Financial Reporting

This section focuses on how financial statements are prepared for a sole proprietorship within the broader scope of financial accounting. Emphasis is placed on the practical application of financial reporting principles, especially in handling key adjustments such as accruals, prepayments, depreciation and provision for doubtful debts. Through this, you will develop the skills required to present a clear picture of the financial position of a business as well as enable you to grasp and master the essential skills of financial reporting.

KEY IDEAS

• Adjustments are accounting entries made at the end of an accounting period to allocate income and expenses to the appropriate period, ensuring that financial statements reflect the true financial position.

• Final accounts refer to the set of financial statements prepared at the end of an accounting period to summarise the financial performance and position of a business.

• Profit and Loss Account is a financial statement that shows a company’s revenues and expenses over a specific period, resulting in the net profit or loss for that period.

• Statement of Financial Position, which is also known as the balance sheet, presents the financial position of a company at a specific point in time, detailing assets, liabilities, and shareholders’ equity.

• Trading Account is a part of the income statement that shows the results of buying and selling goods and services. It calculates the gross profit by comparing net sales with the cost of goods sold.

Sole Proprietorship

A sole proprietorship is a type of business that is owned and run by one person. This person is in charge of everything in the business — they make decisions, invest money and handle day-to-day activities.

One important thing to note is that the sole proprietor (or owner) has unlimited liability.

This means that if the business loses money or cannot pay its debts, the owner is personally responsible. They may have to use their own money or sell personal belongings (like a car or house) to pay what the business owes. However, if the business makes a profit, the owner gets to keep all of it. The owner does not share the profit with anyone else.

In order for the owner of a sole proprietorship business to know whether profit or loss has been made, as well as to assess the assets and liabilities of the business, final accounts must be prepared.

Final Accounts

Final accounts are the financial statements that a business prepares at the end of each financial year. These accounts help show whether the business made a profit or a loss, and what the business owns and owes.

These accounts are useful for many people, such as:

1. The owner (to know how well the business is doing),

2. Investors (who may want to put money into the business),

3. Lenders (like banks, to decide if they can give loans),

4. Government (to check if the business is paying the right amount of tax).

The final accounts of a sole proprietorship usually include two main parts:

1. Income Statement (also called the Trading, Profit and Loss Account),

2. Statement of Financial Position (also called the Balance Sheet).

To prepare the final accounts, the business first creates a trial balance, which lists all the account balances from the ledger.

Trading Account

The Trading Account is the first part of the income statement. It helps the business to find out if it made a gross profit or a gross loss from its trading activities.

Here is how it works:

On the Debit Side (left side), the business records

1. Opening Inventory (goods available at the start of the year),

2. Purchases (goods bought for resale),

3. Carriage Inwards (transport cost of bringing goods into the business),

4. Returns Outwards (goods returned to suppliers),

5. Wages (if directly related to producing or selling goods),

6. Any other direct costs.

On the Credit Side (right side), the business records Net Sales – This is the total sales minus any returns from customers (returns inwards).

The difference between the credit side and debit side is the gross profit (if sales are higher than costs) or gross loss (if costs are higher than sales).

Gross Profit = Net Sales − Cost of Sales Profit and Loss Account _(The) Profit and Loss Account is the second part of the income statement. It starts with the gross profit from the trading account. The aim is to find out the net profit (real profit after all other income and expenses).

Here is how it works:

On the Credit Side (right side), the business records

1. Gross Profit

2. Other incomes, such as:

a. Commission received,

b. Rent receivable,

c. Discount received,

d. Profit from sale of assets, etc.

On the Debit Side (left side), the business records Operating and administrative expenses, such as:

1. Salaries and wages,

2. Maintenance and repairs,

3. Depreciation (reduction in value of fixed assets over time),

4. Sales tax,

5. Selling and distribution expenses (e.g., advertising),

6. Freight and carriage on sales,

7. Provisions (e.g., money set aside for doubtful debts).

After subtracting all these expenses from the gross profit and adding any other income, the business calculates the net profit (if income is more than expenses) or net loss (if expenses are more than income).

