(228)-ACCOUNTING FOR SUBSTANCE

Accounting for Substance

Substance over form

The principle of substance over form was introduced in international accounting standards.
International accounting standards refers to three fundamental accounting assumptions:

1. Going concern
2. Consistency
3. Accrual

International accounting standards further refers to three considerations that should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form.

Substance over form is defined as follows: “transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form”.

Accounting for substance

The concept of substance over form has now been replaced by the concept of accounting for substance. The incidence of so-called “creative accounting” has added increased urgency to the need to develop this concept.

That can be defined as follows: “accounting for transaction in accordance with its substance requires that its accounting treatment should fairly reflect its commercial effect”.

Reporting the substance of transaction proposes that “a reporting entity’s financial statements should report the substance of the transactions into which it has entered”.

Examples of accounting for substance

• Goods sold subject to reservation of title: legal title does not pass to the purchaser until the goods have been paid for. Nevertheless accounts are drawn up including the goods in stock with a corresponding creditor, in accordance with the commercial substance of the transaction.
• Fixed assets acquired under hire purchase contracts: legal title does not pass until the final installment is paid. Nevertheless the fixed asset is included in the balance sheet right from the start together with a corresponding creditor. Again this reflects the commercial substance of the transaction.
• Finance leases: a lessee may obtain the use of a fixed asset over its useful economic life by means of a financial lease contract. Although the lessee never actual obtains legal title the lessee has rights and obligation similar to those of an outright purchaser.

Further considerations

One particular point about the types of transactions that are caught within the accounting for substance was also referred to as follows:

Many transactions are straightforward and embody a number of standard rights and obligations with the result that the commercial effect and consequent accounting treatment are well known.
Some transactions, on the other hand, combine or divide up rights and obligations in ways that make it difficult to discuss their effect on the enterprise’s assets and liabilities.

The following are common features of transactions that combine or divide up rights and obligations:

• Severance of legal title to an item from the ability to enjoy the principle benefits and exposure to the principle risks associated therewith;
• Linkage of a transaction with one or more others in such a way that the commercial effect cannot be understood without reference to the series as a whole;
• Inclusion in the terms of a transaction of one or more options or conditions whose terms make it reasonably probable that the option will be exercised or the condition fulfilled.

Some more examples for accounting for substance

• Sale of goods with a commitment to repurchase: at first sight, a sale of goods might appear to be a trading transaction, with stock replaced by cash. However, the commercial effect is that the transaction is a financing transaction. The cash received should be regarded as receipt of a loan, not as sale of goods.
• Sale and leaseback: a sale and leaseback which involves a finance lease is effectively a financing transaction and both the asset and liability should appear on the balance sheet.
• Consignment stock: consignment stock arrangements are particularly common in the motor trade. Consignment stock is held by one party but legally owned by another on terms which give the holder the right to sell the stock in the normal course of his business or, at his option, to return it unsold to the legal owner.

(227)-VARIATIONS IN ACCOUNTING PRACTICE

Variations in Accounting Practice

The accounting standards programmed has sought to eliminate the scope for variations in accounting practices, both within company annual reports and between one company and another. Nevertheless there remains significant scope for variations. Some of the more common areas are referred to below.

Impact of fixed asset revaluations

Depreciation charges may be based on either historical cost or revalued amount.

Long term contracts

Where a particular contract of less than 12 months’ duration is accounted for as long-term may well be a matter of fine judgment.

In addition, for long-term contracts which are expected to be profitable, there are several acceptable ways of allocating profit over the life of the contract.

Group accounts matters

Business combinations which satisfy the merger conditions may be consolidated either on a merger accounting basis or an acquisition accounting basis.

Where foreign subsidiaries are translated using the closing rate/net investment method, profit and loss accounts items may be translated at either average rate or loosing rate.

Under acquisition accounting, there is scope for determining the extend to which provisions for losses and reorganization costs may be taken into account under the fair value exercise. A future standard is likely to restrict this scope significantly.

Extraordinary and exceptional items

Until there has been considerable scope for deciding whether particular reorganization costs should be treated as exceptional or extraordinary. However, a financial reporting standard effectively abolish extraordinary items and introduces significant changes in both accounting disclosures.

Intangible fixed assets

Goodwill- purchased goodwill may be eliminated against reserves are as soon as it arises. Alternatively it may be carried forward as an intangible fixed asset amortized over useful life.
Development costs which satisfy the criteria may be written off to profit and loss account as they arise. Alternatively they may be capitalized as an intangible fixed asset amortized over a period.

Deferred revenue expenditure

Certain borrowing costs may be capitalized as part of the cost of a fixed asset or they may be charged to profit and loss as incurred.

Pre-opening expenses relating to new hotels or store may be carried forward in the balance sheet and expenses over a period. Alternatively they may be written off as incurred.

Pension costs

Companies were offered a choice of radically different traditional provisions. The effect of this choice will last many years.

Post balance sheet events

Certain post balance sheet events which would normally be classified as non-adjusting may be treated as adjusting in special circumstances.

The above examples are many and varied but the list is by no means comprehensive. The purpose of the above is underlining the scope for significant variations in accounting practice between different companies.

(226)-FUNDAMENTAL ACCOUNTING CONCEPT

Fundamental Accounting Concepts

Disclose of accounting policies refers to four basic assumptions underlying the periodic financial statements of enterprises. The turn used to describe these broad assumptions is fundamental accounting concepts.

• Going concern concept
  This assumption that the enterprises will continue in operational existence for the foreseeable future. This means that there is no intention or necessary either to liquidate the entity or to curtail significantly its activities.
• Accruals concept
  Revenue is included in accounts when earned rather than when money is received. Costs are included when incurred rather than when paid. Revenues dealt with in the profit and loss account are then matched with associated costs in order to determined profit.
  Should the accruals concept conflict with the prudence concept, the prudence concept prevails.
• Consistency concept
  This assumes consistency of treatment of similar items within a particular accounting period as well as from one period to the next.
• Prudence concept
  Revenues and profits are not anticipated. They are recognized in the profit and loss account only when realized either in the form of cash or of other assets. Whose cash realization can be determined with reasonable certainty?
  Provision should be made for all known liabilities whether the amount of these is known with certainty or is a best estimate in the light of the information available.
  If financial statements are not drawn up on the basis of the above assumptions, the facts should be disclosed.

Future Assumptions and Principles

These are including:

• Entity assumptions
  This assumes that for accounting measurement purposes, the business is regarded as a separate entity quite apart from its owners or proprietors. A business is regard as owning the resources which it uses and as owing the claims against those assets. The assets and liability of the business are kept completely separate those relating to the owners.
• Money measurement assumptions
  This assumes that all assets liabilities and transitions can be quantified in monetary terms.
• Stable standard of measurement assumption
  Following on from, historical cost accounting assumes that transactions occurring over a period of time can be measured in terms of a single stable measuring unit $ dollars. The obvious weaknesses of this assumption lad to calls for some form of system of accounting for price changes
• Objectivity principle
  This principle requires accounting to be carried out on an objective and factual basis. However, subjective opinions and estimates play an important part in historical cost accounting. Example of subjectivity includes estimate lives of fixed assets and net realizable value of stock items.
• Dual aspect principle
  Every change in one element of an entity (assets, liabilities, equity) is accompanied by another change of a similar amount, but in an opposite direction. This principle underlies the basis of double-entry book-keeping.
• Substance over form
  Transactions should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form.

