7ritten e#amination are t7o areas e#pected o" &ou to
"ul"ill at the end o" the course. The 1: units o" the course pac,aged "or &ou in modules
are as sho7n 8elo7:
:
M!1"$% 1 Fa&* R%)!&1(
%nit: 1 (eaning and -cope o" Farm records
5 T&pes and uses o" "arm records
3 Developing and improving "arm records
+ Anal&Bing "arm records
: ComputeriBed "arm record ,eeping
M!1"$% 2: 3!!//%%4i'0 a'1 A))!"'ti'0
%nit: 1 (eaning and scope o" 8oo,,eeping
:.0 )oo,,eeping
6.0 (eaning and -cope o" "arm accounting
*.0 -&stem o" "arm accounting
<.0 ComputeriBed "arm Accounting
M!1"$% 3: T&ia$ 3a$a')% a'1 Fi'a$ A))!"'t(
%nit: 1 (eaning and -cope o" Trial )alance
5 /imitations and common errors o" Trial )alance
3 Final Accounts
+ Ad9ustments in the "inal Account 1
: Ad9ustments in the "inal Account 11
From all indications$ &ou should 8e a8le to complete t7o credit unit a8out 1:
7ee,s in a semester. !ell spread out in each unit are: 1ntroduction to the unit$ speci"ic
o89ectives$ 8od& o" the unit$ conclusion$ summar&$ Tutor (ar,ed Assignments and
Re"erences.
C!"&(% Mat%&ia$
(a9or course materials o" the course are as "ollo7s:
i. C!"&(% G"i1%: This loo,s li,e a 8lue print that spells out 7hat constitutes the
course itsel".
ii. St"1 "'it(: Each o" these provides an overvie7 o" the content and num8er
o" units that 7ill 8e covered in this course.
6
iii. A((i0'*%'t 5i$%(: These "iles contain challenging tutorial Cuestions termed as
Tutor ?(ar,ed Assignment @T(AsA that 7ill ena8le &ou to assess &oursel" at
the end o" ever& assignment that 7ill 8e handed out 8& &our tutor.
iv. P&%(%'tati!' ()h%1"$%: Certainl&$ the modus operandis @e.g time ta8le$ hours
e#pected on each unit= (odule$ assignment su8mission procedure on ho7 it
7ill 8e sel" tutored 7ith the monitoring techniCues 8& 0oun 7ill 8e in the
in"ormation pac,age o" this scheduleA.
St"1 U'it(
Details o" the stud& units have earlier 8een presented. 1t is spelt out in modules 7ith
corresponding units and titles. 3ou 7ill 8e e#pected to spend 5;3 hours in stud&ing a
unit.
R%5%&%')%( a'1 !th%& R%(!"&)%(
Apart "rom this stud& unit$ some re"erence materials are provided as additional
reading materials to support &our stud&. 3ou ma& come across them in 0oun li8rar& or
else7here.
I'(t&")ti!'a$ M%1ia
As an open and distance learning %niversit& several and relevant multi;media that can
ma,e learning possi8le are availa8le.
A((i0'*%'t Fi$%
This has 8een discussed later. 1t is mandator& to al7a&s turn in &our assignments to an&
tutor assigned.
A((%((*%'t
3ou 7ill 8e e#pected to complete at least ten assignments 8& the end o" the
course. -ome o" these 7ill 8e in the "orm o" a pro9ect and continuous assessment @CAA.
3ou 7ill 8e e#pected to 7rite a "inal e#amination in the course. The overall score in the
course 7ill 8e a sum o" +0E o" CA and 60E o" 7ritten e#amination. 3ou 7ill 8e
e#pected to have :0E in the CA and :0E in the 7ritten e#aminationF an&thing short o"
this 7ill count as "ailure.
*
T"t!& 6Ma&/%1 A((i0'*%'t
The T(A is a continuous assessment component o" &our course. 1t accounts "or
30E o" the total score. 3ou 7ill 8e given "our @+A T(As to ans7er. Three o" these must
8e ans7ered 8e"ore &ou are allo7ed to sit "or the end o" course e#amination. The T(As
7ould 8e given to &ou 8& &our "acilitator and returned a"ter &ou have done the
assignment. Assignment Cuestions "or the units in this course are contained in the
assignment "ile. 3ou 7ill 8e a8le to complete &our assignment "rom in"ormation and
materials contained in &our reading$ re"erences and stud& units. Do7ever$ it is desira8le
in all degree level o" education to demonstrate that &ou have read and researched more
into &our re"erences$ 7hich 7ill give &ou a 7ider vie7 point and ma& provide &ou 7ith a
deeper understanding o" the su89ect.
(a,e sure that each assignment reaches &our "acilitator on or 8e"ore the deadline
given in the presentation schedule and assignment "ile. 1" "or an& reason &ou can not
complete &our 7or, on time$ contact &our "acilitator 8e"ore the assignment is due to
discuss the possi8ilit& o" an e#tension. E#tension 7ill not 8e granted a"ter the due date
unless there are e#ceptional circumstances.
Fi'a$ E7a*i'ati!' a'1 G&a1i'0
The end o" course e#amination "or introduction to Farm Records and Accounting
7ill 8e "or a8out 3 hours and it has a value o" *0E o" the total course 7or,. The
e#amination 7ill consist o" Cuestions$ 7hich 7ill re"lect the t&pe o" sel" ?testing$ practice
e#ercise and tutor ?mar,ed assignment pro8lems &ou have previousl& encountered. All
areas o" the course 7ill 8e assessed.
%se the time 8et7een "inishing the last unit and sitting "or the e#amination to
revise the 7hole course. 3ou might "ind it use"ul to revie7 &our sel";test$ T(As and
comments on them 8e"ore the e#amination. The end o" course e#amination covers
in"ormation "rom all parts o" the course.
<
C!"&(% Ma&/i'0 S)h%*%
A((i0'*%'t Ma&/(
Assignments 1;+ Four assignments$ 8est three mar,s o" the
"our count at 10E each ? 30E o" course
mar,s.
End o" course e#amination *0E o" overall course mar,s.
Total 100E o" course materials.
Fa)i$itat!&(8T"t!&( a'1 T"t!&ia$(
There are 16 hours o" tutorials provided in support o" this course. 3ou 7ill 8e
noti"ied o" the dates$ times and location o" these tutorials as 7ell as the name and phone
num8er o" &our "acilitator$ as soon as &ou are allocated a tutorial group.
3our "acilitator 7ill mar, and comment on &our assignments$ ,eep a close 7atch
on &our progress and an& di""iculties &ou might "ace and provide assistance to &ou during
the course. 3ou are e#pected to mail &our Tutor (ar,ed Assignment to &our "acilitator
8e"ore the schedule date @at least t7o 7or,ing da&s are reCuiredA. The& 7ill 8e mar,ed
8& &our tutor and returned to &ou as soon as possi8le.
Do not dela& to contact &our "acilitator 8& telephone or e;mail i" &ou need
assistance.
The "ollo7ing might 8e circumstances in 7hich &ou 7ould "ind assistance
necessar&$ hence &ou 7ould have to contact &our "acilitator i":
5 3ou do not understand an& part o" the stud& or the assigned readings.
3 3ou have di""icult& 7ith the sel";tests
+ 3ou have a Cuestion or pro8lem 7ith an assignment or 7ith the grading o" an
assignment.
3ou should endeavour to attend the tutorials. This is the onl& chance to have "ace
to "ace contact 7ith &our course "acilitator and to as, Cuestions 7hich are ans7ered
instantl&. 3ou can raise an& pro8lem encountered in the course o" &our stud&.
To gain much 8ene"it "rom course tutorials prepare a Cuestion list 8e"ore attending
them. 3ou 7ill learn a lot "rom participating activel& in discussions.
>
S"**a&
Farm Records and Accounting is a course that intends to provide concept o" the
discipline and is concerned 7ith ,eeping accurate "arm records and maintaining good
accounts. %pon completing this course$ &ou 7ill 8e eCuipped 7ith the 8asic ,no7ledge
o" "arm records$ 8oo,,eeping and accounting as 7ell as Trial 8alance and "inal account.
1n addition &ou 7ill 8e a8le to ans7er the "ollo7ing Cuestions:
1.0 !hat are "arm recordsG
5.0 !hat are the 8asic things to consider in selecting a computer records ,eeping
s&stemG
3.0 !hich o" the computer so"t7are ,no7n to &ou 7ill &ou recommend as the 8est
"or "arm 8usiness.
+.0 Distinguish 8et7een 8oo,,eeping and Accounting
:.0 E#plain the three ma9or division o" 8oo,s used in 8oo,,eeping and accounting.
6.0 !ho is a 8oo,,eeperG
*.0 -tate and e#plain the ma9or methods o" 8oo,,eeping.
<.0 -tate and e#plain the golden rules o" 8oo,,eeping
>.0 !hat are the "our variants o" the "arm accounting s&stemG
10.0 !hat are the "our ma9or 7a&s 8& 7hich "arm assets can 8e valuedG
11.0 Do7 can complete "arm accounting 8e accomplished electronicall&G
" course$ the list o" Cuestions that &ou can ans7er is not limited to the a8ove list.
To gain the most "rom this course &ou should endeavour to appl& the principles &ou have
learnt to &our understanding o" "arm records and accounting.
1 7ish &ou success in the course and 1 hope that &ou 7ill "ind it 8oth interesting
and use"ul.