An income statement format is shown below:

Example of profit or loss account for the year ended 31ST December, 20X1 GH¢ GH¢ GH¢ Sales xxx Less: Sales returns xxx Net sales xxx Less: Cost of Sales Opening inventory xxx Add: Purchases xxx Add: Carriage inwards xxx Less: Return outwards xxx Net purchase xxx COGAS xxx Less: Closing inventory xxx Cost of goods sold xxx Add: wages xxx Cost of sales xxx Gross profit c/d xxx Add: other incomes Commission received xxx Discount received xxx Rent received xxx Decrease in provision for bad debts xxx Interest received xxx xxx xxx Less: Operating expenses Wages and salaries xxx Insurance xxx Bad debts xxx Electricity xxx Advertisement xxx Increase in provision for bad debts xxx Depreciation xxx xxx Net profit/loss XXX Statement of Financial Position (also called the Balance Sheet) The Statement of Financial Position, also known as the Balance Sheet, is a financial report that shows what a business owns, what it owes, and how much money the owner has invested in the business. It gives a picture of the business’s financial condition at a specific point in time — usually at the end of the year. The statement includes three main parts which you will already be familiar with:

1. Assets – These are the things the business owns or controls that have value.

Examples: Cash, inventory (goods for sale), buildings, equipment, money owed by customers (debtors), etc.

2. Liabilities – These are the amounts the business owes to others.

Examples: Loans, unpaid bills, money owed to suppliers (creditors), salaries yet to be paid, etc.

3. Capital (or Equity) – This is the money the owner has put into the business, plus any profits that have been kept in the business. Capital can also be called the net worth of the business — what is left after all debts have been paid.

The Balance Sheet is always based on the accounting equation which is Assets = Liabilities + Capital (Equity).

This means everything the business owns (assets) has been financed either by:

1. Borrowing from others (liabilities), and/or

2. The owner's own money (capital/equity).

For example, if a business has GH¢10,000 in assets, and owes GH¢3,000 (liabilities), then the owner's capital is GH¢7,000.

Refer to Section 2 if you need to revise the accounting equation.

Purpose of the Statement of Financial Position

1. It helps the owner, banks, investors, and others understand the strength of the business.

2. It shows if the business has enough assets to pay its debts.

3. It shows how much the owner would have left if the business sold everything and paid off all debts.

4. It helps in making important business decisions like taking loans, investing, or expanding.

The statement is prepared by taking the closing balances of various ledger accounts (after all transactions have been recorded) and organising them into:

a. Assets (fixed and current),

b. Liabilities (long-term and short-term),

c. Capital (including net profit or loss and adjustment of drawings).

The result gives a clear and complete snapshot of the business’s finances on a specific date, as at a specific date Fixed Assets Cost Acc. Dep. NBV Motor Van xxx xxx xxx Building xxx xxx xxx Fixtures & Fittings xxx xxx xxx Premises xxx xxx xxx Land xxx xxx xxx Goodwill xxx xxx xxx Current Assets Stock xxx Receivable xxx Less prov. for doubtful debts xxx xxx Bank xxx Cash xxx Expense prepaid xxx xxx Less Current Liabilities Payables xxx Expenses owing xxx Income prepaid xxx xxx Working capital xxx Net Assets XXX Financed by Capital xxx Add Net profit xxx xxx Less Drawings (xxx) xxx Long-term liabilities 5% Debentures xxx Capital employed XXX

Activity 3.1 Characteristics of Sole Proprietorships

1. Identify sole proprietorship businesses in your community.

2. Summarise the advantages of sole proprietorship for these businesses.

3. Summarise the disadvantages that these businesses face as sole proprietors.

4. Make a poster presentation of your answers and display it in your classroom

Activity 3.2 Purpose of Trading and Profit & Loss account Describe the purpose of a trading account and a profit and loss account.