(225)-FINANCIAL STATEMENTS

Financial Statements

Terminology

The term “financial statements” is usually taken to include the balance sheet, profit and loss account and cash flow statement together with notes to the accounts. The term will include the additional statements and notes required by financial reporting standards (FRS).

Accounting conventions

1. Pure historical cost
   Financial statements some companies are usually prepared on the basis of the historical cost. This is taken to mean the monetary amount scarified or lay out at the date of acquisition. This basis is used both for asset measurement and profit measurement.
   2. Modified historical cost
   However, it is common for some companies to incorporate fixed assets valuations into their balance sheets. This means that under statement of standards accounting practice (SSAP) the depreciation charge will be based on the revalued amount. On a sale of the asset, the profit or loss on sale will be determined by comparing, proceeds of sale and net book value at the date of sale, based on revalued amount. The implementations of both these matters are important from the viewpoint of financial reporting standards (FRS).
2. Current cost accounting
   Some companies draw up their financial statements on a current cost basis. For example, electrical companies present current cost information.

(224)---SOME IMPORTANT LEGAL REQUIREMENTS IN FINANCIAL STATEMENTS

Some Important Legal Requirements in Financial Statements

• Terminology
  Accounting reference period (ARP), the period by reference to which the financial statements have to be prepared and presented to members. Accounting reference date (ARD), the date on which the Accounting reference period ends. Financial year (FY), the period covered by the statutory profit and loss account, whether or not this is a year.
• Accounting reference dates
  The companies Act introduced some changes to the rules. Ignoring transitional provisions companies must notify the register of companies of their Accounting reference date within nine months of incorporation.
• Accounting reference period
  The first Accounting reference period begins on the date of incorporation and ends on the Accounting reference date, and is a period of more than six months and less than 18 months. Succeeding Accounting reference periods will be for 12 months unless appropriate notice is given of a change of Accounting reference date.
• Financial year
  The financial year of a company will usually be the same as its Accounting reference period. However, to cover special situations, the financial year may begin or end on dates which are not more than seven days before or after the Accounting reference date.

Accounting Records

The companies Act required accounting records to;

1. Be sufficient to show and explain the company’s transactions
2. Disclosure with reasonable accuracy the company’s financial position at any time
3. Enable the directors to ensure that any accounts which they are required to prepare comply with companies Act.

The records must contain, entries from day to day of all sums of money received and expended and matters in respect of which the receipts and expenditure take place, a record of the company’s assets and liabilities, for a trading or merchant company dealing in goods.

(223)-PREPARATION OF ACCOUNTS AND FILLING REQUIREMENTS

Preparation of accounts and filling requirements

Form and content

Company Profit and loss accounts and balance sheets must comply with the company's act format requirements. These must be accompanied by notes which comply with the disclosure requirements of the company's act as well as the relevant standards.
In additionally to the accounts a director’s report is required
Large public limited companies which are quoted on stock exchange frequently provide more than the minimum required.

Approval and signing

Accounting for post balance sheet date events standard requires the date on which the directors approve the financial statements to be disclosed in the financial statements.
The company's act requires the balance sheet to be approved and signed on behalf of the board by a director.
The director’s report must be approved by the board of directors and signed on behalf of the board either by a director or by company secretary.

Audit

Every company must be audited by a registered auditor. The audit report must accompany the financial statements. Note that the audit requirement applies to unlimited companies and to company's limited by guarantee.

Filling

The directors are required to file with the registrar of companies a copy of the annual accounts, directors’ report and auditors report. This requirement does not apply to unlimited companies.
Special concessions are available to small and medium-sized companies. The directors of these companies may file abbreviated accounts.
There is a time limit for felling of accounts. Private companies within 10 months of the end of there reference period, public companies within seven months.

Summary financial statements

The general rule is that all shareholders and debenture holders must the sent a copy of the full accounts.

(222)-STOCK EXCHANGE DISCLOSURE REQUIREMENT

Stock exchange disclosure requirements

The international stock exchange requires the annual report and accounts of a listed company to disclose a large number of matters including the following

• a statement by the directors as to the reasons for any significant departures from applicable standard accounting practices
• An explanation, should trading results shown by the current period's accounts differ materially from any published fights forecast made by the company.
• A geographical analysis of net turnover and of contribution to trading results of those trading operations carried on outside the United Kingdom and Ireland.
• The name of the principal country in which each subsidiary operates.
• the following particulars regarding each company in which the group interest exceeds 20% of the equity capital
  (1) The country of operation
  (2) Particular of its issued capital and debt securities
  (3) The percentage of each class of debt securities attributable to the company's interest.
• A statement at the end of the financial year shoring as regards.
  (1) Bank loans and overdrafts
  (2) Other borrowing of the company/ group, the aggregate amounts payable
• A statement of the amount of Interest capitalized during the year together with an indication of the amount and treatment of any related tax relief.

a statement showing whether, so far as the directors are aware, the company is a close company for taxation purposes and whether there has been any change in that respect since the end of the financial year.

(221)-BALANCE SHEET DISCLOSURES IN COMPANY ACCOUNTS

Balance Sheet Disclosures in Company Accounts

• Fixed assets
  Unless indicate otherwise, the points below relate also to fixed asset investments and intangibles.
  1. Cost of valuation of each fixed asset category
  2. Cumulative depreciation for each fixed asset category
  3. For fixed asset included on a valuation basis
  4. Land and buildings analysis of NBV between freehold, long leasehold and short leasehold
  5. For fixed assets included at a valuation state, either aggregate cost or aggregate depreciation as would have been determined under historical cost rules; or difference between above and amounts actually includes in balance sheet under modified historical cost.
  6. If no record of original price or production cost of asset
  7. For investment properties
• Investments
• Significant shareholders
• Intangible fixed assets
• Stocks and long term contracts
• Debtors
• Creditors
• Taxation
• Dividends
• Provisions
  1. Where amounts transferred to any provision for liabilities and charges
  2. Where amounts are transferred from any provision for liabilities and charges except for purpose for which provision was established
  3. Other provisions where amounts are material
• Guarantees and other financial commitments
• Share capital
• Reserves
• Loans for acquisition of own shares
• Government grants
• Investment properties
• Leasing and hire purchase
• Post-balance sheet events

