What is Accounting?

• Accounting is the systematic process of identifying, recording, classifying, summarizing, and interpretating
financial information.
• Bookkeeping is the process of recording financial transactions.
• Business is an organization or economic system where goods are exchanged for one another or for money.
• Accounting Equation and formula:
• C=A-L
• A=C+L
• L=A–C
• C: Capital - the amount/funds invested by owner/shareholder, also called Equity
• A: Asset – resources controlled by business for future benefits. For example, property, equipment, inventory,
and debtors. Assets can be a combination of capital and borrowing –loan/liability.
• L: Liability – present obligation as a result of past event resulting in outflow of resources or money owed to
others and obligation created. For example, loans, bank credit, creditors.
• Accounting equation must always be equal on both sides of the equation. Debiting and Crediting – balancing the
books.
• Business is an organization or economic system where goods are exchanged for one another or for money.
 Accounting Cycle
• Accounting cycle: steps in accounting for all business transactions during the accounting period:

• 1. Step one: identify and analyse each transaction and its source documents.

• 2. Step two: record transactions in journal /original entry

• 3. Step three: post journals to the general ledgers using double entry.

• 4. Step four: prepare an unadjusted trial balance for number/mathematical accuracy.

• 5. Step five: prepare adjusting journals entries and post to the general ledger.

• 6. Step six: prepare adjusted Trial Balance

• 7. Step seven: prepare financial statements

 Books of Original Entry
• Six books of original (Prime) entry are:

• 1. Sale Day Book or Journal – records credit sales

• 2. Purchase Day Book or Journal – record credit purchases

• 3. Return Inwards Day Book or journal – records return to the business of goods it previously sold

• 4. Return Outwards Day Book or Journal – records return by business of goods it previously purchased.

• 5. Cash Book – all record cash and cheque transaction –receipts and payment. Example: cash sales, cash
purchase, payment receipts from customers.

• 6. General Journal – all other transactions. For example: depreciation and bad debts.
 Double Entry

• Double entry concept – each ledger T account (a/c) is separated into two:
• 1. Debit (DR) – left hand side 2. Credit (CR) – right hand side
Debit (DR) (Title of Account written here) Credit (CR)

Date Details $ Date Details $

Left side: Debit Right side: Credit

Revenue Money earned from normal business

• Transactions classified as: activities/sale of goods and services.
Types of Accounts:
• 1. Assets Expenses Money spent or cost incurred by a
business to generate/earn income.
• 2. Drawings/dividends
• 3. Expenses/Purchases Drawing Cash or goods taken out of a business by
• 4. Liabilities the owner, a sole trader & partner. In the
case of a company the cash is called
• 5. Equity/Capital dividend.
• 6. Revenue/Sales
 Double Entry Rules
Rule 1: Every transaction affect at least two accounts: debit
and credit. For each transaction, the total debit must equal
the total TYPE OF ACCOUNT INCREASE DECREASE
Rule 2: Every debit is on the left side and every credit is on Assets Debit (DR) Credit (CR)
the right side of the T account of each transaction.
Debit and Credit DO NOT mean plus or minus
Drawings/ Dividend Debit Credit
Rule 3: A debit or credit will increase or decrease on the T
account balance depending on which type of account the
transaction is identified as follows: Expenses/Purchases Debit Credit
Remember ADExLER Debit and Credit
Liabilities Credit Debit
A Debit entry represents an increase to Assets, Expense,
and Drawings.
Equity/Capital Credit Debit
A Credit entry represents an increase to Liabilities,
Equity/Capital, and Revenue/Sales
Revenue/Sales Credit Debit
Decreases to these same accounts will require the
opposite entry
 Double Entry Examples
• Double Entry means the transaction must be recorded on two Accounts
• Every debit must equal every credit for the same transaction.
• Example 1. A company buys goods valued at $1,000 and pays by cash. Two things occurred:
• 1. Money in the company bank account will decrease by $1000
• 2. Stock/inventory of goods will increase by $1,000