You can use the table such as the one below to support your response. Record your answers in your workbook.

Type of account Purpose Trading account Profit and loss account Balance sheet

Activity 3.3 Preparation of Income Statement

1. Your teacher will arrange you in small groups to create a template for the income statement of a sole proprietor.

2. In your groups, discuss the categories of items that need to be included in an income statement.

3. Analyse the following information and use it to prepare an income statement of a sole proprietor using the template you created in part 1.

Trial balance as of 30ᵗʰJune, 20X4.

Dr - GH¢ Cr - GH¢ Return inwards 2,000 Sales 90,000 Discount allowed 7,000 Discount received 1,500 Inventory (31st May, 20X3) 20,000 Purchases 50,000 Carriage inwards 1,000 Return outwards 12,000 Insurance 4,800 Rates 2,000 Electricity 4,500 Bad debt 2,200 Rent 12,000 Total 103,500 103,500

Note

Closing inventory on 30th June, 20X4, Gh¢30,000

4. Present your responses on a flip chart and compare with another group for feedback and discussion.

Activity 3.4 Preparation of Statement of Financial Position

1. In your groups, discuss the purpose of statement of financial position.

2. Create a template for a statement of financial position.

3. Discuss the categories of items that need to be included in the statement.

4. Analyse the information below which relates to GTP Enterprises as of June 30, 20X6. Using the template you have created, prepare the statement of financial position.

GH¢ Capital 25,000

Cash 12,000 Accounts Receivable 9,000

Inventory 15,000 Office Furniture 7,000

Net profit 10,000 Accounts Payable 5,000 Bank 5,000 Creditors 8,000

5. Compare your responses with another group for feedback and discussion Extension Task 1 What does your answer to Activity 3.4 tell you about the financial position of GTP Enterprises at this point in time?

Extension Task 2

Answer the following question to support the review of your learning.

The following trial balance was extracted from the books of Greatness Enterprise for the year ended 30th September, 20X2.

Trial balance as of 30ᵗʰSeptember, 20X2.

Dr - GH¢ Cr - GH¢ Salaries 1,000 Receivables and Payables 20,000 16,500 Return inwards 3,000 Sales 91,000 Discount allowed 7,000 Discount received 3,000 Inventory (31st August, 20X1) 20,000 Purchases 52,500 Carriage inwards 2,000 Return outwards 14,000 Bad debt 2,200 Cash in hand 30,000 Drawings 40,000 Bank overdraft 25,000 Insurance 6,300 Rates 1,000 Electricity 4,500 Capital 153,500 Land and building 43,000 Furniture and fitting 37,000 Equipment 33,500 Total 303,000 303,000

Note

Closing inventory on 30th September, 20X2, Gh¢30,000 Use the information provided in the trial balance to prepare the:

1. Income statement for the year ended 30th September, 20X2

2. Statement of financial position as of 30th September, 20X2.

In the last lesson, you learned how to prepare the final accounts (Income Statement and Statement of Financial Position) for a sole proprietor using a trial balance without any adjustments. In this lesson, we will learn about the adjustments that need to be made at the end of the accounting period to show the true profit or loss and the real financial position of the business.

Adjustments Adjustments are the changes we make to the accounts of a business at the end of the year to ensure that the financial report follow accounting rules. These changes help to:

• Record all incomes and expenses in the correct year.

• Show the correct profit or loss.

• Show the correct value of assets and liabilities.

Types of adjustment in a final account include ₁. Closing inventory

2. Outstanding or accrued expenses

3. Outstanding or accrued income

4. Prepaid expenses

5. Prepaid income

6. Bad debts

7. Allowance for receivable (Provision for doubtful debt)

8. Depreciation Closing inventory This is the value of goods that are still left in the shop or warehouse and have not been sold by the end of the accounting period. Closing inventory includes raw materials, finished goods, work in progress and so on.

Example

You have goods worth GH¢12,000. You sell GH¢9,500 worth of goods before the year ends.

