Beruflich Dokumente
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SUBJECT NO. 1
Study Pack
STRATHMORE
UNIVERSITY
DISTANCE LEARNING
CENTRE
P.O. Box 59857,
00200, Nairobi,
KENYA.
Tel:
Fax:
Email: dlc@strathmore.edu
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of the copyright owner.
THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992
Acknowledgement
ii
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
Acknowledgement
iv
Acknowledgement
CONTENTS
ACKNOWLEDGMENT.....................................................................................ii
INSTRUCTIONS FOR STUDENTS..................................................................iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION..................................vi
LESSON ONE...................................................................................................1
INTRODUTION TO ACCOUNTING...........................................................................1
LESSON TWO................................................................................................32
FINAL ACCOUNTS..................................................................................................32
LESSON THREE............................................................................................68
ACCOUNTING THEORY..........................................................................................68
LESSON FOUR..............................................................................................81
ADJUSTMENTS TO FINAL ACCOUNTS.................................................................81
LESSON FIVE..............................................................................................136
FURTHER ADJUSTMNETS TO ACCOUNTS.........................................................136
LESSON SIX................................................................................................176
OTHER ASPECTS OF FINAL ACCOUNTS............................................................176
LESSON SEVEN..........................................................................................231
PARTNERSHIPS.....................................................................................................231
LESSON EIGHT...........................................................................................287
COMPANY ACCOUNTS.........................................................................................287
LESSON NINE.............................................................................................334
REVISION AID.......................................................................................................334
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.
Text Book: Business Accounting Volume 1 by Frank Wood
Lesson One
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
Many businesses carry out transactions. Some of these transactions have a
financial implication i.e. either cash is received or paid out. Examples of these
transactions include selling goods, buying goods, paying employees and so
many others.
Accounting is involved with identifying these transactions measuring (attaching
a value) and reporting on these transactions. If a firm employs a new staff
member then this may not be an accounting transaction. However when the
firm pays the employee salary, then this is related to accounting as cash
involved. This has an economic impact on the organization and will be recorded
for accounting purposes. A process is put in place to collect and record this
information; it is then classified and summarized so that it can be reported to
the interested parties.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These
financial statements provide information about an entity financial position,
performance and changes in financial position.
Financial position of a firm is what the resources the business has and how
much belongs to the owners and others.
The financial performance reflects how the business has performed, whether it
has made profits or losses. Changes in financial positions determine whether
the resources have increased or reduced.
The users of accounting information have an interest in the existence of the
firm. Therefore the information contained in the financial statements will affect
the decision making process.
The following are the users of accounting information:
i.
Owners:
They have invested in the business and examples of such owners include
sole traders, partners (partnerships) and shareholders (company). They
would like to have information on the financial performance, financial
position and changes in financial position.
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.
FINANCIAL ACCOUNTING 1
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.
Acknowledgement
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.
iv.
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.
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.
v.
vi.
vii.
The Employees
They work for the business/entity. They would like to have information on
the financial position and performance so as to make decisions on their
terms of employment. This information would be important as they can use
it to negotiate for better terms including salaries, training and other
benefits.
They can also use it to assess whether the firm is financially sound and
therefore their jobs are secure.
viii.
The Public
FINANCIAL ACCOUNTING 1
Introduction to Accounting
Institutions and other welfare associations and groups represent the public.
They are interested with the financial performance of the firm. This
information will be important for them to assess how socially responsible is
the firm.
This responsibility is in form the employment opportunities the firm offers,
charitable activities and the effect of firms activities on the environment.
Lesson One
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.
Liabilities are also classified into two main classes.
i)
ii)
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 owners 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
Capital
Non Current Liabilities
Loan
xx
Sh
Sh
Non Current Assets
Land & Buildings
Plant & Machinery
xx
Fixtures, furniture & fittings
Motor vehicles
Current liabilities
xx
Sh
xx
xx
xx
xx
Introduction to Accounting
Overdraft
Creditors
xx
xx
xx
Current Assets
Stocks
Debtors
Cash at bank
Cash in hand
xx
xx
xx
xx
xx
xx
Total assets
xx
Lesson One
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.