(220)-PROFIT AND LOSS ITEMS REQUIRING DISCLOSURES IN COMPANY ACCOUNTS

Profit and Loss Items Requiring Disclosures in Company Accounts

• Turnover
  Analysis of turnover over, Substantial different business activities; substantial different geographical markets, Analysis of profit before tax between substantially different business activities
• Depreciation
  The total depreciation provided. Additional provisions for depreciation and where assets revalued during current year, disclosure the effect, if material, on the depreciation charge
• Expense items
  Charges for hire of plant and machinery, auditor’s remuneration, interest payable to bank loan and overdrafts, total amount of research and development expenditure charged in profit and loss analyzed between current year’s expenditure and amounts amortized from deferred expenditure, amortization charge for goodwill, particulars of staff, staff includes directors, average number of persons employed during year and analyzed within categories according to organization of company’s activities, staff costs disclosures.
• Directors emoluments
• Income items
  Income from listed investments, if a substantial part of company’s revenue, rents from lands.
• Effecting and extraordinary items
• Taxation
• Other matters
  Amounts provided for the redemption of, share capital and loans.
• Reporting financial performance

(219)-PRINCIPAL DISCLOSURES FOR SINGLE COMPANY ACCOUNTS

Principal Disclosures for Single Company Accounts

The principle disclosures are classified as follows’

• Purpose of the checklist
• Accounting policies
• Profit and loss items requiring disclosure
• Balance sheet disclosures
• Cash flow statements
• Directors’ report – Summary of matters to be disclosure

Purpose of the checklist

The aim of the following checklist is to provide a guide to disclosure requirements for the more common reporting arias. All principle companies act requirements for single companies are referred to. The basic requirements are listed below,

1. Long term contracts
2. Goodwill
3. Pension costs
4. Group accounts
5. Earnings per share
6. Cash flow statements
7. Segmental reporting

Accounting policies

1. General policies (Disclosure of significant accounting policies, this would cover all areas)
2. Depreciation (For major class of depreciable assets method of used and useful lives or depreciation rates
3. Developing expenditure
4. Goodwill (explanation of accounting policy and where goodwill is capitalized and amortized, write off period for each major acquisition)
5. Stocks and long term contracts (statement of accounting policies and particular reference to method of ascertaining turnover and attributable profit.
6. Deferred taxation (description of method of calculation)
7. Foreign currency translation
8. Leasing – Lessees (policies for accounting for operating leases and financial leases)
9. Leasing – Lessors (policies for operating leases)

(218)-ENTRIES OF PURCHASING OF A BUSINESS BY A COMPANY

Entries of Purchasing of a Business by a Company

The entries in the company’s books necessary to record the purchase of the business are as follows:

• Assets acquired at acquisition values
  Debit – Assets
  Credit – Vendor’s account
• Liabilities acquired at acquisition values
  Debit – Vendor’s account
  Credit – Liabilities
• Purchase consideration
  Debit – Vendors account
  Credit – Share capital, share premium, debentures, and cash
• Excess of purchase consideration over net assets required
  Debit – Goodwill
  Credit – Vendor’s account
• Excess of net assets acquired over purchase consideration
  Debit – Vendor’s account
  Credit – Capital reserve

Any debtors taken over should be debited at book values and any provisions for doubtful or bad debts should be credited to a provision for bad debts account.

Some accountants prefer to pass the purchase of business account, which replaces the vendor’s account, being credited with the assets acquired and debited with the liabilities taken over and with the purchase consideration.

Where the purchase consideration is less than the value at which the net assets stood in the books of the vendor, but the values of the assets taken over are correctly stated, the surplus should be treated in the company’s books as a capital reserve. The surplus is not available for distribution to shareholders and cannot be credited to a revenue reserve account.
The absence of a goodwill account indicates that no payment has been made for goodwill; it does not indicate that it is nonexistent.

Where a partnership business is transferred to a limited company some difficulty may be experienced in capitalization the company so as to ensure that the rights of the partners are preserved. If the capitals of the partners are in the same ratio as that in which profits are shared, the problem is simplified, as the allotment to the partners of ordinary shares in that ratio will preserve the relationship as nearly as possible. Often, where the capitals are not held in profit-share ratio, the problem is complicated, particularly when taxation is considered.

(217)-PURCHASE OF A BUSINESS BY A LIMITED COMPANY

Purchase of a Business by a Limited Company

Several advantages may stem from the “conversion” of a private business into a limited company e g perpetual succession, whereby a member of a company can transfer his shares, or bequeath them by will at death, without describing the constitution of the company or its financial resources.

The “conversion” may take the from of the transfer to a private company of the assets and goodwill of the business in consideration of the allotment of shares in the company, which the sellers of the business will continue to hold, and through which they will retain the control of the business. Alternatively, a public company may be formed to acquire the business; a promoter or syndicate purchases the business from the original owners, and resells it to the company at a profit, the capital of the company being raised by public subscriptions. Or a public company may be formed to take over the business of a private company, the shareholders of the private company receiving shares or other interests in the public company in exchange for their existing holdings.

Accounting entries in the purchasing company’s books

In the purchasing company’s books, the assets acquired must be debited at acquisition values, which are often different from the book values shown in the vendors business’s books; when a business is hold, assets are frequently revalued. Sometimes the purchasing company assumes trade liabilities as part of the purchase consideration; sometimes the company discharges the trade liabilities and collects the book debts as agent for the sellers; interest may be allowed or changed until final settlement between the purchasing company and the sellers is effected. Book debts are usually acquired at book values less an agreed provision for bad or doubtful debt; any excess received over the book values less the provision for doubtful debts is a capital profit in the purchasing company’s books.

In addition to the purchase price of the tangible assets, a further sum is usually payable for goodwill. A company making a public issue for the purchase of acquiring a business must state in the prospectus the amount of the purchase consideration attributable to goodwill.
Goodwill is the excess of the total purchase consideration over the value of the other assets acquired, less the amount of any liabilities assumed by the company.

(216)-IMPORTANT NOTES FOR REDEMPTION OF DEBENTURES

Important Notes for Redemption of Debentures

• The profit or loss on redemption of debentures, disclosed in the debenture redemption account, is the difference between the price paid on redemption and the nominal value. As the price paid on redemption includes accrued debenture interest, an adjustment made debiting debentures interest account and crediting debentures redemption account with the accrued interest. The amount of such interest, having being paid out of sinking fund cash, must be reimbursed thereto out of general cash, and reinvested.
• If debentures are purchased or redeemed when they are ex-interest, the price paid will exclude interest from the date of purchase to the interest payment date; an adjustment can be made debiting debenture redemption account and crediting debenture interest account with interest on the debentures purchased or redeemed from the date of purchase to the interest payment date; general cash will be debited and sinking fund cash credited.
• No purpose is served by apportioning the proceeds of sale of the investments between capital and income, as both the interest earned and any profit or loss on realization of the investments must be transferred to the sinking fund account.
• An amount equal to the nominal amount of the debenture stock cancelled has been transferred from the sinking fund account to general reserved, as the assets representing it are now part of the general asset and are not include in the sinking fund investment account.
• The discount allowed on the issue should be written off as soon as possible. The discount allowed on the issue of cancelled stock must be written off, as the debentures are no longer outstanding. As, however, the general reserve is available, it has been thought advisable to write off the whole discount against it immediately.

