Financial Reporting

In this section, you will learn how to prepare financial statements for partnerships and companies. You will explore what makes each type of business unique, understand key accounting terms, and practise the steps involved in preparing their financial statements.

You will also learn how partners share profits, how to treat goodwill, and how to present financial information accurately. Through discussions and practice tasks, you will build confidence and skills in preparing financial statements for different types of businesses.

In this section, you will explore:

1. The concept of partnership, its features, the partnership deed, and the advantages and disadvantages of partnership business.

2. The Preparation of appropriation, capital, current accounts and statement of financial position for partnerships.

3. The discussion on the treatment of goodwill in the admission and retirement of a partners

4. The Explanation of the company as a form of business, the types, its advantages and disadvantages.

5. The discussion of terminologies in company accounts.

6. The Preparation of the Statement of Profit or Loss and Statement of Financial Position for companies.

You have already learned how to prepare financial statements for a sole proprietorship and a not-for-profit organisation. This knowledge will help you connect past learning to your new study on partnerships and companies.

KEY IDEAS

• A company is a business organisation formed by people who come together to carry out economic activities for profit or achieve specific objectives t. It is registered under the Companies Act of Ghana and has a separate legal identity from its owners.

• Goodwill is the extra value a business has because of its good name, loyal customers, and good reputation. It is an intangible asset that cannot be touched but adds to the business’s total value.

• Limited liability means that the owners of a company are not personally responsible for the company’s debts. They can only lose the amount of money they invested in the company, not their personal property.

• Partnership deed is a written agreement that shows the rules and terms under which partners operate their business. It states how profits and losses will be shared, how much each partner contributed, and what happens if a partner leaves.

• Partnership is a business owned by two or more people not exceeding twenty who share profits and losses according to an agreement. Partners usually combine their skills, money, and effort to run the business together.

A partnership is a type of business formed by two or more people (no more than 20) who come together to run a business and share in the profits. In Ghana, a business can be called a partnership only when it is registered under the Incorporated Private Partnership Act, 1962 (Act 152).

Business Relationships that are not Considered to be Partnerships The Incorporated Private Partnership Act, 1962 (Act 152) in Ghana does not consider the following as partnership businesses.

a. A company registered under the Companies Act, 2019 (Act 992), even if it has two or up to twenty members.

b. Any company or organisation formed under another law.

c. A foreign company or organisation, whether or not it operates in Ghana.

d. A joint venture without a firm name created for one or more specific projects.

e. A family business or joint ownership of property, even if profits are shared, does not automatically make it a partnership.

This means that not every group working together for profit qualifies as a partnership under Ghanaian law.

Features of a Partnership

1. Membership A partnership is formed by at least two people and usually not more than 20, except for professional firms like law or accounting firms. These people agree to run a business together.

2. Agreement The partners make an agreement known as a partnership deed that sets out how the business will be run, such as how profits are shared, the duties of partners, and what happens if someone leaves.

3. Capital contribution Each partner contributes money, property or skills to start and run the business. All partners work together for a common goal, which is usually to make a profit.

4. Unlimited liability Partners are largely personally responsible for the business’s debts. If the business cannot pay its debts, partners may use their personal property to pay.

5. Sharing of Profits and Losses

Profits and losses are shared among partners according to the partnership agreement or equally if there’s no agreement.

6. Management and Decision-Making

Usually, all partners take part in management, unless the agreement gives special powers to some.

7. No Separate Legal Existence

The partnership and its partners are treated as a single legal entity; it is not a separate legal entity, such as a limited liability company.

A Partnership Deed (or Partnership Agreement) is a written document that outlines the rules and conditions agreed upon by all partners to guide how the business is run. It helps prevent misunderstandings and ensures fairness among partners.

The agreement usually includes the following.

1. The name and purpose of the business.

2. The amount of capital each partner contributes.

3. How profits and losses will be shared.

4. How a new partner can join the business.

5. How an existing partner can retire or leave.

6. The process for dissolving (ending) the partnership.

7. Whether interest will be charged on partners’ loans, drawings, or capital.

Rules that Apply in the Absence of a Partnership Agree- ment According to the Incorporated Private Partnership Act, 1962 (Act 152), if partners do not prepare a Partnership Deed or Agreement, certain default rules will automatically guide the operation of the business. These rules are listed below;

1. All partners shall contribute equal capital to the business.

2. Profits and losses shall be shared equally.

3. No interest shall be charged on partners’ drawings or capital.

4. A partner who gives a loan to the partnership is entitled to 5% interest on that loan.

5. A partner shall be reimbursed for any expenses made on behalf of the business.

6. No new partner shall be admitted without the consent of all existing partners.

7. Business disputes shall be decided by a majority of the partners.

8. Every partner has the right to take part in managing the business.

9. The books of accounts shall be kept at the firm’s place of business, or at the main office if there is more than one.

Cessation of Membership of a Firm

A member shall cease to be a partner in the firm in the event of

a. his or her death

b. his or her becoming an alien enemy during a time of war

c. an insolvency order being made against him or her.

Winding up of Partnership Firm Winding up refers to the official closure of a business. A winding up of a partnership may be either:

a. As a result of insolvency proceedings against all the partners jointly; or

b. Under an order of the Court, or

c. By voluntary liquidation by the partners.

Activity 3.1 Definition of Partnership

1. Recall what your learnt in Year 1 about sole proprietorship. Share your reflections with a colleague by answering the following:

a. What is a sole proprietorship?

b. Mention some of the sole proprietorship businesses in your community.

c. What are the other forms of business entities?

2. In pairs, discuss the meaning of partnership, how this differs from other forms of business relationships and the features of partnership.

3. Share your answers with the larger class for discussion and feedback

Activity 3.2 Partnership Deed

1. In your groups, discuss the partnership deed, the key contents of a partnership deed and the rules that apply when partners fail to prepare a deed under Act 152.

2. Groups organise the work in the format below.

Partnership deed refers to.………………………………………………………………… …………………………………………………………………………………………….

…………………………………………………………………………………………….

S/N Content of Partnership Deed Rules in the Absence of a Deed 1 2 3 4 5 Each group presents their findings to the class for feedback.