Non Current Assets
Sh
Land & Buildings
Plant & Machinery
Fixtures, furniture & fittings
Motors vehicles
Current Assets
Stocks/inventories
Debtors/ trade receivables
Cash at bank
Cash in hand
Current Liabilities
Bank Overdraft
xx
Creditors/trade payables
Net Current Assets
Net assets
Sh
Sh
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Capital
Non Current Liabilities
Loan (from bank or other sources)
(xx)
xx
xx
xx
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.
Introduction to Accounting
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
You are required to prepare a Balance Sheet as at 31 December 2001
B Kelly
Balance Sheet as at 31 December 2001
Non Current Assets
Buildings
Furniture & Fittings
Motor Vehicles
Current Liabilities
Stock
Debtors
Cash at bank
Cash in hand
Creditors
Net Current Assets
Net Assets
Capital
Non-Current Liabilities
Loan
11,000
5,500
5,800
22,300
8,500
5,600
1,500
400
16,000
(2,500)
13,500
35,800
30,800
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.
Lesson One
Motor Vehicle
Premises
Stock
Cash at bank
Cash in hand
Liabilities:
Creditors
Loan - D Evans
3,000
7,000
2,000
600
300
12,900
800
4,000
Capital
(4,800)
8,100
8,100
10
Introduction to Accounting
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.
This can be summarized as follows:
Capital
Creditors
Fixtures
Motor Vehicles
Stock
Debtors
Cash at bank
Cash in hand
Opening
Balances
41,800
3,200
7,000
8,400
9,900
6,560
12,900
240
Increase/(Decrease)
1,540
2,000
1,540
(560)
(2000)
560
Closing
Balances
41,800
4,740
9,000
8,400
11,440
6,000
10,900
800
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Non Current Assets
Fixtures
Motor Vehicles
Current Assets
Stock
Debtors
Cash at bank
Cash at hand
Current Liabilities
Creditors
Net Current Assets
Net Assets
Capital
9,000
8,400
17,400
11,440
6,000
10,900
800
29,140
(4,740)
24,400
41,800
41,800
Lesson One
11
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.
12
Introduction to Accounting
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
During the first week of May 2002 Moody:
a. Bought extra equipment on credit for 5,520.
b. Bought extra stock by cheque 2,280.
c. Paid creditors by cheque 3,160.
d. Debtors paid 3,360 by cheque and 240 by cash.
e. Moody put in extra 1,000 cash as capital.
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
Capital = Assets Liabilities
= 148,120 - 15,800 = 132,320
(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.
Lesson One
13
e. Additional cash of 1,000 increases the cash in hand balance by 1,000 and
the capital balances.
14
Introduction to Accounting
Equipment
46,000
+5,520
51,520
Motor Vehicle
25,160
25,160
Stock
24,600
+2,280
26,880
Debtors
23,080
-3,600
19,480
Cash at bank
29,120
(-2,280 3,160 + 3,360)
27,040
Cash in hand
160
(+240 + 1000)
1,400
Creditors
15,800
(+5,520 3,160)
18,160
Capital
132,320
+1,000
133,320
The balance sheet will therefore be prepared as follows:
D Moody
Balance sheet as at 7 May 2002
Non Current Assets
Equipment
Motor vehicle
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
51,520
25,160
76,680
26,880
19,480
27,040
1,400
74,800
Current Liabilities
Creditors
Net Current Assets
Net Assets
(18,160)
56,640
133,320
Capital
133,320
Detail
Folio
Amount
Credit
Date
Detail
Folio
Amount
Lesson One
15
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.
When we make a debit entry we are either:
i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.
When we make a credit entry we are either:
i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.
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.
Compute the balance on the capital account as at 30 November 2002.
During the first week of December 2002, Jump:
16
Introduction to Accounting
a.
b.
c.
d.
e.
You are to draw up a balance sheet as on 7 December 2002 after the above
transactions have been completed.