(215)-REDEMPTION OF DEBENTURES

Redemption of Debentures

Debentures may be irredeemable; but this unusual, except in companies formed under special act of parliament.

Debentures may be redeemed either at the end of a given period or by annual drawings. The trust deed, or if there is no trust deed, then the debentures themselves, will contain provision for redemption and will unusually stipulate the establishment of a sinking fund for repayment out of profits.

Alternatively a company may take out of a sinking fund policy with an insurance company for the amount of debentures.

A company which has redeemed debentures to reissue them, either by reissuing the same debentures, or by issuing other debentures in lieu; unless provision, express or implied, is contained in the articles or the conditions of issue, or unless the company has, by passing a resolution, or by some other act, shown its intention that the debentures shall be cancelled. Where a company has redeemed debentures, every balance sheet must show particulars of debentures that may be reissued. On reissue the debentures must be stamped as an original issue; they retain, however, the same priorities as the original debentures.

The company can purchase its own debentures; when debentures are purchased at below the issued price a capital profit will result from the purchase. Strict accounting demands appropriate adjustments for accurate interest included the purchase price. In practice this would frequently be ignored.

(214)-DEBENTURE ISSUES

Debenture Issues

Debentures issued at a premium

When debentures are issued at a premium, debenture account is credited with the nominal amount and debenture premium account with the premium. Debenture premium account can be shown in the balance sheet as a revenue reserve. The companies act does not specify the uses of the debenture premium account.

Debenture issued at a discount

Debenture can be issued at a discount, but must be redeemed at par or a premium; since a capital profit (which is subject to tax) is made on redemption, a lower rate of interest can be paid than if the debentures were issued at their redeemable price.

Where debentures are issued at a discount, cash is debited with the net sum received and discount on debentures account being credited with the full nominal value of the debentures, at which value they must appear as a liability in the balance sheet. The discount on debentures, or so much as has not been written off, must be shown separately in the balance sheet.

The discount on the issue is, in effect, deferred interest, and should accordingly be written off over the period having the use of the money raised by the debentures, unless a sinking fund is created to accumulate the full redemption price, including the discount. Where the debentures are to be redeemed by annual drawings, the discount should be written off by proportionately reducing installments, since each succeeding year has the use of a reducing amount of principal.

Debentures repayable at a premium

These debentures will stand in the balance sheet as a liability at their nominal amount, with a note of the amount at which they are repayable, any discount or premium on issue being treated as described above.

If a sinking fund is raised to provide for repayment, it should include provision for the payment of the premium on redemption. If no sinking fund is created, the premium should be provided for out of profits over the period of the debentures.

Debentures may even be issued at a discount and repayable at a premium.

(213)-DEBENTURES OF A COMPANY

Debentures of a Company

A debenture is a written acknowledgement of a debt by a company, usually under seal and generally containing provision for payment of interest and repayment of capital; a simple or naked debenture carries no charge on assets; a secured debenture carries either a fixed charge on a specific asset or a floating charge an all or some of the assets. All form of loan stock is debentures.

A fixed charge is a mortgage on specific assets, under which the company losses the right to deal with the assets charged, except with the consent of the mortgagee. A floating is not a mortgage at all, since the charge is such that so long as the company continues to carry on its business and observe the terms of the charge, the directors are entitled to deal in any way they please in the ordinary course of business with the assets of the company, and may even make specific charges on property which, subject to the terms of the floating charge given, will have priority to the floating charge. The floating charge is a charge on a class of assets, present and future, which in the ordinary course of business is charging from time to time, and attaches to the priority included therein in priority to the general liabilities of the company. The floating charge hovers over or “floats” with the assets, until some event happens which crystallizes or fixes the charge.
A company may take more than one issue of debentures; issues subsequent to the first may rank on an equal footing with the original issue, or may confer a charge, subject to and following the first, according to whether the original debentures contained clauses allowing or forbidding subsequent on an equal footing issues. Where the debentures carry different priorities, they are usually designated first debentures, second debentures etc-a higher rate of interest usually being payable on those of lower rank to compensate for the lower degree of security.

A company can issue debentures within the limits of its borrowing powers, as set out in its memorandum and/or articles of association. A trading company’s borrowing powers are implied unless there are provisions to the contrary in the memorandum or articles.

Interest at the agreed rate is payable on the debentures whether the company makes profits or not, since the charge given covers both principle and interest. Income tax is deductible from the interest payable.

In liquidation, the debenture holders are entitled to the proceeds of their securities, if any, otherwise they rank equally with the unsecured creditors; if the proceeds of a security are insufficient to repay the debentures, the debenture holders rank as unsecured creditors for the balance still due to them.

The entries in the books of a company for an issue of debentures are similar to those on an issue of shares, installment accounts being debited with the various installments as they become due, and debentures account credited. If debentures are issued to the vendor as part of the consideration for a business acquired by the company, the vendors’ account is debited and the debentures account credited. The appropriate entry must also be made in the register of charges kept by the company.

(212)-RESERVES AND PROVISIONS

Reserves and Provisions

Reserves

The term reserves may include the following:

• Reserves created by means of appropriation from profit and loss account.
  

The reserves referred to below be voluntary reserves, the amounts transferred are at the discretion of the directors. These reserves may include following:

1. General reserve
2. Fixed asset replacement reserve
3. Stock replacement reserve
4. Debenture reserve
   

There is no legal restriction on the use of any of these reserves to pay a dividend to the shareholders. However, the fact that a particular company has any of these reserves implies that the directors wish funds to be kept within the business for a future purpose rather than be distributed as dividend.

• Share premium account
• Revaluation reserve
• Capital redemption reserve
• Merger reserve
• Reserves provided for by the articles of association
  

Provisions

The term is defined by companies act and includes:

• Provision for depreciation or diminution in value of assets-this includes provision for depreciation, stock and doubtful debts. Such provisions are deducted from the asset heading to which they relate.
• Provisions for liabilities or charges-amounts retained as reasonably necessary for the purpose of providing for any liability or loss which is either:

1. Likely to be incurred, or
2. Certain to be incurred but uncertain as to amount or date on which it will arise.
   

This includes provisions for redundancy and reorganization, repairs and maintenance, warranty expenditure and deferred taxation.

(211)-ISSUE OF SHARES

Issue of Shares

Whenever an allotment of shares is made, an entry should be made in the journal, debiting an application and allotment account with the amount payable on application and allotment in respect of the shares so allotted, and crediting share capital account. If more than one class of capital is being issued, separate accounts must be opened in the ledger for each class.

Similar entries must be made debiting the vendor or other persons, and crediting share capital account, in respect of all shares issued for a consideration other than cash.

When calls are made, an entry must be made debiting call account and crediting share capital account with the total amount due in respect of all call.

