Financial Reporting

Welcome to section three of your studies. Here, you will acquire an understanding of how to prepare accounts for non-profit organisations and how to prepare accounts for single- entry and incomplete records. You will explore the concepts, challenges and practical applications of these topics. By the end of the section, you should understand not-for- profit organisations, be able to define their purpose and features and be able to prepare income and expenditure accounts. Additionally, you will learn how to handle incomplete records by identifying their causes, understanding the challenges they present, and being able to prepare accurate financial statements.

KEY IDEAS

• Capital Approach: This is a method of estimating profit or loss by comparing the owner’s capital at the beginning and end of a period, while considering additional capital introduced and drawings made.

• Income Statement Approach: This is a method where various components of revenue and expenses are reconstructed to estimate net profit or loss. This involves gathering available data such as sales, purchases and operating expenses to create a profit and loss statement.

• Incomplete Records is a situation where a business or organisation does not maintain a complete and systematic set of accounting records, often due to using a single-entry system or informal bookkeeping practices.

• Non-profit Organisations: These are organisations established to serve a social, educational, religious or charitable purpose without the intention of making a profit for their owners or stakeholders. Any surplus revenue generated is reinvested to further the organisation’s mission.

• Single Entry System: This is a simplified accounting method that records only one side of each transaction, typically focusing on cash and personal accounts. It lacks the detailed structure of double-entry bookkeeping and may result in incomplete records.

Meaning of Not-for-Profit Making Organisation

Not-for-profit organisations are groups or institutions that work to help people or serve the community instead of making money. These organisations are sometimes called non- trading organisations because they do not sell products or services for profit. Examples of such groups include churches, mosques, schools, associations, societies and clubs. They focus on providing support, education or social activities to benefit the public without aiming to make money for themselves.

Sources of finance for not-for-profit making organisations include:

1. Subscription fees/dues

2. Entrance/registration fees

3. Life membership fees

4. Donations received

5. Profit from trading activities, e.g., restaurants, entertainment, etc.

6. Government grants Purpose of Not-for-Profit Organisations Not-for-profit organisations are created to serve purposes other than making money.

Their main goal is to help people or support a specific cause without giving extra income to owners or shareholders. Some of the key purposes of not-for-profit organisations are summarised in Table 3.1.

Table 3.1: Purposes of not-for-profit organisations Social Welfare These organisations aim to help solve social problems like poverty, homelessness and hunger.

They provide support, aid and services to those who need it most.

Education Not-for-profits often work to improve education by running schools, colleges, universities, research centres and scholarship programs.

They focus on making education more accessible to people.

Healthcare Many not-for-profits provide medical services, fund medical research and promote health awareness.

Their work helps to prevent diseases and improve public health.

Environment These organisations work to protect and preserve nature. They run

activities like conservation projects, recycling programs and advocating for laws that help the environment.

Community development These organisations focus on improving communities by supporting economic growth, building housing and making better local facilities.

Charity Not-for-profits collect and distribute money to support different causes.

They may offer financial help to individuals or other organisations in need.

Features of Not-for-Profit Organisations

Not-for-profit organisations (NPOs) have unique qualities that make them different from for-profit businesses. Some of the main features include:

1. Non-Distribution of Profits: Any profit left over (surplus) is used to further the organisation’s goals and activities instead of being shared among owners or shareholders.

2. Purpose-Driven: These organisations are started for a specific reason, such as helping society, supporting education, doing charitable work, promoting religion or helping local communities.

3. Tax-Exempt Status: Many NPOs do not have to pay income taxes on the money they receive. This allows them to use more of their funds to support their cause.

4. Funding Sources: They get their money from different places, such as donations, grants, membership fees, fundraising events and sometimes government aid. Some may also earn money through activities that are in line with their mission.

5. Governance: NPOs are often managed by a board of directors or trustees who oversee the organisation’s operations. These board members usually volunteer their time to make sure the organisation follows its mission and legal requirements.

6. Transparency and Accountability: NPOs need to be clear and open about how they use their funds. They often provide regular financial reports to show donors, members and the public how their money is spent.

7. Legal Status: These organisations must register and follow specific laws and regulations that differ by country or region. This includes keeping proper records and meeting reporting requirements.

8. Social Impact: The success of an NPO is measured by how much positive change it creates, not by how much profit it makes. People often judge their effectiveness by measuring the extent to which the achievement of their goal benefits society.

9. Membership and Participation: Many NPOs have members who pay membership fees and actively take part in the group’s activities and decision-making.

10. Ethical Standards: NPOs are expected to operate honestly and fairly. They should treat people with respect and uphold high ethical values in all their work.

Activity 3.1 Discussion on examples of organisations that help people in your local community or area

1. Turn to your partner and discuss examples of organisations that help people in your

2. local community or area. Do you think they are not-for-profit organisations?

Why?

3. With your partner, define what you understand to be a not-for-profit organisation.

4. Share your definition and examples as part of a wider class discussion. Refine your answer if needed as a result of these discussions.

Activity 3.2 Discussion on not-for-profit organisations

1. Your teacher will arrange you in small groups to continue your discussion on not- for-profit organisations. In your groups, answer the following questions.

a. What are the purposes of not-for-profit organisations?

b. What makes not-for-profit organisations different from profit-making organisations?

c. How are not-for-profit organisations funded?