Activity 3.3 Cessation of a Partner and the Winding up of a Partnership

1. In your groups, discuss the cessation of a partner and the winding up of a partnership.

2. Answer the following questions.

a. What would cause the cessation of a partner?

b. How should the remaining partners handle the partner’s share or interest?

c. What could cause the winding up of a partnership?

d. What steps are involved in winding up a partnership?

3. Each group writes the responses on manila cards.

4. Each group presents their findings to the class for feedback.

1. Shared Resources and Expertise

In a partnership, people come together to combine their money, ideas, skills, and business connections. This helps the business grow stronger and more successful. Each partner brings something special — for example, one may be good at handling money, another at marketing, and another at building useful contacts. Working together makes the business more effective.

2. Shared Responsibility and Reduced Individual Burden

Partners share the work and management duties, so no one person has to do everything.

This helps reduce stress and makes it easier for partners to balance work and personal life. For example, one partner can handle customers while another focuses on record keeping.

3. Potential Tax Advantages

Partnerships may pay less tax because profits are taxed in the partners’ names rather than as a separate business like a company. This means they avoid double taxation (being taxed twice). Partners may also enjoy certain tax reliefs or benefits allowed under Ghana’s tax laws.

4. Flexibility and Ease of Setup

Starting a partnership is usually simple and inexpensive. There are fewer legal processes and less paperwork than forming a company. Partners also have the freedom to decide how to share profits, divide responsibilities, and manage the business according to their own agreement, rather than following strict corporate rules.

5. Increased Access to Capital and Funding

Since there are several partners, it is easier to raise money for the business. The partners’ combined savings, assets, and reputations can help them secure loans from banks or attract investors.

6. Enhanced Business Opportunities

When partners work together, they can expand the business faster and explore new markets. Each partner’s skills and networks can bring in more customers and growth opportunities.

1. Unlimited Liability

In most partnerships, all partners are responsible for the debts of the business. This means if the business owes money or faces a lawsuit, partners may have to use their own personal money or property to pay the debt — even if the problem was caused by another partner’s mistake.

2. Loss of Autonomy

Partners must make decisions together. This means one partner cannot always do what they want without agreement from others. Sometimes, this shared decision-making can slow down progress or cause frustration if partners have different ideas.

3. Potential for Conflicts

Since people have different ideas and working styles, disagreements may occur about how to run the business, share profits, or handle finances. These conflicts can affect the partnership’s success or even cause it to break up.

4. Instability A partnership may not last long as a company. If one partner dies, retires, or leaves, the partnership may need to be dissolved or restructured. This can cause interruptions or losses for the business. Also, serious disagreements among partners can make the partnership unstable and difficult to manage.

Activity 3.4 Advantages and Disadvantages of Partnership

1. Share with a colleague why there is a need for a partnership deed Case Study: ABM Fashion Designers Three friends, Ama, Baah, and Mariam, decided to start a clothing business called ABM Fashion Designers in Kumasi after completing their vocational training.

Ama was talented in sewing and design. Baah had good business management and record-keeping skills. Mariam was creative in marketing and had many social media followers. They agreed to form a partnership, contribute money to buy sewing machines, and rent a small shop. They also agreed to share profits equally.

At first, things went well. Their combined skills helped them attract many customers.

Mariam’s advertising on TikTok and Instagram increased sales, and Baah managed the accounts properly. Their teamwork and shared resources made the business successful within the first year.

However, after some time, problems began to appear Mariam wanted to use some profits to open another branch in Accra, but Ama and Baah disagreed. Baah complained that Ama often made decisions about fabric purchases without consulting them. When the business took a loan to buy new equipment, sales dropped, and they struggled to repay it.

Later, Mariam decided to leave the partnership to study fashion design abroad, causing confusion about how to share profits and pay debts.

The partners realised that while the partnership had helped them grow quickly, it also brought disagreements and financial risks that affected their friendship and business.

2. In your groups study the case and discuss the following

a. Identify three advantages that helped ABM Fashion Designers succeed at the beginning.

b. Identify three challenges that later affected the business.

c. Suggest two ways the partners could have solved their disagreements.

d. In your opinion, was forming a partnership a good decision? Explain your answer.

3. Groups write their findings.

4. Make group presentations to the class for feedback.

In year 1, you learned how to prepare the financial statements of a sole proprietorship, and in year 2, you learned how to prepare financial statements for Not-for-Profit-Making Organisations (NPOs) such as schools, churches, clubs, and associations. Now that you understand how to prepare financial statements for sole traders and non-profit organisations, you are ready to learn about accounting for partnerships.

Because a partnership is owned by multiple people, separate accounts are kept for the business and the partners.

The following accounts discussed below are kept for a partnership Appropriation Account Because more than one person owns the Partnership, any profit or loss arising from the business operation needs to be shared between the owners.

It must be noted that a Statement of Profit / Loss Account is prepared for the Partnership before an Appropriation Account is prepared. The appropriation account is debited with the partner’s salary, interest on capital, and share of profit. The account is credited with net profit from the income statement, interest on drawing and share of loss. A sample of the Appropriation Account is given below:

Table 3.1: Profit or Loss Appropriation Account

GH¢ GH¢

Net Profit for the year xxx Add interest on drawings:

Partner A xxx Partner B xxx xxx xxx Less Partners’ Salaries:

Partner A xxx Partner B xxx Interest on capital Partner A xxx Partner B xxx (xxx) Profit/(loss) to be shared xxx Share of profit (loss):

Partner A xxx Partner B xxx (xxx) Current Accounts This account is used when partners keep fixed capital accounts. The current account is used to record items of recurring nature which relate to the partners, such as drawings, interest on capital, interest on drawings, interest on partners’ loan, partners’ salary, partners’ commission and share of profit/(loss). The monies received and drawings made by the partners are recorded in the current accounts. Below is the format of the current account.

Table 3.2: Partners’ Current Account

A B A B Balance b/f x - Balance b/f - x Drawings x x Interest on capital x x Interest on drawings x x Partners’ salary x x Balance c/d x x Partners’ Commission x x Interest on loan x Share of Profits x x xx xx xx xx Balance b/d x x Capital Accounts This account is credited with the amount of capital of the partners. In some cases, fixed capitals are kept, and where this is done, no other item is recorded in the capital account unless there is an addition or withdrawal of capital.