Lesson One
17
Answer:
Capital = Assets Liabilities
Assets
Liabiliti
es
115,000 Creditor
s
62,900
61,500
57,700
72,800
400
371,300
Equipment
Motor vehicle
Stock
Debtors
Cash at bank
Cash in hand
39,50
0
Creditors A/C
a/c
2002
Motor Vehicles
2002
2002
2002
Bank
7900
c/d 62,900
1.12 Bal c/d
31,600
39,500
1.12
62,900
62,900
39,500
2002
2002
39,500
Equipment a/c
2002
115,000
13,800 7.12 Bal c\d
128,800
128,800
Stock a/c
2002
61,500
5700 7.12 Bal c\d
67,200
128,800
67,200
67,200
18
Introduction to Accounting
Debtors a/c
2002
2002
57,700 Bank
Cash
570 7.12 Bal c\d
57,700
Bank
72,800 Stock
Creditors
8,400 7.12 Bal c\d
81,200
2002
2002
1.12
400
Debtors
Capital
2002
2002
Bal
8,400
600
48,700
57,700
5,700
7,900
67,600
81,200
b\d
600
2500 7.12 Bal c\d
3500
Capital
2002
1.12 Bal b\d
333300 Cash
128,800
Creditors Of Equipment
2002
13800 Equipment
13,800
3500
3500
330800
2500
128,800
13800
13,800
Lesson One
19
Current Assets
Stock
Debtors
Cash at Bank
Cash in Hand
Current Liabilities
Creditors of equipment
Creditors
Net Current Assets
Net Assets
Capital
128,800
62,900
191,700
61,200
48,700
67,600
3,500
187,000
13,800
31,000
(45,400)
141,000
333,300
333,300
20
Introduction to Accounting
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.
Capital a/c
Cash at
bank a/c
2002
2002
30/6 Bal c/f 50,000 1/6
Van
12,000
Bank
50,000
2002
1/6
Capital
12/6
12/6Cash
Cash
2002
50,000 2/6
8,000
1,000
19/6Motor
ltd 8,000
50,000
50,000
30/6 Fixtures
3,000
30/6 Bal c/f 34,000
58,000
58,000
2002
2/6
12,000
8/6
8,000
2002
5/6
4,000
15/6
Motor Van
Bank
Super
M 30/6
20,000
20000
Fixtures
2002
young
Cash
Bal
c/f
20000
Lesson One
600
30/6
3000
21
Bank
Bal c/f
7,600
7,600
2002
19/6
8000
7,600
2002
30/6
2002
12/6
1,000
21/6 J. Marcus
2002
30/6
8000
8000
Cash in hand
2002
Cash 15/6
600
25/6 Bank
10000 30/6 Bal c/f
11000
J. Marcus - Loaner
2002
c\f 21/6 Cash
10000
4000
4000
Cash
800
2400
11000
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
34,000
2,400
36,400
7,600
20,000
27,600
22
Current Liabilities
Creditors others
Net Current Assets
Net Assets
Capital
Non Current Liabilities
Loan J Jarvis
Introduction to Accounting
(4,000)
32,400
60,000
50,000
10,000
60,000
Let us now consider other transactions that take place in a business and the
accounting entries to be made.
Accounting for sales, purchases, incomes and expenses.
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.
For a credit sale:
i.
Debit debtors/ Accounts receivable account.
ii.
Credit sales account.
A new account for sales is opened and credited with cash or credit sales.
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.
Lesson One
23
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.
24
Introduction to Accounting
INCOME
Credit
INCOMES/EXPENSES
EXPENC
Credit cash book
/bank/in hand
Returns Inwards and Returns Outwards.
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.
Returns Outwards: These are goods returned to suppliers/creditors. They may be
for cash purchases or for credit purchases. For cash purchases a cash refund
given to the firm by the supplier,
i.
Debit the cashbook (cash at bank/hand).
ii.
Credit returns outwards.
For credit purchases and no refund has been made:
i.
Debit creditors.
ii.
Credit returns outwards.
Lesson One
25
Inwards
Credit
Credit debtors
Debit cash
Returns
Cash
Outwards
Credit returns
outwards
Debit creditors
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 months wages by cash 117.
31
The proprietor took cash for himself 44.
