Beruflich Dokumente
Kultur Dokumente
SUBJECT NO. 1
Study Pack
STRATHMORE
UNIVERSITY
DISTANCE LEARNING CENTRE
Email: dlc@strathmore.edu
Copyright
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of the copyright owner.
ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the following
bodies: Kenya Accountants and Secretaries National Examination Board (IASNEB);
Chartered Institute of Management Accountants (CIMA); Chartered Association of Certified
Accountants (ACCA).
Acknowledgement iii
SUBMISSION PROCEDURE
1. After you have completed a comprehensive assignment clearly identify each
question and number your pages.
2. If you do not understand a portion of the course content or an assignment
question indicate this in your answer so that your marker can respond to your
problem areas. Be as specific as possible.
3. Arrange the order of your pages by question number and fix them securely to the
data sheet provided. Adequate postage must be affixed to the envelope.
4. While waiting for your assignment to be marked and returned to you, continue to
work through the next two lessons and the corresponding reinforcement problems
and comprehensive assignment.
CONTENTS
ACKNOWLEDGMENT............................................................................................ii
INSTRUCTIONS FOR STUDENTS...........................................................................iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION.................................................vi
LESSON ONE.......................................................................................................1
INTRODUTION TO ACCOUNTING............................................................................................1
LESSON TWO....................................................................................................44
FINAL ACCOUNTS................................................................................................................44
LESSON THREE.................................................................................................86
ACCOUNTING THEORY........................................................................................................86
LESSON FOUR.................................................................................................104
ADJUSTMENTS TO FINAL ACCOUNTS.................................................................................104
LESSON FIVE..................................................................................................175
FURTHER ADJUSTMNETS TO ACCOUNTS...........................................................................175
LESSON SIX....................................................................................................224
OTHER ASPECTS OF FINAL ACCOUNTS..............................................................................224
LESSON SEVEN...............................................................................................295
PARTNERSHIPS..................................................................................................................295
LESSON EIGHT................................................................................................368
COMPANY ACCOUNTS.......................................................................................................368
LESSON NINE..................................................................................................427
REVISION AID....................................................................................................................427
Course Description vi
The subject gives a thorough and comprehensive introduction to double bookkeeping. It develops
the students understanding of the final; accounts of business and that of clubs and societies, and
the treatment of capital expenditure and the purchasing of stock.
Following this it deals with the cashbook and bank reconciliation preparation of accounts from
incomplete records. Its prime purpose is to pre[pare candidates for the Section One examination
of the CPA Kenya accountancy paper and is based on the materials used to prepare students at
Strathmore School of Accountancy.
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting
economic information to the users of this information to permit informed
judgment
This information will enable them to assess how the managers of the
business are performing whether the business is profitable or not and
whether to make drawings or put in additional capital.
ii. Customers
Customers rely on the business for goods and services. They would like to
know how the business is performing and its financial position.
This information would enable them to assess whether they can rely on the
firm for future supplies.
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit.
The suppliers would like to have information on the financial performance and
position so as to assess whether the business would be able to pay up for the goods
and services provided as and when the payments falls due.
iii. Managers
The managers are involved in the day-to-day activities of the business. They
would like to have information on the financial position, performance and
changes in financial position so as to determine whether the business is
operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate
measures (controls) to ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such
lenders include banks and other financial institutions. They would like to have
information on the financial performance and position of the business to
assess whether the business is profitable enough to pay the interest on loans
and whether it has enough resources to pay back the principal amount when
it is due.
FINANCIAL ACCOUNTING 1
Course Description 4
Non current assets are acquired by the business to assist in earning revenues and
not for resale. They are normally expected to be in business for a period of more
than one year.
Major examples include:
Land and buildings
Plant and machinery
Fixtures, furniture, fittings and equipment
Motor vehicles
Current assets are not expected to last for more than one year. They are in most
cases directly related to the trading activities of the firm. Examples include:
Stock of goods – for purpose of selling.
Trade debtors/accounts receivables – owe the business amounts as a
resort of trading.
Other debtors – owe the firm amounts other than for trading.
Cash at bank.
Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which
is expected to result to an economic outflow of amounts from the firm. An
example is when a business buys goods on credit, then the firm has a liability
called creditor. The past event is the credit purchase and the liability being the
creditor the firm will pay cash to the creditor and therefore there is an out flow of
cash from the business.
Non-current liabilities are expected to last or be paid after one year. This
includes long-term loans from banks or other financial institutions. Current
liabilities last for a period of less than one year and therefore will be paid within
one year. Major examples:
Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
Other creditors - owed amounts for services supplied to the firm
other than goods.
Bank overdraft - amounts advanced by the bank for a short-term
period.
Capital:
This is the residual amount on the owner’s interest in the firm after deducting
liabilities from the assets.
The Accounting equation can be expressed in a simple report called the
Balance Sheet. The basic format is as follows:
Name
Balance sheet as at 31.12.
Sh Sh Sh Sh
Capital xx Non Current Assets
Land & Buildings xx
Non Current Liabilities Plant & Machinery xx
Loan xx Fixtures, furniture & fittings xx
Motor vehicles xx
Current liabilities xx
Overdraft xx Current Assets
Creditors xx xx Stocks xx
Debtor’s xx
Capital and Liabilities Cash at bank xx
FINANCIAL ACCOUNTING 1
Course Description 6
Cash in hand xx
xx
xx Total assets
xx
The above format of the balance sheet is the horizontal format however currently
the practice is to present the Balance Sheet using the vertical format which is
shown below.
Name
Balance sheet as at 31.12.
Current Liabilities
Bank Overdraft xx
Creditors/trade payables xx (xx)
Net Current Assets xx
Net assets xx
Capital xx
Non Current Liabilities
Loan (from bank or other sources) xx
xx
Please pay attention to the format. The Non Current assets are listed in order of
permanence as shown i.e. from Land and Buildings to motor vehicles. The
Current Assets are listed in order of liquidity i.e. which asset is far from being
converted into cash. Example ,stock is not yet sold, (i.e. not yet realised yet) then
when it is sold we either get cash or a debtor (if sold on credit). When the debtor
pays then the debtor may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment
first. Bank overdraft is payable on demand by the bank, then followed by
creditors.
Note that in the vertical format, current liabilities are deducted from current
assets to give net current assets. This is added to Non Current assets, which give
us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
FINANCIAL ACCOUNTING 1
Course Description 8
Example 1.1
B Kelly has a business that has been trading for some time. You are given the
following information as at 31.12.2002
£
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
Stocks 8,500
Debtor 5,600
Cash a bank 1,500
Cash in hand 400
Creditors 2,500
Capital 30,800
Loan 5,000
B Kelly
Balance Sheet as at 31 December 2001
Current Assets
Stock 8,500
Debtors 5,600
Cash at bank 1,500
Cash in hand 400
16,000
Creditors (2,500)
Net Current Assets 13,500
Net Assets 35,800
Capital 30,800
Non-Current Liabilities
Loan 5,000
35,800
Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought
motor vehicles of ₤3,000, premises of ₤7,000, stock of goods ₤2,000. He still
owes ₤800 in respect of them. He had borrowed ₤4,000 from D Evans. After the
events just described and before trading starts, he had ₤300 cash in hand and
₤600 cash at bank.
Solution:
Assets: ₤ ₤
Motor Vehicle 3,000
Premises 7,000
Stock 2,000
Cash at bank 600
Cash in hand 300
12,900
Liabilities:
Creditors 800
Loan - D Evans 4,000 (4,800)
8,100
Capital 8,100
Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock
of goods £9,900, Debtors £6,500, Cash at bank £12,900 and Cash in hand £240.
You are to draw up a balance sheet as on 7 July 2002 after the above transactions
have been completed.
FINANCIAL ACCOUNTING 1
Course Description 10
First we need to look at the effect of the above transactions on the assets and
liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because
this is bought on credit the creditors increase by £1,540 also.
(b) Amount received from the debtor means that the level of debtors reduces
and cash increases by £560.
(c) Extra fixtures bought by cheque, will increase the fixtures and reduce the
cash at bank by £2,000.
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Current Assets
Stock 11,440
Debtors 6,000
Cash at bank 10,900
Cash at hand 800
29,140
Current Liabilities
Creditors (4,740)
Net Current Assets 24,400
Net Assets 41,800
Capital 41,800
From the illustration remember that any change in the items of the balance sheet
will have a double effect on the accounting equation has a double effect and
therefore the equation will always balance.
FINANCIAL ACCOUNTING 1
Course Description 12
Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors 15,800
Equipment 46,000
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been
completed.
Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets
and liabilities can be listed as follows.
Assets £ Liabilities £
Equipment 46,000 Creditors 15,800
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
148,120
(ii) To draw up the balance sheet, we consider the effect of the above transactions
on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by
£5,520 and the creditors will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by
£2,280 and the balance at bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and
also reduce the amount at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases
the cash at bank and cash in hand by £3,360 and £240 respectively.
e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and
the capital balances.
FINANCIAL ACCOUNTING 1
Course Description 14
Capital 133,320
Name
Debit Credit
Date Detail Folio Amount Date Detail Folio Amount
In this account the date will show the opening period of the asset ,liability or capital
i.e. the balance brought forward. It will also show the date when a transaction took
place (i.e. either an asset was bought or liability incurred).
The detail column (also called the particulars column) shows the nature of the
transaction and reference to the corresponding account. The Folio Column for
purposes of detailed recording shows the reference number of the corresponding
account. The amount column shows the amount of the asset, liability or capital.
The left side of the account is called the debit side and the right side is called the
credit side. All assets are shown or recorded on the debit side while all the liabilities
and capital are recorded on the credit side. Each type of asset or liability must have
its own account whereby all transactions affecting them are recorded in this
account. Therefore there should be an account for Premises, Plant and Machinery,
Stock, Debtors, Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital
therefore all debits should be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a
corresponding credit entry. The transactions affecting these accounts are posted in
the account as debit entry and credit entry to complete the double entry.
Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500;
Debtors £57,700;Cash at bank £72,800 and Cash in hand £400.
FINANCIAL ACCOUNTING 1
Course Description 16
You are to draw up a balance sheet as on 7 December 2002 after the above
transactions have been completed.
Answer:
Capital = Assets – Liabilities
Assets £ Liabilitie £
s
Equipment 115,000 Creditor 39,50
s 0
Motor vehicle 62,900
Stock 61,500
Debtors 57,700
Cash at bank 72,800
Cash in hand 400
371,300
62,900
62,900
39,500 39,500
Equipment a/c
2002 2002 £
£
1.12 Bal b\d 115,000
Creditors 13,800 7.12 Bal c\d
128,800
128,800 128,800
Stock a/c
2002 2002 £
£
1.12 Bal b\d 61,500
Bank 5700 7.12 Bal c\d 67,200
67,200 67,200
FINANCIAL ACCOUNTING 1
Course Description 18
Debtors a/c
2002 2002 £
£
1.12 Bal b\d 57,700 Bank 8,400
Cash 600
Bank 570 7.12 Bal c\d 48,700
57,700 57,700
Capital
2002 2002 £
£
1.12 Bal b\d 330800
7.12 Bal b\d 333300 Cash 2500
128,800 128,800
Creditors Of Equipment
2002 2002 £
£
H Jump
Balance sheet as at 7 December 2002
Equipment 128,800
Motor vehicles 62,900
191,700
Current Assets
Stock 61,200
Debtors 48,700
Cash at Bank 67,600
Cash in Hand 3,500
187,000
Current Liabilities
Creditors of equipment 13,800
Creditors 31,000 (45,400)
Net Current Assets 141,000
Net Assets 333,300
Capital 333,300
FINANCIAL ACCOUNTING 1
Course Description 20
Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record
the following transactions:
2002
June 1 Started business with £50,000 in the bank.
“ 2 Bought motor van paying by cheque £12,000.
“ 5 Bought Fixtures £4,000 on credit from Office Masters Ltd.
“ 8 Bought a van on credit from Motor Cars Ltd £8,000.
“ 12 Took £1,000 out of the bank and put it into the cash till.
“ 15 Bought Fixtures paying by cash £600.
“ 19 Paid Motor Cars Ltd by cheque £8000.
“ 21 A loan of £10,000 cash is received from J Marcus.
“ 25 Paid £8,000 of the cash in hand into the bank account.
“ 30 Bought more Fixtures paying by cheque £3,000.
58,000
58,000
Motor Van
2002 £ £
2/6 Bank
12,000
8/6 Super M 30/6 Bal c/f
8,000 20,000
20000 20000
Fixtures
2002 £ 2002 £
5/6 young
4,000
15/6 Cash
600
30/6 Bank Bal c/f 7,600
3000
7,600 7,600
Cash in hand
2002 £ 2002 £
12/6 Cash 15/6 Cash
1,000 600
25/6 Bank 800
21/6 J. Marcus 10000 30/6 Bal c/f 2400
11000 11000
J. Marcus - Loaner
2002 £ 2002 £
30/6 c\f 21/6 Cash 10000
10000
Note that the difference between the debit side and the credit side is the balancing
figure. Most assets will have a balance on the credit side and most liabilities and
capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:
M Crash
Balance Sheet as at 30th June 2002
£ £
Non Current Assets
Fixtures 7,600
Motor vehicles 20,000
27,600
Current Assets
Cash at bank 34,000
Cash in hand 2,400
36,400
Current Liabilities
Creditors – others (4,000)
Net Current Assets 32,400
FINANCIAL ACCOUNTING 1
Course Description 22
Capital 50,000
Non Current Liabilities
Loan – J Jarvis 10,000
60,000
Let us now consider other transactions that take place in a business and the
accounting entries to be made.
Sales:
This is the sell of goods that were bought by a firm (the goods must have been
bought with the purpose of resale). Sales are divided into cash sales and credit
sales. When a cash sale is made, the following entries are to be made.
i. Debit cash either at bank or in hand.
ii. Credit sales account.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For
cash purchases:
i. Debit purchases.
ii. Credit cash at bank/cash in hand
For credit purchases, we:
i. Debit purchases.
ii. Credit creditors for goods.
A new account is also opened for purchases where both cash and credit purchases
are posted. NOTE: NO ENTRY IS MADE INTO THE STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales).
Such incomes include:
Rent
Bank interest
Discounts received.
When the firm receives cash, from these incomes, the following entries are
made:
Debit cash in hand/at bank.
Credit income account.
Each type of income should have its own account e.g. rent income, interest
income.
Incomes increase the value of capital and that is the reason why they are
posted on the credit side of their respective accounts.
Expenses:
These are amounts paid out for services rendered other than those paid for
purchases. Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills
• Motor vehicle running expenses.
• Bank charges.
When a firm pays for an expense, we:
i. Debit the expense account.
ii. Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will
be posted. Expenses decrease the value of capital and thus the posting is made on
the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and
expenses.
FINANCIAL ACCOUNTING 1
Course Description 24
INCOME
Credit
EXPENCE
Returns Inwards: These are goods that have been returned by customers due to
various reasons e.g.
i. They may be defective/damaged,
ii. Being of the wrong type .
iii. Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in
relation to cash sales and cash is refunded to the customer the following entries are
made:
i. Debit returns – inwards
ii. Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer,
the following entry is to be made.
i. Debit returns inwards.
ii. Credit debtors.
Cash
Credit cashbook.
Inwards Debit returns inwards
Credit
Credit debtors
Debit cash
Returns Cash
Credit
Credit returns
outwards
Now lets us take one example that includes most of the above transactions.
Example 1.8
You are to enter the following transactions, completing the double entry in the
books for the month of May 2002.
2002
May 1 Started business with £2,000 in the bank.
“ 2 Purchased goods £175 on credit from M Rooks.
“ 3 Bought furniture and fittings £150 paying by cheque.
“ 5 Sold goods for cash £275.
“ 6 Bought goods on credit £114 from P Scot.
“ 10 Paid rent by cash £15.
“ 12 Bought stationery £27, paying in cash.
“ 18 Goods returned to M Rooks £23.
“ 21 Let off part of the premises receiving rent by cheque £5.
“ 23 Sold goods on credit to U Foot for £77.
“ 24 Bought a motor van paying by cheque £300.
“ 30 Paid the month’s wages by cash £117.
“ 31 The proprietor took cash for himself £44.
Example
Bank a/c
2002 2002
£ £
1/5 Capital 3/5Furn& fitting
2,000 150
24/5 Motor vehicle
300
21/5 Rent 31/5 Bal c/f
FINANCIAL ACCOUNTING 1
Course Description 26
5 1,555
2,005 2,005
Capital a/c
31/5 Bal c/f 1/5 Bank 2,000
2,000
Purchases a/c
2002 2002
£ £
2/5M Rooks
175
6/5 P Scot 31/5 Bal c/f
114 289
289 289
352
352
27
27
FINANCIAL ACCOUNTING 1
Course Description 28
Drawings
The owner makes drawings from the firm in various ways:
Taking some of the other assets from the business e.g. motor vehicles or using part
of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle
or converting business premises into living quarters or not paying into the business
cash collected personally from the customers. When this happens we debit
drawings and credit the relevant asset e.g. motor vehicles, premises or some
building or even debtors.
FINANCIAL ACCOUNTING 1
Course Description 30
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the
firm to pay the amount dues within the agreed time. It is an amount deducted from
the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit
discounts received e.g. A. Ltd sells some goods on credit to B Ltd. ₤1,000 under the
terms of sale, B Ltd, will receive a discount of 5% if they pay the amount due within
one month. B decides to take up the offer and pays the amount within the given
time. B will record the transaction as follows.
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the
customers to encourage prompt payment. The amounts deducted from the sales
invoice. In the previous example when A Ltd issued the discount and was taken up
by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.
1,000 1,000
TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified
as per the debits and credits. The purpose of the trial balance is to show the
accuracy of the double entries made and to facilitate the preparation of final
accounts i.e. the trading, profit & loss account and a balance sheet.
The debits of the trial balance should be the same as the credits, if not then there is
an error in one or more of the accounts.
Name
Trial balance as at 31 May
2002
Debit Credit
£ £
Rent – income 5
Debtor – U Foot 7
Motor vehicle 300
Bank 1555
Purchases 289
Wages 117
Capital 2000
Creditor – M 152
Rooks
Furniture & 150
Fittings
Sales 352
Cash in hand 72
Creditor – P Scot 114
Expenses – Rent 15
Expenses – 27
Stationery
Returns Outwards 23
Drawings 44 .
2464 2464
From the trial balance please note that assets and expenses are on the debit side.
Capital, liabilities and incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all
the postings have been made in the relevant accounts.
Example 1.9
Write up the following transactions in the books of S Pink:
FINANCIAL ACCOUNTING 1
Course Description 32
2003
March 1 Started business with cash £1,000.
“ 2 Bought goods on credit from A Cliks £296.
“ 3 Paid rent by cash £28.
“ 4 Paid £1,000 of the cash of the firm into a bank account.
“ 5 Sold goods on credit to J Simpson £54.
“ 7 Bought stationery £15 paying by cheque.
“ 11 Cash sales £49.
“ 14 Goods returned by us to A Cliks £17.
“ 17 Sold goods on credit to P Lutz £29.
“ 20 Paid for repairs to the building by cash £18.
“ 22 J Simpson returned goods to us £14.
“ 27 Paid A Cliks by cheque £279.
“ 28 Cash purchases £125.
“ 29 Bought a motor vehicle paying by cheque £395.
“ 30 Paid motor expenses in cash £15.
“ 31 Bought fixtures £120 on credit from R west.
Solutions
Capital a/c Cash in hand
a/c
1,549
1,549
Purchases a/c
2003 £ 2003 £
2/3 A Hanson 296 31/3 Bal c/d 421 Creditors – A Cliks ac
28/3 Cash 125
2003 £ 2003
£
421 421 14/3 Returns out 17 2/3
Purchases 296
296
296
1,000
1,000
FINANCIAL ACCOUNTING 1
Course Description 34
Stationery a/c
2003 £ 2003 £ Returns outwards a/c
7/3 Bank 15 31/3 Bal c/d 15
2003 £ 2003
£
31/3 Bal c/d 17 14/3 A
Cliks 17
Returns - Inwards
Motor vehicle
2003 £ 2003 £ 2003 £ 2003 £
22/3 J Simpson 14 31/3 Bal c/d 14 29/3 Bank 395 31/3 Bal c/d
395
Fixtures
2003 £ 2003 £
31/3 A. Webster 120 31/3 Bal c/d 120
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
Debit Credit
(£) (£)
Capital 1500
Purchases 421
Cash in hand 363
Bank 311
Rent expense 28
Sales 132
Fixtures 120
Debtor – J Simpson 40
Debtor – P Lutz 29
Motor vehicle 395
Creditors - -
Motor expenses 15
Returns inwards 14
Creditors others – R 120
West
Stationery 15
Returns outwards 17
Building repairs 18 -
1769 1769
Example 1.10
The following transactions took place during the month of May:
2003
May 1 Started firm with capital in cash of £250.
“ 2 Bought goods on credit from the following persons: R Kelly £54;
Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
“ 4 Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
“ 6 Paid rent by cash £12.
“ 9 C Blanes paid us his account by cheque £43.
“ 10 F Skin paid us £150 by cheque.
“ 12 We paid the following by cheque: J Role £25; R Kelley £54.
“ 15 Paid carriage by cash £23.
“ 18 Bought goods on credit from P Combs £43; Mobile £110.
“ 21 Sold goods on credit to B Long £67.
“ 31 Paid rent by cheque £18.
FINANCIAL ACCOUNTING 1
Course Description 36
Answer
Capital Cash in Hand
200 £ 200 £ 200 £ 200 £
3 3 3 3
31/ Bal 250 1/5 Cash 250 1/5 Capit 250 6/5 Rent 12
5 c/d al
15/ Carriag 23
5 e
. 31/ Bal c/d 21
5 5
250 25
0
Purchases Sales
200 £ 200 £ 200 £ 200 £
3 3 3 3
2/5 R Kelly 54 31/ Bal 45 31/ Bal 348 4/5 C 43
5 c/d 9 5 c/f Blanes
2/5 P Combs 87 4/5 F Long 62
2/5 J Role 25 4/5 F Skin 17
6
2/5 D Mobile 76 4/5 B Long 67
2/5 L Sims 64
.
18/5 P Combs 43 34
8
18/5 D. Mobile 10 .
0
45 459
9
Rent
19x £ 19x £
6 6
6/5 Cash 12 31/ Bal 30
5 c/d
31/ Bank 1 .
5 8
3 30
0
Debit Credit
Capital - 250
FINANCIAL ACCOUNTING 1
Course Description 38
Cash 215 -
Creditor – R Kelly - -
Creditor – P Combs - 130
Creditor – J Role - -
Creditor – D Mobile - 186
Creditor – L. Simms - 64
Debtor – C. Blanes - -
Purchases 459 -
Sales - 348
Debtor- B. Long 129 -
Debtor- F Skin 26 -
Bank 96 -
Carriage -
Rent 30 -
978 978
REINFORCEMENT QUESTIONS
Question One
Spark has been trading for a number of years as an electrical appliance retailer and
repairer in premises which he rents at an annual rate of $1,500 payable in arrears.
Balances appearing in his books at 1 January 19X1 were as follows:
$ $
Capital account 1,808
Motor van 1,200
Fixtures and fittings 806
Provision for depreciation on motor van (credit) 720
Provisions for depreciation on fixtures& fittings 250
(credit)
Inventory at cost 366
Receivables for credit sales:
Brown 160
Blue 40
Stripe 20
220
Cash at bank 672
Cash in hand 5
Payables for supplies:
Live 143
Negative 80
Earth 73
296
Amount owing for electricity 45
Local taxes paid in advance 100
Although Sparks has three credit customers the majority of his sales and services
are for cash, out of which he pays various expenses before banking the balance.
The following transactions took place during the first four months of 19X1
Januar Februar Marc April
y y h
$ $ $ $
Suppliers’ invoices:
Live 468 570 390 602
Negative - 87 103 64
Earth 692 - 187 -
Capital introduced 500
Bankings of cash (from cash sales) 908 940 766 1,031
Expenditure out of cash sales before
banking:
Withdrawals on account 130 120 160 150
Stationery 12 14 26 21
Travelling 6 10 11 13
Petrol and van repairs 19 22 37 26
FINANCIAL ACCOUNTING 1
Course Description 40
Sundry expenses 5 4 7 3
Postage 12 10 15 19
Cleaner’s wages 60 60 65 75
Goods invoiced to credit customers:
Brown 66 22 10 12
120 140 130 180
Blue
Stripe 44 38 20 48
Cheque payments (other than those to
suppliers):
Telephone 40 49 59 66
Electricity 62 47 20 106
Local taxes - - 220 -
Motor van (1 February 19X1) - 800 - -
Unbanked at the end of April - - - 12
Spark pays for goods by cheque one month after receipt of invoice, and receives a
settlement discount of 15% from each supplier.
Credit customers also pay by cheque one month after receipt of invoice, and are
given a settlement discount of 10% of the invoice price.
Required:
Write up the ledger accounts of Spark for the four months to 30 April 19X1, and
extract a list of account balances after balancing off the accounts.
Question Two
Mary
Balance Sheet as at 31 December 2000
0) 0
54,000.0
0
Capital 34,000.0
0
Non Current Liabilities:
Loan from bank 20,000.0
0
54,000.00
During the year to 31 December 2001 the following total transactions occurred:
Required:
Question Three
a) Explain the nature of accounting and the accounting equation
(8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following
information
(12 marks)
FINANCIAL ACCOUNTING 1
Course Description 42
26,000.00 29,000.00
Current Assets:
Debtors 8,000.00
4,000.00
Cash 1,000.00 1,500.00
5,000.00 9,500.00
Current
Liabilities:
Creditors 5,000.00 3,000.00
Overdraft 6,000.00 9,000.00
11,000.00 12,000.00
Net Current (6,000.00) (2,500.00)
Liabilities
Net Assets 20,000.00 26,500.00
Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:
£
Sales 47,600.
00
Purchases 22,850.
00
Office expenses 1,900.0
0
Insurance 700.00
Wages 7,900.0
0
Rates 2,800.0
0
Heating and 1,200.0
Lighting 0
Telephone 650.00
Discounts allowed 1,150.0
0
Opening stock 500.00
Returns inwards 200.00
Returns outwards 150.00
Premises 40,000.
00
Plant and 5,000.0
Machinery 0
Motor Vehicles 12,000.
00
Debtors 12,500.
00
Bank balance 7,800.0
0
Creditors 3,400.0
0
Loan-long term loan 10,000.
00
Capital 60,000.
00
Drawings for the 4,000.0
year 0
Closing stock 550.00
Required:
Construct a trial balance, from the above list of balances.
FINANCIAL ACCOUNTING 1
Acknowledgement 44
LESSON TWO
FINAL ACCOUNTS
Name
Trading Account for the year ended 31 Dec.
₤ ₤ ₤
Sales x
Less: Returns Inwards (x)
x
Example: 2.1
From the following details draw up the trading account of Springs for the year
ended 31 December 2002, which was his first year in business.
₤
Carriage inwards 6,700
Returns outwards 4,950
Returns inwards 8,900
Sales 387,420
Purchases 333,330
Stock of goods: 31 December 19x7 74,890
Lesson One 45
Springs
Trading Account for the year ended 31 Dec 2002
£ £
Sales 387,420
Less: Returns Inwards 8,900
378,520
Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the
trading account of R Sings for that year.
£
Stocks: 1 April 2002 16,523
Returns inwards 1,372
Returns outwards 2,896
Purchases 53,397
Carriage inwards 1,122
Sales 94,600
Stocks: 31 March 2003 14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
₤ ₤ ₤
Sales 94,600
Less: Returns Inwards (1,372)
93,228
Less: Cost of sales
Opening Stock 16,523
Purchases 53,397
Add: Carriage Inwards 1,122
54,519
Less: Returns Outwards 2,896 51,623
Cost of goods available for sale 68,146
46 Introduction to Accounting
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
£ £ £
Sales x
Less: Returns Inwards x
x
Less: Expenses
Carriage Outwards x
Discounts allowed x
Postage & stationary x
Salaries & wages x
Rent paid x
Insurance & rates x
Bank charges x
Other expenses x (x)
Net profit/ (loss) x/(x)
Lesson One 47
Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss
account for the year ended 30 September 2002, and a balance sheet as at that
date.
Dr Cr
£ £
Stock 1 October 19x8 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns inwards 2,050
Returns outwards 3,220
Purchases 118,740
Sales 186,000
Salaries and wages 38,620
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting and heating expenses 1,660
General expenses 3,140
Premises 50,000
Motor vehicles 18,000
Fixtures and fittings 3,500
Debtors 38,960
Creditors 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360
332,890 332,890
48 Introduction to Accounting
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
£ £ £
Sales 186,000
Less: Returns Inwards (2,050)
183,950
Less Expenses
Salaries & wages 38,620
Carriage outwards 2,000
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting & heating 1,660
General expenses 3,140 (58,040)
Net Profit 13,070
Lesson One 49
Name
Balance sheet as at 31/Dec/19xx
£ £ £
Non Current Assets
Land & Buildings x
Plant & Machinery x
Fixtures, Furniture & Fittings x
Motor vehicles x
x
Current Assets
Stock/inventories x
Debtors – trade x
Debtors – others x
Cash at bank x
Cash at hand x
x
Current Liabilities
Bank overdraft x
Creditors – trade x
Creditors – others x (x)
Net current assets x
Net Assets x
Capital x
Add: Net profit x
x
Less: Drawings (x)
x
P Boones
Balance Sheet as at 30 Sept 2002
£ £
Non Current Assets
Premises 50,000
Fixtures & fittings 3,500
Motor vehicles 18,000
71,500
Current Assets
Stock 29,460
Debtors 38,960
Cash at bank 4,820
73,240
Current Liabilities
Creditors (17,310)
Net Current Assets 55,930
Net Assets 127,430
Capital 126,360
Add: Net Profit 13,070
139,430
Less: Drawings (12,000)
127,430
`
Final
Documents Prime entry Ledger Balances
Accounts
Account
Recorded
Purchas Purchases
e Journal
Invoice
TRIAL
Credit Return
Recorded
note Inwards
Purchases
Journal
The
Ledger
Profit
&
Loss Return
Outwards BALANCE
Debit
Loss journal
Note Recorded
Account
Receipt The
s cashbook
&
Cheque
Recorded General
s Petty
Ledger
Petty cashbook
Other Recorded General
Correspo
Balance Journal
ndence
Balance Sheet
This shows the evidence transactions. They are collected, filed and posted in the
books of prime entry. Example, if a firm sells goods on credit, then an invoice is
raised. The source documents as shown in the above include:
Lesson One 53
Sales invoice
Purchases invoice
Credit note
Debit note
Receipts, cheques and petty cash vouchers
Other correspondences.
The The
Firm Credit sales (sales invoice)
Debtor
Returns inwards (credit note)
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they
make payments in the form of cash or cheques. It shows:
Cheques
When a firm opens a current account with the bank, a chequebook containing
cheques issued. The cheques allow the firm to make payments against the account
with the bank. When a firm issues a cheque to its creditors for payments, it
authorizes the bank to honour payments against the firm’s account with the bank.
The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how
the money was utilized e.g. fuel receipt, bus ticket e.t.c.
Total 700.00
The individual entries in the sales journal are posted to the debit side of the
debtor’s accounts in the sales ledger and the total is posted on the credit side of the
sales account in the general ledger.
56 Introduction to Accounting
T Binus
19x £ 19x
8 8
3/3 Sal 350
es
L Thompson
19x £ 19x £
8 8
3/3 Sal 150
es
Example 2.4
You are to enter up the sales journal from the following details. Post the items to
the relevant accounts in the sales ledger and then show the transfer to the sales
account in the general ledger.
2003
Mar 1 Credit sales to J Gordon £1,870
“ 3 Credit sales to G Abrahams £1,660
“ 6 Credit sales to V White £120
“ 10 Credit sales to J Gordon £550
“ 17 Credit sales to F Williams £2,890
“ 19 Credit sales to U Richards £660
“ 27 Credit sales to V Wood £280
“ 31 Credit sales to L Simes £780
Lesson One 57
Answer
8,810.00
Sales Ledger
J Gordon U Richards
20 £ 20 £ 20 £ 20 £
03 03 03 03
1/3 157 19/ Sal 660
0 3 es
10/ 550
3
G Abrahams V Wood
200 £ 200 £ 200 £ 200 £
3 3 3 3
3/3 Sal 1,6 27/ Sal 280
es 60 3 es
U White L Simes
200 £ 200 £ 200 £ 200 £
3 3 3 3
6/3 Sal 120 31/ Sal 750
es 3 es
3 3 3 3
17/ Sal 289 Cred
3 es 0 it
Sale
s
Purchases Journal
Purchases journal is also called a purchases day-book. It records all the purchase
invoices received by the firm during a particular financial period. It has the
following format (including records of invoices).
TOTAL 750
The individual entries in the purchases journal are posted to the credit side of the
creditor’s accounts in the purchases ledger and the total is posted to the debit side
of purchases account of the general ledger. This is shown below:
L Smailes
19x £ 19x £
6 6
2/5 Purchas 25
es 0
TOTAL £53
Individual entries in a return inwards journal are posted to the credit of the debtors
accounts in the sales ledger and the total is posted to the debit side of the return-
inwards account of the general ledger.
TOTAL 35
Individual entries are posted on the debit side of the creditors account in the
purchases ledger and on the total to credit side of the returns outwards account in
the general ledger.
M. Hyatt a/c
£ £
3/5 Returns out 12
T. Bills a/c
£ £
4/5 Returns Out 19
Lesson One 61
The following example 2.5 shows how the four journals are used.
62 Introduction to Accounting
19x5
July 1 Credit purchases from: K Hill £3800; M Norman £500; N Senior £106.
“ 3 Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356.
5 Credit purchases from: R Morton £200; J Cook £180; D Edwards £410;
C Davies £66.
“ 8 Credit sales to: A Green £307; H George £250; J Ferguson £185.
“ 12 Returns outwards to: M Norman £30; N Senior £16.
“ 14 Returns inwards from: E Phillips £18; F Thompson £22.
“ 20 Credit sales to: E Phillips £188; F Powell £310; E Lee £420.
“ 24 Credit purchases from: Ferguson £550; K Ennevor £900.
“ 31 Returns inwards from: E Phillips £27; E. Rigby £30.
“ 31 Returns outwards to: J Cook £13; C Davies £11.
