[caption id="attachment_65518" align="alignright" width="235"] Dada Adefolami[/caption] By Dada Adefolami Accounting records are all of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews. Accounting records include records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices Accounting records are key sources of information and evidence used to prepare, verify and/or audit the financial statements. They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non-monetary transactions. The double entry system of bookkeeping is based on the fact that every transaction has two parts: both a positive and negative entry, and will affect two ledger accounts.For instance, recording earnings of N100 would require making two entries: a debit entry of N100 to an account called "Cash" and a credit entry to an account called "Income." A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying on a one sided accounting entry to maintain financial information. Most businesses maintain a record of all transactions based on the double-entry bookkeeping system. However, many small, simple businesses maintain only a single-entry system that records the "bare-essentials. " A general ledger contains all the accounts for recording transactions relating to a company's assets, liabilities, owners' equity, revenue, and expenses. The two main instances in which incomplete records can be found are where: 1. There are no records at all 2. Some records exist and information is available to calculate missing figures. No records at all It is still possible to calculate a profit or loss figure by using the fact that the profit of a business must be represented by more assets, list and value the opening and closing net assets, then calculate the profit as the difference between the two: Profit = Closing net assets - Opening net assets Allowance must be made for proprietor's drawings and extra capital introduced, so the formula becomes: Profit = Closing net assets - Opening net assets + Drawings - Capital introduced Incomplete records: This is a more common scenario, in practice. The following are standard techniques for calculating missing figures: 1. Opening capital 2. Missing figures for sales and purchases 3. Missing figures for cash. Opening capital: We need to have the opening capital of the business at the beginning of a period to provide a starting point - the capital in the balance sheet account. We will have a list of opening assets and liabilities, and we use this to arrive at the opening capital. Missing figures for sales and purchases: If we have the opening and closing receivables/debtors of a business, and the cash received from customers, we can calculate sales. What you need to do is set up a sales ledger total account. Note that Accounts payable is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. Accounts receivable is a legally enforceable claim for payment held by a business against its customer/clients for goods supplied and/or services rendered in execution of the customer's order. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. FIGURE 1: SALES LEDGER TOTAL ACCOUNT N N Opening receivables/debtors 38,600 Cash received 218,650 Sales (balancing figures) 221,250 Closing receivables/debtors 41,200 259,850 259,850 If any three of these figures is known, the fourth can be calculated. Is to use the sales ledger control account format, but instead of proving the accuracy of the sales ledger, we are calculating what the sales must have been in order for the other figures to be what they are. The same technique may be used to calculate credit purchases. If the sales figure is given we can calculate the cash received. There is another way to calculate sales, purchases or stock figures, and that is to use the trading account format, normally set up the trading account as N N Sales 100,000 Less: cost of sales 10,000 opening inventory/stock 78,000 purchases 88,000 less: closing inventory/stock 13,000 75,000 Gross profit 25,000 Suppose the closing inventory/stock has been destroyed by fire, along with all the inventory/stock records. Then we wouldn't have the closing inventory/stock total to include in our trading account. However, we can calculate it if we know the gross profit percentage on sales - or, the mark-up on cost of sales. In the above example, gross profit is 25% of sales. If we are told this, we can insert the gross profit of N25, 000 and calculate the missing inventory/stock figure as a balancing item. We can also find a missing purchases figure, or even a missing sales figure. Suppose we are given: N N Cost of sales opening inventory/stock 10,000 purchases 78,000 88,000 less: closing inventory/stock 13,000 75,000 If the gross profit percentage on sales is 25%. If gross profit is 25% on sales, cost of sales must be 75%. The sales total is therefore: N75,000 x 100/75 = N100,000. Whenever the gross profit percentage is given in incomplete recordsin question, you need to apply this technique. Missing figures for cash: You may be given details of cash receipts and payments plus details of opening and closing