10
Course Code: AEC 306
Course Title: Farm Records and Accounting
Course Developer Dr Joseph lumide seni
!riter Department o" Agricultural Economics and E#tension$
Federal %niversit& o" Technolog&
'() *0+$ A,ure
ndo -tate.
Course Editor:
'rogramme /eader:
Course Coordinator:
0AT10A/ 'E0 %012ER-1T3 F 014ER1A
11
AEC 306: FARM RECORDS AND ACCOUNTING
C!'t%'t(
M!1"$% O'%: Fa&* R%)!&1(
%nit 1 (eaning and -cope o" "arm records
5 T&pes and uses o" "arm records
3 Developing and improving "arm records
+ Anal&Bing Farm Records
: ComputeriBed Farm Record ,eeping
M!1"$% T#!: 3!!//%%4i'0 a'1 A))!"'ti'0
%nit 1 (eaning and scope o" 8oo,,eeping
5 )oo, ,eeping
3 (eaning and scope o" "arm Accounting
+ -&stem o" "arm Accounting
: ComputeriBed Farm Accounting
M!1"$% Th&%%: T&ia$ 3a$a')% a'1 5i'a$ A))!"'t(
%nit 1 (eaning and scope o" Trial )alance
5 /imitations and common errors o" Trial )alance
3 Final Accounts
+ Ad9ustments in the "inal Accounts 1
: Ad9ustments in the "inal Accounts 11
15
MODULE ONE: FARM RECORDS
%nit 1: (eaning and scope o" "arm records
%nit 5: T&pes and uses o" "arm records
%nit 3: Developing and improving "arm records
%nit +: Anal&Bing "arm records
%nit :: ComputeriBed "arm record ,eeping
%nit 1: (eaning and scope o" "arm records
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 De"inition and scope o" "arm records
3.5 'rinciples o" record ,eeping
+.0 Conclusion
:.0 -ummar&
6.0 Tutor ? (ar,ed Assignments
*.0 Re"erences and other sources
13
1.0 I't&!1")ti!'
1n all spheres o" li"e$ adeCuate in"ormation is necessar& "or decision ma,ing. This
is also the case "or "arming decisions. Records are essential in an& management
operation.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit$ &ou should 8e a8le to:
De"ine and e#plain the scope o" "arm records.
3.0 3!1 !5 th% "'it
3.1 D%5i'iti!' a'1 ()!4% !5 5a&* &%)!&1(.
Records are statements o" "act or data concerning a speci"ic su89ect 7hich ma& 8e
speci"ied in ph&sical$ monetar&$ mathematical or statistical terms. Farm records pertain
to in"ormation recorded on the da&;to;da& operation o" a particular "arm.
Farm records can the de"ined as s&stematic documentation o" all activities ta,ing
place in a "arm enterprise over a given period o" time. 1t is an act o" 7riting do7n ever&
activit& engaged in on the "arm in ever& production season and at di""erent stages o" the
production process up to the "inal disposal o" the goods and services to the ultimate
consumer.
Farm record ,eeping is more than 9ust ,eeping trac, o" 7hat crop 7as planted in
7hat "ield$ it is a concept applica8le to the entire "arm operation.
A complete "arm record 7ill include all dail& activities and transactions and 7ith
a proper accounting s&stem it should 8e possi8le to have a complete estimate o" the
pro"it or loss statement at the end o" the &ear. )& ,eeping a complete "arm record on a
&earl& 8asis it is possi8le to have a comparison 8et7een &ears and there8& determine the
rate o" gro7th or deterioration o" the "arm.
There are three 8asic t&pes o" "arm records:
1. Resources inventories
5. 'roduction accounts o" livestoc, and crop operations.
3. 1ncome and e#penses records.
As a "armer$ &ou use resources such as land$ la8our$ machiner&$ 8reeding stoc,
management and "inancial capital. 3ou must assign value to these resources and
1+
maintain current inventories so that &ou ,no7 the "oundation "rom 7hich &ou operate$
"rom this resource 8ase$ &ou produce "ood and "i8re. The production account o" livestoc,
and crop sho7s ho7 this resource 8ase is com8ined 7ith other inputs to &ield ph&sical
output. ConseCuentl&$ production records$ such as the relationship o" "eed to 7eight gain$
co7 to num8er o" calves$ "ertiliBer to crop &ield$ or land to total production$ are most
critical to &our "armHs pro"its. )ecause "armers interact in a mar,ed econom&$ the cost o"
the "eed and revenue "rom the mar,et hog or the cost o" the "ertiliBer and the price o" the
grain are eCuall& important. These income and e#pense records are related to each other
and translate production accounts into 0aira and ,o8o.
3.2 P&i')i4$%( !5 R%)!&1 9%%4i'0
There are some general principles 7hich appl& to all record ,eeping and these are
as stated 8elo7:
1. All records$ to 8e o" value$ must 8e accurate$ neat and "ull. ne 7a& o"
ma,ing sure that records are accurate is 8& "illing them in as soon as possi8le
a"ter the operation or transaction and 8& chec,ing regularl&.
5. All the results o" record ,eeping should 8e compared 7ith some standards
7hich ma& 8e the results "or previous &ears or the results "or other "arms. )&
comparing results and discussing pro8lems together$ "armers can help each
other to improve their management.
3. The record ,eeping s&stem should "it into the "arm organiBation or "rame7or,.
+. The person responsi8le "or ,eeping the records should develop a ha8it o"
regularl& and accuratel& posting transactions.
:. All "inancial transactions should 8e made through the 8an, and the monthl&
statement should 8e reconciled 7ith the cheCue 8oo, and record ,eeping
s&stem.
+.0 C!')$"(i!'
!e have learnt in this unit that "arm record ,eeping is more than 9ust ,eeping
trac, o" 7hat crop 7as planted in 7hat "ield. 1t is a concept applica8le to the entire "arm
operations. -ome o" the principles o" record ,eeping 7ere enumerated.
1:
:.0 S"**a&
3ou have learnt in this unit that:
Farm records can 8e de"ined as the s&stematic documentation o" all activities
ta,ing place in a "arm enterprise over a given period o" time.
There are three t&pes o" "arm records: resources inventories$ production
records and income and e#pense records.
For all records to 8e o" value it must 8e accurate$ neat$ "ull$ current and
simple.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. !hat are "arm recordsG
5. /ist and e#plain the various "arm records a "armer is e#pected to ,eep on his
"arm.
3. /ist and e#plain the principles guiding ,eeping o" good "arm records.
;.0 R%5%&%')%( a'1 Oth%& S!"&)%(
lu,osi$ J and '. Erha8or @1><<A: 1ntroduction to Farm (anagement Economics:
'rinciples and Applications. A41TA) 'u8lishers /td$ Iaria '' 51 ? 55.
4erlo""$ D.C and R.! Dolland @5006A: Esta8lishing and using a "arm "inancial Record ?
,eeping s&stem: The %niversit& o" Tennessee Agricultural E#tension -ervice %* ')
1:+0.
16
U'it 2: T4%( a'1 "(%( !5 5a&* R%)!&1(
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 T&pes o" Farm Records
3.5 %ses o" Farm Records
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
1*
1.0 I't&!1")ti!'
Records are important to the "inancial health o" the "arm. 4ood records do not
ensure &our "arm 7ill 8e success"ul$ ho7ever success is unli,el& 7ithout them. Accurate
and up;to;date records are essential to success"ul "arm management. )e"ore an&
"inancial$ 8udgeting or "inancial decisions can 8e made$ "arm records must 8e maintained.
Farm records are li,e report cards students receive in school$ 7ith a "arm report
card$ &ou can tell ho7 7ell &ou are managing &our operation compared 7ith other
producers in &our JclassK. 3ou can also see the strengths and 7ea,nesses o" &our "arm
operation. 1n this unit$ attempts 7ill 8e made to highlight the various uses o" "arm
records.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit$ &ou should 8e a8le to:
-tate and e#plain the various t&pes o" "arm records
-tate and e#plain the uses o" "arm records.
3.0 Th% 3!1 !5 th% U'it
3.1 T4%( !5 5a&* R%)!&1(
There are three 8asic t&pes o" "arm records: resources inventories production
accounts o" livestoc, and crop operations$ and income and e#pense records.
Records 1nventories ? As a "armer &ou use resources such as land la8our$ machiner&$
8reeding stoc,$ (anagement and "inancial capital.
3ou must assign value to these resources and maintain current inventories so that
&ou ,no7 the "oundation "rom 7hich &ou operate$ "rom this resources 8ase$ &ou produce
"ood and "i8er.
'roduction accounts o" livestoc, and crops ? The production accounts o" livestoc, and
crop sho7 ho7 this resources 8ase is com8ined 7ith other inputs to &ield ph&sical
output$ conseCuentl& production records such$ as the relationship o" "eed to 7eight gain$
co7 to num8er o" calves$ "ertiliBer to crop &ield$ or land to total production$ are most
critical to &our "armHs pro"its.
1ncome and E#pense records ? 8ecause "armers interacts in a mar,et econom&$ the cost o"
the "eed and revenue "rom the mar,et hog or the cost o" the "ertiliBer and the price o"
1<
grain$ are eCuall& important. These income and e#pense records are related to each other
and translate production account into 0aira and ,o8o @"ig 1A.
Fig 1: T&pes o" Farm Records
3.2 U(%( !5 Fa&* R%)!&1(
R%(!"&)%( I'.%'t!&i%(
3ou must count and assign value to &our resources to inventor& &our "arm. These
resources include 8oth assets and lia8ilities. Assets are all items &ou o7nF lia8ilities
indicate 7hat &ou o7e. Counting assets is relativel& eas&. !ith a note8oo, and paper$
7al, around &our "arm and surve& &our assets. Record the num8er o" mil, co7s$
hectares o" tilled land etc valuing assets$ is more di""icult. Assets such as grain 7ill
pro8a8l& 8e valued at the net mar,et price "or 7hich the& could 8e sold. Tractor could 8e
valued at their original cost minus depreciation. -imilarl& land could 8e valued at its
mar,et price @i" developed "or residential housesA or at its agricultural value. /ia8ilities
are easier than assets to count and value. A listing o" de8ts to 8an,s and other creditors
usuall& is su""icient. The onl& di""icult& is ad9usting "or accrued interest.
Resources can 8e counted and assigned a value more o"ten$ 8ut most "armers "ind
an end ? o" &ear valuation most use"ul. Resources inventories are not a J"lo7K concept$
8ut a Jstoc,K measurement. The most direct application o" resources inventor&$ is
completing a 8alance sheet to determine &our net7orth. A resource inventor& also is
use"ul "or computing non cash e#penses$ such as depreciation. Resources on the "arm
1>
'roduction Accounts
Farm Resources Added inputs Farm utput
Resource 1nventories E#penses 1ncome
o"ten are used as collateral "or a loan. A resource inventor& provides a help"ul summar&
o" those assets to 8e used as collateral.
Finall&$ 7ith an up;to;date inventor& o" &our "armHs resources$ &ou can consider
options "or gro7th and diversi"ications more care"ull& and e""icientl&.
P&!1")ti!' A))!"'t(.
'roduction Accounts are used to measure the per"ormance o" crop and livestoc,
enterprises on the "arm$ some production in"ormation can 8e derived "rom income and
e#pense records$ "or e#ample 7here total ,ilogramme purchased might 8e noted. This
in"ormation 7hile use"ul$ usuall& is not speci"ic or complete enough. (ore detailed
production accounts can and should 8e ,ept$ usuall& classi"ied as crop$ livestoc, or
la8our records.
"ten included under crop records are "arm maps. Farm maps are used to descri8e
soil conditions cropping patterns$ "ield la&outs and 8uilding locations. ther 7ritten crop
records sho7 crop rotations$ &ields$ "ertiliBer rates and pesticide applications. This
in"ormation can 8e summariBed and 7ill indicate the e""icienc& o" production.
/ivestoc, and poultr& records usuall& include su8sections "or mortalit&$ 8reeding$
per"ormance and "eed in"ormation. (ortalit& records list the num8er o" livestoc, and
trac, disease pro8lems. )reeding records ensure that onl& superior individuals or groups
o" individuals are used to parent o""spring 7ith desired characteristics.
'er"ormance records "or livestoc, are divided 8et7een 8irth and productive
in"ormation. )irth records indicate date o" 8irth$ important dates in the animalHs li"e$
parental evaluation and 7eaning in"ormation. 'roduction records re"er more directl& to
herd siBe$ rate o" gain$ ,ilogramme sold and purchased.
Finall&$ "eed records are important in evaluating overall production e""icienc&.
Feed normall& constitutes at least :0percent o" the total cost o" raising an animal "or
meat. The t&pe o" "eed ration$ its "ormulation and the rate o" "eeding should 8e monitored
closel&.
Another ma9or categor& o" production record ,eeping is la8our. /a8our records
are important particularl& 7hen la8our shortages are a pro8lem. )& ,no7ing the amount
and timing o" la8our reCuired per operation o" an enterprise &ou can 8etter plan 7hat
enterprises are "easi8le 7hen "aced 7ith la8our constraints on the "arm.
50
I')!*% a'1 E74%'(% R%)!&1(.
A transactions 9ournal and general ledger are use"ul "or recoding income and
e#pense records. 1n the transactions 9ournal$ &ou record "inancial transactions as the&
happen. 1n the general ledger$ &ou 8egin organiBing &our "arm records into a meaning"ul
"ormat. 1mportant uses o" the transactions 9ournal and general ledger are to provide
in"ormation "or the income statement and cash "lo7 statement. !ith the income
statement$ &ou can calculate "arm pro"it. The cash "lo7 statement is a summar& o" the
timing and "lo7 o" 0aira in and out o" the "arm 8usiness. 1t helps &ou meet cash
o8ligations.
For most "armers$ a simple &et suita8le transactions 9ournal is the "arm
chec,8oo,. 1t helps &ou ,eep trac, o" the ma9orit& o" income and e#pense transactions
needed "or a complete set o" records$ 7ith the in"ormation "rom the transactions 9ournalF
the "armer organiBes cash receipts and e#penses in the general ledger 8& date and
categor&.
+.0 C!')$"(i!'
1n this unit$ 7e have leant that accurate and up;to;date records are essential to
success"ul "arm management. Records are used among others to: evaluate past
per"ormance o" the operation$ provide a "inancial picture o" the present situation$ and
serve as a planning guide "or "uture decisions.
:.0 S"**a&
1n this unit$ 7e have learnt that:
There are three 8asic t&pes o" "arm records: resource inventories$ production
accounts o" livestoc, and crop operation$ and income and e#pense records
Farm records are used among others to : evaluate past per"ormance o" the
operation$ provide a "inancial picture o" the present situation and serve as a
planning guide "or "uture decisions.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. -tate and e#plain the various t&pes o" "arm records
5. -tate and e#plain the various uses o" "arm records
51
;.0 R%5%&%')%( a'1 Oth%& S!"&)%(
Danson J.C$ D.($ Johnson and ).2. /esle& @1>>1A: Developing and 1mproving 3our
Farm Records. Fact sheet ' :+5$ (ar&land Cooperative E#tension$ %niversit& o"
(ar&land.
Jose$ ' @1>>+A: Financial Record Leeping -o"t7are Revie7. Te#as Agricultural
E#tension -ervice )ulletin ) ? :0<>$ Te#as A and ( %niversit& s&stem$ (a& 1>>+
55
U'it 3: D%.%$!4i'0 a'1 i*4&!.i'0 5a&* &%)!&1(
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the %nit
3.1 Developing "arm Records
3.5 1mproving "arm Records
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignments
*.0 Re"erences and other sources
53
1.0 I't&!1")ti!'
1n this unit &ou 7ill learn a8out developing and improving "arm records. 3ou 7ill
8e acCuainted 7ith record ,eeping and record anal&sis$ selecting a record ,eeping s&stem
and comparison o" the hand and computer s&stem o" record ,eeping.
5.0 O,-%)ti.%(
1t is e#pected that$ at the end o" this unit$ &ou should 8e a8le to:
E#plain the concept o" record ,eeping and record anal&sis
Compare the hand and computer s&stem o" record ,eeping
E#plain ho7 "arm records can 8e improved.
3.0 Th% ,!1 !5 th% U'it
3.1 D%.%$!4i'0 5a&* &%)!&1(
Record ,eeping re"ers to ,eeping$ "iling$ categoriBing and maintaining "arm
"inancial and production in"ormation.
Record anal&sis re"ers to evaluating "arm records. The evaluation process allo7s a
"arm manager to ma,e in"ormed decisions 8ased on actual @or pro9ectedA "arm
per"ormance. 8viousl&$ record anal&sis cannot ta,e place 7ithin "irst ,eeping records.
The hand s&stem and the computer s&stem are the t7o methods o" developing and
,eeping "arm records.
3.1.1 Th% ha'1 ((t%*
A large num8er o" hand s&stems are availa8le. ne o" the simplest s&stems
involves the recording 8& hand o" all "inancial transactions in a 9ournal "ormat. 'urchases
and sales activities are listed 8& hand as the& occur. The enterprises sho7 the date$ the
item involved @Cuantit&$ siBe etcA and cash involved in sale or purchase.
5+
Ta8le 1: E#ample o" 7hole "arm Record ,eeping
1ncome E#pense
Date Description Calves Cull
Co7s
(aiBe Feed -upplies Fuel
10=1 -old 10 calves
at 010$000
0 100$00
10=1 'urchased "eed
@5 tonsA
0+0$000
10=3 -old 5 co7s at
060$000
0150$000
10=6 'urchased
supplies
050$000
10=< 'urchased 1:00
litres o" "uel
0>*$:00
10=11 -old 5000,g o"
maiBe
0500$000
For e#ample Ta8le 1 portra&s a 7hole;"arm record;,eeping s&stem. The date and
a short description o" each transactions are listed "irst "ollo7ed 8& the 0aira amount o"
each transaction under the appropriate income or e#pense categor&. The num8er o"
income and e#pense categories depends on the amount o" speci"icit& desired 8& the "arm
manager.
Ta8le 5 is smaller to Ta8le 1 8ut adds an enterprise accounting section. 1n
addition to the income and e#pense categories$ the transaction is also listed in an
enterprise categor&. For e#ample$ Jthe purchased suppliesK e#pense o" 050$000 is "irst
listed under the supplies categor&. )ut 016$000 o" the e#pense is listed under Jco7=cal"K
e#penses and 0+$000 is listed under maiBe. Again the num8er o" enterprises used
depends on the amount o" detail desired 8& the "arm manager.
5:
Ta8le 5: E#ample o" Enterprise Record Leeping
1ncome
1ncome E#pense Enterprises
Date Description Calves Cull
Co7s
(aiBe Feed -upplies Fuel Co7=Cal"
1ncome E#pense
(aiBe
1ncome E#pense
10=1 -old
10 calves
at 10$000
0100$000
10=1 'urchased
"eed
@5 tonsA
0 +0$000 0 +0$000
10=3 -old 5
co7s at
060$000
0150$000 0 150$000
10=6 'urchased
supplies
0 50$000 0 16$000 0 +$000
10=< 'urchased
1:00 litres
o" "uel
0 >*$:00 0 5$:00 0 >:$000
10=11 -old
5000,g o"
maiBe
0 500$000 0500$000
Regardless o" the s&stem selected$ entries should 8e made regularl&. 1n addition$
disciplining onesel" to ma,e eas& transaction through a 8an, chec,ing account 7ill ease
record ,eeping di""iculties. And reconciling 8an, statements 7ith "arm records ensures
accurac&.
3.1.2 C!*4"t%&i<%1 &%)!&1 /%%4i'0 ((t%*.
This entails the use o" di""erent so"t7are pac,age in record ,eeping. 1n 1>>+ 'ena
et al evaluated si# computeriBed "arm record ,eeping programs 7ith each program having
some uniCue "eatures.
-electing a computeriBed record ,eeping program should 8e done on the 8asis o"
"eatures needed. -ome program 7ill allo7 "or enterprise accounting$ some programs 7ill
calculate pa&roll reports "or emplo&ees. Fe7 "inancial record ,eeping programs allo7 "or
production records to 8e ,ept simultaneousl& 7ith "inancial records. For e#ample$ in
man& programs$ sales o" grain or livestoc, can 8e reported in 0aira onl&$ 7ith no
accounting "or ,ilogrammes
A computeriBed record;,eeping s&stem 7ill not necessaril& save time. 1ts real
advantage is in record anal&sis. nce the in"ormation is posted in the computer so"t7are
reports and anal&sis can 8e created$ changed and printed. ComputeriBed s&stems Cuic,l&
56
and accuratel& sort and report a great deal o" in"ormation. The& can also provide monthl&
or annual summaries "or identi"&ing strengths and 7ea,nesses o" an operation
Ta8le 3: Comprise o" the hard s&stem and ComputeriBed s&stem o" record ,eeping
Dand -&stem Computer -&stem
/o7 initial out;o";poc,et e#pense
Eas& to implement
Time consuming
(ore opportunities to ma,e mista,es
/imited in e#tent o" anal&sis 7ithout
e#traordinar& investment o" time and e""ort
Digher initial out;o";poc,et e#pense
(a& reCuire signi"icant stud&
Fast
Accurate
Can 8e a po7er"ul anal&sis tool
3.2 I*4&!.i'0 Fa&* R%)!&1(
Accurate records are essential "or evaluating &our "arms per"ormance: accurate
anal&sis reCuired accurate data. Too o"ten "armers rel& on pu8lications 7hich descri8e an
average "arm instead o" personal records that descri8e their "arm. To ma,e the 8est
"inancial decisions concerning &our "arm$ use data collected "rom &our "arm. 1t is possi8le
to ma,e the 9o8 o" record ,eeping easier 8& using "orms and accounting s&stems designed
especiall& "or the "arm. A good source "or record ,eeping 8oo,s is &our local e#tension
agent or agricultural lender. Also so"t7are pac,ages "or "arm record ,eeping can 8e
purchased "or &our personal computer.
Accurac& is 9ust as important in management record ,eeping as in ta# and
"inancial record ,eeping. 1" the management in"ormation isnHt accurate$ it ma& do more
harm than i" &ou didnHt have it at all. !ith ph&sical Cuantities$ chec, sheets are
recommended as a tool "or testing the eCualit& o" the sources and uses o" Cuantities and
there8& testing the accurac& o" Cuantit& in"ormation. The sources=amount o" account "or
should eCual or at least closel& appro#imate the uses=amount accounted "or. Muantit&
sources t&picall& include 8eginning inventor& Cualit&$ Cuantit& purchased$ Cuantit&
produced and Cuantit& trans"er in "rom other production enterprises=production centers.
%ses t&picall& include: Cuantit& sold$ Cuantit& "ed i" "eed or grain$ Cuantit& spoiled or
death loss in livestoc,$ Cuantit& trans"erred out to other enterprises= production centers$
5*
and ending inventor& Cuantit&. 1nventor& change is a critical element i" Cuantities are to
coincide 7ith accrual ad9usted "inancial measures.
Completeness is another matter entirel&. A "armer could 7ear himsel" out ,eeping
trac, o" ever& t&pe o" in"ormation that might remotel& 8e use"ul "or management anal&sis
purposes. The appropriate criteria "or ho7 much and 7hat management in"ormation to
record are:
1. Does the 8ene"it o" recording and using the in"ormation su""icientl& e#ceed the
cost to ma,e it 7orth7hileG
5. 1" the in"ormation is collated$ 7ill it 8e used to in"luence "arm decision ma,ingG
As &ou tr& to appl& these criteria$ it ma& 8e help"ul to thin, a8out 7hat
in"ormation is li,el& to change ho7 &ou operate the "arm. 1n"ormation that 7ill change
ho7 &ou operate and lead to improved &ields 7ould seem to produce a net 8ene"it.
%n"ortunatel&$ 7e generall& donHt have the lu#ur& o" ,no7ing that the in"ormation 7ill
pa& o"". )ut$ it is a good idea to have a plan in mind a8out ho7 the management
in"ormation 7ill 8e used 8e"ore investing large amounts o" time and mone& collecting
that in"ormation. (anagement records are onl& use"ul 7hen the& are used.
+.0 C!')$"(i!'
Farmers have to continuall& ma,e management decisions$ as 7e have so "ar
identi"ied. These management decisions determine the outcome o" a "arm operation in
relation to investment underta,en$ "inancing o" the operation$ protection$ or custodial and
consumption 8ehaviour o" the "arm household. Thus$ to ma,e good decisions$ "armers
must have relevant in"ormation
:.0 S"**a&
1n this unit &ou have learnt that:
Leeping records are essential to the e""icient management o" a "arm 8usiness
Accurate records and resulting anal&ses help "armers ma,e "inancial and
production decisions
Traditional hand record; ,eeping s&stems continue to 7or, 7ell "or man&
"armers
5<
ComputeriBed record ,eeping and anal&sis program have 8een accepted and
used 8& a num8er o" "armers also
Developing and using a "arm record ,eeping s&stem 7ill allo7 the "arm
manager to ma,e more in"ormed decisions a""ecting the pro"ita8ilit& o" the
"arm
6.0 T"t!& 6 Ma&/%1 A((i0'*%'t
1. Di""erentiate 8et7een record ,eeping and record anal&sis
5. Compare and contrast hand s&stem and computeriBed s&stem o" record ,eeping.
;.0 R%5%&%')%( a'1 Oth%& S!"&)%(.
4erlo""$ D.C and R.!. Dolland @5006A Esta8lishing and using a "arm "inancial record;
,eeping s&stem. The %niversit& o" Tennessee Agricultural E#tension -ource %T ') 1:+0
Jose$ ' @1>>+A: Financial Record ,eeping -o"t7are Revie7 Te#as Agricultural E#tension
-ervice )ulletin );:0<>$ Te#as AN( %niversit& s&stem$ (a& 1>>+.
5>
U'it +: A'a$<i'0 5a&* R%)!&1(
15.0 1ntroduction
13.0 89ectives
1+.0 The )od& o" the %nit
3.1 Anal&Bing Farm Records
3.5 Financial statements and list o" ReCuired Records
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
30
1.0 I't&!1")ti!'
nce a "arm record ,eeping s&stem has 8een esta8lished anal&Bing the records
can 8egin. Decision ma,ing can 8e greatl& enhanced 8& anal&Bing 8oth production and
"inancial records and their impact on pro"ita8ilit&. 1n this unit &ou 7ill learn a8out a
num8er o" "inancial anal&sis tools that can 8e used 7hen accurate and complete "arm
records are availa8le.
2.0 O,-%)ti.%(
1t is e#pected that$ at the end o" this unit$ &ou should 8e a8le to :
Discuss the various methods o" anal&Bing "arm records.
3.0 Th% ,!1 !5 th% "'it
3.1 A'a$<i'0 Fa&* R%)!&1(
A num8er o" "inancial anal&sis tools can 8e used 7hen accurate and complete
"arm records are availa8le. These tools include the 8alance sheet$ income statement and
pro9ected monthl& cash "lo7 statement @including "amil& living e#pensesA. These three
"inancial statements provide in"ormation "or ma,ing short and long term "inancial
decisions.
3.1.1 Th% 3a$a')% Sh%%t
Also ,no7n as the "inancial statement or statement o" net7orth. The 8alance
sheet provides an overall "inancial snapshot o" the "arm 8usiness on a speci"ic date. 1t
lists all o" the assets @propert&A and lia8ilities @loansA o" the 8usiness as o" the 8alance
sheet date. 1ncome and e#pense records are not needed "or the 8alance sheet. A value "or
each asset and the outstanding 8alance "or each lia8ilit& is given in the 8alance sheet.
1deall&$ the 8alance sheet should separate assets and lia8ilities into current asset @less than
one &ear o" li"eA$ intermediate @one to seven &ears o" li"eA and long;term @longer than
seven &ears o" li"e$ mainl& 8uildings and landA categories and should list cost @original
cost less depreciationA and mar,et value @current e#pected sale priceA "or each.
31
The 8alance sheet gives the "arm manager a JsnapshotK o" the net7orth on a
speci"ic date. The net7orth is the value o" all assets on the "arm less the amount o"
mone& o7ed against those assets.
-ome o" the ratios and relationships on a t&pical net7orth statement are e#amined
8elo7.
1. Current Ratio @/iCuidit&A 1t is a measure o" a 8usinessH a8ilit& to meet current de8t
o8ligations as the& come due 7ithout disrupting normal operations.
The ratio is calculated 8& dividing the current assets 8& the current lia8ilities.
Current ratio O Current Assets
Current /ia8ilities
As a general rule$ t7o 0aira o" current assets to one naira o" current lia8ilities represents
a strong ratio. A current ratio o" 1.::1 is good. 1 to 1 is 7ea, and P1 to 1 o"ten results in
cash"lo7 pro8lems.
5. De8t to Asset Ratio @-olvenc&A
1t is a measure o" the 8usinessH a8ilit& to meet its total de8t o8ligations$ i" all the assets
7ere to 8e sold. 1t provides an indication o" the 8usiness a8ilit& to continue in the event
o" severe "inancial adversit& caused 8& perils such as drought$ e#cess moisture or a
decline in commodit& prices. 1t also sho7s the percentage o" the assets that are "inanced
8& outside creditors. The ratio is calculated 8& dividing the total lia8ilities 8& the total
assets and is e#pressed as a percentage.
De8t to Asset ratio O Total lia8ilities # 100
Total Assets 1
As a general rule$ a "arm 8usiness having under 5:E o" its assets "inanced is in a "airl&
strong position 7hile 8et7een 5:E to +0E is moderate$ and 8et7een +0E and 60E is in
an increasingl& 7ea,er position. The higher the de8t ratio$ e#pressed as a percentage the
greater the "inancial ris, as a result o" the higher 8orro7ing costs.
3. Earned "inancial progress @pro"ita8ilit&A
Earned "inancial progress re"ers to the increase in the "arm 8usiness net7orth
"rom the 8eginning o" the period to the end o" the period as a result o" the income earned
8& the 8usiness. The ,e& 7ord is earnedH 7hich e#cludes changes in net7orth as a result
o" an o7nerHs contri8utions to the 8usiness$ the gain on the sale o" the assets or the re;
35
evaluation o" the assets including land$ 8uildings and 8reeding stoc,. 1t is important to
trac, the increases to net7orth that relate directl& to income earned 8& the 8usiness as
opposed to other ad9ustments or transactions.
3.1.2 I')!*% Stat%*%'t
ther names used "or this important accounting statement include: a pro"it and
loss statement$ an operating statement and an income and e#pense statement. The
income statement lists the income and e#penses o" a 8usiness over a period o" time called
the accounting period.
3ear ? to &ear pro"its are calculated on the income statement also ,no7n as the