2. Record your answers in your workbooks.

Activity 3.3 Purpose and Features of NPOs

1. In your groups, study the case below and provide answers to the questions that follow.

On a visit to Nyameye, Mr Bempong observed the poverty in the local community, with many people struggling with the affordability of housing and providing food for their families. Following his visit and in collaboration with international colleagues, they founded the Skills Development Club as a not-for-profit organisation. Their main aim was to provide food and shelter to homeless individuals in the Nyameye community.

a. What are the Skills Development Club’s primary purposes and features?

b. How does Skills Development Club differ from institutions that are set up to make a profit?

c. What implications does the Skills Development Club’s purpose have on its operations and financial management?

2. Present your answers on a manila card to your class for discussion and feedback.

Activity 3.4 Self-Assessment

Answer at least one of the following questions to support the review of your learning from this lesson.

1. Identify the sources of funding for not-for-profit making organisations

2. Explain the purpose of not-for-profit making organisations

3. Discuss the features of not-for-profit making organisations.

Terminologies used in the Administration of Not- for-Profit Making Organisations Summarised below is a list of terms commonly used in the financial administration of not- for-profit making organisations. It is important to be familiar with these terms before we move on to look at the accounts for NPOs and how to prepare their financial statements.

1. Accumulated Fund: This is like the main capital or total worth of a not-for-profit organisation. It is calculated by finding the difference between everything the organisation owns (assets) and what it owes (liabilities) at any given time.

2. Subscription: This is a regular payment or dues that members make to the not-for- profit organisation. Members might pay these dues daily, weekly, monthly, quarterly, twice a year or yearly. If a member has not paid their dues by the time the accounts are prepared, it is called a subscription in arrears and is listed as a current asset on the organisation’s balance sheet. If a member pays more than their required dues, it is called a subscription prepaid and is recorded as a current liability on the balance sheet.

3. Receipts and Payments Account: This is similar to the cashbook used by profit- making businesses. The left side (debit side) shows the starting cash or bank balance and all the money received, while the right side (credit side) shows all the payments made and the ending cash or bank balance.

4. Income and Expenditure Account: This account is like the profit and loss account of a regular business. It only records regular income and expenses and shows whether the organisation has a surplus (that is, if their income is greater than expenses) or a deficit (if their expenses are greater than income).

5. Entrance Fees: These are payments made when someone first becomes a member of a club or organisation. The money received from entrance fees is usually recorded as income in the year it is received.

6. Honorarium: This is a payment or token of appreciation given to a professional or expert who provides services to the not-for-profit organisation. It is recorded as an expense for the organisation.

7. Bar Profit: This is the profit earned from activities like selling drinks or food in a not- for-profit organisation. It is calculated by preparing a bar trading account where the cost of what was sold is subtracted from the money earned from sales.

Format of Receipts and Payments Account for a

Not-for-Profit Organisation

An example of a receipts and payments account for an NPO is included below.

Receipt and Payment Account

GH¢ GH¢

Cash in hand (1/1/2021) xxx Purchase of office equipment xxx Cash at bank (1/1/2021) xxx Purchase of furniture xxx Subscriptions: 2020 xxx Repairs xxx 2021 xxx Wages and Salaries xxx 2022 xxx xxx Donation (Given out) xxx Donations (received) xxx Fund raising expenses xxx Sale of programme tickets xxx Bar expenses xxx Bar sales xxx Insurance xxx Receipt from bar debtors xxx Programmes expenses xxx Proceeds from fund raising xxx Transport expenses xxx Transfer from deposit account xxx Secretarial expenses xxx Interest on bank deposits xxx Rates xxx General Expenses xxx Balance c/d xxx xxxx xxxx Format of an Income and Expenditure Account An example of an income and expenditure account for an NPO is included below.

The differences between receipts and payments accounts and income and expenditure accounts are summarised in the following table.

Table 3.2: Differences between receipts and payments accounts and income and expenditure accounts Receipts and Payments Income and Expenditure Receipts are shown on the debit side, and payments are shown on the credit side.

Expenses and losses are shown on the debit side, and income is shown on the credit side.

It starts with the opening balance of cash in hand and at the bank. It has no opening balances.

Accounts are prepared on a cash accounting basis.

Transactions are treated on an accrual basis, or accounts are prepared on the accrual basis.

Capital expenditure as well as revenue expenditure items appear in the receipts and payments account.

Only revenue expenditure items appear or are included in the income and expenditure account.

The difference of the two sides is the cash in hand and at the bank at the end of the period.

The difference of the two sides is either surplus or deficit for the period It is a real account. It is a nominal account.

All receipts and payments are shown irrespective of the year to which they relate.

Only those expenses and income which are related to the period are used to prepare it.

Activity 3.5 Key terminology used in financial accounts for not-for-prof- it organisations

1. Your teacher will arrange you in small groups. Create your own glossary of key terminology used in the administration of financial accounts for not-for-profit organisations.

2. You may use the internet on digital devices to support your research to generate definitions.

3. Discuss each term and make sure you have a consensus in your group on its definition.

4. Record your glossaries in your workbooks so that you can refer back to them later on.

Activity 3.6 Terminologies in NPO Administration

1. Study the scenario below.

Skills Development Club, a Non-profit-making organisation in Nyameye, has been operating for one year. They decide to prepare an income and expenditure account to know the total amount of income received and how it has been expensed.

