CE Principles of Accountancy-A Summary

Part 3-Control Accounts & Sectional Balancing of Ledgers; Simple Interpretation of financial statement & accounting ratios; Basic Accounting Concepts

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Accounting ratios: implications/meanings------comments on 2 co.&same period/1 co.& diff. Period

Table: The Accounting Ratios & Implications (by their value)

Ratios/value	High/increasing (implications)	Low/decreasing (implications)
1.Liquidity ratios: Current ratios/acid test ratios (N.B. the acid test ratios more reliable as it exclude stock as asset)	Easier to pay its Current Liabilities on time (+ve)	Difficult to pay its Current Liabilities on time (-ve)
2. Management Efficiency Ratios a)stockturn (Stock turnover rate ) (times)	Goods can be sell more easily (+ve)	Goods starting to pile up/business slow down (-ve)
b) Debtor/sales ratio (debtors collection period)	Depends Factors can be average ratio of the ind.;(i.e.higher/lower than the othersà Healthy/not)	Depends Factors can be average ratio of the ind.;(i.e.higher/lower than the othersà Healthy/not)
c) Creditor/purchases ratio (creditor collection period)	Depends Factors can be average ratio of the ind. (i.e.higher/lower than the othersà Healthy/not)	Depends Factors can be average ratio of the ind. (i.e. higher/lower than the othersà Healthy/not)
d) Stock turnover ratio (days)	Goods starting to pile up (+ve)	Goods can be sell more easily (-ve)
3.Profitability ratios: a) Return on owners’ equity (ROOE)(%)	Better use of its capital (achieving higher net profit for every $100 employed)(+ve)	Worse use of its capital (achieving lower net profit for every $100 employed)(-ve)
b) Return on capital employed (ROCE)(%)	Better use of its capital (achieving higher net profit for every $100 employed)(+ve)	Worse use of its capital (achieving lower net profit for every $100 employed)(-ve)
c) Gross profit (%)	Higher return (+ve) (E.g. If 2 co. have the same net profit, but one have higher gross profit, it may mean higher operating expenses. (-ve)àbe flexible! )	Lower return (since it is calculation of profit in terms of % of salesàlower%àlower profit with higher amt of goods)(-ve)
d) Net profit (%)	Higher return (+ve)	Lower return (-ve)
4.Investment ratios a)Price/earnings ratio(P/E)	High demand for shares (+ve)	Low demand for shares (-ve)
b) Earnings per share (dollars)	High profit/loss attribute to each ordinary shares	Low profit/loss attribute to each ordinary shares
c) Dividend cover (times)	Dividend highly covered by profits made	Dividend lowly covered by profits made

Ratios/value	High/increasing (implications)	Low/decreasing (implications)
5.Capital structure ratios a) Capital gearing ratio	More risky (since even no profit still have to pay interest);ordinary shareholders: high return in good times &little left in bad times (-ve)	Less risky ;ordinary shareholders: low return in good times & better in bad times (+ve)
b) Interest coverage	More able to cover its interest payment (+ve)	Less able to cover its interest payment(-ve)
c) Debt ratio	Higher the risk of liquidation (-ve)	Lower the risk of liquidation (+ve)
d) Equity ratio	The better the ability of the firm to meet its external obligations (+ve)	The worse the ability of the firm to meet its external obligations (-ve)

Ledger-An Illustration

1. Transactions for the month of September 19XX:

(I) Re Credit Sales

Sept. 10 Credit sales to A Co. $100

Sept. 25 Credit sales to B Co.

40 units of goods $5each, less 25% trade discount

Net amount $150

(II) Re Credit Purchases

Sept.7 Credit sales to C Co. $80

Sept. 23 Credit sales to D Co.

30 units of goods $10each, less 25 % trade discount

Net amount $240

(III) Re Goods Returned from Customers

Sept. 11 Goods returned from A Co. $20

Sept. 28 Goods returned from B Co.

4 units of goods per sales on Sept. 25

(i.e. $5 each with 25 % trade discount)

Net amount $15

(IV) Re Goods Returned to Suppliers

Sept. 9 Goods returned to C Co. $10

Sept. 26 Goods returned to D Co.