With a floating or fluctuating capital account, items such as drawings and interest on drawings are debited to the capital account. It is credited with interest on partner’s loan, interest on capital, partner’s salary, partner’s commission and share of profits.

See below the format of the fixed capital account.

Table 3.3: Partners’ Capital Account (Fixed Capital Account)

A B A B Balance b/f x - Balance b/f - x Withdrawal of capital x x New capital introduced x xx xx xx xx Balance b/d x x

Activity 3.5 Appropriation Account Format

1. Ask a colleague to mention one advantage of partnership, and after answering, he/she in turn asks another colleague to either mention an advantage or a disadvantage of partnership.

2. In pairs, identify the items that are contained in the appropriation account

3. In groups, draw the format of the appropriation account on Manila cards and discuss why those items are entered in the appropriation account.

4. Present your work to the whole class for feedback.

In this lesson, you should be able to apply your understanding of the relevant accounts to prepare appropriations, current and capital accounts based on given financial data.

Activity 3.6 Preparation of Appropriation and Current Accounts

1. Carefully study the scenarios below.

Scenario 1 The following information relates to the activities of a partnership of three people:

David, Evelyn and Francis.

i. Account balances of Partners Capital Account Current Account Drawings Account Partners 01/01/23 01/01/23 31/12/23 GH¢ GH¢ GH¢ David 9,000 3,000 6,000 Evelyn 15,000 1,500 7,200 Francis 24,000 1,500 7,200

ii. Interest is chargeable at 10% per annum on both capital and drawings.

iii. David and Evelyn are to be credited with salaries of GHGH¢3,600 and GH¢2,400, respectively.

iv. The net profit before adjusting for the year ended 31 December 2023 was GH¢29,400.

v. Profits and losses are split in the ratio 5:4:3, respectively.

You are required to prepare

a. The Profit and Loss Appropriation Accounts of David, Evelyn and Francis for the year ended 31/12/23.

b. The Current Account of each partner in columnar form as at 31/12/23.

Scenario 2 Andrew, Alex and Anto are in partnership selling general goods. The profit for the year ended 31 December 2024 is GH¢212,240, and the profit-sharing ratio is 4:3:3.

Their annual salaries are as follows Andrew GH¢36,000 Alex GH¢32,000 Anto GH¢26,000 Cash drawings in the year were;

Andrew GH¢76,000

Alex GH¢60,000

Anto GH¢58,000

Balances on their capital and current at the beginning of the year were Capital Accounts Current Accounts Andrew GH¢56,000 (Cr) GH¢5,000(Cr) Alex GH¢52,000(Cr) GH¢4,320(Cr) Anto GH¢44,000(Cr) GH¢3,740(Cr)

Note that interest on capital is charged at 12% while interest on drawings is at 10%;

all per annum.

You are required to prepare

a. the partners’ Profit or Loss Appropriation Accounts for the year ended 31/12/24.

b. The Current Account of each partner in columnar form as at 31/12/24.

2. Discuss the scenario that your group picked.

3. Present your solution to the class for feedback.

In this lesson, you will have more opportunities to practice using financial data to prepare partnership financial statements.

Activity 3.7 Preparation of Statement of Profit/Loss, Appropriation and Statement of Financial Position of a partnership Kofi and Dudimah are in a partnership sharing profits or losses in the ratio 2:1, respectively.

The trial balance of the firm as at 31st December 2023 is as follows.

DR - GH¢000 CR - GH¢000 Inventory at 1 January, 2023 480 Discount Allowed and Received 50 80 Purchases / Sales Revenue 4,800 7,660 Wages and Salaries 720 Rent 250 Cash 200 DR - GH¢000 CR - GH¢000 20% Long term Bank loan 200 Capital Accounts:

Kofi 300 Dudimah 200

Current Accounts

Kofi 130 Dudimah 70

Drawings:

Kofi 400 Dudimah 260

Bank loan interest 40 Administrative Expenses 440 Receivables / Payables 440 400 Fixtures at cost 1,200 Electricity 60 Depreciation on Fixtures 300 9,340 9,340 Additional information

i. The inventory at 31st December 2023 has been valued at GH¢600,000

ii. The prepayment for rent at 31st December 2005 is GH¢40,000.

iii. Administrative expenses accrued were GH¢5,000.

iv. Depreciation on fixtures is to be provided at the rate of 20% per annum using the reducing balance method.

v. Interest on capital and drawings was agreed at 10% and 5% respectively.

1. In your groups, prepare the following financial statements for the partners.

a. Statement of Profit or Loss and Appropriation Accounts for the year ended 31st December 2023

b. The Partners’ Current Account in columnar form up to 31 December 2023

c. Statement of Financial Position as at that date

2. Present your work for discussion and feedback.

Goodwill is an intangible asset recognised when a firm is purchased as a going concern. It reflects the premium the buyer pays over the net value of its other assets.

Goodwill is often understood to represent the firm’s intrinsic ability to acquire and retain customers or business.

Goodwill refers to the value a company gets from its brand, customer base and reputation associated with its intellectual property. Goodwill is a long-term asset that generates value for a company over time.

Factors Affecting the Value of Goodwill

The major factors affecting the value of goodwill are

1. Location of the Firm: If the business unit is located in the prime market area, then the firm enjoys the attention of more customers, which may result in more profit. When the firm’s profit rises, the value of goodwill also rises. Similarly, if the firm is located in a less popular area or is a part of an undeveloped market area, fewer customers will visit the place, which will result in the firm’s profits being less, thereby decreasing the value of the firm’s goodwill.

2. Life Span of the Firm: A firm that has been serving society for a number of years has more satisfied customers, a strong brand name, and experienced customer service.

Therefore, an older business unit is likely to have a strong customer base and a higher reputation in the market than newly established units. So, the older the business, the greater the value of the goodwill.

3. Efficient Management: The development of any business unit depends upon the efficiency of the management. A business operated under the supervision of efficient managers will earn more profit and is likely to command a high market value of goodwill. If a manager fails to properly execute management plans, the business’s financial position is hampered, ultimately decreasing the value of the firm’s goodwill.

