Inventories are current assets:

• held for sale in the ordinary course of business,
• in the process of production for such sales;or
• in the form of materials or supplies to be consumed in the production process or in the rendering of services

Net realizable value:

• Is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale

Inventories can include any of the following:

• Goods purchased and held for resale, eg goods held for sale by a retailer or land & building for resale
• Finished goods produced
• Work in progress being produced
• Materials and supplies awaiting use in the production process(raw materials)

Therefore some COMMON classifications of inventories often seen in the balance sheet are:

Merchandise; Production supplies; Materials; Work-In-Progress and Finished Goods

How do we measure or value inventories:

• Inventories should be measured at the LOWER of cost and net realizable value. re: the value of these inventories is calculated by taking the lower of cost and net realizable value for EACH SEPARATE item or GROUP of inventory items.

The  COST of inventories comprises:

(a) Purchase

( viz: purchase price + import duties+ taxes +transport+handling & any other cost directly attributable to the acquisition of finished goods, services and materials less trade discount,rebates & other similar reduction)

(b) Costs of conversion

Consists of two parts (a) cost directly related to the unit of production,eg direct materials, direct labour (b) fixed and variable production overheads that are incurred in converting materials into finished goods, allocated on a systematic basis.

(c) Other costs incurred in bringing the inventories to their present location and condition.

Methods to measure or value inventories:

• First-in, first-out (FIFO) method
• Last-in, first-out (LIFO) method
• Weighted average cost method.
• Standard costs

ACCOUNTING TREATMENT OF INVENTORIES:

(a) The value of closing inventories is accounted for in the NOMINAL LEDGER by

debiting an inventory account and crediting the trading account at the end f an accounting period.

{ The inventory will therefore always have a debit balance at the end of a period and this balance will be shown in the balance sheet as a current asset for inventories }

(b) OPENING INVENTORIES brought forward in the inventory account are transferred to the trading account and so at the end of the accounting year, the balance on the inventory account ceases to be the opening inventory b/f, and becomes instead the closing inventories c/f

Below, we describe the three types of organization structure listed with characteristics/key features, advantages and disadvantages of having such structure:

(a) Sole Trade or Sole Proprietor ( Part 1 of 3)
(b) Partnership ( Part 2 of 3)
(c) Limited Company ( Part 3 of 3)

SOLE TRADER OR SOLE PROPRIETOR

CHARACTERISTICS OR KEY FEATURES:

• A one man shop completely responsible for running all aspect of the business

ADVANTAGES:

• A one man shop so able to move quickly to seize opportunity without consulting any other partners, etc,

• Able to have complete freedom to make decisions on the way the business is conducted without reference to anyone else,

• Any assets built up in the business belong 100% to the individual owner and

• The least formal in respect of compliance with government requirements as paperwork is lesser hence might suit the lifestyle and character of the individual

DISADVANTAGESs:

• Assume 100% responsibility for all the debts and liabilities of the business

• As the owner’s personal debt and its business debt is intermingle, hence potential liabilities may increase the debts of the business

• Lack of transparency as the accounts are not publicly inspected or audited. This makes it difficult to contract with public sector organizations who demand a degree of transparency in their business contracts with the private sector.

• Lack of funds to expand further.

• Might incur higher or maximum tax band/liabilities as tax is charged on the amount of net profit left after deducting allowable expenses

Basic rule to remember is that:-
EVERY FINANCAL TRANSACTION gives RISE TO TWO ACCOUNTING ENTRIES, ONE A DEBIT AND THE OTHER A CREDIT.

Also note that:
(a) An increase in an expense ( example rent) or an increase in an asset ( office furniture) is a DEBIT
(b) An increase in revenue ( example sale of goods or services) or an increase in a liability( buying goods or service on credit) is a CREDIT
(c) A decrease in an asset( example making a cash payment) is a CREDIT
(d) A decrease in liability( example paying a creditor) is a DEBIT

EXAMPLES
(a) Purchase of office equipment
DEBIT: Office Equipment ( increase in asset)
CREDIT: Cash at bank ( decrease in asset re: cash at bank decreases)

(b) Purchase of stationery on credit
CREDIT: Accounts Payable ( increase in liability )
DEBIT: Purchases ( item of expense)

© Payment received from a credit customer
CREDIT: Accounts receivable ( decrease in asset)
DEBIT : Cash at bank ( increase in asset)

(a) ABC pays you $100
(b) You return goods to AB to the value of $100
(c) Customer AC returns goods to the value of $150
(d) You pay Jim $500
(e) You receive an invoice from A for $120
(f) Your accounts clerk ask you for $15 to buy stationery
(g) You send customer D an invoice for $700
(h) Your business pays Mr.C, a supplier $1000

Answer to Question. No.1:-
(a) Cash book
(b) Purchase returns day book
(c) Sales returns day book
(d) Cash book
(e) Purchase day book
(f) Petty cash book
(g) Sales day book
(h) Cash book

Question No 2:-
Name the seven books of original entry

Answer to Question No.2:-
(1) Sales day book,
(2) Sales returns day book
(3) Purchase day book
(4) Purchase return day book
(5) Cash book
(6) Petty cash book
(7) Journal

Question No.3:-
What is the difference between the cash book and the petty cash book?