SALES JOURNAL
TOTAL 2,772
Sales Ledger
E Rigby E Phillips
19x £ 19x £ 19x £ 19x5 £
5 5 5
3/7 Sal 51 3/7 Retur 30 3/7 Sal 246 14/7 Returns 18
es 0 ns es
Inwar
ds
20/ Sal 188 31/7 Retuns 27
7 es in
Lesson One 63
F. Thompson
J. Ferguson
19x £ 19x £ 19x £ 19x5 £
5 5 5
3/7 Sal 35 14/ Retur 22 8/7 Sal 185
es 6 7 ns in es
Green F. Powell
19x £ 19x £ 19x £ 19x5 £
5 5 5
8/7 Sal 30 20/ Sal 310
es 7 7 es
H George E Lee
19x 19x £ 19x £ 19x5 £
5 5 5
8/7 Sal 25 20/ Sal 420
es 0 7 es
PURCHASES JOURNAL
Total 3,292
Purchases Ledger
N. Senior
64 Introduction to Accounting
1995 1995
£ £
12/7 Returns out 1/7 Purchases
16 22
M. Norman
1995 1995
£ £
30/7 Returns out 1/7 Purchases
30 500
J. Cook
1995 1995
£ £
31/7 Returns out 5/7 Purchases
13 180
C. Davies
1995 1995
£ £
31/7 Returns out 5/7 Purchases
11 60
K. Hill
1995 1995
£ £
1/7 Purchases
380
R. Morton
1995 1995
£ £
5/7 Purchases
200
D. Edwards
1995 1995
£ £
5/7 Purchases
410
C. Ferguson
1995 1995
£ £
27/7 Purchases
550
K. Ennevor
1995 1995
Lesson One 65
£ £
24/7 Purchases
900
12 July M. Norman 30
12 July N. Senior 16
31 July J. Cook 13
31 July C. Davies 11
70
General Ledger
Sales a/c
1995 1995
£ £
31/7 Sundry debtors
2772
Purchases a/c
1995 1995
£ £
31/7 Sundry creditors
3292
70
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors
or other sources of income) and all the payments (to creditors or suppliers and
other expenses) for a particular financial period. The cashbook will also show us the
cash at bank and cash in hand position of the firm.
i. Cash in hand cashbook, which records the cash transactions in the firm or
business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of
the general ledger and records the source documents (receipts and cheques). The
cash at bank cashbook and cash in hand cashbook are combined together to get a
two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
Additional columns for discounts allowed and discounts received can be included
with the cash at bank columns to get a 3 – column cashbook. The format is as
follows:
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part
of the ledger balances and the discounts allowed and discounts received columns
will be added and the totals posted to the respective discount accounts. The
discount allowed total will be posted to the debit side of the discount allowed
account in the general ledger and the total of the discount received will be posted
to the credit side of the discount-received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the
firm has some cash at the bank and a credit balance means that the account at the
bank is overdrawn. (the firm owes the bank some money).
Example 2.7
Write up a two-column cashbook from the following details, and balance off as at
the end of the month:
2003
Cash Book
Cash Bank Cash Bank
Capital 1000
F Lake 5000
(loan)
Sales 980
N Miller 620
Sales 530
G Moores 650
Cash C
Sales
Bank C
68 Introduction to Accounting
Cash Book
Cash Bank Cash Bank
Capital 1000 Rent 100
F. Lake 5000 B McKenzie 650
(Loan)
Sales 980 B Burton 220
N Miller 620 Bank C 500
Sales 530 F Lake (loan) 1000
G Moores 650 Motor 120 100
Expenses
Cash C 500 Cash C
Sales 660 Wages 970
Bank C 1000 Balances c/d 1840 4540
363 7310 3630 7310
0
19x8
Mar 1 Balances brought forward: Cash £230; Bank £4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5
percent
discounts: R Burton £140; E Taylor £220; R Harris £800.
“ 4 Paid rent by cheque £120.
“ 6 J Cotton lent us £1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2
½ per cent cash discount: N Black £360; P Towers £480; C Rowse
£300.
“ 10 Paid motor expenses in cash £44.
“ 12 H Hankins pays his account of £77, by cheque £74, deducting £3 cash
discount.
“ 15 Paid wages in cash £160.
“ 18 The following paid their accounts by cheque, in each case deducting 5
per cent cash discount: C Winston £260; R Wilson & Son £340; H
Winter £460.
“ 21 Cash withdrawn from the bank £350 for business use.
“ 24 Cash Drawings £120.
“ 25 Paid T Briers his account of £140, by cash £133, having deducted £7
cash discount.
“ 29 Bought fixtures paying by cheque £650.
Lesson One 69
Answer
Cash Book
Disct Cash Bank Disct Cash Bank
Bank
Bal b/d 230 4756 Rent 120
R Burton 7 133 N Black 9 351
E Taylor 11 209 P Towers 12 468
R Harris 15 285 C Rowse 20 780
J Cotton: loan 1000 Motor 44
expenses
H Hankins 3 74 Wages 160
C Winston 13 247 Cash 350
R Wison & 17 323 Drawings 120
Son
H Winter 23 437 T Briers 7 133
Bank 350 Fixtures 650
Commission 88 Balances c/d 123 4833
89 580 7552 48 580 7552
Discounts Received
3/1 Sundry 48
Creditors
Discounts Allowed
3/1 Sundry 89
Debtors
The balance c/d of the petty cash book will signify the balance of cash in hand or
form part of cash in hand. The totals of the expenses are posted to the debit side of
the expense accounts. If a firm operates another cashbook in addition to the petty
cash book, then the totals of the expenses will also be posted on the credit side of
the cash in hand cashbook.
£
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000
Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float).
I n the following week, the following payments are made:
£
1st March – bought stamps for 80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
3rd March – bought fuel 150
3rd March – cleaning wages 300
4th March – bought stamps 200
4th March – paid L. Thompson (creditor) 400
5th March – fuel costs 150
On the 5th of March the cashier requested for a refund of the cash spent and this
amount was reimbursed back.
72 Introduction to Accounting
Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the
next period and the relevant expense accounts, as they would appear on the
General Ledger.
Lesson One 73
Answer
GENERAL JOURNAL
Example 2.9
You are to show the journal entries necessary to record the following items:
• 2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
• 2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
• 2003 May 8 Furniture bought by us for £490 was returned to the supplier
Wood
• Offices, as it was unsuitable. Full allowance will be given us.
• 2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and we
received
• £39 in full settlement of the debt.
• 2003 May 14 we take £45 goods out of the business stock without paying for
them.
• 2003 May 28 Some time ago we paid an insurance bill thinking that it was all
in respect
• of the business. We now discover that £76 of the amount paid was in fact
insurance of our private house.
• 2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.
Lesson One 75
a. Answer
GENERAL JOURNAL
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability,
incomes and expenses and capital.
The ledger accounts can also be classified as follows:
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
REAL NORMAL
ACCOUNTS a/cs
DEBTORS CREDITORS
(for (For goods)
goods) Other
Non-current Liabilities
assets
Other
Inventories/
Assets
Stocks
Income
Expenses
Capital
Lesson One 77
REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a
capital of £5,000.00 with which he opened a bank account for his business.
May 1 Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
May 2 Purchased goods on credit from Abel £650.00
May 4 Sold goods on credit to Bruce £700.00
May 9 Purchased goods on credit from Green £300.00
May 11 Sold goods on credit to Hill £580.00
May 13 Cash sales paid into bank account £200.00
May 16 Received cheque from Bruce in settlement of his account
May 17 Purchased goods on credit from Kay £800.00
May 18 Sold goods on credit to Nailor £360.00
May 19 Sent Cheque to Abel in settlement of his account
May 20 Paid rent by cheque £200.00
May 21 Paid delivery expenses by cheque £50.00
May 24 Received from Hill £200.00 on account
May 30 Drew cheque for personal expenses £200.00 and assistant wages
£320.00
May 31 Settled the account of Green.
Required
a) Record the transactions in the books of prime entry.
b) Post the entries in the ledger accounts
c) Balance the ledger accounts where necessary
d) Extract a trial balance as at 31 May 2000.
78 Introduction to Accounting
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages
bookshop.
Endpages Bookshop
Dr Cr
£ £
Sales 151,500.00
Purchases 103,500.00
Salaries and wages 18,700.00
Office expenses 2,500.00
Insurance 1,100.00
Electricity 600.00
Stationery 2,400.00
Advertising 3,500.00
Telephone 800.00
Rates 3,000.00
Discount allowed 100.00
Discount received 200.00
Rent received 2,000.00
Returns inwards 1,500.00
Returns outwards 3,500.00
Stock at 01 Jan 2001 46,000.00
Premises 80,000.00
Stock as at 31 Dec 41,000.00
2001 5,000.00
Fixtures and fittings 4,800.00 7,500.00
Debtors and Creditors 200.00
Cash in Hand 12,000.00
Cash in bank 11,000.00
Capital 14,000.00
Drawings
Stock as at 31 Dec ________
2001 328,700.00 41,000.00
328,700.00
Required
Prepare a Trading and profit and loss account for the year ended 31 December 2002
and a balance sheet as at that date.
(20 marks)
Lesson One 79
QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of
final accounts for the year ended 31 March 2002.
Dr Cr
£ £
Stock 1 April 2001 1,816,000
Sales 9,234,000
Purchases 6,918,500
Carriage inwards 42,000
Carriage outwards 157,000
Returns outwards 64,000
Wages and salaries 1,024,000
Rent and rates 301,500
Communication 62,400
expenses 21,600
Commissions payable 40,500
Insurance 31,800
Sundry expenses 2,000,000
Buildings 1,432,000
Debtors 816,000
Creditors 285,000
Fixtures 297,000
Cash at bank 11,500
Cash in hand 762,000
Drawings 5,088,800
Capital
152,028 152,028
80 Introduction to Accounting
QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to
draft the trading and profit and loss account for the year to end 30 September 2002
and a balance sheet as at that date.
Dr Cr
£ £
Capital 3,095,500
Drawings 842,000
Cash at bank 311,500
Cash in hand 29,500
Debtors 1,230,000
Creditors 937,000
Stock 30 September 2,391,000
2001 410,000
Motor van 625,000
Office equipment 1,309,000
Sales 9,210,000
Purchases 55,000
Returns inwards 21,500
Carriage inwards 30,700
Returns outwards 30,900
Carriage outwards 163,000
Motor expenses 297,000
Rent 40,500
Telephone charges 1,281,000
Wages and salaries 49,200
Insurance 137,700
Office expenses
Sundry expenses 28,400
17,153,200 17,153,200
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
QUESTION ONE
Shs.
Opening stock of tea 100,000
Purchases – Tea 400,000
Salaries paid 80,000
Buildings 95,000
Cash in hand 2,000
Cash at bank 135,000
Rent, rates and council taxes 15,000
Insurance premium paid 3,000
Miscellaneous receipts 10,000
Sales 720,000
Discounts allowed 4,750
Bad debts 3,250
Building repairs 2,900
Miscellaneous expenses 8,700
Advertisement 20,000
Commission to sales manager 32,400
Furniture and fittings 35,000
Air conditioners 30,000
Sundry debtors 100,000
Sundry creditors 80,000
Loan on mortgage 70,000
Interest paid on the above 3,000
Prepaid expenses 4,000
Drawings 18,000
Bills payable (Current liability) 30,000
Bank charges 2,000
Legal charges 6,000
Motor vehicles 80,000
Travelling and conveyance 10,000
Capital 280,000
Required:
Prepare a trading, profit and loss account for the year ended 31st March 1998 and a
Balance Sheet as at that date.
QUESTION TWO
Hall Ltd., which makes up its accounts to 30th June each year, has a fleet of motor
lorries. Annual depreciation on motor lorries is calculated at a rate of 25% on the
reducing balances, with a full year’s depreciation being made in the year of
purchase, but no charge in the year of sale. An extract from the company’s balance
sheet as on 30th June 1997 showed the following:
Shs
Motor Lorries at cost: 164,900
Less provision for depreciation: 93,382
Net book Value: 71,518
During the year ended 30th June 1998 purchases and sales of lorries were as follows:
1998
Feb 25th H13 9,000
June 24th H14 5,900
Required:
Write up the following accounts in the books of the company for the year ended 30th
June 1998:
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader,
at 31st December 1997:
Shs Shs.
Drawings/Capital 2,148 20,27
1
Debtors/Creditors 7,689 5,462
Purchases/Sales 62,10 81,74
1 2
Rent and Rates 880
Light and heat 246
Salaries and wages 8,268
Bad debts 247
Provision for bad debts 326
Stock in trade 31st Dec 1996 9,274
Insurance 172
General Expenses 933
Bank balances 1,582
Motor van at cost/Provision for 8,000 3,600
depreciation 0
Proceeds on sale of van 250
Motor expenses 861
Freehold premises at cost 15,00
0
84 Introduction to Accounting
Required:
A Trading Profit and Loss account for the year ended 31st December 1997 and a
Balance Sheet as at date using vertical format.
QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it
makes quarterly payments as follows:
The rental agreement began on 1st August 19X4, and the first six quarterly bills
were as follows
Bills and dates received Rental (Shs) Cost of copies (shs)Total cost (Shs)
1 August 19X4 2,100 0 2,100
1 November 19X4 2,100 1,500 3,600
1 February 19X5 2,100 1,400 3,500
1 May 19X5 2,100 1,800 3,900
1 August 19X5 2,700 1,650 4,350
1 November 19X5 2,700 1,950 4,650
Required:
Given that Batley Printing shop ends its accounting year on 31 August,
Lesson One 85
Calculate the charge for photocopying expenses for the year to 31 August, 19X5
and the amount of prepayments and / or accrued charges as at that date.
QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention
looks forwards.”
Required:
a) Explain clearly what is meant by:
LESSON THREE
ACCOUNTING THEORY
− Identifying and reviewing of all the issues associated with the topic,
− Studying national and regional accounting requirements and practice,
consultation with the member bodies’ standard setting bodies and other
interested groups,
− Public Exposure of the draft Accounting Standard,
− Evaluation by the steering committee and the board of the comments
received on exposure drafts.
− IAS 2 Inventories
Previously new standards were called International Accounting Standards but from
2003 any new standards will be called International financial Reporting Standards.
However in the current practice is to refer to all standards as International Financial
Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with
Kenya Accounting Standards (IASs), which were developed and published by ICPAK
(Institute of Certified Public Accountants of Kenya). This were later dropped and
International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic
financial accounts of business enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in
operational existence for the foreseeable future, and that there is no intention
to put the company into liquidation or to make drastic cutbacks to the scale of
operations.
Financial statements should be prepared under the going concern basis unless
the entity is being (or is going to be) liquidated or if it has ceased (or is about to
cease) trading. The directors of a company must also disclose any significant
doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the
business should not be valued at their ‘break-up’ value, which is the amount
that they would sell for it they were sold off piecemeal and the business were
thus broken up.
ii) The accruals concept (or matching concept): states that revenue and costs
must be recognized as they are earned or incurred, not as money is received or
88 Final Accounts
paid. They must be matched with one another so far as their relationship can
be established or justifiably assumed, and dealt with in the profit and loss
account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200)
earned from the sale of 20 units against the cost (£100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect
to charge profit and loss account with the cost of twenty units; there is still two
units in stock. If the firm intends to sell them later, it is likely to make a profit
on the sale. Therefore, only the purchase cost of eighteen units (£90) should be
matched with the sales revenue, leaving a profit of £90.
Lesson Two 89
Assets
190
Liabilities
Creditors 100
90
If, however the firm had decided to give up selling units, then the going concern
concept would no longer apply and the value of the two units in the balance
sheet would be a break-up valuation rather than cost. Similarly, if the two
unsold units were now unlikely to be sold at more than their cost of £5 each
(say, because of damage or a fall in demand) then they should be recorded on
the balance sheet at their net realizable value (i.e. the likely eventual sales price
less any expenses incurred to make them saleable, e.g. paint) rather than cost.
This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked.
Because the business is assumed to be a going concern it is possible to carry
forward the cost of the unsold units as a charge against profits of the next
period.
iii) The Prudence Concept: The prudence concept states that where alternative
procedures, or alternative valuations, are possible, the one selected should be
the one that gives the most cautious presentation of the business’s financial
position or results.
Therefore, revenue and profits are not anticipated but are recognized by
inclusion in the profit and loss account only when realized in the form of
either cash or of other assets the ultimate cash realization of which can be
assessed with reasonable certainty: provision is made for all liabilities
90 Final Accounts
(expenses and losses) whether the amount of these is known with certainty or is
best estimate in the light of the information available.
Assets and profits should not be overstated, but a balance must be achieved to
prevent the material overstatement of liabilities or losses.
The other aspect of the prudence concept is that where a loss is foreseen, it
should be anticipated and taken into account immediately. If a business
purchases stock for £1,200 but because of a sudden slump in the market only
£900 is likely to be realized when the stock is sold the prudence concept dictates
that the stock should be valued at £900. It is not enough to wait until the stock
is sold, and then recognize the £300 loss; it must be recognized as soon as it is
foreseen.
A profit can be considered to be a realized profit when it is in the form of:
• Cash
• Another asset that has a reasonably certain cash value. This includes
amounts owing from debtors, provided that there is a reasonable certainty
that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth £100,000
during the year to 31 December. At 31 December there are debts outstanding
of £15,000. Of these, the company is now doubtful whether £6,000 will ever be
paid.
The company should make a provision for doubtful debts of £6,000. Sales for
20x5 will be shown in the profit and loss account at their full value of £100,000,
but the provision for doubtful debts would be a charge of £6,000. Because there
is some uncertainty that the sales will be realized in the form of cash, the
prudence concept dictates that the £6,000 should not be included in the profit
for the year.
iv) The consistency concept: The consistency concept states that in preparing
accounts consistency should be observed in two respects.
vi) The money measurement concept: The money measurement concept states
that accounts will only deal with those items to which a monetary value can be
attributed.
For example, in the balance sheet of a business, monetary values can be
attributed to such assets as machinery (e.g. the original cost of the machinery;
Lesson Two 91
or the amount it would cost to replace the machinery) and stocks of goods (e.g.
the original cost of goods, or, theoretically, the price at which the goods are
likely to be sold).
The monetary measurement concept introduces limitations to the subject matter
of accounts. A business may have intangible assets such as the flair of a good
manager or the loyalty of its workforce. These may be important enough to give
it a clear superiority over an otherwise identical business, but because they
cannot be evaluated in monetary terms they do not appear anywhere in the
accounts.
92 Final Accounts
vii) The separate valuation principle: The separate valuation principle states
that, in determining the amount to be attributed to an asset or liability in the
balance sheet, each component item of the asset or liability must be
determined separately.
These separate valuations must then be aggregated to arrive at the balance
sheet figure. For example, if a company’s stock comprises 50 separate items, a
valuation must (in theory) be arrived at for each item separately; the 50 figures
must then be aggregated and the total is the stock figure which should appear
in the balance sheet.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is
because valuations tend to be subjective and to vary according to what the
valuation is for. For example, suppose that a company acquires a machine to
manufacture its products. The machine has an expected useful life of four years.
At the end of two years the company is preparing a balance sheet and has decided
what monetary amount to attribute to the asset.
xi) The realization concept: Realization: Revenue and profits are recognized
when realized. The concept states that revenue and profits are not anticipated
but are recognized by inclusion in the income statement only when realized in
the form of either cash or of other assets the ultimate cash realization of which
can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis
of double entry bookkeeping.
xiii) Substance over form: The principle that transactions and other events are
accounted for and presented in accordance with their substance and economic
reality and not merely their legal form e.g. a non current asset on Hire purchase
although is not legally owned by the enterprise until it is fully paid for, it is
reflected in the accounts as an asset and depreciation provided for in the
normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be ‘realized’ and so
‘recognized’ in the trading, profit and loss account when:
c) The critical event in the sale transaction has occurred. The critical event
is the event after which:
i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.
Lesson Two 95
The prudence concept is applied here in the sense that revenue should not be
anticipated, and included in the trading, profit and loss account, before it is
reasonably certain to ‘happen’.
Required
Given that prudence is the main consideration, discuss under what circumstances, if
any, revenue might be recognized at the following stages of a sale.
(a) Goods have been acquired by the business, which it confidently expects to resell
very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer’s cheque in payment for the goods has been cleared by the bank.
Answer
(a) A sale must never be recognized before a customer has even ordered the
goods. There is no certainty about the value of the sale, nor when it will take
place, even if it is virtually certain that goods will be sold.
(b) A sale must never be recognized when the customer places an order. Even
though the order will be for a specific quantity of goods at a specific price, it is
not yet certain that the sale transaction will go through. The customer may
cancel an order, the supplier might be unable to deliver the goods as ordered or
it may be decided that the customer is not a good credit risk.
(c) A sale will be recognized when delivery of the goods is made only when:
i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a
delivery note).
(d) The critical event for a credit sale is usually the dispatch of an invoice to the
customer. There is then a legally enforceable debt payable on specified terms,
for a completed sale transaction.
(e) The critical event for a cash sale is when delivery takes place and when cash is
received, both take place at the same time. It would be too cautious or ‘prudent’
to await cash payment for a credit sale transaction before recognizing the sale,
unless the customer is a high credit risk and there is a serious doubt about his
ability or intention to pay.
(f) It would again be over-cautious to wait for clearance of the customer’s cheques
before recognizing sales revenue. Such a precaution would only be justified in
cases where there is a very high risk of the bank refusing to honour the cheque.
96 Final Accounts
II) Bases
Bases are the methods that have been developed for expressing or applying
fundamental accounting concepts to financial transactions and items. Examples
include:
III) Policies
Accounting policies are the specific accounting bases judged by business
enterprises to be the most appropriate to their circumstances and adopted by them
for the purpose of preparing their financial accounts.
a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and
economic reality and not merely their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some
events and transactions (prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission
can cause information to be false.
Comparability: users must be able to compare the financial statements of an
enterprise through time in order to identify trends in its financial position and
performance. Users must also be able to compare the financial statements of
different accounting policies, changes in the various policies and the effect of these
changes in the accounts. Compliance with accounting standards also helps achieve
this comparability.
The Accountants Act Cap 531 (1977) establishes the Institute of Certified Public
Accountants of Kenya (ICPAK) and two boards, to be known as the Registration of
Kenya Accountants Board (RAB) and Kenya Accountants and Secretaries National
Examinations Board (IASNEB)
98 Final Accounts
e) To carry out any other functions prescribed for it under any of the provisions
of the Act or under any other written law; and
A council known as the Council of the institute governs the Institute, which consists
of the Chairman, nine members from the institute and one member appointed by
the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out
practicing certificates and registration of qualified persons as members of the
institute.
The Act also outlines the following as the functions of IASNEB:
(a) Define the following accounting concepts and for each explain their implication
in the preparation of financial statements.
4 marks
Solution:
Materiality prevents time being wasted on items which do not impact on the results
of the entity; it provides a focus on the significant items.
(iv) Realization
The realization concept involves recognizing amounts in the financial statements at
the point at which they crystallize. Profit should not be reflected in the profit and
loss account until it has been earned.
The realization concept means that the profit in the financial statements should be
reasonably stated.
100 Final Accounts
(Total: 19 marks)
(Covered adequately in the text)
Lesson Two 101
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:
Question Two
Accounting practice depends upon the guidance provided by a number of
accounting concepts, some of which are to be found in IAS 1 and/or in the
conceptional framework of the International Accounting Standards Committee.
Required:
(a) Define and explain the relevance of the following accounting concepts.
Neutrality
Money measurement
Accruals
Substance over form
Consistency (15
marks)
(20
marks)
Question Three
If the information in financial statements is to be useful, regard must be had to the
following:
Materiality
Comparability
Prudence
Objectivity
Relevance
102 Final Accounts
Required
Explain the meaning of each of these factors as they apply to financial accounting
including in your explanations one example of the application of each of them.
(Four marks for each of (a) to (e).)
(
20 marks)
Lesson Two 103
Question Four
a) Explain what is meant by materiality in relation to financial statements and
state two factors affecting the assessment of materiality.
(4 marks)
b) Explain what makes information in financial statements relevant to users.
(5 marks)
c)
1. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’.
Explain the meaning of these two terms.
2. Explain how a possible conflict between them could arise and how that
conflict should be resolved.
(5 marks)
LESSON FOUR
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received.
An accrued income should be reported in the profit & loss account and the same
income will be shown in the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month,
assuming that this is the first year of renting and rent is received in arrears (rent 4
January is received early Feb).
The ledger accounts of the firm will be as follows:
Cashbook
Year 1 £
22,000
Lesson Three 105
Rent – Income
Year 1 £ Year 1 £
Jan C/B 2,000
Feb C/B 2,000
Mar C/B 2,000
April C/B 2,000
May C/B 2,000
Jun C/B 2,000
July C/B 2,000
Aug C/B 2,000
Sept C/B 2,000
Oct C/B 2,000
31/12 P&L 24,000 Nov C/B 2,000
Dec Accrued c/f 2,000
24,000 24,000
Although the cashbook is showing that rent received amounts £22,000, the full
rental income of £24,000 will be reported in the Profit & Loss a/c as rent income and
the accrued rent for Dec of £2,000 will be reported in the balance sheet as a current
asset.
Cashbook
Year 1 £ Year 1 £
Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
Apr (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 June) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000
106 Accounting Theory
Rent – Expenses
Year 1 £ Year 1 £
C/B Rent for Jan 2,000
Rent for Feb 2,000
Rent for Mar 2,000
Rent for Apr 2,000
Rent for May 2,000
Rent for June 2,000
Rent for July 2,000
Rent for Aug 2,000
Rent for Sept 2,000
Rent for Oct. 2,000
Rent for Nov 2,000
31/12 Bal c/d 2,000 31/12 P&L 24,000
24,000 24,000
The cashbook shows that the rent for the 11 months was paid for. However in
the P&L a/c we should report rent for the full year of £24,000 and the £2,000, rent
for Dec being the accrued expense will be shown in the balance sheet as a current
liability.
PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens
where an income is payable in advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should
be carried forward and reported in the period it relates to.
The accounting treatment will be to show it as a current liability.
Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance.
Assuming that the firm’s rental income began in 1st March and the financial year,
end is on 31st Dec. The ledger accounts will be:
Cashbook
Lesson Three 107
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Income
Year 1 £ Year 1 £
1/3 Cashbook 15,000
1/6 Cashbook 15,000
P&L (10 x 5,000) 50,000 1/9 Cashbook 15,000
31/12 Bal c/d 10,000 1/12 Cashbook 15,000
60,000 60,000
Rent for the 4 quarters of 12 months has been received as per the cashbook but
because the end of the financial year is at 31 Dec, rent for 2 months is pre-paid.
This £10,000 is not charged in the P&L but is carried forward as current liability in
the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been
paid. A prepaid expense should not be charged in the P&L a/c but should be carried
forward to the next financial period and should be shown in the balance sheet as a
current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that
rent is an expense. The ledger accounts is as follows:
Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Expenses
Year 1 £ Year 1 £
1/3 C/B (Mar, April, May) 15,000
1/6 C/B (June, July, Aug) 15,000
1/9 C/B (Sept, Oct, Nov) 15,000 P&L (10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb) 15,000 31/12 Bal c/d (2 x 5,000) 10,000
60,000 60,000
108 Accounting Theory
Rent of £10,000 for 2 months is carried forward to the next financial period and
shown in the balance sheet as a current asset.
Lesson Three 109
Income
Prepaid -Not
reported Current
Liability
Accruals/
Prepayments
Accrued - Charge as
Current
an expense
Liability
Expense
Current
In P& L Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in
the Balance Sheet as follows:
Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x
X
110 Accounting Theory
The accruals and expenses items may also be adjusted in the relevant income and
expense accounts so that the correct amount of expense or income is reported in
the profit and loss account for the year.
Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger
accounts for the following items including the balance transferred to the necessary
part of the final accounts, also the balances carried down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December
2002 £2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December
2002 £3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December
2001 £25,000; Owing as at 31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December
2001 £2,200; Prepaid as at 31December 2002 £2,900.
e) Seamers sub-lets part of the
premises. Receives £5,500 during the year ended 31 December 2002.
Tenant owed Seamers £1,800 on 31 December 2001 and £2,100 on 31
December 2002
a) Motor Expenses
19X6 £ 19X6 £
Cashbook 7,440
31/12 Bal c/d 280 P/L a\c 7220
7200 7200
19x7
1/1 Bal b/d 280
b) Insurance
19x6 £ 19x6
£
Cashbook 4,200 31/12 P&L a/c 3850
31/12 Bal c/d 350
4,200 4200
19x7
1/1 Bal b/d 350
===
c) Stationery
19x6 £ 19x6 £
Cashbook 18,000 1/1 Bal b/d 2,500
Lesson Three 111
d) Rates
19x6 £ 19x6 £
1/1 Bal b/d 2200 P&L 8800
Cashbook 9500 31/12 Bal c/d 2900
11,700
11,700
19x7
1/1 Bal b/d 2900
e) Rent – Income
19x6 £19x6 £
1/1 Bal b/d 1800 Cashbook 5500
P&L 5800 31/12 Bal c/d 2100
7600 7600
19x7
1/1 Bal b/d 2100
Credit bad – debts account to transfer the balance on the bad – debts
account to the Profit and Loss Account.
114 Accounting Theory
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A
specific provision is where a debtor is known and chances of recovering the debt
are low.
The general provision is where a provision is made on the balance of the total
debtors i.e. Debtors less Bad debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of
trading and the entries will be as follows. If it is the 1st year of trading (1st year of
making provision):
If it is a decrease:
i. Debit provision for doubtful debts.
ii. Credit P&L a/c (with the decrease in provision only).
Example
Debtors x
Bad debts (x)
x
Specific Provision (x)
x
General Provision (x)
x
A firm started trading in the year 1999, the balance on the debtor’s account was
£400,000. Bad debts amounting to £40,000 were written off from this balance,
there was a specific provision of £5,000 to be made to one of the debtors and a
general provision of £5% was to be made on the balance of the debtors. The ledger
accounts of 1999 were as follows:
400,000 400,000
116 Accounting Theory
Bad debts
1999 £ 1999 £
Debtors 40,000 31/12 P&L 40,000
£
Debtors 400,000
Bad debts (40,000)
360,000
Specific Provision (5,000)
355,000
General Provision (5%) (17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
£ £
Expenses:
Bad debts 40,000
Increase in provision for D/debts22,750
In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of
£50,000 needs to be written off there is no specific provision but the general
provision is to be maintained at 5%. The ledger accounts will be as follows:
Debtors 500,000
Bad debts (50,000)
450,000
General Provision (5%) 22,500
427,500
Lesson Three 117
Debtors
2000 £ 2000 £
Bal b\d 500,000 Bad Debts 50,000
______ Bal c\d 450,000
500,000 500,000
Bad Debts
2000 £ 2000 £
Debtors 50,000 31\12 P& L 50,000
Expenses
Bad debts 50,000
£ £
Current Assets
Debtors 450,000
Provision for bad debts (22,500)
427,500
In the year 2001 the debtors balance goes up to £600,000 from which bad debts of
£50,000 need to be written off, there is no specific provision but the general
provision is to be maintained at 5% the ledger accounts is as shown:
£
Debtors 600,000
Bad debts (50,000)
550,000
General provision % (27,500)
522,500
118 Accounting Theory
Debtors
2001 £ 2001 £
Bal b\ Bad Debts 50,000
600,000
______ Bal c\d 550,000
600,000 600,000
Bad Debts
2001 £ 2001 £
Debtors 50,000 31\12 P& L 50,000
Profit And Loss Account (Extract) for the year ended 31/12/2001
£ £
Expenses
Bad debts 50,000
Increase in provision 5,000
Example 4.6
In a new business during the year ended 31 December 2002 the following debts are
found to be bad, and are written off on the dates shown:
£ Bad Debts
Debtors 70,036 2002 £ 2002
£
Bad debts (1,860) Bad debts 1860 31/12 P\L
1860
68,500 Provision for
D/Debt (2,200)
66,300
i. The Bad Debts Account and the Provision for Doubtful Debts Account for each
of the two years.
ii. The relevant extracts from the Balance Sheet as at 31 December 2001 and
2002.
Solutions
Bad debts = 2,250
405,000
Provision (5,500)
399,500
Bad Debts
2001 £ 2001 £
31\8 W.Best 850
30\9 S.Aron 1400 31\12 P&L 2250
2250 2250
2001 £ 2001 £
1\1 Bal b\d 550
1\1 Bal c\d 600 31\12 P&L 50
600
600
Bad Debts
2001 £ 2001 £
28/2 J. Friend 1,800
31/8 N. Kelly 600
30/11 A. Oliver 2,500 31/13 P&L 4,900
4,900 4,900
122 Accounting Theory
19x6 £ £
Expenses
Bad debts 2,250
Provision for Doubtful Debts 5,000
19x7
Bad debts 4,900
Increase in provision for D/Debts 500
Current Assets
Debtors 405,000
Less provision (5,500) 399,500
19x7
Debtors 473,000
Less: provision (6,000) 467,000
Debtors x
Bad debts (x)
x
Specific provision (x)
x
(x)
x
Provision for discount allowed (on balance) (x)
x
Lesson Three 123
Expenses
Bad debts x
Increase in provision for D/Debts x
Increase in provision for discounts allowed x
Current Assets £ £
Debtors x
Less: provision for Doubtful Debts (x)
Less: provision for discounts allowed (x) x
Example:
A firm recovers debts amounting to £10,000 that had been written off in the
previous periods. In the same financial period the firm writes off bad debts
amounting £30,000. The ledger accounts will be as follows:
Bad debts
£ £
Debtors 30,000 Bad Debt Recovered 10,000
P\L 20,000
30,000 30,000
Unpresented Cheques: Cheques issued by the firm for payment to the creditors
or to other supplies but have not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and
other sources for which the firm has banked but the bank has not yet availed the
funds by crediting the firm’s account.
Errors made in the cashbook
These include:
• Payments over/understated
• Deposits over/understated
• Deposits and payments misposted
• Overcastting and undercasting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the
cashbook:
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per cashbook (updated) x
Add: Un presented cheques x
Errors on Bank Statement (see note 1) x x
x
Less: Uncredited deposits x
Errors on Bank Statement (see note 2) x (x)
Balance at bank as per Balance Sheet x
Note 1: These types of errors will have an effect of increasing the balance at bank
e.g. an overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank
e.g. an understated deposit or an overstated payment by the bank, or making an
unknown payment.
126 Accounting Theory
Format 2
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per bank statement x
Add: Uncredited deposits x
Add errors on bank statement (note 2) x x
x
Less: Unpresented cheques x
Errors on bank statement (note 1) x (x)
Balance at bank as per cashbook (updated) x
===
Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date,
ascertaining the balance on the bank statement, from the following as on 31 March
2003:
£
Cash at bank as per bank column of the cashbook (Dr)
38,960
Bankings made but not yet entered on bank statement
6,060
Bank charges on bank statement but not yet in cashbook
280
Un presented cheques C Clarke 1170
Standing order to ABC Ltd entered on bank statement, but not in cash book
550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook
1,890
Solution
Cashbook – Bank
19X9 £ 19X9 £
31/3 Bal b/d Bank charges
38960 280
ABC (standing order)
550
A Wood (credit transfer) 1890 31/3 Bal C/D 40,020
40,850 40,850
£ £
Balance at bank as per cashbook 40,020
Add: Unpresented cheques 1,170
41,190
Less: Uncredited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
Example 4.9
The following are extracts from the cashbook and the bank statement of J Richards.