4. Trend in profits: A firm’s goodwill is determined by its earning capacity. If the trend in profit is constantly rising, the firm will have goodwill. However, instability in profits will affect the value of goodwill adversely.

5. Nature of business: Nature of business refers to the type of products manufactured by the firm, the demand for those products, accessibility of raw materials, the competition faced by the firm, and government regulations that affect firm’s activities; all these factors are considered to determine the value of goodwill. If these conditions work in favour of the firm and it has some kind of monopoly in the market, it will earn more and have more goodwill.

6. Owner’s reputation: A firm’s goodwill is influenced by the goodwill of its owner. If the owner is truthful and trustworthy, they would have a good reputation in the market;

this, in turn, would attract more customers to the business.

Admission of a New Partner - Ledger Entries

1. Creation of goodwill

a. Where goodwill is maintained Dr.: Goodwill a/c Cr: Partners’ Capital a/c With the value of goodwill

b. Where goodwill is written off:

Dr.: Partners’ Capital a/c Cr: Goodwill a/c With the value of goodwill

2. Revaluation of assets

a. When there is an increase in the value of non – asset Dr.: Non – current Asset a/c Cr: Revaluation a/c

b. When there is a decrease in the value of non – current asset Dr.: Revaluation a/c Cr: Non – current Asset a/c

c. Any profit or loss on revaluation is shared between the pre-change (before change) partners in their pre-change profit and loss sharing ratio.

3. Introduction of capital Dr.: Cash/Bank a/c Cr: Partners’ Capital a/c

Activity 3.8 Understanding Goodwill

1. Recall what your learnt in the previous lesson about items in the appropriation account and the balance sheet of a partnership. Share your reflections with a colleague.

2. Discuss in your groups goodwill and the factors affecting goodwill

3. Match the following terms or keywords to their respective descriptions in the

table.

Terms/Key words Owner’s reputation, Nature of business, Efficient Management, Location of the Firm, Life Span of the Firm Descriptions The type of products manufactured by the firm, the demand for those products, accessibility of raw materials, the competition faced by the firm, and government regulations that affect firm activities …………………….

The firm is situated in the prime market area, and as such, enjoys the attention of more customers ………………….

A business operated under the supervision of good managers ……………………..

A firm has been serving society for some years and has more satisfied customers, a strong brand name …………………………… The owners of Jay & Jee Ventures are influential people in the society …………………………

4. Present your work for discussion and feedback

Activity 3.9 Admission of a New Partner

1. In your groups, carefully study the question below.

Araba and Barnswaa are partners sharing profits in the ratio of 3:2. Their statement of financial position as at June 30 2024, is given below GH¢ GH¢ Non – current assets 2,625,000 Investments 437,500 Long Term Receivables 875,000 Current Assets 1,750,000 5,687,500 Capital & Liabilities Capital accounts:

Araba 1,050,000 Barnswaa 700,000 1,750,000

Long Term Loan 1,750,000

Current Liabilities 2,187,500

5,687,500 They agreed to admit Arthur as a new partner with effect from July 1, 2024, on the following terms:

a. Goodwill was valued at GH¢650,000, and this will be maintained in the books.

b. Arthur will bring in cash of GH¢1,500,000 as capital.

c. The assets of the firm were revalued as follows

i. Non – current assets – GH¢3,100,000

ii. Long Term Receivables – GH¢875,000

iii. Current assets – GH¢1,575,000

iv. Investments - GH¢400,000

d. The new profit ratio is to be 7:5:8.

2. Prepare the following ledger accounts

a. Revaluation Account

b. Goodwill Account

c. Partners’ Capital Account

d. Statement of Financial Position of the new firm as at July 1, 2024.

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

When an existing partner retires or resigns, all his interests in the partnership firm are determined and paid to the partner. Sometimes, part of the retiring partner’s interest is left in the partnership as a loan. The entitlement of the retiring partner includes:

a. A share of profit/loss for the period to the date of retirement or resignation.

b. A share of the value of goodwill.

c. A share of revaluation surplus or deficit.

d. Balances in his/her current and capital accounts.

The remaining partners make a new partnership agreement to continue the business, often with a new profit and loss sharing ratio.

1. Creation of goodwill

a. Where goodwill is maintained Dr.: Goodwill a/c Cr: All Partners’ Capital a/c With the value of goodwill

b. Where goodwill is written off:

Dr.: The remaining Partners’ Capital a/c Cr: Goodwill a/c With the value of goodwill

2. Revaluation of assets

a. When there is an increase in the value of non – current asset Dr.: Non – current Asset a/c Cr: Revaluation a/c

b. When there is a decrease in the value of non – current asset Dr.: Revaluation a/c Cr: Non – current Asset a/c

c. Any profit or loss on revaluation is shared between the pre-change (before change) partners in their pre-change profit and loss sharing ratio

3. Withdrawal of capital Dr.: Cash/Bank a/c Cr: Partners’ Capital a/c

4. Asset taken over by a partners Dr.: Partners’ Capital a/c Cr: Asset a/c

Activity 3.10 Retirement of a Partner

1. You have been given the following information Patrick, Mensah and Reginald have been partners in a detergent business, sharing profits in the ratio of their capital contributions. Their statement of financial position as at 31 December, 2024 was as follows:

GH¢ GH¢

Land & Building 450,000 Motor Vehicles 350,000 Equipment 95,000 Inventories 500,000 Receivables 340,000 Investments 300,000 Bank 515,000 2,550,000 Capital & Liabilities Capital Accounts:

Patrick 640,000 Mensah 320,000

Reginald 480,000 1,440,000 Long from Mensah 625,000 Current Liabilities 485,000 2,550,000 On 1 January 2025, Reginald retired after taking into account the following adjustments

a. Inventories were to be written down by 5%.

b. Investments are to be written down to GH¢435,000

c. Reginald will take his official motor vehicle home at an agreed value of GH¢160,000.

d. Goodwill was valued at GH¢648,000 and this will not be maintained in the books.

e. Patrick and Mensah will continue the business and share profits in their capital contributions.

2. In your groups, prepare the following

a. Revaluation Account.

b. Goodwill Account

c. Partners’ Capital Account

d. Statement of Financial Position of the new firm as at 1ˢᵗJanuary 2025.