pro"it=loss statement. The income statement is used to calculate net cash income$
ad9usted 8& changes in inventories and capital items.
The 0et "arm income re"ers to the Q8ottom lineH pro"it that is earned @or pro9ected
to earnA 8& the 8usiness during the accounting period. The 0et Farm 1ncome provides the
ans7er to the Cuestion o" ho7 much pro"it the "arm has made or is pro9ected to ma,e$ in
the 8usiness plan.
Anal&Bing the 0et Farm 1ncome as a return on the "arm assets and eCuit&
@net7orthA can also 8e in"ormative. -ince the 0et Farm 1ncome represents the return the
"arm earns on investment.
The measures o" pro"ita8ilit& are as discussed 8elo7.
1. Returns on Assets @RAA
1t is a measure o" pro"ita8ilit& measuring the rate o" return that the "arm 8usiness
earns on its average asset 8ase over the period. The higher the return$ the more pro"ita8le
the "arm 8usiness.
RA O 0et Farm 1ncome R 1nterest e#pense ? la8our # 100
Total Farm Assets @AverageA 1
5. Return on ECuit& @REA
1t is a measure o" the return to the net7orth @eCuit&A in the 8usiness. The "arm
eCuit& is the capital that could 8e invested else7here @i" &ou 7ere not "armingA and so this
anal&sis provides an interesting perspective to see 9ust ho7 good a return a "armer is
receiving on his investment in "arming as compared to other alternatives. 1t is calculated
8& dividing the 0et Farm 1ncome less the unpaid la8our=management costs$ 8& the
33
average value o" the "arm eCuit& @net7orthA "or the period and is e#pressed as a
percentage.
RE O 0et Farm 1ncome ? /a8our # 100
Farm ECuit& @averageA 1
A return on eCuit& e#ceeding the return on assets indicated an economical use o"
8orro7ed "unds. 1n other 7ords$ it paid to 8orro7 mone& 8ecause the return on this
8orro7ed capital 7as greater than the cost o" 8orro7ing.
3. E#pense=Revenue Ratio
-ho7s the percentage o" the "arm income that is reCuired to cover the operating e#penses$
e#cluding the principal and interest pa&ments. The ratio is calculated 8& dividing the
operating e#penses 8& the value o" the "arm production and is e#pressed as a percentage.
E#penses=Revenue Ratio O perating e#penses # 100
2alue o" "arm production 1
The value o" "arm production is the total value o" the "arm sales less the cost o" purchased
"eeds$ grain and mar,et livestoc,.
3.1.3 Ca(h 5$!#
The cash"lo7 pro9ection stimulated the anticipated "inancial activit& that 7ill "lo7
through the "arm 8an, account during the accounting period.
The pro9ected monthl& cash"lo7 statement is used to loo, ahead to the ne#t &ear
o" operations. )& pro9ecting a cash"lo7 "or the ne#t &ear$ potential cash short"alls can 8e
noted and appropriate changes in the "arm operation can 8e anal&Bed.
3.2 Fi'a')ia$ (tat%*%'t a'1 $i(t !5 R%="i&%1 R%)!&1(
Ta8le + illustrates the ,inds o" records that go into the ma,ing o" "inancial
statements and production summaries. The le"t column contains the "inancial or
production statement desired 8& the "arm manager. The right column contains the
records reCuired to complete the statement.
Records can 8e used "or more than one statement "or e#ample$ JDe8t pa&mentsK
are used in the income statement$ cash"lo7 statement and in income ta#es$ li,e7ise$
3+
JFarm 1ncome and E#penseK are used in the 1ncome statement$ Cash"lo7 statement$
Enterprise Anal&sis and 1ncome Ta#es.
Ta8le +: Financial -tatements and list o" ReCuired Records.
-tatement Records ReCuired
)alance sheet Farm Assets cost and 2alue. Farm and 'ersonal Assets
changes$ /ivestoc,$ Crop and other products
1nventories$ /oan 8alances
Cash "lo7 Farm 1ncome and E#penses 0on ? Farm 1ncome and
E#penses De8t pa&ments.
Enterprise Anal&sis Farm 1ncome and E#penses. /ivestoc, and Crop &ields.
1ncome -tatement Farm 1ncome and E#penses 1nterest 'a&ments /ivestoc,
and 4rain 1nventories Accounts pa&a8le N Receiva8le
1ncome Ta#es Farm 1ncome and E#penses 0on;Farm 1ncome and
e#penses$ 1nterest 'a&ments$ Depreciation -chedule
+.0 C!')$"(i!'
1n this unit &ou have attempted to learn a8out ho7 "arm records are used to
anal&Be a "arm 8usiness$ as 7ell as the "inancial statements and list o" reCuired records.
:.0 S"**a&
1n this unit$ &ou have learnt that:
A num8er o" "inancial anal&sis tools;The 8alance sheet$ income statement and
pro9ected cash"lo7 statement can 8e used to anal&Be a "arm 8usiness 7hen
accurate and complete "arm records are availa8le.
The 8alance sheet provides an overall "inancial snapshot o" the "arm 8usiness
on speci"ic date.
The income statement is used to calculate net cash income$ ad9usted 8&
changes in inventories and capital items.
The pro9ected monthl& cash"lo7 statement is used to loo, ahead to the ne#t
&ear o" operations. )& pro9ecting a cash"lo7 "or the ne#t &ear$ potential cash
short"alls can 8e noted and appropriate changes in the "arm operation can 8e
anal&Bed.
3:
There are some records reCuired "or some "inancial statements. For instance
in preparing the 8alance sheet$ records needed include: "arm Assets cost and
value$ "arm and personal assets$ changes in livestoc,$ crop and other product
inventories$ loan 8alances.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. %se &our ,no7ledge o" a 8alance sheet and ratio anal&sis to complete the 8alance
sheet 8elo7. 4iven that the net capital ratio O +$ the current ratio O 5 and the
intermediate ratio O 3
Assets /ia8ilities
Total Current Assets 0 +00$000 Total current /ia8ilities SSSSSSSSSSSS
Total 1ntermediate Assets SSSSS Total 1ntermediate /ia8ilities SSSSSSSSSSSS
Total Fi#ed Assets SSSSSSSS Total /ong;term /ia8ilities SSSSSSSSSSSS
Total /ia8ilities 0et7orth SSSSSSSSSSS
Total Assets SSSSSSSSS Total /ia8ilities and 0et7orth 0+$000.000
5. " 7hat use is the Returns on ECuit& ratio in "arm "inancial anal&sis.G
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
4erlo""$ D.C and R.! Dolland @5006A Esta8lishing and using a "arm "inancial Record
,eeping s&stem. The %niversit& o" Tennesse Agricultural E#tension -ervice %T ') 1:+0
(oore$ L.J @5005A: J!hat are the most necessar& "arm records and ho7 do i interprete
and use themK FreCuentl& As,ed "arm (anagement and (ar,eting Muestions @FA 0o
>A. The pursue %niversit& Cooperative E#tension -ervice 'u8lications ? 'urdue
E#tension ? Lno7ledge to 4o
!ie8e$ '.1 @500+A: JAnal&Bing a Farm )usinessK: A guide to help producers prepare$
anal&Be and interprete "arm 8usiness plans in order to ma,e in"ormed management
decisions. 'u8lished 8& (anito8a Agriculture and Food -ection$ (anito8a %niversit&.
36
U'it :: C!*4"t%&i<%1 Fa&* R%)!&1 /%%4i'0
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 ComputeriBed "arm record ,eeping
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
3*
1.0 I't&!1")ti!'
A concern o" man& "inancial consultants and lenders is that man& "armers lac,
adeCuate records to monitor and anal&Be the "inancial health o" their "arm 8usiness. /ac,
o" "inancial data ma,es it di""icult to determine proper de8t loads$ or to develop plans "or
8usinesses 7ith ma9or "inancial pro8lems.
A variet& o" methods could 8e used in collecting the necessar& "arm record
in"ormation: hand ,ept records$ simple or comple# computer s&stems. As "arm siBe and
or de8t increases$ man& "armers and lenders loo, "or computer program that allo7 "ast
data entr&$ have internal chec,s "or accurac& and allo7 summariBing the data in a variet&
o" 7a&s. (ost 8egin their search 8& as,ing: 1s there a simple computer program that 7ill
,eep m& records li,e the "arm account 8oo,sKG 1n this unit there"ore$ attempts 7ill 8e
made to e#plain the various commercial so"t7are program that can do an e#cellent record
,eeping 9o8 on the "arm.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit &ou should 8e a8le to:
/ist and e#plain the uses o" the various commercial so"t7are programs
availa8le to ,eep computeriBed "arm records.
-tate the advantages and the disadvantages o" each so"t7are s&stem=program.
3.0 Th% ,!1 !5 th% "'it
3.1 C!*4"t%&i<%1 Fa&* R%)!&1 9%%4i'0
1n recent times$ there are numerous commercial so"t7are programs that can do an
e#cellent 9o8 o" recording 8asic income and e#pense data "or "armers$ plus Cuic,l&
summariBing and preparing a variet& o" "inancial reports$ 7hile not ruling out hand ,ept
records$ there are some 8asic Cuestions to consider in selecting a computer record
,eeping s&stem. The "ocus 7ill 8e on so"t7are @computer program that per"orms various
tas,sA rather than the hard7are @computer and printerA.
Farm record ,eepers can pic, their so"t7are "rom "our groups:
1. -imple cash s&stems: Muic,en
5. 4eneral cash accrual accounting s&stem: Muic, )oo,s$ DacEas&$ peachtree
3<
3. Farm Cash= accrual accounting s&stems ? 'C(ars$ Transactions 'lus @TARA
8& F)- -&stems$ Red7ing
+. Add;ons "or anal&sis: -preadsheets$ F10'ACL$ AFRA 8& F)-.
3.1.1 A1.a'ta0%( a'1 Di(a1.a'ta0%( !5 %a)h ((t%*
Si*4$% )a(h ((t%*(
1n a simple cash s&stem$ users are a8le to record all cash transactions o" 8oth the
"arm and "amil&. Muic,en is the onl& program listed due to its 7idespread use across the
%nited -tates o" America. 1ts popularit& is due to the ease o" data entr& and to its lo7
price. This single ? entr& s&stem is essentiall& an electronic chec,8oo,. Do7ever$ it
allo7s users to trac, loans$ stoc, port"olios and other "inancial= assts. The a8ilit& to
easil& enter data$ 7rite cheCues "rom the computer$ reconcile the cheCue 8oo, 7ith the
8an, statement and Cuic,l& create reports "or "inancial and ta# purposes e#plains its
8road acceptance$ there is a pa&roll module that can 8e added 7hich is adeCuate "or the
"irm 7ith onl& a "e7 emplo&ees.
Critics o" Muic,en point to producers 7ith limited ,no7ledge o" accounting
concepts 7ho "ail to propert& classi"& income and e#pense entries that lead to "la7ed
reports$ Muic,en does not have a chart o" accounts 7ith income and e#pense categories
speci"ic to agriculture users can correct this pro8lem 8& contacting e#tension agents "or
training and o8tained a sample chart o" accounts to use 7ith their "arm records. thers
"ault Muic,en "or the lac, o" "ields to trac, ph&sical Cuantities.
'roperl& used$ Muic,en can provide use"ul$ accurate summaries o" all cash
transactions$ including sales and purchases o" capital assets such as machiner& and
8reeding livestoc,. nce the depreciation schedule is created$ not 8& Muic,en$ producers
have all data needed "or ta# reporting.
G%'%&a$ )a(h8a))&"a$ a))!"'ti'0 ((t%*(.
Three programs: Muic,8oo,s$ DacEas&$ and 'eachtree are listed under general
cash accrual accounting s&stems. Muic,)oo,s is representative o" this group.
Muic,)oo,s has an e#cellent chart o" accounts speci"ic to agriculture. Reconciliation o"
computer accounts 7ith 8an, statements is Cuite eas&. Dou8le ?entr& "eatures allo7
either cash or accrual reports$ "irms 7ith emplo&ees en9o& the ease o" generating pa&roll
chec,s and all related emplo&ee reporting. The user 8egins 8& entering a 8eginning cost
3>
8asis 8alance sheet. As dail& receipts and e#penditures are entered$ the 8alance sheet is
updated. )ut unless the user also records trans"ers o" "eed "rom inventor& to livestoc,$
monthl& depreciation etc the intra;&ear 8alance sheets are not correct. For "arm users a
8alance sheet once a &ear is t&picall& all that is use"ul and necessar&. This is
accomplished 8& ta,ing a &ear end inventor& and entering the ad9ustments$ including
depreciation to ma,e the &ear;end 8alance sheet. The 8eginning and ending 8alance
sheets$ plus cash receipts and e#penditures give the user an accrual income statement$
thus providing &our 8asic "inancial statements.
%se o" a program such as Muic,)oo,s does reCuire some ,no7ledge o"
accounting. Again$ these are general accounting programs and ma& not allo7 "or
recording ph&sical Cuantities. There are some training materials and !e8 sites that can
assist producers 7ho 7ish to use such programs. /i,e Muic,en$ it allo7s &ou to separate
the data into enterprise groups$ such as dair& versus crops. 1n order to produce accurate
"inancial statements$ onl& in"ormation relating to the "arm 8usiness should 8e recorded.
1" a computer is used to trac, "amil& income and e#pense$ &ou should have separate
chec,8oo,s and use Muic,en to record all non "arm transactions$ 7hile more e#pensive
than Muic,en$ the price tag is still attractive to man& small 8usinessmen$ including
"armers.
Fa&* Ca(h a))&"a$ a))!"'ti'0 ((t%*(.
The "arm cash accrual accounting s&stems reCuire some ,no7ledge o" accounting.
(ost "ocus onl& on the "arm 8usiness$ 8ut some allo7 "amil& or other 8usiness data to 8e
,ept in the same s&stem. Tr&ing to totall& integrate man& programs$ especiall& the
integration o" "eed produced$ purchased$ "ed and sold 7ith all cash transactions can 8e a
daunting tas,. )& starting 7ith the 8asic program and adding others as needed$ ma9or
pro8lems should 8e avoided.
3.1.2 G%tti'0 ,%!'1 >"(t /%%4i'0 &%)!&1(
An& o" the a8ove t&pes o" record s&stems can get annual summaries o" cash
receipts and e#penses. This includes sale and purchase o" capital assets$ principal and
interest pa&ments and addition=8orro7ings. To o8tain "inancial statement and anal&Be
"inancial position reCuires using the data in a separate program.
+0
This ma& 8e an additional module "rom the so"t7are compan&$ or it ma& 8e a separate
program. 1n either case$ the chart o" accounts used must match up 7ith the grouping o"
income and e#pense categories in the other program.
-pread sheets are availa8le that can 8e used 7ith &ear end inventor& data to
develop 8alance sheets$ income statements and anal&sis. Chec, the (ontana state
%niversit& 7e8 site "or ones currentl& availa8le$ little cash outla& is reCuired$ 8ut &ou 7ill
need to spend time to understand ho7 to collect and enter the data to do it right. F10'AC
provides another 7a& to develop and anal&Be "inancial statements. 1t is also possi8le to
use a program that is integrated 7ith the 8asic so"t7are li,e TAR or Red 7ing.
3.1.3 Th% 3%(t P&!0&a* ?S(t%*@ 5!& Fa&* 3"(i'%((
!hich program @s&stemA is 8est "or &our "arm 8usinessG 0o one can predict
7hich program is 8est. The "ollo7ing ma& help in the decision.
1. E#amine "arm speci"ic programs
1" &ou:
0eed complete$ 7ell documented "inancial statement
Dave$ or are planning on a large amount o" de8t
Dave man& emplo&ees
Dave someone 7ho has some ,no7ledge o" accounting
Forsee a need "or more e#tensive records in the "uture.
5. E#amine cash ? 8ased or generic programs$ e.g Muic,en i" &ou:
Leep records primaril& "or ta# purposes.
're"er to use spreadsheets$ F10'ACL or an accountant to generate and anal&Be
"inancial statements.
Dave "e7 emplo&ees
Can get needed production data else7here
Dave little ,no7ledge o" computers.
+.0 C!')$"(i!'
1n this unit 7e have learnt that computeriBed "arm record ,eeping could 8e done
7ith the aid o" an& o" the "ollo7ing groups o" so"t7are: -imple cash s&stems @Muic,enA
4eneral cash accrual accounting s&stems @e.g Muic,)oo,s$ DacEas& 'eachtreeA$ Farm
+1
cash accrual accounting s&stems @e.g 'C(ars Transactions plus @TARA$ Red7ingAF Add;
ons "or anal&sis @e.g -preedsheets$ F10'ACL$ AFRA 8& F)-
:.0 S"**a&
1n this unit$ 7e have learnt that:
All accounting so"t7are discussed in this unit allo7 chec,s to 8e 7ritten 7ith the
computer as the data are entered.
All allo7 "or reconciliation o" accounts 7ith 8an, statements; a ma9or step in
improving the accurac& and completeness o" "arm 8usiness records.
Reports can 8e tailored to the needs o" the ta# preparer$ accountant and manager
using the computeriBed so"t7are program "or record ,eeping.
The ma9or disadvantage "or some is that the& all reCuire use o" a computer.
An& program can get the needed cash receipt and e#pense data. Do7ever$ to get
use"ul "inancial statements an inventor& must 8e ta,en at the end o" each
8usiness &ear. !ithout this$ it is impossi8le to develop accurate 8alance sheets
and income statements.
Farmers 7ho need accurate$ complete "inancial statements and anal&sis should
consider using some "orm o" computer record s&stem.
-uch statements can 8e prepared using a simple cash onl& s&stem li,e Muic,en
7hen used in con9unction 7ith spreadsheets other so"t7are programs such as
F10'ACL or the AFRA program 8& F)- or in con9unction 7ith an accountant.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. /ist and e#plain the uses o" the various commercial so"t7are program availa8le to
,eep computeriBed "arm records.
5. -tate the advantages and the disadvantages o" each so"t7are s&stem=program
3. !hat are the 8asic things to consider in selecting a computer record ,eeping
s&stemG
+. !hich o" the computer so"t7are ,no7n to &ou 7ill &ou recommend as the 8est
"or "arm 8usinessG
+5
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
Duvic,$ R. D @500*A: ComputeriBed Farm Record Leeping. hio -tate %niversit&
)ulletin <>0;01 Department o" Agriculture$ Environmental and Developmental
Economics$ the hio -tate %niversit&$ Colum8us.
+3
M!1"$% T#!: 3!!//%%4i'0 a'1 A))!"'ti'0
%nit 1 (eaning and scope o" 8oo,,eeping
5 )oo, ,eeping
3 (eaning and scope o" "arm accounting
+ -&stem o" Farm accounting
: ComputeriBed Farm Accounting
%nit 1: (eaning and scope o" 8oo,,eeping
1.0 1ntroduction
5.0 89ectives
3.0 The )od& o" the unit
3.1 (eaning and scope o" 8oo, ,eeping
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
++
1.0 I't&!1")ti!'
1n this unit &ou 7ill learn a8out meaning and scope o" 8oo, ,eeping. 3ou 7ill 8e
acCuainted 7ith the distinction 8et7een 8oo, ,eeping and accounting as 7ell as the
various 8oo,s used "or 8oo, ,eeping.
2.0 O,-%)ti.%(
1t is e#pected that$ at the end o" this unit$ &ou should 8e a8le to:
E#plain the concept o" 8oo, ,eeping
Distinguish 8et7een 8oo, ,eeping and accounting.
Discuss the various 8oo,s used "or 8oo, ,eeping.
3.0 Th% ,!1 !5 th% "'it
3.1 M%a'i'0 a'1 ()!4% !5 3!!/ /%%4i'0
)oo, ? ,eeping ma& 8e de"ined as the science o" recording transactions involving
mone& or mone&Hs 7orth in a regular and s&stematic manner in such a 7a& that the 8oo,s
o" accounting 7ill sho7 a true and "air state o" the "inancial 7orth o" a 8usiness readil& at
an& point in time.
)oo,;,eeping is the recording o" transactions i.e the record ma,ing phase o"
accounting. The recording o" transactions tend to 8e mechanical and repetitive$ it is onl&
a part o" the "ield o" accounting and pro8a8l& the simplest part.
n the other hand$ accounting includes the design o" accounting s&stems$
preparation o" "inancial statements$ audits$ cost studies$ development o" "orecast$ income
ta# 7or,$ computer applications to accounting in"ormation as an aid to ma,ing 8usiness
decisions.
The 8oo,s that are used "or 8oo, ,eeping "all naturall& into the "ollo7ing
divisions namel&:
1. 'rincipal 8oo,s: under this su8;head 7e have the ledger and the cash 8oo,.
These are the main 8oo,s 7hich are used "or practicing the s&stem o"
accounts.
5. -u8sidiar& 8oo,s: This is other7ise ,no7n as 8oo,s o" original entr&$ "irst
entr& or prime entr&. (an& details are recorded in these 8oo,s 8e"ore the
amounts concerned are trans"erred to the ledger accounts.
+:
3. -tatistical or memorandum 8oo,s: 1n these 8oo,s are "ound various details
connected 7ith the 8usiness operations that cannot convenientl& 8e recorded
in other 8oo,s. E#amples o" these are the cost 8oo,s and stoc, 8oo,s o" a
manu"acturing "irm$ the registers o" shareholders in limited lia8ilit&
companies$ the polic& registers o" an insurance compan& etc.
+.0 C!')$"(i!'
!e have e#amined the meaning and scope o" 8oo, ,eepingF the 8oo,s that are
used "or 8oo, ,eeping 7ere also discussed.
:.0 S"**a&
1n this unit$ 7e have learnt that:
)oo, ,eeping is the science o" recording transactions involving mone& or
mone&Hs 7orth in a regular and s&stematic manner in such a 7a& that the 8oo,s
o" accounts 7ill sho7 a true and "air state o" the "inancial 7orth o" a 8usiness
readil& at an& point in time.
The various 8oo,s that are used "or 8oo, ,eeping can 8e classi"ied into: 'rincipal
8oo,s$ su8sidiar& 8oo,s$ statistical or memorandum 8oo,s.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. De"ine 8oo,;,eeping and Accounting
5. Distinguish 8et7een 8oo, ,eeping and accounting.
3. E#plain the three ma9or divisions o" 8oo,s used in 8oo, ,eeping and accounting.
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
lo"inlana /. and R.! de7ale @1>>>A: Fundamentals o" Accounting 2olume 1$
-econd Edition$ -tecom 'u8lishers /td A,ure$ ndo -tate$ 0igeria pp 1:;1<.
+6
U'it 2: 3!!/ /%%4i'0
1.0 1ntroduction
5.0 89ective
3.0 The 8od& o" the unit
3.1 )oo, ,eeper
3.5 )oo, ,eeping s&stems
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
+*
1.0 I't&!1")ti!'
1n this last unit @unit oneA$ &ou have "ound out that$ 8oo, ,eeping is the record
ma,ing phase o" accounting. 3ou have also learnt that$ the various 8oo,s that are used
"or 8oo, ,eeping can 8e classi"ied into: principal 8oo,s$ su8sidiar& 8oo,s$ statistical or
memorandum 8oo,s. 1n this unit$ &ou 7ill learn a8out the 8oo, ,eeper as 7ell 8oo,
,eeping s&stems.
2.0 O,-%)ti.%(
At the end o" this unit$ &ou 7ill 8e e#pected to 8e a8le to:
E#plain the various s&stems o" )oo, ,eeping.
3.0 Th% 3!1 !5 th% "'it
3.1 3!!/ /%%4%&
A 8oo, ,eeper @or 8oo, ,eeperA$ also ,no7n as an accounting cler, or accounting
technician$ is a person 7ho records the da&;to;da& "inancial transactions o" an
organiBation. A 8oo, ,eeper is usuall& responsi8le "or 7riting the Jda&8oo,sK$ The
da&8oo,s consist o" purchase$ sales$ receipts and pa&ments. The 8oo,,eeper is
responsi8le "or ensuring all transactions are recorded in the correct da& 8oo,$ suppliers
ledger$ customer ledger and general ledger. The 8oo, ,eeper 8rings the 8oo,s to the trial
8alance stage. An accountant ma& prepare the income statement and 8alance sheet using
the trial 8alances and ledgers prepared 8& the 8oo,,eeper.
3.2 3!!//%%4i'0 S(t%*(
T7o common 8oo,,eeping s&stems used 8& 8usinesses and other organiBations
are the single entr& 8oo, ,eeping s&stem and the dou8le;entr& 8oo,,eeping s&stem.
3.2.1 Si'0$% 6 %'t& ((t%*
The primar& 8oo, ,eeping record in single;entr& 8oo, ,eeping is the cash8oo,
7hich is similar to a chec,ing @cheCuingA account register 8ut allocates the income and
e#penses to various income and e#pense accounts -eparate account records are
maintained "or pett& cash$ accounts pa&a8le and receiva8le and other relevant
transactions such as inventor& and travel e#penses.
+<
The main characteristic o" this s&stem is the ,eeping o" personal accounts onl&.
For e#ample$ a trader 7ho operates this s&stem 7ill certainl& have a cash8oo,$ 8ut he
ma& or ma& not 7rite the cash8oo, up correctl&$ since he alone operates the 8oo,s and
the 8usiness. De 7ill have access to his 8an, account and this is enough "or him to ,no7
the state o" the 8usiness. )esides the cash8oo,$ he 7ill also ,eep his customers accounts
to 7hom goods are sold on credit 9ust "or the record. For creditors he ma& not 8other
much to record their transactions$ since this is 8ased on personal dealings.
This is one o" the pro8lems o"ten encountered 7hen the dou8le entr& s&stem is not
in use. ther accompanied pro8lem o" the single entr& s&stem are non ,eeping o" the
"ollo7ing records:
i. Accurate E#penses Account
ii. Total sales and purchases o" 4oods
iii. Accurate "igures "or creditors
iv. AcCuired Assets o" the 8usiness @8esides the de8torsA
v. Accurate "igure "or capital Account at an& given time.
!hen these records are not in place$ it 7ill 8e ver& di""icult to have complete records
leading to trial 8alance.
To prepare the pro"it and /oss Account and a 8alance sheet "rom single entr&
8oo,;,eeping$ the "ollo7ing procedure are recommended:
i. )uild up a statement o" A""airs and capital Account: This reCuires the value o"
assets and lia8ilities to 8e determined in "acts and "igures. This is done 8&
ta,ing the value o":
ii. Cash availa8le at the 8eginning and end o" a trading period including cash at
8an,.
iii. Availa8le assets 8oth at the 8eginning and close o" 8usiness e.g "urniture$
machiner&$ stoc, in trade and the value o" de8tors including prepaid and 8ills
receiva8le.
iv. Consider the value o" sundr& creditors$ this 7ill include personal advances to
the proprietor$ 8an, overdra"ts$ 8ills pa&a8le and outstanding e#penses o7ing.
+>
v. Construct a capital account "or the o7ner o" the 8usiness. n credit @CrA side
insert the opening 8alance o" the capital$ then add an& additional capital
contri8uted either in the "orm o" cash or o" other assets.
n the De8it side enter the closing 8alance o" capital at the end o" the period. The
di""erence 8et7een the t7o sides o" the capital account 7ill represent the pro"it or loss "or
the period.
0ote: 1" the opening capital e#ceeds the closing capital$ such e#cess is considered
to 8e a loss and 7here the closing capital e#ceeds the opening capital$ it is regarded as
pro"it "or the period.
E#ample 1
The "ollo7ing is an e#ample o" a single entr& record$ 'repare a statement o" A""airs and
statement o" pro"it "or the &ear ended.
Ascertain 8oth the opening and closing capital.
Jan 1
st
Dec 31
st
-toc, ; in ?trade
0
5:$000
0
<0$000
(achiner& 1:$000 +0$000
Furniture 30$000 :0$000
De8tors 60$000 *:$000
Creditors ::$000 100$000
1nsurance 'repaid ; 5$:00
Electricit& prepaid +000 6$*:0
Cash in hand 30$000 15$000
Cash at 8oo, :0$000 3*$:00
)& Januar& 1
st
$ accrued e#penses 7as 03$000 and 7ages o7ing 7as 011$500. At the end
o" the &ear$ :E provision "or )ad de8ts 7as to 8e set aside. Also at the close o" the
8usiness rent o7ing 7as 0 <:00 and 8ills pa&a8le 7as 011$1:0. The amount 7ithdra7n
8& the o7ner in the &ear 7as 050$000. !ithin the &ear$ he sold his used car "or 0 +0$000
and the proceeds paid into his 8usiness account.
i. Find the value o" sales in the period
ii. Find the value o" purchases in the period.
iii. Calculate the cost o" goods sold
:0
!here the opening stoc, and purchases are added together$ the result is the cost
o" goods availa8le "or sale. !hen closing stoc, is deducted$ the resulting "igure is
cost o" 4oods -old.
iv. Then "ind the 4ross pro"it
To "ind sales and purchases "igure:
-A/E- C0TR/ ACC%0T
Dr ? pening value o" de8tors
Cr ? Cash received "rom de8tors
Cr ? Closing value o" de8tors
The di""erence 8et7een the de8it and credit sides represents the value o" sales in the
period$
'%RCDA-E- C0TR/ ACC%0T
Dr ? Cash paid to Creditors
Cr ? pening value o" creditors and ta,e do7n 8elo7 the lines.
The Jdi""erenceK 8et7een the de8it and credit sides represents the value o" purchases in
the period.
The "ollo7ing transactions sho7s the preparation o" sales control Account and the
purchases control Account.
0
pening "igure o" de8tors "or the &ear$ Jan 1
st
500;1 +0$000
pening "igure o" creditors "or the &ear$ Jan 1
st
500;1 ::$000
Cash received "rom de8tors 7ithin the &ear 5:0$000
Cash paid to creditors 7ithin the &ear 1<0$000
Closing "igure o" creditors at the end o" trading Dec 31 500;1 3:$000
Closing "igure o" de8tors at the end o" trading Dec 31 500;1 60$000
-olution:
E#ample 1
-ales Control Account
500;1 0 500;1 0
:1
Jan 1
Dec 31
500;5
Jan 1
)alance 8="
-ale @di""erenceA
)alance 8=d
+0$000
5*0$000
310$000
60$000
Dec 31
Cash
)alance c=d
5:0$000
60$000
310$000
'urchases Control Account
0 500;1 0
500;1
Dec 31
500;5
Cash
)alance c=d
1<0$000
3:$000
51:$000
Jan 1
Dec 31
500;5
Jan 1
)alance 8="
'urchases di""erences
)alance 8=d
::$000
160$000
51:$000
3:$000
-tatement o" A""airs as at 1
st
Januar&
0 0 0 0
Capital Fund
Cash 1ntroduced
@di""erenceA
Current /ia8ilities:
Creditors
Accrual e#penses
!ages o7ing
::$000
3$000
15$000
1++$000
*0$000
51+$000
Fi#ed Assets
(achiner&
Furniture
Current Assets
-toc,
De8tors
Electricit&
prepaid
Cash in hand
Cash at 8an,
1:$000
30$000
5:$000
60$000
+$000
30$000
:0$000
+:$000
16>$000
51+$000
0ote:
%nder the capital "und$ cash introduced in Januar& 7as arrived at 8& su8stracting
the current lia8ilities "rom the total o" 8oth "i#ed and current assets. This di""erence
:5
8et7een Assets and lia8ilities in the statement o" A""airs is the cash introduced @capitalA
on 1
st
Januar&.
5. 'reparation o" -tatement o" 'ro"it
A"ter the opening statement o" A""airs has 8een opened and the capital ascertained
the ne#t step is to prepare the statement o" pro"it "or the &ear. )ut 8e"ore this is done$ the
closing capital 7ill have to 8e ascertained as 7ell.
Capital at the close o" 8usiness is ascertained thus:
DR CR
A--ET-:
(achiner&
Furniture
-toc, in trade
De8tors
Cash
Electricit& 'repaid
1nsurance
)an,
/1A)1/1T1E-
Creditors
Rent 7ing
)ills pa&a8le
Closing capital @di""erenceA