2. As the Financial Secretary of the organisation, help the members to get a deeper understanding of the following:

a. The purpose of preparing an Income and Expenditure Account.

b. The differences between Receipts and Payments Account and Income and Expenditure Account.

3. Type your responses in MS Word format and share with your colleagues for discussion and feedback.

Activity 3.7 Self-Assessment

Answer at least one of the following questions to support the review of your learning from this lesson:

1. Discuss three terminologies that apply to not-for-profit making organisations.

2. Identify the differences between receipts and payments accounts and income and expenditure accounts.

How to Calculate the Accumulated Fund (Using a

Statement of Affairs)

The accumulated fund (which is like the capital for not-for-profit organisations), is found using the accounting equation:

Accumulated fund = Assets – Liabilities This is done through the statement of affairs. In this statement, all the assets are listed on one side and all the liabilities on the other side. The difference between the total assets and total liabilities is what we call the accumulated fund, which represents the organisation's financial worth at a particular moment.

Format of a statement of affairs STATEMENT OF AFFAIRS AS AT ....................................

ASSETS GH¢ GH¢

Equipment xxx Motor van xxx Bar stock xxx Subscription accrued xxx Cash/bank balance xxx xxx

Subscription in advance xxx Creditors for bar xxx Expenses accrued xxx Creditors xxx xxx Accumulated fund xxx An example is presented below.

You have been asked to prepare the Statement of Affairs of NYAMEDEA Fun Club from the following list of balances as at 1ˢᵗJanuary, 2022.

Bank 1,000 Debtors 5000

Stock 16,000 Machinery 4,000

Loan 5000 Based on this information, the statement of affairs will look like this:

In the books of NYAMEDEA Fun Club Statement of Affairs as at 1ˢᵗJanuary, 2022 GH₡ Assets:

Machinery 4000 Stock 16,000

Debtors 5,000 Bank 1,000

26,000 GH₡ Liabilities

Loan 5,000 Accumulated fund 21,000 26,000 How to Prepare the Subscription Account The subscriptions/dues account is created to find out how much should be recorded in the income and expenditure account as subscriptions for the current accounting year.

If any money has been received that does not belong to the current year, it should be subtracted from the total.

On the other hand, any money that is supposed to be collected for the current year but has not been paid yet should be added.

In simple terms, subscriptions that have been paid in advance (beyond the current year) should be subtracted, while subscriptions that are still unpaid (owed for the current year) should be added. This helps to show the true amount of income from subscriptions for the year.

Format of Subscription Account

An example of the format of a subscription account is included below.

Subscriptions Account (2020 ) GH¢ GH¢ Bal. b/f (Owing from previous year

- 2019) xxx Bal b/f (Advance from previous year (2019) xxx Income and Expenditure A/c difference) xxx Bad debts (if any) xxx Bal. c/d (Advance for next year - 2021) xxx Cash received 2019 xxx 2020 xxx 2021 xxx Bal c/d (Owing for current year

- 2020) xxx xxxx xxxx Bal. b/d (Owing - 2021) xxx Bal b/d (Advance - 2021) xxx Here is an example 1/1/2020 31/12/2020 Subscription owing 1,800 750 Subscription prepaid 2500 1250 Subscription received during the year amounted to GH₡ 5,500.

You have been asked to prepare the subscription account for the year.

Solution

Subscription account for the year ended 31ˢᵗDecember, 2020 GH₡ Bal. b/d (opening owing) 1800 Income & Expenditure(Difference) 5700 Bal. c/d (closing prepaid) 1250 8750 Bal. b/d 750 GH₡ Bal. b/d (opening prepaid) 2500 Receipts & Payments 5500 Bal. c/d (closing owing) 750 8750 Bal. b/d 1250

Activity 3.8 Accumulated fund

1. Form a small group with your friends.

2. In your groups, discuss the method of calculating the accumulated fund using the statement of affairs.

3. Summarise your answers as a brief process flow and record this in your books.

Activity 3.9 Subscription account In groups, discuss how to prepare a subscription account. Create a template format that you could use in worked examples.

Record this in your books to refer back to later.

Activity 3.10 Calculating the accumulated fund

1. In your groups, analyse the following lists of assets and liabilities of Accounting Social Club for the year ended 31ˢᵗDecember, 20X3. Use this information to calculate the accumulated fund.

GH¢ Furniture and fittings 4,000 Recreational equipment 2,700 Subscription in advance 2,000 Rent accrued 5,000 Caretakers’ wages prepaid 500 Subscription in arrears 5,000 Bank 10,000 Cash 1,000

2. Share your answers with another group for discussion and feedback.

Activity 3.11 Preparation of Financial Statements for NPOs

1. You have been given the following information regarding the Unity Fun Club for the year 2018.

GH¢ Subscriptions unpaid at the beginning of 2018 4,700 2017 Subscriptions received in 2008 4,700 2018 Subscriptions received 38,500 2018 Subscriptions remaining unpaid at the year ended 1,500 2019 Subscriptions received in the current year 5,500

2. In your groups, prepare the club’s subscription account based on this information.

You may use the templates you created in Activity 3.7 to format your account.