This means GH¢2,500 worth of goods remain. That is your closing inventory.

Treatment

1. In the Income Statement: Subtract it from the “cost of goods available for sale”

2. In the Statement of Financial Position: Show it under Current Assets.

Outstanding or accrued expenses Accrued expenses are the costs of goods or services that a business has used or consumed in its operations during an accounting period, but for which payment has not yet been made.

Example

If you used water worth GH¢140 but have not paid it yet, it is an outstanding expense.

Treatment

1. In the Income Statement: Add it to the related expense.

2. In the Statement of Financial Position: Show it as a Current Liability.

Outstanding or accrued income This is money the business has earned but has not yet been received.

Example

Let us say a business invests GH¢10,000 in treasury bills at an interest rate of 15% p.a. and earns GH¢1,500 interest at the end of the year but the interest earned has not yet been received by the business.

Treatment

1. In the Income Statement: Add it to other incomes.

2. In the Statement of Financial Position: Show it as a current asset.

Prepaid expenses This is when the business pays for an expense in advance, more than what is needed for the current year.

Example

Assume you paid GH¢3,000 as rent within an accounting period, but the total amount that you were supposed to pay for the period was GH¢ 1,800. This means that the extra GH¢1,200 is a prepaid expense.

Treatment

1. In the Income Statement: Subtract it from the total expense paid

2. In the Statement of Financial Position: Show it under current assets.

Prepaid income This is an amount of income that is received in excess of the amount that was earned in that accounting period.

Example

Assume you receive a rent payment of GH¢800,000 from a tenant for a period of five years.

However, the rent you charge the tenant is GH¢160,000 a year. Therefore, the prepaid income is GH¢640,000 over the next 4 years.

Treatment

1. In the Income Statement: Subtract it from the “amount received”.

2. In the Statement of Financial Position: Show it as a current liability.

Bad debt Bad debt is an amount money that the sole proprietorship cannot collect from its customers, after all reasonable attempts of recovery have been made. Bad debt usually occurs when the debtor goes into bankruptcy, becomes untraceable, through death, or when the additional cost of pursuing the debt is more than the amount the creditor could collect.

This debt, once considered to be bad, will be written off by the company as an expense.

Example

A buyer, who is supposed to pay GH¢1,000 to the sole proprietorship, was declared bankrupt and the amount was later written off as bad debt.

From the sole proprietor’s perspective, the debt of GH¢1,000 should be treated as bad debt (expense) in the income statement and deducted from the total receivables figure.

Treatment In the Income Statement: Record it as an expense.

In the Statement of Financial Position: Deducted it from the “total receivables”.

Note

If the bad debt figure is in the trial balance, do not deduct it from the receivables.

However, if there is additional bad debt in the footnote, the bad debt figure in the footnote must be added to the bad debt figure in the trial balance and treated as an expense and then deduct only the bad debt in the footnote from the receivables (debtors) before calculating provision for bad debts if there is any Allowance for receivables or provision for doubtful debt Provisions are amounts set aside out of profit and other surpluses to provide for depreciation, renewal, uncollectible debts, etc. This is an estimate of how much of the debts may not be collected in the future. It is like saying: “Out of all the money customers owe, some may not pay. So, let us prepare for it.” The reasons for potential non-payment include disputes over quantity supplied, delivery, the conditions of the item, or the financial stress of a customer’s operations.

Treatment for allowance for receivables (provision for doubtful debt)

1. If the provision (estimate) increases from last year:

a. In the Income Statement: treat the increase as an expense.

b. In the statement of financial position: subtract the end of year provision figure from the receivables (debtors) under current assets.

2. If the provision (estimate) decreases:

a. In the Income Statement: treat the decrease as an income.

b. In the statement of financial position: Subtract the end of year provision figure from the receivables (debtors) under current assets.

3. If there is no provision (estimate) in the trial balance but only in the footnotes:

a. In the Income Statement: treat the entire provision as an expense.

b. In the statement of financial position: subtract the same provision figure from the receivables (debtors) under current assets.