0
+0$000
:0$000
<0$000
*:$000
15$000
6$*:0
5$:00
3*$:00
303$*:0
0
100$000
<$:00
11$:00
1<3$*:0
303$*:0

)e"ore &ou prepare the Jstatement o" pro"itK$ o8serve the "ollo7ing steps.
1. Find the di""erence 8et7een the opening and closing capital. The di""erence
given the apparent Jpro"itK "or the &ear.
:3
5. 0ote the 7ithdra7als made 8& the o7ner o" the 8usiness$ and an& introduction
o" capital during the trading period. Also note the amount 8& 7hich "i#ed
assets have 8een depreciated. The same thing applies to )ad de8ts provision.
-TATE(E0T F 'RF1T A0D /-- FR TDE 3EAR E0DED 31
-T
DECE()ER
0 0
Dec 31 -undr& /ia8ilities
Closing capital c=d
pening Capital
Jan 1
-ales @carA
)ad de8ts @provisionA
0et 'ro"it
150$000
1<3$*:0
303$*:0
1++$000
+0$000
3$*:0
16$000
503$*:0
Dec 31
Dec 31
-undr& Assets
Capital 8=d Dra7ing
303$*:0
303$*:0
1<3$*:0
50$000
503$*:0
CA'1TA/ ACC%0T
0 0
Dec 31 Dra7ings
)alance c=d
50$000
1+0$000
160$000
Jan 1 )alance c=d
0et pro"it

1++$000
16$000
160$000
3.2.2 D!",$% 6 %'t& ((t%*
The dou8le entr& s&stem o" 8oo,,eeping is one 7here8& t7o @5A entries are made
"or ever& transaction. Dere$ 7e come to the long esta8lished principle o" dou8le entr&
8oo,;,eeping. The "irst golden rule is:
Ever& de8it entr& must have a corresponding credit entr& and ever& credit entr& must
have a corresponding de8it entr&. The second golden rule is de8it the account that
receives and credit the account that gives.
The o89ectives o" dou8le entr& s&stem are to:
:+
1. 'rovide a permanent$ s&stematic and complete record o" "inancial
transactions.
5. 'rovide "inancial records "or the value o" assets and lia8ilities$ purchases and
sales$ income and e#penses.
3. 'rovide records "or ascertaining pro"it or loss made at an& given time.
+. -ho7 the "inancial 7or, o" an organiBation at an& point in time.
:. Chec, the arithmetical accurac& o" monetar& transactions recorded in the
8oo,s o" accounts.
6. Delp in detecting "raud and other irregularities that ma& arise "rom inadeCuate
accounting records.
*. 'rovide "inancial records "or 8usiness comparative purposes 7ithin and
7ithout the activities o" the organiBation.
<. 'rovide 8asis "or planning and e""ective control o" 8usiness operations.
The ledger is the principal 8oo, o" accounts. Ever& other entries or transactions in all the
other 8oo,s o" account are recorded in it. A ledger account has t7o sides$ one "or
recording values received and the other "or recording value given. 1t could 8e de"ined as
a diar& o" events in 7hich all happenings @"inancial transactionsA are recorded "or eas&
re"erence and to assist in the dou8le entr& s&stem. A -pecimen o" ledger.
Dr Cr
Date 'articulars Folio 0 : , Date 'articulars Folio 0 : L

The Accounts in the ledger are s sho7n 8elo7
'ersonal Accounts
::
De8tors Creditor
@e.g )an,$ customersA @e.g supplies$ goods=servicesA
1mpersonal Accounts
Real Account 0ominal Account
'ropert& Accounts
e.g 'lant N machiner&
stoc, and cash etc 4ains$ 'ro"its$ losses=E#penditure
Discount received 7ages$ rents
Dividend received
S",(i1ia& 3!!/(
-u8siding 8oo,s are the records o" transactions entered in separate 8oo,s$ mainl&
"or the purpose o" listing and classi"&ing the various transactions as the& occur and to
avoid the ris, o" errors and omissions o" direct entries in the ledger. -u8sidiar& 8oo,s are
also called 8oo,s o" original entr& or J8oo,s o" prime entr&K
The su8sidiar& 8oo,s reCuired in 8usiness are:
ii. 'urchases 9ournal=purchase da& )oo,. This 8oo, contains the particulars o"
goods 8ought on credit. 'articular o" each purchase 7ith date and names o"
seller are entered in it and the amount is posted individuall& to the credit o"
the account o" the supplier in the ledger. The total amount o" purchases "or a
given period is posted to the De8it o" purchases Account.
iii. -ales Journal= sales Da& )oo,: 1n the 8oo,$ a dail& record is made o" all sales
o" goods on credit. 'articulars o" each sales 7ith date$ name o" consumer and
the good sold are entered in it. Do7ever$ all transactions entered in this 8oo,
have to 8e posted to the credit o" the sales account at the end o" a given
period.
iv. 'urchases Returns )oo,
:6
This contains particulars o" goods returned$ the date and the name o" the
seller
= supplier. All postings 8eing made in respect o" purchases returns are ta,en
to the De8it o" the account o" the seller= supplier to 7hom goods are returnedF
and the periodic total is posted to the credit o" the purchases Returns Account.
v. -ales Returns )oo,
This 8oo, records goods sold 8ut later returned "or one reason or the other
@i.e de"ective$ under;siBe$ 7rong suppl&$ irregular siBe or colour etcA.
/i,e the purchases Returns$ it records the names$ date$ goods returned
and the reason "or its return. All posting 8eing made in respect o"
this returns are ta,en to the credit o" the account o" the customer
7ho returned the goods. The respective totals are posted to the De8it
o" sales Returns Account periodicall&.
vi. The Journal 'roper
The 9ournal or Journal proper is used "or the purpose o" recording
transactions$ 7hich 8ecause o" their nature cannot 8e entered in an& other
8oo, o" prime entr&. 1t is also used "or opening and closing entries$ trans"er
o" items or corrections o" errors etc.
E#ample 1
Enter the "ollo7ing transactions in dou8le entr& s&stem in the ledger accounts o"
/. ladime9i "or the month o" Januar& 1> # <
Jan 1 -tarted 8usiness 7ith 0 600$000$ 300$000 in the 8an,$ 0 500$000 in hand
and 0 100$000 on loan "rom D. T7ins 8& cheCue
5 )ought 0 1:0$000 goods 8& cheCue
3 )ought 0 300$000 goods on credit "rom '. )alogun
+ -old goods on credit to J. 'eter 0 500$000 and '. John 0 5:0$000
: )ought motor van pa&ing 8& cash 0 100$000
6 'aid motor e#penses 8& cheCue 0 10$000
* Returned goods to '. )alogun 0 50$000
< 4oods returned 8& '. John 0 5:$000
:*
> 'aid '. )alogun 8& cheCue 0 1:0$000
10 The "ollo7ing people paid 8& cheCue J. 'eter 0 1*0$000 and
'. John 0 1>0$000
11 ladime9i 8rought a "urther 0 100$000 into the 8usiness and deposited it
in the 8an,
15 )ought ""ice "urniture on credit "rom '. Tete 0 +00$000.
13 )ought o""ice stationer& on credit "rom A Dar,o 0 50$000
1+ 'aid rent 8& cash 0 10$000
1: Returned part o" the o""ice "urniture to '. Tete 0 :0$000
16 'aid '. Tete 8& cheCue 0 1:0$000
1* -old some o" the o""ice "urniture "or cash 0 0*0$000
1< Too, cash "or private use 0 1:$000
1> Too, goods 7or, 0 10$000 "or private use
50 )ought 8uilding on credit "rom A A8an,7a 0 +00$000
51 Received rent 0 10$000 "rom part o" the 8uilding su8;let cheCue
55 'aid rent 8& cheCue 0 30$000
5: Repaid part o" D. TaleHs loan 8& cheCue 0 <0$000
56 Cash sales paid direct the 8an, 0 +00$000
31 Cash sales 0 1:0$000
-olution
/. ladime9iHs ledger accounts "or the month o" Januar& 1> # <
Capital Account
1> # < 0 1> # < 0
Jan 1 )an, 300$000
1 Cash 500$000
11 )an, 100$000
/oan D. TaleHs Account
1> # < 0 1> # < 0
Jan 5: )an, <0$000 Jan 1 )an, 100$000
:<
)an, Account
1> # < 0 1> # < 0
Jan 1 Capital 300$000 Jan 1 'urchase 1:0$000
1 /oan @D. TaleA100$000 6 (otor e#penses 10$000
10 J. 'eter 1*0$000 > '. )alla
1:0$000
10 '. John 1>0$000 16 '. Tete 1:0$000
11 Capital 100$000 55 Rent 30$000
51 Rent Receive 10$000 5: /oan @D. TaleA <0$000
56 -ales +00$000
Cash Account
1> # * 0 1> # < 0
Jan 1 Capital 500$000 Jan : (otor van 100$000
1* ""ice Furniture *0$000 1+ Rent 10$000
31 -ales 1:0$000 1< Dra7ings 1:$000

'urchase Account
1> # < 0 1> # * 0
Jan 5 )an, 1:0$000
3 '. )alla 300$000
'. )alogunHs Account
1> # < 0 1> # < 0
Jan * Returns out7ards 50$000 Jan 3 'urchases 300$000
> )an, 1:0$000
-ales Account
1> # < 0 1> # < 0
Jan + J. 'eter 500$000
+ '. John 5:0$000
:>
56 )an, +00$000
31 Cash 1:0$000
J. 'eterHs Account
1> # < 0 1> # < 0
Jan + -ales 50$000 Jan 10 )an, 1*0$000
'. JohnHs Account
1> # < 0 1> # < 0
Jan + -ales 5:0$000 Jan < Return in7ards 5:$000
10 )an, 1<0$000
(otor van Account
1> # < 0 1> # < 0
Jan : Cash 100$000

(otor E#penses Account
1> # < 0 1> # < 0
Jan 6 )an, 100$000

Returns ut7ard Account
1> # < 0 1> # < 0
Jan * '. )alogun 50$000
Returns 1n7ard Account
1> # < 0 1> # < 0
Jan < '. John 5:$000
60
""ice Furniture Account
1> # < 0 1> # < 0
Jan 15 '. Tete +00$000 Jan 1: '. Tete :0$000
1* Cash *0$000
'. TeteHs Account
1> # < 0 1> # < 0
Jan 1: ""ice Furniture :0$000 Jan 15 ""ice "urniture +00$000
16 )an, 1:0$000
""ice -tationer& Account
1> # < 0 1> # < 0
Jan 13 A. Dar,o 50$000
A. Dar,oHs Account
1> # < 0 1> # < 0
Jan 13 ""ice stationer& 50$000
Rent E#penses Account
1> # < 0 1> # < 0
Jan 1+ Cash 10$000
55 )an, 30$000
Dra7ings Account
1> # < 0 1> # < 0
Jan 1< Cash 1:$000
1> 4oods 7ithdra7n 10$000
)uilding Account
1> # < 0 1> # < 0
Jan 50 A. A8an,7a +00$000
61
4oods !ithdra7n Account
1> # < 0 1> # < 0
Jan 1> Dra7ings 10$000
Rent Received Account
1> # < 0 1> # < 0
Jan 51 )an, 10$000
Rent E#penses Account
1> # < 0 1> # < 0
(a& 55 )an, 30$000
3a$a')i'0 !55 !5 A))!"'t
This means "inding the 8alance on each account that ma,e the de8it side eCual to
the credit side. The 8alance is the accounting term indicating the di""erence 8et7een the
t7o sides o" an account. 1" the total o" the de8it entries e#ceeds the total o" the credit
entries$ the account is said to have a de8it 8alance$ i" the total o" the credit entries e#ceeds
the total o" the de8it entries$ the account is said to have a credit 8alance. 1" the total o" the
de8it entries eCual the total o" the credit entries$ the account is said to have a nil 8alance
and is thus sel" closing.
E#ample ii
Record the "ollo7ing transactions in the ledger account o" D. Lollo "or the month
o" (arch 1> T * and 8alance o"" accounts at the end o" the month
1> T * 0
(ar 1 -tarted 8usiness 7ith:
Cash in hand 100$000
Cash at 8an, 1$+00$000
65
/oan "rom A.9o 8& cash 300$000
/oan "rom J.A9a&i 8& plant and (achiner& 7orth 500$000
(ar 5 )rought goods "rom J .'aul 5:0$000
: -old goods Joseph and -ons 500$000
* -old goods "or cash 100$000
11Dra7 cheCue "or sel" :0$000
15 )rought goods "rom A. /a,olu 300$000
1< 'aid cash to )an, *0$000
50 Cash 'urchases +0$000
51 'aid J. 'aul 8& cheCue 500$000
5+ -old goods 8& cheCue 600$000
56 !ithdra7 "rom current acct to saving acct 5:0$000
5< traveling e#penses paid 8& cheCue 100$000
5> Traveling e#pense 7ing 50$000
30 utstanding rent e#penses 10$000
31 'aid advertising 8& cheCue 50$000
31 'aid 8& cheCue the 8alance in A 9oHs account ;;;;;;;;
31 )an,ed all the mone& in cash till e#cept 10$000
-olution
D. LolloHs ledger accounts "or the month o" (arch 1> # *
Capital Account
1> # * 0 1> # * 0
(ar 31 )al c=d 1$:00$000 (ar 1 Cash 100$000
1 )an, 1$+00.00
1$:00$000 1$:00.00
April 1 )al 8=d 1$:00$000

/oan Account @A. 9oA
1> # * 0 1> # * 0
(ar 31 )an, 300$000 (ar 1 Cash 300$000
63
/oan Account @J. A9a&iA
1> # * 0 1> # * 0
(ar 31 )an, 500$000 (ar 1 'lant N (achiner& 500$000

)an, Account
1> # * 0 1> # * 0
(ar 1 Capital 1$+00$000 (ar 11 Dra7ings :0$000
1< Cash *0$000 51 J. 'aul 500$000
5+ -ales 600$000 56 Deposit Account 5:0$000
31 Cash 3<0$000 5< Travelling e#penses 100$000
31 Advertising e#penses 50$000
31 J. A9a&i 500$000
31 A. 9o 300$000
31 )al cd 1$330$000
5$+:0$000 5$+:0$000
April 1 )al 8=d 1$330$000
Cash Account
1> # * 0 1> # * 0
(ar 1 Capital 100$000 (ar 1< )an, *0$000
1 /oan @A. 9oA 300$000 50 'urchases +0$000
* -ales 100$000 31 )an, 3<0$000
31 )al c=d 10$000
:00$000 :00$000
)al 8=d 10$000
'lant and (achiner& Account
1> # * 0 1> # * 0
(ar 1 /oan @J.A9a&iA 500$000
6+
'urchase Account
1> # * 0 1> # * 0
(ar 5 J. 'al 5:0$000 (ar 31 )al c=d :>0$000
1: A./a,olu 300$000
50 Cash +0$000
:>0$000 :>0$000
April 1)al 8=d :>0$000
J. 'aulHs Account
1> # * 0 1> # * 0
(ar 51 )an, 500$000 (ar 5 'urchases 5:0$000
31 )al c=d :0$000