3. Share your answers with another group for discussion and feedback.

Activity 3.12 Preparing statement of affairs

1. Study the following data presented by Skill Development Club covering their assets and liabilities for the year ended 31ˢᵗDecember, 20X2 GH¢ Equipment 12,500 Furniture & Fittings 6,500 Subscription in advance 9,500 Rent accrued 3,890 Cleaners’ wages paid 1,580 Bar stock 2,500 Subscription in arrears 2,500 Bank 2,600 Cash 800

2. Prepare a statement of affairs for Skill Development Club to determine their accumulated fund as at December 20X2.

3. Record your answer in your workbooks and share with your teacher for feedback.

How to Prepare the Income and Expenditure

Account The income & expenditure account (the profit and loss account) is prepared by debiting all expenditure like rent, general expense, honorarium, donations given, stationery, electricity, depreciation, etc. and crediting all income like subscriptions, bar profits, surplus from dance, donations received, etc.

If the debit (expenditure) total is more than the credit (income) total, the difference is called a deficit (loss), but if the credit (income) total is more than the debit (expenditure) total, the difference is called a surplus (profit).

Format of Income and Expenditure Account of a Not- for-Profit Making Organisation The format of an income and expenditure account is shown below .

Income and Expenditure Account for the year ended............................

Income: GH₵ GH₵

Subscriptions Donations received Bar profit xxx xxx xxx xxx Expenditure:

Rent and rates xxx Printing and postage Secretary’s expenses Salaries General expenses Depreciation: Equipment xxx xxx xxx xxx xxx (xxx) Surplus Xxx OR Deficit xxx Here is an example The following is the Receipts and Payments Accounts of VON Social Club for the year ended 31ˢᵗDecember, 20X2.

Receipts and Payments for the year ended 31ˢᵗDecember, 2022 GH₵ GH₵ Cash in hand 1/1/2022 500 Cash at bank 1/1/2022 1,000 Subscriptions 7,500 Donations 2,000 End of year show 15,000 Transfer from deposit account 3,000 29,000 Bal. b/d 16,000 GH₵ Purchase of sports equipment 1,800 Repairs 1,500 Salaries 1,700 Insurance 1,000 Show expenses 3,200 Transport expenses 500 Secretarial expenses 300 Purchase of furniture 3,000 Balance c/d 16,000 29,000 Additional information

1. Equipment was valued at GH₵3,250 and furniture GH₵1,550 on 31ˢᵗDecember, 20X1

2. Depreciation is to be provided as follows:

Equipment GH₵505

Furniture GH₵55

3. The following expenses were outstanding:

Salaries GH₵300

Transport GH₵100

Repairs GH₵250

You have been asked to prepare the Income and Expenditure Account for the year ended 31ˢᵗDecember, 20X2.

Solution

Based on the information provided, the income and expenditure account will look like this:

Income and Expenditure Account for the Year ended 31 ˢᵗDecember, 20X2 GH₵ GH₵ Expenditure Repairs 1,500 Add owing 250 1,750 Salary 1,700 Add owing 300 2,000 Transport expenses 500 Add owing 100 600 Insurance 1,000 Show expenses 3,200 Secretarial expenses 300 Depreciation:

Equipment 505 Furniture 55

Surplus 15,090 24,500 GH₵

Income Subscriptions 7,500

Donations 2,000 End of year show 15,000 24,500

Activity 3.13 Preparing income and expenditure account

1. Form small groups with friends.

2. In your groups, discuss how to prepare an income and expenditure account.

Create a template format that you could use in worked examples.

3. Record this in your workbooks to refer back to later.

Activity 3.14 Preparation of Financial Statements for NPOs

In your groups, analyse the receipts and payments accounts of God is Good Social Club for the year ending 31ˢᵗDecember 20X2.

Receipts and Payments Accounts

GH¢ GH¢

Cash in hand 1/1/20X2 500 Purchase of sports equipment 1,800 Cash at bank 1/1/20X2 1,000 Repairs 1,500 Subscriptions Salaries 1,700 20X1 1,200 Insurance 1,000 20X2 4,000 Show expenses 3,200 20X3 2,300 Transport expenses 500 Donations 2,000 Secretarial expenses 300 End of year show 15,000 Purchase of furniture 3,000 Transfer from deposit account 3,000 Balance c/d 16,000 29,000 29,000 Additional information Equipment was valued at GH₵3,250 and furniture GH₵1,550 on 31ˢᵗDecember, 20X1 Depreciation is to be provided as follows:

a. Equipment GH₵505

b. Furniture GH₵55 The following expenses were outstanding:

a. Salaries GH₵300

b. Transport GH₵100

c. Repairs GH₵250 Subscriptions owing by members were as follows:

a. 31ˢᵗDecember, 20X1 GH₵1,200

b. 31ˢᵗDecember, 20X2 GH₵2,100 The balance in the bank deposit account of 31ˢᵗDecember, 20X1 was GH₵3,000.

Prepare each of the following:

a. Statement of affairs as of 31ˢᵗDecember, 20X1;

b. Subscription account for the year ended 31ˢᵗDecember, 20X2;

c. Income and expenditure account for the year ended 31ˢᵗDecember, 20X2.

Present your answers on flip charts and share with another group for discussion and feedback.