DR Inventory CR DR Bank CR
$1000 cash
$1000 goods

• Example 2. A company buys a motor van costing $30,000 and pays by cheque. Two things occurred.
• 1. Money in the company bank account will decrease by $30,000
• 2. Motor van, bought by the company is an asset and will increase by $30,000
DR Asset CR DR Bank CR
Motor Van $30,000
Cheque $30,000
 Source Documents
• Source documents – original documents containing details of business transactions:
• Date
• Name of parties
• Amounts paid
• Substance of the transaction
• Unique numbers for identification, indexed for easy access and storage
• QUOTATION: documents stating estimated cost of goods and services
• SALES ORDER: order document from business owner to customer
• PURCHASE ORDER (PO): order document of buyer’s order or request to business.
• CREDIT NOTE (CN): receipt given by seller to buyer who returned goods to exchange for future purchase of goods.
• DEBIT NOTE: document given by supplier to buyer stating the buyer’s debt.
• GOODS RECEIVED NOTE: internal document showing goods received by the business.
• INVOICE: bill/document issued by seller to buyer stating the details of the sale transaction.
• Source documents are:
• evidence of recorded transaction, proof of payment, and receipt of goods
• required to be kept for several years, e.g., Inland Revenue for six years
 Documents Process
SALES DOCUMENTS AND PURCHASE DOCUMENTS AND
PROCESS PROCESS

1. Sales Order 1. Purchase Requisition

2. Delivery Note 2. Purchase Order
3. Sales Invoice 3. Delivery note
4. Recording Sales Invoice 4. Purchase Invoice
5. Recording Payments 5. Recording Purchase Invoice
6. Recording Payments
 Balancing off Ledger Accounts

Balancing off a ledger ‘T’ Account

Finding difference between credit
and debit sides and entering this Dr Bank A/C CR
difference to ensure both sides are Date Details $ Date Details $
equal: Debit side = Credit side. 1-March-19 Bal b/d 10,000 25-March-19 Purchases 5,000*
25-March-19 Sales 3,000 (Step 1)*
• Steps to balance off:
Total (Step 1)*
1. Total the credits and total the 13,000
31-March-19 Bal c/d 8,000
debits (Step 4) (Step 3)
2. Deduct smaller total from the 1-April-19 Bal b/d 8,000
larger total (Step 5)

3. Enter this difference on the

lesser side to get balance
4. Call this difference: Balance
Step 2: 5,000 – 13,000 = 8,000
carried down (Bal c/d)
5. Enter this difference below This is also a typical close off when preparing the trial balance
total -called Balance brought
down (Bal b/d).
 Balancing off Ledger
• Opening balances b/d on debit side called debit balance and those brought down on the credit side called
credit balance.
• Customers owing money to business is called accounts receivable and this balance is on the debit side.
• Suppliers who the business owe is called accounts payable and this balance is on the credit side.
• Ledger T Accounts record transactions in manual system of accounting. Computerized system make it easier
but still need to understand ledger T Accounts.

Sales A/C
Date Details $ Date Details $
3-March-23 cash 1,000
• All accounts types are closed
off EXCEPT for: Transfer to Trading Account 5,000 11-March-23 Bank 2,500
• Income/revenue or sales A/C
• Purchase A/C 22-March 23 Debtor 1,500
• Expenses A/C 5,000
5,000
• In normal cases the account type above
are to be closed off by transferring to
the Trading and P&L account
 Trial Balance

• Step 3 in the Accounting Cycle is posting to Ledgers using Double Entry and next closing the accounts.
• Then step 4 of the accounting cycle is preparing the unaudited trial balance for arithmetical accuracy of
the double entry.
• Trial Balance detects:
• 1. Calculation errors-entering incorrect balance of a ledger account.
• 2. Transcription errors – entering debit instead of credit and vice versa
• Transportation errors – data entry error: reverse sequencing error
• Posting error: general ledger posting error.
• Trial Balance shows a list of the business accounts titles: ADExLER
• Balances from the ledger will be summarized on the Trial Balance as follows:
• Assets – Debits balances (DR)
• Drawings Debits balances (DR)
• Expenses Debit balances(DR)
• Liabilities –Credit balances (CR)
• Equity/capital – credit balances (CR)
• Revenue/income/sales – credit balances (CR)
• General ledger accounts and their balances when closed off shows Debit balances = Credit Balances.
 Preparing Trial Balance
Sample: Millenium Company Limited
• Accounting Cycle are steps in accounting for Trial Balance As at 31st December 2022
all transactions.
• Trial Balance is simply a List of Account Titles Account Title Debit Credit
and their balances Equity/Capital 80,000
Cash 16,174
• Steps for preparing trial balance are: Bank 39,000
• 1. Check books balances: Debits = Credits Purchases 18,200
Creditor- Paul 680
• 2. Identify any errors and correct them Motor Van 35,000
• 3. Summarize balances from each Equipment 28,100
ADExLER ledger account Sales 62,700
Stationary 275
• 4. Prepare Trial Balance for the period -
Return Inwards 141
example ‘as at 31st December 2022’, showing Return Outwards 80
three columns of account title, debit, and Advertising 470
credit Debtor -smith 1,000
• Trial Balance ensures arithmetical accuracy of Loan 29,000
double entry prior to preparing financial Wages 2,900
Electricity 6,000
statements
Telephone 1,200
• Trial Balance: essential stage and basis for Rent 24,000
preparing the financial statement of business. 172,460 172,460
 Errors

