According to IAS 8 (revised) states that the correction of an error that relates to prior periods should be shown as an adjustment in the opening balance of retained earnings. As a result, in 2014 accounts (ignoring all tax implications):

Dr retained earnings brought forward      GH¢600

Cr Accumulated depreciation                   GH¢600

It is important to notice that this will have no impact on the current income statement but is shown as a prior period adjustment in the statement of changes in equity:

Building has been depreciated by 20% over 10 years (01.01.06 – 31.12.15) so annual rate of depreciation has been 2% i.e. 20% / 10 years as asset has been depreciated evenly since acquistion. Therefore the original useful life is 50 years i.e. 100% / 2% and the remaining useful life is 40 years. Therefore, the remaining useful life is 10 years.

Depreciation       =                                                                     37,500

• Name – A partnership cannot use the word “limited” in its name.
• No separate legal personality – a partnership has no separate legal personality, separate from its partners/members of the partnership. However, a company does have a separate personality from its shareholders. A company owns its property, not the shareholders. Partners own the partnership property.
• Unlimited Personal Liability– a partnership has unlimited liability for all the debts of the firm whereas shareholders in a company have liability limited.
• Succession – when one partner dies, the partnership is dissolved unless the partnership agreement provides otherwise. However, a company has “perpetual succession”. Shareholders may die but the company continues until it is wound up.
• Management – a partnership is managed by the partners together – they are the shareholders, managers and workers. A company is managed by the directors not the shareholders.
• Shares – partners have a share in a partnership as agreed between them. A partner’s share cannot be transferred without the consent of the other partners. In reality there is not a substantial difference in the definition of a share between a company and a partnership. Size – a partnership can have between 2 and 20 partners, except solicitors and accountants. A private company can have more and a public company can have 7 or more shareholders.
• Regulation – a company has memorandum & Articles of Association and a partnership usually has a Partnership Agreement to regulate its affairs.
• Legislation – the Incorporated Partnership Act of 1952 Act 152 is the primary piece of law (legislation) which governs partnerships .Companies are governed by the Companies Acts 1963, Act 179 – to date.
• Taxation – it is often said that partnerships are tax-transparent. Tax is paid by the partners on the profits each partner makes at the usual income tax levels for an individual. A company, being a separate legal personality, pays corporation tax (currently at 25%) but in addition to this, the shareholders will pay tax on any dividends received from the company.
• Accounts – Partnerships are not required to file accounts in the Company records office. Companies must file accounts at the Company records office. Therefore while a lot of a company’s financial details are a matter of public record, Partnerships financial details are kept private.                                                                                                                                (Any 3)

• Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For example if the business must pay any debts, these will be satisfied from the owner’s own personal funds. The owner could be sued for any unlawful acts committed by the employees. This is drastically different from corporations, wherein the members enjoy limited liability (i.e., they cannot be held liable for losses or violations)
• Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees.
• Lack of “continuity”: The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes.
• Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do.

• To confirm the accuracy of entries in the cash book
• To uncover any error which may have been made by the bank.
• To provide a reliable cash figure for the trial balance.
• To identify any items, such as bank charges, which need to be entered in the accounting records, including the cash book.                                                                                                                                                                                                   (Any 2)

Human Error – There is more chance of errors happening in the bank account details in a company due to human error in inputting details in a bank statement.

Reported as current asset if it is positive or as a current liability if it a negative in the statement of financial position.

WORKINGS

WORKINGS

Definition of Assets

“Assets” are future economic benefits controlled by the entity as a result of past transactions or other past events.

Criteria for Recognition of Assets

An asset should be recognised in the statement of financial position when and only when:

• it is probable that the future economic benefits embodied in the asset will eventuate; and
• The asset possesses a cost or other value that can be measured reliably.

Definition of Liabilities

“Liabilities” are the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events.

Criteria for Recognition of Liabilities

A liability should be recognised in the statement of financial position when and only when:

• it is probable that the future sacrifice of economic benefits will be required; and
• the amount of the liability can be measured reliably.

Definition of Equity

“Equity” is the residual interest in the assets of the entity after deduction of its liabilities.

Definition of Revenues

“Revenues” are inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners that result in an increase in equity during the reporting period.

Criteria for Recognition of Revenues

A revenue should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:

• it is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred; and
• the inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably.

Definition of Expenses

“Expenses” are consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners that result in a decrease in equity during the reporting period.

Criteria for Recognition of Expenses

An expense should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:

• it is probable that the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred; and
• the consumption or loss of future economic benefits can be measured reliably

                                                                                                                                                                                               (Any 2)

Inventories, per paragraph 6 of IAS 2 are assets that are:

• Held for sale in the ordinary course of business
• In the process of production for such sale; or
• In the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories per IAS 2 comprise a) Merchandise b) Production Supplies c) Materials d) Work in Progress e) Finished Goods authorized for issue.

Inventories are measured at the lower of  Cost And Net Realisable Value (NRV)

Cost should include all: [IAS 2.10]

• costs of purchase (including taxes, transport, and handling) net of trade discounts received,
• costs of conversion (including fixed and variable manufacturing overheads) and
• other costs incurred in bringing the inventories to their present location and condition.

Net Realisable Value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

1,400,000/1,120,000 = 1.25 times

160,000/320,000 = 0.5:1

396,000/22,000 = 18 times

316,000/200,000 = 1.58 times

(550,000/1,120,000) x 100 = 49.11%

316,000/450,000 = 70.22 pesewas

When profits are high the ordinary shareholders will benefit from the high gearing ratio of Gade Ltd and the ordinary shareholders will show an increased earnings per share. Lower interest rates of Gade Ltd will have a minimal effect on profit and will benefit the ordinary shareholders. If the profits of Gade Ltd were to fall, then the shareholders will be disadvantaged because the interest payments and preference share dividends must be met before any ordinary dividends are paid. An increase in interest rates would also affect the return of the ordinary shareholders. Gade Ltd might have to reduce gearing by selling off any surplus assets or increasing revenue reserves as an alternative to payment of dividends.

• Investors are those who provide risk capital i.e. mainly shareholders. They are concerned with the risk inherent in and the return provided by the business. They need information to help them determine whether they should buy, hold or sell their holdings. They also need information to assess the ability of the business to pay dividends.
• Employees of the business and their representative groups are interested in information about the stability and profitability of their employer. They need to assess the likelihood of future employment and increase or decrease in remuneration packages. They will also be interested in retirement benefits and employment opportunities/advancement.
• Lenders: These consist of debenture holders, banks, lessors, other financial institutions, other businesses etc. They are interested in information that enables them to determine whether their loans, and the interest attached to them, will be paid when due.
• Suppliers and other trade payables: These are people the business owes money to. They are interested in information that enables them to determine whether amounts owing to them will be paid when due. Many suppliers will also be interested in the long term survival of the business if the business is their major customer.
• Customers or trade receivables: Customers have an interest in information about the continuance of the business especially if they have bought goods with guarantees etc. if the business is a major supplier of goods to them they will wish to know that that supply will continue into the future.
• Governments and their agencies: Governments are interested in the allocation of resources within a country and of course the collection of revenues such as taxes from individual businesses. They will require information on the activities of the business to regulate them, determine taxation policies and assess the basis for national income and similar statistics.
• The general public: The most interested ‘public’ are generally those that live in close proximity to the business. They will wish to know if the business makes a contribution to the local economy and what effect it has on the local environment, for example in terms of pollution. They will wish to know the number of people the business employs from the locality, their patronage of local suppliers and the possible effect on the locality if the business ceases to operate.                       (Any 5)