MODULE THREE: TRIAL BALANCE AND FINAL ACCOUNTS
3.5 Notes to the Accounts
The notes to the accounts give a brief explanatory information to the users of accounting statements as to how and why some items have been treated in the books and states its compliance with the legal requirements of disclosure of some relevant and significant transactions.
Example
The following information is in respect of the business affairs of Olaoluwa and Sons Enterprises for the year ended 31st March 19 x 4
i. Stock on 31st March, 19 x 4 was N38,500
ii. Provide depreciation on plant and machinery which has a life span of 12 years and a residual value of N4,000.
iii. Provide depreciation on motor vehicle at the rate of 20% on the net book value.
iv. The organization sub-let the building on 30th June, 19 x 3 and the rent received covered 30th June 19 x 3 to 1st October, 19 x 4.
v. Loan from S. Johnson was received on 1st January, 19 x 3 at 15 percent per annum and only N4,500 have been paid as interest throughout the period.
vi. 20% P.a deposit on NN Bank Limited was made on 31st May, 19 x 3.
vii. Maintain provision for doubtful debts on debtors as 5 percent and adjust the provision for discounts allowable on debtors to 1 percent.
viii. Create a provision for discount received on creditors at ½ percent.
ix. Provide for interest on capital account as 1 percent.
x. The following expenses are under-paid: Telephone N4,000 and salaries and wages N11,500.
xi. Salaries and wages paid include N3,500 for direct wages.
xii Distribution and selling expenses was over-paid by N1,500.
Question
1. Prepare the trial balance from the extract of the books during the same period.
2. Make the necessary adjustments and prepare:
i. The Trading and Profit and loss Account for the year ended 31st March, 19x 4 and ii. The Balance sheet as at 31st March, 19 x 4
(Note: show you answer to the nearest Naira) Solution
1. Trial balance: The following is the trial balance extracted from his books during the same period.
DR CR
N N
Purchases and Sales 500,000 750,000
Returns 10,500 15,000
Debtors and Creditors 60,500 75,100
Carriage on purchases 1,500
Carriage on sales 2,000
Bad debts written off 5,000
Provision for bad debts - 1st April 19 x 3 2,500
Provision for discount on debtors - 1st April 19 x 3 1,000
Salaries and Wages 20,000
Lighting 4,500
Telephone Expenses 5,000
Stationery 7,000
Bank Charges 1,000
Loan from S. Johnson 40,000
Loan interest owing - 1st April, 19 x 2 1,500
Travelling Expenses 1,600
Loan Interest 4,500
20% P.a Deposit in NN Bank Ltd 60,000
Interest on Bank Deposit 7,000
Salesmen Commission 2,700
Distribution and selling Expenses 25,000
Buildings 80,000
Plant and Machinery at cost 100,000
Provision for Depreciation on plant & Machinery 32,000
Motor vehicles at cost 150,000
Provision for depreciation on motor vehicles 60,000
Rent Received from building sub-let 12,000
Stock on hand - 1st April, 19 x 3 35,000
Bank and Cash 3,000
Drawings 5,800
Capital 87,000
Discounts 7,000 8,500
1,091,600 1,091,600 2i Olaoluwa and Sons Enterprises Trading Account for the year ended 31st march, 19 x 4.