• To identify errors, check:

• 1. Errors of omission - entire transaction left out on both debit and credit
• 2. Error of commission – posted to wrong A/C debited wrong debtor
• 3. Error of principle –wrong A/C type identified e.g. Expense Vs Asset
• 4. Error of original entry – wrong amount recorded initially e.g. $1,200 Vs $2, 100
• 5. Complete reversal of entries-debits and credits mixed up
• 6. Compensatory errors – shortage or overage on both sides cancelling out each other/one
error offsetting another error to create a balance on both sides.
• Trial Balance is adjusted if errors are found to give the Adjusted Trial Balance
which is then used to prepare the financial statements.
• Errors may still exist even if the trial balance is balanced as not all errors may be
detected.
• Trial Balance use to prepare the financial statements by:
• Classifying account titles and determining their nature i.e., ADExLER
• ALE accounts titles are contained in the balance sheet
• Rex accounts titles are contained in the Trading/P&L
 Manual Trial Balance

• Four basic steps to prepare trial balance manually:

• 1. prepare a worksheet with 4 columns: Account number, Account name, Debit, and Credit

• 2. List your total debits and total credits from each general ledger. The assets, expense, and losses are
recorded as debits, while the liabilities, capital, and income/revenue are recorded as credits.

• 3. After all the accounts balances are entered, each column is summed up.

• 4. the total of the debit column should equal the total of the credit column. If not, then check for errors
such as:
• Amount in the ledger is not posted to the Trial Balance.
• Incorrect posting of amount.
• Incorrect balancing of ledger account.
• Wrong total in original entry books
 Depreciation

• Depreciation: process of spreading the original cost of a non-current asset over the accounting period,
the useful life of the asset.
• An asset is a resource controlled by the business from which future benefits are expected to flow.
• A non-current asset is an asset with long life, used in the business, and not bought for resale.
• Depreciation isa legitimate non-cash expense recorded on the P&L account.
• Causes of depreciation:
• 1. Physical deterioration caused by:
• Wear and tear in plant, for example: machinery, equipment, and motor vehicle
• Erosion, rust, rot, decay resulting from elements of nature for example land can be eroded, metal
can rust wood can rot.
• 2. Economic factors:
• Obsolescence – advanced technology can cause products to become outdated
• Inadequacy –assets that are no longer used after experiencing growth increase business
• Time Factor:
• - assets that are useless after a period for example patents – an exclusive right to market an
invention.
• 4. Depletion – consumption of natural resource such as mines, quarries, and oil wells.
 Straight-line Method of Depreciation

• Two Methods of calculating depreciation:

• 1. Straight-line method:
• Fixed charged using, Cost Price of Asset and estimated years of useful life.
• Cost price of an asset divided by the number of years of useful life to
calculate annual depreciation.
• Scenario: Bought vehicle costing $44,000 with a useful life of 4 years and
with a disposal value of $4,000. What is the annual depreciation charge?
• Annual depreciation charge:
• Cost price less disposal value ÷ Useful life # of years
• $44,000 -$4000 ÷ 4 years = $10,000 per year.
 Reducing Balance Method of Depreciation
• 2. Reducing balance method:
• Variable charges using, Net Book Value (NBV) of the asset and rate of
depreciation.
• Calculates depreciation with a fixed percentage of depreciation
• Year 1 – cost price of asset multiplied by depreciation rate.
• Year 2 – and onwards – cost less accumulated depreciation, multiplied by
depreciation rate for example NBV x Depreciation %
• Scenario: bought asset costing $10,000 with an agreed depreciation rate of 20%.
What is the annual depreciation in the first three (3) years.
• Cost price -$10,000 ÷ Depreciation rate 20%
• Depreciation workings:
• Year 1: 20% x $10,000 = $2,000
• Year 2: 20% x (10,000 -2,000) = $1,600
• Year 3: 20% x (10,000 – , – 1,6000) = $1,280
 Accounting Treatment of Depreciation
• To record a depreciation charge:
• Debit: Depreciation expense in the Profit & Loss (P&L)
• Credit: Provision for depreciation in the Balance Sheet (B/S)
• The purchase of a non-current asset is recorded in a separate account called “Accumulated Provision for Depreciation
Account”
• Scenario: a machine is bought for $2,000 on 1 January 2015 and paid by cheque.
1. Transaction is recorded as:
- Debit the machinery account
- Credit the Bank account
• 2. Depreciation is calculated using either of the methods.
• 3. Record the depreciation:
- Debit the profit and loss account with the amount each year
- Credit the provision for depreciation of machinery account with the amount depreciated each year.
• 4. Show how the item would appear in the B/S
- machinery shown as cost price
- balance on the provision of machinery account is shown as the NBV that is the cost price less the balance
on the provision of machinery account.
• To record a reversal of depreciation (do the reverse)
• Debit: Provision for depreciation in B/S
• Credit: Depreciation expense in the P&L
 Accruals
• Business expenses may not always Rent
be fully paid some may be underpaid Date Details Amount Date Details Amount
• In accounting, expenses for the
period must be accounted for 2017 $ 2017 $
properly
31-March Bank 3,000
• Accruals: an expense that has been 2 July Bank 3,000 31 Dec. Profit & 12,000
incurred but not yet paid Loss
• Scenario: 4 October Bank 3,000
• annual Rent Expense = $12,000.
• $3,000 payable every quarter 31Dec. Accrued 3,000 12,000
end c/d
• Payment dates- 31 March 2017, 12,000
2 July 2017, 4 October 2017, 5
2018 Accrued b/d 3,000
January 2018 paying $3,000,
respectively. 1-Jan.
 Prepayments

• Prepayments – an Insurance
expense that has been Date Details Amount Date Details Amount
paid for in advance
2017 $ 2017 $
• Scenario: 28 Feb Bank 210
• Total Annual Insurance 31 August Bank 420 31 Profit & Loss 840*
Expense -$840 Dec.
• $210- payable every 18 Nov. Bank 420
quarter end 31 Prepaid c/d 210
• Payment dates: 28 Dec.
February 2017 = $210, 1,050 1,050*
31 August 2017 = $420 2018
And 18Nov. 2017 = $420 1 Jan. Prepaid 210
b/d
 Provision for Bad Debts
(T Accounts Workings)
• Bad debts: a debt (amount owed Dr Bad Debts (GL16) Cr
to you) that will not/unlikely to 2017 Folio $ 2017 Folio $
be collected/paid.
August 31 H. Marshal SL99 78
• It is to be written off as an
expense in P&L as follows: Dr H. Marshall (SL99) Cr
• Debit: Bad debts expense in P&L 2017 Folio $ 2017 Folio $
August 1 Balance b/d 78 August 31 Bad debts GL16 78
• Credit: Accounts Receivable in
(B/S)
• Example: a bad debt of $78
The Journal
owing to us is written off as a bad Date Details Folio Dr Cr
debt on 31 August 2017. This 2017 $ $
means we will credit H.
August 31 Bad Debts GL16 78
Marshall’s account to cancel the
H. Marshall GL99 78
amount out of his account. The
double entry record is as follows:
Debt written off as bad. See letter in file 7/8906
 Provision for Doubtful Debts
• Doubtful Debts: a debt that you may not Dr Provision for doubtful Debts Cr
collect. Provision would be:
2017 $ 2017 $
• Debit: Doubtful debts expense in the December 31 Balance c/d 200 December 31 P&L A/c 200
P&L 2018
• Credit: Accounts Receivable in B/S Jan. 1 Balance b/d 200
• If the customer/debtor financial
situation change,
Profit and Loss Account (Income Statement) for the year ended31 December 2017(Extract)
it is likely that amounts can now be
$ $
collected so the provision must be
reversed as follows: Gross Profit xxx
Less expenses
• Debit Accounts Receivable in B/S
Provision for doubtful debts 200 200
• Credit: Provision for Bad debts expense
in P&L Statement of Financial Position (Balance Sheet) as at 31 December 2017 (Extract)
• “Example: At 31 December 2017, the $ $
accounts receivable figure after Current assets
deducting bad debts amounted to
Accounts receivable 10,000
$10,000. it is estimated that 2% of debts
=$200 will eventually prove to be bad Less Provision for doubtful debts 200 9,800
debts and it is decided to make a
provision for these as follows:”
 Financial Statements
• Financial Statements:
• convey business activities and financial performance of a business
• often audited to ensure accuracy for tax, financing, and investing purposes
• Includes:
• Statement of Comprehensive Income (SOCI)
(Trading and Profit & Loss Account / Income Statement)