3 units of goods per purchased on Sept. 23

(i.e. $10 each with 20 % trade discount)

Net amount $24

(V) Transactions not passing through Special Journals

Sept. 8 Bought 2 typewriters on credit from E Co. $1,000

Sept. 10 Returned 1 typewriter to E Co. $500

Sept. 21 Corrected the error:

Motor expenses had been posted in $100

motor vehicle account

Sales Journal Page 9

Date	Invoice No.	Particular	Folio	Amount
19XX				$
Sept.10	17551	A. Co	SL6	100
Sept.25	17552	B. Co	SL14	150
	Total sales	of the month		250

Purchases Journal Page 9

Date	Invoice No.	Particular	Folio	Amount
19XX				$
Sept.7	A109	C. Co	PL16	80
Sept.23	10871	D. Co	PL22	240
	Total purchases	of the month		320

Return Inwards Journal Page 9

Date	Invoice No.	Particular	Folio	Amount
19XX				$
Sept.11	9/1	A. Co	SL6	20
Sept.28	9/2	B. Co	SL14	15
	Total return inwards	of the month		35

Return Outwards Journal Page 9

Date	Invoice No.	Particular	Folio	Amount
19XX				$
Sept.91	9/11	C. Co	PL15	10
Sept.26	9/12	D. Co	PL22	24
	Total return outwards	of the month		34

SALES LEDGER

A Co. Page 6

19XX $	19XX $
Sept. 10 Sales SJ9 100	Sept. 11 Returns Inwards RIJ 9 20
	Sept. 20 Bank & Discount CB 9 80

B Co. Page 14

19XX $	19XX $
Sept. 25 Sales SJ 9 150	Sept. 28 Returns Inwards RIJ 9 15

PURCHASES LEDGER

C Co. Page 5

19XX $	19XX $
Sept. 9 Returns Outwards ROJ 9 10	Sept. 7 Purchases PJ 9 80

D Co. Page 22

19XX $	19XX $
Sept. 26 Returns Outwards ROJ 9 24	Sept. 23 Purchases PJ9 240

GENERAL LEDGER

Sales Page 10

	19XX $
	Sept. 30 Total sales for Sept SJ9 250

Purchases Page 15

19XX $

Sept. 30 Total Purchases

for Sept PJ9 320

Returns Inwards Page 21

19XX $
Sept. 30 Total RI for Sept RIJ9 35

Returns Outwards Page 30

	19XX $
	Sept. 30 Total RO for Sept ROJ9 34

Journal Page 9

Date	Particular	Folio	Debit	Credit
8/9	Office Equipment E.Co Bought 2 typewriters from E. Co. @$500	GL18 GL27	1000	1000
10/9	E. Co Office Equipment Returned one typewriter to E. Co	GL27 GL18	500	500
21/9	Motor Expense Motor Vehicle Correction of Error		100	100

GENERAL LEDGER

Office Equipment Page 18

19XX $	19XX $
Sept. 8 E Co. GJ 9 1,000	Sept. 10 E. Co. GL27 500

E Co. (Sundry Creditor) Page 27

19XX $	19XX $
Sept. 10 Office Equipment GL18 500	Sept. 8 Office Equipment GJ 9 1,000

2. Illustration – Three Column Cash Book

19-4

May 1 Balance brought down from April: $

Cash Balance 290

Bank Balance 6,540

Debtors Account:

A. Co. 1,200

B. Co. 2,800

Creditor Accounts:

D. Co. 600

E. Co 4,400

May 2 A. Co. paid us by cheque, having deducted 2.5%

cash discount $30 1,170

We withdrew $1,000 cash from the bank for

business use 1,000

May 16 B. Co. paid his account by cheque, deducting 2.5%

Cash discount $70 2,730

May 25 We paid wages in cash 920

May 29 We paid D. Co. by cheque less 5% cash discount $30 570

May 30 We paid E. Co. by cheque less 2.5%

cash discount $110 4,290

Cash Page 64
Date	Vocher No.	Particulars	Folio	Discounts Allowed	Cash	Bank	Date	Vocher No.	Particulars	Folio	Discounts Received	Cash	Bank
19-4					$	$	19-4					$	$
1/5		Bal b/d			290	6540	2/5		Cash	C			1000
2/5		A. Co.	SL13	30		1170	25/5		Wages	GL77		920
2/5		Bank	C		1000		29/5		D. Co.	PL15	30		570
16/5		B. CO.	SL84	70		2730	30/5		E. Co.	PL98	110		4290
									Bal c/d			370	4580

				100	1290	10440					140	1290	10440

1/6		Bal b/d			370	4580