Opening Stock Add:
Purchases
Carriage on purchase Less:
Returns Outwards Goods Available for Sale
Less: Closing Stock
N N N
35,000 Sales (Gross) 750,000
Les Returns Inwards 10,500
500,000 Net Sales 739,500
1,500 501,500 15,000
486,500 521,500 38,500
Cost of Goods sold 483,000
Gross Profit c/d 256,500
739,500 739,500
Olaoluwa and Sons Enterprises profit and Loss Account for the year ended 31st March 19 x 4
N N N N
Discount Allowed 7,000 Gross Profit b/d 253,000
Carriage on sales 2,000 Discount Received 8,500
Bad Debts 5,000
Provision for bad debts 525 Interest on Bank Deposit 7,000
Lighting 4,500 Add: Outstanding 3,000
Telephone Expenses 5,000 10,000
Add: under paid 4,000 Rent Received 12,000
9,000 Less: Received in Add 4,800
Stationery 7,000 7,200
Bank charges 1,000
Interest on Loan Decrease in provision for
4,500 discount in debtors 425
Add: Interest owing 3,000 7,500
Less: Payment in arrears 1,500 Provision for discount
received on creditors 375
6,000
Salesmen commission 2,700
Travelling Expenses 1,600
Salaries and Wages 20,000
Add Owing 11,500
31,500 Less: Direct Wages 3,500
28,000 Distribution and selling
expenses 25,000
Less: Prepaid 1,500
23,500 Dep: Motor vehicle 18,000
Plant & Machinery 8,000
26,000 Provision for interest in
capital 870
Net Profit c/d 154,806
279,501 279,501
Olaoluwa and Sons Enterprises Balance Sheet as at 31st March, 19 x 4
N N Fixed Assets: N N
Capital 87,000 Building 80,000
Add: Net Profit 154,806 Plant & Machinery 100,000
241,806 Less: Provision for Dep 40,000
Less drawings 5,800 60,000
236,006
Long term liability loan: Motor vehicles 150,000
S. Johnson 40,000
Current Liabilities: Less: Prov. For Dep 78,000
Creditors 75,000 72,000
Less Provision for 212,000
Discount Received 376
74,724 Current Assets:
Accruals: Stock 38,500
Telephone 4,000 Debtors 56,900
Provision for interest on 870 Prepaid Distribution & 1,500
capital Selling expenses
Interest on loan 3,000 Interest Receivable (W.C) 3,000
Salaries and Wages 11,500 Bank Deposit 60,000
Rent Received in Advance 4,800 Bank and Cash 3,000
24,170 162,900
374,900 374,900
Workings:
(W.a)
Provision for Bad Debts Account
19 x 4 N 19 x 3 N
Mar 31 Bal c/d 3,025 April 1 Bal b/d 2,500
19 x 4
Mar 31 Profit and Loss 525
3,025 3,025
Provision for Discount Allowed on Debtors Account
19 x 4 N 19 x 3 N
Mar 31 Profit and Loss 425 April Bal b/d 1,000
31 Bal c/d 575
1,000 1,000
Calculation of provision of discount on debtors:
= (N60,500 - N3,025) x 1% = N575 approximately Calculation of Total Debtors: N : N
Debtors as per Trial Balance 60,500
Less:
Provision for Bad Debts 3,025 Provision for Discount Allowed
on Debtors 575
3,600 56,900
(w.b) Interest on loan from Johnson Date Received: 1st January, 19 x 3 Amount of loan: N40,000
Rate: 15% per annum Amount paid: N4,500
1st January, 19 x 3 to 31st March, 19 x 3 = 3 months 1st April 19 x 3 to 31st March 19 x 4 = 12 months 15% x N40,000 x 3/12 = N1,500
15% x N40,000 = N6,000
Out of the N4,500 that was paid N1,500 is in respect of the last financial period and N3,000 is in respect of this financial period out of the N6,000 that is actually due, and as such N3000 is still outstanding.