5:0$000 5:0$000
Joseph N -ons Account
1> # * 0 1> # * 0
(ar : -ales 500$000
-ales Account
1> # * 0 1> # * 0
(ar 31 )al c=d >00$000 (ar : Joseph N -ons 500$000
* Cash 100$000
5+ )an, 600$000
>00$000 >00$000
April 1 1 )al 8=d >00$000
Dra7ings Account
1> # * 0 1> # * 0
(ar 11 )an, :0$000
6:
A. /a,oluHs Account
1> # * 0 1> # * 0
(ar 1: 'urchases 300$000
Deposit Account
1> # * 0 1> # * 0
(ar 56 )an, 5:0$000
Travelling E#penses utstanding Account
1> # * 0 1> # * 0
(ar 5< )an, 100$000 (ar 31 )al c=d 150$000
5> Travelling E#p. ut 50$00
150$000 150$000
April 1 )al 8=d 150$000
Travelling E#penses outstanding Account
1> # * 0 1> # * 0
(ar 5> Travelling E#p 50$000
utstanding Rent E#penses Account
1> # * 0 1> # * 0
(ar 30 Rent E#penses 10$000
Rent E#penses Account
1> # * 0 1> # * 0
(ar 30 utstanding rent e#penses 10$000
Advertising E#penses Account
1> # * 0 1> # * 0
(ar 31 )an, 50$000
66
0ote: The accounts 7ith onl& one entr& need not to 8e 8alanced although i" the accounts
are 8alanced there is no pro8lem.
3.2.3 C!*4"t%&i<%1 ,!!//%%4i'0
ComputeriBed 8oo,,eeping removes man& o" the paper J8oo,sK that are used to
record transactions and usuall& en"orces dou8le entr& 8oo,,eeping$ computer so"t7are
increases the speed at 7hich 8oo,,eeping can 8e per"ormed.
3.2.+ O'$i'% ,!!//%%4i'0
nline 8oo,,eeping or remote 8oo,,eeping allo7s source documents and data to
reside in 7e8;8ased application 7hich allo7 remote access "or 8oo,,eepers and
accountants. All entries made into the online so"t7are are recorded and stored in a
remote location. The online so"t7are can 8e accessed "rom an& location in the 7orld and
permit the 8oo,,eeper or data entr& person to 7or, out o" an o""ice. The paper7or, can
either 8e delivered to the 8oo,,eeper$ or a compan& can scan its 8usiness documents and
upload them to a secure location or into an online 8oo,,eeping application on a regular
8asis. This allo7s the 8oo,,eeper to 7or, remotel& 7ith these documents to update the
8oo,s. %sers o" the technolog& include:
(o8ile emplo&ees scanning and sending in their receipts and 8ills 7hile on the
road to get reim8ursed more Cuic,l&.
rganiBations 7ith multiple o""icers centraliBing their accounting department and
having the documents scanned and sent to this location.
+.0 C!')$"(i!'
1n this unit$ 7e have learnt a8out 8oo,,eeping and the various methods o"
8oo,,eeping.
:.0 S"**a&
1n this unit$ &ou have learnt that:
)oo,,eeping is the act o" ,eeping accounts in a regular and s&stematic manner.
i.e the record ma,ing phase o" accounting.
6*
The 8oo,s that are used "or 8oo,,eeping "all naturall& into the "ollo7ing
divisionsF principal 8oo,s$ su8sidiar& 8oo,s and memorandum 8oo,s.
The ma9or methods o" 8oo,,eeping are single entr& and dou8le entr&. Do7ever$
8oo,,eeping can 8e done on;line or computeriBed.
The golden rules "or dou8le entr& s&stem are:
i. Ever& de8it entr& must have a corresponding credit entr& and ever& credit
entr& must have a corresponding de8it entr&.
ii. De8it the account that receives and credit the account that gives.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. !ho is a 8oo,,eeperG
5. -tate and e#plain the ma9or methods o" 8oo,,eeping
3. -tate and e#plain the golden rules o" 8oo,,eeping
+. Enter the "ollo7ing transactions in dou8le entr& "orm in the 8oo,s o" Jo,o9e N
-ons and 8alance o"" the accounts at the end o" mouth.
1> # >
Dec 1 -tarted 8usiness 8& cheCues 0 >00$000 and 0 100$000 8& cash
5 )ought goods on credit "rom Tade N sons 0 +00$000
3 'aid "or carriage on purchases 8& Cash 0 1:$000
: -old goods 8& cheCue 0 *00$00
* )ought motor vehicle on credit "rom loto /td 0 *00$000
> -old goods in credit to )olu7ati"e N Daughters 0 600$000
11 Received cheCue "rom )olu7ati"e 0 5:0$000
13 Returned goods to Tai7o N -ons 0 5:$000
1: )ought goods on credit "rom 'elu N -ons 0 +00$000
1* 'aid /oto /td 0 :00$000 8& cheCue
1> 'aid carriage on sales 8& cash 0 1<$000
51 Dra7 cheCue "or 0 :0$000 "or 8usiness use
53 !ithdra7 cash "or personal use 0 30$000
5: 'aid "or advertising in cash 0 >$000
56 'aid salaries and 7ages 8& cheCue 0 *:$000
6<
5* 'aid the 8alance on Tade N sons account 8& cheCue
5< )an,ed cash in the cash till 7ith the e#ception o" 0$000
31 7ithdra7 0 *0$000 "rom current account to deposit account
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
lo"inlana$ /. and R.! de7ale @1>>>AF Fundamentals o" Accounting volume 1$
second Edition$ -tecom 'u8lishers$ A,ure$ ndo -tate$ 0igeria. 'p 16;30.
1g8en$ R. @500+A: Financial Accounting (ade -imple. 2olume 1 First edition.
E/ ? TDA 2entures /td$ /agos$ /agos -tate$ 0igeria '' 551;556.
!illiams$ J.RF -.F Da,aF (.- )ettner$ J.2. Carcello @500<A: Financial and (anagerial
Accounting$ (c4ra7;hill 1r7in 'u8lishers '. 56.
'inson$ / and J. Jinnett @1>>3A: Leeping the )oo,s$ -econd Edition. %pstart 'u8lishing
Compan&$ 1nc. '' 10.
6>
U'it +: S(t%* !5 Fa&* A))!"'ti'0
1.0 1ntroduction
5.0 89ectives
3.0 The )od& o" the unit
3.1 -&stems o" "arm Accounting
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
*0
1.0 I't&!1")ti!'
(a,ing o8servations on the 8usiness and deriving in"ormation is one o" the most
important roles o" "arm management. Farm Accounting provides in"ormation to control
mone& "lo7 in the 8usiness. 1t provides in"ormation on "inancial J7orthnessK$
per"ormance and monetar& chec,ing. 1n this unit$ &ou 7ill learn a8out the s&stems o"
"arm accounting.
2.0 O,-%)ti.%(
At the end o" this unit$ &ou 7ill 8e e#pected to 8e a8le to e#plain the various
s&stems o" "arm accounting.
3.0 Th% ,!1 !5 th% "'it
3.1 S(t%* !5 5a&* A))!"'ti'0
Accounts are "inancial records o" 7hat the "armer spends and receives.
'otentiall&$ a complete s&stem o" "arm accounting should give the "armer much
in"ormation. e.g.
i. The current cash position and estimates o" the "uture cash positions.
ii. The past pro"ita8ilit& o" di""erent crops.
iii. The amounts o7ed to the "armer 8& de8tors$ and 8& him to creditors.
iv. The value o" the 8usiness assets @plant$ stoc,$ land and 8uilding etcA and.
v. The pro"ita8ilit& o" the 7hole "arm and estimates o" li,el& "uture pro"its.
Four variants o" the accounting s&stem are discussed in this unit and these are:
3.1.1 Fa&* I')!*% Stat%*%'t !& Ca(h A'a$(i( A))!"'t
The Farm 1ncome Account is a statement o" all cash transactions that too, place
7ith regard to the "arm "or the &ear that has 9ust ended. 1n the "arm Account 8oo,$ -ales
and receipts are recorded on the le"t hand side$ 7hile purchases and e#penses are
recorded on the right hand side. %nder each o" the t7o sides o" the Account$ there are
three columns: Date$ Details and Total.
*1
Ta8le :: Farm 1ncome -tatement "or the 3ear ended Dec 31$ 500*
-ales and Receipts 0 'urchase and E#penses 0
Date Details Total
received
Date Details Total
paid
Jan 1 pening 8alance
8eing cash in 8an, 1$000$000 1mplements 100$000
!ages :00$000
Feeds 1$500$000
-eeds <0$000
FertiliBer :0$000
Jul& 3ams +00$000 Rent 50$000
-ept (aiBe 5:0$000
0ov Cassava 1<0$000
0ov Eggs :00$000
0ov )roiler 600$000
Dec thers +:0$000
3$3<0$000 5$000$000
Closing )alace
8eing cash in 8an, 1$3<0$000
3$3<0$000 3$3<0$000
3ear 500<: pening 8alance 8eing cash in 8an, O 01$3<0$000
3.1.2 Fa&* T&a1i'0 A))!"'t !& P&!5it a'1 $!(( A))!"'t
1n order "or a "armer to ,no7 7hether he had made a pro"it or loss during the
&ear$ he needs to present his records in "orm o" trading account in details.
The pro"it and loss Account provides in"ormation a8out the per"ormance o" the
8usiness in a given period o" time. This is normall& in one &ear. 'ro"it is a return to the
management. -o$ a manager 7ill 8e interested in ma,ing 9udgments 8ased on the pro"it
earned.
1n the "arm Trading Account$ it is customar& to put Jpurchase and E#penses on
the le"t hand side and Jsales and ReceiptsK on the right. The closing valuation is also on
the right and opening valuation on the le"t
Ta8le 6: Farm Trading Account as at Decem8er 31$ 500*.
'urchases and E#penses 0 -ales and Receipts 0
pening valuation -heep 5:0$000
-heep 5:0$000 4oat 3<<$000
4oat +10$000 3ams 500$000
*5
-eed +0$000 Cocoa +:0$000
FertiliBer 150$000 (aiBe 1><$000
Cocoa Trees <:0$000 (elon 10+$000
-pra&s 3:$000 'roduce consumed 1:<$000
(aiBe <<$000 (iscellaneous
3am :+$000 Receipts 115$000
(elon 66$000 Total Receipts 1$<60$000
Total opening valuation 1$>13$000 Closing 2aluation
Cocoa Trees 1$000$000
-heep 300$000
E#penses 4oat +<0$000
-eed 35$000
1mplements +:$000 (aiBe 1+0$000
1nsecticides 5:$000 3am 33$000
!ages 101$000 (elon **$000
Feeding -tu""s ++$000 1mplements <<$000
Rent :0$000 Total closing
-eeds and "ertiliBer 510$000 2aluation 5$100$000
Depreciation :00$000
2eterinar& -ervices *5$000
Total E#penses 5$>60$000
Farm 'ro"it 1$000$000
3$>60$000 3$>60$000
3.1.3 3a$a')% Sh%%t
The 8alance sheet other7ise ,no7n as the net7orth statement or "inancial
statement 7hich applies to a point in time and represents a stoc, concept. 1t is li,e ta,ing
a snapshot o" the 8usiness at a particular point in time. The net7orth statement sho7s the
value o" the assets that 7ould remain i" the 8usiness 7ere to 8e liCuidated and all outside
claims paid.
)& de"inition$ net7orth statement is eCual to total assets minus total lia8ilities$
that is:
The 0et7orth statement sometimes gives in"ormation on the solvenc& o" the 8usiness and
is used as 8asis "or credit 8ecause it sho7s the a8ilit& o" the 8usiness to meet short;run
"inancial demands. 1" the total assets e#ceed the total lia8ilities$ the 8usiness is solvent.
The greater the net7orth$ the 8etter the solvenc& position o" the 8usiness.
Ta8le *: A 0et7orth -tatement "or Chivita Farm as at Dec 31
st
5006
Assets @0A /ia8ilities @0A
Current Current
Cash 600$000 Account 'a&a8le no7 +00$000
*3
Crops +00$00
!or,ing Capital 1ntermediate
-uppliers 5:0$000 Account 'a&a8le 600$000
Tools :0$000 !ithin three &ears
Fi#ed Capital /ong Term
/and >00$000 Account 'a&a8le in :00$000
)uilding 300$000 50 &ears
Fencing 500$000 Total lia8ilit& 1$:00$000
0et !orth 1$500$000
Total Assets 5$*00$000 Total /ia8ilit&
R 0et7orth 5$*000$000
3.1.+ Fa&* A((%t( Va$"ati!'
2aluation entails o8taining a realistic measure o" the current value o" the assets o"
the "arm 8usiness. The "irst thing to do in assets valuation is the listing o" all the
resources availa8le in ph&sical terms then$ place value on the assets. The various
methods o" valuation include valuation at cost$ mar,et price$ net selling price$
reproductive value etc.
1. 2aluation at cost:; This entails entering in the inventor&$ the actual amount
invested on the asset 7hen it 7as originall& acCuired. A ma9or disadvantage o" this
method is that a"ter the 8uiness has 8een in operation "or sometimes$ the original cost is
no more o" much value since the conditions might have changed.
5. 2aluation at (ar,et 'rice; The mar,et price o" an assets at the time under
consideration can 8e ta,en as its value e.g land
3. 2aluation at 0et -elling price some costs such as cost o" advertisement and
transportation might 8e incurred 7hen selling an asset. !hatever price can 8e o8tained
in the mar,et "or the assets @i.e mar,et price @'mA less the cost o" selling @CsA is the net
selling price @'nsA$ 0otationall&$
'ns O 'm ? Cs
+. 2aluation 8& Reproductive 2alue
*+
An asset can 8e valued at 7hat it 7ould cost to produce it at present prices and
under present methods o" production. This method is more use"ul "or long;term assets
and has little or no application "or short ? lived assets
+.0 C!')$"(i!'
!e have learnt in this unit the various "orms o" "arm accounting.
:.0 S"**a&
3ou have leant in this unit that:
Accounts are "inancial records o" 7hat the "armer spends and receives.
Farm accounting provides in"ormation to control mone& "lo7 in the 8usiness. 1t
provides in"ormation on "inancial 7orthiness$ per"ormance and monetar&
chec,ing.
The "our variants o" "arm accounting s&stem are: Farm 1ncome -tatement or cash
Anal&sis Account$ Farm Trading or pro"it and /oss Account$ Farm )alance sheet
or 0et7orth statement and Farm Assets valuation.
Farm assets could 8e valued using these methods: valuation at cost$ valuation at
mar,et price$ valuation at net selling price and valuation 8& reproductive value.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. !hat are the "our variants o" the "arm accounting s&stemG
5. !hat are the "our ma9or 7a&s 8& 7hich "arm assets can 8e valued.
3. !ith the aid o" an eCuation$ e#plain the concept o" 8alance sheet.
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
Adesimi$ A.A @1><<A: Farm (anagements Anal&sis 7ith 'erspectives through the
Development process. 'p +3;:5.
lu,osi$ J. and '. Erha8or @1><<A 1ntroduction to "arm management Economics:
'rinciples and Application A41TA) 'u8lisher /td$ Iaria 'p +< ? 61.
*:
U'it :: C!*4"t%&i<%1 Fa&* A))!"'ti'0
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the %nit
3.1 Farm Funds: Complete Farm Accounting
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and ther -ources
*6
1.0 I't&!1")ti!'
This is the computer age and the 7orld is 8ecoming a glo8al village. 1n this unit$
7e shall e#amine complete "arm Accounting using a so"t7are ,no7n as Farm "unds.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit$ &our should 8e a8le to.
U E#plain the "eatures o" the "arm "unds.
3.0 Th% 3!1 !5 th% "'it
3.1 Fa&* F"'1(
Farm Funds is the onl& "arm accounting so"t7are that "ull& integrates 7ith "ield
records @Farm TracA$ herd management records @Farm -toc,A$ and mapping @Farm siteA.
Do &ou ,no7 &our cost per acreG !hat is &our cost per ,ilogramme o" livestoc,G Farm
"unds o""ers eas& enterprising per "ield$ livestoc, groups$ machine$ or structure 7hile still
maintaining the records &ou need "or ta# purposes. Eliminate the stress 8& ,eeping &our
receipts in the shoe8o# and let "arm "unds create ta# reports &ou need.
The "eatures o" the "arm "unds are
Dou8le entr& accounting "or 8oth cash and accrual 8oo,s
1ntegrates 7ith Farm Trac to ,eep accounting records at the same time as
,eeping "ield histories$ herd notations and chemical records.
%p ? to ? date inventor& trac,ing
'ro"ita8ilit& o" each "ield and herd o" animals is automaticall& calculated.
-upports detailed cost records "or eCuipment
Full pa&roll s&stem that calculates Federal and most state 7ithholdings
0o monthl& closings reCuired and &ear;end is simple
Records animal 7eights and "eedings to calculate "eed conversion and cost per
,ilogramme gained "or each livestoc, group.
Ta# schedule area allo7s &ou to create reports to ma,e ta# preparation eas&.
4enerate mar,et value 8alance sheets.
1ncludes 8udgeted cash"lo7s
Leep "amil& living costs separate "rom "arm costs.
**
Full chec, ? recording s&stem. 1ncludes interactive chec, register "or eas&
editing and printing o" transactions.
'rede"ined accounts and "inancial statement "ormats are availa8le that can easil&
8e modi"ied to reduce set up time.
Depreciation amounts "or eCuipment$ structures$ land improvements and
livestoc, can 8e entered.
REM%1RE- Farm Trac$ (icroso"t 7indo7 >< or higher$ 133 (DI 'rocessor$
6+() (emor&$ 50() Dard drive space.
Enhancements in "arm Funds version 500> includes: E#panded )udget
comparison Report and the cash"lo7 statement.
+.0 C!')$"(i!'
!e have learnt in this unit that "arm accounting can 8e computeriBed and that
complete "arm accounting could 8e carried out using computer so"t7are such as Farm
Funds.
+.0 S"**a&
1n this unit$ &ou have learnt that:
Farm Funds is the onl& "arm accounting so"t7are that "ull& integrates 7ith "ield
records$ herd management and mapping.
For e""icient per"ormance o" the "arm "und$ it reCuires Farm Trac$ (icroso"t
7indo7 >< or higher$ 133(DI processor$ 6+() (emor&$ 50() Dard Drive
space.
The "eatures o" the Farm Fund among other include dou8le entr& accounting "or
8oth cash and accrual 8oo,s.
6.0 T"t!& Ma&/%1 A((i0'*%'t(
1. Do7 can complete "arm accounting 8e accomplished electronicall&G
5. -tate the ma9or "eatures o" the "arm "unds.
3. !hat are the enhancements in the 500> version o" the Farm FundsG
*<
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
Farm Funds: Complete Farm Accounting. Farm "unds ? Farm Accounting "rom Farm
7or,s so"t7are$ martens "arm http:==777.153 "arm 7or,ers. Com="unds.htm.
Farm !or,s -o"t7are @version 1+A:
(a9or 0e7 "eatures and Enhancements. Farm 7or,s so"t7are 500> @2ersion 1+A ?
1ntegrated "arm and Agri8usiness (anagement. http:==777.153 "arm7or,s.
Com="arm7or,s 500>. htm.

*>
MODULE THREE: TRIAL 3ALANCE AND FINAL
ACCOUNTS.
%nit 1: (eaning and -cope o" trial 8alance.
%nit 5: /imitations and common errors o" trial 8alance
%nit 3: Final Accounts
%nit +: Ad9ustments in the "inal Accounts 1.
%nit :: Ad9ustments in the "inal Accounts 11
%nit 1 (eaning and scope o" Trial )alance
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 De"inition o" Trial 8alance
3.5 Constructing a Trial )alance
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and ther -ources
<0
1.0 I't&!1")ti!'
1" the dou8le ? entr& principle have 8een completel& and correctl& applied$ it is
o8vious that the total o" all de8it entries 7ill 8e eCual to the total o" all credit entries. )&
e#tension$ the total o" the de8it 8alances should 8e eCual to the total o" the credit
8alances. The list dra7n up sho7ing the 8alances e#tracted "rom all accounts is ,no7n as
a trial 8alance. This unit e#amines the de"inition o" trial 8alance$ its "unctions and ho7 to
construct it.
2.0 O,-%)ti.%(
)& the end o" this unit$ &ou should 8e a8le to:
De"ine and e#plain trial 8alance
-tate the "unctions= purposes o" trial 8alance
Construct a trial 8alance
3.0 Th% ,!1 !5 th% "'it
3.1 D%5i'iti!' !5 t&ia$ 3a$a')%
The Trial 8alance can 8e de"ined as the list o" accounts 8alances at a given point
in time dra7n up to test the arithmetical accurac& o" accounting entries. A trial 8alance
can also 8e de"ined as a chec, o" arithmetical accurac& o" the 8oo,,eeping to test the
dou8le 7hether it has 8een completed in the ledger or not. A trial 8alance is a list o"
8alances 8oth credit and de8it e#tracted "rom the ledgers and cash 8oo, o" a compan& as
at a particular date. 1t is not an account 8ut a statement sho7ing the list o" accounting
8alances. The total o" all the de8it 8alances in the accounts must eCual the sum o" all the
credit 8alances.
1n accounting$ the trial 8alance is a 7or,sheet listing the 8alance at a certain date
o" each ledger account in the columns$ namel& de8it and credit. %nder the dou8le ? entr&
s&stem$ in an& transaction the total o" an& de8it must eCual the total o" an& credit. -o in a
trial 8alance the total o" the de8it side should al7a&s 8e eCual to the total o" the credit
side.
1" the 9ournal entries are error ? "ree and 7ere posted properl& to the general
ledger$ the total o" all the de8it 8alances should eCual the total o" all the credit 8alances.
<1
1" the de8it do not eCual the credits then an error has occurred some7here in the process.
The total o" the accounts on the de8it and credit side is re"erred to as the trial 8alance
3.2 C!'(t&")ti'0 a t&ia$ ,a$a')%
A trial 8alance can 8e constructed in t7o 7a&s:
1. )& means o" Totals
-ince a trial 8alance is a test o" arithmetical accurac&$ it 7ill 8e 7rong to adopt this
means o" totals in e#tracting an accurate trial 8alance. For this reason$ this method is
rarel& used. )ut it could 8e used 7here there are less transaction to cope 7ith in the
8oo,s.
5. )& means o" )alances
This is the most popular method used in ta,ing out the 8alances o" accounts in order to
e#tract an accurate trial 8alance. This method has some advantages amongst 7hich is the
outright revelation o" compensating errors$ 7here the total o" the de8it column o" the trial
8alance has to agree 7ith the total o" those su8sidiar& 8oo,s together 7ith the closing
cash 8alance 8ut omitting the cash 8alance in the opening entries.
The procedure "or e#tracting the trial 8alance is:
i. Close the ledger accounts
ii. !rite the correct heading: Trial )alance as at @or onA speci"& the period.
iii. All the de8it 8alances in the ledger accounts 7ould appear under the de8it
column o" the trial 8alance.
iv. All the credit 8alances in the ledger accounts 7ould appear under the credit
column o" the trial 8alance.
v. The additions o" 8oth the credit and de8it columns must 8e eCual.
E#amples
To calculate the trial 8alance$ "irst determine the 8alance o" each general ledger account
as sho7n in the e#ample 8elo7:
/a7&erHs /edger accounts "or the month o" -eptem8er$ 1> # <
Cash Accounts Receiva8le
-ep 1 *:0$000 -ep 1: 100$000 -ep 1* *0$000 -ep 5: +5$:00
1* +0$000 5< :0$000
5: +5$:00
)al 6<5$:00 )al 5*$:00
<5
'arts 1nventor& Accounts 'a&a8le
-ep < 5:0$000 -ep 1<$ 5*$:00 -ep 5< :$000 -ep < 5:0$000
)al 555$:00 )al 500$000
Capital Revenue
-ep 1 *:0$000 -ep 1* 110$000