• Statement of Financial Position (SOFP)

(Balance Sheet)

• Statement of Cash Flow (SOCF)

• Statement of Changes in Equity (SOCIE)

 Statement of Comprehensive Income (SOCI)
(Trading and Profit & Loss Account / Income Statement)

• SOCI looks at financial performance i.e profit Cost of goods sold (Extract):
or loss- contains income and expense $ $
Opening Stock 10,000
information for the accounting period as
follows: Add: Purchases 27,500
Less: Purchases returns (1,500)
• Revenue/Income money earned,
Net Purchases 26,000
received and receivable from sale of
goods and services of business activities
Cost of goods available for sale 36,000
• Cost of Goods Sold (COGS) to customers
Less closing Stock (6,000)
• Expenses money spent or costs incurred
Cost of goods sold 30,000
by the business to make revenue.
• Gross Profit sales less cost of goods sold
• Net Profit gross profit less expense
• Net Loss expenses greater than revenue
ABC Limited – SOCI (Trading and Profit & Loss Account / Income Statement)
For Period ended 31 December 2019
$ $
Sales 90,000
Less cost of goods sold:
Opening Stock 14,000
Add Purchases 38,000
52,000
Less Closing Stock (17,000) (35,000)
Gross Profit 55,000
Less Expenses:
Salaries (15,000)
Rent (4,500)
Bad Debt expense (2,500)
Depreciation expense (7,000)
Office expenses (1,000) (30,000)
NET Profit/ Loss 25,000
Statement of Financial Position (SOFP) (Balance Sheet)

• SOFP looks at financial position or net worth of the business – contains existing
assets and liabilities information as follows:
• Assets: resources controlled by the business, resulting in future economic benefits
• Current assets: those within 12 months –short term e.g. stocks, debtors, cash/bank
• Non-current assets: those over 1 year- long term e.g. building, machinery, mortgages
• Tangible assets: of physical existence for example: buildings, plant, machinery, motor
vehicles, fixtures and fittings.
• Intangible assets: Goodwill, intellectual property such as copyrights, trademark, and
patents.
• Liabilities: present obligation which settlement would result in outflow of funds/
resources.
• Current liabilities: those within 12 months – short term e.g. creditors, bank overdraft,
salaries payable
• Non-current liabilities: those over 1 year –long term
• Capital: amount of funds invested in business by owner. Companies issue shares to
owner/shareholders this is equity of the business.
ABC Limited - Statement of Financial Position (SOFP) (Balance Sheet)
As at 31 December 2019
$ $ $
$
Non-Current Assets Current liabilities:
Property, plant, machinery 115,000 Accounts payable (Creditors) 6,000
Motor vehicle 47,000 162,000 Rent payable 2,000 8,000

Long term liabilities:

Current assets Loan from Bank 120,000
Inventory 17,000
Accounts receivable (debtor) 1,800 TOTAL LIABILITIES 128,000
Cash at Bank 33,000
Cash in Hand 1,200 53,000 Financed by Capital/Equity:
Balance sheet as at 1 January 2019 68,000
TOTAL ASSETS 215,000 Add: Net profit for the year 25,000
Less: Drawings/dividends (6,000)