Answer to Question No.3:
The cash book records amounts into or out of the bank account. The petty cash book records payments of small amounts of cash.

The different function or role of each source document as follows:

Sales order
-A customer writes out or signs an order for goods or services he requires

Purchase order
-A business orders from another business goods or services

Invoice
-A document for billing the customers for goods or services. The invoice is a request for the customer to pay what he owes. The details in an invoice should tally with the details of a purchase order.

Major information shown in an invoice:

•Name and address of the seller and purchaser;
•Date of the sale
•Description of what is being sold
•Quantity and unit price of what has been sold

Credit note
-A document relating to RETURNED goods or refunds when a customer has been overcharged. It can be regarded as a negative invoice.

Debit note
-Issue to adjust an invoice already issue. Normally a debit note is issued to a supplier as a means of formally requesting a credit note.

Goods received note
-Record receipt of goods , commonly used in a warehouse. Used in addition to suppliers’ advice notes. Accounts department normally want this document as support of goods received before making any payment to the supplier.

BOOKKEEPING DOUBLE ENTRY RULES/PRINCIPLES OF CHARGING DEPRECIATION:

YEARLY method:-

• Full year depreciation should be charged in the year of purchase and NO depreciation should be charged in the year of sale, irrespective whether the asset was used for 2 or more in the year of sale and purchase

MONTHLY method:-

• Depreciation is charged for the NUMBER OF MONTHS asset is used in the year of purchase and for the number of month asset is used in the year of sale

Next the following deals with how to record provision for depreciation in our books of accounts:

RECORDING OF PROVISION FOR DEPRECIATION:

(a) Double entry bookkeeping principle or system:-

Debit: Profit & Loss account

               Credit: Provision for Depreciation

Note that the CURRENT year’s depreciation is transferred to the Profit and Loss Account Previous and current year is deducted from asset balance in the Balance Sheet

Lastly lets look at the bookkeeping double entry for DISPOSAL OF FIXED ASSETS:-

Journal double entries as follows:

(a) Debit: Asset Disposal Account

      Credit: Fixed Asset Account

[ to transfer all the cost of the assets to an Asset Disposal Account so as to determine whether there is any gain or loss from disposing these fixed assets]

(b) Debit: Provision for Depreciation

       Credit: Asset Disposal Account

[ to transfer the total depreciation charged on the asset to the Asset Disposal Account]

© Debit: Cash or Bank

     Credit Asset Disposal Account

[ to post cash received from sale of asset to Asset Disposal Account]

 Append below are some True Or False Questions on Accounting Concepts:- 

Question No 1: Fill In The Blank for the following:

Answer:

1a $30,000 ($40,000-$10,000)

1b $4,000 ($15,000-$11,000)

1c $15,000 ($5,000+$10,000)

1d $3,000 ($11,000-$8,000)

Question No. 2:

The following is the summary data of XYZ Ltd for July presented in equation form. Describe each of the transactions that occurred during July.

Answer:

2a The owner made an investment by injecting cash as capital

2b Equipment was bought and paid for

2c Supplies were bought and paid for

2d Additional equipment was bought on account creating a liability

2e The company recorded an income for work done for customers

2f The company paid salaries to the workers

2g Cash was paid to reduce amount owing to Accounts Payable(Liability)

2h Owner withdrew cash for her personal use.

As mentioned, the acccounting cycle enable us to have a snapshot of whats should be done from source documents to preparation of financial statements whilst the below demonstrates the double entry effect which has inter-relationship between the various financial statements:

Before preparing the format we need to understand that a Balance Sheet is called the Statement of Financial Position. as it is a snapshot of a company’s financial position at a particular point in time. The Accounting equation which is Assets=Liabilities+Stockholder’s Equity is closely link to the Balance Sheet. Because of this accounting equation and the double entry system, the Balance sheet must always tally.  

Below we have two formats namely the Horizontal and Vertical Presentation to display the Balance sheet of a company:- 

(a)Format of A Balance Sheet: Horizontal Presentation 

The horizontal presentation uses a format that present assets on the left and liabilities and equity on the right 

XYZ Company

Balance Sheet As at December 31st 2008 

(b) The Vertical Presentation of The Format Of A Balance Sheet

 The vertical presentation show the assets followed by liabilities and equity directly below the assets.

 XYZ Company

Balance Sheet As At 31 st December 2008