You are required to:
Cashbook
2002 Dr £ 2002 Cr £
Dec 1 Balance b/d 1,740 Dec 8 A Dailey 349
Dec 7 J Map 88 Dec 15 R Mason 33
Dec 22 J Cream 73 Dec 28 G Small
115
Dec 31 K Wood 249 Dec 31 Balance c/d 1,831
Dec 31 M Barrett 178
2,328
2,328
Bank Statement
2002 Dr Cr Balance
£ £ £
Dec 1 Balance b/d 1,740
Dec 7 Cheque 88 1,828
Dec 11 A Dailey 349 1,479
Dec 20 R Mason 33 1,446
Dec 22 Cheque 73 1,519
Dec 31 Credit transfer: J Walters 54 1,573
Dec 31 Bank charges 22 1,551
Cashbook –Bank
2002 £ 2002 £
31/12 Bal b/d 1,831 31/1 Bank charges 22
31/12 J. Walters (C/T) 54 31/12 Bal C/D
1,863
1,885
1,885
128 Accounting Theory
Lesson Three 129
J. Richards
Bank Reconciliation Statement as at 31/12/2002
£ £
Balance at bank as per cashbook – bank 1,863
Add: Unpresented cheques – (G Small) 115
1,978
Less: Uncredited deposits
K Wood 249
M. Barret 178 (427)
Balance at bank as per balance sheet 1,551
OR:
Balance at bank as per balance sheet 1,551
Add: Uncredited deposits:
K. Wood 249
M. Barret 178
1,978
Less: Unpresented cheques (115)
Balance at bank as per cashbook – bank 1,863
Required:
i. A statement showing Ssemakula’s adjusted cashbook balance as at 30 June
2001. (9 marks)
ii. A bank reconciliation statement as at 30 June 2001.
(5marks)
(Total: 20 marks)
Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at
bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank
statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.
b) ADJUSTED CASHBOOK
2,397,500
2,397,500
SSEMAKULA
Bank Reconciliation Statement as at 30 June 2001.
Sh. Sh.
Lesson Three 131
19 Deposit 42,750
427,036
21 Cheque no. 79 2,410 424,626
21 Cheque no. 77 12,506
412,120
21 Cheque no. 78 4,000 408,120
21 Cheque no. 81 6,500
401,620
21 Deposit 9,000
410,620
23 Cheque no. 82 16,240
394,380
23 Deposit 63,000
457,380
26 Cheque no. 84 1,500
455,880
26 Dividends 8,750 464,630
26 Deposit 62,500
527,130
28 Cheque no. 88 35,500
491,630
28 Standing order 10,400
481,230
(Insurance)
28 Cheque no. 85 27,000
454,230
28 Cheque no. 87 22,500
431,730
28 Deposit 13,025
444,755
31 Service charge 750 444,005
31 Deposit 28,050
472,055
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was
in transit and two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as
Sh.26, 500 and Sh.36, 000 and in the bank statement as Sh.62, 500 and
Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but
was dishonored and the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for
Sh.5, 800 and Sh.33, 500 respectively.
Required:
a) A correct cashbook balance. (8 marks)
b) A bank reconciliation statement on 31 October 1996. (8
marks)
(Total: 20 marks)
Lesson Three 135
No 96 Q4
CASHBOOK (ADJUSTED)
Sh. Sh.
Balance as per the cashbook 365,875
Add: Unpresented cheques 63 31,000
64 51,000 82,000
447,875
Less: Uncredited cheques
Deposits (82,000)
Balance as per the bank statement 365,875
Revenue Expenditure: There’s an amount spent by the firm in the normal trading
process or to assist in earning revenues or income. Examples:
i. Postage and stationery.
ii. Carriage outwards (sales).
iii. Repairs and maintenance.
Example 4.10
For the business of K Spinns,a wholesaler, classify the following between ‘capital’
and ‘revenue’ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
Lesson Three 137
k) Revenue expenditure
l) Capital expenditure.
e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the
firm. IAS 16 on property, plant and equipment defines depreciation as the
allocation of a depreciable amount of a non-current asset over its estimated useful
life.
Under the matching concept, all incomes or revenues and expenses for a
particular period should be reported in the financial statements and because
depreciation is an expense of the business therefore, it will be charged in the P&L
A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to
use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by
the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming
inadequate e.g. when a
business grows or expands then some buildings may become
inadequate due to space. Also some machines that are unable
to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology
or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw
materials, minerals or oil. Such assets include mines, oil wells, and quarries.
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L
a/c for a particular asset and is based on the following formular:
= £10,000 per
year.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm,
also called Sales Value / Scrap Value.
Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight
years. After the eight years the machine will be sold for £20,000. Under the
straight-line method, the depreciation amount will be computed as follows:
This means for this asset £10,000 will be charged in the P&L account as
depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current
asset are spread out evenly over the life of the asset e.g. buildings use straight-line
method.
Percentage rate based on cost as opposed to number of years can also be used to
calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset
during the first period of use. The same rate is applied in the subsequent financial
periods but the rate is applied on the reduced value of the asset. (Cost of asset –
total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L
account in the earlier periods of use and lower amounts in the latter periods of use
as shown in the following example:
Example 4.12
140 Accounting Theory
Assume a firm buys machinery for £100,000 and provides depreciation on machines
at 20% p.a. on reducing balance method. The depreciation charged to the P&L will
be as follows for the next 3 years.
Lesson Three 141
Year 1
£
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1
Balance to YR 2 80,000
Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2
Balance to YR 3 64,000
Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3
Balance to YR 4 51,200
Expenses £ £
Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x
Land x - x
Buildings x (x) x
Plant and Machinery x (x) x
Furniture, Fixtures & fittings x (x) x
Motor vehicles x (x) x
x x x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars
account and the provision for depreciation account for the year ended 31 December
2002 from the information given below. Depreciation is at the rate of 20 per cent
per annum. Using the basis of one month’s ownership needs one month’s
depreciation.
Motorcars a/c
2002 £ 2002 £
1/1 Cashbook 24,000
1/7 Cashbook 14,000 31/12 Bal c/d
38,000
38,000 38,000
Expenses £ £
Depreciation:
Motor vans 6200
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31
December.
You are to show:
Depreciation is at the rate of 10 per cent per annum, using the straight-line method,
plant being depreciated for each proportion of a year.
Lesson Three 145
Plant a/c
1999 £ 199 £
1/1 Cashbook 8000 31/12 Bal c/d 8000
2000 2000
1/1 Bal b/d 8000
1/7 Cashbook 10,000
1/10 Cashbook 6,000 31/12 Bal c/d 24,000
24,000 24,000
2001 2001
1/1 Bal b/d 24,000 31/12 Bal c/d
24,000
2002 2002
1/1 Bal b/d 24,000
1/4 Cashbook 2,000 31/12 Bal c/d 26,000
26,000 26,000
2000
£10,000 x 10/100 x 6/12 = 500
2001
£24,000 x 10/100 x 12/12 = 2400 4,650
2002
£24,000 x 10/100 x 12/12 = 2400
2000 £ 2000 £
1/1 Bal b/d 800
31/12 Bal c/d 2,250 P&L 1,450
2,250 2,250
2001 £ 2001 £
1/1 Bal b/d 2,250
31/12 Bal c/d 4,650 P&L 2,400
4650 4650
2002 £ 2002 £
1/1 Bal b/d 4,650
31/12 Bal c/d 7,200 P&L 2,550
7,200 7,200
1999
Motor vans 24,000 (2,250) 21,750
1999
Motor vans 24,000 (4,650) 19,350
1999
Motor vans 26,000 (7,200) 18,800
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
Lesson Three 147
When an asset is disposed and is no longer used by the firm, the appropriate entries
should be made in the asset account and the total depreciation provided to date on
the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
If the insurance pays before the end of the financial period, it will not be necessary
to create an insurance debtor so the following entries will be made:
Debit – cashbook.
Credit – asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries will
be made in the asset account and provision for depreciation a/c only.
The balance in the disposal a/c after the above entries will either be a debit balance
or a credit balance. A credit balance represents a profit on disposal, which is
reported in the profit and loss a/c together with other incomes. The entry will be:
A debit balance in the asset disposal a/c is loss on disposal which is reported in the
P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is
£800. The firm decides to trade in the motor vehicle with a new one the value of
the new one being £500. The supplier of the new vehicle agree with the firm that
the old motor vehicle is worth £300, therefore the difference will be paid by cash.
£ £
Motor vehicle a/c 1,000 Provision for depreciation 800
P&L 100 Motor vehicle 300
1,100 1,100
JOURNAL ENTRIES £ £
Debit – motor vehicles disposal 1,000
Credit – motor vehicles a/c 1,000
(Motor vehicle being traded in now transferred to disposal a/c)
In case of a loss,
If the firm trades in an old asset for a new one, the following entries will be made in
addition to the movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old
asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line
method, for each month of ownership. From the following details draw up the plant
account and the provision for depreciation account for each of the years 1999,
2000, 2001 and 2002.
You are also required to draw up the plant disposal account and the extracts from
the balance sheet as at the end of each year.
Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500
2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d
1,500
2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d
2,050
2,050 2,050
2002 2002
150 Accounting Theory
1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210
2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510
2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865
2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230
2000
1/1 1,500 12 20/100 x 1,500 x 12/12 =
300
2001
Lesson Three 151
2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L
10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L
10,000
20,000 20,000
Year 3 Year 3
1/1 Bal b/d 20,000
31/12 Bal c/d 30,000 31/12 P&L
10,000
30,000 30,000
Year 4 Year 4
1/1 Bal b/d 30,000
31/12 P&L 14,000
31/12 Bal c/d 44,000
44,000 44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And
the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease
but increases from 10 years to 13 years.
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L
10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L
10,000
20,000 20,000
Year 3 Year 3
31/12 Bal c/d 30,000 1/1 Bal b/d
20,000
Year 4 Year 4
1/1 Bal b/d
30,000
31/12 Bal c/d 37,000 31/12 P&L
7,000
37,000 37,000
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices
and these are revalued at:
Land -£ 1,200,00
Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land ⇒ 1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings ⇒ 900,000 – 800,000)
(c) Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to
revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£ £
Bal B/D 1,000,000
Revaluation __200,000 Bal C/D 1,200,000
reserve
1,2000,000 1,200,000
Buildings a/c
£ £
Bal B/D 800,000
Revaluation 100,000 Bal C/D 900,000
reserve
900,000 900,000
156 Accounting Theory
P&L 100,000
1,200,000 1,200,000
Buildings
Year 3 £ Year 3 £
1/1 Bal B/D 900,000 31/12 100,000
Revaluation
P&L 100,000
_______ Bal C/D 700,000
900,000 900,000
Revaluation Reserve
Year 3 £ Year 3 £
31/12 Land 200,000 1/1/ Bal B/D 340,000
31/12 Building 100,000
31/12 Prov. For depr. _40,000 _______
340,000 340,000
for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on
vehicles on hand at the end of the year irrespective of the date of purchase.
Depreciation is not provided for vehicle disposed of during the year. The firm’s year
ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss
account for each of the five years.
(7 marks)
b) Prepare the motor vehicle account (at cost).
(8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles
disposed of by the company.
(5 marks)
(Total: 20 marks)
a
Vehicle 1990 1991 1992 1993 1994
KA 560,000 560,000 560,000 560,000
KB 720000 720,000 - - -
KC - - 800,000 - -
KD - - 800,000 800,000 800,000
KE - - - - 840,000
KF - - - - 960,000
Total cost 1,280,00 1,280,00 2,160,00 1,360,00 2,600,00
0 0 0 0 0
Depreciation at 320,00 320,00 540,00 340,00 650,00
25% 0 0 0 0 0
Motor Vehicle
1990 Sh 1990 Sh
1/3 Cashbook 1,280,00 31/12 Bal c/d 1,280,000
0
Lesson Three 159
1991 1991
1/1 Bal b/d 1,280,00 31/12 Bal c/d 1,280,000
0
1992 1992
1/1 bal b/d 1,280,00 1/2 Disposal 720,000
0
Cashbook 1,600,00 31/12 Bal c/d 2,160,000
0
2,880,00 2,880,000
0
1993 1993
1/1 Bal b/d 2,160,00 1/11 Disposal 800,000
0
________ 31/12 Bal c/d 1,360,000
2,160,00 2,160,000
0
1994 1994
1/1 Bal b/d 1,360,00
0
1/1 Cashbook 840,000
1/3 Cashbook 960,000 31/12 Bal c/d 3,160,000
3,160,00 3,160,000
160 Accounting Theory
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost
still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
Lesson Three 161
Required:
Prepare ledger accounts to record these transactions in the records of Pentland
Limited.
(16 marks)
162 Accounting Theory
Land
1999 £ 1999 £
1/7 Bal b/d 4,000
2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 5,200
5,200 5,200
Buildings
1999 £ 1999 £
1/7 Bal b/d 2,200
2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 3,400
3,400 3,400
Revaluation Reserve
2000 £ 2000 £
1/1 Buildings 1,200
30/6 Bal C/D 2,022 1/1 Provision for 822
depr.
2,022 2,022
2000 2000
1/1 Revaluation 82 30/6 P&L
2
2,200 x ½ x
15
30/6 Bal c/d 34 3,400 x ½ x 56_
_ 15
85 856
6
Plant
1999 £ 1999 £
Lesson Three 163
2000 2000
1/1 Cashbook 400 1/1 Disposal 300
_____ 30/6 Bal c/d 1,700
2,000 2,000
2000 2000
1/1 Disposal 252.50 30/6 P&L 247.50
Bal c/d 595.00
847.50 847.50
Motor Vehicles
1999 £ 1999 £
1/7 Bal b/d 600
2000 2000
1/4 Disposal 12 1/4 Disposal 20
1/4 Cash book 18 30/6 Bal C/D 610
630 630
2000 2000
1/4 Disposal 13 1/4 P&L 120.5
30/6 Bal c/d 307.5 30/6 Bal C/D ______
320.50 320.50
Plant - Disposal
2000 £ 2000 £
1/1 Plant 300 1/1 Provision for 252.50
164 Accounting Theory
depr.
P&L 2.50 Cash book 50___
25 302.50
Depreciation/
Amortization
Bal as at xx - xx xx xx xx
1/1/10
Change for xx - xx xx xx xx
year
Revaluation (xx) - (xx) (xx) (xx) (xx)
Eliminated
on Disposal (xx) - (xx) (xx) (xx) (xx)
Bal as at -
31/12/01 (xx) (xx) (xx) (xx) (xx)
N.B. V as at xx xx xx xx xx xx
31/12/01
NBV as at xx xx xx xx xx xx
31/12/01
1. It is the company’s policy to write off cost of the assets using above
percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year
of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in
during the year at a value of sh.157,500 in part exchange of the new delivery
truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a
company that went out of business. At the time of acquisition sh.90,000 was
paid to have the assets revalued by a professionally qualified valuer. The
revaluation indicated the following market values.
Sh.
Land 900,000
Buildings 600,000
Machinery 300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for
inclusion in the company’s accounts for the year ended 30 April 2000.
(10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of
use by the firm. IAS 16 on property plant and equipment defines depreciation as
allocation of a depreciable amount of a non-current asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses
that relate to a particular financial period and therefore because the firm to earn
revenue or income uses the assets, then the loss of value should be marched with
these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the
non-current asset.
168 Accounting Theory
Depreciation
Bal as at 1/5/99 4,755,000 300,000 1,470,000 6,525,000
Charge for the year 1,066,500 112,500 931,687.5 2,110,687.5
Eliminated on (37,500) -______ (124,125) (161,625)
disposal
Bal as at 30/4/2000 5,784,000 412,500 2,277,562. 8,474,062.5
5
NBV 1/5/99 8,332,500 600,000 2,055,000 10,987,500
NBV 30/4/2000 8,916,000 487,500 1,449,187. 10852,687.
5 8
Workings:
= 141,000
At 2.5% = 2,925,000 x 2.5% x 4 = 292,500
4% = 292,500 x 4% x 4 = 468,000
175,500
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and
purchases ledgers. The control accounts for the month of September 1999 are in
balance and incorporate the following totals:
£
Sales ledger:
Balances at 1 September 386,430
1999: Debit
190
Credit
Sales 163,194
Cash received 158,288
Discounts allowed 2,160
Sales returns inwards 590
Credit balances at 30 370
September 1999
Purchases ledger:
Balances at 1 September 184,740
1999: Credit
520
Debit
Purchases 98,192
Cash payments 103,040
Discounts received 990
Purchases returns outwards 1,370
Debit balances at 30 520
September 1999
Although the control accounts agree with the underlying ledgers, a number of errors
have been found, and there are also several adjustments to be made. These errors
and adjustments are detailed below:
1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as
a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the
sales ledger account for the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed
account. As a result, the supplier issued a credit note for £2,000 on 26
September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the
account of R Jones.
170 Accounting Theory
8. A debit balance of £420 existed in the purchases ledger at the end of August
1999. The supplier concerned cannot now be traced and it has been decided
to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should
appear after allowing, where necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its
debtor collection system, the company maintains a sales ledger control account. In
preparing the accounts for the year to 31 October 20X3 the accountant discovers
that the total of all the personal accounts in the sales ledger amounts to £12,802,
whereas the balance on the sales ledger control account is £12,550.
1. Sales for the week ending 27 March 20X3 amounting to £850 had been
omitted from the control account.
2. A debtor’s account balance of £300 had not been included in the list of
balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the
control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell’s sales ledger account.
10.Returns inwards valued at £200 had not been included in the control account.
11.Cash received of £80 had been credited to a personal account as £8.
12.A cheque for £300 received from a customer had been dishonored by the
bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended
balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of
personal account balances so that it reconciles with the amended sales ledger
control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999,
which showed a profit of £81,208, when he realized that no bank reconciliation
statement had been prepared at that date.
Lesson Three 171
When checking the cashbook against the bank statement and carrying out other
checks, he found the following:
1. A cheque for £1,000 had been entered in the cashbook but had not yet been
presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31
March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but
have not been recoded by George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had
been mistakenly entered in the cash book and the plant account as £2,900.
Depreciation of £290 had been charged in the profit and loss account for this
plant.
5. A cheque for £980 from a credit customer paid in on 26 March was
dishonoured after 31 March and George decided that the debt would have to
be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been
entered in the cash book as a debit and posted to the credit of motor vehicles
account. Depreciation at 25% per annum (straight line) is charged on motor
vehicles, with a full year’s charge calculated on the balance at the end of
each year.
7. The total of the payments side of the cash book had been understated by
£1,000. On further investigation it was found that the debit side of the
purchases account had also been understated by £1,000.
George had instructed his bank to credit the interest of £160 on the deposit account
maintained for surplus business funds to the current account. This the bank had
done on 28 March. George had made an entry on the payments side of the
cashbook for this £160 and had posted it to the debit of interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a
cheque drawn on the business account. The entry in the cashbook had been
debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account
in the purchases ledger, using a cheque drawn on George’s personal bank account.
No entries have yet been made for this transaction.
The cashbook showed a debit balance of £4,890 before any correcting entries had
been made. The balance in the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should
appear in George’s balance sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999. (2
marks)
3. Draw up a statement for George showing the effect on his profit of the
adjustments necessary to correct the errors found.
(8
marks)
172 Accounting Theory
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial
balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995.
The difference was put in the suspense account. The final accounts which
were then prepared showed a net profit of Sh. 64,000. During audit, the
following errors were noted:
Required:
1. Journal entries to correct the errors. (8 marks)
2. Statement of corrected profit. (2 marks)
3. Suspense account. (2 marks)
(Total: 20 marks)
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on
31st December 2002:
£ £
Capital 40,000
Purchases 26,154
Sales 36,246
Salaries 4,814
Opening stock 4,307
Insurance 820
Rent 965
Buildings 25,000
Lesson Three 173
Furniture 14,500
Debtors 6,140
Other expenses 1,060
Creditors 4,638
Commission _____ __946
82,795 82,795
Adjustments:
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business
organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and
transactions relating to the company’s control accounts for the month of December
1994 are listed below:
Required:
Post the sales ledger and the purchases ledger control accounts for the month of
December 1994 and derive the respective debit and credit closing balances on 31
December 1994.
(17 marks)
LESSON FIVE
(i) Sales ledger control Account – also called total debtors. The balance on
the sales ledger control account should be the same as the total of the
balances in the sale ledger.
(ii) Purchases Ledger Control Account – also called total creditors .The
balance carried down (Bal c/d) on the purchases Ledger Control Account
should be the same as the total of the balances in the purchases ledger.
SALES LEDGER
Debtor A a/c
Debtor B a/c
Debtor C a/c
300 300
Lesson Four 177
Debtor D a/c
PURCHASES LEDGER
Creditor A
Creditor B
Creditor C
Creditor D
9. Allowances to customers
(price reduction in excess to
discounts allowed)
6. Total credit balances of the 10.Total debit balance carried
sales Ledger carried forward down to the next period – to
be derived after posting all
those transactions
Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes
place when there is a credit balance on the debtor’s a/c and the customer is not a
creditor too.
The entry will be:
Cr. Cashbook
Example:
Debtor A
£ £
Sales 1000 Cashbook 950
(Refunds) C/B 100 Discounts 50
Returns 100
1100 1100
If the firm has not paid this amount owed to the customer, then it’s carried forward
to the next period then is a credit balance in the customer’s a/c. Therefore, if a firm
has several customer, this information will be shown in the control a/cs as total
balance c/f
(debit side).
Example:
Debtor (A)
Creditor (A)
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger
control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade
discounts should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c.
i.e. increase or decrease in provisions for doubtful debts will not affect this
account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C.
However in some cases it can be included especially where there are
incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be
shown on the debit side of the sales ledger control. However when trying to
determine the turnover under incomplete records then it is wise to omit it.
Example 5.1
You are required to prepare a purchases ledger control account from the following
for the month of June. The balance of the account is to be taken as the amount of
creditors as on 30 June.
2003 £
June 1 Purchases ledger balances 36,760
Totals for June:
Purchases journal 422,570
Returns outwards journal 10,980
Cheques paid to suppliers 387,650
Discounts received from 8,870
suppliers
June 30 Purchases ledger balances ?
Solution
Purchases Ledger Control A/C
2003 £ 2003 £
Returns out 10,980 Bal b/d (1/6) 36,760
Lesson Four 181
Bank 387,95
0
Discounts received 8,870
Bal c/d (30/6) 51,830 Purchases 422,570
459,33 459,330
0
Example 5.2
Prepare a sales ledger control account from the following:
£
2003
May 1 Debit balances 64,200
Totals for May:
Sales journal 128,000
Cash and cheques received from debtors 103,700
Discounts allowed 3,950
Debit balances in the sales ledger set off
against credit balances in the purchases 1,450
ledger
May 31 Debit balances ?
Credit balances 500
Solution
(a) Explain the purposes for which control accounts are prepared. (3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd.
for the month of November 1997 are listed below:-
Sh.
Balances on 1 November 1997:
Sales ledger 9,123,00 (debit)
0
211,000 (credit)
Purchases ledger 4,490,00 (credit)
0
88,000 (debit)
Transactions during November 1997:
Purchases on credit 18,135,0
00
Allowances from suppliers 629,000
Receipts from customers by 27,370,0
cheques 00
Sale on credit 36,755,0
00
Discount received 1,105,00
0
Payments to creditors by cheques 15,413,0
00
Contra settlements 3,046,00
0
Bills of exchange receivable 6,506,00
0
Allowances to customers 1,720,00
0
Customers cheques dishonored 489,000
Cash received from credit 4,201,00
customers 0
Refunds to customers for 53,000
overpayments
Discounts allowed 732,000
Balances on 30 November 1997
Sales ledger 136,000 (credit)
Purchases ledger 67,000 (debit)
Required:
The sales ledger and purchases ledger control accounts for the month of November
1997 and show the respective debit and credit closing balances on 30 November
1997.
(17 marks)
(Total: 20 marks)
Lesson Four 183
(a)
i) Provide for arithmetical check on the postings made in the
individual accounts (either in the sales ledger or purchases ledger.)
ii) To provide for a quick total of the balances to be shown in the trial
balance as debtors and creditors.
iii) To detect and prevent errors and frauds in the customers and
suppliers account.
Kopesha Ltd
Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April
2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
• Errors that don’t affect the trial balance
• Errors that affect the trial balance
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the
double entry is not made e.g. a sales invoice of £400 is not posted in the sales
journal therefore no entry is made in the debtor’s account and the sales account i.e.
both debit of £400 in debtor’s account and credit of £ 400 in the sales account.
The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is
of the same class. Example: a credit sale to T Thompson is posted to L Thompson’s
186 Adjustment to Final Accounts
Although the debit entry is made into the wrong account, the two accounts are of
the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson
by:
£
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of
a different class e.g. Motor vehicle purchased for £ 400 is posted to the motor
vehicle expenses a/c. (Instead of debiting motor vehicles, we debited motor vehicle
expenses a/c and the credit entry in the cashbook is correct)
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c
is an expense account. Therefore a capital expenditure has been posted as
revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the
motor vehicles a/c by:
£
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400
To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
(ii) Post the transaction correctly
To correct the error of £ 150 posted in the wrong sides of these account
£
Debit cash book 90
Credit debtors 90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to
understate the debits or credits then another error may take place to overstate the
debits or credits by the same amount, hence canceling out each other. E.g. if the
balance c/d of the purchases a/c is £3,980 but shown in the trial balance as £3,890
and another error carried to the trial balance of fixture amounting to £4,540 instead
of £4,450:
188 Adjustment to Final Accounts
£
Purchases 3,980
3,890
(90)
£
Fixtures 4,450
(4,540)
90
Example 5.5
Give the journal entries needed to record the corrections of the following.
Narratives are required.
a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the
cash column in the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s
account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
Lesson Four 189
Solution
THE JOURNAL
Debit Credit
Sales 10,000
Capital 10,000
Additional capital passed into
sales a/c now transferred to
capital a/c
Drawings 700
General expenses 700
Drawings debited in general
expense now transferred to
drawing a/c
Drawings 89
Insurance 89
Private insurance transferred from
insurance a/c to drawings a/c
Purchases 270
C Kelly 270
Purchases and creditors amount
to 857 initially entered as £587
Bank 390
Cash 390
Correct error in posting
Bank 390
Cash 390
To post the cash banked correctly
Bank 400
Cash 400
Cash drawings correctly started
from bank to cash
J Charlton 168
M McCarthy
Returns in from McCarthy entered
in error in J Carlton now 168
transferred to his a/c 1000
Motor expenses 1000
Motor disposal a/c
To correct error in recording sales
proceeds In expense account
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
190 Adjustment to Final Accounts
1. The closing stock includes damaged goods which, although they had cost Sh.
10,000 have an estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt.
A provision for doubtful debts of 2 ½% is also required on the balance of the
debtors.
3. The machinery was acquired five years ago and is being depreciated to its
scrap value on a straight-line basis over eight years. A more realistic
estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been
reflected in the accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected
in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr.
Patel had been deducted as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business
premises to external party had not been received and no entry had been
made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions. (10
marks)
b) A statement of revised profit for the year ended 31 March 2000. (8
marks)
c) A revised balance sheet as at 31 March 2000. (7
marks)
(Total: 25 marks)
Solution
Lesson Four 191
a) THE JOURNAL
Debit Credit
Trading account 2,500
Stock 2,500
Being a reduction in stock for damaged goods
Profit and loss(Bad debts) 20,000
Debtors 20,000
Debtors gone bankrupt written off
Profit and loss) 10,000
Provision for doubtful debts 10,000
Being a provision for doubtful debts created
at 20%.
Provision for depreciation 150,000
Profit and loss 150,000
A change in estimated lifespan for machinery
Profit and loss( wages ) 9,500
Accrued expenses 9,500
Wages owing omitted in the accounts
Profit and loss (Bank overdraft 8,000
charges)
Bank overdraft 8,000
Changes for overdraft not reflected in the
accounts.
Drawings 100,000
Profit and loss 100,000
Drawing to Mr. Patel deducted as an expense.
Accrued income 20,000
Profit and loss (rent income) 20,000
Rent receivable owing not reflected in the
accounts.
192 Adjustment to Final Accounts
Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not
be same as the credits. The debits may be more than the credits and vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a
credit entry. Example cash received from a debtor is debited to the cashbook
and no other entry is made in the account, i.e. no credit entry on the debtor’s
a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two
credits. Example a payment to a creditor of £ 300 is credited in the cashbook
and also credited in the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the
same as the credit. Example – cash received from a debtor of £ 450 is debited in
the cashbook as £ 450 and credited as £ 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an
account balance due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when
opening the ledger accounts or when taken up to the trial balance. Example Bal
c/d in the cash book for cash at bank of £ 2000 is shown as a credit i.e. an
overdraft, instead of a debit in the trial balance. The balance may also be
brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made
through an account called a suspense account.
The difference in the accounts is posted to this account and the entries to correct
the accounts are posted here. The balance to be shown on the suspense accounts
depends on which side the error is shown on the trial balance.
If the debits > credits, then an amount is included on the credit side of the trial
balance so that the debits = credits. This is a credit balance and will be taken to
the suspense account on the credit side.
Example:
DR CR
Total 240 200
Suspense - 40
240 240
Suspense a/c
£ £
Difference as per T/B 40
If the credits are more than the debits this is a debit balance and therefore we
require an amount to be added to the total of the debits for the two side to be
same. This debit balance is posted to the debit side of the suspense a/c.
194 Adjustment to Final Accounts
DR CR
Total 260 300
Suspense 40 -
300 300
Suspense a/c
£ £
Difference as per 40
T/B
Posting the correct entries should eliminate the balance on the suspense account.
In some cases, after checking for all errors that can affect the trial balance, the
suspense a/c has a balance. This balance depends on whether it is a credit or debit
and whether it is material or not for purposes of proper accounting treatment. The
following is the recommended approach:
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree
by £3,300, a shortage on the credit side of the trial balance. A suspense account
was opened for the difference.
In January 2003 the following errors made in 2003 were found:
Solution
THE JOURNAL
£ £
Suspense 1,000
Sales ,1000
Lesson Four 195
Suspense a/c
£ £
Sales 1,000 Bal b/d 3,300
Discount received 3,000 Rent 700
4,000 4,000
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial
balance is extracted at the end of each month, and a profit and loss account and
balance sheet are computed. This month, however, the trial balance did not
balance, the credits exceeding debits by £1,536.
196 Adjustment to Final Accounts
Your are asked to help and after inspection of the ledgers discover the following
errors:
(i) A balance of £87 on a debtor’s account has been omitted from the schedule
of debtors, the total of which was entered as debtors in the trial balance.
(ii) A small piece of machinery purchased for £1,200 had been written off to
repairs.
(iii) The recipiets’ side of the cashbook had been under cast by £720.
(iv) The total of one page of the sales daybook had been carried forward as
£8,154, whereas the correct amount was £8,514.
(v) A credit note for £179 received from a supplier had been posted to the wrong
side of his account.
(vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a
filing tray.
(vii) Mr. Smith, whose past debts to the company had been the subject of a
provision, at last paid £731 to clear his account. His personal account has
been credited but the cheque has not yet passed through the cashbook.
Solution
Suspense a/c
£ £
Opening balance 1,536. Debtors 87.00
00
Sales - under record 360.00 Cashbook under cast 720.00
Creditors error 179.00
Creditors (correct) 179.00
Cashbook: smiths debt 731.00
paid
1,896.0 1,896.00
0
Investigations carried out after preparing the above trial balance detected the
following errors:
1. The total of the sales daybook for December 2001 was overcast by Sh 25,700.
2. On July 2001, the business purchased office equipment for Sh 40,000. These
were debited to purchases account. Depreciation on the equipment is at the
rate of 10% per annum on cost and based on the period (months) of usage in
the year.
3. A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the
creditor’s account.
4. A payment of Sh. 4,500 for telephone expenses was debited to telephone
account as Sh 5,400.
5. An amount of Sh 15,000 received from a debtor was not posted to the debtor’s
account from the cashbook.
6. Purchases daybook for October 2001 was under cast by Sh 28,000.
198 Adjustment to Final Accounts
Assume the business had reported a net profit of Sh 85,800 before adjusting for the
above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account.
(6 marks)
(b) Journal entries to correct the errors (Narrations not required) (6
marks)
(c) Suspense account starting with the balance determined in the adjusted trial
balance in (a) above.
(4 marks)
(d) The adjusted net profit for the year. (4
marks)
Solution:
Adjusted Trial Balance
Sh Sh
Fixed assets – cost 832,000
Stock - 1 January 2001 148,000
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for 166,400
depreciation
Purchases 733,000
Operating expenses 126,000
Provision for doubtful 3,800
debts
Discounts received 5,000
Discounts allowed 5,800
Suspense account 47,800 _______
2,338,200 2,338,200
THE JOURNAL
Dr Cr
Sales 25,700
Suspense 25,700
Creditors 8,500
Suspense 8,500
Creditors 8,500
Suspense 8,500
Suspense 900
Telephone 900
Suspense 15,000
Debtor 15,000
Suspense 2,500
Discounts allowed 2,500
Suspense 2,500
Discounts received 2,500
Purchases 28,000
Suspense 28,000
SUSPENSE ACCOUNT
2001 Sh 2001 Sh
1 Jan Bal b/d 47,800 1 Jan Sales 25,700
Telephone 900 Creditors 8,500
Debtors 15,000 Creditors 8,500
Discount 2,500 Purchases 28,000
allowed
Discount 2,500
received
Bal c/d 2,000 ______
70,700 70,700
Sh Sh
Net profit as per the accounts 85,800
Add
Purchases 40,000
Telephone expenses 900
Discount allowed + received 5,000 45,900
131,700
Less
Sales 25,700
Depreciation 2,000
Purchases 28,000 (55,700)
Corrected Net Profit 76,000
The cost of inventories should include all costs of purchase. (Purchase price and
other taxes like import duties), costs of conversion (e.g. direct labour) and other
costs incurred in bringing the inventories into their present location and condition
(carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry.
In most cases either carrying out stocktaking or checking the stock records that the
firm is kept determines the value of stock at the end of the financial period.
Stocktaking involves counting the number of units of finished goods, work in
progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per
unit to the total number of units available.
Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400
each respectively. At the end of year 2002, stocktaking was carried out and the
following units were available:
Required:
Compute the cost of stock to be included in the final accounts.
Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000
Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each
unit as far as the business can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number
of transactions and changes in the cost price, IAS 2 on inventories recommends the
use of the following estimates:
Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000
is damaged. This stock can fetch the firm Sh 22,000 after repairs and packaging
that will cost Sh 4,000.
Required:
What value will be attached on this damaged units and the total closing stock for
the final accounts purposes.
Sh
Cost 20,000
Selling price 22,000
Repairs 4,000
NRV (22-4) 18,000
202 Adjustment to Final Accounts
The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this
damaged unit will be shown as Sh 18,000. The balance of the stock of Sh 280,000
+ 18,000 of the damaged stock will be included in the final accounts and shown
together as Sh 298,000.
Lesson Four 203
d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial
balance in column form. A work sheet has 8-10 columns and the simple headings
are as follows:
Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of
balances has been extracted from his ledger as at 30 April 19X7, the end of his
most recent financial year.
