AFIN102: FINANCIAL ACCOUNTING

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 AFIN102: FINANCIAL ACCOUNTING

MANUFACTURING ACCOUNTS
MANUFACTURING ACCOUNTS
Learning outcome:
• Calculating the prime cost and production cost of goods
manufactured.
• Preparing the manufacturing accounts, and appropriate trading
and profit and loss accounts.
•
• Adjusting the manufacturing account in respect of work in
progress.
MANUFACTURING ACCOUNTS
• For companies that manufacture goods, a manufacturing account
is prepared in addition to the trading and profit and loss accounts.
• A manufacturing account Produced for internal use to calculate
production costs.
• Instead of a figure for purchases (of finished goods), the trading
account will contain the cost of manufacturing the goods that were
manufactured during the period.
MANUFACTURING ACCOUNTS
• The production costs calculated in the manufacturing account is
then used in the trading account to calculate cost of sales.
 15.1 Template
•A manufacturing account consists of the following:
Director materials XXXX Direct labour XXXX
Direct Expenses XXXX Prime Cost XXXX
Indirect manufacturing costs XXXX
Current year production costs XXXX
Opening work in progress XXXX
Closing work in Progress (XXXX) Total
Production cost of finished goods XXXX
MANUFACTURING ACCOUNTS
• Detailed template provided in MS Word Document.

• Class Exercise 16 (Exercise 16 on the Portal)

AFIN102: FINANCIAL ACCOUNTING

PARTNERSHIP ACCOUNTS
 PARTNERSHIP ACCOUNTS
Learning outcome:
• Define the circumstances creating a partnership.
• Describe the main features of a partnership agreement.
• Draw up the financial statements for a partnership.
• A partnership entity is very similar to a sole trader entity except
that there must be at least two owners of the business.
• Partnerships often grow out of a sole trader entity, perhaps
because more money needs to be put into the business or
because the sole trader needs some help.
 PARTNERSHIP ACCOUNTS
• But it is also quite common for a new business to begin as a
partnership, e.g. when some friends get together to start a
business.
• The partners should agree among themselves how much money
they will each put into the business, what jobs they will do, how
many hours they will work, and how the profits and losses will be
shared.
• In the absence of any agreement (whether formal or informal), the
courts will deduce from the way the partners having been
conducting business what the agreement was.
 PARTNERSHIP ACCOUNTS
• Examples include an accountancy practice, a medical practice
and legal practice.
• Contents of partnership agreements.
1 The capital to be contributed by each partner.
2 The ratio in which profits (or losses) are to be shared.
3 The rate of interest, if any, to be paid on capital before the profits
are shared.
4 The rate of interest, if any, to be charged on partners’ drawings.
5 Salaries to be paid to partners.
6 Arrangements for the admission of new partners.
7 Procedures to be carried out when a partner retires or dies
 PARTNERSHIP ACCOUNTS
• Capital contributions
• Partners need not contribute equal amounts of capital.
• What matters is how much capital each partner agrees to
contribute.
• It is not unusual for partners to increase the amount of capital they
have invested in the partnership.
• Profit (or loss) sharing ratios
• Partners can agree to share profits/losses in any ratio or any way
that they may wish.
• Interest on capital
 PARTNERSHIP ACCOUNTS
• May be provided at a set percentage to reflect the differing
amounts of capital invested.
• Partnership salaries
• One partner may have more responsibility or tasks than the others
and may be given a partnership salary which is deducted before
sharing the balance of profits.
• Performance-related payments to partners
• Partners may agree that commission or performance-related
bonuses be payable to some or all the partners linked to their
 PARTNERSHIP ACCOUNTS
individual performance. As with salaries, these would be deducted
before sharing the balance of profits.
• The financial statements
• The income statement for a partnership is exactly the same as
that for a sole trader.
• An extra statement is required in which the profit from the income
statement is shared between the partners.
• This is referred to as the Appropriation Account.
• Thereafter, current accounts for the partners need to be prepared.
• The financial statements
 PARTNERSHIP ACCOUNTS
• A and B have been in partnership for one year sharing profits and
losses in the ratio of A: 3/5, B: 2/5.
• They are entitled to 5 per cent per annum interest on capitals, A
having K20,000 capital and B K60,000.
• B is to have a salary of K15,000.
• They charge interest on drawings, A being charged K500 and B
K1,000.
• The net profit, before any distributions to the partners, amounted
to K50,000 for the year ended 31 December 2018
 PARTNERSHIP ACCOUNTS
Solution: Appropriation Account
Net profit (from the Profit and Loss Account) 50,000
Add: Interest on drawings: Partner A 500
Partner B 1,000
1,500
51,500
Less: Salary: Partner B 15,000
Less: Interest on capital : Partner A 1,000
Partner B 3,000
4,000
(19,000)
 32,500
Balance of profits shared: Partner A 3/5 19,500
Partner B 2/5 13,000
32,500
PARTNERSHIP ACCOUNTS
Current Accounts
Partner A
Dr Cr
31/12 Drawings 15,000 31/12 Balance b/f - 31/12
Interest o drawings 500 31/12 Interest on capital 1,000
31/12 Balance c/d 5,000 31/12 Share of profits 19,500
20,500 20,500
 Partner B
31/12 Drawings 26,000 31/12 Balance b/f - 31/12
Interest o drawings 1,000 31/12 Salary 15,000
31/12 Balance c/d 4,000 31/12 Interest on capital 3,000
______ 31/12 Share of profits 13,000
31,000 31,000
 PARTNERSHIP ACCOUNTS
Capital Accounts
Partner A