)al *:0$000 )al 110$000
E#penses
-ep 1: 100$000
-ep 1< 5*$:00
)al 15*$:00
nce the account 8alances are ,no7n$ the trial 8alance can 8e calculated as sho7n 8elo7
Trial )alance as at 30
th
-eptem8er$ 1> # <
0 : L
Account Title De8its Credit
Cash 6<5$:00
Accounts Receiva8le 5*$:00
'arts 1nventor& 555$:00
Accounts 'a&a8le 500$000
Capital *:0$000
Revenue 110$000
E#penses 15*$:00
1$060$000 1$060$000
1n this e#ample$ the de8its and credits 8alance. This result does not Cuarantee that there
are no errors.
The trial 8alance serves three purposes:;
v. 1t serves as a chec, on the Jarithmetical accurac&K o" the entries$ as alread&
mentioned$ and.
<3
vi. 1t is the 8asis upon 7hich the Trading and 'ro"it and /oss Account and
)alance sheet are dra7n upon.
vii. 1t ensures that all the credit entries in the 8oo,s have a corresponding de8it
entries.
+.0 C!')$"(i!'
This unit has ena8led &ou to understand 7hat a trial 8alance is and ho7 it is 8eing
constructed. 1n addition$ the purposes o" the trial 8alance 7as highlighted.
:.0 S"**a&
This unit has acCuainted &ou 7ith:
!hat the de"inition o" trial 8alance is
The purposes o" a trial 8alance.
The Construction o" a trial 8alance "rom a ledger.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. -tate and e#plain the concept o" Trial 8alance.
5. -tate three uses= purposes o" the trial 8alance.
3. -tate the procedure "or e#tracting the trial 8alance.
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
1g8en$ R. @500+A: Financial Accounting (ade -imple. 2olume 1 E/;TDA ventures
/imited$ /agos$ 0igeria 'p 1*;5:.
Trial 8alance ? !i,ipedia$ the "ree enc&clopedia. http:==en$7i,ipedia.org=7i,i=Trial
8alance
Trial 8alance. http:==777.netm8a.com=accounting="in=process=trial=
!illiams$ J.R$ -.F Da,a$ (.- )ettner$ J.2 Carcello @500<A: Financial and (anagerial
Accounting$ (c4ra7;Dill 1r7in. 'u8lisher '. 56
<+
U'it 2: Li*itati!' a'1 )!**!' %&&!&( !5 th% t&ia$ ,a$a')%
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 /imitations o" the trial 8alance
3.5 Common errors o" the trial 8alance
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
<:
1.0 I't&!1")ti!'
Agreement o" the trial 8alance does not mean that there are no errors in the entries
as there are some errors 7hich 7ill not prevent the trial 8alance "rom agreement.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit &ou 7ould 8e a8le to:
-tate and e#plain the limitations o" the trial 8alance.
-tate and e#plain the common errors that can a""ect the trial 8alance.
3.0 Th% ,!1 !5 th% "'it
3.1 Li*itati!'( !5 th% t&ia$ ,a$a')%
The limitations o" the trial 8alance lies in the t&pe o" errors that though the& e#ist
in the accounts &et do not a""ect 8alancing o" the trial 8alance. These are discussed in
turns:
1. Error o" omission: This is 7here a transaction is not recorded at an& time at all in
the 8oo,s. That is$ 7hen a transaction is completel& omitted "rom the accounting
records. The trial 8alance 7ill not 8e a""ected and the error remains unrevealed.
5. Error o" commission: This is 7hen the entries are made at the correct amount$ and
the appropriate side @de8it or creditA 8ut one or more entries are made to the 7rong
account o" the correct t&pe. For e#ample$ i" "uel costs are incorrectl& de8ited to the
postage account @8oth e#penses accountsA. This 7ill not a""ect the totals.
3. Error o" original entr&: This is 7hen 8oth sides o" a transaction include the 7rong
amount. For e#ample$ i" a purchase$ invoice "or 051$000 is entered as 015$000$ this 7ill
result in an incorrect de8it entr& @to purchasesA and an incorrect credit entr& @to the
relevant creditor accountA 8oth "or 0>$000 less$ so the total o" 8oth columns 7ill 8e
0>$000 less$ and 7ill thus 8alance
+. Error o" principle: This is 7hen the entries are made to the correct amount$ and
the appropriate side @de8it or creditA$ as 7ith an error o" commission$ 8ut the 7rong t&pe
o" account is used$ "or e#ample$ i" "uel costs @an e#pense accountA are de8ited to stoc, @an
asset accountA. This 7ill not a""ect the totals.
:. Compensating error: This is 7here a com8ination o" errors cancel each other out
or 7here one account has 8een under or over de8ited or credited 7ith the certain amount$
<6
and another account over or under de8ited or credited 7ith the same account. This 7ill
not prevent the trial 8alance agreement. -o$ the error remains undetected. For e#ample$
7here purchases account 8alance is increased 8& 05$000 and sales account 8alance is
also increased 8& 05000$ the t7o accounts 7ould cancel out the error.
6. Error o" Reversal: This is 7hen entries are made to the correct amount$ 8ut 7ith
de8its instead o" credits$ and vice versa$ "or e#ample$ i" a cash sale "or 01$000 is de8ited
to the sales account$ and credited to the cash account$ such an error 7ill not a""ect the
totals.
*. Error o" complete Reversal o" Entr&: This error occurs 7here the dou8le entr& "or
a transaction is reversed resulting in a situation 7here8& the account that ought to 8e
de8ited is credited and the account that ought to 8e credited is de8ited. For e#ample$ an
amount paid to a supplier ma& 8e 7rongl& de8ited to the cash 8oo, and credited to his
personal account.
<. Error o" Transposition: The meaning o" this error can 8e deduced "rom the
meaning o" the 7ord JtransposeK as to cause t7o or more things to change places. Error
o" transposition$ there"ore$ is a mista,e involving the changing o" the places o" the
numerals ma,ing up an amount. For e#ample$ 03$101 ma& 8e 7rongl& posted as 03$01$
0+$533 ma& 8e 7rongl& posted as 0+$335 and so on.
!hen the error o" transposition occurs at the time source document is 7ritten or at
the time the source document is posted to the su8sidiar& 8oo,$ it is e""ectivel& an error o"
original entr&. This is the reason 7h& error o" original entr& and error o" transposition are
sometimes regarded as one and the same$
3.2 E&&!&( a55%)ti'0 th% t&ia$ ,a$a')%
1" the trial 8alance is not in 8alance$ then an error has 8een made some7here in
the accounting process. The "ollo7ing is listing o" common errors that 7ould result in an
un8alanced trial 8alanceF this listing can 8e used to assist in isolating the cause o" the
im8alance.
1. -ummation error "or the de8its and credits o" the trial 8alance.
5. Error trans"erring the ledger account 8alances to the trial 8alance columns.
i. Error in numeric value
ii. Error in trans"erring a de8it or credit to the proper column
<*
iii. mission o" an account
3. Error in the calculation o" a ledger account 8alance.
+. Error in posting a 9ournal entr& to the ledger.
i. Error in numeric value
ii. Error in posting a de8it or credit to the proper column
:. Error in the Journal entr&
i. Error in a numeric value
ii. mission o" part o" a compound 9ournal entr&.
+.0 C!')$"(i!'
1n this unit$ 7e have learnt a8out the limitations o" the trial 8alance as 7ell as the
common errors o" the trial 8alance.
:.0 S"**a&
3ou have learnt in this unit that:
Agreement o" the trial 8alance does not mean that there are no errors in the
entries.
The limitations o" the trial 8alance lies in the t&pes o" errors that though the&
e#ist in the accounts &et do not a""ect 8alancing o" the trial 8alance.
Errors that do not a""ect the trial 8alance include among others: Error o"
omission$ error o" commission$ error o" original entr&$ error o" principle$
compensating error$ error o" reversal and error o" complete reversal o" entr&.
Errors that a""ect the trial 8alance include among others: -ummation error$
error in the calculation o" a ledger account 8alance.
6.0 T"t!& Ma&/%1 A((i0'*%'t(
1. -tate and e#plain "ive limitations o" the trial 8alance.
5. -tate and e#plain common errors that a""ects the trial 8alance.
<<
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
1gen$ R. @500+A: Financial Accounting (ade simple. 2olume 1$ E/;TDA ventures
/imited /agos$ 0igeria.
Trial 8alance. http:==777.netm8a.com=accounting="in=process=trial=
Trial 8alance ? !i7ipedia$ the "ree enc&clopedia. http:==en.7i,ipedia.org=7i,i=trial
8alance.
<>
U'it 3: Fi'a$ A))!"'t(
1.0 1ntroduction
5.0 89ectives
3.0 The )od& o" the unit
3.1 (anu"acturing account in a manu"acturing organiBation
3.5 Trading account
3.3 'ro"it and loss Account
3.+ 'ro"it and /oss Appropriation account in partnership and limited lia8ilit&
companies
3.: )alance sheet
3.6 0otes to the accounts
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
>0
1.0 I't&!1")ti!'
1n this unit &ou 7ill learn a8out "inal accounts. 3ou 7ill 8e acCuainted 7ith the
various accounts that ma,e up the "inal account.
2.0 O,-%)ti.%(
1t is e#pected that$ at the end o" this unit$ &ou should 8e a8le to:
E#plain the concept o" "inal accounts.
'repare the various accounts that ma,es up the "inal accounts
3.0 Th% ,!1 !5 th% "'it
The term "inal account is applied to the "ollo7ing in its 8road "orm.
i. (anu"acturing account is a manu"acturing organiBation.
ii. Trading account
iii. 'ro"it and loss account
iv. 'ro"it and loss Appropriation account @in partnership and limited lia8ilit&
companiesA
v. )alance sheet and
vi. 0otes to the account @in limited lia8ilit& companies.
3.1 Ma'"5a)t"&i'0 A))!"'t
The main purpose o" preparing the manu"acturing account is to determine the cost
o" production 7hether it is more pro"ita8le to continue in production o" the goods "or sale
or it is more economical to purchase them 7holesale "rom outside suppliers. 1" it is "ound
that the cost o" production o" the good is lo7er than outside purchase$ them it is
7orth7hile producing 8ut i" the cost is higher than outside procurement$ then it is
uneconomical to produce 7ithin.
3.2 T&a1i'0 A))!"'t
The trading Account helps in determining the trading position o" a 8usiness. The
aim o" the Trading Account is to ascertain the gross pro"it or gross loss "or a certain
period. The gross pro"it or gross loss is arrived at a"ter charging the goods and materials
and other items o" direct cost.
>1
The gross pro"it "igure can 8e used to compare the per"ormance o" one 8usiness 7ith
another and to help in ta,ing certain progressive 8usiness decisions 7ith the pricing o"
goods "or sale.
3.2.1 T&a1i'0 A))!"'t La!"t:
De8it: on the de8it side are placed the stoc, at the start i.e. at the commencement o" the
period to 7hich the account relates.
All purchases @cash and creditA out o" 7hich all returns @returns out7ardsA are to 8e
lessen$ carriage in7ards i.e the charge made "or conve&ance o" goods 8& land. /ess
closing stoc, o" goods availa8le at the end o" a trading period.
Credit: on the credit side are placed the sales$ less all sales returns @Returns in7ardsA$
closing stoc, o" good ?i.e the value o" the goods unsold at the end o" the period.
The summar& o" the la&out is as "ollo7s:
pening -toc,
0
### -ales
0
###
R 'urchases ###
/ess Returns
ut7ards ## ### /ess Returns 1n7ard ##
R Carriage 1n7ards #
4oods availa8le "or sale ###
; Closing stoc,
Cost o" goods sold ###
4ross 'ro"it c=d ##
### ###
N!t%:
The di""erence 8et7een cost o" goods sold and the 0et sales @i" there is Returns 1n7ardsA
represents the 4ross pro"it made and this is trans"erred do7n to the credit o" pro"it and
loss Account.
3.3 P&!5it a'1 L!(( A))!"'t
>5
The pro"it and /oss Account is an account into 7hich all gains and losses are
collected. !here the gains made in the trading period e#ceed the losses or e#penses$ the
e#cess is the 0et pro"it. Do7ever$ 7here the losses are greater than the gains$ the
di""erence is the 0et /oss.
The 'ro"it and loss account is used to ascertain the net pro"it or net loss "or the
same period o" trading a"ter charging administrative selling and distri8ution e#penses and
some other "inancial charges @li,e discount allo7ed$ 8an, charges$ interest on loanA etc
against the gross pro"it or included 7ith the gross loss to increase the non;pro"ita8ilit& o"
the 8usiness during the "inancial &ear.
3.3.1 P&!5it a'1 L!(( A))!"'t La!"t:
The pro"it and /oss Account$ contains on the credit side$ the 4ross pro"it sho7n
8& the Trading Account and on the De8it side all the e#penses or losses incurred in
carr&ing out the 8usiness.
T3I
'ro"it and loss Account "or the &ear ended 31
st
Decem8er$66
0 0
4ross /oss )=d ## 4ross 'ro"it 8=d ##
!ages and -alaries ## Discount Received ##
Rent and Rates ## 1nterest on Deposit Account ##
1nsurance 'remium ## Recoveries or part
Advertising ## Recoveries o" )ad De8ts ##
Carriage ut7ards ## -elling )onuses ##
Discount Allo7ed ## 'ro"it on sale o" Asset ##
-tationer& and 'ostages ## 1ncome "rom 1nvestment ##
)ad De8ts ## Commission Received ##
'rovision "or 8ad de8ts ## Rent Received ##
Depreciation ## 0et /oss ##
/ighting and Deating ##
Telephone E#penses ##
/oan 1nterest ##
)an, charges ##
4eneral E#penses ##
Repairs and Rene7als ##
Accounting N 'ro"essional charges ##
Travelling E#pense ##
-alesmen Commission ##
Distri8ution E#penses ##
Entertainment E#penses ##
>3
/egal charges ##
0et 'ro"it c=d ## ##
0et /oss 8=d ## 0et 'ro"it 8=d ##

0ote:
4ross pro"it and 4ross /oss$ 0et 'ro"it and 0et /oss "igures occur at the same time$ it
onl& sho7s the side the& 7ould appear i" an& o" them should occur.
(oreover$ e#penses incurred in carr&ing on the a""airs o" a 8usiness concern 7ill
var& in accordance 7ith the surrounding circumstances. This is also applica8le to gains
made. The a8ove list o" e#penses and income are 8& no means e#haustive.
3.+ P&!5it a'1 L!(( A44&!4&iati!' A))!"'t
The o89ective o" the 'ro"it and loss appropriation account is to sho7 all
dispositions$ divisions and appropriations o" the net pro"it and loss.
The 'ro"it and /oss Appropriation Account is the third segment o" the
conventional Trading$ 'ro"it and /oss Account. The 0et pro"it o" the 'ro"it and /oss
Account is usuall& 8rought do7n to this account as an opening 8alance. Added to it is
the amount charged "or interest on dra7ings.
n the De8it side are interest on capital so charged on each partner$ the amount
paid as commission or salaries to partners. The di""erence 8et7een the de8it and credit
sides represents the 8alance o" pro"its or loss to 8e shared 8et7een or among the partners.
3.: Th% 3a$a')% Sh%%t
The 8alance sheet is a statement o" the assets at a particular moment in time and
the lia8ilities and proprietorHs capital$ )esides 8eing the statement o" asset and lia8ilities$
it also sho7s 7hether a 8usiness is solvent or insolent i.e. the a8ilit& o" the 8usiness and
its ina8ilit& to meet its "inancial o8ligations as at 7hen due. The di""erence 8et7een the
assets and lia8ilities represents the capital o" the 8usiness.
The 8alance sheet sho7s the summar& "orm o" the "inancial state o" the concern as
disclosed in the 8oo,s. 1t is to 8e noted that the 8alance sheet is not an account 8ut a
>+
statement o" the assets and lia8ilities o" a person or 8usiness on a given date arranged in
the "orm o" the 8oo,;,eeping eCuation 7hich runs thus:
Capital R /ia8ilities O Assets
This is ,no7n as the accounting eCuation.
T3I
)alance sheet as at 31
st
Decem8er$ 6..
Capital: 0 0 Fi#ed Assets: 0 0
Capital ## /and and )uildings ##
Add: 0et 'ro"it ## /ess: 'rovision "or Depreciation ## ##
## 'lant N (achiner& ##
/ess: Dra7ings ## /ess 'rovision "or Dep ## ##
## (otor vehicles ##
/ess: 'rovision "or Dep ## ##
Furniture and "ittings ##
/ess: 'rovision "or Depreciation ## ##
/oose Tools ##
/ess: 'rovision "or Deprecation ## ##
/ong Term /ia8ilit&:
/oan ##
Current Assets:
-toc, ##
Current /ia8ilities De8tors ##
/ess:
)an, overdra"t ## 'rov. For )ad de8ts ## ##
Trade creditors ## )ills Receiva8le ##
)ills pa&a8le ## )an, Deposit ##
Accrued E#pense ## Cash ##
1ncome Received in
Advance ##
'repa&ments ##
Accrued 1ncome ##
## ##
## ##
3.: N!t%( t! th% A))!"'t(
The notes to the accounts give a 8rie" e#planator& in"ormation to the users o"
accounting statements as to ho7 and 7h& some items have 8een treated in the 8oo,s and
states its compliance 7ith the legal reCuirements o" disclosure o" some relevant and
signi"icant transactions.
E#ample
>:
The "ollo7ing in"ormation is in respect o" the 8usiness a""airs o" laolu7a and
-ons Enterprises "or the &ear ended 31
st
(arch 1> # +
i. -toc, on 31
st
(arch$ 1> # + 7as 03<$:00
ii. 'rovide depreciation on plant and machiner& 7hich has a li"e span o" 15 &ears
and a residual value o" 0+$000.
iii. 'rovide depreciation on motor vehicle at the rate o" 50E on the net 8oo, value.
iv. The organiBation su8;let the 8uilding on 30
th
June$ 1> # 3 and the rent received
covered 30
th
June 1> # 3 to 1
st
cto8er$ 1> # +.
v. /oan "rom -. Johnson 7as received on 1
st
Januar&$ 1> # 3 at 1: percent per annum
and onl& 0+$:00 have 8een paid as interest throughout the period.
vi. 50E '.a deposit on 00 )an, /imited 7as made on 31
st
(a&$ 1> # 3.
vii. (aintain provision "or dou8t"ul de8ts on de8tors as : percent and ad9ust the
provision "or discounts allo7a8le on de8tors to 1 percent.
viii. Create a provision "or discount received on creditors at V percent.
i#. 'rovide "or interest on capital account as 1 percent.
#. The "ollo7ing e#penses are under;paid: Telephone 0+$000 and salaries and 7ages
011$:00.
#i. -alaries and 7ages paid include 03$:00 "or direct 7ages.
#ii Distri8ution and selling e#penses 7as over;paid 8& 01$:00.
A"%(ti!'
1. 'repare the trial 8alance "rom the e#tract o" the 8oo,s during the same period.
5. (a,e the necessar& ad9ustments and prepare:
i. The Trading and 'ro"it and loss Account "or the &ear ended 31
st
(arch$ 1># + and
ii. The )alance sheet as at 31
st
(arch$ 1> # +
@0ote: sho7 &ou ans7er to the nearest 0airaA
S!$"ti!'
1. Trial 8alance: The "ollo7ing is the trial 8alance e#tracted "rom his 8oo,s during
the same period.
DR
0
CR
0
'urchases and -ales :00$000 *:0$000
Returns 10$:00 1:$000
>6
De8tors and Creditors 60$:00 *:$100
Carriage on purchases 1$:00
Carriage on sales 5$000
)ad de8ts 7ritten o"" :$000
'rovision "or 8ad de8ts ? 1
st
April 1> # 3 5$:00
'rovision "or discount on de8tors ? 1
st
April 1> # 3 1$000
-alaries and !ages 50$000
/ighting +$:00
Telephone E#penses :$000
-tationer& *$000
)an, Charges 1$000
/oan "rom -. Johnson +0$000
/oan interest o7ing ? 1
st
April$ 1> # 5 1$:00
Travelling E#penses 1$600
/oan 1nterest +$:00
50E '.a Deposit in 00 )an, /td 60$000
1nterest on )an, Deposit *$000
-alesmen Commission 5$*00
Distri8ution and selling E#penses 5:$000
)uildings <0$000
'lant and (achiner& at cost 100$000
'rovision "or Depreciation on plant N (achiner& 35$000
(otor vehicles at cost 1:0$000
'rovision "or depreciation on motor vehicles 60$000
Rent Received "rom 8uilding su8;let 15$000
-toc, on hand ? 1
st
April$ 1> # 3 3:$000
)an, and Cash 3$000
Dra7ings :$<00
Capital <*$000
Discounts *$000 <$:00
1$0>1$600 1$0>1$600
5i laolu7a and -ons Enterprises Trading Account "or the &ear ended 31
st
march$ 1>
# +.
0 0 0
pening -toc, 3:$000 -ales @4rossA *:0$000
Add: /es Returns 1n7ards 10$:00
'urchases :00$000 0et -ales *3>$:00
Carriage on purchase 1$:00
:01$:00
/ess:
Returns ut7ards 1:$000
+<6$:00
4oods Availa8le "or
-ale :51$:00
/ess: Closing -toc, 3<$:00
>*
Cost o" 4oods sold +<3$000
4ross 'ro"it c=d 5:6$:00
*3>$:00 *3>$:00
laolu7a and -ons Enterprises pro"it and /oss Account "or the &ear ended
31
st
(arch 1> # +
0 0 0 0
Discount Allo7ed *$000 4ross 'ro"it 8=d 5:3$000
Carriage on sales 5$000 Discount Received <$:00
)ad De8ts :$000
'rovision "or 8ad de8ts :5: 1nterest on )an, Deposit *$000
/ighting +$:00 Add: utstanding 3$000
Telephone E#penses :$000 10$000
Add: under paid +$000 Rent Received 15$000
>$000 /ess: Received in Add +$<00
-tationer& *$000 *$500
)an, charges 1$000
1nterest on /oan
+$:00
Decrease in provision "or
discount in de8tors +5:
Add: 1nterest o7ing 3$000
*$:00
/ess: 'a&ment in arrears 1$:00 'rovision "or discount
received on creditors 3*:
6$000
-alesmen commission 5$*00
Travelling E#penses 1$600
-alaries and !ages 50$000
Add 7ing 11$:00
31$:00
/ess: Direct !ages 3$:00
5<$000
Distri8ution and selling
e#penses 5:$000
/ess: 'repaid 1$:00
53$:00
Dep: (otor vehicle 1<$000
'lant N (achiner& <$000
56$000
'rovision "or interest in
capital <*0
0et 'ro"it c=d 1:+$<06
5*>$:01 5*>$:01
><
laolu7a and -ons Enterprises )alance -heet as at 31
st
(arch$ 1> # +
0 0 Fi#ed Assets: 0 0
Capital <*$000 )uilding <0$000
Add: 0et 'ro"it 1:+$<06 'lant N (achiner& 100$000
5+1$<06 /ess: 'rovision "or Dep +0$000
/ess dra7ings :$<00
536$006
60$000
/ong term lia8ilit& loan:
-. Johnson +0$000
(otor vehicles 1:0$000
Current /ia8ilities: /ess: 'rov. For Dep *<$000
Creditors *:$000 *5$000
/ess 'rovision "or
Discount Received 3*6
515$000
*+$*5+ Current Assets:
Accruals: -toc, 3<$:00
Telephone +$000 De8tors :6$>00
'rovision "or interest on
capital
<*0 'repaid Distri8ution N
-elling e#penses
1$:00
1nterest on loan 3$000 1nterest Receiva8le @!.CA 3$000
-alaries and !ages 11$:00 )an, Deposit 60$000
Rent Received in Advance +$<00 )an, and Cash 3$000
5+$1*0 165$>00
3*+$>00 3*+$>00
!or,ings:
@!.aA
'rovision "or )ad De8ts Account
1> # + 0 1> # 3 0
(ar 31 )al c=d 3$05: April 1 )al 8=d 5$:00
1> # +
(ar 31 'ro"it and /oss :5:
3$05: 3$05:
'rovision "or Discount Allo7ed on De8tors Account
1> # + 0 1> # 3 0
(ar 31 'ro"it and /oss +5: April )al 8=d 1$000
31 )al c=d :*:
>>
1$000 1$000
Calculation o" provision o" discount on de8tors:
O @060$:00 ? 03$05:A # 1E O 0:*: appro#imatel&
Calculation o" Total De8tors: 0 : 0
De8tors as per Trial )alance 60$:00
/ess:
'rovision "or )ad De8ts 3$05:
'rovision "or Discount Allo7ed
on De8tors :*:
3$600
:6$>00