(w.c) 20% p.a Deposit in NN Bank Ltd (Note vi):
Date of deposit: 31st May 19 x 3
Total months used in the bank = 10 months i.e June 19 x 3 to March 19 x 4
N
Interest supposed to be received = 20% x 60,000 x 10/12 10,000
Less: Amount Received 7,000
Interest Receivable 3,000
(w.d) Rent from building sub-let
Date building was sub-let = 30th June, 19 x 3 Total months covered = 15 months receipts The number of months that is utilized = 9 months The amount that is meant for the financial year = N12,000 x 9/15 = N7,200
Rent Received in advance = N12,000 - N7,200
= N4,800
(w.e) Depreciation on plant and machinery N Plant and Machinery at cost = 100,000 Less Residual value (Note ii) 4,000 96,000 Depreciation on motor vehicles
= N150,000 - N60,000 x 20% = 18,000
(w.f) Provision for discount received on creditors (Note viii) N75,000 x ½ %
= N376
4.0 Conclusion
We have learnt in this unit that final accounts is made up of different accounts such as: Manufacturing Account, Trading Account, Profit and Loss Account, Profit and Loss Appropriation Account, Balance sheet and Notes to the accounts.
5.0 Summary
You have learnt in this unit that:
• The main purpose of preparing the manufacturing account is to determine the cost of production.
• The aim of the trading account is to ascertain the gross profit or gross loss for a certain period.
• The profit and loss account is used to ascertain the net profit or net loss for the same period of trading after charging administrative, selling and distribution expenses and some other financial charges,
• The objective of the profit and loss appropriation account is to show all dispositions, divisions and appropriations of the net profit and loss.
• The Balance sheet shows whether a business is solvent or insolvent i.e the ability of the business and its inability to meet its financial obligations as at when due.
6.0 Tutor Marked Assignment
1. State and explain the different components that makes up the final account.
2. Mr Olaleleye the account clerk of Manuwa Enterprises extracted the following list of balances from the records on 31st December, 19 x 3 Capital N75,000, Sales N126,270, Purchases N295,000, Carriage inwards N2,000 Carriage outwards N3,000 Discount Allowed N6,500, Discount Received N8,100, Creditors N80,500, Debtors N70,100, Rent N6,000, Rates N6,000, Bad debts N3,500, Provision for bad debts N2,800 as at January 1 19 x 3, Provision for discount allowed on debtors N500 as at January 1 19 x 3. Provision for discount received on creditors N700 as at January 1, 19 x 3, stock in trade as at January 1 19 x 3 N40,500, Accountancy charges N11,500, Travelling expenses N15,100, Entertainment expenses N5,600, Salaries and Wages N12,500, Salesmen commission N4,100, commission and selling bonuses received N7,700 cash in hand N5,100, cash at bank N9,500, Plant and Machinery at cost N40,000 (the plant has a net book value of N22,000 on 1st January 19 x 3), furniture and fittings at cost N30,000, the provision for depreciation on furniture and fittings on 1st January 19 x 3 was N8,130, proceeds from sale of furniture and fittings N3,500, Building N45,000, Drawings N6,700, Returns Inwards N7,000, Returns outwards N5,000. You are Required to:
i. Extract a trial balance from the above list of balances as at 31st December, 19 x 3 ii. Prepare a Trading Profit and loss Account for the year ended 31st December, 19 x 3 and a Balance sheet as at that date after taking the under listed adjustments into consideration
i. Stock in trade 31st December 19 x 3 N52,700
ii. Goods withdrawn without record for personal uses N2,500
iii. N1,600 included in the entertainment expenses is meant for advertising.
iv. Adjust provision for discount allowed on debtors at 1%.
v. Write off provisions for discount received on creditors because it is no longer required.
vi. Plant and machinery to be depreciated at 15% on cost.
vii. Furniture and fittings are to be depreciated at 10% on the net book value.
viii. On 1st January, 19 x 0, some furniture and fittings were purchased for N5,000 and they were disposed off on 31st December 19 x 3 and N3,500 was realized.
The proceed of this transaction was only recorded in the cash book and disposal of furniture and fittings account.
ix. Additional furniture and fittings purchases on 30th June, 19 x 3 for N9,000 has not yet been recorded in the assets account.
x. N9,000 introduced as additional capital during the year has not been recorded in the capital account.
xi. Commission and selling bonuses received in advance amounted to N500.
(Note: show your answer to the nearest Naira).