£
Capital 83,887
Sales 259,870
Trade creditors 19,840
Returns out 13,407
Provision for bad debts 512
Discounts allowed 2,306
Discounts received 1,750
Purchases 135,680
Returns inwards 5,624
Carriage outwards 4,562
Drawings 18,440
Carriage inwards 11,830
Rent, rates and insurance 25,973
Heating and lighting 11,010
Postage, stationery and telephone 2,410
Advertising 5,980
Salaries and wages 38,521
Bad debts 2,008
Cash in hand 534
Cash at bank 4,440
Stock as at 1 May 19x6 15,654
Trade debtors 24,500
Fixtures and fittings – at cost 120,740
Provision for depreciation on fixtures
and fittings – as at 30 April 19X7 63,020
Depreciation 12,074
Required:
MR CHAI Trial Balance Adjustments Trading Profit & loss Balance
account a/c sheet
WORKSHEET £ £ £ £ £ £ £ £ £ £
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Capital 83,887 83,8
87
Sales 259,87 259,8
0 70
Trade 19,840 19,8
creditors 40
Returns 13,407 13,40
outwards 7
Provision for 512 223 735
B debts
Discounts 2, 2,306
allowed 306
Discounts 1,750 1,750
received
Purchases 135,68 135,6
0 80
Returns 5,624 5,624
Inwards
Carriage 4,562 4,562
outwards
Drawings 18,440 18,44
0
Carriage 11,830 11,83
inwards 0
Rent, rates & 25,973 6,55 19,41
insurance 5 8
Heating & 11,010 1,360 12,37
lighting 0
Postage, 2,410 2,410
stationery
and
telephone
Advertising 5,980 5,980
Salaries and 38,521 38,52
wages 1
Bad debts 2,008 2,008
Cash in hand 534 534
Cash at bank 4,440 4,440
Lesson Four 205
Net profit
(Balancing 24,11 24,1
figure) 7 17
123,9 123,9 192,9 192,
89 89 59 959
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In
the next session we shall prepare the final accounts incorporating these
adjustments. Some adjustments will affect the format of final accounts and
therefore they will look as follows:
206 Adjustment to Final Accounts
NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£ £ £
Sales XX
Less (XX)
Returns
inwards
XX
Less cost
of sales
Opening XX
stock
Purchases XX
Add XX
carriage
in
XX
Less (XX XX
Returns )
out
XX
Less (XX) (XX)
closing
stock
Gross XX
profit
Discount XX
received
Other XX
incomes
(rent,
interests,
dividends)
Profit on XX
disposal
of non-
current
assets
Reduction XX
in
provision
for
doubtful
debts
Reduction XX
in
Lesson Four 207
provision
for
discount
allowable
Interest XX
on
overdue
debtors
balances
XX
Less
Expenses
Bad debts XX
Depreciati XX
on: (eg)
Plant
XX
Motor
vehicle
Increase XX
in
provision
for
doubtful
debts
Increase XX
in
provision
for
discount
allowable
Loss on XX
disposal
of non
current
assets
Loss of XX
other
assets
(eg) stock
Interest XX
charged
by
creditors
Other XX
expenses:
Rent
Insurance XX
Postage XX
Interest XX (XX)
208 Adjustment to Final Accounts
on loan
etc
NET XX
PROFIT
Non current £ £ £
assets
Land XX - XX
Buildings XX (XX) XX
Plant and XX (XX) XX
machinery
Fixtures, furniture XX (XX) XX
and fittings
XX XX XX
Current assets
Stock XX
Debtors XX
Less provision for (XX) XX
doubtful debts
Accrued income XX
Prepaid expenses XX
Cash at bank XX
Cash in hand XX
Lesson Four 209
Current
liabilities
Bank overdraft XX
Trade creditors XX
Net current X
assets X
Net assets XX
Capital XX
Add net profit X
X
XX
Less drawings (XX)
XX
Non current
liabilities
Loan X
X
XX
Non current
liabilities
Loan X
X
XX
Non current
liabilities
Loan X
X
XX
Non current
liabilities
Loan X
X
XX
210 Adjustment to Final Accounts
Loan
Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be
as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
£ £
£
Sales 259,8
70
Less (5,62
Returns 4)
inwards
254,2
46
Less
cost of
sales
Opening 15,654
stock
Purchas 135,680
es
Add
carriage
in
147,510
Less (13,407) 134,103
Returns
out
Cost of 149,757
goods
availabl
e for
sale
Less (17,750) (132,
closing 007)
stock
Gross 122,2
profit 39
Add: 1,750
Discoun
t
receive
d
123,9
Lesson Four 211
89
Less
Expens
es
Discoun 2,306
t
allowed
Carriag 4,562
e
outward
s
Rent, 19,418
rates
and
insuran
ce
Heating 12,370
and
lighting
Postage 2,410
,
statione
ry and
telepho
ne
Advertis 5,980
ing
Salaries 38,521
and
Wages
Bad 2,008
debts
Provisio 223
n for
bad
debts
Provisio
n for
depreci
ation –
fixtures 12,074 99,87
and 2
fitting
Net 24,11
profit 7
Mr Chai
Balance Sheet as at 30 April 19X7
212 Adjustment to Final Accounts
Non £ £ £
current
asset
Fixtures 120,7 (63,020) 57,720
and 40
fittings
Current
assets
Stock 17,750
Debtors 24,50
0
Less (735) 23,765
provision
for
doubtful
debts
Prepaym 6,555
ents
Cash at 4,440
bank
Cash in 5
hand 34
53,044
Current
liabilitie
s
Creditors 19,84
0
Accruals 1,360 (21,200) 31,844
89,564
Capital 83,887
Add net 24,117
profit
108,004
Less (18,440)
drawings
89,564
Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a
sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£ £
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Lesson Four 213
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£ £ £
Sales 138,078
Less cost of sales
Opening stock 11,927
Purchases 82,350
Carriage inwards 2,211 84,561
96,488
Less closing stock (13,551 (82,937
)
Gross profit 55,141
Less expenses
Carriage outwards 2,933
Rent, rates and insurance 5,952
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Increase in provision for bad 40
debts
Depreciation – equipment 8,700 (49,253
Net profit 5,888
Mr. Yousef
Balance Sheet as at 31 May 19X6.
£ £ £
Non Current assets
Equipment 58,000 (27,700) 30,300
Current Assets
Stocks 13,551
Debtors 12,120
Less provision for doubtful (170) 11,950
debts
Prepayments 880
Cash in hand 177
Cash at bank 1,002
Current Liabilities 27,560
Creditors 6,471
Accruals 210 6,681 20,879
51,179
Capital 53,091
Add: Net Profit 5,888
58,979
Less Drawings (7,800)
Lesson Four 215
51,179
216 Adjustment to Final Accounts
Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a
sole trader, as at 31 May 20X9, the end of his most recent financial year.
Herbert Howell
Trial Balance As At 31 May 20x9
Dr Cr
£ £
Property at cost 90,000
Equipment at cost 57,500
Provision for depreciation (as at 1
June 20X8)
Property 12,500
Equipment 32,500
Stock as at 1 June 20X8 27,400
Purchases 259,600
Sales 405,000
Discounts allowed 3,370
Discounts received 4,420
Wages and salaries 52,360
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,800
Trade debtors 46,200
Trade creditors 33,600
Provision for bad debts 280
Cash on hand 151
Bank overdraft 14,500
Drawings 28,930
13% loan 12,000
Capital, as at 1 June 20X8 ______ 98,101
612,901 612,901
Required:
Lesson Four 217
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May
20X9 and his balance sheet as at 31 May 20X9.
(20 marks)
Solution:
£ £
Sales 405,000
Less cost of sales
Opening stock 27,400
Purchases 258,560
285,960
Less closing stock (25,900) (260,060)
Gross profit 144,940
Discounts received 4,420
Decrease in provision for bad ____49
debts
149,409
Less expenses
Depreciation: Property 900
Equipment 8,625
Discounts 3,370
allowed
Wages and 52,500
salaries
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating 38,500 (112,485)
expenses
NET PROFIT 86,924
Herbert Howell
Balance Sheet as at 31 May 2000
£ £ £
Non current Assets
Property 90,000 (13,400) 76,600
Equipment 57,500 (41,125) 16,375
147,50 54,525 92,975
0
Current Assets
Stock 25,900
Debtor 46,200
Less provision (231) 45,969
Prepayments 500
Cash in hand 151
72,520
Current liabilities
Bank overdraft 14,500
218 Adjustment to Final Accounts
Creditors 33,600
Accruals __340 (48,440)
24,080
117,055
Capital 98,101
Add net profit 36,924
135,025
Less drawings (29,975)
105,055
Non current liabilities
Loan (13%) 12,000
117,055
Workings:
1) Depreciation for:
Property 1% X 90,000 = 900
Equipment 15% X 57,500 = 8,625
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March
2001
Sales 378,500.00
Discount Received 2,400.00
Rent Received 7,500.00
Returns outwards 7,700.00
Creditors 18,700.00
Bank Overdraft 30,000.00
Capital 287,500.00
Purchases 261,700.00
Salaries and Wages 45,700.00
Office expenses 8,400.00
Insurance premiums 3,100.00
Electricity 1,600.00
Stationery 6,200.00
Advertising 8,400.00
Telephone 2,100.00
Business Rates 7,500.00
Discounts allowed 600.00
Returns Inwards 4,100.00
Stocks as at 1 April 2000 120,600.00
Warehouse, shop and office 210,000.00
Fixtures and fittings 12,800.00
Debtors 13,000.00
Cash in till 500.00
Drawings 26,000.00
Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March
2001 and balance sheet as at that date.
220 Adjustment to Final Accounts
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December
20X0.
Required
Prepare Donald Brown’s trading and profit and loss account for the year ended 31
December 20X0 and his balance sheet at that date.
Lesson Four 221
QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a
sole trader.
Brenda Bailey
Trial Balance As At 30 June 20x9
Dr Cr
£ £
Sales 427,726
Purchases 302,419
Carriage inwards 476
Carriage outwards 829
Wages and salaries 64,210
Rent and rates 12,466
Heat and light 4,757
Stock at 1 July 20X8 15,310
Drawings 21,600
Equipment at cost 102,000
Motor vehicles at cost 43,270
Provision for
depreciation: 22,250
Equipment 8,920
Motor vehicles 50,633
Debtors 41,792
Creditors 3,295
Bank 8,426
Sundry expenses 477
Cash ______ 122,890
Capital 626,873 626,873
Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended
30June 20X9 and her balance sheet at that date.
222 Adjustment to Final Accounts
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for
December 19X9. The statement showed the following.
MIDWEST BANK
CASH BOOK
19x8 $ 19x8 Cheque $
No
Dec 1 Balance 1,862 Dec 1 Electricity 243
b/d 864
Dec 4 J 212 Dec 2 P 865 307
Shannon Simpson
Dec 9 M Lipton 185 Dec 5 D 866 174
Underhill
Dec 19 G Hurst 118 Dec 6 A Young 867 17
Dec 26 M Evans 47 Dec 10 T Unwin 868 95
Dec 27 J Smith 279 Dec 14 B Oliver 869 71
Dec 29 V Owen 98 Dec 16 Rent 870 161
Dec 30 K Walters 134 Dec 20 M Peters 871 25
Dec 21 L Philips 872 37
Dec 22 W 873 12
Hamilton
Dec 31 Balance 1,793
_____ c/d 2,935
2,935
Required
a) Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
b) Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)
LESSON SIX
There are 4 main approaches in preparing final accounts where there are
insufficient records.
Or where there are no non current liabilities then this optional formula can be used
Example: 6.1
A sole trader’s capital position is as follows:
31 December
19X2 19X3
£ £
Motor vehicle:
Cost 7,500 7,500
Depreciation 3,000 4,500
4,500 3,000
Stock 2,960 3,450
Debtors 1,150 2,060
Bank 925 2,125
Cash __263 ___54
9,798 10,689
Creditors 2,860 3,340
Net assets 6,938 7,349
He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the
year.
Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets
= £12,911
E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the
Gross Profit Margin will be:
= 25 x 100
100
226 Further Adjustments to Accounts
= 25%
Lesson Five 227
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (£100,000)
= £25,000
2) Mark up
= 25 x 100
75
= 33.33%
N/B: 75 = 100 – 25
Cost = selling price – gross profit
3) Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
= 11.6 times
Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001 6,000
Purchases 54,000
Jones’s mark-up is 50% on cost of goods sold. His average stock during the year
was £12,000. Draw up a trading and profit and loss account for the year ended 30
June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed
if he is to maintain a net profit on sales of 10%.
Solution
= 18,000
Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600.
Trade discount (i.e. margin allowed) is 33¼% off all selling prices. Expenses are 66
¾% of gross profit.
Solution:
Profit schedule
£
Turnover 132,300
Cost of goods sold 88,200
Gross profit 44,100
Expenses (29,400)
Net profit 14,700
7 = Cost of Sales
12,600
(c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a
simple cashbook for both cash in hand and cash at bank can be prepared in
confirmation of deposits and payments made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income
received to the relevant income accounts, expenses to relevant expense accounts
and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from
debtors can be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate
any cash sales or credit sales and cash purchases or credit purchases.
1) Prepare a statement of affairs at the beginning of the period (a list of all assets
and liabilities) to determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e.
the cashbook (for both cash in hand and bank), sales ledger control account
and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
5) Prepare the final accounts.
Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank
payments and receipts during the year to 31 December 19X8 were as follows:
Lesson Five 231
Reciepts Payments
£ £
Balance 1 Jan 572 Purchases 10,007
19X8
Cheques for sales 13,17 Expenses 2,950
9
Cash banked 14,00 Drawings 11,250
5
Balance 31 Dec 3,751 Delivery van 7,300
19X8
31,50 31,507
7
Capital 3,884
Hobbs
Trading and Profit and Loss Account for the year ending 31 December
19X8
£ £
Sales 29,699
Less cost of goods sold:
Opening stock 2,650
Add purchases 12,027
14,677
Less closing stock (2,990) 11,687
GROSS PROFIT 18,012
Less Expenses:
Expenses (375 + 2,950) 3,325
Depreciation 1,460 (4,785)
NET PROFIT 13,227
234 Further Adjustments to Accounts
Hobbs
Balance Sheet as at 31 December 19X8
£ £ £
Fixed Assets Cost Depreciation NBV
Delivery van 7,300 1,460 5,840
Current Assets
Stock 2,990
Debtors 2,070
Cash ___65
5,125
Less current liabilities
Creditors 1,420
Bank overdraft 3,751 5,171
5,794
Financed by:
Capital 3,884
Add net profit 13,2
27
17,111
Less drawings (11,250 + 67) 11,317
5,794
Insurance premium for the year to 30 June 2001 was Sh 160,000. All these
expenses have been paid by cheque.
7. Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
8. Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had
been received by 31 March 2001. Debt totaling to Sh 17,000 were abandoned
during the year as bad. Other customers for jobs too small to invoice have paid
Sh 726,000 in cash for work done of which Sh 560,000 was banked. Kimeu used
Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya
Charity Sweepstake tickets worth 24,000 and Sally used the rest on general
expenses except for Sh 30,100 which was left in the office on 31 March 2001.
9. You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.
Required:
(a) Profit and loss account for the year ended 31 March 2001. (10
marks)
(b) Balance sheet as at 31 March 2001. (10
marks)
(Total: 20 marks)
Solution:
Cash book – Bank
Sh Sh
Capital 1,200,00 Salary 120,000
0
Loan 400,000 Drawings 936,000
Debtors 5,080,00 Timber 1,960,000
0
Cash 560,000 Equipment 960,000
Electricity 240,000
Motor vehicle 182,000
expenses
General expenses 270,000
Insurance 160,000
________ Bal c/d 1,812,000
7,240,00 7,240,000
0
Capital
Sh Sh
Bank 1,200,000
Bal c/d 1,860,00 Pick up 660,000
0
1,860,00 1,860,000
0
Debtors
Sh Sh
236 Further Adjustments to Accounts
Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh Sh
Sales (cash + credit) 6,904,000
Less expenses
Timber used (1,960,000 – 1,802,000
158,000)
Depreciation – motor vehicle 220,000
- Equipment 192,000
Loan interest 45,000
Salary 720,000
Electricity bills 288,000
Motor vehicle expenses 182,000
General expenses 306,900
Insurance premium 120,000
Rates 27,000
Bad debts 17,000
Accountancy fees 55,000 (3,974,900)
Net profit 2,929,100
238 Further Adjustments to Accounts
Kimeu
Balance Sheet as at 31 March 2001
Non current Asset Sh Sh Sh
Equipment 960,000 192,000 768,000
Motor vehicle 660,000 220,000 440,000
1,620,000 412,000 1,208,000
Current Assets
Stock 158,000
Debtors 108,000
Insurance – prepayments 40,000
Cash at bank 181,200
Cash in hand 30,000
3,121,100
Less current liabilities
Accruals 175,000 2,946,100
4,154,100
Capital 1,860,000
Add net profit 2,929,100
4,789,100
Less drawings 1,035,000
3,754,100
Non current liability
Loan 15% 400,000
4,154,100
Sh Sh
Payments for goods 4,747,50 Takings 5,465,000
0
Payments for expenses 565,000
Profits 152,500 ________
5,465,00 5,465,000
0
Abi instructs you to examine his records and prepare accounts. From your
examination of the records and interview with your client, you ascertain the
following information:
1. The takings are kept in a drawer under the counter; at the end of each day the
cash is counted and recorded on a scrap of paper; at irregular intervals Mrs. Abi
transcribes the figures into a notebook; a batch of slips of paper was
inadvertently destroyed before the figures had been written into the notebook,
Lesson Five 239
but Mr. And Mrs. Abi carefully estimated their takings for that period, and the
estimated figure is included in the total of Sh. 5,465,000.
2. Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500
per week with cash taken from the drawer. His winnings totaled Sh. 29,500.
4. Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings
included Sh 12,500 recovered in respect of an old debt abandoned in the
previous year.
5. Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52
weeks in a year; the rent is included in expenses of Sh 565,000. The living
accommodation comprises one-third of the building.
6. The total expenses also include:
7. Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal
expenses. This excludes the amount indicated in note 8.
8. Mr. Abi draws Sh. 750 per week for cigarettes and beer.
9. During the year, Mr. Abi bought a secondhand car (not for use in the business)
from a friend; the price agreed was Sh. 175,000, but as the friend owed Mr. Abi
Sh. 33,500 for goods supplied from the business, the difference was settled by
cheque.
10. An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
11. Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored
and the friend is repaying the Sh. 50,000 by installments. He had paid Sh.
20,000 by 30 June 1994.
12. Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh.
55,000 for income tax.
13. You are to provide Sh. 21,000 for accountancy fees.
N.B. All receipts and payments of Mr. Abi are made through his business
account.
Required:
240 Further Adjustments to Accounts
(a) Mr. Abi’s balance sheet for the business at 30 June 1993.
(4 marks)
(b) Mr. Abi’s profit and loss account for the year ended 30 June 1994.
(12 marks)
(c) Mr. Abi’s balance sheet for the business at 30 June 1994.
(6 marks)
(Total: 20 marks)
Lesson Five 241
Solution:
Abi
Balance Sheet as at 30 June 1993
Current Assets Sh Sh
Stock 97,500
Debtors 229,00
0
Cash at bank 78,000
Cash in hand 22,500
1,304,5
00
Current liabilities
Creditors (139,50 1,165,0
0) 00
1,165,0
00
Capital 1,165,0
00
Cash at Bank
Sh Sh
Balance b/d 78,000 Drawings – personal expense 260,000
for wife
Sales ledger control 12,500 Drawings – cigarettes and 39,000
a/c beer
Insurance (drawings) 320,500 Expenses 565,000
Drawings 50,000 Drawings – second hand car 141,500
Drawings 20,000 Cash in hand 6,500
Debtors 5,591,00 Drawings – friend 50,000
0
Creditors 4,747,500
Dishonored cheque – 50,000
drawings
Drawings 48,000
Income tax 55,000
________ Balance c/d 109,500
6,072,00 6,072,000
0
Cash in Hand
Sh Sh
Balance b/d 22,500 Drawings 15,000
Drawings – betting 12,500
Bank 6,500 Balance c/d 43,500
242 Further Adjustments to Accounts
58,500 58,500
Expenses
Total Business Private
Rent 78,000 52,000 26,000
Motor running 17,500 - 17,500
expenses
Decoration 30,000 20,000 10,000
Alterations 80,000 80,000
Other expenses 359,500 359,500 _____
565,000 532,500 53,500
Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£ £
Sales 5,819,000
Less cost of sales
Opening stock 975,000
Purchases 4,729,500
57,040,500
Less closing stock 950,000 4,754,500
Gross profit 1,064,500
Less expenses
Rent 52,000
Decoration 20,000
Alterations 80,000
Other expenses 359,500
Bad debts 165,500
Lesson Five 243
Abi
Balance Sheet as at 30 June 1994
Cost Depreciatio Book Value
n
Current Assets: £ £ £
Stock 950,000
Debtors 245,500
Cash at bank 109,500
Cash in hand 43,500
1,348,500
Current Liabilities
Creditors 121,500
Accruals 21,000 (142,500) 1,206,000
Capital 1,165,000
Add net profit 366,500
1,531,500
Less drawings (325,500)
1,206,000
Example:
1. Instead of a cashbook, the clubs will maintain a receipts and payments which
has similar entries to those of a cashbook.
2. Instead of profit and loss account, we have an income and expenditure account.
3. Because the club is not formed by any one owner (has no owner), it is funded by
members’ contributions, donations, income from investments to get an
accumulated fund instead of capital.
From the income and expenditure account, if the incomes are more than the
expenditures for the period, then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of
the clubs activities and incase a firm has a trading activity, then in addition to the
income and expenditure account and the balance sheet, prepare a Bar Trading
Account.
244 Further Adjustments to Accounts
Incomes £ £
Subscriptions XX
Donations XX
XX
Expenditure
Depreciation XX
NAME
BALANCE SHEET AS AT 31 DECEMBER ……
Non current Assets £ £ £
Buildings XX (XX) XX
Fixtures, fittings and XX (XX) XX
equipment
Motor vehicle XX (XX) XX
XX (XX) XX
Investments XX
Current Assets
Stocks XX
Debtors XX
Prepayments and accrued XX
income
Cash at bank/hand (receipts + XX
payments)
XX
Current liabilities
Creditors XX
Accrued expenses and prepaid XX
income
Bank overdraft XX (XX) XX
XX
Accumulated fund balance b/f XX
Add/less surplus / deficit XX/(XX)
Other funds
Life membership fund XX
Building fund XX
Education fund XX XX
XX
1. Subscriptions:
These are the amounts received by the club from the members to renew their
membership. It is often paid on an annual basis.
• It is income for the club and therefore reported in the income and
expenditure account.
• Depending on the policy of a club, any subscriptions due but not received
are shown as accrued income (debtors for subscriptions) in the balance sheet.
• Any amounts prepaid are shown as prepaid (creditors for subscriptions).
• Some clubs will not report subscriptions as income until it is received in
form of cash.
3. Other funds
• These are funds set up for a specific purpose and not general. They will
be shown together with the accumulated fund.
• Any incomes relating to these funds, will be credited directly to the funds
and any expenses will be taken off from these funds e.g. building fund,
education fund.
Example 6.7
The following is the receipts and payments account of the Friendship Club for the
year ended 31 December 19X1:
£ £
Balance at bank
31 December 102 Bar purchases 4,434
19X0
Entrance fees 42 Wages 416
Subscriptions: 25 Rent 186
19X0
19 305 Heating and 128
X1 lighting
19 35 Postage and 33
X2 stationery
Bar Sales 5,227 Insurance 18
Sale of 750 General expenses 46
investments
Lesson Five 247
Payments on
account of new 450
furniture
Balance at bank,
_____ 31 December 775
19X1
6,486 6,486
2) On 31 December 19X0, the club held investments which cost £500. During the
year ended 31 December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club
purchased additional furniture at a cost of £520. Depreciation of all furniture
is to be provided for at the rate of 10% per annum.
Required:
(a) Prepare an income and expenditure account for the year ended 31 December
19X1.
(b) Prepare a balance sheet at that date.
Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1
Assets £ £
Stock 272
Subscriptions due 25
Insurance prepaid 5
Investments 500
Furniture 300
Balance at bank 102
1,204
Liabilities
248 Further Adjustments to Accounts
Creditors 306
Rent due 18
Heating and lighting expenses 16 (340)
Accumulated fund 864
Creditors
£ £
Receipts and 4,434 Balance b/f 306
payments
Balance c/d 358 Purchases 4,486
4,792 4,792
Subscriptions
£ £
Balance b/d 25 Receipts & 365
payments
Income & 345
expenditure
Balance c/d 35 Balance c/d 40
405 405
Lesson Five 249
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
£ £
Sales 5,227
Purchases 4,486
4,758
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£ £
Profit from bar trading 784
Entrance fees 42
Subscriptions 345
Profit from sale of investments 250
1,421
Expenditure
Wages 416
Rent 204
Heating and lighting 131
Postage and stationery 33
Insurance 16
General expenses 46
Depreciation – furniture 56 (902)
Surplus 519
250 Further Adjustments to Accounts
Friendship Club
Balance Sheet as at 31 December 19X1
Non current Assets £ £ £
Furniture 820 (56) 764
Current Assets
Stock 315
Subscriptions due 40
Prepaid expense 7
Cash at bank 775
1,137
Current liabilities
Creditors 398
Prepaid subscriptions 35
Accrued expenses 55
Creditors fixtures 70 (518) 619
1,383
Accumulated fund b/f 864
Add surplus 519
1,383
Receipts Payments
Sh Sh
Transport 248,000
Investments 1,500,000
4,561,000 4,561,000
Subscriptions in 85,000 -
advance
Additional information:
Required:
(a) Income and expenditure account for the year ended 31 March 2001.
(8 marks)
(b) Balance sheet as at 31 March 2001. (6
marks)
(Total: 20 marks)
Solution:
Equipment 690,000
5,180,000
Liabilities
5,027,000
254 Further Adjustments to Accounts
Subscriptions
2001 Sh 2001 £
Balance b/d 300,000 Balance b/f 85,000
Receipts and 45,000 Receipt and 2,493,00
payments payment 0
Income & 2,465,000 Income & 51,000
expenditure expenditure
Balance c/f 194,000 Balance c/f 375,000
3,004,000 3,004,00
0
Incomes Sh
Profit from trading account 182,000
Subscriptions 2,465,000
Dinner dance 723,000
Investment income 400,000
Profit on sale of investments 125,000
3,895,000
Lesson Five 255
Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be
collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10%
has been earned on the deposit account. No changes have taken place all year
in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the
close of the year although the wine had been included in the bar stock
valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
256 Further Adjustments to Accounts
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000
(6 marks)
(b) An income and expenditure account for the year ended 30 September 2000
(8 marks)
(c) A balance sheet as at 30 September 2000 (6
marks)
(Total: 20 marks)
Lesson Five 257
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September
2000
Sh Sh
Sales 7,674,000
Less cost of sales
Opening stock 473,600
Add purchases 4,450,800
4,924,400
Less closing stock
Profit to the income and (642,800) (4,281,600)
expenditure
3,392,400
Income Sh Sh
Profit on trading account 992,400
Interest on bank deposit account 100,000
Subscriptions 1,450,000
Donations 108,000
Rental of rooms 495,000
3,146,200
Expenditure
Lecturer’s fees 920,000
Depreciation on furniture and 194,000
fitting
Equipment 19,000
Lecturer’s travel and 358,000
accommodation exp.
Camera repairs 17,000
Rates and water 277,000
Lighting and heating 867,200
Caretakers wages 880,000
Interest on loan 64,000
Provision for subscription 43,600 (3,139,800)
Surplus 6,400
258 Further Adjustments to Accounts
(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in
operational costs. (i.e. it is cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is
reported in the final accounts.
Therefore, in addition to a trading, profit and loss account, a new account called
manufacturing account is shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in
producing the goods. These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)
The manufacturing account will show the factory cost of goods produced that will be
shown in the trading account in place of purchases.
260 Further Adjustments to Accounts
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31
December
£ £
Raw Materials
Opening stock of raw materials XX
Purchases of raw materials XX
Add carriage inwards XX
XX
Less returns outwards (XX) XX
Cost of raw materials available for use XX
Less closing stock of raw materials (XX)
Raw materials consumed XX
Direct labour (factory wages) XX
Direct expenses XX
Prime cost XX
Factory overheads
Salary to factory manager XX
Depreciation on – Plant and machinery XX
- Factory buildings XX
Other expenses – Factory power XX
Lighting and heating XX
Water XX
Cleaners wages XX XX
Total cost of production XX
Add: opening Work In Progress XX
Less: closing Work In Progress (XX) XX
Factory cost of production (cost of finished XX Note 1
goods)
FACTORY PROFIT XX
Finished goods at a transfer price XX Note 2
Sales XX
Less returns inwards (XX)
XX
Less cost of sales
Opening stock – finished goods XX
Factory cost of production/transfer price XX
XX
Less closing stock of finished goods (XX) (XX)
Gross profit XX
Add factory profit XX
Other incomes – discount received XX
- Profit on disposal XX
XX
Less expenses
Salaries and wages – administration & non XX
production
Lesson Five 261
For the balance sheet, the format is the same for all the assets and liabilities except
for the current assets section whereby the stock at the end of the period should be
shown for each type of stock as per this format:
Current Assets £ £
Stock: raw materials XX
Work in progress XX
Finished goods XX XX
Note 1: This represents the total costs of all the units produced during the period
and therefore will be taken to the trading account as the goods are transferred to
the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher
than the cost of production, then this generates a factory profit. The goods will be
shown in the trading account at the transfer price and the factory profit is added to
the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and
includes managers salaries (not factory managers), legal and accounting fees,
depreciation of furniture and fixtures and equipment not used in production, finance
cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.
Example 6.10
B spikes
Trial Balance as on 31 December 2002
Dr Cr
Stock of raw materials 1.1.2002 21,000
Stock of finished goods 1.1.2002 38,900
Work in progress 1.1.2002 13,500
Wages(direct £180,000: factory 325,000
indirect£145,000)
Royalties 7,000
Carriage inwards (on raw materials) 3,500
Purchases of raw materials 370,000
Productive machinery (cost 230,000
£280,000)
Accounting machinery (cost £20,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Administrative salaries 44,000
Sales representatives’ salaries 30,000
Commission on sales 11,500
Rent 12,000
Insurance 4,200
General administration expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Sales 1000,000
Debtors and creditors 142,300 125,000
Bank 56,800
Cash 1,500
Drawings 20,000
Capital as at 1.1.2002 ______ 29,680
1,421,800 1,421,800
Notes at 31.12.2002
Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002.
Lesson Five 263
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002
Raw Materials £ £
Opening Stock of raw materials 21,000
Purchases 370,000
Carriage inwards on raw materials 3,500 373,500
394,500
Less: closing stock of raw materials (24,000)
Raw materials consumed 370,500
Direct wages 180,000
PRIME COST 550,500
Factory Overheads
Wages 145,000
Royalties 7,000
Depreciation: productive machinery 28,000
General factory expenses 31,000
Lighting( 5/6 x 7,500) 6,250
Factory power 13,700
Rent(5/6 x 12,000) 10,000
Insurance( 5/6 x 4,200 ) 3,500 24,4,450
Total cost of production 794,950
Add: opening work in progress 13,500
808,450
Less: closing work in progress (15,000)
Factory cost production per finished 793,450
goods
Sales 1,000,000
Less cost of sales
Opening stock of finished goods 38,900
Factory cost of production 793,450
832,350
Less closing stock of finished goods (40,000) 792,350
Gross profit 207,650
Expenses
Accounting machinery – depreciation 2,000
Lighting (1/6 x 7,500) 1,250
Administrative salaries 44,000
Sales representatives salaries 30,000
Commission on sales 11,500
Rent ( 1/6 x 12,000) 2,000
Insurance (1/6 x 4200) 700
General administrative expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900 (117,850)
Net profit 89,800
264 Further Adjustments to Accounts
B Spikes
Balance Sheet as at 31 December 2002
Dr Cr
Sh Sh
Capital at 1 February 1985 171,120
Accounts payable 86,000
Bank and cash balance 5,400
Accounts receivable 92,000
Drawings 60,000
Administration expenses 150,360
Advertising expenses 12,000
Factory direct wages 60,000
Factory indirect wages 24,000
Factory power 36,000
Furniture and fittings (all offices) 18,400
Heat and light 16,000
Plant and equipment 276,800
Motor vehicle (used by salesmen) 144,000
Plant hire 4,000
Provision for bad debts 3,200
Provision for depreciation 1 February
1985:
− Furniture and fittings 9,200
− Plant and equipment 138,400
− Motor vehicle 24,000
Raw material purchases 228,000
Rent rates 20,000
Sales 829,440
Selling and distribution expenses 66,400
Inventories at cost, 1 February 1985:
− Raw materials 8,000
− Work in progress 16,000
− Finished goods 24,000 _______
1,261,360 1,261,360
There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:
Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31
January 1986
Direct materials Sh Sh
Opening stock of raw materials 8,000
Add: purchases of raw materials 228,000
236,000
Less: closing stock of raw materials (15,200)
Raw materials consumed 220,800
Factory direct wages 60,000
PRIME COST 280,800
Factory overheads
Factory indirect wages 24,000
Factory power 37,600
Plant hire 4,000
Heat and light 14,400
Rent and rates 14,400
Depreciation on plant 55,360 149,760
430,560
Add opening work in progress 16,000
446,560
Less closing work in progress (30,400)
Factory cost of production 416,160
Sales 829,440
Less cost of sales
Opening stock of finished goods 24,000
Add factory cost of production 416,160
440,160
Less closing stock of finished goods (45,600) 394,560
Gross profit 434,880
Less expenses
Increase in provision for doubtful 1,400
debts
Rent and rates 9,600
Heat and light 1,600
Depreciation: motor vehicle 36,000
Furniture and fittings 1,840
Selling and distribution expenses 65,600
Lesson Five 267
Bibi Maridadi
Balance Sheet as at 31 January 1986
COST DEPRECIATION NET BOOK
VALUE
Non current Assets £ £ £
Plant and equipment 276,800 (193,760) 83,040
Furniture and fittings 18,400 (11,040) 7,360
Motor vehicle 144,000 (60,000) 84,000
439,200 (264,800) 174,400
Current Assets
Stock: Raw materials 15,200
Work in progress 30,400
Finished goods 45,600 91,200
Debtors 92,000
Less: provision for doubtful (4,600) 87,400
debts
Prepayments 800
Cash in hand and bank 5,400
184,800
Current liabilities
Creditors 86,000
Accruals 5,600 (91,600) 93,200
267,600
Capital 171,120
Add net profit 156,480
327,600
Less drawings (60,000)
267,600
Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
£ £
Gross profit X
Add: factory profit X
Add: other incomes X
Add: decrease in UPCS X
X
Less expenses
Other expenses (X)
Net profit X
Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of
production. The opening stock of finished goods for the period was valued at Sh.
100,000. (The marked up cost) The closing stock at the end of the financial period
was Sh.160,000.