@7.8A 1nterest on loan "rom Johnson
Date Received: 1
st
Januar&$ 1> # 3
Amount o" loan: 0+0$000
Rate: 1:E per annum
Amount paid: 0+$:00
1
st
Januar&$ 1> # 3 to 31
st
(arch$ 1> # 3 O 3 months
1
st
April 1> # 3 to 31
st
(arch 1> # + O 15 months
1:E # 0+0$000 # 3=15 O 01$:00
1:E # 0+0$000 O 06$000
ut o" the 0+$:00 that 7as paid 01$:00 is in respect o" the last "inancial period and
03$000 is in respect o" this "inancial period out o" the 06$000 that is actuall& due$ and as
such 03000 is still outstanding.
@7.cA 50E p.a Deposit in 00 )an, /td @0ote viA:
Date o" deposit: 31
st
(a& 1> # 3
Total months used in the 8an, O 10 months
i.e June 1> # 3 to (arch 1> # +
0
100
1nterest supposed to 8e received O 50E # 60$000 # 10=15 10$000
/ess: Amount Received *$000
1nterest Receiva8le 3$000
@7.dA Rent "rom 8uilding su8;let
Date 8uilding 7as su8;let O 30
th
June$ 1> # 3
Total months covered O 1: months receipts
The num8er o" months that is utiliBed O > months
The amount that is meant "or the "inancial &ear
O 015$000 # >=1: O 0*$500
Rent Received in advance O 015$000 ? 0*$500
O 0+$<00
@7.eA Depreciation on plant and machiner& 0
'lant and (achiner& at cost O 100$000
/ess Residual value @0ote iiA +$000
>6$000
Depreciation on motor vehicles
O 01:0$000 ? 060$000 # 50E O 1<$000
@7."A 'rovision "or discount received on creditors @0ote viiiA 0*:$000 # V E
O 03*6
+.0 C!')$"(i!'
!e have learnt in this unit that "inal accounts is made up o" di""erent accounts
such as: (anu"acturing Account$ Trading Account$ 'ro"it and /oss Account$ 'ro"it and
/oss Appropriation Account$ )alance sheet and 0otes to the accounts.
:.0 S"**a&
3ou have learnt in this unit that:
The main purpose o" preparing the manu"acturing account is to determine the
cost o" production.
101
The aim o" the trading account is to ascertain the gross pro"it or gross loss "or
a certain period.
The pro"it and loss account is used to ascertain the net pro"it or net loss "or the
same period o" trading a"ter charging administrative$ selling and distri8ution
e#penses and some other "inancial charges$
The o89ective o" the pro"it and loss appropriation account is to sho7 all
dispositions$ divisions and appropriations o" the net pro"it and loss.
The )alance sheet sho7s 7hether a 8usiness is solvent or insolvent i.e the
a8ilit& o" the 8usiness and its ina8ilit& to meet its "inancial o8ligations as at
7hen due.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. -tate and e#plain the di""erent components that ma,es up the "inal account.
5. (r lalele&e the account cler, o" (anu7a Enterprises e#tracted the "ollo7ing list
o" 8alances "rom the records on 31
st
Decem8er$ 1> # 3 Capital 0*:$000$ -ales 0156$5*0$
'urchases 05>:$000$ Carriage in7ards 05$000 Carriage out7ards 03$000 Discount
Allo7ed 06$:00$ Discount Received 0<$100$ Creditors 0<0$:00$ De8tors 0*0$100$ Rent
06$000$ Rates 06$000$ )ad de8ts 03$:00$ 'rovision "or 8ad de8ts 05$<00 as at Januar& 1
1> # 3$ 'rovision "or discount allo7ed on de8tors 0:00 as at Januar& 1 1> # 3. 'rovision
"or discount received on creditors 0*00 as at Januar& 1$ 1> # 3$ stoc, in trade as at
Januar& 1 1> # 3 0+0$:00$ Accountanc& charges 011$:00$ Travelling e#penses 01:$100$
Entertainment e#penses 0:$600$ -alaries and !ages 015$:00$ -alesmen commission
0+$100$ commission and selling 8onuses received 0*$*00 cash in hand 0:$100$ cash at
8an, 0>$:00$ 'lant and (achiner& at cost 0+0$000 @the plant has a net 8oo, value o"
055$000 on 1
st
Januar& 1> # 3A$ "urniture and "ittings at cost 030$000$ the provision "or
depreciation on "urniture and "ittings on 1
st
Januar& 1> # 3 7as 0<$130$ proceeds "rom
sale o" "urniture and "ittings 03$:00$ )uilding 0+:$000$ Dra7ings 06$*00$ Returns
1n7ards 0*$000$ Returns out7ards 0:$000. 3ou are ReCuired to:
i. E#tract a trial 8alance "rom the a8ove list o" 8alances as at 31
st
Decem8er$ 1> # 3
ii. 'repare a Trading 'ro"it and loss Account "or the &ear ended 31
st
Decem8er$ 1> #
3 and a )alance sheet as at that date a"ter ta,ing the under listed ad9ustments into
consideration
105
i. -toc, in trade 31
st
Decem8er 1> # 3 0:5$*00
ii. 4oods 7ithdra7n 7ithout record "or personal uses 05$:00
iii. 01$600 included in the entertainment e#penses is meant "or advertising.
iv. Ad9ust provision "or discount allo7ed on de8tors at 1E.
v. !rite o"" provisions "or discount received on creditors 8ecause it is no longer
reCuired.
vi. 'lant and machiner& to 8e depreciated at 1:E on cost.
vii. Furniture and "ittings are to 8e depreciated at 10E on the net 8oo, value.
viii. n 1
st
Januar&$ 1> # 0$ some "urniture and "ittings 7ere purchased "or 0:$000
and the& 7ere disposed o"" on 31
st
Decem8er 1> # 3 and 03$:00 7as realiBed.
The proceed o" this transaction 7as onl& recorded in the cash 8oo, and
disposal o" "urniture and "ittings account.
i#. Additional "urniture and "ittings purchases on 30
th
June$ 1> # 3 "or 0>$000 has
not &et 8een recorded in the assets account.
#. 0>$000 introduced as additional capital during the &ear has not 8een recorded
in the capital account.
#i. Commission and selling 8onuses received in advance amounted to 0:00.
@0ote: sho7 &our ans7er to the nearest 0airaA.
B.0 R%5%&%')%( a'1 !th%& (!"&)%(
lo"inlana$ /. and R.! de7ale @1>>>A: Fundamentals o" Accounting$ volume 1.
-tecom 'u8lishers$ A,ure$ ndo -tate.
103
U'it +: A1-"(t*%'t( i' th% 5i'a$ A))!"'t 1
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 Depreciation
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
10+
1.0 I't&!1")ti!'
1n this unit$ attempts 7ill 8e made to e#plain Ad9ustments in the "inal account 1
particularl& in relation to Depreciation.
2.0 O,-%)ti.%(
1t is hoped that$ at the end o" this unit$ &ou 7ill 8e a8le to:
De"ine and e#plain depreciation
(ethods o" charging depreciation
-tate and e#plain the accounting entr& "or depreciation.
3.0 Th% 3!1
Ad9ustments in accounting is the process 7here8& necessar& amendments in "orm
o" additions$ deductions and provisions are made to income and e#penditure in the
"inancial statements to re"lect the true and "air state o" the "inal accounts o" a 8usiness
during the "inancial period under consideration.
1n this unit$ emphasis 7ill 8e placed on depreciation as a "orm o" ad9ustment.
3.1 D%4&%)iati!' i( th% #%a& a'1 t%a& i' th% .a$"% !5 a((%t(.
Depreciation is the loss in value o" a capital asset over time due to age$
o8solescence and 7ear and tear.
Depreciation is the loss in value o" "i#ed or capital assets emplo&ed in the
8usiness li,e plant and machiner& motor vehicle$ 8uildings$ and other eCuipment o7ing
to the normal and inevita8le process o" ma,ing use o" the assets over a num8er o" &ears.
The o89ectives o" charging depreciation among others include:
i. To spread the cost o" the asset reasona8l& over the li"e span o" the asset.
ii. To get aside out o" pro"it the amount o" the original investment used up during
the &ear.
iii. To allocate cost to the service o" the assets 7hich 7ere consumed during the
"inancial or trading period.
3.1.1 T%&*i'!$!0i%( "(%1 i' D%4&%)iati!' A))!"'t
i. riginal value: This is the cost price o" an asset 7hen it is ne7l& acCuired.
10:
ii. Residual value: This is either called JscrapK$ J)rea,;o""K or salvage JvalueK. 1t is
the estimated amount to 8e realiBed 8& sale o" asset 7hen it is retired "rom use. 1t is the
mar,et or 8oo, value o" a "i#ed asset as at the end o" its span or service.
iii. /i"e span o" assets: This is the length o" time an asset is estimated to 8e in use
8e"ore it is "inall& scrapped or 7ritten o"".
iv. 8solescence: This means the process o" 8ecoming outdated due to ne7
inventions.
3.1.2 M%th!1( !5 )a$)"$ati'08)ha&0i'0 1%4&%)iati!'
There are various methods o" calculating depreciation and the& are as listed
8elo7.
i. The straight ? line method
ii. The reducing 8alance method
iii. Revaluation method
iv. -in,ing "und method
v. Depletion unit method
vi. 'roduction unit method
The t7o main methods 7hich are commonl& in use are the straight line method and the
reducing 8alance method and the& are discussed into details 8elo7.
The straight line method
Annual depreciation @ADA o" an asset is computed 8& dividing the original value @2A
minus the salvage value @-2A 8& the e#pected &ears o" li"e o" the assets @E/A
AD O 2 ? -2
E/
The straight line method is the simplest and the most 7idel& used method o" calculating
depreciation.
The advantages o" this method include among others that:
i. 1t is simple to operate as it does not reCuire much e""ort in computing
depreciation charge.
ii. 1t eliminates the cost o" the asset "rom the 8oo,s 7here there is no residual
value at the end o" the use"ul li"e.
iii. 1t gives room "or 8etter comparative costs.
106
The disadvantages o" this method include among other that:
i. The earl& &ears are over charged as the same amount appears &earl& 7hereas
the machine man& 8e loosing its e""icienc& in the latter &ears.
ii. 1t does not ta,e the e""ective and e""icient usage o" the asset into account in
the latter &ears.
E#ample
Calculate the depreciation charge per annum on a machine costing 01:0$000 having a
li"espan o" "ive &ears 7ith a 8rea, ?o"" value o" 0:$000 at the end o" its use"ul li"e.
-olution
Formula AD O 2 ? -2
E/
O 01:0$000 ? 0:$000
:
O 05>$000 per &ear
The Reducing )alance (ethod
This is other7ise ,no7n as the Qdiminishing 8alance methodH or JReducing 1nstallment
methodK This is a method o" providing "or depreciation 8& means o" periodic charges as a
constant proportion o" the net 8oo, value o" the asset a"ter deducting the amount
previousl& provided. The declining 8alance method assumes a "i#ed rate o" depreciation
ever& &ear. The salvage value is not su8tracted "rom the initial cost 8ut the "i#ed rate is
applied to the uncovered 8alance till the salvage value is reached. -ince the value o" the
asset is greater at the 8eginning 7hen the rate is applied the amount o" depreciation is
also greater at the 8eginning and less at the end. Dence$ this method is use"ul "or assets
7hich lose value "ast at the 8eginning o" its use.
The advantages o" the declining 8alance method among others is that:
i. All items including addition$ are grouped together and depreciated at the same
rate.
ii. The charge "or depreciation decreases accordingl& as the asset is getting
older and loosing its e""icienc&.
The disadvantages o" the declining 8alance method among others is that:
i. An asset cannot 8e completel& 7ritten o"" 8& this method.
10*
ii. There is di""icult& in calculating depreciation especiall& at the time o"
disposal.
iii. 1" the li"e span o" the asset is short$ the 8urden thro7n on earlier &ears ma& 8e
e#cessive.
E#ample
A machine cost 0100$00 and the rate o" depreciation "or it is 50E per annum
using reducing 8alance method. 3ou are reCuired to calculate the depreciation charge on
the machine "or + &ears.
-olution
a
3ear
8
Cost and )alance
8rought "or7ard
c
Rat e @EA
d
Depreciation per
annum dO@8 # cA
e
0et )oo, value
e O @8;dA
1
0
100$000 50
0
50$000
0
<0$000
5. <0$000 50 16$<00 6+$000
3 6+$000 50 15$<00 :1$500
+ :1$500 50 10$5+0 +0$>60
3.1.3 A))!"'ti'0 E't& 5!& D%4&%)iati!'
The accounting entr& "or depreciation "or straight line and reducing 8alance
methods are 8asicall& the same$ it is onl& the computation o" depreciation e#penses that
there is di""erence.
There are t7o methods o" recording depreciation in the 8oo,s:
i. The old method
ii. The modern (ethod
The ld (ethod
This is 7here the dou8le entr& "or each &earHs depreciation charge is recorded in
the asset account.
The accounting procedures o" the old method are as stated 8elo7:
1. !hen asset is purchased:
De8it ? Asset Account
Credit ? )an, =Cash @or creditor i" it is purchased on creditA Account.
10<
5. !hen depreciation is charged at the end o" the period:
De8it ? Depreciation account
Credit ? Asset Account
3. Trans"er the depreciation e#pense to pro"it and loss account at the end o" the
accounting period
De8it ? 'ro"it and /oss Account
Credit ? Depreciation Account
+. The depreciation charges 7ill 8e deducted "rom the 8oo, value o" the asset in the
8alance sheet at the end o" the period.
The (odern (ethod
1n this case$ depreciation is not recorded in the asset account instead it is sho7n
accumulating in a separate account.
The accounting procedures "or the modern method is as stated 8elo7:
1. !hen an asset is ne7l& purchased:
De8it ? Asset Account
Credit ? Cash=)an, @or creditor i" it is 8ought on creditA Account.
5. !hen depreciation is charged at the end o" the period:
De8it ? pro"it and /oss Account
Credit ? 'rovision "or Depreciation Account
3. 1n the )alance sheet$ the accumulated depreciation is deducted "rom the cost price
o" the asset.
E#ample @1nvolving the use o" the old methodA
Lo,umo and -ons Enterprises 'urchased the "ollo7ing motor vehicles on the stated
dates:
Januar& 1$ 1> # + ? 5 motor vehicles at 0:0$000 each 8& cheCue.
June 30$ 1> # : ? 3 motor vehicles at 0+0$000 each 8& cheCue
Decem8er 31$ 1> # : ? 1 (otor vehicle at 060$000 "rom /aco /td on credit.
The rate o" depreciation is assumed to 8e 50E per annum. 3ou are to record the
a8ove transactions in the motor vehicles account 7ith its depreciation on 8oth straight;
10>
line and reducing 8alance methods "or 1> # +$ 1> # : and 1> # 6. -ho7 also ho7 it 7ill
appear in the pro"it and /oss Account and the )alance -heet "or the same periods.
-olution
-traight;/ine method
Depreciation Account
1> # + 0 1> # + 0
Dec 31 motor vehicles 50$000 Dec 31 'ro"it and /oss 50$000
1> # :
Dec 31 (otor 2ehicles 35$000
1> # :
Dec 31 'ro"it and /oss
35$000
1> # 6
Dec 31 (otor 2ehicles :6$000
1> # 6
Dec 31 'ro"it and /oss :6$000
(otor 2ehicles Account
1> # + 0 1> # + 0
Jan 1 )an, 100$000
100$000
Dec 31 Depreciation
31 )al c=d
50$000
<0$000
100$000
1> # :
Jan 1 )al 8=d
)an,
Dec 31 /oca /td
<0$000
150$000
60$000
560$000
1> # :
Dec 31 Depreciation
31 )al c=d
35$000
55<$000
560$000
1> # 6
Jan 1 )al 8=d
1> #*
Jan 1 )al 8=d
55<$000
55<$000
1*5$00
1> # 6
Dec 31 Depreciation
31 )al c=d
:6$000
1*5$000
55<$000
Lo,umo and -ons Enterprise 'ro"it and /oss Account @E#tractsA
1> # + 0 1> # + 0
110
Dec 31 Depreciation 50$000
1> # :
Dec 31 Depreciation 35$000
1> # 6
Dec 31 Depreciation :6$000

Lo,umo and -ons Enterprises )alance -heet as at 31
st
Decem8er$ 66.@E#tractsA
1> # + 0 0
(otor 2ehicles 100$000
/ess Depreciation 50$000