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

This lesson offers you an opportunity to apply the accounting principles to preparing the accounts involving the retirement of an old partner and, at the same time, the admission of a new partner in a partnership firm.

Activity 3.11 Retirement of an Old Partner and Admission of a New Part- ner

1. In pairs, recollect what you previously learnt about admission and retirement of partners and answer the following questions:

a. What steps should a business take to admit a new partner?

b. What process would be followed if a partner in a business retires?

c. How is the revaluation of assets treated on the retirement of a partner?

2. Share your answer with the next pair for discussion and feedback.

3. Study the following data presented by the Agbeko and Musah partnership.

Agbeko and Musah had been in partnership for several years, sharing profits or losses in the ratio 5:3. On 1 January 2025, Musah decided to retire as a result of old age. They agreed to admit Osei, who will replace Musah. The Statement of Financial Position of the partnership before the admission of Osei was as follows:

Non-current assets GH¢ GH¢ Plant and machinery 110,000 Furniture and Fittings 70,450 Motor Vehicles 55,000 235,450 Current assets Inventory 46,200 Receivables 76,450 Bank 15,000 137,650 Total assets 373,100 Capital and liabilities Capital accounts:

Agbeko 111,250 Musah 83,750 195,000

Current accounts:

Agbeko 26,650 Musah 20,450 47,100

Non-current liabilities:

Loan 75,000 Current liabilities:

Payables 56,000 Total capital and liabilities 373,100 Additional Information

a. The assets were revalued as follows.

i. Plant and machinery - GH¢98,200.

ii. Inventory - GH¢40,500.

iii. Trade Receivables - GH¢62,000.

iv. Furniture and fittings - GH¢50,400.

b. Motor vehicles were taken over by Musah at an agreed value of GH¢40,800.

c. A discount of GH¢4,320 was received when trade payables were paid off.

d. The loan was repaid in full on 1 January 2025.

e. Osei is to bring in a capital of GH¢100,000, while Agbeko is to bring extra cash of GH¢20,775 to top up his capital. The new partners decided to maintain fixed capital accounts.

f. The balance on Musah’s capital account should be kept as a loan to the business.

4. In your groups, prepare the following:

a. Revaluation Account

b. Partners’ capital accounts.

c. Bank account.

d. Statement of financial position of the new firm

5. Make a presentation to the class for discussion and feedback.

A company is a type of business organisation that is created by law to carry out business

activities to make a profit or achieve specific objectives.

In Ghana, companies are formed and regulated under the Companies Act, 2019 (Act 992).

When a company is registered under this law, it becomes a separate legal person different from the people who own or manage it.

Types of Companies

An incorporated company may be one of the following.

a. a company limited by shares;

b. a company limited by guarantee;

c. an unlimited company; or

d. an external company.

1. Company limited by shares This is a company whose liability of its members is limited to the amount unpaid on the shares respectively held by them. This means that the owners (shareholders) are only responsible for the company’s debts up to the amount they invested.

2. Company limited by guarantee It refers to a company whose liability of its members is limited to an amount that the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Companies limited by guarantee do not use shares.

3. An unlimited company This is a company which does not have a limit on the liability of its members. This means that if the business run up into debts and is unable to pay, the owners become personally liable for the unpaid debts and will be required if necessary to sell their private possessions to repay the debts.

4. An external company An external company is a company a body corporate formed outside the Republic which, has an established place of business in the country.

Forms of Companies

The types companies above may be a private company or a public company.

1. Private company A private company, other than a company limited by guarantee, is a company which by virtue of its constitution.

a. restricts the right to transfer the shares of the company,

b. limits the total number of the members and debenture holders to fifty,

c. prohibits the company from making an invitation to the public to acquire shares or debentures of the company; and

d. prohibits the company from making an invitation to the public to deposit money for fixed periods or payable at call, whether bearing or not bearing interest.

2. Public company A company which is not a private company, is a public company with the exception of a company limited by guarantee which has a membership of fifty or less.

Features of a Company

A company typically has the following characteristics.

1. Separate Legal Entity

A company is considered a separate legal entity from its owners. It can own assets, enter into contracts, sue or be sued, and be held liable for its actions or debts.

2. Limited Liability

In certain types of companies, such as corporations or limited liability companies (Plc), the liability of the shareholders or members is limited to their investment in the company. Their personal assets are generally protected in case the company faces financial difficulties or legal issues.

3. Shareholders or Members

A company is owned by its shareholders or members, who contribute capital or other resources to the company in exchange for ownership interests or shares. The shareholders or members typically have the right to participate in decision-making processes and share in the profits and losses of the company.

4. Management Structure

Companies have a management structure that oversees the day-to-day operations and strategic direction of the business. This may include directors, officers, or managers who are responsible for making decisions and managing the company’s affairs.

5. Perpetual Existence

Unlike partnerships or sole proprietorships, companies have perpetual existence. This means that the company can continue to exist and operate even if there are changes in ownership or there is a departure of shareholders or members.

Activity 3.12 Types of Companies

1. In pairs, state two things that happen when a partner dies in a partnership business

2. Show your response to the next pair for discussion

3. In your groups, discuss the meaning of a company, types of companies and the distinction between a private company and a public company.

4. Write your response in the following format A company can be explained as .……………………………………………………… ………………………………………………………………………………………… S/N Type of Company Description 1 2 3 4 The distinction between a private company and a public company S/N Private Company Public Company 1 2 3 4 5

5. Exchange your work with another group for discussion and feedback

Activity 3.13 Features of a Company

1. In your groups, discuss what makes companies different from other forms of business ownership

2. Identify the scenario that fits the feature of the company Scenario Feature Mr. Ayine only lost amount he invested in XYZ company when the company collapsed MR. Mensah sued the ABC company for breach of contract that he entered with the company regarding supply of goods. The case did not involve the owners of the company.

Miss Zakli wanted to joint her friend who is one of the owners of a certain company and she was advised to purchase shares of the company which she did.

Zaklele company continues to operate even when 5 of its shareholders died through an accident after attending the annual general meeting of the company The owners of the company appoint a board of directors, who also employ competent people to run the day-to-day affairs of the company.