Activity 3.15 Subscription, expenditure account and Statement of af- fairs

1. In pairs, study the data below relating to the Skills Development Club.

Account balances in the books of Skills Development Club as at 31ˢᵗDecember 20X7 are as follows:

GH ¢ GH¢ Plots of Land 120,000 Subscription in arrears 2,400 Building (Cost GH¢96,000) 72,000 Subscription in advance 900 Equipment (Cost GH¢12,000) 8,000 Bank and cash 19,500 Furniture (Cost GH¢9,000) 7,200 Accrued expenses. 3,000 The financial secretary of the club prepared the following receipts and payments account for the year ended 31ˢᵗDecember, 20X8 Receipts and Payments Accounts GH¢ GH¢ Balance at 1/1/20X8 19,500 Entertainment 9,000 Subscription 90,000 Repairs and maintenance 4,500 Entrance fees 12,000 Postage and telephone 2,100 Sale of land 48,000 Extension to buildings 14,000 Bank interest 2,000 Equipment 4,200 Donations 7,500 Electricity 3,600 Sundry income 1,500 Salaries 60,000 General expenses 3,000 Balance at 31/12/20X8 8,100 180,500 108,500 The following additional information has also been supplied by the financial secretary of the club

a. Subscriptions received included GH¢2,400, which had been in arrears as of 31ˢᵗDecember, 20X7 and GH¢1,300, which had been paid for the year starting from January 2019. Subscription by members as of 31ˢᵗDecember 2018 amounted to GH¢3,000.

b. The land sold had a book value of GH¢40,000 on 1ˢᵗJanuary 2018.

c. Details of accrued expenses are as follows:

31/12/2017 31/12/2018 GH¢ GH¢

Electricity 300 400 Salaries 2,700 6,000

Total 3,000 6,400

d. It is the policy of the club to depreciate assets as follows;

i. Buildings 5% on cost

ii. Equipment 20% on cost

iii. Furniture 10% on cost

2. Prepare the following for Skills Development Club:

a. Subscription account for 20X8.

b. Income and expenditure account for the year ended 31ˢᵗDecember, 20X8.

c. Statement of affairs as at 31ˢᵗDecember, 20X8.

3. Present your answers to your teacher for feedback.

Activity 3.16 Preparation of Financial Statements for NPOs

1. Read and discuss the case below The Navrongo branch of Tree Planting Club was formed on 1st January 20X6.

During the club's first annual general meeting on 31st December 20X6, the honorary financial secretary presented to the members the following report covering the first year's activities of the club.

"The financial results of our first year's operation have been successful. 100 senior members joined the club and each of them paid in full the annual subscription of GH¢150. In addition, 20 of these members paid their subscriptions for the second year (GH¢150 each). 50 junior members also joined the club but only 45 have paid their annual subscriptions of GH¢100 each. The remaining five have promised to pay their subscription on 15th January 20X7.

We are thankful to Mr. Fertilizer who lent the club an amount of GH¢20,000 on 1st July 20X6 at an annual interest rate of 10%. The loan is to be repaid in the year 20X9. The interest for this year has been paid.

Our social activities proved very successful; receipts were GH¢12,000, compared with expenses of GH¢4,500. The expense figure (GH¢4,500) includes GH¢500 outstanding bills, which the club will settle in January, 20X7. Also, in January, we paid GH¢9,000 for office furniture, which, by my estimation, can be used for nine more years.

Payment for operating expenses was as follows:

a. rent GH¢3,000.

b. electricity GH¢1,800.

c. stationery GH¢600

d. miscellaneous expenses GH¢1,200.

The electricity bill for December, GH¢200, has just been received, but payment will be affected next week.

We have deposited GH¢30,000 into a savings bank account, and the remainder of our cash is now in the office safe. I estimate that we have earned GH¢6,000 interest during the year on the savings account".

2. Based on this, prepare the following accounts for the year ended 31st December, 20X6.

a. Subscription account

b. Receipts and payments account

c. Income and expenditure account.

3. Show the Statement of Affairs of the club as at 31st Dec. 20X6.

4. Share your answers with your teacher for feedback.

What are Single Entry and Incomplete Records?

A single-entry and incomplete records system is a way of recording business transactions where the usual double-entry bookkeeping method is not used.

In this system, the two-sided effect of each transaction is not recorded. Instead, only a few important accounts are kept, which means not all financial activities are fully tracked, hence the term “incomplete records”.

This type of system often relies on basic cash-based accounting. Consequently, it does not include detailed records of assets, liabilities, expenses or income.

Characteristics of Single-Entry Systems and

Incomplete Records

Some of the key characteristics of single entry and incomplete records are summarised in the table below.

Table 3.3: Key characteristics of single-entry and incomplete records No Debits and Credits The system does not use the concept of debits and credits, which are essential in double-entry bookkeeping.

Not Systematic

The records are not kept in an organised way.

This means that means accountants often need to piece together records from limited data.

This process can be slow and may lead to mistakes.

Partial Financial

Data Only some financial information, like cash receipts and payments, is recorded.

Other important transactions are often left out.

Scattered Data: The financial information is not kept in a consistent format, making it hard to prepare accurate financial reports.

Different Profit

Calculation Methods

Businesses using this system may not use the same method for calculating profit every time, leading to inconsistencies.