UPCS
Balance b/f 16,667
Balance 26,667 Profit and loss 10,000
c/d a/c
26,667 26,667
Lesson Five 269
Current Assets Sh Sh
Stock:
Raw materials X
Work in progress X
Finished goods 160,000
Less: UPCS (26,667) 133,333
Some organizations have various departments carrying out trade and therefore the
profitability of each department needs to be established. For each department,
trading, profit and loss account should be prepared. The final accounts will be very
important for the management to assess the performance of each department.
The expenses in relation to a specific department should be charged in the Profit
and Loss account for that department. The accounts will be represented in
columnar form and the format will be as follows: (Assume a firm has departments A
and B).
Name
Trading Profit and Loss account for the year ended 31 December
The balance sheet will reflect the position of the whole organization and therefore a
departmental balance sheet is not required.
270 Further Adjustments to Accounts
When departments in a firm are sharing resources, then the various expenses need
to be apportioned between or among the different departments e.g. if the
departments are sharing a building, then rent expense should be apportioned
among the departments.
The following guidelines can be followed in apportioning the expenses among the
departments.
Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and
children’s games and toys. For the purposes of his accounts, he wishes the
business to be divided into two departments:
The following balances have been extracted from his nominal ledger at 31 March
19X9:
Dr Cr
Sales Department A 15,000
Sales Department B 10,000
Stocks Department A, 1 April 19X8 250
Stocks Department B, 1 April 19x8 200
Purchases Department A 11,800
Lesson Five 271
Cleaning 30
Accountancy and audit charges 120
General office expenses 60
25,000 25,000
Department A £300
Department B £150
Prepare J Spratt’s trading and profit and loss account for the year ended 31 March
19X9, apportioning the overhead expenses, where necessary, to show the
Department profit or loss.
Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
Less expenses
Wages 1,000 750 1,750
Newspaper delivery 150 - 150
wages
General office salaries 450 300 750
Rates 26 104 130
Fire insurance – 10 40 50
buildings
Lighting and air- 24 96 120
conditioning
Repairs to premises 5 20 25
Internal telephone 5 20 25
Cleaning 6 24 30
Accountancy or audit 72 48 120
charges
General office 36 (1,784) 24 (1,426) 60 (3,210)
expenses
NET PROFIT 1,466 324 1,790
Workings:
5) Repairs: A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
274 Further Adjustments to Accounts
Interdepartmental Trading
A department may buy goods from another department in the same firm and
therefore the departments trade with one another. Example, in 4.16 above,
department A sells goods to Department B. (Department B is buying from
department A). Interdepartmental sales and purchases should be excluded from
the total sales and total purchases of the whole firm. If we assume that A sold
goods to B amounting to £1,000 and this figure is included in sales of A and
purchases of B, the trading account for the whole firm will be as follows (other items
will remain the same):
£ £
Sales 24,000
Less cost of sales
Opening stock 450
Purchases 19,000
19,450
Less closing stock (450) (19,000)
Gross profit 5,000
Managers Commission
A commission based on the net profit made in each department may reward
managers of each department.
The commission is normally a percentage of the net profit but it may be a
percentage on the net profit before or after charging the commission.
Assume the commission is 5% of the net profit after charging such commission:
Note:
If we use percentage for each commission assuming a 5% rate, the commission will
be computed as follows:
REINFORCEMENT QUESTIONS
QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31
December 19X6:
£ £
Amounts credited by 32,050 Balance at 1 January 892
bank 19X6
Payments to trade 27,380
creditors
Rent and rates 475
Fixtures 100
Lighting and heating 210
General expenses 800
Loan interest 120
Drawings 900
Customers’ cheques 180
dishonoured
_____ Balance at 31 December 993
19X6
32,050 32,050
1. Trading receipts consisted partly of cash and partly of cheques. During the
year, Dare had paid, out of his takings, wages for part-time staff amounting to
£2,914 and sundry expenditure of £140. He retained between £2 and £5 per
week pocket money and maintained a balance of £20 in the till for change. The
balance of his takings, together with cheques amounting to £250, which he had
cashed out of his takings for the convenience of certain friends, was paid into
the bank.
276 Further Adjustments to Accounts
2. Cheques drawn payable to trade creditors, but not presented at 1 January 19X6,
amounted to £280 and at 31December 19X6 to £320.
3. All dishonoured cheques were re-presented and honoured during the year.
4. The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000
some years ago at a nominal rate of interest of 3% per annum. The interest
was duly paid half-yearly on 31st March and 30 September, and the loan was still
outstanding at the end of the year.
5. Discounts allowed by trade creditors amounted to £480 and those allowed to
debtors were £520.
1 January 31
December
£ £
Stocks 4,500 5,800
Trade debtors 2,800 3,200 (including a bad debt of
£200 to be written off)
Accrued general 240 190
expenses
Rates paid in advance 40 50
Fixtures valued at 2,800 2,550 (including those
purchased during the
year)
Trade creditors 1,800 2,200
Creditors for heating and
lighting 80 70
QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social
Club.
The summarized balance sheet on 31.12.94 as prepared by the previous
bookkeeper contained the following items. All figures are in £s.
Assets
Heating oil for clubhouse 1,000
Bar and café stocks 7,000
New sports ware, for sale, at cost 3,000
Used sports ware, for hire, at 750
valuation
Equipment for grounds person – 5,000
cost
Lesson Five 277
- 3,500 1,500
depreciation
Subscriptions due 200
Bank – current account 1,000
- deposit account 10,000
Claims
Accumulated fund 23,150
Creditors – bar and café stocks 1,000
- Sports ware 300
278 Further Adjustments to Accounts
The bank account summary for the year to 31.12.95 contained the
following items:
Receipts:
Subscriptions 11,000
Bankings – bar and sale 20,000
Sale of sports ware 5,000
Hire of sports ware 3,000
Interest on deposit account 800
Payments
Rent and repairs of clubhouse 6,000
Heating oil 4,000
Sports ware 4,500
Grounds person 10,000
Bar and café purchases 9,000
Transfer to deposit account 6,000
You discover that the subscriptions due figure as at 31.12.94 was arrived
at as follows:
Subscriptions due for more than 12 months should be written off with
effect from 1.1.95
2
/3 rds of the sportswear purchases made in 1995 had been added to stock of new
sportswear in the figures given in the list of assets above, and 1/3 had been added
directly to the stock of used sportswear for hire.
Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these
older items into the stock of used sportswear, at a valuation of 25% of their original
cost.
No cash balances are held at 31.12.95. The equipment for the grounds person is to
be depreciated at 10% per annum, on cost.
Required:
Prepare income and expenditure account and balance sheet for the AB Sports club
for 1995, in a form suitable for circulation to members. The information given
should be as complete and informative as possible within the limits of the
information given to you. All workings must be submitted.
(23 marks)
QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the
name of Chero Hardware. Most goods in which he trades are purchased from
various suppliers in a finished form. In addition, a separate department of the firm
manufactures various types of lampshades from purchased raw materials. When
finished, the lampshades are transferred to the shop at an agreed transfer price for
sale. No lampshades are sold other than through the shop.
The firm’s Accounts Assistant presents you with the following trial balance at 30
June 1988:
Sh Sh
Capital account – Cherono 740,000
Drawings – Cherono 95,000
Long term loan (interest at 15% p.a) 240,000
Fixtures and fittings at cost 900,000
Accumulated depreciation at 1 July 350,000
1987
Motor vehicle at cost 208,000
Accumulated depreciation at 1 July 60,000
1987
Stock at 1 July 1987 (at cost):
Raw materials for lampshades 40,000
Completed lampshades 20,000
Other goods 328,000
Trade debtors and creditors 122,000
Bank balance 98,000
Sales 4,100,000
Purchases – raw materials for 855,000
lampshades
- other goods 2,400,000
Wages 254,000
280 Further Adjustments to Accounts
Additional Information:
(a) The agreed transfer price for lampshades produced was Sh. 1,000,000.
The workshop produced 50,000 lampshades during the year.
(b) Wages include those of the lampshades making employee who has
been paid Sh. 50,000 for the year. In addition, she is entitled to a
commission on the annual profit of her department of 10% p.a. after
charging such commission. Shop assistants’ wages were Sh. 108,000.
(c) The apportionment of rent and rates; and water and electricity to the
lampshades is 25% of the total.
Required:
(a) Prepare a manufacturing, trading and profit and loss accounts for the year
ended 30 June 1988, disclosing clearly (i) the profit earned by the lampshades-
making department and (ii) the gross profit earned by the shop.
(b) Prepare a balance sheet as at 30 June 1988.
QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The
financial year of the club, which had been formed to provide training facilities for
both field and track event athletes, had ended two days previously on 31 October
1983. An extraordinary general meeting was convened for the purpose of
appointing a new treasurer whose task it would be to prepare the annual accounts
for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an
elementary knowledge of bookkeeping, soon found himself in difficulty.
He sought your assistance, which you agreed to give. During your conversation he
said, ‘The previous treasurer maintained a Cash and Bank account. I have
282 Further Adjustments to Accounts
summarized the detailed entries into what I think you call a Receipts and Payments
Account, and have rounded the figures to the nearest £1’.
After you had perused the above account, Guy Rowppe explained the numbered
items, as follows:
(1) On admittance to membership of the club, new members pay an initial entrance
fee together with their annual subscription. At 31 October 1982, annual
subscriptions of £70 had been paid in advance and £180 was owing but unpaid;
of this latter amount, £40 related to members who left during the current year
and is now no longer recoverable. The figures at 31 October 1983 are £100
subscriptions in advance and £230 subscriptions in arrear. The policy of the
club is to take credit for subscriptions when due and to write off irrecoverable
amounts as they arise.
284 Further Adjustments to Accounts
(2) As an alternative to paying annual subscriptions, members can at any time opt
to pay a lump sum, which gives them membership for life without further
payment.
Amounts so received are held in suspense in a Life Membership Fund account
and then credited to Income and Expenditure Account in equal instalments over
10 years; the first such transfer takes place in the year in which the lump sum is
received. On 31 October 1982 the credit balance on the Life Membership Fund
Account was £4,720, of which £850 credited was as income for year ended 31
October 1983.
(3) The club has a permanent training ground. Non-members can use the facilities
on payment of a fee. In order to guarantee a particular facility, advance
booking is allowed. Advance booking fees received before 31 October 1983 in
respect of 1984 total £470. The corresponding amount paid up to 31 October
1982 in advance of 1983 was £325. Members can use the facilities free of
charge.
(4) Club members can take out insurances through the club at advantageous rates.
Initially, premiums are paid by members to the club. Subsequently, the club
pays the premiums to an insurance broker and receives commission. At 31
October 1982, premiums received but not yet paid over to the broker amounted
to £102 and commissions due but not yet received were £11. The
corresponding amounts at 31 October 1983 are £160 and £13 respectively.
(5) The grounds man is employed for the six months April to September only. He is
then paid a retaining fee to secure his services for the following year. At 31
October 1982 the grounds man had been paid a retainer (£250) for 1983.
Included in the Wages figure (£3,600) is the retainer (£300) for 1984.
(6) Sporting requisites are sold only on cash terms. There are therefore no debtors
for these items.
(7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163;
the corresponding figure on 31 October 1983 was £202.
(8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31
October 1983, was £927. In arriving at this latter figure, the sum of £137,
representing damaged and unsaleable stock at cost price, had been
excluded.
(9) Postage stamps unused at 31 October 1983 totalled £4.
(10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36
respectively.
(11) Rates are payable to the District Council in two installments (in advance)
each year. £360 had been paid on 1 October 1982, £390 on 1 April 1983 and
£456 on 1 October 1983.
(12) The club receives interest on investments bought a number of years ago at a
cost of £7,400 (current valuation £7,550). At the end of October 1983, the
club had acquired further investments which cost £5,600 (current valuation
£5,600) and at the same time placed £3,000 in a short-term deposit account.
(13) The written down value of the furniture which had been sold during the year
was £350; it had originally cost £800.
Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an
inclusive cost of £4,000. Subsequently, the club had some timber buildings erected
Lesson Five 285
to provide various facilities for members. The total cost of these buildings was
£35,000; depreciation is calculated at the rate of 10% per annum on a straight-line
basis. At 31 October 1982, the provision for depreciation account had a balance of
£9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club’s
books as £7,900 (cost) against which there was a provision for depreciation of
£4,150 (calculated on the same basis as for buildings). Apart from the disposal
referred to in note (12) above there had been no other disposals or acquisitions
during the year.
Required:
Prepare the club’s Income and Expenditure Account for year ended 31 October
1983 and the Balance sheet at that date.
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
QUESTION ONE
The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as
shown below for the month of October 19-6:
Bank Account
19- 19-6
6
Oct Oct
1 Balance c/d 91.40 2 Petty Cash 0623 36.15
13
3 McIntosh and Co 260.1 3 Freda’s Fashions 0623 141.1
1 14 7
3 Malcolm Brothers 112.8 6 Basford Ltd 0623 38.04
3 15
3 Cash sales 407.5 8 Hansler Agencies 0623 59.32
4 16
14 Rodney 361.0 9 Duncan’s storage 0623 106.7
Photographic 2 17 5
17 Puccini’s Cold Store 72.54 9 Aubrey plc 0623 18.10
Ltd 18
20 Eastern Divisional 10 Secretarial services 0623 28.42
Gas Board – rebate Ltd 19
(August direct 63.40
credit)
22 Grainger’s Garage 93.62 14 Trevor’s Auto 0623 11.75
repairs 20
29 Cash sales 235.3 15 Wages cash 0623 115.5
9 21 2
31 Balance c/d 221.5 16 Towers Hotel 0623 44.09
2 22
17 Bank charges - 12.36
(September)
20 Broxcliffe borough
Council SO 504.2
2
21 Eastern Area
Electricity Board DD 108.6
4
Lesson Five 287
24 Eastern Divisional
Gas Board DD 41.20
28 Petty Cash 0623 119.0
23 7
30 Wages cash 0623 337.7
24 4
______ 31 Salaries transfer - ______
1,919. 1,919.
37 37
Nov
1 Balance c/d 221.5
2
£ £ £
1 BCE 90.45
2 CR 175.02 265.47
3 CR 780.48 910.02
17 CR 443.56 1,151.12
20 SO 504.22 646.90
21 DD 196.83 343.32
22 CR 93.62 162.21
28 DD 108.64 80.42
Abbreviations:
BCE = Balance SO = Standing Order CR = Credit ADJ =
Adjustment
INT = Interest DD = Direct Debit CGS = Charges
Required:
Prepare the company’s bank reconciliation statement as at 31 October 19-6.
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul
Rudyerd, a wholesale fruiter, at the end of his financial year ended on 31 May 19X1.
£ £
Purchases and sales 104,310 146,200
Stocks 3,010
Motor vehicles at cost 26,360
Provision for depreciation on motor vehicles as 12,960
at 1 June 19X0
Warehouse equipment at cost 20,000
Debtors and creditors 25,250 21,200
Bank 3,200
Motor vehicle expenses 11,960
Rent and rates 11,220
Advertising 2,500
Sundry expenses (including insurance and 3,470
electricity)
Drawings 6,600
Capital as at 1 June 19X0 ______ 31,120
214,680 214,680
290 Further Adjustments to Accounts
(a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a
consignment of rare fruit from abroad which cost £300, which would normally
sell for approximately £660, but which is badly bruised and could be sold as
juice pulp for £100.
(b) Depreciation on motor vehicles is normally charged at an annual rate of 20%,
using the reducing balance method. The motor vehicles at cost figure includes
a new car purchased during the year for £9,600 for Rudyerd’s personal use
which it is estimated will last four years with an estimated residual value of
£4,000.
(c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
Prepayments Accruals
£ £
Rates 230
Rent 160
Insurance 180
Electricity 200
(d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of
outstanding debtors should be created.
(e) A recording error has resulted in a second-hand delivery van, purchased on 2
June 19X0 for £9,000, being treated as a motor vehicle expense.
(f) No record has been made of fruit, estimated to have cost £520, withdrawn from
the business by Rudyerd for his personal use.
(g) No adjustment should be made, in preparing the answer to part (a) for the new
warehouse equipment purchased during the year.
Required:
(a) Prepare a draft trading, profit and loss account for Paul Rudyerd’s wholesale
fruit business for the year ended 31 May 19X1 and a draft balance sheet as at
31 May 19X1. (15 marks)
(b) Briefly explain what accounting concepts and conventions would be important in
considering the treatment of the new warehouse equipment. (4 marks)
(c) Itemize the additional information that you would wish to know before you could
make the appropriate adjustments to the above financial statements in respect
of the new warehouse equipment.
(3 marks)
QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after
your arrival the finance director is rushed into hospital; the auditors are about to
arrive to prepare the accounts for the recently-ended financial year; you cannot find
any working papers for the previous year’s accounts; and the other accounts staff
are too busy to assist you in preparing for the auditor’s visit.
The eight situations described below are detailed on a notepad left by the finance
director and their treatment in the accounts needs to be considered by you.
Lesson Five 291
(a) A supply of office stationery was purchased five months before the year-end at
a cost of £1,000. At the year-end it is estimated there is about £250 worth left
in stock.
(b) An electronic typewriter was purchased during the year at a cost of £270. It is
estimated to have a useful life of five years.
(c) A batch of goods was produced to a customer’s special order. The goods cost
£5,800 but have not been delivered as it transpires the customer is now
bankrupt. A buyer for the goods has been found, who will pay £4,500 but
modifications costing £1,200 will have to be made to the goods.
(d) Three technical staff have spent the last six months exclusively on a new
product design project; their salaries for this period amount to £22,000. At the
year-end it is known that the design stage will take another month, to be
followed by market research; after this the directors will decide whether the
project should proceed to production and marketing. The company’s chief
engineer is confident that sales of the new product will start in the next financial
year and will last for at least four years.
(e) A freehold property was purchased on the first day of the financial year at a cost
of £650,000. The building is estimated to have a useful life of ten years when it
is expected it will have to be demolished for redevelopment. It is estimated
that the freehold land, at the time of purchase, was worth £500,000.
(f) A specialist machine was purchased seven years ago for £200,000. It has been
depreciated, using the straight-line method, at 10% per annum since then. To
the beginning of the year under review £120,000 depreciation has been
provided. The chief engineer has advised that the machine is worn out and
would need to be rebuilt to last more than another two years. The directors
have already decided the machine should not be rebuilt but scrapped one year
after the end of the year under review.
(g) The debtors’ ledger shows balances totalling £52,000 at the year-end. Two
debts, totalling £2,000, are known to be bad. Another customer has gone into
liquidation owing £3,000; it is expected he will be able to pay 60p of every £
owed to his creditors. The sales director recommends a general bad debt
provision of 2% in respect of the remaining debtor balances.
(h) The company has undertaken a heavy advertising campaign throughout the
year under review to promote its corporate image and product range. The sales
and managing directors feel that this campaign will benefit the company for at
least a further six months after the year end. You determine that the campaign
cost £150,000 and has been fully paid for before the year-end.
Required:
For each of the eight situations described above:
(a) Describe what action should be taken in respect of:
(i) The amount to be charged or credited to the year’s profit and loss account (if any);
(ii) The value to be placed on the asset in the balance sheet at the year end (if any);
(8 marks)
(b) State what accounting assumptions, conventions or concepts could be involved
and give reasons, where there is a conflict between two or more of them, why
you have chosen the action you propose.
(9 marks)
292 Further Adjustments to Accounts
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31
December 19X9:
Ksh Ksh
Carriage inwards 6,310
Capital account at 1 January 500,000
19X9
Motor vans 200,000
Stock at 1 January 19X9 164,000
Balance at bank 116,860
Purchases 1,593,690
Sales 2,224,000
Trade debtors 290,000
Trade creditors 157,600
Rent and rates 56,080
Salaries 350,400
General expenses 44,720
Motor expenses 25,600
Discounts allowed 40,400
Discounts received 37,600
Insurance 17,600
Bad debts 30,400
Provision for doubtful debts 1 8,000
Jan 19X9
Provision for depreciation on 60,000
vans
Drawings 50,000
Disposal 6,000
Returns inwards 7,140 _______
2,993,200 2,993,200
(b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected
to sell them at Ksh 232,470.
(c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
(d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but
the instalment due on 31 December 19X9 was not paid until 15 January in the
next year.
(e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
Lesson Five 293
(f) Depreciation is to be provided for on the motor truck at the rate of 20% per
annum straight line on cost.
(g) General expenses include Ksh 3,060 relating to the telephone account which is
made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
(h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent
sand rates relate to private use.
Prepare a trading and profit account for the year to 31st December 19X9, and a
balance sheet as at 31 December 19X9.
QUESTION FIVE
The balance sheet of Johnson’s shop at 1 October 19X7 was as follows:
The following is a summary of the transactions which took place during the year to
30 September 19X8:
1. Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh
83,000.
2. Stock in trade bought, all on credit for Ksh 78,000.
3. Cash of Ksh 113,000 was taken from the till (cash register) and paid into the
bank.
4. The trade creditors were paid Ksh 73,000 by cheque.
5. Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The
loan is for 5 years.
6. Wages of Kshs 17,000 were paid in cash.
7. Rates of Ksh 2,900 were paid by cheque.
8. Sundry expenses of Ksh 6,000 were paid in cash.
9. Electricity bills of Ksh. 1,600 were paid by cheque.
10. The owners of the business withdrew Ksh 9,000 in cash.
1. Interest Ksh 2,500 due to Black for the year was unpaid.
294 Further Adjustments to Accounts
2. Shop fittings are to be depreciated at 10% per annum on the total at the year-
end; the delivery van is to be depreciated at 20% per annum of the total at the
year-end.
3. The rates payment during the year included Ksh 1,000 in respect of the period
1/10/19X8 to 31/3/19X9.
4. The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.
Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for
the year to that date.
LESSON SEVEN
PARTNERSHIPS
Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for
professional firms (e.g.) lawyers, doctors, accountants etc. whose maximum
membership is twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that
they agree on the terms upon which the partnership will be run and the relationship
between each other. This is done in writing and signed off as agreed by all the
partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a
percentage.
4) Salaries to be paid to any partners who will be involved in the active
management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
changes are passed through the capital account therefore the capital account
becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current
account are shown in the following formats.
CAPITAL ACCOUNT
A B C A B C
£ £ £ £ £ £
Loss or xx xx xx Bal b/d xx xx xx
revaluation
Goodwill written xx xx xx Additional capital xx xx xx
off (c/book or asset)
Gains on revaluation xx xx xx
Bal c/d xx xx xx Goodwill xx xx xx
xx xx xx xx xx xx
Bal b/d xx xx xx
CURRENT ACCOUNT
A B C A B C
£ £ £ £ £ £
Bal b/d xx Bal b/d xx xx
Interest on xx xx xx Interest on capitalxx xx xx
drawings
Drawings xx xx xx Salaries xx xx xx
Share of profits xx xx xx
Bal c/d xx xx - Loan interest - xx -
Bal c/d xx
xx xx xx xx xx xx
xx Bal b/d xx xx xx
£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)
£ £
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)
Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each
partner in the business should be shown separately and any loan given by a partner
to the firm is also shown separately in the non-correct liability section therefore, the
format will be as follows.
£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx
298 Other Aspects of Final Accounts
Example 7.1
Read the following and answer the questions below.
A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:
(a) From the information above prepared the firm’s appropriation account and the
partners’ current accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840
CURRENT ACCOUNT
A B A B
£ £ £ £
Drawings 12,86 13,400 Interest on 6,000 4,800
0 capital
Salaries 9,000 6,000
Bal c/d 5,66 920 Profit shared. 3,520 3,520
0
18,52 14,320 18,520 14,32
0 0
Bal b/d 5,660 92
0
Lesson Six 299
EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December
19X7 and balance sheet extracts at the date, from the following:
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December
2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)
Current Account
W P H W P H
£ £ £ £ £ £
Interest on 240 18 130 Bal b/d 1,860 94 717
draw 0 6
Drawings 9,200 7,10 6,900 Interest on 2,000 1,50 900
0 capital 0
Bal c/d Salaries 2,00 3,500
0
300 Other Aspects of Final Accounts
Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the
books of Brick and Stone, trading partnership, sharing the balance of profits and
losses in the proportions 3:2 respectively.
£
Printing, stationery and postage 3,500
Sales 322,100
Stock in hand at 1 October 19X8 23,000
Purchases 208,200
Rent and rates 10,300
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running costs 5,620
Discounts allowable 950
Discount receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings: at cost 26,000
Provision for depreciation 11,200
Motor vehicles: at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current account balances
Lesson Six 301
At 1 October 19X8:
Brick 3,600 credit
Stone 2,400 credit
Capital account balances
At 1 October 19X8:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened
Brick Loan Account on 1 July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1
April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400
and rent of £600 prepaid at that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing
£1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line
basis:
Fixtures and fittings 10%
Motor vehicles 20%
Required:
(a) Prepare a trading and profit loss account for the year ended 30 September
19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include
summaries of the partners’ capital and current accounts for the year ended
on that date.
Note: In both (a) and (b) vertical forms of presentation should be used.
SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
302 Other Aspects of Final Accounts
Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470
Current Account
Brick Stone Brick Stone
£ £ £ £
Drawings 24,00 12,000 Bal b/d 3,600 2,400
0 (adj)
Interest on loan 250
Bal c/d 2,80 11,700 Salaries. 6,00
0 0
Share profits 22,950 15,30
0
26,80 26,800 26,800 23,70
0 0
Lesson Six 305
EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The
following is the trial balance as at 30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 19X8 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,000
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040
Required:
Prepare a trading and profit and loss appropriation account for the year ended 30
June 19X9 and a balance sheet as at that date.
£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580
£ £ £
Non Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300
Current Assets
Stock 56,3400
Debtors (16,243 – 320) 15,9230
Cash at bank 6770
72,9400
Current Liabilities
Creditors 111,500
Accruals (200 + 96) 2,960 (114,460) 61,4940
1,174,240
Example 7.5
JUNE 1998 QUESTION 4
After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as
Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and
depreciated at 20% by straight line method on an assumed residual value
of Sh.20,000 had been sold at Sh.60,000 but no entries, other than in the
bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been
omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad
debts should have been maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary
of Sh.60,000 which should have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of
Sh.39,200. No entries had been made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%
Required:
a) A statement of adjustments to show the correct net profit for the y
(12 marks)
Lesson Six 309
SOLUTION
The following journal can be included although not required in the question.
DR CR
i) DR: Suspense Account 26,400
CR: Discount Allowed Account 26,400
Capital Accounts
Kombo 1,400,000
Nzuki 1,400,000 2,800,000
Current Accounts
Kombo 198,128
Nzuki 86,352 284,480
3,084,480
NB
This is a very good question on partnership as it combines both errors on the
accounts and Partnerships. Please study it carefully and follow up the entries and
adjustments.
The next example is still on past paper and combines both incomplete records and
partnerships.
Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while
purchases, all on credit for the same period were Sh.2,952,480. On 31 March 1996
Kefa’s capital was Sh.200,000 less than that of Mark. The analysis of the cash book
for the year ended 31 March 1997 shows the following:
Receipts:
Cash from credit sales 3,491,520
Additional capital by Kefa 240,000
Cash sales 586,800
Payments:
For purchases 3,070,080
Salaries paid 420,000
Rent paid (for 6 months to 30.9.96) 144,000
Rates paid (for 6 months to 30.6.97) 120,000
Electricity charges 60,000
Advertising 41,760
Motor vehicle expenses 119,520
Sundry expenses 33,600
Drawings - Kefa 132,480
Mark 102,000
On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One
vehicle was sold on credit for Sh.640, 000 while the other was taken over by Kefa at
a valuation of sh.250, 000. the combined book value of the two vehicles was
Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor
vehicles on hand at 31 March 1997. No depreciation is to be provided for the
vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997.
(10 marks)
b) Balance sheet as at 31 March 1997. (8 marks)
c) Partner’s capital accounts (4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
Furniture 360,000
Motor vehicle 1,920,000
3,528,000
Liabilities
Creditors (423,360)
Net Assets 3,104,640
Capital Kefa 1,452,320
Mark 1,652,320 3,104,640
Trading, Profit and loss account for the year ended 31 March 1997
Sh Sh.
Sales 3,849,120
Less cost of sales
Opening stock 541,200
Purchases 2,952,480
Less: Closing stock 488,640) (3,005,040)
Gross profit 844,080
Profit on disposal adjustment 230,000
1,074,080
Less Expenses
Salaries 420,000
Rent adjustment 288,000
Rates 60,000
Electricity 72,480
Advertising 48,000
Motor vehicle 119,520
Sundry expense 37,200
Depreciation – Furniture 36,000
- Motor vehicle 126,000 (1,207,200)
(133,120)
Net Loss should in PSR
Kefa (66,560)
Mark (66,560) 133,120
Current Assets
Stock 488,640
Debtors – Trade Adjustment 382,800
- others vehicle 640,000
Prepayments 60,000
Bank 169,680
1,741,120
Lesson Six 315
Current Liabilities
Creditors 305,760
Accruals 166,320 (472,080) 1,269,040
2,727,040
Capital - Kefa 1,243,280
Mark 1,483,760
2,727,040
316 Other Aspects of Final Accounts
Capital Account
Kefa Mark Kefa mark
Shs. Shs. Shs. Shs.
Drawings 132,48 102,00 Bal b/d 1,452,3 1,652,3
0 0 20 20
Disposal 250,00 Cash 240,0
0 00
Loss shared 66,56 66,56
0 0
Bal c/d 1,243,28 1,483,76
0 0
1,692,32 1,652,32 1,692,3 1,652,3
0 0 20 20
1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the
share of a partner’s effort to improve the business. The problem is normally
to ascertain the value or cost of goodwill.
There are two types of goodwill:
1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates.
There are various approaches to these. Goodwill maybe arrived at by
taking the average profits for lets say three previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or
shown in the accounts.
2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business
above its net assets.
This is less subjective because it is the excess amounts paid for a
business above its net assets.
Lesson Six 317
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these
case the net assets will be total assets less total liabilities) of another
business that is still trading on and the value of the net asset is 3 M,
therefore the purchased goodwill may be shown in the accounts as an
intangible asset. Purchased goodwill can be treated in the following three
main ways:
The practice is normally to carry it in the accounts together with the other
assets (as an intangible asset) and amortize it over estimated period of
time.
318 Other Aspects of Final Accounts
In a partnership, there are normally three situations where goodwill is accounted for
in the accounts:
The goodwill may remain in the accounts and therefore no partner entries will be
made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account
Example:
A and B have been trading as partners sharing profits and losses equally. They
decided to change profit sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.
Solution:
1) CAPITAL ACCOUNT
A B A B
Bal b/d 1,000,0 1,500,0
00 00
Goodwill(OPSR) 250,0 250,0
00 00
Bal c/d 12,500,0 1,750,0
00 00
12,500,0 1,750,0
00 00
2) CAPITAL ACCOUNT
A B A B
Goodwill 300,000 200,00 Bal b/d 1,000,000 1,500,00
Lesson Six 319
(NPRS) 0 0
Bal c/d (NPSR) 950,000 1,550,00 Goodwill 250,000 250,00
0 (OPSR) 0
12,500,00 1,750,00 12,500,00 1,750,00
0 0 0 0
REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based
on market price.
The revaluation is normally done when a new partner is to be admitted or an old
partner is retiring.
Any revaluation gains or losses are passed through a new account (i.e) a
Revaluation account and the balance on this account profit or low on revaluation is
transferred to the partner’s capital accounts in the existing profit sharing ratio.
Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1.
They have the following assets and liabilities at the book values and they wish to
restate these values at market values and agreed values.
Required:
Prepare Revaluation account and the partner’s capital account given the
partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000
REVALUATION ACCOUNT
£ £
Fixtures 100,000 buildings 500,000
Motor vehicles 50,000 Creditors 100,000
Stock 50,000
Debtors 50,000
Capital A/C A 2 140,000
5
B 2 5 140,000
320 Other Aspects of Final Accounts
C 1 70,000
5
600,000
600,000
CAPITAL ACCOUNT
A B C A B C
Goodwill £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Bal b/d 3,000 2,500 1,500
Bal c/d 3,140 2,640 1,510 Revaluatio 140 140 70
n
3,140 2,640 1,570 3,140 2,640 1,570
EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1
respectively.
Fixed Assets £ £
Premises 90,000
Plant 37,000
Vehicles 15,000
Fixtures 2,000
144,000
Current Assets
Stock 62,379
Debtors 34,980
Cash ___760 98,119
£242,11
9
Capital
Alan 85,000
Bob 65,000
Charles 35,000
185,000
Lesson Six 321
Current account
Alan 3,714
Bob (2,509)
Charles 4,678 5,883
Current liabilities
Creditors 19,036
Bank overdraft 4,200
£242,11
9
Charles decides to retire from the business on 30 June 19X6, and Don is admitted as
a partner on that date. The following matters are agreed:
322 Other Aspects of Final Accounts
The original partner in the old firm who has the higher investment will draw out
cash so that his capital and current account balances equal those of his new
partners.
Required;
a) Account for the above transactions, including goodwill and retiring partners’
accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June
19X6.
Solution:
Capital Accounts
Don Alan Bob Charl Don Alan Bob Charl
es es
£ £ £ £ £ £ £ £
Goodwill
written off 12,0 18,00 12,0 - Bal b/d - 85,00 65,0 35,00
00 0 00 0 00 0
Motor - - - 3,900 Goodwil - 21,00 14,0 7,000
vehicle l 0 00
Cashbook - 21,00 38,10 Cash 79,0 - - -
0 0 book 00
Bal c/d 67,0 67,00 67,0 -
00 0 00
79,0 106,0 79,0 42,00 79,0 106,0 79,0 42,00
00 00 00 0 00 00 00 0
Current Accounts
Don Alan Bob Charl Don Alan Bob Charl
Lesson Six 323
es es
£ £ £ £ £ £ £ £
Bal b/d - - 2,50 - Bal b/d - 3,714 - 4,678
9
Cash 9,02 7,478 Revaluation - 8,400 5,60 2,800
book 3 a/c 0
Cash book 3,09 - - -
1
Bal c/d 3,09 3,091 3,09 -
1 1
3,09 12,11 5,60 7,478 3,09 12,11 5,60 7,478
1 4 0 1 4 0
324 Other Aspects of Final Accounts
Revaluation Account
£ £
Plant 2,000 Premises 30,000
Stock 8,200
Debtors 3,000
Profits shared:
Alan 8,400
Bob 5,600
Charles 2,800 _____
30,000 30,000
Cash book
£ £
Bal b/d 760 Charles – capital 38,100
account
Don - capital 79,000 Loan 8,000
account
Current account 3,091 Current 7,478
account
Alan – capital account 21,000
Current account 9,023
Bal c/d ******
Cash book
£ £
Bal b/d 4,200
Don - capital 79,000 Charles – capital 38,100
account account
Current account 3,091 Loan account 8,000
Current account 7,478
Alan – capital account 21,000
Current account 9,023
Lesson Six 325
Current Accounts
Alan 3,091
Bob 3,091
Don 3,091 9,273
210,273
Non current
liabilities
Loan – Charles 20,000
230,273
NOTE:
i. Goodwill introduced shared among the partners in the old partnership in current
profit sharing ratios.
ii. Same case applies for any gain or loss in the revaluation of assets.
iii. Goodwill written off in the new profit sharing ratios against the capital accounts
only for the new partners.
iv. When there is no enough cash to be paid to the retiring partners, his balance
remains in the business as a loan.