Balance as at 31 December 2019 87,000

TOTAL EQUITY AND LIABILITIES 215,000

 ABC Limited Statement of Cash Flow (SOCF)
Statement of Changes in Equity (SOCIE)
As at 31 December 2019
Cash flows from operating activities:
• SOCF: xxx
• Prepared according to cash basis instead of Profit before taxation
accrual basis Adjustments for:
xxx
Depreciation of PPE
• Report showing cash movement during the xxx
Gain on disposal of PPE
period of inflows and outflows by category
i.e. Operating, investing, and financing (Increase)/decrease in inventory
activities. xxx
(Increase)/decrease in trade and other receivables
xxx
(Increase)/decrease in trade and other payables
• SOCIE: xxx
Taxes paid
• Report showing movement of capital xxx
Net cash generated by operating activities
position from capital injection to earnings xxx
and retained earnings for the period. Cashflows from financing activities
xxx
Loan amount received
• Opening Capital + Profit – Drawings =Closing xxx
Loan repayments
Capital Xxx
Net cash used in financing activities
(Decrease)/increase in cash and cash equivalents
xxx
• To calculate Earnings per share (EPS) take xxx
the total net income and divide it by the Cash and cash equivalents
number of outstanding shares of the -beginning of year
xxx
company
-end of year
Control accounts
• Control accounts: summary accounts based on general ledger. It
contains totals instead of individual ledger information.
• Principle of control accounts: if opening balance is known with
additions and deductions in the accounts, the closing balance can be
calculated.
• Purpose of control accounts: it is a way of checking the accuracy of
entries in the ledgers.
• Two types of control accounts:
• Sales Ledger Control Accounts (SLCA) –Debtors account
• Purchases Ledger Control Accounts (PLCA) – Creditors account
 Sales Ledger Control Accounts (SLCA) –Debtors account

• SLCA records the following: SALES LEDGER (DEBTORS) CONTROL A/C

• Opening debtors-list of Date Details Amount Date Details Amount
debtors’ balances for end of 2017 $ 2917 $
period
• Debit sales- total from sales 1-Jan Balance b/d 1,894 31-Jan Bank 7,284
journal 31-Jan Sales 10,290 31-Jan Cash 1,236
• Credit Return inwards – total 31-Jan Return inwards 296
from returns inwards journal 31-Jan Balance c/d 3,368
• Cheques/cash received – 12,184 12,184
cashbook, bank, and cash 1-Feb Balance b/d 3,368
• Closing debtors –list of
debtors’ balances for end of
period
Purchases Ledger Control Accounts (PLCA) – Creditors account

SALES LEDGER (CREDITORS) CONTROL A/C

• PLCA records the Date Details Amount Date Details Amount
following: 2017 $ 2917 $
• Opening creditors – list of
creditors’ balances for
end of period 31-Jan Bank 3,620 1-Jan Balance b/d 3,890
• Credit purchases- total 31-Jan Return outwards 95 31-Jan Purchases 4,936
from purchase journal 31-Jan Balance c/d 5,111 8,826
• Debit Return outwards- 8,826
total from returns 1-Feb Balance b/d 5,111
outwards journal
• Debit Cheques/cash paid-
cashbook, bank payments
• Closing creditors- list of
creditors’ balances for end
of period
 Bank Reconciliation
• Bank reconciliation matches the business’s bank records to what the bank
is reporting in the bank statement
• This is done to:
• Track cashflow
• Keep track of accounts receivable
• reconcile any difference between the two
• Identify bank errors
• Identify fraud
• Prevent backlog and audit implications
• Step by step process:
1. Update Cash Book with entries seen on the bank statement, not yet on the Cash
Book
2. Identify entries on Cash Book –receipts and payments, not yet seen/cleared on
bank statement. These amounts referred to as ‘reconciling items’
 Ratio Analysis

• Ratios are used to interpret financial information and assess the

performance of the business.

• Ratios are used to compare one period's result against that of a previous
period.

• Ratios can be categorised as follows:

• Profitability ratios –assess profitability of business
• Liquidity ratios- ability to liquidate assets to meet debts/liabilities
• Debt Gearing ratios – assess gearing and capital structure
 Profitability ratios
• Profitability ratios measure management ability to make a profit and are:
• Return on Capital Employed (ROCE): measure % rate of return (ROI) a business get on use of
its capital –Formula: Net profit ÷ total assets x100

• Gross Profit Margin: Sales less COGS – expressed as a percentage of revenue i.e for every $100
of sales, $15 gross profit is made Formula: Gross Profit ÷ Revenue x 100

• Net Profit Margin: gross profit less all expenses –expressed as a % of revenue i.e. for every
$100 of sales, $10 net profit is made Formula: Profit after tax ÷ Revenue x 100

• Rate of inventory Turnover or Stockturn: measures how fast goods are sold Formula: COGS ÷
Average Inventory = X times. Further analysed into 12 months inventory turnover or 365 days
inventory turnover