Dr Cr
01/01 Bank 20,000

Partner B

01/01 Bank 60,000

 PARTNERSHIP ACCOUNTS
The Capital Side in the Balance Sheet
Capital Accounts: Partner A 20,000
Partner B 60,000
80,000
Current Accounts: Partner A 5,000
Partner B 4,000
9,000
89,000
Class Exercise
• Class Exercise
 AFIN102: FINANCIAL ACCOUNTING
LIMITED LIABILITY COMPANIES
INTRODUCTION
•Companies are incorporated to take advantage of
‘limited liability’ for their owners (shareholders).
 •This means that, while sole traders and partnerships are
personally responsible for the amounts owed by their
business, the shareholders of a limited liability company
are only responsible for the amount to be paid for their
shares.
INTRODUCTION
• In law sole traders and partnerships are not separate
entities from their owners.
•However, a limited liability company is legally a separate
entity from its owners and it can issue contracts in the
company’s name.
•For accounting purposes, all three entities are treated as
separate from their owners.
•This is called the separation of business entity concept.
 19.1 LIMITED LAIBILITY COMPANIES
• There are two classes of company, the public company
and the private companies.
•Public companies are usually addressed by the
abbreviation Plc whilst private companies are addressed at
Ltd, e.g. Zambeef Products Plc and Trade Kings Ltd.
•A Plc is listed on the stock exchange and can, but doesn’t
have to offer its shares for sale on the Stock Exchange.
•It is through the Lusaka Stock Exchange (LuSE) that a
large ownership base can be established.
 19.1 LIMITED LAIBILITY COMPANIES
• A limited company is said to possess a ‘separate legal
identity’ from that of its shareholders.
•This concept is often referred to as the veil of
incorporation.
•Shareholders of a limited company obtain their reward in
the form of a share of the profits, known as a dividend.
• The directors consider the amount of profits and decide on
the amount of profits which are placed to reserves.
 19.1 LIMITED LAIBILITY COMPANIES
•Out of the profits remaining the directors then propose the
payment of a certain amount of dividend.
•There are two main types of shares:
•1 Preference shares. Holders of these shares get an
agreed percentage rate of dividend before the ordinary
shareholders receive anything.
•2 Ordinary shares. Holders of these shares receive the
remainder of the total profits available for dividends. There
 19.1 LIMITED LAIBILITY COMPANIES
is no upper limit to the amounts of dividends they can
receive.
•The term ‘share capital’ can have any of the following
meanings:
1 Authorised share capital. Sometimes known as
registered capital or nominal capital. This is the total of the
share capital which the company is allowed to issue to
shareholders.
 19.1 LIMITED LAIBILITY COMPANIES
2 Issued share capital. This is the total of the share capital
actually issued to shareholders.
3 Called-up capital. Where only part of the amount payable
on each issued share has been asked for, the total amount
asked for on all the issued shares is known as the called-up
capital.
4 Uncalled capital. This is the total amount which is to be
received in future relating to issued share capital, but which
has not yet been asked for.
 19.1 LIMITED LAIBILITY COMPANIES
5 Calls in arrears. The total amount for which payment has
been asked for (i.e. ‘called for’), but has not yet been paid
by shareholders.
6 Paid-up capital. This is the total of the amount of share
capital which has been paid for by shareholders.
Debentures
•The term debenture is used when a limited company
receives money on loan, and certificates called debenture
certificates are issued to the lender.
 19.1 LIMITED LAIBILITY COMPANIES
•Interest will be paid to the holder, the rate of interest being
shown on the certificate. They are not always called
debentures; they are often known as loan stock or as loan
capital.
• A debenture may be either:
1 Redeemable, i.e. repayable at or by a particular date, or
2 Irredeemable, normally repayable only when the
company is officially terminated by its going into liquidation.
(Also sometimes referred to as ‘perpetual’ debentures.)
 19.1 LIMITED LAIBILITY COMPANIES
•Debenture interest The interest payable for the use of the
money is an expense of the company, and is payable
whether profits are made or not.
•Directors’ remuneration - As directors exist only in
companies, this type of expense is found only in company
accounts.
•Directors are legally employees of the company, appointed
by the shareholders.
•Their remuneration is charged to the profit and loss
account.
 19.1 LIMITED LAIBILITY COMPANIES
•Goodwill – only applies to companies, it does not apply to
partnerships or sole traders.
 19 Class Exercise