Activity 3.5 Meaning, Types and Purpose of Adjustment

1. Find a partner to work with and discuss the meaning of “adjustments” in the context of final accounts.

2. Identify the purpose of adjustments.

3. Describe seven (7) types of adjustments.

4. Record your answers in your workbook and share with another pair for feedback.

If you are unsure, seek clarification from your teacher.

Activity 3.6 Identification of Adjustment

1. Analyse the following scenario and answer the questions that follow in your workbook:

Your parents rent a shop in which they sell shoes and dresses. They pay GH¢ 2,500 per year as rent. In the year 20X3, they decided to pay GH¢4,000 to the shop owner as rent in that year.

a. Identify the term used in accounting for the excess money paid by your parents.

b. Describe how the excess money would be treated in your parent’s books of account.

c. If circumstances were different and your parents had paid GH¢ 1,800 to the shop owner as rent for the year 20X3, how that would be treated in their books of account?

2. Share your answers with a colleague for feedback

Activity 3.7 Treatment of Adjustment

1. Your teacher will arrange you in small groups of no more than five to discuss how the following accounting adjustments would be treated in the final accounts of a sole proprietor.

a. Bad debt

b. Accrued expenses

c. Allowance for receivable

2. Make a presentation of your responses using a flip chart.

You could use a table such as the one below to present your answers:

Type of adjustment How is the adjustment applied?

Bad debt Accrued expenses Allowance for receivable

What is Depreciation?

Depreciation is the reduction in the value of a non-current asset (like machines, vehicles, or buildings) over time. This happens because the asset becomes old, or is affected by weather or technology.

Why Do We Depreciate Assets?

Here are some reasons why depreciation is important:

1. To spread the cost over time: Instead of charging the full cost of an asset in one year, depreciation allows us to spread the cost over the number of years the asset will be used.

2. To know the real value of the asset: At any point, we can know how much the asset is worth now (called net book value), not just how much we bought it for.

3. To help with selling: If we want to sell the asset, the reduced value helps set a fair price.

4. To show correct profit: Depreciation is an expense. Recording it helps show the true profit of the business. Otherwise, profits may be overstated.

5. To calculate gain or loss on disposal: When the asset is sold, we compare its selling price with its book value to know if we made a profit or loss.

6. To protect business capital: Depreciation keeps part of the income from being shared as dividends. This helps the business maintain its strength.

7. To help with insurance claims: If the asset is damaged or destroyed, depreciation helps calculate the right amount to claim.

8. To plan for replacement: It helps the business decide when to buy a new asset before the old one becomes useless.

Causes of Depreciation

Depreciation happens for several reasons. Some of them are as follows

1. Wear and tear: Using an asset regularly causes it to wear out.

2. Weather damage: Exposure to rain, sun, wind, etc., can cause rust, rot, or erosion.

3. Becoming outdated (Obsolescence): New technology may replace the old asset.

4. Inadequacy (Superfluity): The asset may no longer be enough for the growing needs of the business.

5. Passage of time (Effluxion of time): Some assets like patents, leases, or licenses expire after a set period.

6. Depletion: Natural resources like oil, gold, or timber reduce as we extract them.

Methods of Depreciation

There are different ways to calculate depreciation. Here are four common methods:

Straight-Line Method (Fixed Amount Every Year)

In this method, the same amount of depreciation is charged every year. We calculate this by subtracting the residual value (what the asset will be worth at the end) from the cost and dividing it by the number of years.

Formula: (Cost – Residual Value) ÷ Useful Life = Depreciation per year

Example: Ama bought office furniture for GH¢5,000. She expects to use it for 5 years and then sell it for GH¢500.

(5,000−500) ÷5 = 900 So, depreciation is GH¢900 every year.

Reducing Balance Method (Declining Value Each Year)

Here, we calculate depreciation by applying a fixed percentage on the book value (remaining value) each year. The amount decreases every year.