Example
2002
1/5
2,000
Bank a/c
2002
Capital 3/5Furn&
150
24/5
300
fitting
Motor
vehicle
26
Introduction to Accounting
31/5
1,555
21/5
5
Bal
c/f
Rent
2,005
31/5
2,000
Bal
2,005
Capital a/c
c/f 1/5 Bank
2,000
Purchases a/c
2002
Rooks
2002
2/5M
175
6/5
114
Scot 31/5
289
289
Bal
289
Returns
in 2/5
175
Bal
c/f
2002
18/5
23
31/5
152
c/f
Purchases
175
175
3/5 Bank
150
31/5 Bal c/f 150
Sales a/c
2002
2002
352 5/5
275
150
150
23/5
U. Foot 77
352
352
Lesson One
27
5/5 Sales
275
10/5 Rent
15
12/5 Stationery 27
6/5Purchases 114
30/5 Wages
117
31/5 Bal c/f 116
275
P Scot a/c
2002
31/5
275
Bal c/f
2002
114
114
114
Expenses Rent a/c
2002
11/5 Bal c/f
27
2002
15 10/5 Cash
2002
15
12/5 Cash
27
2002
31/5Bal c/f
27
27
28
Introduction to Accounting
2002
23
18/5
2002
2002
M Rooks
23/5 Sales
77
31/5 Bal c/f
300
23
77
21/5
2002
117
2002
117
31/5
2002
Expenses
Drawings a/c
2002
30/5 Cash
c/f 44
Bal c/f
Wages
31/5 Cash
44
a/c
200
31/5
Bal
Lesson One
29
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.
30
Introduction to Accounting
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 creditors 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.
Debit: Creditor A Ltd
Credit: Discounts Received
Creditor
A.
Ltd
a/c
Purchases a/c
2002
2002
2002
Bank
950
1,000
Discount received 50
1000
Purchases
2002
200
Bal c/f
50
Ltd
950
A Ltd
2002
1,000
A Ltd
1000
2002
50
Bank a/c
2002
A
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.
2002
Sales
2002
1,000 Bank
950
2002
Discount
Debtor 1,000
Sales a/c
2002
50
Lesson One
31
1,000
2002
Debtor
1,000
50
2002
Debtor
Bank a/c
950
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.
The trial balance in example 1.8 would be extracted as follows:
Name
Trial balance as at 31 May
2002
Debit Credi
t
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
23
Outwards
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.
32
Introduction to Accounting
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:
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
2003
2003
2003
2003
1,500
49
3/3 Rent
4/3
20/3
Bank
Repairs
18
28/3
Purchases
125
30/3
exp.
Motor
15
31/3
Bal c/d
363
1,549
1,549
Purchases a/c
Lesson One
33
2003
2003
Creditors A Cliks ac
2003
2003
421
Purchases
421
17 2/3
296
27/3 Bank
279
296
296
Rent Expenses a/c
2003
3/3
15
2003
Cash
28
31/3
Bank a/c
2003
Bal c/d
28
2003
4/3 Cash
1,000
5/3 Stationery
27/3 A. Hanson
279
29/3 Motor van
395
31/3
Bal c/d
311
1,000
1,000
Debtor J Simpson a/c
Sales
a/c
2003
3/3
Sales
JSimpson
54
2003
54
22/3 Returns in
31/3 Bal c/d
2003
14
` 2002
31/3
40
Bal c/d
132
5/3
11/3 Sales
49
17/3 P Lutz
29
54
54
132
132
34
Introduction to Accounting
Stationery a/c
2003
15
31/3 Bal c/d
2003
7/3
Bank
2003
31/3
Cliks
Bal c/d
17 14/3
17
P Lutz Debtor a
Building repairs -
expenses
2003
2003
2003
20/3
Cash
2003
18
31/3 Bal
Returns - Inwards
2003
2003
2003
14
29/3 Bank
2003
31/3 A. Webster
2003
Fixtures
2003
Motor vehicle
2003
Motor expenses
2003
120
2003
30/3 Cash
15
Lesson One
35
36
Introduction to Accounting
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
Debit
()
Capital
Purchases
Cash in hand
Bank
Rent expense
Sales
Fixtures
Debtor J Simpson
Debtor P Lutz
Motor vehicle
Creditors
Motor expenses
Returns inwards
Creditors others R
West
Stationery
Returns outwards
Building repairs
Credit
()
1500
421
363
311
28
132
120
40
29
395
15
14
120
15
18
1769
17
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.