3. Present your work to the class for discussion and feedback.

₁. Limited Liability: One of the most significant benefits is that owners (shareholders) are generally not personally liable for the company’s debts and obligations. This means their personal assets are typically protected from business debts and legal issues.

2. Separate Legal Entity: A company is recognised as a separate legal entity, distinct from its owners. This allows it to own property, enter into contracts, sue and be sued, and generally operate independently.

3. Easier Access to Funding: Companies can raise capital more readily through the sale of shares, attracting investors who may be hesitant to invest in unincorporated businesses.

4. Enhanced Credibility: A formal company structure, particularly a limited company, can be perceived as more credible and trustworthy by clients, partners, and financial institutions.

5. Ownership Flexibility: Shares can be easily transferred, allowing for changes in ownership and attracting investors. This ensures continuity as a company can continue to exist even if owners change or if some members leave or pass away.

Disadvantages of Forming a Company

1. Higher Costs

Incorporating a company often involves higher initial expenses compared to other business structures like sole proprietorships or partnerships. These costs can include legal fees, accounting fees, and registration fees. Companies also face higher ongoing costs for accounting, legal compliance, and other administrative tasks.

2. Record Keeping and Reporting

Companies need to maintain detailed records and file regular reports with government agencies. There are ongoing obligations to adhere to corporate governance rules and regulations.

3. Loss of Control

In a company structure, the business owner may share control with other shareholders, potentially leading to conflicts or disagreements about management and decision- making. Decision-making may require the approval of a board of directors, which can slow down the process and limit the owner’s autonomy.

4. Complex Legal Requirements

The process of incorporating a company can be complex and time-consuming, requiring legal and administrative expertise. The winding up or dissolving a company is also a complex process that can take considerable time and resources.

Activity 3.14 Advantages and Disadvantages of Companies

1. Study the case in your groups and answer the questions that follow.

Bright Drinks Ghana Ltd.

Bright Drinks Ghana Ltd is a registered company that produces fruit juices made from local fruits such as mango, pineapple, and orange. It was started by five young entrepreneurs who contributed capital and decided to operate as a limited liability company to enjoy the benefit of limited risk. This has given them protection over their personal assets, even when the company faces financial difficulties.

Over the years, the company has expanded its operations and employed many workers. It has gained a good reputation for producing high-quality fruit juices and for supporting local farmers by buying their produce. The company has also been able to raise additional capital through the sale of shares, which helped it to purchase modern machines and improve production.

However, Bright Drinks Ghana Ltd has also faced some challenges. The cost of running the business has become very high due to taxes, electricity bills, and maintenance expenses. Recently, there have been disagreements among the directors about how profits should be shared and which markets to enter. The company also finds it difficult to make quick decisions because of the many procedures involved in management. Moreover, as a registered company, it is required to publish its financial statements, which reduces the level of privacy in its operations.

a. Identify the type of company.

b. Discuss the disadvantages faced by the company.

c. If you were one of the directors, what steps would you take to reduce the effects of these demerits?

d. In your opinion, do the merits of forming a company outweigh the demerits?

Explain your answer.

2. Present your work to the class for discussion and feedback.

Authorised Shares

This refers to the maximum number of shares a company is legally allowed to issue as stated in its registration documents. It represents the limit of shares the company can sell to raise money. The company cannot issue more shares than the authorised amount unless it changes this through legal approval. For instance, if a company’s authorised shares are 100,000, it cannot issue more than 100,000 shares without permission.

Issued Shares

These are the actual shares that the company has sold or given out to shareholders. Issued shares are part of the authorised shares. The number of issued shares can never be more than the authorised shares. For example, if a company has 100,000 authorised shares but has sold 60,000 to the public, then 60,000 are issued shares.

Stated Capital

This is the total amount of money the company actually receives from issuing its shares.

It includes shares that were;

a. Sold for cash, or

b. Given in exchange for other assets or services, or

c. Transferred from any surplus or reserve.

Capital Structure

The Capital Structure of a company can be made up of the following listed.

a. Stated Capital – Ordinary shares and Preference shares;

b. Loan Stock;

c. Surpluses Preference Shares Preference shares are a type of share that gives their holders certain privileges over ordinary shareholders. Preference shareholders receive a fixed dividend each year, usually stated as a percentage of the share’s value. Example: A 5% Preference Share of GH¢2 means the holder will receive a dividend of 5% × GH¢2 = GH¢0.10 per share each year.

Preference dividends must be paid before any dividend is paid to ordinary shareholders.

Preference shareholders do not have voting rights in the company. Some preference shares are cumulative, meaning that if the company cannot pay dividends in a particular year, the unpaid dividends are carried forward and paid in the future when the company has enough money.

Classification of Preference Shares

₁. Redeemable Preference Shares: These are shares that the company promises to buy back (redeem) at a future date. The company pays back the nominal value of the share at the agreed time. After redemption, the shares are cancelled and no longer earn dividends. For example, A 6% Redeemable Preference Share of GH¢1, redeemable in 20X5, means the company will pay GH¢1 back to the shareholder in 20X5.

2. Irredeemable Preference Shares: These shares are not repaid by the company.

Holders continue to receive dividends every year for as long as the company exists.

3. Cumulative Preference Shares: There are shares in which, if the company is unable to pay dividends in a particular year, the unpaid amount is carried forward to the next year. The company must pay all arrears of dividends before paying any to ordinary shareholders.

4. Non-Cumulative Preference Shares: These are the opposite of cumulative preference shares. If the company cannot pay dividends in a given year, the right to that year’s dividend is lost. There are no arrears to be paid in the future.

5. Participating Preference Shares: The holders of this type of shares receive their fixed dividend first, and then they may also share in extra profits with ordinary shareholders.

This type of share allows holders to participate in additional profits beyond their fixed rate. For instance, participating preference shareholders receive a fixed dividend first, such as 5% (depending on the terms of issue), and if the company performs very well, they may also receive a bonus dividend.

6. Non-Participating Preference Shares: These shareholders receive only their fixed dividend and do not share in any extra profits.

They have no claim beyond the fixed rate.

7. Convertible Preference Shares: These are shares that can be changed (converted) into ordinary shares after a certain period or under certain conditions. The conversion gives the shareholder voting rights and the chance to earn variable dividends in the future.