The new partner will have to bring in the capital that is due from him as per the
agreement and also pay for a share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by
debiting the partner’s account(inclusive of the new one in the new Profit Sharing
Ratio).
If the admission is taking place part way through the financial period, then the new
partner will be entitled to the profits or losses for the remaining part of the financial
period. (i.e from the point of joining the partnership).
Care should be taken when apportioning interest on capital, salaries and profits
because of the changes
Example:
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,070,000
13,420,000 13,420,000
Additional information:
1. On I November 2000 Tonui was admitted as a partner and from that date
profits and losses were to be shared on the ratio 2:2:1. For the purposes of this
admission, the value of goodwill was agreed at Sh.3, 000,000. No account for
goodwill was to be maintained in the books, adjusting entries for transactions
between the partners being made in their current accounts. On that date,
Tonui introduced Sh.1,250,000 more into the firm of which Sh.375,000
Lesson Six 327
comprised his fixed capital and the balance was credited to his current
account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum
after Tonui’s admission. In addition, after Tonui’s admission, no interest was to
be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales.
Expenses, unless otherwise indicated were to be apportioned on a time basis.
4. A charge was to be made fro depreciation on motor vehicle and furniture and
fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April, the stock was valued at Sh.1,275,000.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9
marks)
b) Partners’ current accounts for the year ended 30 April 2001 (4
marks)
c) Balance sheet as at 30 April 2001 (7 marks)
(Total: 20 marks)
Solution
a) ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30
APRIL 2001
Sh. Sh.
Sales 8,750,000
Less: cost of sales
Opening stock 1,200,000
Purchases 4,180,000
5,380,000
Less: Closing stock (1,275,000) 4,105,000 Gross Profit
4,645,000
328 Other Aspects of Final Accounts
1.3.2000- 1.11.2000-
3.10.2000 30.4.2001
Sh Sh Sh Sh Sh Sh
Gross profit 1,858,00 2,787,00 4,645,00
S
TS ×GP 0 0 0
Expenses
Dep. Motor 160,0 160,00 320,00
Vehicle 00 0 0
Furniture 15,0 15,00 30,00
00 0 0
Salaries 483,7 483,75 967,50
50 0 0
Accountancy 52,5 52500 105,00
fees 00 0
Wages 275,0 275,00 550,00
00 0 0
Rent, rates, 137,5 137,50 275,00
electricity 00 0 0
General 362,4 359,60 612,00
expenses 00 0 0
Prov. For 30,0 (1,506,1 10,00 (1,393,3 40,00 2,899,50
depreciation 00 50) 0 50) 0 0
Net Profit 351,8 1,393,6 1,745,50
50 50 0
Less: Interest on
capital
Rotich 37,5 37,50 75,00
00 0 0
Sinei 25,0 25,00 50,00
00 0 0
Tonui - (62,50 18,75 (81,2 18,75 (143,75
0) 0 50) 0 0)
Balance of profit 289,35 1,312,4 1,601,75
shared 0 00 0
192,9 524,9 717,86
Rotich 2 3 2
5 00 60 0
1 2 96,4 524,9 621,41
Sinei
3 5 50 60 0
1 - (289,3 262,4 (1,312,4 262,48 (1,601,7
Tonui - 5 50) 80 00) 0 50
b)
Current Account
R S T R S C
Sh. Sh. Sh. Bal b/d Sh. Sh. Sh.
Lesson Six 329
Current Assets
Stock 1,275,000
Debtors 193,000
Less Provision (40,000) 153,000
Prepayments 50,000
Balance at bank 820,000
2,298,000
Current Liability
Creditors 1,070,000
Accruals 15,000 (1,085,000) 1,213,000
4,613,000
1,625,000
Current Account: Rotich 1,842,860
Sinei 651,410
Tonui 493,730 2,988,000
4,613,000
(d) The adjusting entries on admission of a new partner should be made to the
capital account (i.e) for any introduction of goodwill and revaluation of assets
If the adjustments are made in the current account then there will be no
change on the capital balance and therefore no change on the interest charged
on the capital balances.
Therefore the profit and loss account will be split between the two periods and
appointment of profits done and this will be based on the terms of the
partnership in each period.
EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail
business and shared profits and losses in the ratio 2:2:1 respectively
Additional information:
1. On 1 April 2001, Wakil retired from the partnership and was to start a
business as a sole trader while Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him
while Kyamba and Onyango continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value Transfer value
Sh Sh.
Fixed assets 260,000 306,000
Stocks 166,000 157,000
Debtors 172,000 165,000
332 Other Aspects of Final Accounts
5. The profit of the new partnership before interest on capitals and partners’
salaries was Sh.240,000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000,
debtors by Sh.90,000 and bank balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango
Sh.70,000.
Required:
a) Profit and loss and appropriation account for the year ended 31 March 2002.
(4 marks)
b) Capital accounts for the year ended 31 March 2002 (4
marks)
c) Current accounts for the year ended 31 March 2002.
(4 marks)
d) Balance sheet of the new partnership as at 31 March 2002.
(8 marks)
(Total: 20 marks)
Lesson Six 333
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh Sh.
Net profit for the year 240,000
Less: Interest on capital
Kyamba 20,000
Onyango 20,000 (40,000)
200,000
Less: Salaries
Kyamba 72,000
Onyango 60,000 (132,000)
Balance of profits shared in PSR 68,000
Kyamba ½ 34,000
Onyango ½ 34,000 (68,000)
b) CAPITAL ACCOUNT
K O W K O W
(2) Goodwill 100,00 100,00 - Bal b/d 160,0 140,0 200,0
in New PSR 0 0 00 00 00
(4) Fixed 306,0 (1)Goodwill in 80,0 80,0 40,0
Assets 00 old PSR 00 00 00
Stocks 157,0 Cashbook 48,0 68,0 -
00 00 00
Debtors 165,0 Profit on 12,0 12,0 6,0
00 transfer in old 00 00 00
PSR
Creditors 156,0
00
Bal c/d 200,00 200,00 Current 53,0
0 0 account (3) 00
c) CURRENT ACCOUNT
K O W K O W
Sh Sh Sh Sh Sh sh
Capital - - 53,000 Bal b/d 65,300 49,0 53,00
00 0
Drawings 85,0 70,00 - Interest on 20,000 20,0 -
00 0 capital 00
334 Other Aspects of Final Accounts
Workings:
Stock:
Bal b/f 294,000
Transfer (166,000)
Lesson Six 335
Increase 100,000
228,000
Debtors:
Bal b/f 209,000
Transfer (172,000)
Increase 90,000
127,000
Creditors:
Bal b/f 252,000
Transfer 156,000
96,000
EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been
extracted from their books of account as at 31 March 19 –2 after their trading
and profit and loss account has been prepared, but before any consequent
adjustments have been made to the partners’ respective capital accounts.
Dr. Cr.
Capital accounts (as at 1 April 19 – 1): £ £
Upp 60,000
Downe 40,000
Cash 6,600
Creditors 29,250
Debtors 201,000
Downe: goods withdrawn 400
Drawings:
Upp (all at 31 December 19 – 1) 20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost 200,000
Accumulated depreciation 90,000
Accrued interest on Upp’s Loan account 10,000
Loan account: Upp 50,000
Net profit for the year to 31 March 19 – 2)
179,750
Salary: Downe 12,000
Stocks 3,500
Upp: private expenses paid (on 31 March 19 – 2) 500
£459,000 459,000
Additional information
1. The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as
at 1 April in each year at a rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the
year at a rate of interest of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
336 Other Aspects of Final Accounts
f) A specific loan made by any partner is to bear interest at a rate of 20% per
annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be
revalued at their market value as at the date of retirement of the partner.
Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31
March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of
the above transactions. and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of
the above transactions have
been settled.
(Detailed working should be submitted with your answer).
SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2
£ £ £
Net profit b/d 179,750
Add interest on drawings
Upp [3/12 x (10% x 500
20,000)]
Lesson Six 337
(b)
Capital Accounts
Upp Downe Upp Downe
£ £ £ £
Appropriation Balances b/d 60,00 40,000
0
- interest on 500 750 Loan interest 10,00
drawings 0
Salary 12,000 Appropriation
Drawings 20,00 15,000 -salary 16,000
0
Private 500 400 -interest on 9,000 6,000
expenses/goods capital
Car 10,00 -residual profit 75,00 75,000
0 0
Revaluation (deficit) 20,00 20,000
(W1) 0
[see workings after
(c)]
Loan (balancing 103,0
figure) 00
Balance c/d _____- 88,850 ______ ______
154,0 137,00 154,0 137,00
00 0 00 0
(c)
Balance Sheet as at 1 April 19-2
£ £
Non current assets 50,000
Current assets
Stocks 5,000
Debtors 180,000
Cash (W3) __5,100
190,100
Lesson Six 339
Current liabilities
Creditors [35,000 + 4,750] 39,750
Working capital 150,350
Net assets employed 200,350
Financed by
Capital
Downe 58,850
Side 65,000
123,850
Loan
Upp (W4) _76,500
200,350
Workings
W1
Revaluation
£ £
Debtors 201,00 Creditors 29,250
0
Fixed assets (cost) 200,00 Provision for 90,000
0 depreciation
Stocks 3,500 Capital – Upp (car) 10,000
Legal etc expenses 4,750 Fixed assets 50,000
Creditors 35,000 Stocks 5,000
Debtors 180,00
0
Goodwill 40,000
______ Balance c/d (deficit) 40,000
444,25 444,25
0 0
W2
Goodwill
£ £
Revaluation 40,000 Capital
-Downe (75%) 30,000
_____ -Side (25%) 10,000
40,000 40,000
340 Other Aspects of Final Accounts
W3
Cash
£ £
Balance b/d 6,600 Loan
Capital -Upp [1/2 x 76,500
153,000]
-Side 75,000 Balance c/d 5,100
81,600 81,600
Bal b/d 5,100
W4
Loan - Upp
£ £
Cash 76,500 Balance b/d 50,000
Balance c/d 76,500 Capital
-Upp 103,00
0
153,00 153,00
0 0
Balance b/d 76,500
Lesson Six 341
REINFORCEMENT QUESTIONS
QUESTION ONE
1. K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys,
Kimeu being responsible for the factory and Maingi for the sales. All
completed toys are transferred from the factory to sales department at
agreed price. Profits are shared on the following basis:
Factory Sales Department
Kimeu 80% 40%
Maingi 20% 60%
The following trial balance has been extracted from the books at 31 March
1992:
Sh. Sh.
Freehold factory at cost 1,053,750
Factory plant, at cost 843,750
Provision for depreciation 1 April 1991 151,250
Delivery van, at cost 401,250
Provision for depreciation 1 April 1991 86,250
Stocks at 1 April 1991
Raw materials 100,700
Work-in-progress 85,000
Toys completed (30,000 at Sh.40) 1,200,000
Sales (45,500 toys) 2,775,500
Purchases of raw materials 716,250
Factory wages 375,500
Sales department wages 150,750
Expenses:
Factory 301,750
Sales Department 250,500
Provision for doubtful debts 1 April 1991 40,000
Trade debtors and creditors 450,000 150,000
Bank overdraft 176,200
Capital accounts:
Kimeu 1,400,000
Maingi 1,425,000
Drawings:
Kimeu 150,000
Maingi 125,000
6,204,200 6,204,200
342 Other Aspects of Final Accounts
Additional information:
i 38,000 toys at Sh.45 each were manufactured and transferred to Sales
Department during the year. Tys in stock at the end of the year were to be
valued at Sh. 45 each. Stock of raw materials was Sh.79.50 and work-in-
progress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii Accrued expenses outstanding at 31 March 1992:
Factory Sales Department
Sh. Sh.
Expenses 52,250 27,000
Factory wages 7,000 -
iii Provision for depreciation is to be made as follows:
- Factory plant 10% p.a. on cost
- Delivery van 20% p.a. on cost
iv The general provision for bad debts is to be maintained at 10% of the trade
debtors.
Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March
1992 and a balance sheet as at that date.
(20 marks)
QUESTION TWO
Amis, Lodge and Pym were in partnership sharing profits and losses in the
ratio 5:3:2. The following trial balance has been extracted from their books
of accounts as at 31 March 19-8:
£ £
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis 80,000
Lodge 15,000
Pym 5,000
Carriage inwards 4,000
Carriage outwards 12,000
Cash at bank 4,900
Current accounts:
Amis 1,000
Lodge 500
Pym 400
Discount allowed 10,000
Discount received 4,530
Drawings:
Amis 25,000
Lodge 22,000
Pym 15,000
Motor vehicles: 80,000
Accumulated depreciation (at 1 April 19-7) 20,000
Lesson Six 343
£583,300 £583,300
Additional information:
1. Stock at 31 arch 19-8 was valued at £35,000.
2. Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March
19-8.
3. The provision for bad and doubtful debts is to be maintained at a level
equivalent to 5% of the total trade debtors as at 31 March 19-8.
4. An office expense of £405 was owing at 31 March 19-8, and some rent
amounting to £1,5000 had been paid in advance as at that date. These items
had not been included in the list of balances shown in the trial balance.
5. Interest on drawings and on the debit balance on each partner’s current
account is to be charged as follows:
£
Amis 1,000
Lodge 900
Pym 720
Required:
a) Prepare the Partners trading, profit and loss account for the year ended
31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8
QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after
charging annual salaries of £20,000 each. The regularly make up their
accounts to 31 December each year.
344 Other Aspects of Final Accounts
On July 1996 they admitted Coral as a partner and agreed profits shares from
that date of 40% Amber, 40% Beryl and 20% Coral. The salaries credited to
Amber and Beryl ceased from 1 July 1996.
Lesson Six 345
£ £
Capital accounts as at 1.1.96:
Amber 280,000
Beryl 210,000
Capital account Coral (see note (d) below) 140,000
Current accounts as at 1.1.96
Amber 7,000
Beryl 6,000
Drawing accounts
Amber 28,000
Beryl 24,000
Coral 15,000
Loan account Amber 50,000
Sales 2,000,000
Purchases 1,400,000
Stock 1.1.96 180,000
Wages and salaries of staff 228,000
Sundry expenses 120,000
Provision for doubtful debts at 1.1.96 20,000
Freehold land at cost (see not (e) below) 200,000
Buildings: cost 250,000
Aggregate depreciation 1.1.96 30,000
Plant, equipment and vehicles: cost 240,000
Aggregate depreciation 1.1.96 50,000
Trade debtors and creditors 420,000 350,000
Cash at bank 38,000
3,143,000 3,143,000
Require:
a) Prepare a trading account, profit and loss account and appropriation
account for the year ended 31 December 1996 and a balance sheet as at
that date. (17 marks)
b) Prepare the partners’ capital accounts and current accounts for the year
in columnar form.
(7 marks)
(Total: 24
marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic
Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs
and maintenance are carried out and also a small showroom form which new and
second hand cars are sold.
£
Cash sales:
Workshop (repair charges) 32,125
Petrol and oil 32,964
Showroom (car sales) 8,500
Credit sales:
Workshop (repair charges) 65,892
Petrol and oil 41,252
Showroom (car sales) 81,914
Stocks (at 1 October 1985):
Workshop (repair materials) 1,932
Petrol and oil 3,018
Showroom (cars) 20,720
Credit purchases:
Workshop (repair materials) 23,860
Petrol and oil 41,805
Showroom (cars) 52,100
Fixed assets (at 1 October 1985):
*Freehold buildings:
Workshop 12,600
Petrol and oil 14,200
Showroom 38,000
Plant, equipment and vehicles:
Workshop 65,180
Petrol and oil 22,900
Lesson Six 347
Showroom 17,450
Provisions for depreciation (at 1 October
1985):
Freehold buildings:
Workshop 5,060
Petrol and oil 7,100
Showroom 19,390
*Note ‘Freehold’ – held in perpetuity
Plant, equipment and vehicles:
Workshop 48,254
Petrol and oil 17,077
Showroom 9,451
Fixed asset acquisitions during year (at
cost):
Plant and equipment:
Workshop 26,210
Petrol and oil 4,250
Showroom 1,060
Fixed asset disposal proceeds during the
year (see note (3)):
Plant and equipment:
Workshop 5,200
Salaries:
Showroom 10,200
Rates 26,738
Electricity 9,453
General expenses 10,692
Wages:
Direct:
Workshop 34,050
Petrol and oil 5,602
Indirect:
Workshop 6,810
Showroom 4,160
Creditors:
Workshop 4,225
Petrol and oil 5,602
Showroom 15,250
Bank/Cash:
Workshop 316
Petrol and oil 1,605
Showroom 30,470
Debtors:
Workshop 1,365
Petrol and oil 537
Drawings:
Duke 12,190
Earl 9,740
Current accounts (at 1 October 1985)
(credit balances):
348 Other Aspects of Final Accounts
Duke 9,750
Earl 10,477
Capital accounts:
Duke 50,000
Earl 40,000
Lesson Six 349
6) Rates and electricity are apportioned over departments on the basis of the
original cost of freehold buildings at the end of the current financial year.
7) General expenses are apportioned over departments on the basis of turn
over for the current year.
8) Duke and Earl are credited with interest on their respective capital account
balances at the rate of 5% per annum.
Required:
Prepare, using separate columns for each department and the business as a whole;
(14 marks)
(Total: 34 marks)
350 Other Aspects of Final Accounts
Lesson Six 351
QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on
capital and partnership salaries is not provided. The position of the business at th
end of its financial year is:
There were no additions to, or reductions of, the capital accounts during the four
months, but the following drawings have been made:
352 Other Aspects of Final Accounts
Reg £2,000
Sam £1,600
Ted £1,800
Lesson Six 353
• It has also been agreed that the share of a deceased partner should be repaid
in three equal installments, the first payment being made as on the day after
the day of death.
• The surviving partners agree that Abe (son of Reg) should be admitted as a
new partner with effect from 1 November, and it is agreed that he will bring
into the business £4,000 as his capital together with a premium for his share
of the goodwill (using the existing valuation). The new profit-sharing
agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
• Show the partnership Balance Sheet as at 1 November 19-6, on the
assumption that the above transactions have been completed by that date.
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the College.
QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts
and payments, which he records in cash and bankbooks. Periodically, these books
are handed over to the firm of certified accountants that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary
step, you have prepared the receipts and payments account (rounded to the
nearest £1) for the year ended 31 May 1985. This is shown below, together with
the explanatory notes which the treasurer has supplied to enable you to understand
the nature o f some of the items.
Receipts Payments
Cash Ban Cash Bank
k
£ £ £ £
£
Opening balances 31 309 Creditors: trade
b/d
Debtors: Fixed assets (note
members 4)
Lesson Six 355
In respect of Capital
year grants
Ended 31 May Suspense
Lesson Six 357
£
1981 30
1982 70
1983 120
1984 120
£340
7) Throughout the year, the Society competes at various musical festivals. Cash
prizes won by individual members are retained by the Society and credited to
income and expenditure account in order to reduce the cost of attending the
festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each
of them an ex-gratia (honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated
to the Regional Musical Festival Community (RMFC). The annual fee, which
has remained the same for a number of years, is paid on 1 March in each
year.
10) The Society pays rent for its premises. The rental, which is inclusive of
rates, heating, lighting, cleaning etc. is reviewed annually on 31 March. The
payment shown in the receipts and payments account represents quarterly
payments in advance, as follows:
1984 Payment
£
30 June 120
30 120
September
31 120
December
120
1985
31 March 150
£510
3) Stocks at 31 May
Goods for resale
Sheet music 31 52
Musical instruments 70 94
Refreshments not brought into account on the grounds that
It is not material in amount
Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May
1985, showing the surplus or deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)
QUESTION TWO
A client of the firm of accountants by which you are employed is interested in
buying a road transport business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business
and has delegated to you the task of discovering the amount of investment in
vehicles at the end of each of the financial years ended 30 September 1980 to 1983
inclusive. The business had commenced operations on 1 October 1979.
The only information available to you is the fact that the owner calculated
depreciation at a rate of 20% per annum, using the Reduction Balance method,
based on the balance at 30 September each year, and copies of certain ledger
accounts which are reproduced below:
1981 1981
30 Balance c/d 57,600 30 Profit and 25,600
Sept. Sept. loss
57,600 £57,60
0
£ £
1982 1 Balance b/d 57,600
Oct.
30 Disposals 10,800 1982
Sept.
Balance c/d 73,440 30 Profit and 26,640
Sept. loss
includes
£10,000
(depreciation
on 1982
acquisitions) ___
_____ __
£84,24 £84,24
0 0
£ £
1983
30 Disposals 29,280 1 Balance b/d 73,440
Sept. Oct.
Balance 79,328 1983
30 Profit and 35,168
Sept. loss
(includes
£20,000
Depreciation
on
_____ 1983 ___
__ acquisitions) ___
£108,6 £10860
08 8
1 Balance b/d 79,328
Oct.
Disposals
£ £
1982 1982
30 Vehicles 30 Provision for
Sept. (vehicles Sept.
Originally Depreciation 10,800
acquired
On 1 30,000 Bank 16,000
360 Other Aspects of Final Accounts
October
1979)
Profit and 3,200
loss
___ ___
___ ___
£30,00 £30,00
0 0
£ £
1983 1983
30 Vehicles 300 Provision for
Sept. (vehicles Sept.
Originally Depreciation 29,280
acquired
On 1 60,000 Bank 42,000
October
1979)
Profit and 11,280
loss
___ ___
___ ___
£71,28 £71,28
0 0
Required:
a) Calculate the cost of asset, vehicles, held by the business at 30
September in each of the years 1980 to 1983 inclusive
(4 marks)
b) Show the detailed composition of the charge for depreciation of
the vehicles to profit and loss account at 30 September 1981, 1982 and
1983. (9 marks)
All workings must be shown. (13
marks)
QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes
the following items:
i. The sales ledger debit balances total £111,111 and the credit balances total
£1,234.
Lesson Six 361
ii. The purchase ledger credit balances total £77,777 and the debit balances
total £1,111.
iii. The sales ledger includes a debit balance of £700 for business X, and the
purchase ledger includes a credit balance of £800 relating to the same
business X. Only the net amount will eventually be paid.
iv. Included in the credit balance on the sales ledger is a balance of £600 in the
name of H. Smith. This arose because a sales invoice for £600 had earlier
been posted in error from the sales daybook to the debit of the account of M.
Smith in the purchase ledger.
v. An allowance of £300 against some damaged goods had been omitted from
the appropriate account in the sales ledger. This allowance had been included
in the control account.
vi. An invoice for £456 had been entered in the purchase daybook as £654.
vii. A cash receipt from a credit customer for £345 had been entered in the
cashbook as £245.
viii. The purchase daybook had been overcast by £1,000.
ix. The bank balance of £1,200 had been included in the trial balance, in error,
as an overdraft.
x. The bookkeeper had been instructed to write off £500 from customer Y’s
account as a bad debt, and to reduce the provision for doubtful debts by £700.
By mistake, however, he had written off £700 from customer Y’s account and
increased the provision for doubtful debts by £500.
xi. The debit balance on the insurance account in the nominal ledger of £3,456
had been included in the trial balance as £3,546.
Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the
sales ledger control account with the sales ledger balances, and the purchase
ledger control account with the purchase ledger balances. What further action do
you recommend?
(25 marks)
362 Other Aspects of Final Accounts
QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel
Services, as radio and television suppliers and repairers, sharing profits and losses
in the ratio one half, one third and one sixth, respectively. Val Vez works full-time
in the business with responsibility for general administration for which she receives
a partnership salary of £4,000 per annum.
All partners receive interest on capital at 5% per annum and interest on any loans
made to the firm, also at 5% per annum.
It also had been agreed that Val Vez should receive not less than £4,000 per annum
in addition to her salary. Any deficiency between this guaranteed figurer and her
actual aggregate of interest on capital, plus residual profit (or less residual loss) less
interest on drawings, is to be borne by Dyo and UII in the ratio in which they share
profits and losses; such deficiency can be recouped by Dyo and UII at the earliest
opportunity during the next two consecutive years provided that Val Vez does not
receive less than the guaranteed minimum described above. During the year ended
30 September 1983, Dyo and UII had jointly contributed a deficiency of £1,500.
Radtel Services rents two sets of premises - one, a workshop where repairs are
carried out, the other, a shop from which radio and television sets are sold. The
offices are situated above the shop and are accounted for as part of the shop.
The workshop and shop are regarded as separate departments and managed,
respectively, by Phughes and Sokkitt who are each remunerated by a basic salary
plus a commission of one ninth of their departments’ profits after charging their
commission.
£ £
Stocks at 1 October 1993:
Shop (radio and television sets) 19,750
Workshop (spares, components etc.) 8,470
Purchases:
Radio and television sets 155,43
0
Spares, components etc. 72,100
Turnover:
Sales of radio and television sets 232,60
0
Repair charges 127,00
0
Wages and salaries (employees):
Shop and offices 54,640
Workshop 18,210
Prepaid expenses (at 30 September 640
1984)
Accrued expenses (at 30 September 3,160
1984)
Lesson Six 363
£525,5 £525,5
90 90
364 Other Aspects of Final Accounts
1) Manager’s commissions.
2) Partnership salary (Vez).
3) Interest on partners’ capital accounts (these have not altered during the year).
4) Interest on partners’ drawings; Dyo £70; UII £30; Vez £20.
5) Closing stocks: shop £31,080; workshop £10,220.
6) Provision for doubtful debts at 30 September 1984, £540.
7) Residual profits/Losses.
N.B. Loan interest and the movement in the provision for bad debts are
regarded as ‘shop’ items.
Lesson Six 365
Required:
a) Prepared columnar departmental trading and profit and loss
accounts and a partnership appropriation account for he year ended 30
September 1984 and the partnership balance sheet at that date.
(21 marks)
b) Complete the posting of the partners’ current accounts for the
year. (4 marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife
keeps some accounting records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:
£
Assets
Plant and equipment: cost 12,600
Depreciation to date 5,800
Motor Van: cost 9,000
Depreciation to date 6,500
Stock of materials 14,160
Debtors 9,490
Rent of premises paid in advance to 30 750
September 1997
Insurance paid in advance to 31 December 700
1997
Bank balance 1,860
Cash in hand 230
Liabilities
Creditors for supplies 3,460
Telephone bill owing 210
Electricity owing 180
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998
are as follows:
bank 0
Cash withdrawn from 48,26 Electricity 890
bank 0
Closing balance 2,100 Wages of repair staff 68,20
0
Miscellaneous expenses 1,280
Drawings by Ernie 8,000
Required:
Prepare Ernie’s trading profit and loss account for the year ended 30 June
1998 and a balance sheet as at that date.
Lesson Six 367
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business
and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is
limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot
invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words
public limited company at the end of their name.
They can invite the members of the public to invest in their ownership and the
companies may be quoted on the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share
capital is divided into shares. The investor will then pay for and be issued with the
shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a
company decides to set up a share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which
only 150,000 share have been issued, Although the firm requested the shareholders
to pay 80p per share, the shareholders were able to pay 50p per share.
Required:
Determine the:
• Authorized share capital
• Issued share capital
• Called up share capital
• Uncalled up share capital
• Paid up share capital
Other expenses x
Directors salaries/fees/---- x
Audit fees (x)
Debenture Interest x
Amortization of good will x
Operating profit for the period x
Add investment income x
Profit before tax x
Taxation: Corporation tax x (x)
Transfer to deferred tax x
Under or over provision (x)
Profit after tax x
Less: transfer to the general reserve
x
Less: Dividends x
Preference dividend: Interim paid x
Final proposed x
x (x)
Ordinary dividend: Interim paid x
Final proposed x
Retained profit for the year x
Retained profit b/f
Retained profit c/d
B Limited
Balance sheet as at 31.12………
£ £ £
Non current Assets
Land & Building x (x) x
Plant and Machinery x (x) x
Fixtures, Furniture & Fittings x (x) x
Motor vehicle x (x) x
x x x
Intangible Assets
Goodwill x (x) x
Copyrights, patents x (x) x
x x
(Longterm) Investments (mkt x
value sh x) x
Current Assets x
Stock x
Debtors (x) x
Less provision for bad debts x
Prepayments x
(Short term) Investments x
Cash at bank x
Cash in hand x
373 Partnerships
Current liabilities x
Bank overdraft x
Creditors x
Accruals x
Interest payable(debenture x
interest) x (x) x
Tax payable x
Dividends payable
x
Financed by x
Authorized share capital x
100,000 ordinary shares of £1 (x)
each x
100,000 preference shares of £1
each x
x
Issued and Fully paid
80,000 ordinary shares of £1 each x
50,000 10% preference shares of x
£1 each x x
Capital Reserves x
Share premium x x
Revaluation Reserve x
Capital Redemption Reserve x
Revenue Reserves
General Reserve x
Profit and loss A/C x x
x
Deffered tax A/C
Non Current Liabilities
10% debenture
Other Long term Loans
Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as
company accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as
appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and
therefore any fees paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these
loans are charged as an expenses and unpaid amount are shown as current
liabilities in the business.
The debenture is classified under non-current liability.
Lesson Seven 374
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the
accounts because a company is a separate legal entity unlike for sole traders and
partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over
provision for previous period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government
and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended
31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000, which the
company pays and at the end of the year 2000, the company estimates that the tax
liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore
deferred tax).
DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is
because the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----
Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L
appropriation should disclose interim paid and final proposed.
375 Partnerships
CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to
shareholders. The three types of capital reserves are:
Share Premium: A share premium arises when accompany issues shares at a price
that is more than the par value. The share Premium may be applied in:
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per
value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000 × £1.5) 150,000
Cr Ordinary shares capital (100,000 × £1) 100,000
Cr Sahre Premium /C A
(100,000 × £0.5) 50,000
Issue of shares at a premium of £0.5
REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the
General Reserves. Transfers are made from the Profits to the General reserves to
provide for expansion or purchase of non current assets. The General Reserves can
also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and
certificates called debenture certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid
whether profits are made or not. A debenture may either be redeemable of
irredeemable. Redeemable is repayable at or by a particular date and irredeemable
is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either
the share premium, balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder
the choice of receiving cash or stock dividends. In a bonus issue the shareholder
has no choice but to take up the shares.
Lesson Seven 376
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000
and a balance on the share premium A/C of £50,000. It issues some bonus shares to
existing shareholders at a rate of 1 share for every 5shares held. This amount is to
be financed by the share premium. The entries will be as follows:
Shares to be issued:
100,000 × 1 =20,000
5
Rights Issue
A right issue is an option on the part of the shareholder given by the company to
existing shareholders at a price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a
prorata basis. When the rights are issued the shareholders have 2 options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to
buy the new shares issued by the company.
Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The
balance on the share premium is £60,000. Additional capital is raised by way of a
right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price
of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the
shareholders exercise their rights and the relevant balance sheet extract.
Shares to be issued
100,000 × 2 =40,000 shares
5
Dr cash book [40,000 × £2.5 ] £100,000
Cr Ordinary share capital [40,000 × £2 ] £80,000
Cr Share Premium [40,000 × £0.5 ] £20,000
377 Partnerships
The following examples will illustrate the preparation of final Account for
companies.
Example 8.1
Just before you launch yourself into the question that follows remember that
everything you have learnt about double entry bookkeeping and the presentation of
year end accounts is valid in the context of companies, subject only to the points we
have added in this session.
part settlement of the price of £800 of a new van, but no entries with regard to
these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.
Required:
• A profit and loss account for the year ended 31 March 19X8:
• A balance sheet at that date. (22 marks)
379 Partnerships
Solution:
Transit Ltd
A
Profit and Loss /C for the year ended 31.3.19X8
£ £
Gross profit 72,45
Profit on disposal of van 0
Rent Receivable 190
3,600
Less: Expenses 76,24
Depreciation on motor vans 500 0
Administration expenses 32,65
Distribution expenses 0
Debenture interest 10,00
Bank interest 0
Trading profit for the year 1,050
Add investment income 162 (44,3
Profit before tax 62)
Taxation 31,87
Profit after tax 8
Less: Dividends 340
Interim paid 32,21
Final proposed 8
Retained profit for the year 1,260 (12,7
Retained profit b/f 4,200 00)
Retained profit c/d 19,51
8
(5,46
0)
14,05
8
17,85
2
31,91
0
Lesson Seven 380
Transit Ltd
Balance sheet as at 31.3.19X8
£ £ £
Non-Current Assets
Leasehold properties 75,000 - 75,000
Motor vans 2,400 (960) 1,440
77,400 960 76,440
Investments 6,750
83,190
Current Assets
Stock 16,700
Debtors 31,000
47,700
Current liabilities
Bank overdraft 980
Creditors 24,100
Tax payable 12,700
Proposed dividends 4,200 (41,980 5,720
) 88,910
Financed by:
Authorized issued and fully paid
42000 ordinary share of £1 42,000
Revenue Reserves
Profit and Loss A/C c/f 31,910
73,910
Non-Current liabilities
7% Debentures 15,000
88,910
Workings
Sales 206,500
Less: Cost of sales
Opening stock 12,000
Purchases 138,750
150,750
Less Closing stock (16,700) (134,050)
Gross profit 72,450
Motor vehicle
Bal b/f 2,500 Disposal 900
Disposal 550
381 Partnerships
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd
At 31 December 19X5
£ £
Share capital authorized and issued:
243,6
05
Required:
With particular emphasis on presentation, prepare a trading and profit and loss
account for the year 19X5, and a balance sheet at 31 December 19X5, ignoring
taxation. (24 marks)
383 Partnerships
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
£ £
Sales 142,7
Opening stock 13,93 70
Purchases 0
108,4
Less: Closing stock 40
Cost of goods sold 122,3
70 107,7
Directors’ remuneration 14,60 70
Wages and salaries 0 35,00
Motor and delivery expenses 0
Rates (700 - 140)
Legal expenses (644 - 380) 4,000
General expenses 13,12
Bad debts 7
Loss on disposal 3,258
Depreciation 560
Net profit 264
5,846
Proposed dividend 1,150
80 31,30
Retained profit brought forward 3,019 4
Retained profit carried forward 3,696
4,000
(304)
2,430
2,126
£ £ £
Non-Current Assets
Freehold properties 59,380 ---- 59,380
Motor vans 15,095 (9,294) 5,801
74,475 (9,294) 65,181
Current Assets
Stock 14,600
Debtors and prepayments, less
provision for doubtful debts 11,110
Cash at bank 6,615
32,325
Current liabilities
Creditors 11,380
Proposed dividends 4,000
15,380
16,945
82,126
Share capital
Ordinary shares of £1 each 80,000
Profit and loss account 2,126
82,126
Workings
Bad debts
£ £
Debtors Balance b/f
1,075 275
Balance c/f Profit and loss account
350 1,150
1,425 1,425
Motor vans
£ £
Balance b/f Disposals
15,000 680
Additions Balance c/f
775 15,095
15,775 15,775
9,769 9,769
385 Partnerships
Disposals
£ £
Motor vans Provision for depreciation
680 475
Proceeds
125
Loss on capital
680 80
680
Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local
farmers.
