ACCOUNT SS1 SECOND TERM LESSON NOTE
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ACCOUNT SS1 SECOND TERM LESSON NOTE
SS1
FINANCIAL ACCOUNTING
SIGMA – TERM
SCHEME OF WORK
WEEK
1. Revision of 1st term’s work
2. Partnership Accounts – Admission of new partners. Terminologies Goodwill
accounts, valuation of assets, treatment of goodwill according to profit sharing ratio.
3. Dissolution of partners reasons for dissolution, entry requirements in closing
the firm’s books of account (settlement account).
4. Accounting Ratio
Introduction to ratio, types with working exercise.
5. Single entry/incomplete records – Determination of profit and loss from
statement of affairs, preparation of trading, profit and loss accounts and Balance sheet
from incomplete records.
6. Accounts of non-profit making organization – meaning, terminologies,
features of receipts and payments account and format.
7. Receipts and payments account, income and expenditure account – meaning,
rules, similarities and differences between receipts and payments account and income and
expenditure account.
8. Treatment of subscriptions other nominal ledgers in arrears and in advance.
9. Preparation of income and expenditure account and balance sheet with
working exercise.
10. Revision
11. Examination
ACCOUNT SS1 SECOND TERM LESSON NOTE
WEEK ONE
GOODWILL
Goodwill is the amount by which the value of a business as a going concern exceeds the value of
its net assets, if they were sold separately. It is an intangible asset because it cannot be touched
or seen physically. Goodwill may not be shown in the balance sheet for reasons that will be
explained later. Nevertheless, it must be considered when a partnership change occurs.
Factors that can give rise to goodwill are as follows:
· The location of the company.
· The quality of the product and services.
· The quality of the employees willing to continue after the business changes hand.
· Monopolistic advantage of the company.
· Possession of trademarks and patent rights to be used by the buyer.
· Opportunity for the buyer to retain the same name.
· Quality of the research and development that can be taken over.
· Good public image and reputation build by organization over the years.
ACCOUNT SS1 SECOND TERM LESSON NOTE
Introduction of Goodwill
Goodwill may be introduced if any of the following situations occur:
· Admission of a new partner
· Change in profit-sharing ratio of partners
· Retirement or death of a partner
· Dissolution of partnership business
· Business purchase
Types of Goodwill
· Inherent goodwill
· Fugitive goodwill
· Purchased goodwill
The first two are non-purchased goodwill. Value cannot be placed on them. These types of
goodwill exist in a business but will disappear immediately as the business changes hand.
Examples include goodwill attached to the owner of the business, location, employees and so on.
When any of these are not taken over, the goodwill will be vanished.
However, purchased goodwill arises as a result of one company acquiring another. This type of
goodwill remains in the business even if the ownership changes. The value of goodwill is the
difference between the purchase price (purchase consideration) and the book value of the assets.
ACCOUNT SS1 SECOND TERM LESSON NOTE
Valuation of Goodwill
There are many methods of valuing goodwill, the method adopted is the sole responsibility
of the partnership. The common methods are as follows:
· Purchase of average profit
· Purchase of average gross fee income
· Purchase of average super profit
· Excess of purchase price of a business over value of tangible net assets taken over.
Accounting for Goodwill in the Books of a Partnership Business
Irrespective of the method of a valuation of goodwill used, the value of goodwill can be retained
in the books or written off immediately. Goodwill account is opened and credited to partners in
their old profit-sharing ratio.
How to account for goodwill when no goodwill account is opened.
Partner often do not wish to record goodwill in their books for two reasons:
· The value placed on goodwill is usually very difficult to justify being a matter of
opinion; it may not even exist.
· If goodwill is shown in the balance sheet, it would be difficult to persuade a
prospective purchaser of the business to pay more, even if the value had increased since
goodwill was first introduced into the books.
When there is a partnership change and the partners decide not to open a goodwill account, the
procedure to be followed is as follows:
Step 1: Credit the partner’s capital accounts with their share of goodwill in their old
profit-sharing ratio
Step 2: Debit the partners’ capital accounts with their share of goodwill in their new
profit-sharing ratio.
ACCOUNT SS1 SECOND TERM LESSON NOTE
Apportionment of Profit
Partnership changes often occur in the middle of a firm’s financial year. If a profit and loss
account is not prepared at the time of the change, the profit and loss for the financial year
must be apportioned between the periods before and after the change. If the profit and loss
is assumed to have been earned evenly throughout the year, it should be divided between the
old and new partnership on a time basis. However, any expenses not incurred on time basis
must be allocated to the period to which they belong. The profit and loss account can be
prepared in columnar form to show the apportionment of profit.
ACCOUNT SS1 SECOND TERM LESSON NOTE
Illustration 4: Change in profit-sharing ratio
Shola and Shogo are partners sharing profits and losses equally after allowing Shola a salary of N10,000 p.a. On 1 January 2010, their capital and current accounts balances were as follows:
On 1 July, 2010, the partners agree to the following revised terms of partnership.
1. Shola to transfer N5,000 from his capital accounts to a loan account on which he would be
entitled to interest at 10% per annum.