8. Non-Convertible Preference Shares: These cannot be converted into ordinary shares. The holder will remain a preference shareholder for life or until the shares are redeemed.

Ordinary Shares

Ordinary shares, also called equity shares, constitute the company’s main capital.

Ordinary shareholders are the company’s real owners and have voting rights. They receive dividends after preference shareholders have been paid. The dividends for ordinary shareholders are not fixed and depend on the company’s profits Market Value of Shares The market value of a share is the price at which it is bought or sold on the stock market. In some countries, companies issue shares at a fixed value (par value).

However, in Ghana, companies issue shares at no par value, meaning there is no fixed price for shares. The price is determined by demand and supply in the market.

Surplus Accounts

Surpluses are funds set aside for future use. Surpluses are profits earned by the company that have not been appropriated or distributed as dividends to shareholders. Surpluses are sometimes referred to as Reserves or Accumulated Profits. In Ghana, surplus is described as Retained Earnings or Income Surplus. Income Surplus is a distributable surplus, which means it is borne out of profits and is available for distribution as dividends.

Dividends Dividends are the returns that a shareholder gets for investing in a company. Dividends are paid out of the company’s after-tax profit and are usually approved by shareholders at a general meeting.

Capital Surplus

Capital Surplus, also called Revaluation Surplus or Reserve, arises when a company revalue its non-current assets (like buildings or land) and the value increases. It is a non-distributable reserve, meaning it cannot be shared as dividends. If the asset’s value decreases in the future, the capital surplus will also reduce.

Difference between Surplus and Provisions A surplus is the part of profit that is retained (kept) in the business instead of being shared as dividends, while a provision is an amount set aside out of profit to cover an expected expense or possible loss in the future. Surplus is a form of profit kept in the business, but Provision is a form of expense or charge against profit.

Bonus (Capitalisation) Issue

A bonus issue (also called a capitalisation issue or scrip issue) happens when a company gives extra shares free of charge to its existing shareholders. The shareholders do not pay for these new shares. The bonus shares are given in proportion to the number of shares a person already owns. For example, A 1-for-5 bonus issue means a shareholder receives 1 free share for every 5 shares already held.

A bonus issue is usually made by converting retained earnings or reserves into share capital.

It is often used as an alternative to paying cash dividends, meaning that instead of giving shareholders cash, the company gives them more shares.

Rights Issues

A rights issue is when a company offers its existing shareholders the right to buy additional shares for cash. It helps the company to raise extra money for expansion or other needs.

Rights issues are usually offered at a lower price (discount) than the market price of the shares to encourage shareholders to buy them. Each shareholder is given the first option (right) to buy new shares before the company offers them to the public.

Activity 3.15 Terminologies in Company Accounting

1. Mention one feature of a company.

2. Discuss in your groups the following terminologies of companies.

a. The difference between preference shares and ordinary shares

b. The difference between surpluses and provisions

c. bonus issue and right issue of shares

d. authorised shares and issued shares

3. Shares your points with another group for discussion and feedback.

The final accounts of a company can be prepared for publication (for external purposes) or for internal use. At this level, we shall concentrate on the preparation of accounts for internal use only.

Statement of Profit/ Loss Account

Statement of Profit/ Loss Account or Statement of Comprehensive Income is a measure of the financial performance of the business. It shows the items of income and expenses recognised in a period. International Accounting Standard 1 (IAS 1) gives the format for the Statement of Profit/ Loss Account of a company as follows:

Name of Company

Format for Statement of profit or loss account / Statement of Comprehensive Income GH¢ Revenue XX Cost of Sales (XX) Gross Profit XX Selling General & Administrative expense (XX) Operating Profit XX Other Income XX Profit before Interest and Tax XX Finance Cost (XX) Profit before Tax XX Income Tax Expense (XX) Gains on property revaluation XX Profit/Loss for the year from discontinued operations XX Profit for the year XX Other Comprehensive Income XX Total Comprehensive Income for the year XX Statement of Changes in Equity The Statement of Changes in Equity looks at the equity section of financial statements. It shows any changes that have occurred within the financial year.

Table 3.4: Format for Statement of Changes in Equity Stated Capital Capital Surplus Income Surplus Total Balance on January 01 XXX XXX XXX XXX Net Profit after tax XXX XXX Divided paid (XXX) (XXX) Shares issued XXX XXX Revaluation of asset XXX XXX Balance on 31 December XXX XXX XXX XXX

Table 3.5: Format of Statement of Financial Position

Non – current Assets Cost Depreciation NBV GH¢ GH¢ GH¢ Buildings XX XX XX Plant & Equipment XX XX XX Motor Vehicles XX XX XX Furniture & fittings XX XX XX XX XX XX Current Assets Closing inventory XX Receivables XX Cash at bank XX Cash in hand XX XX Total Assets XX Capital & Liabilities Stated Capital XX Income Surplus XX Capital Surplus XX Shareholders fund XX Non – current Liabilities:

Debenture XX

Current Liabilities:

Trade payables XX Accruals XX XX Total Capital & Liabilities XX

Activity 3.16 Formats of Final Accounts of a Company

1. State two final accounts of a company and share it with a colleague

2. Discuss the format of the financial statement chosen by your group and answer the following questions:

a. What account has your group picked?

b. What items are debited and why?

c. What items are credited and why?

d. What is the main reason for preparing the account?

3. Present your work to the class for discussion and feedback

In this lesson, you will apply your understanding of the composition of financial statements to prepare the Statement of Profit or Loss and Statements of Financial Position for companies.

Activity 3.17 Preparation of Final Accounts of a company – I

1. Study the question below.

The following balances were extracted from the books of Mokola PLC on 31 December 20X8.