Services offered include the collection of produce, the use of rapid freezing
equipment, storage of the frozen produce and transport from frozen storage in
refrigerated vehicles to any point within the country. Orders for these services are
secured by the company’s sales staff.
The company’s revenue consists of charges for transport and freezing, and of
storage rentals. Customers may hire storage space either on a long-term contract
basis at advantageous charges (payable in advance) or on a casual basis (invoiced
monthly).
A considerable amount of electricity from the public supply is used by the company
in the freezing and storage operations. In the event of a sudden failure in this
supply, the company is able to generate its own emergency supplies from standby
generators kept for this purpose. An insurance policy has been taken out to protect
the company against the claims which would arise should any of the frozen produce
deteriorate as the result of power or equipment failure.
At the end of the company’s financial year ended 30 September 1982, the assistant
accountant extracted the following balances from the ledgers.
Lesson Seven 386
Assets Account £
Land and buildings (at cost) 390,000
Plant (at cost) 271,900
Vehicle (at cost) 82,600
Provision for depreciation (at 1 October
1981): 39,600
Land and buildings 144,800
Plant 27,050
Vehicles 23,449
Stock of consumable stores (at 30 18,204
September 1982) 2,332
Debtor – for rentals 30,710
for charges 1,103
Bank
Cash
7,390
Liability Accounts 80,000
Trade Creditors 200,000
7% Debentures 2004/2012 25,000
Ordinary Share Capital (see note 7) 108,284
General reserve 15,000
Unappropriated profit (at 1 October 1981)
Share Premium
302,090
Revenue Accounts 85,063
Storage rentals – long term contracts 112,810
Casual 90,107
Freezing charges
Transport charges
128,004
Expense Accounts 79,112
Wages, salaries and related expenses 76,860
Rates 43,271
Electricity 30,319
Transport costs 29,800
Repairs 15,604
Consumable stores 7,800
Postages, stationery, telephones 5,600
Insurance premium 9,176
Debenture interest
Sundries
8,650
Other Accounts
Suspense (credit balance)
to this disposal which have been made so far, are a debit to Bank and a credit to
Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence
the contents deteriorated to such an extent that they had to be disposed of by
incineration. Compensation of £1,350 was paid to the farmer by Owik – Freez by
cheque and debited to Suspense.
The insurance company has admitted liability under the policy but no further ledger
entries have as yet been made.
During the 1981-82 financial year, the company replaced one of its refrigerated
vehicles, which has originally cost £16,400 and on which £13,120 had been
provided as depreciation to date of disposal. A trade-in (part exchange) allowance
of £6,000 was granted in respect to this vehicle. A replacement vehicle was
acquired at a list price of £27,000. The entries relating to the disposal of the old
vehicle have not yet been made, except that the trade-in allowance has been
debited to Vehicles and credited to Suspense. The balance of the price of the new
vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis
calculated on the cost of fixed assets held at the end of each financial year and
assuming no residual value. Annual depreciation rates are:
%
Building 2
Plant 10
Vehicles 25
The ‘Buildings’ content of the item Land and Buildings included in asset account
balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following
items:
£
Storage rentals received in advance 25,631
Insurance premium prepaid 600
Wages and Salaried accrued 1,920
Rates prepaid 28,820
Electricity accrued 5,757
Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary
Shares of £0.50 per share. The directors have recommended a dividend for the year
of £0.12 per share.
Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez
p.l.c.for the year ended 30 September 1982 and a Balance Sheet at that date. All
workings must be shown.
(31 marks)
Open the Suspense account and post the entries needed to eliminate the opening
credit balance.
(2 marks)
Lesson Seven 388
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
£ £
Revenue
Storage rentals – long term 276,459
(302,090 – 25631) 85,063
casual 112,810
Freezing charges 90,107
Transport charges 564,439
Less:
Expenses 129,92
Wages, Salaries etc. (128,004 + 1,920) 4
Rates (79,112 – 28,820) 50,292
Electricity (76,860 – 5,757) 82,617
Transport costs (43,271 + 4,131 + 57,374
9,972) 20,347
Repairs (30,319 – 9,972) 25,669
Consumable stores (29,800 – 4,131) 15,604
Postages, stationery, telephones 7,200
Insurance premiums (7,800 - 600) 43,540
1,2 *Depreciation 5,600
Debenture Interest 9,176 447,343
Sundries 117,096
1,520
118,616
5 Profit (less loss) on disposal of 108,284
fixed assets 226,900
Net Profit For The Year
Retained profit brought forward 48,000
Distributed profit 178,900
Less:
Ordinary dividends proposed
Retained profit carried forward
Workings:
Land Building Plant Vehicl Total
Fixed Assets: £ s £ e £
Balance 1 October 1981 270,0 £ 271,90 £ 717,50
(veh 82,600 – (6,000 + 00 120,00 0 55,600 0
21,000)) 0
Acquisitions (21,000 – 27000 27,000
6,000) (26,00 (16,40 (42,40
Disposals 0) 0) 0)
Balance 30 September 270,0 120,00 245,90 66,200 702,10
1982 00 0 0 0
389 Partnerships
Depreciation
-rate - 2% 10 25
£ £ £ £ £
-current year charge - 2,400 24,59 16,5 43,54
0 50 0
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a
transport cost, thereby increasing that figure to £73,924.
Lesson Seven 390
£ £ £ £ £
Written down values at 30
September 1982 270,0 78,000 97,31 35,72 481,0
00 0 0 30
Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£
42,000
148,590
30,480
Net
£
348,000
97,310
35,720
702,100
221,070
Lesson Seven 392
Suspense
£ £
Fixed Asset Disposals:
` Plant 4000 Balance b/d 8650
Vehicle 6000 Debtors (insured loss) 1350
10000 10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the
family. The following trial balance was extracted from the books of the company as
at 31 March 1993:
Sh. Sh.
Freehold property, at cost (land Sh. 75,000) 125,00
Plant, at cost 0
Depreciation 130,00 62,000
Motor vehicle, at cost 0
Depreciation – motor vehicle 30,500
Fittings and fixtures, at cost 53,000
Depreciation – fittings and fixtures 11,790
20,000 Ordinary shares of Sh. 10 each 38,600
authorized, issued and fully paid 200,00
Share premium 0
General reserve 50,000
Interim dividend paid 120,00
Cash at bank and in hand 0
Accounts receivable and payable 16,000
15% Debentures 33,570
Discount received 130,54 57,430
Profit and loss account 1 April 1992 0 100,00
Purchases of raw materials 0
Sales of finished goods 3,640
Inventories 1 April 1992: 103,87
Raw materials 942,38 0
Work in progress 0
Finished goods 1,254,
Provision for doubtful debts 760
Bad debts 33,060
Rates and insurance 57,660
Wages 107,86
Factory power 0
Light and water 6,400
Plant maintenance 4,890
Salaries 9,430
Returns of raw material 108,37
Sales returns 0
Advertising 22,560
Transport expenses (Sales department) 16,280
Bank charges 10,970
General expenses 90,000 3,240
393 Partnerships
1,360
8,580
24,320
3,040
36,1 2,003,
60 630
2,003,
630
Lesson Seven 394
Additional information:
Sh.
Electricity and wateer accrued 860
was 270
Insurance prepaid was 780
Rates prepaid were
Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for
the year ended 31 March 1983 and a Balance Sheet as at that date. (25 marks)
395 Partnerships
Trading, Profit And Loss Account For The Year Ended 31 March 1993
Shs Shs
Sales 1,254,760
Less: Closing stocks (1,360)
1,253,400
Opening stock 107,860
Goods manufactured 902,854
1,010,714
Less: Closing stocks (124,320) 886,394
367,006
Discount received 3,640
370,646
Debenture interest 15,000
Provision for bad debts 6,654
Depreciation
- Motor vehicle 5,625
- Fittings and fixtures 2,681
Dividend
- Interim 16,000
- Fianl 24,000 40,000
Retained Profit for the year 49,150
Retained Profit brought forward 103,870
Retained Profit carried forward 153,870
Lesson Seven 396
Financed by:
Authorized, and issued share
capital: 200,000
20,000 Ordinary shares each
Sh. 10
Reserves: 50,000
Share Premium 120,000 323,020
General Reserve 153,000 523,020
Profit and Loss account
100,000
623,020
15% debentures
Workings:
Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:
Sale of
When shares are sold in exchange for lump sum cash payment and this is at per
value, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
When shares are sold in exchange for lump sum cash payment and this is at a
premium, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium
Sale of shares which are to be paid for in installments are normally dealt with as
follows:
The number of installments may vary from 2 – 4. Each installment is collected
through a comprehensive set of processed(called a stage). The 4 possible stages
are:
Application stage
For each stage, an account is opened.
Allotment stage
This account must close at the end of
1st Call stage
the stage. (The application stage &
2nd Call stage
allotment stage may be dealt with in a
single account called the application/
Application Stage
In this stage, the company invites members of the public to send in applications for
share they (the public) are interested in purchasing.
The application firms must be accompanied by the 1st installment money when the
public respond to the company’s offer.
When the company requests members of the public to send in application forms &
application money it will make the following entries in its books:
Lesson Seven 398
Allotment Stage
In this stage, the company selects the applicants and informs them of their
allotment. It also requests them to bring in a second installment. As it requests for
the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the
company, will in its books: -
DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the
account has closed by this stage, the stage is deemed to be over.
this is very similar to the 1st Call whereby the company requests for the second (and
last) call money; as it does so, it will:
DEBIT: 2nd Call A/C
CREDIT: Share Capital
When the public respond by sending in the second call money, then the company
will:
DEBIT: Cashbook
CREDIT: 2nd Call A/C
It is possible that some of the allotees do not pay up their 2nd Call money. When this
is so:
DEBIT: Cashbook – with money collected.
DEBIT: Calls in arrears with money not received
CREDIT: 2nd Call A/C.
When a debtor for share money (calls – in –arrears) does not pay up his dues, his
shares will be cancelled and any money he previously gave the company forfeited
(i.e. not refunded to him). This is known as Share Forfeiture. The entries to be made
when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.
If resold at per:
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale
will be expressly illegal unless:
Amounts collected from previous allotee plus an amount collected from current
allotee equals or is greater than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.
Last entry in this exercise is to transfer any balance on the share forfeiture A/C to
Share Premium A/C as follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.
Lesson Seven 400
The excess application monies received from the successful applicants is not to be
refunded but is to be applied to reduce the amount payable on allotment.
The calls were made and paid in full with the exception of one member of one
member holding 5,000 shares who paid neither the first nor the second call and
another member who did not pay the second call on 1,000 shares. After requisite
action by the directors the shares were forfeited. They were later reissued at a price
of Sh.8 per share.
Required:
The necessary ledger accounts to record these transactions (15 marks)
(Total: 20 marks)
Solution:
Memorandum of association explains the relationship between the company and
the outside world. It shows the object of the company, the name, address, the
authorized share capital, its location (its registered office) and the date of
incorporation.
Articles of association state the rules under which the company will operate e.g. the
number of directors, the structure, and meetings. It explains the relationship
between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is
registered by the registrar of companies.
Application A/C
Sh. Sh.
Cashbook 130,000 Cashbook 1,630,000
OSC 1,000,000
Allotment 500,000
1,630,000 1,630,000
401 Partnerships
Allotment A/C
Sh. Sh.
OSC 3,000,000 Application 500,000
Allotment Cashbook 2,500,000
3,000,000 3,000,000
1st Call
Sh. Sh.
OSC 4,000,000 Calls in arrears 20,000
Cashbook 3,980,000
4,000,000 4,000,000
Lesson Seven 402
2nd Call
Sh. Sh.
OSC 1,990,00 Calls in arrears 2,000
Cashbook 1,988,000
1,990,000 1,990,000
Share Premium
Sh. Sh.
Bal c/d 1,630,000 Share forfeiture 1,630,000
Calls in Arrears
Sh. ` Sh.
1st Call 20,000
2nd Call 2,000 Share forfeiture 22,000
22,000 22,000
LIQUIDITY RATIOS.
These measure the firm’s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been
financed by non-owner supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various
assets to generate sales revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses
various funds to generate profits or returns. They also measure the management’s
ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and
returns expected by the owners of the firm. They also try to look at the overall
performance of the firm and going concern of the firm.
The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992
Sh Sh
Sales 850,000
Less: Cost of Sales
Opening stock 99,500
Purchases 559,500
659,000
Less: Closing stocks (149,000) (510,000)
Gross profit 340,000
Less expenses
Selling and distribution 30,000
Depreciation 10,000
Administration expenses 135,000 (175,000)
Earnings before interest & taxes 165,000
Interest (15,000)
Earnings before tax 150,000
Tax @ 50% 75,000
Less ordinary dividend 75,000
(0.75 per share)
Retained profit for the year (15,000)
60,000
ABC
Balance Sheet as at 31 December 1992
Non Current Sh. Issued share Sh.
Assets 250,00 capital 200000
Land and 0 (20000 share of 90000
Buildings 80,000 Sh, 10) 60000
Plant & 330,00 Reserve 100000
Machinery 0 Retained profit 130000
75,000 Long term
Current Assets (4,000) 149,00 Current liabilities.
Inventory 0
Debtors 580,000
405 Partnerships
Additional Note
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
The higher the ratio then the more liquid the firm is.
= 0.78 : 1
this is a more refined ration that tries to recognize the fact that stakes may not be
easily converted into cash. The higher the ratio, the better for the firm as it means
an improved liquidity position.
Cash Ratio
= Cash + Marketable Securities
Current Liabilities
= 30,000 = 0.23 : 1
130,000
= 0.23 : 1
This ratio assumes that stakes may not be converted into cash easily and the
debtors may not pay up their accounts on time. The higher the ratio, the better for
the firm as the Liquidity position is improved.
= 0.27 : 1
The higher the ratio the better for the firm and therefore the improved Liquidity
position.
GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able
to pay up its debts). The more debts a business has (non owner supplied funds) the
higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets
This ratio measures the proportion of total assets financed by non owner supplied
funds. The higher the ratio, the higher the financial risk .
= 230,000 = 0.4
580,000
40% is supplied by non owners
= Total Liabilities
Networth (share holders funds)
= 230,000 = 0.66
350,000
40% is supplied by non-owners
This ratio measures how much has been financed by the non-owner supplied funds
in relation to the amount financed by the owners i.e. for every shilling invested in
the business by the owners how much has been financed by the non-owner supplied
funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the
creditor have put in 67 cents.
The higher the financial risk.
= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner
supplied funds.
407 Partnerships
The higher the ratio, then the higher the financial risk.
ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250
= 4.1 times
This is the number of times stock has been converted to sales in a financial year.
The higher the ratio the more active the firm is.
An alternative formula is
= Sales
Closing Stock
Debtors Turnover
= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit
The higher the ratio, the more active the firm has been (we had debtors over 10
times to generate the sales)
Note
Average Collection Period = 360
Debtors Turnover
= 360 = 34 days
10.625
This measure the number of days it takes for debtors to pay up. The lesser the
period, the better for the firm as it improves the liquidity position.
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
Lesson Seven 408
130,000
= 42 times
The ratio tries to measure how many times we have creditors during a financial
period. The lesser the ratio the better.
The ratio measures the efficiency with which the firm is using its fixed/ Non Current
Assets to generate sales.
The higher the ratio the more active the firm.
= Sales
Total Assets
= 850,000
580,000
= 1,046 times
Measures the efficiency with which the firm is using its total assets to generate
sales.
PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales 850,000
The higher the margin, the more profitable the firm is.
The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.
Return On Investment
= Net Profit after tax
Total Assets
= 75,000 = 13%
580,000
Shows how efficient the firm has been in using the total assets to generate returns
in the business.
= 750,000 = 17%
450,000
How efficient the firm has been in using the net assets to generate returns in the
business.
Return On Equity
= Earnings after tax
Networth
= 75,000
850,000
= 21%
NOTE
The higher the ratio the more efficient is the firm.
EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.
= 75,000
20,000
= 3.75
This is the return expected by an investor for every share held in the firm.
Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC’S shares is Sh20/Share.
Lesson Seven 410
= 3.75 × 100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in
the business.
= 15,000
20,000
This is the amount expected by an investor for every share held in the firm.
NOTE
The higher the amounts, the better for the firm.
DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company’s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same
industry.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
Expenses
Distribution costs 200 150
Administrative expenses 290 250
Interest paid 10 400
500 800
Profit before tax 500 400
Taxation 120 90
Net profit for the period 380 310
Lesson Seven 412
Required:
a) Calculate for each company a total of eight ratios which will assist in
measuring the three aspects of profitability, liquidity and management of the
elements of working capital. Show all workings.
(8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies
as regards their profitability, liquidity and working capital management.
(8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the
implications of this for the two companies?
(4 marks)
(20 marks)
Solution:
413 Partnerships
PROFITABILITY
Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing
policy. Omega’s net margin is lower than Zeta’s. Omega’s expenses are therefore
proportionally higher. It should be noted that Omega’s bottom line profit is reduced
significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset
base due in part to a revaluation. It may be that a revaluation of Zeta’s assets will
partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both
companies’ quick ratios are much closer, Zeta’s liquidity does appear to be an issue
especially as there is no cash at hand. It would be wise to examine projected
cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has
no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market
which can be subject to obsolescence.
Zeta’s creditor and debtor days are a cause for concern. Debtors should be
collected within 60 days if not sooner. 60 day collection would improve cash flow by
over £140,000 reducing the debtors balance to £658,000(60/73 × £800,000).
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks
damaging the goodwill it has with its suppliers. Paying creditors within 60 days
would have an adverse effect on cash flow of over £270,000. The creditors balance
would be £527,000 (60/91 × £800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing
means that should profits fall they may not be in a position to pay the loan interest.
Zeta’s capital is entirely share capital and so a fixed return is not required.
Omega’s loan appears to be fixed rate. This means that in times of falling interest
rates Omega will have higher interest costs than say, Zeta, if Zeta borrowed the
same amount. The converse is true in times of rising interest rates.
415 Partnerships
REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31
October 1999.
Sh. Sh.
Authorized and issued capital 400000
Share premium 00
8% debenture stock 5000
Profit and loss stock 00
Motor vehicles at cost 165000 100000
Provision for depreciation on motor vehicle 00 00
Plant and machinery at cost 55000
Provision for depreciation on plant and 258000 00
machinery 00
Land buildings at cost 34000
Stock in hand 1 November 1998 – Finished 300000 00
goods 00
– Raw materials 42000 63000
– Work-in-progress 0 00
38000
0
Trade debtors 56000
Office furniture and equipment at cost 0
Provision for depreciation on office furniture
and equipment Sh. Sh.
Trade creditors 736000
Purchase of raw materials 0
Sales of finished goods 89000 18500
Direct wages 0 0
Direct expenses 10000
Factory expenses 00
Indirect materials 950000
Factory insurance 0 285500
Sales room expenses 00
Administration expenses 135000
Office salaries and wages 0
Vehicles running expenses 395000
Bad debts written-off 290000
Balance at bank – overdrawn 350000
150000
485000
620000
840000
656000
640000 11750
00
966100 966100
00 00
Lesson Seven 416
Notes:
Closing stock includes
– Finished goods
– Raw materials
– Work-in-progress
Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a
transfer of Sh. 2000000 to a general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on
furniture and equipment, plant and machinery and motor vehicles respectively.
The overdraft interest of Sh. 725000 was communicated to the company by the
bank on 5 November 1999 and therefore it has not been posted in the cash book.
Required:
Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
(12 marks)
Balance sheet as at 31 October 1999. (8 marks)
(Total: 20 marks)
QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31
October 1998.
Sh,’00 Sh,’00
Authorized and issued capital (shares of Sh. 20 0’ 0’
each fully paid) 30,000
Share premium 350
10% premium 3,500
General reserve 2,000
Profit and loss account 1 November 1997 2,850
Motor vehicles at cost 3,500
Provision for depreciation 265
Freehold property 44,50
Trade debtors 0
Trade creditor 1,375 460
Purchases and sales 127,45
Stock in hand 1 November 1997 95,650 0
Furniture and fittings at cost 3,478
Provision for depreciation 1,540
Goodwill 138
Rent receivable 500
Salaries and wages 385
General expenses 2,285
Vehicles running expenses 358
Bad debts 2,470
Telephone and postage 124
Water and electricity 568
417 Partnerships
Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no
entries were made in the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October
1998 but no entries were made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000
respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been
received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are
10% and 20% on cost respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a
transfer of Sh.2,500,000 to the general reserve.
10.The debenture interest has not yet been paid.
Required:
1. Trading, profit and loss account for the year ended 31 October 1998. (13
marks)
2. Balance sheet as at 31 October 1998. (7 marks)
(Total: 20 marks)
The summarized profit and loss accounts for the company for the years ended 31
December 1995 and 1996 were:
Required:
a) Calculate the following accounting ratios for both years:
• The gross profit percentage
• The current ratio and the quick ratio (or acid test)
• Debtors’ collection period in days
• Trade creditors’ payment period in days (based on purchases
figures which are to be calculated)
• Gearing ratio.
b) Show you full workings. (10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and
from comparing them with those for 1995. (5 marks)
d) State two points which could cause the movement in the gross profit
percentages between the two years and explain how they could bring the
change about. (2 marks)
e) State the extent to which you agree or disagree with the following and give
brief reasons for your answers.
f) The current ratio and the quick ratio help to assess whether a company is
able to meet its debts as they fall due. Therefore the higher these ratios are
the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit
from the income produced by investing the money borrowed.
(3 marks)
(20 marks)
QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1
each at 120p per share, payable as to 50p on application (including the premium),
40p on allotment and the balance on 1 May 19X1.
The lists were closed on 10 February 19X1, by which date applications for 70,000
shares had been received. Of the cash received, £4,000 was returned and £6,000
was applied to the amount due on allotment, the balance of which was paid on 16
February 19X1. All shareholders paid the call due on 1 May 19X1, with the
exception of one allotee of 500 shares. These shares were forfeited on 29
September 19X1 and reissued as fully paid at 80p per share on November 19X1.
Lesson Seven 420
You are required to write up the necessary accounts, excluding those relating to
cash, to record these transactions.
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of
Shs.5,000.00. On 2 January 2002, this assistant did not report for work and it was
found that he had left, taking with him the balance in the till. It had been Pesa
Nyingi’s practise to bank each Monday morning the balance in the till resulting from
the previous week’s transactions. No float was maintained. The only records kept,
apart from the bank statement, were details of sales on credit and unpaid invoices
for goods.
Stock 688,000.00
Creditors 988,000.00
Bank 276,000.00
Debtors 344,000.00
Cash 228,000.00
Accrued expenses 100,000.00
Fixtures and Fittings 1,000,000.00
Receipts 180,000.00
Banking from debtors cheques 4,116,000.00
Cash 4,296,000.00
Payments 3,748,000.00
Creditors for goods 232,000.00
Rent and expenses 3,980,000.00
Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00
for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week
excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs.
13,960,000. An amount of Shs. 336,000.00 was still outstanding.
Lesson Seven 422
Creditors for goods have always been paid by cheque. Unpaid invoices on 31
December 2001 amounted to Shs. 1,120,000.00. Creditors for expenses were Shs.
800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned
against a cash receipt of Shs. 48,000.00. The receipt has not been recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
A depreciation charge of 20% is to be charged on the value outstanding on the
fixtures and fittings at the end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact
has not yet been reflected in the bank statement.
Assume a 50 week year
Required:
a) Prepare workings showing your calculation of the amount of the theft. (8
marks)
b) Prepare a trading, profit and loss account for the year ended 31 December
2001 and a balance sheet as at that date.
17 marks)
QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the
following information is available.
Debit Credit
Sales Ledger balances as at 1 May 2002 1,672,000. 114,600.00
Purchases Ledger balances as at 1 May 2002 00 747,000.00
Sales Ledger balances as at 31 May 2002 28,000.00 67,000.00
Purchases Ledger balances as at 31 May 2002 ? ?
36,500.00
Credit Sales 18,938,000.
Credit Purchases 00
Cash and cheques received Sales Ledger 670,000.00
Purchases Ledger 1,549,700.0
Cash and cheques received Sales Ledger 0
Purchases Ledger 13,000.00
Credit notes issued (for returns inwards) 47,000.00
Debit notes received (returns outwards) 632,000.00
Dishonoured cheques 119,800.00
Discounts allowed 24,000.00
Discounts received 32,000.00
Bad debts written off in December 2001 but now 43,000.00
recovered 33,800.00
14,200.00
It has been decided to set off a debt due from a customer, A Mutiso, of Shs.
30,000.00 against a debt due to him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the
total debtors on 31 May.
423 Partnerships
Required:
a) Prepare the sales ledger control account and the purchases ledger control
account for May 2002 in the books of Jambo Dealers Ltd.
(14
marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers
Ltd relating to the company’s trade debtors and trade creditors.
(3
marks)
c) Briefly explain the purpose of control accounts. (3
marks)
QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year
ended 30 April 2000, 2001, 2002 and balance sheet as at 30 April 1999, 2000, 2001
2002 for James Mwendapole, a sole trader.
Trading, Profit and Loss Accounts for the year ended 31 May
Current Assets
Stocks 140.00 160.00 200.00 290.00
Debtors 100.00 180.00 400.00 520.00
Balance at bank 900.00 130.00 390.00 160.00
Total Current Assets 330.00 470.00 990.00 970.00
Current Liabilities
Creditors (40.00) (80.00) (120.00) (180.00)
Loan (received on 31 - - (500.00) (500.00)
May 2001) (40.00) (80.00) (620.00) (680.00)
Total Current Liabilities
290.00 390.00 370.00 290.00
Net Current Assets 670.00 870.00 1,050.00 1,190.00
Lesson Seven 424
Net Assets
Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income
from his grandfather and therefore has taken no drawings from his retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services
rendered to the business by James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the
rate of 8% per year.
Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following
financial ratios.
• Return on capital employed
• Quick ratio
• Stock turnover
• Net Profit Margin (8 marks)
2. Use two financial ratios (not referred in (a) above) to draw attention to two
aspects to the business which would appear to give cause for concern.
(6
marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue
trading and whether it was a sound decision to borrow the loan.
(6
marks)
QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality
wheelbarrows, Bingwa being responsible for the factory and Shabiki being
responsible for sales. Completed wheelbarrows are transferred from the factory to
the warehouse at agreed prises. Bingwa and Shabiki are credited with one third of
the manufacturing profit and 10% of the trading gross profit respectively and the
balance of the firm’s profit being shared equally. All wheelbarrows are sold at Sh.
680.00 each. No interest is credited or charged on capital accounts or drawings.
Sh. Sh.
Capital Accounts
Bingwa 482,000.
Shabiki 00
Drawings 507,000.
Bingwa 96,000.0 00
Shabiki 0
Freehold factory (including land Sh. 87,400.0
300,000.00) 0
Factory Plant at cost 708,800.
Delivery Van at cost 00
Provision for depreciation 326,400.
Freehold Factory 00
Factory Plant 82,000.0 307,040.
Delivery Van 0 00
Stocks on 1 February 2001 110,160.
Raw materials 00
Work in progress 38,400.0
Wheelbarrows (1220 at Shs. 440) 0
Sales
Return inwards 42,000.0
Purchases of raw materials 0
PAYE 40,200.0
Factory wages 0 1,237,60
Office wages 536,800. 0.00
Expenses Factory 00
Office
Provision for unrealized stock (in 13,600.0 8,800.00
warehouse) 0
Provision for doubtful debts 291,600.
Debtors and creditors 00
Bank
165,400. 48,800.0
00 0
48,000.0 19,200.0
0 0
126,800. 109,200.
00 00
143,400. 57,200.0
00 0
217,600.
00
2,926,00 2,926,00
0.00 0.00
Additional information:
Lesson Seven 426
Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March
2002 and a balance sheet as at that date.
(20 marks)
QUESTION FIVE
State and explain the qualities of useful financial information. (10
marks)
To what extent do International Accounting Standards help achieve these qualities.
(5 marks)
(25 marks)
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
Lesson Eight 428
Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
DR CR
£ £
Cash at bank 1,703
Cash in hand 12
Drawings 560
Postage and stationery 129
Traveling expenses 104
Cleaning expenses 260
Sundry expenses 19
Telephone 214
Electricity 190
Motor vas 2,000
Rates 320
Fixtures ad fittings 806
Capital 2,308
Purchases 3,163
Discounts received 419
Credit sales 830
Cash sales 4,764
Discount allowed 81
Provision for
depreciation: 700
Motor van 250
Fixtures ad fittings
Stock at 1 January 20X1 366
Loan - Frey 250
Debtors – Brown 12
Blue 150
Stripe 48
Creditors – Live 602
Negative _____ 64
10,207 10,207
Workings
429 Company Accounts
Cash at bank £
Opening balances 672
Bankings of cash (908 + 940 + 766 + 1,031) 3,643
Capital introduced 500
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 729
+ 38 + 20) x 90%
5,546
Less cheque payments (telephone, electricity, rates and
van)
Payments to suppliers
(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + (2,374)
187)
1,703
Cash at Bank
£
£
Bal b/d 5 Bank 3,645
Sales (bal) 4,764 Drawings 560
Stationery 73
Travel 40
Petrol ad van 104
Sundry 19
Postage 56
Cleaner 260
Bal c/d _12
4,769 4,769
Question 2
Mary Carter
Balance Sheet as at 31.12.2001
Workings
Stock: 11,000 + 34,000 – 37,000 = 8,000
Debtors: 10,000 + 51,000 – 54,000 = 7,000
Cash at bank: 5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 =
1,000
Cash hand: 3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000
Capital
Bal b/f 34,000
Add profit _5,000
39,000
Less drawings (10,000)
29,000
Profit:
Sales 60,000
Cost of sales (37,000)
Electricity (2,000)
Rates (1,000)
Wages (10,000)
Sundry expenses (2,000)
Bank interest (3,000)
Net profit 5,000
Creditors
= 12,000 + 34,000 – 36,000 = 10,000
Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.
Net profit = closing capital (net assets) – opening capital + drawings – additional
capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000
431 Company Accounts
Question 4
Brian Barmouth
Trial balance as at 30 June 2000
£ £
Sales 47,600
Purchases 22,850
Office expenses 1,900
Insurance 700
Wages 7,900
Rates 2,800
Heating and lighting 1,200
Telephone 650
Discounts allowed 1,150
Opening stock 500
Return inwards 200
Returns outwards 150
Premiums 40,000
Plant and machinery 50,000
Motor vehicle 12,000
Debtors 12,500
Bank balance 7,800
Creditors 3,400
Loan – long term loan 10,000
Capital 60,000
Drawings for the year __4,000 ______
121,150 121,150
NB: The closing stock does not appear in the trial balance.
Lesson Eight 432
LESSON 2
Question 1
(a)
£ £
1-May Capital 5,000 1-May Store fitments 2,000
13-May Sales 200 19-May Abel 650
16-May Bruce 700 20-May Rent 200
24-May hill 200 21-May Delivery exp 50
30-May Drawings 200
30-May Wages 320
31-May Green 300
_____ 31-May Balance c/d 2,380
6,100 6,100
Check the account balances with the balances shown on the trial balance.
(d)
Dr Cr
£ £
Cash 2,380
Sales 1,840
Purchases 1,750
Debtors 740
Creditors 800
Capital 5,000
Fixtures and fittings 2,000
Rent 200
Delivery expenses 50
Drawings 200
Wages _320 ____
7,640 7,640
433 Company Accounts
Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
£ £ £
Sales 15,500
Less returns inwards (1,500)
150,000
Cost of sales
Opening stock 46,000
Purchases 103,500
Less returns outwards (3,500) 100,000
146,000
Less closing stock (41,000) (105,000)
Gross profit 45,000
Discount received 200
Rent received 2,000
47,200
Expenses
Salaries and wages 18,700
Office expenses 2,500
Insurance 1,100
Electricity 600
Stationery 2,400
Advertising 3,500
Telephone 800
Rates 3,000
Discount allowed __100 (32,700)
Net profit 14,500
End Papers
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Premises 80,000
Fixtures and fittings 5,000
85,000
Current assets
Stocks 41,000
Debtors 4,800
Cash in hand 200
46,000
Current liabilities
Bank overdraft 12,000
Creditors 7,500 (19,500)
26,500
111,500
Capital 111,000
Add net profit 14,500
125,500
Lesson Eight 434
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
£ £ £
Sales 9,234,000
Less: Cost of sales
Opening stock 1,816,000
Purchases 6,918,500
Add carriage inwards 42,000
6,960,500
Less returns outwards (64,000) 6,896,500
8,712,500
Less closing stock (2,239,000) (6,473,500)
2,760,500
Less expenses
Wages and salaries 1,024,000
Carriage outwards 157,000
Rent and rates 301,500
Communication 62,400
expenses
Commission payable 21,600
Insurance 40,500
Sundry expenses 31,800 (1,638,800)
Net profit 1,121,700
K Smooth
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Buildings 2,000,000
Fixtures 285,000
2,285,000
Current assets
Stocks 2,239,000
Debtors 1,432,000
Bank 297,000
Cash 11,500
3,979,500
Current liabilities
Creditors (816,000) 3,163,500
5,448,500
Capital 5,088,800
Add net profit 1,121,700
6,210,500
Less drawings 762,000
5,448,500
435 Company Accounts
Lesson Eight 436
Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
£ £ £
Sales 13,090,000
Less: returns outwards __(55,000)
13,035,000
Cost of sales:
Opening stock 2,391,000
Purchases 9,210,000
Add carriage inwards ___21,500
9,231,500
Less returns outwards __(30,700) 9,200,800
11,591,800
Less closing stock (2,747,500) (8,844,300)
4,190,700
Less expenses
Wages and salaries 1,282,000
Carriage outwards 30,900
Motor expenses 163,000
Rent and rates 297,000
Telephone 40,500
Insurance 49,200
Office expenses 137,700
Sundries 28,400 (2,027,700)
Net profit _2,163,000
Skates
Balance Sheet as at 30September 2002
Non current assets £ £ £
Office equipment 625,000
Motor van 410,000
1,035,000
Current assets
Stocks 2,747,500
Debtors 1,239,000
Bank 311,500
Cash __29,500
4,318,500
Current liabilities
Creditors (937,000) 3,381,500
4,416,500
Capital 3,095,500
Add net profit 2,163,000
5,258,500
Less drawings (842,000)
4,416,500
437 Company Accounts
LESSON 3
Question 1-
Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users’
decisions taken on the basis of the financial statements. The materiality of the
omission or misstatement depends on the size and nature of the item in question
judged in the particular circumstances of the case. Only items material in amount
or in nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit
account, it might well be regarded as a material misstatement if these two amounts
were displayed on the balance sheet as ‘cash at bank £5,000’. In other words,
incorrect presentation may amount to material misstatement even if there is no
monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time
to identify trends and with other enterprise’s statements to evaluate their relative
financial position, performance and changes in financial position. It is therefore
necessary for similar events and states of affairs to be represented in a similar
manner.