Shares issued at a premium

A company may issue shares at a premium, for an amount in excess of their nominal value. Such an issue might be made by a successful company which has paid high dividends on its existing capital and where shares, as a result, already stand at a premium on the market. When shares are issued at a premium, whether for cash or otherwise, the premium must be credited to an account called “the share premium account” unless the manager reserve provisions of the companies act. The amount credited to share premium account can only be applied as follows:

1. Subject to the conformation of the court, in a scheme for reduction of capital, as if it were paid-up share capital of the company;
2. In paying up unissued shares of the company to be issued to the members as fully paid bonus shares;
3. In writing off preliminary expenses or the expenses of, or commission paid or discount allowed on, any issue of shares or debentures of the company;
4. In providing for the premium payable on the redemption of the company.
   

The premium is usually payable with the installment due on allotment, and where this is so, the journal entry for allotment must show the amount payable for the premium, which must be credited direct to the share premium account, only the proportion of the amount due representing a payment on account of the nominal value of the shares being credited to share capital account.

(210)-SHARE CAPITAL OF A COMPANY

Share Capital of a Company

The most common class of share capital is ordinary shares which carry votes. In principle a company may have more than one class of shares, including:

• Voting ordinary shares which carry the right to vote on all matters and to participate in surplus profits or surplus assets on liquidation.
• Non-voting ordinary shares which have similar rights as for above except that the ability to vote is restricted.
• Preference shares, provided that there are profits available for distribution.
  

Two further points are relevant:

1. Preference shares are deemed to be cumulative unless they are designated as non-cumulative. Cumulative means that should a company be unable to pay preference dividend in a particular year, the entitlement is carried forward as a memorandum note outside the double entry system. Should available profits arise in a subsequent year, such arrears of preference dividends must be paid in priority to ordinary dividends.
2. Participating preference shares are a special type of share. They may have a prior entitlement to a fixed amount of dividend, and then a further entitlement, once ordinary shareholders have received a particular amount.
   

• Deferred or founders’ shares-such shares carry votes but shareholders are not entitled to dividends until holders of ordinary shares have received a specified dividend. Such shares are fairly rare.

(209)-FINANCIAL STATEMENTS OF COMPANIES

Financial Statements of Companies

Special features of company financial statements include:

• Profit and loss account
  

The profit and loss account will be charged with directors’ remuneration and auditors’ remuneration. If the company has borrowings in the form of loan of debenture stock, the profit and loss account will be charged with interest. Company profits are assessable to corporation tax and the profit and loss account thus includes a charge of tax on profits. Finally, the profit and loss account will show appropriations of profit, for example, dividends paid and proposed.

• Balance sheet
  

The balance sheet will include liabilities for tax and proposed dividends. If may also include long-term liabilities in the form of loan or debentures stock. Finally, the capital section of the balance sheet will include share capital reserves.

Company financial statements to be presented to shareholders are subject to detailed disclosure requirements. The illustration below shows the preparation of accounts in a form suitable for presentation internally.

(208)-DISSOLUTION OF PARTNERSHIPS

Dissolution of Partnerships

Presidential realization and interim distributions

When assets are realized piecemeal, the partners may desire, as soon as all liabilities have been discharged, to withdraw immediately such as is available for decision between them rather than wait until all the assets have been sold. In such circumstances, subject to any contrary agreement between the partners, the interim payments to the partners should be of such amounts that even though the remaining assets prove to be worthless no partner will receive more than the amount to which he is ultimately found to be entitled after being debited with his proper share of the total loss sustained on realization of all assets. To enable this to be done the proceeds of realization of assets must first be applied in repaying to partners any sums necessary to reduce their capitals to amounts which will bear the same proportion to the total capital as those in which profits and losses are shared.

Amalgamation of firms

Where members of two or more partnerships decide to amalgamate, the transaction resolves itself into the dissolution of the existing partnerships and the formation of a new one. For the purposes of the amalgamation, it is probable that the goodwill and other assets of the original firms will be revalued, and the capitals of the respective partners adjusted by reference to the profit or loss arising on such revaluation, before arriving at the amount of capital introduced by each partner into the new firm. Where the capital of the new firm is a fixed amount, to be provided by the partners in specified proportions or sums, it may be necessary, after giving effect to the agreed revaluation of assets, for cash to be withdrawn or paid in by one or more of the partners in order to adjust the capitals to the agreed amounts.

(207)-CONVERSION OF A PARTNERSHIP INTO A LIMITED COMPANY

Conversion of a Partnership into a Limited Company

Frequently a private business is converted into a limited company. The partners give up their partnership stakes in exchange for shares in the company. This conversion is usually seen as a necessary stage of development of the growth of the business. A larger stage may see the conversion of the private company into a public limited company.

Accounting entries

Such a transaction will necessitate the books of the firm being closed, and new books being opened for the company. The following will be the procedure for closing the firms’ books:

1. Open the realization account, and transfer to the debit thereof the book value of the assets taken over by the purchasing company, crediting the various asset accounts.
2. Transfer to the credit of the realization account the liabilities assumed by the company, debiting the respective liability accounts.
3. Debit the purchasing company’s account, and credit realization account with the agreed purchase price of the net assets taken over by the company. (The term net assets mean the assets less the liabilities).
4. The balance on the realization account, after debiting expenses, will represent the profit or loss on realization of the net assets, and will be transferred to the partners’ capital accounts in the proportions in which they share profits and losses.
5. Debit the accounts of the assets received as purchase consideration, and credit the purchasing company’s account.
6. Pay off any liabilities not taken over by the new company, crediting cash and debiting the liability accounts.
7. Distribute between t6he partners the shares, debentures and so on received from the company in the proportions agreed between them, debiting their capital accounts and crediting the accounts of the shares, debentures and so on.
8. Any balances remaining on capital accounts must now be cleared by the withdrawal or payment on of cash.
   

(206)-THE RULE IN GARNER VERSUS MURRAY

The Rule in Garner versus Murray

This is the situation where, on dissolution, a partner, capital account is in debt and he is unable to discharge his indebtedness.

Prior to the decision in Garner versus Murray it was generally supposed that any loss occasioned by one of the partners of a firm being unable to make good a debit balance on his account should be borne by the remaining partners in the proportions in which they shared profits and losses.

In this case, however, it was held that a deficiency of assets occasioned through the default of one of the partners must be distinguished from an ordinary trading loss, and should be regarded as a debt due to the remaining partners individually and not to the firm.

The decision of the case gave rise to considerable controversy. The circumstances were as follows: Garner, Murray and Wilkins were in partnership under a parole agreement by the terms of which capital was to be contributed by them in unequal shares, but profits and losses were to be divided equally. On the dissolution of the partnership, after payment of the creditors and of advances made by two of the partners, there was a deficiency of assets of 635 $, in addition to which Wilkins’ capital account was overdrawn by 263$, which he was unable to pay. There was thus a total deficiency of 898$, and the plaintiff claimed that this should be borne by the solvent partners, Garner and Murray, in their agreed profit and loss ration, via equally. Mr. Justice Joyce held, however, that each of the three partners was liable to make good his share of the 635$ deficiency of assets, after which the available assets should be applied in repaying to each partner what was due to him on account of capital. Since, however, one of the assets was the debt balance on Wilkins’ account, which was valueless, the remaining assets were to be applied in paying to Garner and Murray ratable what was due to them in respect of capital, with the result that Wilkins’ deficiency was borne by them in respect of capital, with the result that Wilkins’ deficiency was borne by them in proportion to their capitals.