No Clear

Distinction A distinction between long-term (capital) and short-term (revenue) expenses is usually not made clear No Adjustments Adjustments for items like closing stock and depreciation on assets are often not made.

Reasons for Using Single Entry and Incomplete

Records Whilst it may seem that single-entry systems and incomplete records are less rigorous, there are reasons why business entities choose to use them. The most common reasons are listed below.

1. Simple and Easy to Use: This system is simpler to understand and use, especially for people who do not have a formal accounting background.

2. Good for Small Businesses: It works well for small operations that have few transactions and simpler financial needs.

3. Saves Cost and Resources: This system is cheaper to maintain because it requires less money and fewer people to manage.

4. Saves Time: Recording and keeping financial data takes less time. This is useful for small businesses that do not have much time to spare.

5. Lack of Accounting Knowledge: Business owners or managers might not have enough knowledge of accounting principles, so they end up using simpler or incomplete records.

6. No Need for External Reporting: Some small businesses do not need to prepare detailed financial statements for outside reporting.

7. Avoiding Taxes: Some businesses may choose not to keep full records to reduce their tax obligations.

8. Keeping Business Details Private: Some businesses prefer not to have detailed records to keep their financial operations private and away from public view.

Activity 3.17 Group discussion

1. Take five minutes to think about the type of business that may not keep full financial records using the double-entry system.

2. Make a note of them in your workbook and be prepared to share your examples in a class discussion.

Activity 3.18 Characteristics and reasons for Incomplete records

1. Form a small group with your friends. In your group, discuss the following:

a. The concept of single entry and incomplete records.

b. The characteristics of single-entry and incomplete records.

c. The reasons for using single-entry and incomplete records.

2. Summarise your discussion in a notebook and make a flip chart presentation to the class for discussion and feedback.

Activity 3.19 Characteristics and reasons for Incomplete records

1. Copy the table below into your book.

2. Read the statements carefully and state if you “AGREE” or “DISAGREE” with each one regarding incomplete records.

Incomplete records refer to a bookkeeping system where only partial financial transactions are recorded. AGREE A Incomplete records are kept in an organised and detailed manner B Recording and keeping financial data takes less time when using the single-entry system C Businesses with a very low volume of transactions may use incomplete records because a full accounting system is unnecessarily complex for their needs.

D Incomplete records do not follow the double entry system in accounting for business transactions E A business using incomplete records will find it easy to track historical financial trends for decision-making purposes.

F A statement of affairs can be used to estimate the financial position of a business that maintains incomplete records G Incomplete records typically result in a lack of detailed information about assets and liabilities H Incomplete records can still accurately capture all accounts payable and receivable without additional adjustments.

I Single-entry bookkeeping, which results in incomplete records, focuses primarily on recording cash inflows and outflows J Incomplete records can still provide sufficient data to accurately calculate tax liabilities without further analysis.

K A major advantage of incomplete records is that it makes it easy to prepare a comprehensive balance sheet.

L A business might use incomplete records due to a lack of accounting knowledge or resources M One reason businesses choose incomplete records is to achieve better long-term financial tracking N Preparing financial statements from incomplete records involves challenges like reconciling unrecorded transactions O The use of incomplete records makes it easier for businesses to implement accrual-based accounting practices

3. Compare your results with a colleague for feedback

Disadvantages of Single Entry and Incomplete

Records Using a single-entry or incomplete records system can create difficulties when trying to prepare financial reports. Here are some of the main drawbacks:

1. Less Accurate and Trustworthy: These systems are more likely to have mistakes because they do not have built-in checks and balances like the double-entry bookkeeping system has. This affects how reliable the financial reports are.

2. Risk of Poor Financial Management: With incomplete record-keeping, businesses may struggle to manage their finances properly and make sound decisions due to lack of reliable data.

3. Hard to Get Loans or Investments: Banks and investors usually ask for detailed financial statements before giving loans or investing in a business. Single entry or incomplete systems often cannot provide the needed information hence making it difficult to secure funding.

4. Limited Business Growth: Without accurate financial data, it will be difficult for a business to plan for expansion, manage its budget or create effective strategies.

5. Operational Problems: Single entry and incomplete records can make everyday business operations less efficient and harder to manage smoothly.

6. Difficulties in Auditing: Audits become more challenging because there are not enough detailed records. This makes it easier for mistakes or inaccuracies to go unnoticed.

7. Problems with Tax Compliance: Many tax authorities require businesses to keep detailed and accurate financial records. Single-entry systems and incomplete records often do not meet these standards, leading to possible issues with tax reporting. This can result in mistakes in declaring income, expenses and other financial details needed for tax filings.

8. Higher Risk of Fraud: These systems are more open to fraud since each transaction is only recorded once, making it easier for errors or dishonest actions to go unnoticed compared to double-entry systems, where every transaction is cross-checked.

Preparation of profit and loss using the capital balances approach from single-entry records We will now look at how to prepare profit and loss statements from single-entry records based on the following approaches:

1. Using the capital balance or statement of affairs

2. Using the income statement.

Capital or Statement of Affairs Approach

This approach is used to find the capital by preparing a statement of affairs, which involves subtracting total liabilities from total assets. It is especially useful when there is not enough information to create full financial statements.