• Return on Sales: operating income expressed as a percentage of revenue. Operating income

aka Earnings before Interest and Tax (EBIT) or Earnings before Interest, Tax, Depreciation and
Amortization (EBITDA). Formula: EBIT ÷ Revenue x 100
 Liquidity ratios

• Liquidity Ratios indicate the business’s ability to settle its due debts and
they are:
• Current Ratio aka Working Capital Ratio: measures the business’s liquidity and its
ability to meet short term obligations/liabilities. Formula: Current
Assets ÷ Current liabilities e.g. 2:1 means that for every $1 of debt, the business
has $2 available to settle/meet the liability.

• Quick Ratio Acid Test Ratio: measures liquidity and ability to meet short term
obligations. Formula: Current Asset less Inventory ÷ Current Liabilities

• Debtor to Sales Ratio: assess how long it takes a debtor to pay the business.
Formula: Debtors ÷ Sales x 12 – giving the number of months on average

• Creditor to Purchases Ratio: assess how long it takes the business to pay its
suppliers. Formula: Creditors ÷ Purchases x 12 giving the number of months on
average
 Debt Gearing Ratios
• Debt Gearing Ratios assesses the financial structure or capital of the
business, and they are:

• Debt to Equity Ratio: measure of how much loan and equity make up the
capital structure of the business.
Formula: Total Debt ÷ Total Debt + Total Equity x 100 e.g., 50% implies that
half of the business financing came from loan borrowing.

• Interest Cover Ratio: number of times the interest payments can be safely
covered by the business, based on the profits made during the period
Formula: Net Profit ÷ Interest Expense

• High Gearing: more debt funding of operations.

Low Gearing: more equity less debt that funds the operations
 Ratio Analysis
• Business information:
• Revenue/Sales = $250,000
• Gross Profit = $100,000
• Net Profit = $ 50,000
• Net assets/Capital employed =$1,000,000
• Current assets = $140,000
• Current liabilities = $ 70,000
• Stock/inventory (amount included within current assets) = $77,000
Calculate the following ratios with above information.
• Gross profit as a % of sales = 40%
• Net profit as a % of sales = 20%
• Returned on Capital employed (ROCE) = 5%
• Current ratio = 2:1
• Acid test ratio = 0.9:1
 Payroll and Statutory Deductions
• Payroll is the process of:
• Tracking employee’s hourly work
• Ensure calculations for each employee are done correctly
• Giving employees payslip showing earnings and deductions
• Comprises: Gross salary, health surcharge, National insurance, PAYE, other deductions, and net pay.
• Gross Salary: amount the employee earns for carrying out duties without deductions.
• Net Pay: amount received by employee after deductions of all statutory amounts called ‘take-home-pay’
• Health Surcharge an amount charged and payable by:
• By an employed individuals liable to make contributions under National Insurance Act
• By an employed individual other than a self-employed individual liable to file an income tax return.
• Exemptions: under age 16 and over age 65 and those whose only source of income is pension
• Health Surcharge Rates:
• Weekly income of more than TT$109 – rate = TT$8.25 weekly
• Weekly income of less that TT$109 – rate = TT$4.80 weekly
• Health Surcharge Payments:
• Employers must make deductions and pay it on each pay period.
• Payments due on or before 15th day of every month following the month deductions were made
• Employer failing to make such payments is guilty of an offence and liabile to a penalty of 25%and
an interest of 20% on outstanding amount and penalty.
 Payroll and Statutory Deductions contd.
• National Insurance (NIS): contribution is on earnings of basic salary including:
• Acting allowance: where employee is in a position temporarily
• Overtime: payment in excess for working over the prescribed time
• Stipends: small payment for work done
• Housing allowance: payment for house/apartment rental
• Cost of living allowance (COLA): monthly payment for increase of living cost
• Commissions on sale: percentage amount for each sale
• Bonuses: one-time payment for good/timely work done
• Allowances for dependents: e.g employee work relocation cost
• NIS Contribution:
• Weekly payments on earning of insured
• Structure into 16 earnings class
• Rates: effective September 5, 2016, is 13.5% of the assumed average earnings
 Payroll and Statutory Deductions contd.