(205)-ACCOUNTING FOR CLOSING PARTNERSHIP BOOKS ON DISSOLUTION

Accounting for Closing Partnership Books on Dissolution

Apart from special circumstances, the following outline of the steps necessary to close the books of a partnership when the assets are sold en bloc, may be found useful:

1. Open a realization account, and debit there to the book value of the assets, crediting the various asset accounts. The realization account will also be debited with any expenses of realization, and cash credited.
2. Debit cash and credit realization account with the amount realized on the sale of assets.
3. Pay off the liabilities, crediting cash and debiting sundry creditors. Any discount allowed by creditors on discharging liabilities should be debited to the creditors’ accounts and credited to realization account.
4. The balance of the realization account will be the amount of the profit or loss on realization, which will be divided between the partners in the proportion in which they share profits and losses and transferred to their capital accounts.
5. Pay off partners’ advances as distinct from capital, first setting off any debit balance on the capital account of a partner against his loan account.
6. The balance on the cash book will now be exactly equal to the balances on the capital accounts, provided they are in credit; credit cash and debit the partners’ capital accounts with the amounts paid to them to close their accounts.
   

(204)-BASIC PRINCIPLES FOR DISSOLUTION OF PARENERSHIPS

Basic Principles for Dissolution of Partnerships

Upon the dissolution of a partnership, the partnership act provides that the assets of the firm, including the sums contributed by the partners to make up losses or deficiencies of capital, must be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein.
2. In paying to each partner rateable what is due from the firm to him for advances as distinguished from capital.
3. In paying to each partner the amount due to him in respect of his capital and current account balances.

In the absence of agreement to the contrary, the partnership act provides that the following shall be grounds for the dissolution of a partnership:

1. The expiration of the term for which the partnership was entered into, if a fixed term was agreed upon.
2. The termination of the advantage or undertaking, when a single adventure or undertaking was the purpose of the partnership.
3. When one partner gives notice to the others of his intention to dissolve the firm.
4. The death of a partner.
5. The bankruptcy of a partner.
6. The happening of an event which causes the partnership to become illegal.
7. When a partner allows his share of the partnership to be charged for his separate debt.

(203)-GOODWILL IN PARTNERSHIP ACCOUNTS

Goodwill in Partnership Accounts

From the accountants’ viewpoint, goodwill, in the sense of attracting custom, has little significance unless it has a saleable value. To the accountant, therefore, goodwill may be said to be that elements arising from the reputation, connection or other advantages possessed by a business which enables it to earn grater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business. In considering the return normally to be expected, regard must be had to the nature of business, the risks involved, fair management remuneration and any other relevant circumstances.

The goodwill possessed by a firm may be due, inter Alia, to the following:

• The location of the business premises.
• The nature of the firms’ products or the reputation of its service.
• The possession of favorable contracts, complete or partial monopoly.
• The personal reputation of the partners.
• The possession of efficient and contented employees.
• The possession of trade marks, partners or well known business name.
• The continuance of advertising campaigns.
• The maintenance of the quality of the firms’ product, and development of the business with changing conditions.
• Freedom from legislative restrictions.

Although a firm may possess goodwill, it is not customary to raise an accountant for it in the books expected to the extent that cash or other assets of the firm have been used to pay for it. It follows, therefore, that when goodwill exists and is unrecorded in the books, the capitals of the partners of the firm are under stated to the extent of the value of their respective share of the goodwill.

Even though a goodwill account may at some time have been raised in the books, the goodwill account would not be adjusted to give effect to every variation in its value, and in most cases, therefore, the partners’ capitals are at all times understated or overstated in the books to some extent by their shares of the unrecorded appreciation or depreciation in the value of goodwill.
As the amount by which goodwill is undervalued or overvalued in the books is a profit or loss to be shared by the partners in their agreed profit sharing ratio, any alteration in the proportions in which profits and losses are shared, without first making an adjustment on the book value of goodwill, will result in an advantage to one or more partners and a disadvantage to others.

(202)-PARTNERS' ACCOUNTS AND ALLOCATION OF PROFITS

Partners’ Accounts and Allocation of Profits

Capital and current accounts

The partnership agreement provides for a fixed amount of capital to be contributed by each partner, it is preferable for the amounts therefore to be credited to the respective partners’ capital accounts, and for partners’ drawings, salaries, interests on capital and shares of profits to be dealt with the current account.

This enables a clear distinction to be made in the accounts between fixed capital and not drawn profits.

Partners’ loan accounts

Where a partner makes an advance to the firm as distinct from capital, the amount therefore should be credited to a separate loan account and not to the partners’ capital account.
Interest on a partners’ advance or loan at the agreed rate or, in absence of agreement, at 5% per annul should be credited to his current account and debited to profit and loss account as an expense of the business in arriving at net profit.

Allocation of partnership profits

The formula for allocation of partnership profits between the partners will usually be set out in the partnership agreement. The formula may take account of some or all of the following adjustments:

• Interest on capital
• Interest on drawings
• Partners’’ salaries
• Profit-sharing ratios

Interest on capital

By making notional charge against profits for this expense at a fair commercial rate on the capital employed in a business, it can be seen whether the balance of profit remaining is sufficient to satisfy the continuance of the firm with unlimited liability, since the interest charged may be regarded as approximately the income the partners would have derived from the interest of their capital in securities involving little or no risk. Apart from this, however, where there are two or more partners with unequal capitals, the effect of charging interest on capital is to adjust the rights of the partners as between themselves as regards capital, giving each a reasonable return on his capital before dividing the balance of profit in the agreed proportions.

Interest on drawings

Where that is charged, it is usually calculated at a fixed rate per annul from the date of each drawing to the date the accounts are closed and taken account of in the statement of allocation of net profit in a similar way to interest on capital.

Partners’ salaries

In the absence of agreement no partner is entitled before arriving at the amount of divisible profits to remuneration for his services to the firm.

Where the agreement provides for the payment of salaries to partners, it should be appreciated that such payments, although designated salaries are, like above expenses, merely in the nature of preferential shares of the divisible profit. The amounts such salaries should therefore be taken into account in the statement of allocation of net profit.

(201)-PARTNERSHIP ACCOUNTS

Partnership Accounts

Introduction

Partnership is defined by the partnership act as “the relation which subsists between persons carrying on a business in common with a view of profit”. The participation in profits is not, however, of itself alone conclusive evidence of the existence of a partnership, since the relationship rests upon mutual intention.

As the essence of partnership is mutual agreement, it is describable for the partners to come to some understanding before entering into partnership as to the conditions upon which the business is to be carried on, and as to their respective rights and powers.

Even though a formal agreement is made, this does not preclude subsequent variation where changing circumstances demand it; such variation can always be effected with the consent of all the partners, which may be evidenced by an amending agreement, or inferred from a course of dealing.

Clauses relating to accounting matters in partnership agreement

The general provisions affecting questions of accounts that could be contained in all partnership agreements, apart from any special circumstances, are as follows:

• As to capital; whether each partner should contribute a fixed amount or otherwise.
• As to the division of profits and losses between the partners, including capital profits and losses.
• Whether the capitals are to be fixed, drawings and profits being adjusted on current accounts, or whether they are to be adjusted on the capital accounts.
• Whether interest on capital or on drawings, or both, is to be allowed or charged before arriving at the profits divisible in the agreed proportions, and if so, at what rate.
• Whether current accounts are to bear interest, and if so, at what rate.
• "Whether partners" drawings are to be limited in amount.
• Whether partners are to be allowed remuneration for their services before arriving at divisible profits, and if so, the amounts thereof.
• Those proper accounts shall be prepared at least once a year so that these shall be audited.
• Those accounts when duly signed shall be binding on the partners, but shall be capable of being reopened within a specific period on an error being discovered.
• The method by which the value of goodwill shall be determined in the event of the retirement or death of any of the partners.
• The method of determining the amount due to a decreased partner and the manner in which the liability to his personal representatives is to be settled, for example, by the lump sum payment within a specific period, by installments of certain proportions, and the rate interested to be allowed on outstanding balances.
• In the event of there being any partnership insurance policies, the method of treating the premiums thereon and the division of the policy money.

(200)-INCOME AND EXPENDITURE ACCOUNTS

Income and Expenditure Accounts

An income and expenditure account is the profit and loss account of a non-trading concern. It contains only revenue items, being debited with all expenditure, and credited with all income of a period, weather or not it has actually being paid or received within that period. The final balance of and income and expenditure account represents the excess of income over expenditure, or the excess of expenditure over income, as the case may be, for then period. This balance is similar to the net profit or loss of a trading concern.

Receipts and payments accounts and income and expenditure accounts are used commonly by such non-trading concerns as social clubs, societies for the purpose presenting their financial position to their members. A receipts and payments account is no substitute for an income and expenditure account as the letter is prepared on an accruals basis.

Contrast with receipts and payments accounts

The main differences between the two accounts are:

Receipts and payments cash transactions only, indicates capital payments, balance represents cash in hand, bank balance, or bank overdraft. Income and expenditure includes accruals and prepayments, excludes capital receipts and capital payments, balance represents surplus/deficiency of income over expenditure for a given period.

Basis of preparation

In order to prepare an income and expenditure account Receipts and payments accounts, post all revenue items appearing in the Receipts and payments accounts to the opposite sides of the income and expenditure account, and make adjustments for accruals and prepayments at the beginning and the end of the period.

Such items as subscriptions, entrance fees, income from investments like that. Which have been received in cash and debited to the receipts and payments account, must be credited to the income and expenditure account, whilst expenditure such as rent, wages, repairs like that appearing on the credit side of the receipts and payments account must be debited to the income and expenditure account. Capital items appearing in the receipts and payments account will be posted to the debit or credit, as the case may be, of the relevant asset or liability accounts, and will not affect the income and expenditure account.

The balance sheet of a non-trading concern is prepared in the usual way, and contains particulars of all the assets and liabilities at the date as at which it is made up. The excess of the assets over the liabilities is similar to the capital of a trader, but is usually called the accumulated fund, or generally fund since it is normally made up of the excess of income over expenditure which has been accumulated within the concern.

Separate accounts should be kept for funds raised for special purposes, for example building appeal funds and election funds.

Two problems on the solutions of which accountants are divided are:

1. Should club entrance fees be credited in the income and expenditure account or be shown on the balance sheet of the club as an addition to the accumulated fund? Provided entrance fees are consistently treated, either method is correct; although it can be argued that revenue might be destroyed if there were a large number of entrance fees in any one period, the benefit of which is to be spread over a number of accounting periods.
2. Should club subscriptions in arrears be shown as debtors at the balance sheet date? A large number of club subscriptions in arrears are never received and the balance sheet could be destroyed by a fictitious asset of debtors should club subscriptions in arrears be included on the balance sheet and never received. In practice, subscriptions in arrears are often excluded from the balance sheet on prudence grounds.

(199)-INCOMPLETE RECORDS

Incomplete Records

Incomplete records are intended to signify any accounting records which fall short of complete double entry. There are varying degrees of incompleteness and the procedure to be adopted in order to prepare final accounts must depend upon the nature of the records and data available.
Approach to be adopted

In order to prepare a profit and loss account and a balance sheet, the following procedure is recorded:

Step 1

Construct a statement of the financial position at the beginning of the year. This requires assets and liabilities to be determined.

The values of any fixed assets can be obtained from such details as the trader is able to supply of their cost and the dates upon which they were acquired, provision for depreciation from the date of acquisition to the commencement of the current period being deducted. The trader must provide an estimate of the value of his stock and estimated asset values posted to the debit side. The total of the book debts should be debited to a total debtors account, and the total of the liabilities credited to a total creditors account. The excess of the aggregate of the assets over the liabilities may be taken to represent the amount of traders’ capital at the commencement of the period and should be credited to his capital account.

Step 2

A carefully analysis should be made of the bank statement, and a cash summary prepared. For this purpose, analysis columns should be prepared for each of the principle headings of receipts and payments.

Step 3

Ascertain the amounts of any cash taking which have not been paid into the bank, but have been used by the trader for the payment of business expenses, goods purchased for cash and personal expenses. An estimate should also be obtained of the value of any stock which may have been withdrawn by the trader for his own personal use or for that of his family.

Step 4

On completion of the above analysis, posting will be made as follows:

1. Cash takings to the credit of total debtors account
2. Income from investments to the credit of income from investment account
3. Proceeds of sale assets to the credit of the appropriate asset accounts
4. Other items to the credit of the relevant accounts

If a profit or loss on the sale assets is disclosed, this should be transferred either to profit and loss account or to the proprietors’ capital account.

Step 5

The amount of any cash taking used for business or private purposes should be noted, the appropriate account debited and total debtors account credited.

Step 6

This involves calculating year end adjustments and balances.

A schedule should be compiled of the book debts outstanding, the total of which should be carried down in the total debtors account. The balance of this account will now represent the total sales for the period and should be transferred to the trading account.

Similarly, a schedule should be made of liabilities outstanding to trade and other creditors. The total should be carried down in the total creditors account. The balance of this account will now represent the total purchases for the period and should be transferred to the debit of trading account.

Accruals and prepayments will be carried down as closing balances in the relevant expenses accounts.

Step 7

The whole of the transactions will now be recorded in total in double entry form and it will be possible to extract a trading and profit and loss account and balance sheet in the usual way.

(198)-FIXED ASSETS AND DATABASES

Fixed Assets and Databases

An organization, especially a large one, may possess a large quantity of fixed assets. Before computerization these would have been kept in a manual fixed asset register. A database enables this fixed asset register to be stored in an electronic form. A database file for fixed assets might contain most or all of the following categories of information.

• Code number to give the asset a unique identification in the database
• Type of asset. For example motor car, leasehold premises, for published accounts purposes
• More detailed description of the asset. For example serial number, car registration number, make
• Physical location of the asset. For example address
• Organization location of the asset. For example accounts department
• Person responsible for the asset. For example in the case of a company owned car, the person who use it
• Organization cost of the asset
• Date of purchase
• Depreciation rate and method applied to the asset
• Accumulated depreciation to date
• Net book value of the asset
• Estimated residual value
• Date when the physical existence of the asset was last verified
• Supplier

Obviously, the details kept about the asset would depend on the type of asset it is.
Any kind of computerized fixed asset register record will improve efficiency in accounting for fixed assets because of the ease and speed with which any necessary calculations can be made. Most obvious is the calculation of the depreciation provision which can be an extremely onerous task if it is done monthly and there are frequent acquisitions and disposals and many different depreciation rates in use.

The particular advantage of using a database for the fixed asset function is its flexibility in generating reports for different purposes. Aside from basic cost and net book value information a database with fields such as those listed above in the record of each asset could compile reports analyzing assets according to location say, or by manufacturer. This information could be used to help compare the performance of different divisions, perhaps, or to assess the useful life of assets supplied by different manufactures. There may be as many more possibilities as there are permutations of individual pieces of data.

Using spread sheets

A spreadsheet is essentially an electronic piece of paper divided into rows and columns with a built in pencil, eraser and calculator. It provides an easy way of performing numerical calculations.

The intersection of each column and row of a spreadsheet is referred to as a cell. A cell can contain text, numbers of formulate. Use of a formula means that the cell which contains the formula will display the results of a calculation based on data in other cells. If the numbers in those other cells change, the result displayed in formula cell will also change accordingly. With this facility, a spreadsheet is used to create financial models.

(197)-DATABASES

Databases

A database may be described as a “pool” of data, which can be used by any number of applications. Its use is not restricting to the accounts department. A stricter definition is provided in the computer terminology of the CIMA.

“Frequently a much abused term, in its strict sense a database is a file of data structured in such a way that it may serve a number of applications without its structure being dictated by anyone of those applications. The idea is that programs are written around the database rather than files being structured to meet the needs of specific programs. The term is also rather loosely applied to simple file management software”.

The software that runs the database is called the database management system (DBMS). The CIMA’s definition is as follows.

“Technically a database management system is a system which uses a database philosophy for the storage of information in practice this term is often used to describe any system which enables the definition, storage and retrieval of information from discrete files written a system. Thus, many simple file can be handling systems are frequently referred to as database system.












Note the following from the diagram.

• Data is input, and the DBMS software organizers it into the database if you like you can think of the database as a vast library of files and records, waiting to be used.
• Various application programs are “plugged into” the DBMS software so that they can use the database, or the same application used by different departments can all use the database.
• As there is only one pool of data, there is no need for different departments to keep many different files with duplicated information.

Objective of a data base

The main virtues of a database are as follow.

• There is common data for all users to share.
• The extra effort of keeping duplicate files in different department is avoided.
• Conflicts between departments who use inconsistent data are avoided.

A database should have four major objectives.

1. It should be shared.
2. The integrity of the database must be preserved.
3. The database system should provide for the needs of different users.
4. The database should be capable of evolving, both in the short term and in the longer term.

(196)-NOMINAL LEDGER IN COMPUTERIZED SYSTEM

Nominal Ledger in Computerized System

The nominal ledger or general ledger is an accounting record which summarizes the financial affairs of a business. It is the nucleus of an accounting system. It contains details of asset, liabilities and capital, income and expenditure and so profit or loss. It consists of a large number of different accounts, each account having its own purpose or “name” and identity or code.

A nominal ledger will consist of a large number of coded accounts. A business will, of course, choose its own codes for its nominal ledger accounts.

It is important that a computerized nominal ledger works in exactly the same way as a manual nominal ledger, although there are some differences in terminology. For instance, in a manual system, the sales and debtors accounts were posted from the sales day book. But in a computerized system, the sales day book is automatically produced as part of the “sales ledger module”. So it may sound as if you are posting directly from the sales ledger, but in fact the day book is part of a computerized sales ledger.

Inputs to the nominal ledger

Inputs depend on whether the accounting system is integrated or not.

• If the system is integrated, then as soon as data is put into the sales ledger module (or anywhere else for that matter), the relevant nominal ledger accounts are updated. There is nothing more for the system user to do.
• If the system is not integrated than the output from the sales ledger module (and anywhere else) has to be input into the nominal ledger. This is done by using journal entries.
• Regardless of whether the system is integrated or not, the actual data needed by the nominal ledger package to be able to update the ledger accounts includes:
  1. Data
  2. Description
  3. Amount
  4. Account code

Outputs from the nominal ledger

The main outputs apart from listing of individual nominal ledger accounts are:

• The trial balance
• Financial statements

(195)-PURCHASED LEDGER IN COMPUTERIZED SYSTEM

Purchase Ledger in Computerized System

A computerized purchase ledger will certainly be expected to keep the purchase ledger up-to-date, and also it should be able to output various reports requested by the user. In fact, a computerized purchase ledger is much the same as a computerized sales ledger; expect that it is a sort of mirror image as it deals with purchases rather than sales.

Input to a purchase ledger system

Bearing in mind what we expect to see held a purchase ledger, typically data input into a purchase ledger system is:

• Details of purchase recorded on invoices
• Details of returns to suppliers for which credit notes are received
• Details of payments to suppliers
• Adjustments

Process in a purchase ledger system

The primary action in updating the purchase ledger is adjusting the amounts outstanding on the supplier accounts. These amounts will represent money owed to the suppliers. This processing is identical to updating the accounts in the sales ledger, expect that the sales ledger balances are debts (debtors) and the purchase ledger balances are credits (creditors). Again, the option item approach is the best.

Outputs from a purchase ledger system

Typically outputs in a computerized purchase ledger are as follows.

• Lists of transactions posted – produced every time the system is run.
• An analysis of expenditure of nominal ledger purposes. This may be produced every time the system is run or at the end of each month.
• List of creditor’s balances together with reconciliation between the total balances brought forward, the transactions for the month and the total balance carried forward.
• Copies of creditors’ accounts. This may show merely the balance b/f, current transactions and the balance c/f. If complete details of all unsettled items are given, the ledger is known as an open-ended ledger.
• Any purchase ledger system can be used to produce details of payments to be made.
• Other special reports may be produced for, costing purposes, updating records about fixed assets, comparison with budget, aged creditors list.