balances, but with one figure missing, often the proprietor's drawings. We can calculate the missing figure by setting up a cash account to find the balancing item required. Here are the incomplete records techniques: Construct To calculate 1 Opening assets and liabilities Opening balance 2 Sales or purchases ledger total amounts Any missing figure 3 Trading profit (gross profit percentage must be given) Any missing figure 4 Cash account Any missing figure [caption id="attachment_65518" align="alignright" width="235"] Dada Adefolami[/caption] Practical Examples The net assets of John, a trader, at 1 January 2005 amounted to N128, 000. During the year to 31 December 2005, John introduced a further N50, 000 of capital and made drawings of N48, 000. At 31 December 2005, John's net assets totaled N184, 000. Using this information compute John's total profit for the year ended 31 December 2005. Alex does not keep proper accounting records, and it is necessary to calculate her total purchases for the year ended 31 January 2006 from the following information: N Trade payables/creditors 31 January 2005 130,400 130,400 31 January 2006 171,250 171,250 Payments to suppliers 888,400 Cost of goods taken by Alex for her personal use 1,000 Refund received from suppliers 2,400 Discounts received 11,200 Compute the figure for purchases for inclusion in Alex s financial statements. Tony fixes prices to make a standard gross profit percentage on sales of 331/3%. The following information is available for the year ended 31 January 2006 to compute her sales total for the year: N Inventory/stock 1 February 2005 243,000 31 January 2006 261,700 Purchases 595,400 Purchases returns 41,200 Calculate the sales figure for the year ended 31 January 2006. Answers 1. N Opening capital 128,000 Capital introduced 50,000 178,000 less: drawings 48,000 130,000 Closing capital 184,000 Profit is therefore 54,000 2: Purchases total account N N Payments 888,400 Balance brought forward 130,400 Discounts received 11,200 Goods taken by Alex 1,000 Balance carried forward 171,250 Refunds from suppliers 2,400 Purchases (balancing figure) 937,050 1,070,850 1,070,580 3. Cost of sales N N Opening inventory/stock 243,000 Purchases 595,400 less: returns 41,200 554,200 797,200 less: closing inventory/stock 261,700 535,500 Sales figure is therefore: N535,500 x 3/2 803,250 The sub ledger, or subsidiary ledger, provides details behind entries in thegeneral ledger used in accounting. The sub ledger shows detail for part of the accounting records such as property and equipment, prepaid expenses, etc. The detail would include such items as date the item was purchased or expense incurred, a description of the item, the original balance, and the net book value A balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year The basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a business. It is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset A liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. [caption id="attachment_65518" align="alignright" width="235"] Dada Adefolami[/caption] Double-entry bookkeeping, in accounting, the double entry system of bookkeeping is based on the fact that every transaction has two parts: both a positive and negative entry, and will affect two ledger accounts. 1. Receivables may refer to a company's claims to the future collection of cash, other assets, or services. These are frequently classified as: o Accounts receivable, receivables resulting from the sale of goods or services on account. 1. Accounts receivable is a legally enforceable claim for payment held by a business against its customer/clients for goods supplied and/or services rendered in execution of the customer's order. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. o Accounts receivable are amounts that customers owe the company for normal credit purchases. Since accounts receivable are generally collected within two / Three months of the sale, they are considered a current asset. Also Accounts receivable is a legally enforceable claim for payment held by a business against its customer/clients for goods supplied and/or services rendered in execution of the customer's order Accounts receivable usually appear on balance sheets below short-term investments and above inventory o o An accountspayable is recorded in the AccountPayable sub-ledger at the time an invoice is vouched for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in the General Ledger or AP sub ledger as an outstanding, or open, liability because it has not been paid o o Ledger accounts use the T-account format to display the balances in each account. Each journal entry is transferred from the general journal to the corresponding T-account. The debits are always transferred to the left side and the credits are always transferred to the right side of T-accounts. An accounting information system (AIS) is a system of collecting, storing and processing financial and accounting data that is used by decision making The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: surajudada@yahoo.com; 08052043855