Example: Kojo bought a laptop for GH¢10,000 and the rate of depreciation is 25% per year.

Year 1:

25% of 10,000 = GH¢2,500 Book value now = 10,000 - 2,500 = GH¢7,500 Year 2:

25% of 7,500 = GH¢1,875 Book value now = 7,500 - 1,875 = GH¢5,625 So, the depreciation keeps getting smaller.

Revaluation Method

This method is used when we don’t know the asset’s original cost. The asset is simply revalued at the beginning and end of the year. The difference is treated as depreciation.

Example: A printer was worth GH¢1,200 on 1st January. At the end of the year (31st December), its value dropped to GH¢950.

1,200 − 950 = GH¢250 depreciation Sum of the Years’ Digits Method (More in Early Years) This method gives more depreciation in the early years and less in the later years.

We add the digits of the asset’s useful life and then divide each year's digit (starting from the highest) by the total.

Example: A delivery truck costs GH¢150,000 and will be used for 5 years.

Step 1: Add the digits – 1 + 2 + 3 + 4 + 5 = 15

Step 2: Calculate each year’s depreciation

1. Year 1: 5/15 × 150,000 = GH¢50,000

2. Year 2: 4/15 × 150,000 = GH¢40,000

3. Year 3: 3/15 × 150,000 = GH¢30,000 Summary Table of Depreciation Methods Method Depreciation Pattern Best For Straight-Line Same amount every year Simple assets with equal usage each year Reducing Balance Declining amount each year High-tech or fast-depreciating items Revaluation Based on new value each year Assets with unknown or changing market value Sum of Years’ Digits Higher early, lower later Expensive assets that lose value quickly early

Activity 3.8 Meaning and Causes of Depreciation

1. In pairs, define the meaning of depreciation.

2. Explain the reasons for depreciation

3. Discuss the causes of depreciation.

4. Compare your responses with another pair for feedback

Activity 3.9 Methods of Calculating Depreciation

1. Discuss the different methods of calculating depreciation with a partner.

2. Make a poster presentation of the key points of your discussions to share with the class. Your poster should summarise each of the methods covered in the lesson. Include examples to help show how these methods are used in practice.

Activity 3.10 Calculation of Depreciation

1. Arrange yourself in small groups to analyse and answer the following questions

a. Zebilla Ltd. purchased a delivery van on January 1, 20X4, at a cost of GH¢50,000. The estimated useful life of the van is 5 years, and its residual value at the end of its useful life is expected to be GH¢5,000.

Calculate the annual depreciation for the van using the following methods:

i. Straight line method

ii. Reducing balance method (using a 20% depreciation rate)

iii. Sum of the years’ digits method For each method remember to calculate the depreciation for each of the five years.

Show your workings for each stage of your calculations.

b. Kumi and Sons Company owns machinery that was purchased on January 1, 20X3, for GH¢80,000. The company uses the Revaluation Method to calculate depreciation. The machinery’s value was re-assessed at the end of each year, with the following revalued amounts:

Date Value (GH¢)

January 1, 20X3 80,000 December 31, 20X3 72,000

December 31, 20X4 64,000 December 31, 20X5 56,000

December 31, 20X6 48,000 Calculate the depreciation to be charged for each year using the Revaluation Method.

2. Present your response using a flip chart and share with another group for feedback.

Extension Task 1

Using one of your worked examples from activity 3.10, explain how depreciation would be treated in the final accounts of that business.

Extension Task 2

Answer the following questions to support the review of your learning.

Scenario 1 Joman Manufacturing purchased a piece of equipment on January 1, 20X4, for GH¢100,000. The equipment has an estimated useful life of five years and a residual value of GH¢10,000.