2. Shogo to bring his private car into the firm at a valuation of N12,000
3. Shogo to receive a salary of N5,000 per annum.
4. Profits and losses to be shared: Shola – , Shogo-
Additional information for the year ended 31 December, 2010 is as follows:
Of the general expenses, N5,000 was incurred in the 6 months to 30 June 2010.
Shogo’s car is to be depreciated over four years on the straight line basis and is assumed to have no value at the end of that time.
All sales produces a uniform rate of gross profit.
Required:
(a) Prepare the trading, profit and loss and appropriation accounts for the year ended 31 December 2010.
(b) Prepare the partners current accounts for the year ended 31 December 2010.
Solution
Shola and Shogo
Trading, Profit and Loss and Appropriation Account for the
Year Ended 31 December 2010
WEEK TWO - THREE
ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS
Partnership changes usually occur during a financial year and the accounting records are contrived without interruption. Final accounts are prepared at the end of the financial year.
When a partner leaves the firm or a new partner joins, it marks the end of one partnership and the beginning of a new one. No records and entries are made in the books as at the period of change until the end of the financial year. In the process, revaluation of asset, valuation of goodwill and changes in the profit/loss sharing ratio may occur.
Illustration 5: Admission of a new partner
Dami and Lola have shared profits and losses in the ration of 3:2. On 1 October 2010, they decided to admit Bola as a partner. No entries to record Bola’s admittance as a partner were
made in the books before the end of the financial year on 31 December 2010.
Information extracted from the books for the year ended 31 December 2010 include the following:
The partners agreed the value of goodwill on 1 October 2010 at N40,000 and decided that no goodwill account should be opened in the books.
On 1 October 2010, Bola paid N20,000 into the firm’s bank account as capital. On the same day, Dami lent the partnership N20,000. He is entitled to interest at a rate of 100% per annum on the loan.
The balances on the partners drawings account at 31 December 2010 were as follows:
The new partnership agreement provided for the following as from 1 October 2010.
(a) Interest was allowed on the balances on capital accounts on 31 December each year at a rate of 5% per annum.
(b) Lola was entitled to a salary of N12,000 per annum.
(c) The balance of profits and losses were to be shared. Dami - , Lola and Bola -
Required:
(a) Prepared the capital accounts of Dami, Lola and Bola as at 31 December 2010.
(b) Prepare the partnership trading, profit and loss and appropriate account for the year ended 31 December 2010.
(c) Prepare the partners current accounts as at 31 December 2010.
Solution
2. Goodwill: Since the partners agreed that no goodwill account should be opened, then working of the share of goodwill to capital account is only shown as follows:
Value of goodwill N40,000 as at 1 October 2010 share to Dami and Lola in their old profit-sharing ratio as follows:
Dami ( x 40,000) = 24,000
Lola ( x 40,000) = 16,000
Goodwill to be written off immediately from the books as follows using new profit-sharing ratio:
Dami ( x 40,000) = 16,000
Lola ( x 40,000) = 16,000
Bola ( x 40,000) = 8,000
(a) Partners Capital Account
ACCOUNT SS1 SECOND TERM LESSON NOTE
(a) Dami, Lola and Bola
Trading, Profit and loss and Appropriation Account for the Year Ended 31 December, 2010
N
Turnover 400,000
Less: Cost of Sales 240,000
Gross profit c/d 160,000
9 months to 30 3 months to 31 year to
September 2010 December 2010 31 December 2010
Essay Type Questions
1. (a) Define ‘partnership’.
(b) Is it possible for a partnership to exist without agreement? If so, why do you consider a written agreement to be desirable?
(c) Is it possible for a person
(i) To receive a share in the profits of a business without being liable as a partner therein;
(ii) To be liable as partner without receiving a share of the profits of a business?
2. The following trial balance has been extracted from the books of Sam and Dan at 30 April 2011.
Additional Information
(a) Stock at 30 April, 2011 is valued at N27,000
(b) Sam is to be credited with interest on the loan at a rate of 10% per annum.
(c) The bank reconciliation shows that bank interest of N314 and bank charges of N860 have been debited in the bank statements. These amounts have not been entered in the cash book.
(d) On 30 April 2011, rent of N1,500 and advertising of N2,000 have been paid in advance.
(e) Depreciation is to be provided as follows:
i. Plant and machinery 10% per annum on cost.
ii. Motor vehicles 20% per annum on their written down values.
(f) The partners are to be charged interest on drawings and allowed interest on capital at a rate of 10% per annum.
(g) Partnership salaries are to be allowed as follows: Sam N10,000 per annum, Dan N8,000 per annum.
(h) The balance of profits and losses is to be shared as follows: Sam – 3/5; Dan 2/5.
Required:
(a) Prepare the partnership trading, profit and loss and appropriate accounts for the year ended 30 April 2011.
(b) Prepare the partners’ current accounts for the year ended 30 April 2011.
(c) Prepare the balance sheet as at 30 April 2011.
1. Bose, Bukky and Biola are partners sharing profit and losses in ratio 3:2:1 respectively.
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