• Employee and employer contribute to employee payment

• Employer responsible for sending total contributions tho the National
Insurance Board (NIB)
• Failure to send the contributions is an offence
• Contributions payments due 15thof every month
• Penalty of 25% charged from 16th of every month for non-payment in
addition to interest of 15% on total amount outstanding from the following
month.
• Employer must complete registration of new employees (not previously
registered) with in 7 days employment
• Employer must by law provide the employee with a payslip showing:
earnings period, statutory deductions and the NIS number
• Payroll reports must be kept for 10 years.
Payroll and Statutory Deductions contd .

• Pay as you earn (PAYE)

• PAYE taxes Introduced to Trinidad and Tobago in 1958
• Employer responsible to deduct taxes from salary of employees over the
age of 60 years
• Employee should submit to employer a TD 1 form which states the
employee's deduction/allowances in calculating the taxes
• All taxpayers entitled to personal allowance of TT$84,000 per year, so no
income tax on the first $84,000 earned.
• Employer must pay the total PAYE deducted from the Board of Inland
Revenue (BIR) by the 15th of the following month.
• Failure to do so the employer is liable to penalty of 25% of the tax
payable and interest of 20% on the total of tax and penalty.
• Taxes are reduced by BIR approved tax-deductible expenses
Payroll and Statutory Payroll Extract
Deductions contd. Employee Name Michael Persaud

• Payroll extract- example of payslip GROSS SALARY 15,000.00

• Payroll- employees list specifying

Less Statutory Deductions:
salary/wages due to them.
PAYE 2,000.00
• Wages- term for payment made on a Health Surcharge 33.00
time basis –hourly rate NIS 552.40
• Gross Salary –salary or wages without
deductions NET SALARY (PAY) 12,000.00

• Overtime: higher rate than the prior

agreed rate
• Piecework: payment for separate or
units of work done
• Statutory deductions: health surcharge,
NIS, and PAYE.
Taxation
•Taxation: a way for government to get its revenue from taxes on individuals and business entities taxes which meets government
expenses/expenditure. Taxes run in a calendar year.
•Tax compliance –taxpayer complies with tax laws and regulations by (1) Declaring income from all sources
(2) File Tax/ VAT, and PAYE Returns.
•Tax classified as:
•Income tax 25% of chargeable income, Sole trader pay 25% income tax on profit and 30% if profit is over $1M
•Corporation tax 30% on profits

•Value Added Tax (VAT) 12.5% collected on sale of goods. Business must register to pay VAT if sales exceed $500,000 in 12
consecutive months. Late payment penalty of 8% on VAT plus interest.

•Business Levy (BLV) 0.6% Due quarterly-March 31 st, June 30th, September30th , December31st. Interest on payments below
90%of BLV due. No tax deduction for BLV.

•Green Fund Levy (GFL) 0.3% of gross revenue or receipt, due last day of each quarter in calendar year. Interest of 90% of GFL
late payment. No tax deduction for GFL. No tax credit against BLV/taxes due.

•Health Surcharge $429 pa

•Hotel accommodation tax 10%
•Financial services tax 15%
•Stamp duty on property sale price

•Individuals pay income tax and Health surcharge. Sole trader pays health surcharge, income tax, and business levy.
Companies pay Corporation Tax, VAT, BLV, GFL
Taxation contd.

• Individual Deductible expenses

• Tertiary education limited to $60,000
• First time homeowner limited to $30,000
• Deed of Covenant limited to 15% of total income
• Contribution/premium on pension and deferred annuity limited to 70%
• NIS contributions limit to $60,000
• Alimony/maintenance payments by Court Order
• Personal allowance of $84,000 up to 2021 and $72,000 prior -2016-2020
• CNG Kit and Cylinder tax credit
• National tax-free savings bonds credit
• tax exempt income on approved commercial farming
• Wear & Tear allowances
• Agricultural supplies
Tax computation
• Compute taxes, using the following information:
• Revenue/sales for the year =$380,000
• Profits after business expenses for year = $150,000
• Compute:
• Income tax after business expense and personal allowance –answer $16,500
• Corporation tax after business expenses – answer $45,000
• Green Levy fund – answer $1,140
• Business Levy – answer $2,280
• Penalties for non-compliance
• Interest of 20%on unpaid taxes
• Extension to file tax returns up to 31st October for the year
• Penalty of $100 for late filing of income tax and $1,000 for corporation tax
returns from 31st October for every 6 months after.
• Guilty of an offence if person fails to file tax returns