1> # :
(otor 2ehicles
/ess Depreciation
<0$000
560$000
35$000
55<$000
1> # 6
(otor vehicles
/ess Depreciation
55<$000
:6$000
1*5$000
!or,ings: All dates end on 31
st
Decem8er
1> # + 0
Jan 1 (otor 2ehicles 0100$000 # 50E O 50$000
1> # :
Jan 1 (otor vehicles 0100$000 # 50E O 50$000
June 30 (otor vehicles 150$000 # 50E # 6=15 O 15$000
Dec 31 (otor vehicles$ 0o Depreciation O ;
35$000
1> # 6
Jan 1 (otor vehicles 0100$000 # 50E O 50$000
1 (otor vehicles 0150$000 # 50E O 5+$000
1 (otor vehicles 060$000 # 50E O 15$000
:6$000
111
Reducing )alance method
(otor vehicles Account
1> # + 0 1> # + 0
Jan 1 )an, 100$000
100$000
Dec 31 Depreciation
31 )al c=d
50$000
<0$000
100$000
1> # :
Jan 1 )al 8=d
Jan 30 )an,
Dec 31 /oca /td
<0$000
150$000
60$000
560$000
1> # :
Dec 31 Depreciation
31 )al c=d
5<$000
535$000
560$000
1> # 6
Jan 1 )al 8=d
1> #*
Jan 1 )al 8=d
535$000
535$000
1<:$600
1> # 6
Dec 31 Depreciation
31 )al c=d
+6$+00
1<:$600
535$000
Depreciation Account
1> # + 0 1> # + 0
Dec 31 (otor vehicles 50$000 Dec 31 'ro"it and /oss 50$000
1> # :
Dec 31 (otor vehicles 5<$000
1> # :
Dec 31 'ro"it and /oss 5<$000
1> # 6
Dec 31 (otor vehicles +6$+00
1> # 6
Dec 31 'ro"it and /oss +6$+00
115
Lo,umo and -ons Enterprises
'ro"it and /oss Account @E#tractsA
1> # + 0 1> # + 0
Dec 31 Depreciation 50$000
1> # :
Dec 31 Depreciation 5<$000
1> # 6
Dec 31 Depreciation +6$+00
1> # 6
Dec 31 'ro"it and /oss +6$+00
Lo,umo and -ons Enterprises
)alance -heet as at 31
st
Decem8er$6.. @E#tractA
1> # + 0 0
(otor 2ehicles 100$000
/ess Depreciation 50$000
<0$000
1> # :
(otor vehicles
/ess depreciation
560$000
5<$000
535$000
1> # 6
(otor vehicles
/ess Depreciation
55<$000
+6$+00
1<:$600
!or,ings: All dates and on 31
st
Decem8er
1> # + 0 0
Jan 1 (otor vehicles 0100$000 # 50E 50$000
1> # :
Jan 1 (otor vehicles 0<0$000 # 50E 16$000
June 30 (otor 2ehicle 0150$000 # 50E # 6=15 15$000
Dec 31(otor vehicles ? 0o Depreciation ;
5<$000
1> # 6
Jan 1 (otor vehicles 535$000 # 50E +6$+00
E#ample @1nvolving the ne7 methodA
The "inancial &ear end o" Rain8o7 and "riends Enterprises is 31
st
Decem8er annuall&.
The "ollo7ing machines 7ere purchased:
113
1
st
Januar&$ 1> # +$ 5 machines at 0<0$000 8& cash
31
st
August$ 1> # +$ 1 machine at 060$000 8& cheCue
1
st
Decem8er$ 1> # +$ 3 machines at 0+0$000 each on credit "rom John )ros
31
st
Decem8er$ 1> # + 1 machine at 030$000 8& cheCue.
31
st
(arch$ 1> # :$ 5 machines at 0:0$000 each 8& cheCue.
Depreciation is charged at 5:E
3ou are reCuired to sho7:
i. The machiner& account
ii. The provision "or depreciation account
iii. The provision and loss accounts e#tracts$ and
iv. The 8alance sheet e#tracts "or the "ollo7ing &ears: 1> # +$ 1> # : and 1> # 6
11+
-olution
(achiner& Account
1> # + 0 1> # + 0
Jan 1 Cash <0$000 Dec 31 )al c=d 5>0.000
Aug 31 )an, 60$000
Dec 1 John )ros 150$000
Dec 31 )an, 30$000
5>0$000 5>0$000
1> # : 1># :
Jan 1 )al 8=d 5>0$000 Dec 31 )al c=d 3>0$000
(ar 31 )an, 100$000
3>0$000 3>0$000
1> # 6 1> # 6
Jan 1 )al 8=d 3>0$000 Dec )al c=d 3>0$000
1> # *
Jan 1 )al 8=d 3>0$000
'rovision "or Depreciation Account
1> # + 0 1> # + 0
Dec 31 )al c=d 5*$:00 Dec 31 'ro"it and /oss 5*$:00
1> # : 1> # :
Dec 31 )al c=d 11<$*:0 Jan 1 )al 8=d 5*$:00
Dec 31 'ro"it and /oss >1$5:0
11<$*:0 11<$*:0
1> # 6 1> # 6
Dec 31 )al c=d 516$5:0 Jan 1 )al 8=d 11<$*:0
Dec 31 'ro"it and /oss >*$:00
516$5:0 516$5:0
1> # *
Jan 1 )al 8=d 516$ 5:0
Rain8o7 and "riends Enterprises
'ro"it and /oss Account "or the &ear ended 31
st
Decem8er$666
E#tracts
0 0
> # + 'rovision "or Depreciation 5*$:00
1> # : 'rovision "or depreciation >1$5:0
1> # 6 'rovision "or Depreciation >*$:00
Rain8o7 and Friends Enterprises
11:
)alance -heet as at 31
st
Decem8er$ 666.
E#tracts
1> # + 0 0
(achiner& 5>0$000
/ess 'rovision "or Depreciation 5*$:00
565$:00
1> # :
(achiner& 3>0$000
/ess provision "or Depreciation 11<$*:0
5*1$5:0
1> # 6
(achiner& 3>0$000
/ess 'rovision "or Depreciation 516$5:0
1*3$*:0
!or,ings on depreciation charge per &ear:
All dates end on 31
st
Decem8er.
1> # + 0 0
Jan 1 0 <0$000 # 5:E O 50$000
Aug 31 0 60$000 # 5:E # +=15 O :$000
Dec 1 0 150$000 # 5:E # 1=15 O 5$:00
Dec 31 0 30$000 ? 0o depreciation O 01/
5*$:00
1> # :
Jan 1 05>0$000 # 5:E O 0 *5$:00
(ar 31 0100$000 # 5:E # >=15 O 1<$*:0
>1$5:0
1> # :
Jan 1 03>0$000 # 5:E O >*$:00
116
Reducing )alance (ethod
'rovision "or Depreciation Account
1> # + 0 1> # + 0
Dec 31 )al c=d 5*$:00 Dec 31 'ro"it and /oss 5*$:00
1> # : 1> # :
Dec 31 )al c=d 111$<*: Jan 1 )al 8=d 5*$:00
Dec 31 'ro"it and /oss <+$3*:
111$<*: 111$<*:
1> # 6 1> # 6
Dec 31 )al c=d 1<1$:06 Jan 1 )al 8=d 111$<*:
Dec 31 'ro"it and /oss 6>$:31
1<1$+06 1<1$+06
Rain8o7 and Friends Enterprises
'ro"it and /oss Account "or the &ear ended 31
st
Decem8er$ 66..
E#tracts
0 0
> # + 5*$:00
1> # : <+$3*:
1> # 6 6>$:31
Rain8o7 and Friends Enterprises
)alance -heet as at 31
st
Decem8er$ 666 @E#tractsA
1> # + 0 0
(achiner& 5>0$000
/ess provision "or Depreciation 5*$:00
565$000
1> # :
(achiner&
/ess 'rovision "or depreciation
3>0$000
111$000
5*<$15:
1> # 6
(achiner& 55<$000
11*
/ess provision "or Depreciation 1<1$+06
50<$:>+
!or,ings on depreciation charge per &ear: All dates end on 31
st
Decem8er.
1> # : 0 0
Jan 1 0565$:00 # 5:E O 6:$65:
(ar 31 0100$000 # 5:E # >=15 O 1<$*:0
<+$3*:
1> # 6
Jan 1 5*<$15: # 5:E O 6>$:31
0ote:
i. The machiner& account under 8oth straight ? line and reducing 8alance
methods are the same. There is no change in the recording o" transactions.
ii. The depreciation "or the "irst &ear 1> # + under 8oth methods are the same.
+.0 C!')$"(i!'
1n this unit$ 7e have so "ar gotten acCuainted 7ith ad9ustment in the "inal accounts
especiall& as regards to depreciation. The various methods o" calculating depreciation
7ere highlighted. The accounting entr& procedure "or depreciation o" old and modern
methods 7ere eCuall& mentioned and discussed. !or,ed e#amples involving the use o"
old and modern methods o" treating depreciation in accounting palance 7ere
demonstrated.
:.0 S"**a&
Daving gone through this unit$ &ou should have learnt that:
Ad9ustments in accounting is the process 7here8& necessar& amendments in "orm
o" additions$ deductions and provisions are made to income and e#penditure in the
"inancial statements to re"lect the true and "air state o" the "inal accounts o" a
8usiness during the "inancial period under considerations.
Depreciation is the 7ear and tear in the value o" assets.
There are various methods o" charging depreciation over the li"e span o" an asset
such as: The straight line method$ the reducing 8alance method$ revaluation
method$ sin,ing "und method$ depletion unit method and production unit method.
11<
The accounting entr& "or depreciation "or straight line and reducing 8alance
methods are 8asicall& the same$ it is onl& in computation o" depreciation e#penses
that there is di""erence.
There are t7o methods o" recording depreciation in the 8oo,s:; The old method
and the modern method.
6.0 T"t!& Ma&/%1 A((i0'*%'t
1. !hat is depreciation
5. Calculate the depreciation charge per annum on a machine costing 0300$000
having a li"e span o" "ive &ears 7ith a salvage value o" 010$000 at the end o" its use"ul
li"e.
3. A machine costs 0500$000 and the rate o" depreciation "or it is 50E per annum.
%sing reducing 8alance method$ &ou are reCuired to calculate the depreciation charge on
the machine "or + &ears.
+. De8o and -ons Enterprises maintains a s&stem o" dou8le entr& in 7hich
depreciation is recorded in the assets account. The depreciation polic& "or motor vehicles
is reducing 8alance method 8ased on monthl& o7nership at the rate o" 50E per annum.
The "inancial &ear ends on 31
st
Decem8er annuall&. The "ollo7ing motor vehicles 7ere
purchased on the stated dates.
Januar& 1$ 500+ 5 motor vehicles at 0:00$000 each
June 30$ 500+ 1 motor vehicle at 0+00$000
(arch 31$ 5006 1 motor vehicle at 0600$000
n 1
st
cto8er$ 5006$ one o" the motor vehicles 8ought "or 0:00$000 7as disposed o" "or
03:0$000. n 30
th
April$ 500*$ motor vehicle 8ought "or +00$000 on June 30$ 500+ 7as
disposed o" "or 0500$000 and another 7as purchased "or 0300$000.
3ou are reCuired to sho7:
iv. (otor vehicles account incorporating the disposal account.
v. Depreciation account
11>
vi. 'ro"it and loss account @E#tractsA and
vii. )alance -heet @E#tractsA "or 500+$ 500:$ 5006$ and 500*.
;.0 R%5%&%')%( a'1 !th%& S!"&)%(
E,ongocha$ F. and L. Jegasoth& @1>>0A: (anaging a small;scale plantation: A
Teaching (anual. CTA 1RETA 'u8lications$ Apia$ !estern -amoa
1g8en R. @500+A: Financial Accounting made simple$ volume 1. El ? TDA ventures
/imited$ /agos$ /agos -tate$ 0igeria.
lo"inlana$ /. and R.! de7ale @1>>>A: Fundamentals o" Accounting$ 2olume 5$
-tecom 'u8lishers$ A,ure$ ndo -tate.
150
U'it :: A1-"(t*%'t( i' th% 5i'a$ A))!"'t( II
1.0 1ntroduction
5.0 89ectives
3.0 The 8od& o" the unit
3.1 )ad De8ts
+.0 Conclusion
:.0 -ummar&
6.0 Tutor (ar,ed Assignment
*.0 Re"erences and other sources
151
1.0 I't&!1")ti!'
!e discussed depreciation in the previous unit$ our emphasis in this unit is
shi"ting to treatment o" 8ad de8ts in the "inal accounts and the accompan&ing
ad9ustments.
2.0 O,-%)ti.%(
1t is e#pected that at the end o" this unit$ &ou 7ill 8e a8le to:
De"ine 8ad de8t
Lno7 the accounting entr& "or 8ad de8ts
'rovisions "or 8ad de8t
Lno7 the various circumstances leading to occurrence o" 8ad de8ts.
3.0 Th% ,!1 !5 th% U'it
3.1 3a1 1%,t(
)ad de8ts could 8e de"ined as de8ts 7hich are irrecovera8le "rom de8tors and
there"ore regarded as losses to the compan& and hence are de8ited to the pro"it and loss
account as an e#pense o" the period.
An& o" the "ollo7ing circumstances could lead to occurrence o" 8ad de8ts:
i. The death o" the de8tor
ii. Court ruling ad9udging the de8tor 8an,rupt
iii. The de8tor is at large and could no longer 8e "ound.
3.1.1 A))!"'ti'0 E't& 5!& 3a1 D%,t(
1. !hen the de8t is irrecovera8le "rom the de8tor:
De8it ? )ad de8t account
Credit ? The de8torHs account
5. Trans"er the de8ts in the 8ad de8ts account to pro"it and loss account at the end o"
the &ear:
De8it: 'ro"it and /oss Account
Credit: )ad de8t account.
155
3.1.2 P&!.i(i!' 5!& 3a1 D%,t(
'rovision "or 8ad de8it is an item o" estimated e#pense "or de8ts that are dou8t"ul
or uncertain to 8e "ull& recovered "rom the hands o" the de8tors.
This can 8e treated under t7o methods:
i. !hen no separate provision "or 8ad de8t account is maintained: 1n this case
the provision "or 8ad de8ts is recorded in the 8ad de8ts account.
ii. !here separate provision "or 8ad de8ts account is maintained: This is a
situation 7here there are independent accounts "or 8oth 8ad de8ts and
provision "or 8ad de8ts.
Accounting entr& 7here there is no separate provision "or 8ad de8t
The accounting entr& is as "ollo7s 7here no separate provision "or 8ad de8ts is
maintained:
a. 'rovision "or 8ad de8ts is recorded in the 8ad de8t account.
8. The provision "or dou8t"ul de8t entr& at start in 8ad de8t account:
De8it ? )ad De8t account$ this 7ould appear as 8alance carried do7n
Credit ? )ad De8t account this 7ould appear as 8alance 8rought do7n.
c. -u8seCuent provision "or dou8t"ul de8t in the succeeding &ears:
De8it ? )ad de8t account$ this 7ould 8e recorded as 8alance carried do7n.
Credit ? )ad de8t account$ this 7ould 8e recorded as 8alance 8rought do7n.
d. Trans"er the di""erence in 8ad de8t account to pro"it and loss account as an
e#pense:
De8it ? 'ro"it and /oss account
Credit ? )ad de8t account
e. 1n the 8alance sheet$ the provision "or 8ad de8t 7ould 8e deducted "rom the
aggregate de8tors.
!here separate provision "or dou8t"ul de8t is maintained
For instance 7here separate provision "or dou8t"ul de8t is maintained$ the
accounting entr& runs thus:
a. !ith provision "or dou8t"ul de8t at start$
De8it ? 'ro"it and /oss Account
Credit ? 'rovision "or )ad de8t account
153
8. !ith increase in the provision:
De8it ? 'ro"it and /oss account 7ith the increase onl&
Credit ? provision "or )ad de8t account 7ith the increase onl&
c. !ith decrease in the provision:
De8it ? 'rovision "or 8ad de8t account 7ith the decrease.
Credit ? 'ro"it and loss Account 7ith the decrease
d. 1n the 8alance sheet$ the provision "or 8ad de8t 7ould 8e deducted "rom the
aggregate de8tors.
3.1.2 R%)!.%&%1 ,a1 D%,t(
This is a de8t 7hich had 8een 7ritten o"" as irrecovera8le "rom the de8tor and
later on the de8tor sho7ed up to pa& up his de8t or part o" it. !hen 8ad de8ts 7ritten o""
are recovered$ the 8oo, ,eeping entries is as "ollo7s:
a. First reinstate the de8t 8& ma,ing the "ollo7ing entries:
De8it ? De8torHs account
Credit ? )ad de8t recovered account
8. !hen cash or cheCue is received "rom the de8tor in settlement o" the account or
part thereo":
De8it ? )an, or cash account
Credit ? De8torHs account
c. Trans"er the amount paid on 8ad de8ts recovered account to pro"it and loss
account.
De8it ? )ad de8t recovered account.
Credit ? 'ro"it and loss Account
3.1.3 W!&/%1 E7a*4$%(
1. (r . Aro8ie,e o7ed A9i,e Enterprises the sum o" 0500$000 as at Fe8ruar& 1$
500:$ he 7as declared 8an,rupt on 5<
th
Fe8ruar& 500: and his propert& 7ere distri8uted
among his creditors o" 7hich A9i,e Enterprises is one. All the creditor received *:, over
on the 0aira on 31
st
cto8er$ 500:. Record the a8ove transactions in the relevant ledger
accounts o" A9i,e Enterprises at the end o" the &ear 31
st
Decem8er$ 500:.
15+
. Aro8ie,eHs Account
500: 0 500: 0
Jan 1 )al c=d 500$000 ct 31 )an,=Cash 1:0$000
Dec 31 )ad de8ts :0$000
500$000 500$000
)ad De8t Account
500: 0 500: 0
Dec 31 . Aro8re,e :0$000 'ro"it and /oss :0$000
'ro"it and /oss Account
500: 0 500: 0
Dec 31 )ad De8ts :0$000
5. The Accounting &ear o" A9e7ole and -ons Enterprises runs "rom Januar& to
Decem8er ever& &ear. During the three &ears ended 31
st
Decem8er 500+$ 500: and 5006$
the "ollo7ing de8ts 7ere "ound to 8e irrecovera8le and 7ere su8seCuentl& 7ritten o"" to
8ad de8t account on the stated dates 8elo7: 0
5<
th
Fe8ruar&$ 500+ T. Tai7o 10$000
31
st
(a&$ 500+L. Lehinde 5:$000
30
th
0ovem8er$ 500+ 1. 1do7u 1:$000
31
st
Januar& 500: A. Ala8a 30$000
31
st
Jul&$ 500: . 9o :$000
31
st
August 5006 3. 3emisi <$000
1
st
Decem8er$ 5006 L. Lo,umo >$000
n 31
st
Decem8er$ 500+$ 500: and 5006$ the outstanding "igure "or total de8tors "rom
sales ledger account 7as 0600$000$ 0<00$000 and 0:00$000 respectivel&. 1t is the
compan&Hs polic& to ma,e :E provision "or dou8t"ul de8ts at the end o" the &ears.
3ou are reCuired to prepare "or the &ears 500+ to 5006.
viii. )ad de8t account 7ith provision inclusive
i#. 'ro"it and loss account @e#tractsA
15:
#. )alance sheet @e#tractsA
-olution
A9e7ole and -ons Enterprises 'ro"it and /oss Account "or the &ear ended 31
st
Decem8erF
666.
E#tracts
500+ 0 0
Dec 31 )ad De8t <0$000
500:
Dec 31 )ad de8t *:$000
5006
Dec 31 )ad de8t +5$000
)ad De8t Account
500+ 0 500+ 0
Fe8 5< T. Tai7o 10$000 Dec 31 'ro"it and /oss <0$000
(a& 1 L. Lehinde 5:$000
0ov. 30 1. 1do7u 1:$000
Dec 31 'rovision "or Dou8t"ul De8t c=d 30$000
<0$000 <0$000
500: 500:
Jan 31 A. Ala8a 30$000 Jan 1 'rovision "or dou8t"ul
de8ts 8=d
30$000
Jul& 31 . 9o :$000
Dec 31 'rovision "or dou8t"ul de8t c=d +0$000 Dec 31 'ro"it and loss +:$000
*:$000 *:$000
5006 5006
Aug 31 3. 3emisi <000 Jan 1 provision "or dou8t"ul
De8t 8=d +0$000
Dec 1 L. Lo,umo >000
Dec 31 'rovision "or dou8t"ul De8t c=d 5:.000 Dec 31 'ro"it and /oss 5$000
+5$000 +5$000
500*
Jan 1 'rovision "or Dou8t"ul
De8t 8=d 5:$000
A9e7ole and -ons Enterprises )alance -heet as at 31
st
Decem8er$6.
E#tracts
156
500+ 0 0
De8tors 600$000
/ess provision "or dou8t"ul de8t c=d
30$000
:*0$000
500:
De8tors
/ess 'rovision "or dou8t"ul de8t
<00$000
+0$000
*60$000
5006
De8tors
/ess provision "or dou8t"ul de8t
c=d
:00$000
5:$000
+*:$000
@3A A&oola Enterprises accounting &ear run "rom (arch 1 o" one &ear to Fe8ruar& 5<
o" another &ear. The polic& o" the compan& is to ma,e a + percent provision in the
aggregate de8tors at the end o" the &ear$ n (arch 1 5003$ the provision "or dou8t"ul
de8t stood at 05:$000. During the &ear$ T. Thomas 7ho 7as a customer o" the "irm
o7ing 0100$000 7as declared 8an,rupt in 7hich onl& 60L per 0aira 7as received on
cto8er 31
st
5003 and '$ Faro,Hs de8t o" 0:000 7as 7ritten o"" at the end o" the "inancial
&ear; 5<
th
Fe8ruar& 500+. The aggregate de8tors at the end o" the &ear stood at 0:00$000.
1n 500+$ (r. 9o JohnHs de8ts o" 06000 7as 7ritten o"" as 8ad on 31
st
Jul&. The
sales ledger accounts total 8alance stood at 0*00$000 as at 5<
th
Fe8ruar&$ 500:
3ou are reCuired to 7rite up the "ollo7ing accounts "or the t7o &ears ended.
i )ad de8t account
ii 'rovision "or 8ad de8t account
iii 'ro"it and loss account We#tractsX
iv )alance sheet We#tractsX

-olution
A&oola Enterprises
)ad De8t Account
5003 0 5003 0
ct 31 T. Thomas +0$000 Fe8 5< 'ro"it and /oss +:$000
15*
500+
Fe8. 5< '. Fran, :$000
+:$000 +:$000
500+ 500:
Jul& 31 9o John 6$000 Fe8 5< 'ro"it and /oss 6$000
'rovision "or Dou8t"ul De8t Account
500+ 0 5003 0
Fe8 5< 'ro"it and /oss @Dec. in provA :$000 (ar 1 )al 8=d 5:$000
Fe8 5< )al c=d 50$000
5:$000 5:$000
500: 500+
Fe8 5< )al c=d 5<$000 (ar 1 )al 8=d 50$000
500:
Fe8 5< 'ro"it and /oss @1ncrease
in provisionA <$000
5<$000 5<$000
500:
(ar 1 )al 8=d 5<$000
'ro"it and /oss Account$ 6. @E#tractsA
500+ 0 500+ 0
Fe8 5< )ad de8t +:$000 Fe8 5< 'rovision "or )ad De8t
@DecreaseA
:$000
500:
Fe8. 5< )ad de8t 6000
5< provision "or )ad de8t <000

)alance sheet as at 000 @E#tractsX
500+ 0 0
De8tors :00$000
/ess: 'rovision "or 8ad De8t 50$000
500:
+<0$000
De8tors *00$000
15<
/ess: 'rovision "or )ad de8t 5<$000
6*5$000
!or,ings:
500+ 0
'revious 'rovision O 5:$000
Fe8.5< 'rovision +=100 # :00$00 O 50$000
Decrease in provision O :$000
500:
'revious 'rovision O 50$000
Fe8. 5< provision +=100 # *00$000 O 5<$000
1ncrease in provision O <$000
+.0 C!')$"(i!'
!e have learnt that 8ad de8ts are irrecovera8le de8ts "rom de8tors. The
circumstance under 7hich 8ad de8ts could occur$ the accounting enteries "or 8ad de8ts
7ere discussed and 7or,ed e#amples sho7n.
:.0 S"**a&
1n this unit &ou have learnt that:
)ad de8ts are de8ts 7hich are irrecovera8le "rom de8tors and there"ore
regarded as losses to the compan&.
An& o" the "ollo7ing circumstances could lead to occurrence o" 8ad de8ts:
The death o" the de8tor$ court ruling ad9udging the de8tor 8an,rupt$ the de8tor
ma& 8e at large.
Recovered 8ad de8t is a de8t 7hich had 8een 7ritten o"" as irrecovera8le "rom
the de8tor 8ut 7as later paid 8& the de8tor either in "ull or in part.
6.0 T"t!& 6 Ma&/%1 A((i0'*%'t
a. !hat is 8ad de8tG
8. -tate the circumstances under 7hich a 8ad de8t can occur.
c. !hat is Recovered 8ad de8t G
15>
d. The accounting &ear o" mo&eni and sons Enterprises ends on 31
st
Decem8er ever& &ear. During the three &ears ended 31
st
Decem8er 500:$
5006 and 500* the "ollo7ing de8ts 7as ,no7n and approved to 8e 8ad and
7as 7ritten o"" as 8ad de8ts account on the stated date:
Date De8tors 0ame Amount @0A
(a& 1$ 500: -. )oulos 56$000
cto8er 31$ 500: . )io&e 5*$000
0ovem8er 31$ 5006 3. Asa 53$000
Januar& 31 5006 I. Fola 50$000
August 5<$ 500* L. )o8o&e 31$000
Fe8ruar& 31500* ).0i,e 1>$000
Jul& 31 500* F.)a&o 1*$000
n 31
st
Decem8er 500:$ 5006 and 500* the sales ledger 8alances stood
at 0>00$000$ 01$000$000 and 0*:0$000 respectivel&. 1t is the compan&Hs
polic& to ma,e +E provision "or dou8t"ul de8ts at the end o" the &ear.
3ou are reCuired to prepare "or the &ear 500: to 500*.
i The ledger accounts o" each de8tor
ii )ad de8ts account in 7hich provision "or 8ad de8ts account is
em8edded
iii 'ro"it and loss account We#tractsX
iv )alance sheet We#tractsX
;.0 R%5%&%')%( a'1 !th%& (!"&)%(
1g8an$ R. W500+X: Financial Accounting (ade simple. 2olume 1 E/ ? TDA
2entures /imited$ /agos -tate$ 0igeria
130
lo"inlana /.. and R! de7ale W1>>>X: Fundamentals o" Accounting$ 2olume 5
-tecom 'u8lishers$ A,ure$ ndo -tate.



131