Compliance with accounting standards helps to achieve comparability by ensuring
that different entities account for similar transactions and events in a similar way.
Example:
Depreciation policy must be consistent from one period to the next, unless it
becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative
valuations, are possible, the one selected should be the one which gives the most
cautious presentation of the business’s financial position or results.
IAS 1 describes the prudence concept as being that ‘revenue and profits are not
anticipated, but are recognized by inclusion in the profit and loss account only when
realized in the form either of cash or of other assets, the ultimate cash realization of
which can be assessed with reasonable certainty; provision is made for all
known…….expenses and losses whether the amount of these is known with
certainty or is a best estimate in the light of the information available.’
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a
provision should be made so that the amount in question is not included in the
profit for the year.
Objectivity:
Lesson Eight 438
This means that accountants must be free from bias. They must adopt a neutral
stance when analyzing accounting data. This means that they should try to strip
their answers of any personal opinion or prejudice and should be as precise and as
detailed as the situation warrants. The result of this should be that any number of
accountants will give the same answer independently of each other.
439 Company Accounts
Example:
Internally generated good will should not be capitalized in the balance sheet, as its
value cannot be determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful,
information must be relevant to the decision-making needs of users. Information is
relevant when it has the ability to influence the decisions of users by helping them
to evaluate past, present or future events or to confirm or correct their past
evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to
determine if to lend to the firm or supply on credit.
Question 4
Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
Factors affecting materiality are:
• The size of the item;
• The nature of the item.
Neutrality means that the information in financial statements should be free from
deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about
certain items.
The potential conflict between the two is that neutrality requires freedom from bias
while the exercise of prudence is a potentially biased concept since judgment is
required.
In resolving the conflict, a balance should be found that neither overstates nor
understates assets, gains, liabilities and losses.
Safeguards to ensure that a company’s financial statements are free from material
error:
The fact that the financial statements have been audited by an independent
professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.
Lesson Eight 440
LESSON FOUR
Question 1
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
£ £ £
Sales 378,500
Less returns (4,100)
inwards
374,400
Less cost of sales
Opening stock 120,600
Purchases 261,700
Less returns out (7,700) 254,000
374,600
Less closing stock 102,500 272,100
Gross profit 102,300
Add
Discount received 2,400
Rent received 7,500
112,200
Less expenses
Salaries and 45,700
wages
Office expenses 8,400
Insurance 2,200
premiums
Electricity 2,300
Stationery 6,200
Advertising 8,900
Telephone 2,100
Business rates 6,000
Discounts allowed 600 (82,400)
Net profit 29,800
441 Company Accounts
Capital 287,500
Add Net Profit 29,800
317,300
Less drawings (26,000)
291,300
Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
£ £
Sales 491,620
Less cost of sales
Opening stock 18,460
Purchases 387,936
406,396
Closing stock 19,926
386,470
Gross profit 105,150
Discounts received 1,175
106,325
Less expenses:
Discounts allowed 1,304
Lighting and heating 6,184
Motor expenses 3,080
Rent 8,161
General expenses 7,413
Depreciation (w) 13,146
39,288
Net profit 67,037
Lesson Eight 442
Working:
Depreciation charge:
Donald Brown
Balance Sheet as at 31 December 20X0
Cost Depreciation Net
Non current £ £ £
asset
s
Fixtures and 42,200 6,200 36,000
fittings
Motor vehicles 45,730 24,438 21,292
87,930 30,638 57,292
Current assets
Stock 19,926
Debtors 42,737
Prepayments 680
Cash in hand 1,411
64,754
Current
liabili
ties
Creditors 35,404
Accruals 218
Bank overdraft 19,861
55,483
Net current 9,271
assets
Net assets 66,563
Financed by
Capital 26,094
Net Profit for 67,037
year
Less drawings 93,131
26,568
66,563
443 Company Accounts
Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
£ £
Sales 427,726
Opening stock 15,310
Purchases 302,419
Carriage inwards 476
318,205
Less closing stock 16,480
Cost of sales 301,725
Gross profit 126,001
Carriage outwards 829
Wages and salaries 64,210
Rent and rates (12,466 – 11846
620)
Heat and light (4,757 + 5,107
350)
Depreciation – 10,200
equipment
Motor 8,654
vehicles
Sundry expenses 8,426
109,272
Net profit for the year 16,729
Brenda Bailey
Balance Sheet as at 30 June 20X9
Cost Depreciation Net book
value
Non current £ £ £
assets
Equipment 102,000 32,450 69,550
Motor vehicles 43,270 17,574 25,696
145,270 50,024 95,246
Current assets
Stock 16,480
Debtors 50,633
Prepayments 620
Cash __477
68,210
Current liabilities
Bank overdraft 3,295
Creditors 41,792
Accruals 350
45,437
Net current assets 22,773
118,019
Lesson Eight 444
Capital
Balance at 1 July 122,890
20X8
Add Profit for year 16,729
139,619
Less drawings 21,600
Balance at 30 June 118,019
20X9
Question 4
Frank Mercer
Cash book
20X8 £ 20X8 £
Dec 31 Balance b/f 1,793 Dec 31 Bank 18
charges
Dec 31 Dividend 26 Dec 31 Standing 32
order
Dec 31 Direct 88
debit
____ Balance 1,681
c/d
1,819 1,819
£ £
Balance per bank 1,557
statement
Add unrecorded
lodgments:
V Owen 98
K Walters 134
232
Less unpresented
cheques:
B Oliver (869) 71
L Philips (872) 37
(108)
Balance per cash book 1,681
(corrected)
445 Company Accounts
LESSON FIVE
Question 1
Question 2
Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts
of customers. They have no effect on the control account.
Lesson Eight 446
(b)
Statement Of Adjustments To List Of Personal Account Balances
£ £
Original total of list of balances 12,802
Add: debit balance omitted (b) 300
debit balance understated (e) 200
500
13,302
Less: transposition error (c ): understatement 180
of cash received
cash debited instead of credited (2 x 500
£250) (h)
discounts received wrongly debited to 50
Bell (i)
Understatement of cash received (i) _72
__802
12,500
Question 3
(a)
George – Cash book
£ £
Balance 4,890 Bank charges (3) 320
Correction of error - 320 Plant (4) 10,000
interest
Balance 11,890
Cheque 980
dishonored
Correction of
error in entering 4,800
cheque (6)
_____ Error in addition 1,000
(7)
17,100 17,100
(b)
Bank reconciliation
£
Balance per bank statement 12,800
Less lodgments not credited (2) 2,890
9,910
Add: dishonored cheque 980
447 Company Accounts
(d)
Journal
£ £
George – drawings 870
Repairs to premises 870
Repairs to George’s house
mistakenly charged as a business
expense
*Note: a debit to accounts payable ledger control account is also acceptable for this
entry.
Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the
records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the
same class e.g. a credit sale posted in a wrong debtors account (e.g. to debtor 1
instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also
the class e.g. an expense of plant repair posted to the plant account (an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the
amount is incorrect e.g. a credit sale of £250 is posted to the debtor and sales
account as £520.
(b)
(i)
DR (Sh) CR (Sh)
Suspense 10,000
ABD Bank – loan 10,000
Cashbook 4,000
P& L – Rent received 4,000
(ii)
Statement of Corrected net profit
(Sh) (Sh)
Net profit 64,000
Add: Rent received 4,000
Discount received 500
Prepaid insurance 220
Insurance receivable 12,000 16,720
80,720
Less: closing stock overvalued 1,500
Discount allowed 500
Opening stock 3,200 (5,200)
Adjusted net profit 75,520
Question 5
WORKSHEET
ACCOUNTS Pre-Adjusted Adjustmen Adjusted T&P&L Balance sheet
Trial Balance ts Trial Balance Account
Dr Cr Dr Cr Dr Cr Dr Cr Asset Liab.
s
£ £ £ £ £ £ £ £ £ £
Capital 40,00 40,00 40,00
0 0 0
Purchases 26,15 26,15 26,15
4 4 4
Sales 36,24 36,24 36,24
6 6 6
Salaries 4,814 350 5,164 5,164
Opening 4,307 4,307 4,307
stock
Insurance 820 205 615 615
Rent income 965 165 800 800
Buildings 25,00 25,00 25,00
0 0 0
Furniture 14,50 1,45 13,05 13,05
0 0 0 0
Debtors 6,140 307 5,833 5,833
Other 1,060 1,060 1,060
expenses
Creditors 4,638 4,638 4,638
Commission 946 120 1,066 1,066
82,79 82,79
5 5
Salaries due 350 350 350
Prepaid 205 205 205
insurance
Rent rec’d in 165 165 165
adv.
Accrued 120 120 120
commission
Depreciation 1,45 1,450 1,450
0
Bad debts 307 307 307
Closing stock 5,008 5,008
Net profit 4,063
2,59 2,59 83,26 83,26 43,12 43,12 49,21 49,21
7 7 5 5 0 0 6 6
Column 1 2 3 4 5 6 7 8 9 10
numbers
Lesson Eight 452
Question 6
Purpose of Control Accounts
i. To provide for arithmetic check on the postings made in the individual account i.e.
either the sales ledger or the purchases ledger.
ii. To provide a quick total of the debtors and creditors balances to be shown in the
trial balance.
iii. To detect and prevent errors and frauds on the debtor and creditors account.
iv. To facilitate delegation of duties especially where the debtors and creditors are
many.
453 Company Accounts
LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets £ £
Stocks 4,500
Debtors 2,800
Rates prepaid 40
Fixtures 2,500
10,140
Liabilities
Bank overdraft (add 1,172
unpresented cheques)
Accrued expenses 240
Creditors 1,800
Loan 4,000
Accrued interest [4,000 x 3% x 30
3
/12]
Heating and lighting 80 (7,322)
2,818
(b)
Dare
Profit and loss account for the year ended 31 December 1996
£ £
Gross profit 9,000
Discounts received 480
9,480
Less expenses
Rent and rates 465
Fixtures and fittings 350
(depreciation)
Lighting and heating 200
General expenses 450
Loan interest 120
Wages 2,914
Sundry expenses 140
Discounts allowed 520
Bad debt 200 (5,659)
Net profit 3,821
455 Company Accounts
(c)
Dare
Balance Sheet as at 31 December 19X6
Non current assets £ £ £
Fixtures and fittings 2,550
Current assets
Stocks 5,800
Debtors 3,000
Prepayments 50
Bank (less unpresented 673
cheques)
Cash __20
9,543
Current liabilities
Creditors 2,200
Accruals _290 (2,490)
7,053
9,603
Capital 2,818
Net profit 3,821
6,639
Less drawings (1,036)
5,603
Non current liabilities
Loan – 3% 4,000
9,603
Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
£ £
Income
Subscriptions (W1) 10,690
Bar and café profit (W2) 9,200
Sale of sportswear (W3) 1,400
Hire of sportswear (W5) 1,700
Deposit account interest 800
23,790
Expenditure
Rent of clubhouse 6,000
Groundsperson 10,000
Heating oil (W6) 4,500
Depreciation 5,000 x 10% 500
(21,000)
Surplus of income over expenditure for 2,790
the year
Lesson Eight 456
Workings:
Subscriptions
SUBSCRIPTIONS
£ £
Arrears b/f 1.1.X5 (10 + 230) 240 Advance b/f 40
1.1.X5
Subscription income for year 10,690 Cash received 11,000
(bal fig)
Advance c/f 31.12X5 __200 Arrears c/f ___90
31.12.X5
11,130 11,130
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.
(5,000)
Closing stock 10,800
Profit 9,200
*Note: Purchases are 9,000 + 800 – 1,000 = £8,800
Lesson Eight 458
Sale of sportswear
£ £
Sales 5,000
Opening stock 3,000
Purchases (W4) 3,100
6,100
Closing stock (4,000)
Closing stock (2,100)
Gross Profit 2,900
Sportswear written (1,500)
down
Net profit 1,400
Purchases of sportswear
£
Bank 4,500
Add closing creditors 450
Less opening creditors (300)
4,650
For sale 2/3: £3,100 For hire 1/3: £1,550
Hire of sportswear
£ £
Receipts 3,000
Costs*
Opening stock 750
Purchases (W4) 1,550
2,300
Closing stock (1,000)
(1,300)
Profit 1,700
*Note: While there is a case for treating the sportswear for hire as non current
assets, in club accounts it is more usual to treat such items as stock in trade.
Heating Oil
£
Opening stock 1,00
0
Purchases (4,000 + 4,20
200) 0
5,20
0
Less closing stock (700
)
Expense for year 4,50
0
459 Company Accounts
Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
Raw materials
Opening stock 40,0000
Purchases 855,000
895,000
Less closing stock (80,000)
Raw materials consumed 815,000
Wages _50,000
865,000
Factory overheads
Wages 96,000
Rent and rates 22,500
Water and electricity 13,000 131,500
Cost of goods completed 996,500
Factory profit ___3,500
Transfer price 1,000,000
Sales 4,100,000
Cherono
Balance Sheet as at 30 June 1998
Non current assets Cost Depreciatio NBV
n
Fixtures and fittings 900,000 (440,000) 460,000
Motor vehicles 152,000 (38,000) 114,000
1,052,000 (478,000) 574,000
Current assets
Stock: Raw materials 80,000
Lampshades 30,000
Less UPCS (120)
Other goods 252,000 361,880
Debtors 108,000
Prepayments 10,500
Bank balance _98,000
578,380
Current liabilities
Creditors 107,000
Accruals 27,318 (134,318) 444,062
1,018,062
Capital 740,000
Add net profit 133,062
873,062
Less drawings (95,000)
778,062
Add loan _240,000
1,018,062
Lesson Eight 462
Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
£ £
Income
Annual subscriptions (4,680 + 70 + 230 – 4,740
(140 + 100))
Entrance fees 250
Life membership fees credited (850 + 53) 903
5,893
Training ground fees (7,660 – 470 + 325) 7,515
Sales of sporting requisites 8,774
Investment interest received 626
Insurance commissions received (53 – 11 55
+ 13)
Advertising revenue 603
Profit on sale of furniture (370 – 350) 20
Total income 23,486
Expenditure:
Cost of sporting requisites sold
(5,270 + 202 – 163 = 5,309 (purchases)
5,309 + 811 – 1,064 = 5,056) 5,056
Damaged stock etc 137
Wages of grounds man (250 + 3,600 – 3,550
300)
Postages (692 – 4) 688
Stationery (55 + 629 – 36) 648
Rates (300 + 846 – 380) 766
Subscriptions in arrear written off 40
World-wide Athletics Club affiliation fee 50
Training ground upkeep 1,200
Depreciation: buildings 3,500
Furniture, equipment etc
(10% x (7,900 – 800) __710
Total expenditure 16,345
Surplus of income over expenditure £7,141
463 Company Accounts
LESSON 7
Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
Shs Shs
Raw materials
Opening stock 100,700
Purchases 716,250
816,950
Less stock of raw materials (79,500)
Raw materials consumed 737,450
Factory wages 382,500
Prime cost 1,119,950
Add opening w/p 85,000
Less closing w/p (126,250) (41,250)
1,078,700
Factory overheads
Depreciation on plant 84,375
Factory expenses 354,000 438,375
Factory cost of completed goods 1,517,075
Add factory profit ( missing figure) 192,925
Transfer price given in the question (par) 1,710,000
(38,000 x 45)
Sales 2,775,500
Cost of sales
Opening stock of finished goods 1,200,000
Transfer price 1,710,000
2,910,000
Less closing stock of finished goods (10,125,000 (1,897,500)
)
878,000
Add factory profit 192,925
1,070,925
Expenses
Depreciation on delivery van 80,250
Sales department wages 150,750
Selling department expenses 277,500
Increase for provision for bad debts 5,000
Provision for unrealized profits 112,500 (626,000)
Net profit 444,925
Share of factory profits
K 154,340
M 38,585 (192,925)
Share of remaining profit 252,000
K 100,800
M 151,200 252,000
Lesson Eight 466
K M K M
Drawings 15,00 125,00 Share of factory 154,34 38,585
0 0 profit 0
Bal c/d 105,1 54,785 Balance of profit 100,80 51,200
40 0
255,1 189,78 255,14 189,785
40 5 0
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-
8
£ £ £
Sales 404,500
Less
Opening stock 30,000
Purchases 225,000
Carriage inwards 4,000 229,000
Plant depreciation 259,000
Closing stock (35,000)
Cost of sales (224,000)
Gross profit 180,500
Discount received 4,530
Interest received ____750
185,780
Expenses
Carriage outwards 12,000
Vehicle depreciation 15,000
[25% x (80,000 – 20,000)]
Depreciation of plant 20,000
[20% x 100,000]
Discounts allowed 10,000
Office expenses [30,000 + 405] 30,805
Rent, rates , heat and light 7,300
[8,800 – 1,500]
Provision for bad debts increase
[(5% x 14,300) – 420] 295
(95,400)
Net profit for year 90,380
Interest charged on drawings etc
Amis 1,000
Lodge 900
Pym 720
2,620
93,000
Less
Salary – Pym 13,000
Interest on capital accounts
Amis 8,000
Lodge 1,500
Pym 500
23,000
Residual profit 70,000
Less
Share of residual profit
Amis ( 5/10) 35,000
Lodge (3/10) 21,000
Lesson Eight 468
(b)
Current Accounts
A L P A L P
£ £ £ £ £ £
Balances 1,00 500 400 Appropn – 13,00
0 salary 0
Drawings 25,0 22,00 15,0 - 8,00 1,500 500
00 0 00 Interest 0
Appropn – 1,00 900 720 - 35,0 21,00 14,00
interest 0 Residue 00 0 0
Bal c/d 16,0 _____ 11,3 Bal c/d _____ 900 ____-
00 - 80 -
43,0 23,40 27,5 43,0 23,40 27,50
00 0 00 00 0 0
Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
£’000 £’000
Sales 2,000
Cost of sales
Opening stock 180
Purchases 1,400
1,580
Closing stock (200)
1,380
Gross profit 620
Expenses
Wages and salaries (228 240
+ 12)
Sundry expenses 120
Bad and doubtful debts 26
Depreciation:
Building 5
Plant and 24
equipment
Interest on loan – Amber __5
420
Net profit 200
Salaries 10 10 20
Share of profit:
£80,000 (60:40) 48 32 80
1.7.X6 to 31.12.X6
£100,000 (40:40:20) 40 40 20 100
98 82 20 200
CAPITAL ACCOUNTS
A B C A B C
£’00 £’00 £’00 £’000 £’000 £’000
0 0 0
Balances b/f 280 210
Goodwill 80 80 40 Cash 140
Balances c/f 368 242 100 Goodwill 120 80
(W1)
Revaluation 48 32
448 322 140 448 322 140
Balances b/f 368 242 100
471 Company Accounts
CURRENT ACCOUNTS
A B C A B C
£’00 £’00 £’00 £’000 £’000 £’000
0 0 0
Drawings 28 24 15 Balances b/f 7 6
Balances c/f 82 64 5 Profit for 98 82 20
year
__ __ __ Loan _5 __ __
interest
110 88 20 110 88 20
Question 4
The solution provided has the workings shown beside the accounts to make the
comparison easier. Remember to adhere to previous partnerships and
departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
Working Worksho Petrol/oil Showroo Total
s p m
£ £ £ £
Sales and charges:
32,125 32,964 8,500 Cash 73,589
65,892 41,252 81,914 Credit 189,05
8
98,017 74,216 90,414 Total turnover 262,64
7
Less materials:
1,932 3,018 20,720 Opening stock 25,670
23,860 41,805 52,100 Purchases 117,76
5
25,792 44,823 72,820 143,43
5
(2,752) (2,976) (25,310) Closing stock (31,038
)
23,040 41,847 47,510 Usage 112,39
7
(2) 34,163 5,685 ____- Direct wages 39,848
57,203 47,532 47,510 Cost of sales 152,24
5
40,814 26,684 42,904 Gross profit 110,40
2
(1) 1,333 - - Profit on sale of 1,333
plant
42,147 26,684 42,904 111,73
5
Less
(3) 7,024 - 4,391 Indirect wages 11,415
- - 10,200 Salaries 10,200
(4) 2,613 2,945 7,880 Rates 13,438
Lesson Eight 472
Less appropriations
Interest on capitals
Duke (5% x (2,500)
£50,0000
Earl (5% x £40,000) (2,000)
Residual profit* 13,692
Duke (6,846)
Earl (6,846)
-
*The equal division stipulated by the Partnership Act applies in the absence of
agreement to the contrary.
473 Company Accounts
Aristocratic Autos
Balance Sheet as at 30 September 1986
Working Worksho Petrol/oil Showroo Total
s p m
£ £ £ £
Non current assets at
written down value:
(8) 5,020 4,260 11,010 Freehold buildings 20,290
(8) 24,891 4,859 5,357 Plant, equipment and 35,107
vehicles
29,911 9,119 16,367 55,397
Current assets:
2,752 2,976 25,310 Stocks 31,038
1,365 537 - Debtors 1,902
(4) 2,586 2,915 7,799 Prepayments 13,300
316 1,605 30,470 Bank and cash 32,391
7,019 8,033 63,579 78,631
Current liabilities:
4,225 5,602 15,250 Creditors 25,077
(9) 915 564 983 Accruals 2,462
5,140 6,166 16,233 27,539
1,879 1,867 47,346 Working capital 51,092
31,790 10,986 63,713 Net assets employed 106,48
9
Financed by
Capital accounts
Duke
50,000
Earl
40,000
90,000
Current accounts:
(10) Duke
6,906
(10) Earl
9,853
16,489
106,48
9
Working
s
(1) Plant disposal: Cost 19,500
Accumulated depreciation (15,633
)
Written down value 3,867
Proceeds 5,200
Profit on sale 1,333
Lesson Eight 474
Question 5
WORKINGS
The first step is to derive the profit for the period:-
£
Lesson Eight 476
CAPITAL ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Goodwill w/o - 3,00 3,00 1,5 Opening 9,000 8,00 8,00 -
0 0 00 balances 0 0
Goodwill 2,500 2,50 2,50 -
raised 0 0
Closing - 7,50 7,50 4,0 Bank 4,00 4,00
balances 0 0 00 0 0
Exors of Capital 1,50 1,50
0 0
R decd 11,5 - - - Premium (1/5
00 x 7,500)
11,5 10,5 10,5 5,5 11,50 10,5 10,5 5,50
00 00 00 00 0 00 00 0
CURRENT ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Balance b/d - - 100 - Balances b/d 140 200 - -
Drawings 2,00 1,60 1,80 - Appropriation 2,12 2,12 2,12 -
0 0 0 a/c 0 0 0
Closing - 720 720 - (profit)
balance
Exors of R 260 - - -
(decd)
2,26 2,32 2,12 - 2,26 2,32 2,12 -
0 0 0 0 0 0
The Capital and Current Accounts are given as workings for the Balance sheet
figures.
LESSON 8
Question 1 (a)
477 Company Accounts
AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31
October 1999
Raw Materials Sh’000 Sh’000
Opening stock – Raw material 380
Purchases – Raw material 9,500
9,880
Less closing stock – Raw material (465)
Cost of raw materials consumed 9,415
Add: direct wages 1,350
direct expenses _395 1,745
Prime Cost 11,160
Factory overheads
Factory expenses 290
Indirect materials 350
Factory insurance 150
Depreciation – plant and 5,160 5,950
machinery
Total cost of production 17,110
Add opening W.I.P 560
17,670
Less closing W.I.P – Finished (695)
goods
Factory cost of production – 16,975
finished goods
Sales 28,550
Less cost of sales
Opening stock – finished goods 420
Factory cost of production – 16,975
finished goods
17,395
Less closing stock – finished goods (610) (16,785)
Gross profit 11,765
Less expenses
Sales room expenses 485
Administration expenses 620
Office salaries and wages 898
Vehicle running expenses 656
Bad debts w/o 64
Overdraft interest 725
Debenture interest 800
Depreciation: furniture and 89
equipment
Motor vehicles 4,125 (8,462)
3,303
Less dividend (4,000)
Net profit for the year (697)
Add retained profit b/d 5,500
4,803
Less transfer to general reserve (2,000)
Lesson Eight 478
AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets Sh’000 Sh’000 Sh’000
Land & Buildings 30,000 - 30,000
Plant and machinery 25,800 (11,460) 14,340
Furniture and equipment 890 (274) 616
Motor vehicles 16,500 (7,525) 8,975
73,190 19,259 53,931
Current Assets
Stock – Finished goods 610
Raw materials 465
WIP 695
7,360
9,130
Current Liabilities
Bank overdraft 1,175
Creditors 1,000
Accruals 783
Debenture interest 800
Dividends accrued 4,000 (7,758) 1,372
55,303
Financed by:
Authorized and issued capital 40,000
Capital reserve
Share premium 500
Revenue reserve
General reserve 2,000
Retained profit 2,803
45,303
Non current liability
8% debenture 10,000
55,303
Lesson Eight 480
STA
Balance Sheet as at 1 November 19-6
£ £
Buildings 17,000
Equipment 3,480
20,480
Current assets
Stock 1,100
Debtors 2,230
Bank 4,950
8,280
Current liabilities
Creditors (980) 7,300
27,780
Capital: Sam 7,500
Ted 7,500
Abe 4,000
19,000
Current accounts: 720
Sam
Ted 220
Abe __- 940
19,940
Estate of Reg. 7,840
27,780
481 Company Accounts
KK Ltd
Balance Sheet as at 31 October 1998
Shs ‘000’ Shs ‘000’ Shs
‘000’
Non Current Assets
Freehold property 44,500 - 44,500
Furniture and fittings 1,540 (292) 1,248
Motor vehicles 3,500 (965) 2,535
49,540 (1,257) 48,283
Goodwill 500
Current Assets
Stock 4,398
Debtors 1,540
Less provision for doubtful debts (77) 1,463
Rent receivable 35
Cash at bank 10,492
16,388
Current Liabilities
Creditors 332
Accrued expenses 189
Debenture interest 350
Tax payable 8,960
Proposed dividends 4,500 (14,331) 2,057
50,840
Authorized and issued share capital
1,500,000 ordinary shares of Sh. 20
each fully paid 30,000
Capital reserves
Share premium 350
Revenue reserves
General reserve 4,500
Profit and loss account 12,490 16,990
47,340
10% debenture 3,500
50,840
Lesson Eight 482
Question 3
(a)
1995 1996
Gross profit
percentage
Gross profit 24,000 = 37.5% 32,400 = 30%
Sales 64,000 108,000
Current ratio
Current assets 23,900 = 1.68:1 31,000 = 1.52:1
Current liabilities 14,200 20,400
Quick ratio
Current assets less 23,900 – 12,000 = 31,000 – 15,000 =
stock 0.84:1 0.78:1
Current liabilities 14,200 20,400
Debtors collection
period
Debtors x 365 10,500 x 365 = 60 14,000 x 365 = 47
Sales days days
64,000 108,000
Creditors payment
period
Trade creditors x 6,800 x 365 = 59 days 9,400 x 365 = 44 days
365 42,000 78,600
Purchases (W)
Gearing ratio
Loan capital 60,000____ = 70% 60,000____ = 55%
Total capital 60,000 + 26,000 60,000 + 49,000
1995 1996
£’000 £’000
Cost of sales 40,000 75,600
Add: closing stock 12,000 15,000
52,000 90,600
Deduct: opening stock 10,000 12,000
Purchases 42,000 78,600
(b)
• The gross profit margin has fallen when compared with last year, although in
absolute terms, both profit and sales are higher. Possibly the firm has
lowered the price of goods to increase sales, although there may be other
explanations (see part (c) below).
• There has been a reduction in liquidity as evidenced by a fall in both the
current and the quick ratios. However, this is no immediate cause for
483 Company Accounts
(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is
important, and a company ought to be able to pay its debts as they fall due.
However, an excessively high current ratio means that resources are tied up in
stock, debtors and cash instead of producing profits. Current assets should
generally be kept as low as is compatible with efficient production and paying
creditors as they fall due.
There is some truth in this statement. High gearing means greater risk, but also, in
good times, greater returns. It is important that the percentage return to
shareholders is greater than the percentage rate of interest being paid on the
borrowings.
Question 4
shares allotment
account 35,000
(50,000 @ 70p)
1 Nov Balance 1 May Call account
carried 50,000 (50,000 @ 30p) 15,000
down
1 Nov Forfeited
______ shares reissued ___500
£50,50 £50,500
0
Call account
19X1 19X1 £
1 May Share 15,000 1 May Cash 14,850
capital
_____ 29 Sep Forfeited ___150
shares
£15,00 £15,000
0
Forfeited Shares
19X1 19X1 £
29 Sep Call account 150 29 Share capital (500 500
Sep @ £1)
1 Nov Forfeited
shares 350 ____
reissued
£500 £500
Forfeited Shares
19X1 £ 19X1 £
1 Nov Share 500 1 Nov Cash 400
capital
1 Nov Share 250 1 Nov Forfeited shares 350
premium
£750 £750
485 Company Accounts
Lesson Eight 486
STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I
Sh‘000’ Sh.‘000’
Revenue 816,160
Cost of sales 401,000
Wages and salaries 186,440
Operating expenses 95,860
Insurance 1,180
Directors’ fees 960
Ordinary share capital; 5,200,000 shares of Sh.20
each fully paid 104,000
Profit and loss account, 1 November 2000 77,600
9% debenture stock – secured 160,000
Share premium 18,000
Capital redemption reserve 56,400
Trade debtors and creditors 63,860 61,520
Bad debts written off 240
Audit fees 400
Interest on loan and overdraft 13,900
Depreciation expense 17,300
Accruals 900
Interim dividends paid 26,000
Freehold land and buildings 164,600
Leasehold land and buildings (over 50 years)125,600
Leasehold land and buildings (over 50 years) 51,900
Furniture and equipment 85,600
Stock 46,400
Prepayments 720
Bank balance 2,820
Investments 9,800
1,294,580 1,294,580
487 Company Accounts
1. The balances of fixed asset accounts as at the beginning of the year and
additions during the year were as follows:
Cost or valuation Accumulated depreciationAdditions
1 November 2000 during the year
Sh. ‘000’ Sh.‘000’ Sh.‘000’
Freehold land and buildings157,000 7,600
Leasehold land and buildings
(over 50 years) 121,800 3,800
Leasehold land and buildings
(under 50 years) 60,200 5,800
Furniture and equipment 150,800 52,200 1,800
2. Some of the leasehold property in the books costing Sh.7,500,000 had just 50
years remaining on the lease in October 2000 and has not yet been transferred
to the under 50 years category.
3. Disposals during the year included the following:
All the sale proceeds have been included in the revenue: no other adjustment
has been made.
The determination of depreciation expense for the year included in the trial
balance above has correctly been done for those properties not disposed and
include in the under 50 years category at the beginning of the year.
6) The directors have decided to recommend a final dividend of Sh.5 per ordinary
share
Required:
a) A schedule showing fixed assets movements for the year ended 31 October
2001. (10 marks)
b) Profit and loss account for the year ended 31 October 2001.
(10 marks)
c) Balance sheet at 31 October 2001.
(5 marks)
489 Company Accounts
QUESTION TWO
Rotich and Sinei have been in partnership for several years, sharing profits and
losses in the ratio 2:1. Interest on fixed capitals was allowed at the rate of 10% per
annum, but no interest was charged or allowed on current accounts.
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
1. On 1 November 2000, Tonui was admitted as a partner and from that date,
profits and losses were to be dated in the ratio 2:2:1. For the purpose of this
admission, the value of goodwill was agreed at Sh.3,000,000. No account for
goodwill was to be maintained in the books, adjusting entries for transactions
between the partners being made in their current accounts. On that date,
Tonui introduced Sh.1,250,000 into the firm of which Sh.375,000 comprised his
fixed capital and the balance was credited to his current account.
Lesson Eight 490
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum
after Tonui’s admission. In addition, after Tonui’s admission, no interest was to
be charged or allowed on current accounts.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001.
(9 marks)
b) Partners’ current accounts for the year ended 30April 2001.
(4 marks)
c) Balance sheet as at 30 April 2001. (7 marks)
(Total: 20marks)
QUESTION THREE
a) State and briefly explain any three distinguishing features between (i) a receipts
and payments account and (ii) an income and expenditure account. (6 marks)
b) The accountant of Mamba Sports Club has extracted the following information
from the books of account for the year ended 31 March 2001:
Receipts Payments
Sh. Sh.
Balance brought forward 288,000 Salaries and wages 254,000
Subscriptions: New equipment 565,000
Year 1999 2000 249,000 Repairs and
Maintenance 124,000
2000 2001 2,050,000 Office expenses 415,000
2001 2002 194,000 Printing and stationery168,000
Dinner dance 723,000 Purchase ofBeverages 197,000
Beverage sales 657,000 Dinner dance expenses315,000
Investments income 400,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 218,000
491 Company Accounts
Investments 1,500,000
Balance carried forward 405,000
4,561,000 4,561,000
Lesson Eight 492
Additional information:
Required:
a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
QUESTION FOUR
a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(6 marks)
b) Ssemakula, a sole trader received his bank statement for the month of June
2001. At that date the bank balance was Sh.706,500 whereas his cash book
balance was Sh.2,366,500. His accountant investigated the matter and
discovered the following discrepancies:
1) Bank charges of Sh.3,000 had not been entered in the cash book.
2) Cheques drawn by Ssemakula totalling Sh.22,500 had not yet been
presented to the bank.
3) He had not entered receipts of Sh.26,500 in his cash book.
4) The bank had not credited Mr Ssemakula with receipts of Sh.98,500 paid
into the bank on 30mJune 2001.
5) Standing order payments amounting to Sh.62.000 had not been entered into
the cash book.
6) In the cash book Ssemakula had entered a payment of Sh.74,900 as
Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank
marked “refer to drawer” but had not been written back into the cash book.
8) Ssemakula had brought forward the opening cash balance of Sh.329,250 as
a debit balance instead of a credit balance.
9) An old cheque payment amounting to Sh.44,000 had been written back in
the cash book but the bank had already honoured it.
493 Company Accounts
10) Some of Ssemakula’s customers had agreed to settle their debts by paying
directly into his bank account. Unfortunately, the bank had credited some
deposits amounting to Sh.832,500 to another customer’s account.
However, acting on information from his customers, Ssemakula had actually
entered the expected receipts from the debtors in his cash book.
Lesson Eight 494
Required:
i) A statement showing Ssemakula’s adjusted cash book balance as at 30 June
2001. (9 marks)
ii) A bank reconciliation statement as at 30 June 2001.
(5 marks)
(Total: 20 marks)
QUESTION FIVE
The accounting profession has for a long time relied on certain accounting
conventions to guide accounting practice. Yet the application of the same
conventions has been the source of criticism of the quality and relevance of
information contained in financial reports.
Some of these conventions include:
Required:
For each of the principles listed above: