In: Accounting
QUESTION 1
Kasabrunu Enterprise is a business operating in the second-hand
clothing in Kwadaso. Mr.
Bruni the owner of Kasabrunu Enterprise (KE) employed Mr. Ojidomi a
BSc. Accounting
graduate as the Accountant. Business is booming and KE is expected
to be in operation for a
long time. Mr. Odjidomi has been with the business for 5 years and
has assured Mr. Bruni that
profits declared will not be deceptive since the same method will
be continuously used for the
accounting treatment of similar items until Mr. Bruni decides to
change from dealing in second
hand clothing to the purchase and sale of spare parts which they
discussed. As part of the policy
adopted by the business, the Accountant records only transactions
that can be valued in
monetary terms in the books of account and produces financial
information at regular period
for the perusal of Mr. Bruni.
On reaching home, Sefakor Ojidomi, the daughter of Mr. Ojidomi who
is pursuing an
accounting programme in Owusuwusu College of Accountancy asked his
father to guide her
with an assignment.
Sikadanka, the Chairman and CEO of Defenders Ltd recently
confronted the Chief Accountant
of the company over the way and manner the financial statements
were presented for the 2019
financial year. The following points are summaries of the CEO’s
reservations about the
financial statements:
a. He argued that the values of the company’s assets be shown at
current market values
since these values will provide a better view of the company’s
value. The Chief
Accountant is still insisting that the assets should be stated at
original cost.
b. He expressed shock when the financial statements did not show a
value for the
company’s efficient staff. He argued that the company’s beautiful
and handsome sales
personnel are valuable assets used to attract customers and
therefore insisted that this
“power of attraction” should be recognised in the books of accounts
and reflected on
the face of the financial statement.
c. He was worried when a potential sale of millions of Ghana cedis
to a certain buyer from
whom purchase orders have been received have not been recognized in
the books of
accounts as sales. The Chief Accountant argued that these potential
customers have
only been sent pro-forma invoices and so are not obliged to pay the
company.
d. The CEO recently bought a saloon car for his son out of company
funds. The Chief
Accountant recorded this on a current account for the CEO. This
resulted in an intense
argument. The CEO threatened to dismiss the Chief Accountant should
he refuse to
recognize the purchase of the saloon car as a transaction of the
company.
e. The CEO insisted that the value of expired inventory should be
maintained in the books
of accounts and not written off.
Sefakor presented the assignment and scored a 100% for the 1st
time.
On the 27th of March, 2019, Mr. Ogboro, the purchasing officer of
KE prepared documents to
purchase on credit 1,500 bales of second-hand clothing from Osimeyo
and brothers (OB.). O.B
delivered the goods to KE 4 (four) days after the order was placed
with all appropriate
documents. KE only deals in male second-hand clothing but included
in the goods delivered
were 15 bales of ladies second-hand clothing which Mr. Ogboro
returned to OB as it did not
meet the description provided. Customers purchased the goods either
on credit or outright
payment with cash or cheque. Documents showing evidence of payment
were given to these customers. All customers who purchased on
credit paid through their bankers by transfers made
directly to the bank accounts of KE. KE is later advised
accordingly by her bankers.
Mr. Odjidomi prepares bank reconciliation statements quarterly. He
made a request on the 15th
of March 2019 for a bank statement from Obidibi commercial bank.
Upon receipt of the bank
statement, he compared the balance with that of the Cash book and
it did not agree. The
Accountant’s friend, Oyeni Bawabawat, an accounts officer at
Oshikishiki Enterprise requested
for reasons for the disagreement. He confessed his inability to
grasp these reasons during his
studies. After an in-depth explanation, Mr. Odjidomi, the
Accountant asked his friend to assist
him prepare a bank reconciliation statement as he had to urgently
attend an important meeting.
The Accountant provided his friend with the information
below:
The cash book, bank column of Kasabrunu Enterprise showed a credit
balance of
GHS578,000 while the bank statement for the period showed a debit
balance of GH¢338,000
on 31st March,2019. A thorough investigation revealed the
following:
i. Cheques drawn amounting to GHS195,0000 had not been presented to
the bank for
payment.
ii. A cash deposit into the bank of GHS97,800 was recorded as
GHS79,800 in the cash
book.
iii. Bank charges of GHS10,900 and standing order payment of
GHS12,100 relating to
telephone bills entered on the bank statement had not been recorded
in the cash book.
iv. A cheque of GHS245,000 drawn by the firm had been charged by
the bank in error to
another customer’s account.
v. A dividend of GHS15,000 paid directly to the bank had not been
entered in the cash
book.
vi. A cheque for GHS20,000 paid into bank had been dishonoured and
shown as such by
the bank but no entry of the dishonour had been made in the cash
book.
vii. The following cheques and cash deposits entered in the cash
book and paid to the
bank have not been credited by the bank: cash deposits GHS76,500;
cheques receipts:
Maame Dakona GH¢54,500; Ntekuma Ananse GHS34,000.
viii. A cheque drawn for GHS32,000 had been entered in the cash
book in the error
GHS23,000.
ix. A cheque for GHS16,000 drawn by another customer of the same
name had been
charged to the firm’s bank account in error.
After adjusting the cash book balance, Oyeni Bawabawat prepared the
bank reconciliation
statement. After waiting for 3 hours, he was informed that Mr.
Odjidomi will be in the
meeting for 6 hours. Oyeni then left for his office.
Required:
A
i) Identify and explain two (2) accounting policies adopted by
Kasabrunu Enterprise (1mark)
ii) State the accounting concept in each of the CEO’s reservation
in Sefakor’s assignment.
Explain your reason for choosing the concept.
NB: Present your answer in a tabular form as illustrated
below
Concept/Principle Definition/Explanation Reason
Identify and explain the use of three (3) source documents in the
transaction to purchase
and sell 1,500 bales of second-hand clothing.
C. i) State and explain six (6) reasons Mr. Odjidomi will give to
his friend for the
disagreement in the cash book and bank statement balances.
i) Imagine you are Oyeni Bawabawat. Show the appropriate
adjustments to be made in
the cash book.
ii) Prepare a Bank Reconciliation Statement for Mr.
Odjidomi.
A(i)- Money Measurement Concept: The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money.
Accounting Period Concept: Every organization, according to its needs, chooses a specific period of time to complete an accounting cycle.So the indefinite life of an organization is divided into shorter, generally equal time period. This facilitates a comparison of performances.
A(ii)-
Concept | definition | Explanations |
(a) Cost Concept |
This accounting concept states that all assets of the firm are entered into the books of account at their purchase price (cost of acquisition + transport + installation etc). In the subsequent years to, the price remains the same (minus depreciation charged). The market price of the asset is not taken into consideration. | Hence, The CEO's arguement is void-ab-initio because it's not in compliance of Accounting Concept. |
(b) Money Measurement Concept |
This accounting concept states that only financial transactions will find a place in accounting. So only those business activities that can be expressed in monetary terms will be recorded in accounting. Any other transaction, no matter how significant, will not find a place in the financial accounts. | Hence, Human Resource Capital of a firm can't be measured in monetary terms.for example, if the company underwent a major management overhaul this would have no effect on the accounting records as well. This concept is actually one of the major drawbacks of accounting. |
(c) Revenue recognition Concept /
Realisation Concept |
The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash (or Equivalent Accomodation Amount e.g. in the form of Purchases made here) is collected. | Now revenue is the cash inflow for a business arising from the sale of goods or services. And we assume this revenue as realized only when it legally arises to be received. So in simpler terms, the profit earned will be recorded when it is actually earned. |
(d) Matching Concept |
The matching accounting concept follows the realization concept. First, the revenue is recognized and then we match the costs associated with the revenue. So costs are matched with revenue, the reverse would be an incorrect system. | here, cost of purchasing Saloon car by CEO for his personal purpose does'nt match with any corresponding Revenue in the firm. hence, to be charged as drawings. |
(e)
Conservatism Concept |
This accounting concept promotes prudence in accounting. It states that profit should not be included until it is realized. However, losses even those not realized but with the remote possibility of occurring should be included in the financial statements. So all losses are recognized – those that have occurred or are even likely to occur. But only realized profits are recognized. | Expired stocks are of no use to firm anymore.In a way or the other They bear zero realizable Value in Market.so, Inventories are valued at Cost or NRV whichever is lower.as such, expired stocks does'nt hold any value except in the form of scraps.so, have to be written off for the purpose of better transparency of Financial Statements. |
B. 3 Source Documents could possibly be the following ones:
Previous Invoices | these are used normally as concrete proof. |
Purchase Requisitions | showing the estimations of required raw materials for upcoming Batches. |
Computer-generated receipts for previous Orders | They can be most reliable than anything to prepare the budget for upcoming quarters. |
C(ii):
Aforementioned Values are merely Adjustments to the Corrected Cash book balance.