This method helps to calculate profit when only details like assets, liabilities, drawings and additional capital are available.

Steps to Follow

Figure 3.1: Preparation of profit and loss using the capital balances approach The format of statement of profit or loss Statement of profit or loss for the year ………………………………………… Closing capital xxx Add drawings xxx xxx Opening capital xxx Add additional capital xxx xxx Profit/loss xxx The calculations can be summarised as follows Net profit = (closing capital + drawings) – (opening capital + additional capital) OR Net profit = (closing capital + drawings) – opening capital – additional capital

NOTE

1. The drawings have been added to the closing capital because if the drawings had not been made, the closing capital would have been greater.

2. The additional capital has been added to the opening capital because both create the total amount that the proprietor has put into the business.

Here is an example DIB presented the following information relating to the year ended 31ˢᵗDecember, 20X0.

GH₡ Capital – 1/1/20X0 35,000 Capital – 31//12/20X0 43,000 Drawings in cash and goods 7,000 Capital introduced 5,000 Calculate DIB’s profit or loss from the information above.

The resulting profit and loss statement will look like this:

In the books of DIB Statement of profit or loss for the year ended 31/12/20X0 GH₡ GH₡ Closing capital 43,000 Add: drawings 7,000 50,000 Less: opening capital 35,000 Capital introduced 5,000 40,000 Profit 10,000

Activity 3.20 Disadvantages of Incomplete Records

1. In groups, discuss the disadvantages of incomplete records and the single-entry system.

2. Summarise your discussions on a manila card.

3. Make a poster presentation to your class for feedback.

Activity 3.21 Capital Approach Format for Profit and Loss Determination

1. Prepare five flash cards and write on each of the cards one of the following

a. Add drawings

b. Profit/loss

c. Opening capital

d. Closing capital

e. Add additional capital

2. Arrange the flash cards on a flipchart to depict the capital approach format for the determination of profit or loss under incomplete records.

3. Share with your colleague for feedback. Make a note of your agreed process in your workbooks to refer back to later.

Activity 3.22 Preparing statement of affairs

1. Working in groups, analyse the information in the following scenario.

Joshua runs a butchery for which proper accounting records are not kept. However, you have been able to ascertain the following:

01/01/20X1 31/12/20X1 GH¢ GH¢

Creditors 720 1180 Debtors 300 550

Stock 840 1140 Bank 1,570 120 O/D

Cash 230 246 Motor vehicle 7,200 5,400 Fixtures and fittings 4,000 3,000 Joshua withdrew GH¢250 cash and sold GH¢20 worth of meat per week.

2. Within your groups, organise the following using this information:

a. A statement of affairs as of 1ˢᵗJanuary 20X1 and 31ˢᵗDecember, 20X1.

b. A statement of profit for the year ended 31ˢᵗDecember, 20X1.

3. Compare your statements with another group for discussion and feedback.

Income Statement Approach

The income statement approach involves preparing an income statement and a statement of financial position at the end of the accounting year to show the financial position of the business.

The business owner typically keeps a cashbook that records all cash and bank transactions, as well as balances of debtors (people who owe the business) and creditors (people the business owes) at both the beginning and the end of the year.

To calculate profit using this method, follow the steps discussed below.

Table 3.4: Steps for Preparing Final Accounts from Incomplete Records

1. Prepare the

opening statement of affairs

a. Start by creating a statement of affairs at the beginning of the period to find out the opening capital.

b. This shows the financial worth of the business at the start of the year.

2. Adjust the

cashbook

c. Make any necessary adjustments to the cashbook to ensure that it shows the correct closing balance at the end of the year.

d. This helps to reflect the true cash position.

3. Find total sales

e. Prepare the receivables ledger control account to determine the credit sales (sales made on credit).

f. Add these credit sales to the cash sales recorded in the cashbook to get the total sales for the year.

4. Determine the

total purchases

g. Prepare the payables ledger control account to find the credit purchases (purchases made on credit).

h. Add these to the cash purchases recorded in the cashbook to calculate the total purchases for the year

5. Adjust expense and revenue account

i. Make adjustments to the expense and revenue accounts, including depreciation, to ensure that the closing balances are accurate.

j. These adjustments are necessary for the preparation of the profit and loss account.

6. Include missing transactions k. Record any transactions that were not included in the books, such as assets introduced by the owner, or drawings (money or goods taken out by the owner).

7. Prepare the

final income statement and the statement of financial position l. Once all adjustments have been made, prepare the income statement to show the profit or loss for the year and statement of financial position to show the business's overall financial status at the end of the year.

Activity 3.23 Steps for Preparing Final Accounts from Incomplete Re- cords

1. In groups, discuss the steps involved in the process of using the income statement approach to determine the profit or loss and financial position of a business.

2. Create a flowchart that outlines each of the steps you have discussed.

3. Make a poster presentation or PowerPoint presentation to your class for feedback.

Activity 3.24 Preparing income statement and statement of financial position

1. Working in groups, review the information below and complete the task.

Bank account summary for a retailer, Joe, for the year 20X4.