At the end of each year, Joman Manufacturing reassesses the value of the equipment for the Revaluation Method as follows:

December 31, 2024: GH¢85,000

December 31, 2025: GH¢70,000

December 31, 2026: GH¢55,000

December 31, 2027: GH¢40,000

December 31, 2028: GH¢25,000

Calculate the annual depreciation for each of the five years using the following methods:

1. Straight Line Method

2. Reducing Balance Method (with a depreciation rate of 25%)

3. Sum of the Years’ Digits Method

4. Revaluation Method

For each method remember to calculate the depreciation for each of the five years.

Show your workings for each stage of your calculations.

Scenario 2 The cost of a motor vehicle is GH¢30,000 and the rate of depreciation is 5% per annum.

Calculate the depreciation charge for each of the first five years of the asset using the straight-line method.

An asset costs GH¢18,000 on 1st January, 20X5. As of 31st December 20X5, the value placed on the asset was GH¢15,000.

What is the depreciation charge for the year using the revaluation method?

Present your answers to your teacher for feedback.

This section allows you to practice including the adjustments you have just covered in the financial statements of a sole trader.

Before completing these exercises, it will be useful to refer back to start of this section and revisit the format of a trading, profit and loss account and balance sheet.

Activity 3.11 Preparing the final account of a sole trader

1. Your teacher will arrange you in small groups to prepare the final accounts of a sole trader. Carefully analyse the information below, paying particular attention to the adjustments and how these will need to be reflected in the business’s financial statements.

Santo Enterprise is a business owned and managed by Bob Santo. The business has been operating throughout the year, and as the year ends, Bob Santo wants to prepare the financial statements to understand the financial position and performance of his business.

Below are the balances extracted from the books of Santo Enterprise as of December 31, 2016:

GH¢ Capital 315,200

Purchases 259,800 Sales 484,700

Carriage inwards 17,410 Premises at cost 215,000 Equipment at cost 198,000 Trade debtors 76,800 Bank overdraft 63,509 Trade creditors 64,820 Cash in hand 13,400 Stock (Jan. 1, 2016) 27,680 Salaries and wages 56,700 Provision for doubtful debts 13,000 Discount allowed 11,450 Drawings 70,000 Discount received 22,800 Electricity 29,229 General expenses 37,060 Rent 43,000 9% Debentures 100,000 Return inwards 24,500 Return outwards 16,000 Additional information:

a. Stock in trade on December 31, 2016 was GH¢29,400;

b. Provision for doubtful debt to remain at 8% of debtors.

c. General expenses owing totalled GH¢12,860;

d. Rent prepaid GH¢19,500.

Depreciation is to be provided as follows:

a. Premises 12.5% on cost

b. Equipment 10% on cost

2. Prepare the following final accounts for Santo Enterprise

a. Trading, Profit and Loss Account for the year ended December 31, 2016.

b. Balance Sheet as of December 31, 2016.

3. Type your answer in MS Excel format and compare with other groups for feedback.

Ask your teacher to clarification if needed.

Activity 3.12 Preparation of financial statements

1. Study the information below.

Esi Kwansima owns a small dressmaking business. On 31ˢᵗDecember 2004, the following balances appeared in her books:

GH¢ GH¢

Capital, 1ˢᵗJanuary 2004 20,000 Equipment at cost 7,200 Stock, 1ˢᵗJanuary 2004 5,800 Purchases and sales 22,000 51,600 Returns inwards and outwards 1,000 600 Carriage inwards 300 Carriage outwards 500 Trade debtors 10,000 Trade creditors 5,980 Provision for bad debts 600 Bad debts written off 380 Wages and salaries 7,360 Discount allowed and received 240 1,100 Advertising 1,400 Electricity 1,000 Rent and rates 2,320 General expenses 440 Cash 7,120 Bank 14,820 Provision for depreciation of equipment .

. 2,000 81,880 81,880 Additional information:

a. Stock on 31ˢᵗDecember 2004 was valued at GH¢7,400.

b. Wages owing on 31ˢᵗDecember 2004 amounted to GH¢10,000.

c. Provide for bad debt 5% on debtors.

d. Provide for depreciation on equipment at 10% on cost.