•Class Exercise – Limited Liability Companies

 AFIN102: FINANCIAL ACCOUNTING
FINANCIAL REPORTS FOR OTHER TYPES OF
ENTITIES
AFIN102: FINANCIAL ACCOUNTING
UNIT 18
NOT FOR PROFIT ENTITIES, RECEIPTS
AND PAYMENTS ACCOUNTS & PUBLIC
SECTOR ACCOUNTS
18.1 NOT FOR PROFIT ENTITIES
• As the term suggests, not-for-profit entities are in business
solely to provide some sort of service without necessarily
needing to or wanting to make a profit.
• Examples include charities such as ‘Save the Children’,
professional bodies such Zambia Institute of Chartered
Accountants (ZICA), music societies and sports organizations.
• It is possible that such bodies can also engaged in some sort
of trading (or even manufacturing) but the profit motivation
would not be their main consideration.
18.1 NOT FOR PROFIT ENTITIES
•Such organisations prepare financial statements called
income and expenditure account, in place of a profit and
loss account, but the two are identical.
•The main difference is that the balance on the income and
expenditure account is described as the excess of income
over expenditure (or expenditure over income) instead of
profit (or loss).
18.1 NOT FOR PROFIT ENTITIES
•If not-for-profit entities have some manufacturing or trading
activities, they will prepare manufacturing and trading
accounts.
•The balance on the manufacturing account would be
transferred to the trading account and the balance on the
trading account (i.e. the gross profit) to an income and
expenditure account.
18.1 NOT FOR PROFIT ENTITIES
•Just as a sole trader has a capital account, A non-
profitoriented organisation has an accumulated fund.
•In effect, it is the same as a capital account, as it is the
difference between the assets and liabilities. That is:
Accumulated Fund = Assets – Liabilities
•Which will appear in the balance sheet.
18.2 RECEIPTS AND PAYMENT ACCOUNTS
•Receipts and payments accounts are a summary of the
Cash Book for the period.
•For an organisation with no assets (other than cash) and
no liabilities, a summary of the Cash Book reveals
everything about what has happened financially during a
period.
18.3 PUBLIC SECTOR (GOVERNMENT ENTITIES)
•Another important set of entity accounts relate to the
government sector of the economy.
•Such accounts may generally be regarded as part of
the not-for-profit service sector.
•There are three broad categories: central government
accounts, local government accounts, and
quasigovernmental accounts.
18.3 PUBLIC SECTOR (GOVERNMENT ENTITIES)
•In Zambia, central government still prepares financial
statements using receipts and payments accounts system.
•Attempts are still being made to migrate to accrual
accounting using the International Public Sector
Accounting Standards (IPSAS).
•IPSAS are alternative accountings standard to IFRS.
18.4 Class Exercise

•Class Exercise – Income and Expenditure Accounts

 End
•End