GH¢ Balance on January 1, 20X4 1,448

Cash from customers 34,722 Payment to suppliers 28,364 Rent and rates 1,488 Drawings 5,816 You are given the following additional information:

Jan. 1 Dec. 31

GH¢ GH¢

Furniture 1,000 1,000 Stock 5,260 4,380

Debtors 2,900 3,270 Creditors 3,750 3,940

During the year, wages amounting to GH¢1,300 and GH¢220 worth of general expenses were paid in cash out of the cash received from customers. All the remaining cash received from customers was paid to the bank.

2. You are required to prepare an income statement and a statement of financial position as of December 31, 20X4.

3. Compare your responses with another group for discussion and feedback.

In the last lesson, you learned the steps involved and the methods for preparing an income statement and a statement of financial position. In this lesson, you will learn how to use those steps to prepare financial statements for sole proprietors who do not keep detailed or proper records. This skill is important for handling businesses where full bookkeeping is not maintained, so that you can piece together the information needed to create clear and reliable financial reports.

Activity 3.25 Preparation of statement of affairs, account and financial position

1. Luther, a sole trader, has the following financial details for the year ended 31/12/20X5.

Cashbook (Summary) GH¢ GH¢

Balance b/d 6,000 Creditors 12,000 Sales 10,000 Salaries 5,000 Debtors 20,000 Rent and rates 4,000 Insurance 1,000 Balance c/d 14,000 36,000 36,000 Additional information 01/01/20X5 31/12/20X5 GH¢ GH¢ Stock 4,000 2,000 Land and building 15,000 15,000 Motor vehicle 6,000 4,000 Debtors 2,000 3,000 Creditors 1,000 500 Insurance owing 2,000 6,000

2. You are required to prepare

a. Statement of affairs as of 1ˢᵗJanuary, 20X5

b. Income statement account for the year ended 31/12/20X5

c. Statement of financial position as at 31/12/20X5.

Activity 3.26 Calculate the capital, net profit and financial position Emma started a business on 01/01/20X6 with GH¢8,000 capital in cash. She kept very few records of her transactions in the first year of business. The assets and liabilities of the business as at 31/12/20X6 were:

GH¢ Freehold property 152,000 Debentures 100,000 Stock 48,000 Debtors 5,600 Creditors 15,200 Cash and Bank 10,800 During the year, Emma withdrew GH¢18,000 cash for her personal use. She also paid GH¢12,000, received from the sale of her private car, into the business bank account.

You are required to:

a. Calculate the capital as at 31/12/20X6.

b. Prepare the statement of the net profit for the year ended 31/12/20X6.

c. Prepare statement of financial position as at 31/12/20X6.

Activity 3.27 Account Preparation for a Sole Trader

1. In pairs, read the case below.

Alhaji Sofo started trading as a general merchant on 1 January 20X0.

During his first month of trading, his total sales were GH¢53,000, made up of GH¢10,800 for cash and the remainder on credit terms.

He started the business with his accumulated savings of GH¢20,000 and a loan of GH¢10,000 at an interest rate of 30% per annum.

He rented a store on 1 January and paid GH¢500 as two months’ rent.

Operating expenses, including assistants' wages paid during the month, totalled GH¢980.

Electricity bill for the month, estimated at GH¢50, remained unpaid as of 31ˢᵗJanuary 20X0, and insurance premium for 20X0, amounting to GH¢1,200, was paid on 1ˢᵗJanuary.

Purchases for the month were GH¢47,000, and so far, GH¢7,000 had been paid to the supplier at 31ˢᵗJanuary 20X0.

Alhaji Sofo took goods costing GH¢30 for his personal use.

Stock remaining unsold on 31ˢᵗJanuary cost GH¢15,000.

2. Discuss and prepare the following for Alhaji Sofo:

a. The bank account of his business as at 31 January 20X0;

b. The trading and profit and loss account for the month of January 20X0;

c. A balance sheet as at that date.

3. Exchange your response with another pair for feedback.

Activity 3.28 Account Preparation for a Sole Trader

1. In groups, study the following records which have been extracted from the books of Joe Tampuli Enterprise for the year ended 31ˢᵗDecember, 20X8 GH¢ Capital 10,000.00 Receipts from debtors 98,225.00 Payment to creditors 54,482.50 Advertising 240.00 Postage and telephone 281.50 Salaries 18,087.50 Electricity 487.00 Rent 3,600.00 Carriage outwards 618.50 Return inwards 234.50 Return outwards 412.50 Transport and travelling 2,615.00 Repairs and maintenance 3,256.50 Furniture & Fittings (Cost) 15,725.00 Motor Vehicles (Cost) 16,000.00 Accumulated depreciation:

Furniture & Fittings (1/1/20X8) 4,690.00 Motor vehicles (1/1/20X8) 6,000.00 Cash 4,265.50 Additional Information 31/12/20X7 31/12/20X8 GH¢ GH¢

i. Stock 6,742.50 9,162.00

ii. Electricity – 43.50 (Credited)

iii. Rent – 400.00 (Credited)

iv. Debtors 5,000.00 10,000.00

v. Creditors 12,500.00 17,500.00 Depreciation is to be provided as follows

i. Motor vehicles 25%

ii. Furniture & Fittings 20% on cost

2. Prepare the following for Joe Tampuli Enterprise using MS Excel Spreadsheet

a. Trading and Profit and Loss account for the year ended 31ˢᵗDecember, 20X8

b. Balance sheet as at that date

3. Present your work to your teacher for assessment