2. Prepare the following financial statements:

a. Trading, Profit and Loss account for the year ended 31ˢᵗDecember 2004

b. A Balance sheet as of that date.

Remember to include all relevant adjustments.

3. Share your answers with your colleague for feedback. Seek clarification from your teacher as needed.

Activity 3.13 Preparing the final account of a sole trader

1. Working in small groups, examine the following trial balance that was extracted from the books of Free SHS Trading Enterprises on 31ˢᵗDecember 2018.

DEBIT CREDIT

GH¢ GH¢

Sales 2,400,000 Purchases 2,110,000

Freehold Buildings at cost 250,000 Freehold land 80,000 Capital 571,000 Investments 50,000 Bank overdrafts 12,500 Trade creditors 74,000 Trade Debtors 165,000 5% Loan 100,000 Discount Allowed 2,500 Discount Received 6,500 Provision for depreciation:

Freehold buildings 25,000 Fixtures and fittings 128,000 Fixtures and fittings at cost 320,000 Stock 1st Jan. 2018 210,000 Returns outwards 40,000 Miscellaneous expenses 65,000 Administration expenses 28,000 Selling and distribution expenses 83,500 Bad debts written off 2,000 Provision for doubtful debts 9,000 3,366,000 3,366,000 Additional information:

a. Write off GH¢ 5,000 as bad debt.

b. Provision for doubtful debts is to be made at 5% of trade debtors.

c. Miscellaneous expenses prepaid at 31ˢᵗDecember 2018 amounted to GH¢2,000.

d. Administration expenses accrued at 31ˢᵗDecember 2018 amounted to GH¢3,500.

e. A years’ interest on the loan is due and unpaid.

f. Stock on 31ˢᵗDecember 2018 amounted to GH¢360,000.

g. Provide for depreciation as follows:

i. Freehold building 5% on cost,

ii. Fixtures and fittings 10% on cost.

2. In your groups discuss the treatment of the various adjustments that will need to be made to SHS Trading Enterprises’ financial statements.

3. Prepare the Trading, Profit and Loss Account for the year ended 31ˢᵗDecember 2018; and a balance Sheet as at that date for Free SHS Enterprise. Remember to include all adjustments.

4. Share your answers with another group for feedback and discussion. Seek clarification from your teacher as needed.

Extension Task

Answer the following question to support the review of your learning

1. Based on the following information, prepare final accounts for Adwumawura, a general merchant based in Akim Oda, for the year ended 31ˢᵗDecember 20X3.

a. Stocks on 31ˢᵗDecember 20X3 were valued at GH¢436,740.

b. Outstanding liabilities were GH¢5,640 for wages due and GH¢1,020 for unpaid rent.

c. Insurance had been prepaid by GH¢720.

d. You are to write off GH¢4,800 as irrecoverable debts while a provision of 5% on the remaining debtors balance is to be made for doubtful debts.

e. Depreciation is to be calculated at 5% and 20% per annum of Fixtures and Fittings and Motor van respectfully.

This is Adwumawura’s trial balance on 31ˢᵗDecember, 20X3.

GH¢ GH¢

Advertising 93,900 Bank Loan 89,280

Capital 600,000 Carriage inwards 24,180 Carriage outwards 52,500 Cash at bank 25,500 Cash in hand 1,320 Creditors 186,120 Debtors 412,800 Discount 25,080 Drawings 144,000 Fixtures and Fittings 75,600 Lighting and heating 11,220 Motor vans 41,100 Office salaries 30,600 Postage and internet data 4,080 Provision for bad debts 19,200 Purchases 1,274,280 Purchases returns 66,600 Rates and insurance 30,120 Rent 3,060 Sales 2,054,100 Sales returns 99,120 Salesmen’s salaries and commission 97,080 Stationery 7,200 Stocks, 1st January 20X3 352,560 Wages 210,000 . .

3,015,300 3,015,300

2. Share your answer with your teacher for feedback.