Dr. Cr

GH¢ GH¢

Purchases 283,000 Sales 495,000

Inventories at 1 January 20X8 18,000

Distribution costs 33,100 Irrecoverable debt expense 1,200 Allowance for receivables at 1 January 20X8 840 Administration expenses 157,380 Dividends paid 5,200 Equity Share capital (GH¢1 shares) 50,000 5% Loan stock 25,000 Dr. Cr GH¢ GH¢ Retained Earnings at 1 January 20X8 23,700 Fixtures and Fittings at cost 98,200 Accumulated Depreciation - Fixtures and Fittings 43,700 Motor vehicles at cost 64,000 Accumulated Depreciation - Motor Vehicles 18,500 Trade Receivables 55,400 Trade Payables 57,300 Bank 1,600 Cash 160 715,640 715,640 Additional information

a. Inventories at 31 December 20X8 was valued at GH¢20,000.

b. Administrative expense for the year ended 31 December 2018, GH¢1,100 have not been accounted for.

c. Distribution costs include a payment of GH¢3,700.

d. The company’s depreciation policies are as follows:

Fixtures and Fittings – Straight line over 5 years.

Motor vehicles – Reducing balance method at 20% per annum.

e. Irrecoverable debts of GH¢450 in addition to those already written off.

f. General allowance of 3% against the remaining receivables.

g. The interest on the loan stock is outstanding at the year – end.

2. In your groups, prepare the following.

a. Statement of Profit or Loss account for Mokola PLC for the year ended 31 December 20X8.

b. Statement of Changes in Equity for the year ended 31 December 20X8.

c. Prepare a Statement of Financial Position for Mokola PLC as at 31 December 20X8.

3. Each group should make a presentation to the class for discussion and feedback

In this lesson, you will apply the understanding of the composition of financial statements to further prepare income statements and statements of financial position for companies.

Activity 3.18 Preparation of Final Accounts of a company – II

1. Identify the key accounts prepared by a company and share them with the class

2. In your groups, study the Kakro Ltd information below and answer the questions.

The following trial balance relates to Kakro Ltd at 31 July 20X2.

Dr. GH¢ Cr. GH¢

Sales revenue 211,820 Cost of sales 84,600 Inventory at 31 July 20X2 38,400 Administrative expenses 12,500 Rent received 39,000 Land 40,000 Building cost 100,000 Accumulated depreciation at 1 June 20X1 28,000 Plant and equipment: Cost 128,000 Accumulated depreciation on 1 June 20X1 32,000 Allowance for receivables 12,000 Trade receivables 68,200 Trade payables 56,000 12% Loan 60,000 Loan interest 4,600 Cash at bank 15,100 Retained earnings 12,580 Ordinary shares 40,000 491,400 491,400 Additional Information

a. The cost of inventory was GH¢ 38,400 for the year ended 31 July 20X2.

b. Trade receivables totalling GH¢4,000 are to be written off, and allowance for receivables is to be adjusted to GH¢8,000. The irrecoverable debt expense is to be included in administrative expenses.

c. Depreciation is to be provided for as follows:

• Buildings 2.5% per year on cost.

• Plant and equipment 25% per year on cost

• 70% of the depreciation is to be charged in cost of sales, and 15% each in distribution costs and administrative expenses.

d. Current year income tax charged was GH¢18,100.

3. Prepare for Kakro Ltd

a. The Statement of Profit and Loss for the year ended 31 July 20X2.

b. The Statement of Financial Position as at 31 July 20X2.

4. Show your solution to the class for discussion and feedback

1. Explain partnership and why partnership is important

2. Explain the forms of businesses that the Incorporated Private Partnership Act, 1962 (Act 152) does not consider as partnerships.

3. Explain how a partnership business will operate smoothly without a partnership agreement.

4. Discuss the advantages and disadvantages of partnership and how to overcome the challenges.

5. Suggest the type of company to establish for five young university graduates and why

6. How different are private companies from public companies in Ghana?

7. Discuss the features that distinguish companies from other forms of business ownership

8. a. As a consultant, explain to a potential investor the type of shares to invest in and why.

b. Explain the classifications of preference shares.

9. Avoole, Baffour and Cudjoe are partners engaged in retail business, sharing profits or losses in the ratio 2:1:2, respectively. The following are the details of the extracts from their books as at 31ˢᵗDecember 2023.

Avoole Baffour Cudjo

GH¢ GH¢ GH¢

Capital Accounts 50,000 45,000 60,000

Current Accounts 20,800 (5,000) 8,500

Additional information

i. The firm’s sundry assets were valued at GH¢431,000.

ii. The firm was cash-strapped, and on 01/07/2023, Baffour advanced a loan of 100,000 to the partnership at the rate of 5% per annum. Interest was payable every six months and was to be credited to his account.

iii. Interest on capital is 10% per annum.

iv. Avoole and Cudjo were to receive salaries of GH¢25,000 each

v. The profit for the partnership before charging loan interest was GH¢158,000 for the year ended 31st December 2023. The loan was not repayable until after the year 2026.

You are required to prepare the following.

a. Statement of Profit or Loss Appropriation for the year ended 31st December 2023

b. Partners’ Current Accounts in columnar form.

10. Below is the Trial Balance of Golden Foods Ghana Ltd as at 31st December 2024:

Debit Credit

GH¢ GH¢

Stated Capital 80,000

Retained Earnings (1st January 2024) 15,000

Sales 250,000 Purchases 120,000

Salaries and Wages 36,000

Rent and Rates 12,000

Electricity and Water 8,000

Insurance 3,000 Office Equipment 40,000

Motor Vehicles 60,000

Accounts Receivable 25,000

Accounts Payable 20,000

Bank 39,000 Cash in Hand 22,000

Inventory (1st January 2024) 15,000

Accumulated depreciation (1ˢᵗJanuary, 2024):

Office Equipment 10,000

Motor Vehicle 15,000

Dividend Paid 10,000

Totals 390,000 390,000 Additional Information

a. Closing inventory on 31st December 2024 was valued at GH¢18,000.

b. Depreciation is to be provided as follows:

Office Equipment – 10% per annum on cost Motor Vehicles – 20% per annum on reducing balance method

c. Outstanding Rent amounts to GH¢1,000.

d. Prepaid Insurance amounts to GH¢500.

e. 40,000 new ordinary shares were issued at GH¢0.50 each on 1 December 2024.

The shares were subscribed and fully paid for. This transaction has not been recorded at all in the books.

f. Corporation tax for the year is estimated at GH¢16,000.

You are required to do the following.

i. Prepare the Statements of Profit or Loss for the year ended 31st December 2024.

ii. Prepare the Statement of changes in equity

iii. Prepare the Statement of Financial Position as at 31st December 2024.