Lesson One
37
Answer
200
3
31/
5
200
3
12/
5
200
3
12/
5
Bal
c/d
Creditor R Kelly
200
3
Ban
54 2/5 Purcha
k
ses
Creditor J Role
Ban
k
200
3
31/5 Bal
c/d
200
3
4/5
21/
5
Capital
200
3
250
1/5 Cash
25 2/5
Purcha
ses
Creditor I Sims
200
3
64 2/5 Purcha
ses
Debtor B Long
200
3
Sale
62 31/ Bal c/d
s
5
Sale
67
s
129
250
54
25
64
129
.
129
200
3
1/5
200
3
31/
5
200
3
31/
5
200
3
4/5
200
3
4/5
Cash in Hand
200
3
Capit 250 6/5 Rent
al
15/ Carria
5
ge
. 31/ Bal c/d
5
250
12
23
21
5
25
0
Creditor P Combs
200
3
Bal c/d 130 2/5
Purcha
ses
. 18/5 Purcha
ses
130
Creditor D Mobile
200
3
Bal
186 2/5 Purcha
c/d
ses
. 18/ Purcha
5
ses
186
Debtor C. Blares
200
3
Sales 43
4/5 Bank
Debtor F Smith
200
3
Sales
176 10/ Bank
5
. 31/ Bal c/d
5
176
87
4
3
13
0
76
11
0
18
6
43
15
0
2
6
17
6
38
Introduction to Accounting
Sales
Purchases
200
3
200
3
2/5
R Kelly
2/5
P Combs
54 31/
5
87
2/5
J Role
2/5
200
3
45
9
31/
5
200
3
348
4/5
43
4/5
25
4/5
F Skin
D Mobile
76
4/5
B Long
17
6
67
2/5
L Sims
64
18/5
P Combs
43
18/5
D.
Mobile
10
0
45
9
10/5
C
Blanes
H
F
Skin
.
459
Cash
Bank
2003
15/5
J Role
25
15 12/5
0
31/5
R
Kelly
Rent
54
Bal
c/d
9
6
19
3
31/5
31/
5
Carriage Expenses
43 12/5
.
19
3
19x
6
6/5
62
.
34
8
Bank
200
3
200
3
Bal
c/f
C
Blanes
F Long
9/5
Bal
c/d
Rent
19x
6
12 31/
5
1
8
18
Bal
c/d
30
.
200
3
Cash
23 31/
5
Bal c/d
23
Lesson One
39
3
0
30
Debit
215
Credit
250
-
130
186
64
-
459
348
129
26
96
30
978
978
40
Introduction to Accounting
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
Motor van
Fixtures and fittings
Provision for depreciation on motor van (credit)
Provisions for depreciation on fixtures& fittings
(credit)
Inventory at cost
Receivables for credit sales:
Brown
Blue
Stripe
Cash at bank
Cash in hand
Payables for supplies:
Live
Negative
Earth
Amount owing for electricity
Local taxes paid in advance
$
1,808
1,200
806
720
250
366
160
40
20
220
672
5
143
80
73
296
45
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
Januar Februa Marc
y
ry
h
$
$
$
Suppliers invoices:
Live
468
570
390
Negative
87
103
Earth
692
187
Capital introduced
500
Bankings of cash (from cash sales)
908
940
766
Expenditure out of cash sales before
banking:
Withdrawals on account
130
120
160
19X1
April
$
602
64
1,031
150
Lesson One
41
Stationery
Travelling
Petrol and van repairs
Sundry expenses
Postage
Cleaners wages
Goods invoiced to credit customers:
Brown
Blue
Stripe
Cheque payments (other than those to
suppliers):
Telephone
Electricity
Local taxes
Motor van (1 February 19X1)
Unbanked at the end of April
12
6
19
5
12
60
14
10
22
4
10
60
26
11
37
7
15
65
21
13
26
3
19
75
66
120
22
140
10
130
12
180
44
38
20
48
40
62
-
49
47
800
-
59
20
220
-
66
106
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
Non Current Assets
Premises
Plant
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities:
Creditors
25,000.0
0
12,000.0
0
37,000.0
0
11,000.00
10,000.00
5,000.00
3,000.00
29,000.00
(12,000.0
17,000.0
42
Introduction to Accounting
0)
Capital
0
54,000.0
0
34,000.0
0
20,000.0
0
54,000.00
During the year to 31 December 2001 the following total transactions occurred:
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)
Non Current
Assets
01.01.200
1
31.12.200
1
Lesson One
Property
Machinery
43
20,000.00
6,000.00
26,000.00
Current Assets:
Debtors
Cash
Current
Liabilities:
Creditors
Overdraft
Net Current
Liabilities
Net Assets
20,000.00
9,000.00
29,000.00
8,000.00
4,000.00
1,000.00
5,000.00
1,500.00
9,500.00
5,000.00
6,000.00
3,000.00
9,000.00
11,000.00
(6,000.00)
12,000.00
(2,500.00)
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
Purchases
Office expenses
Insurance
Wages
Rates
Heating and
Lighting
Telephone
Discounts allowed
Opening stock
47,600.
00
22,850.
00
1,900.0
0
700.00
7,900.0
0
2,800.0
0
1,200.0
0
650.00
1,150.0
0
500.00
44
Introduction to Accounting
Returns inwards
Returns outwards
Premises
Plant and
Machinery
Motor Vehicles
Debtors
Bank balance
Creditors
Loan-long term
loan
Capital
Drawings for the
year
Closing stock
200.00
150.00
40,000.
00
5,000.0
0
12,000.
00
12,500.
00
7,800.0
0
3,400.0
0
10,000.
00
60,000.
00
4,000.0
0
550.00
Required:
Construct a trial balance, from the above list of balances.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK
Acknowledgement
45
LESSON TWO
FINAL ACCOUNTS
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of
goods/stocks) of the
business and tries to determine the gross profit for the
relevant financial period.
The gross profit is then taken up in the profit and
loss account as part of the income.
Format for the trading account:
Name
Trading Account for the year ended 31 Dec.
Sales
Less: Returns Inwards
x
(x)
x
x
x
x
x
x
x
x
(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
Returns outwards
Returns inwards
Sales
Purchases
Stock of goods: 31 December 19x7
6,700
4,950
8,900
387,420
333,330
74,890
FINANCIAL ACCOUNTING 1
46
Final Accounts
Springs
Trading Account for the year ended 31 Dec 2002
Sales
Less: Returns Inwards
387,420
8,900
378,520
333,330
6,700
340,030
4,950
335,080
74,890
260,190
The following details for the year ended 31 March 2003 are available. Draw up the
trading account of R Sings for that year.
16,523
1,372
2,896
53,397
1,122
94,600
14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
Sales
Less: Returns Inwards
94,600
(1,372)
93,228
16,523
53,397
1,122
54,519
Lesson Two
47
2,896
51,623
68,146
18,504
43,586
Sales
Less: Returns Inwards
x
x
x
x
x
x
x
x
x
(x)
x
x
x
x
x
x
Less: Expenses
Carriage Outwards
Discounts allowed
Postage & stationary
Salaries & wages
Rent paid
Insurance & rates
Bank charges
Other expenses
Net profit/ (loss)
x
x
x
x
x
x
x
x
(x)
x/(x)
48
Final Accounts
Lesson Two
49
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
332,890
50
Final Accounts
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
186,000
(2,050)
183,950
Sales
Less: Returns Inwards
Less: Cost of sales
Opening stock
Purchases
Add: Carriage inwards
23,680
118,740
3,100
12,1840
3,220
118,620
142,300
29,460
(11,2840)
71,110
Less Expenses
Salaries & wages
Carriage outwards
Rent
Insurance
Motor expenses
Office expenses
Lighting & heating
General expenses
Net Profit
38,620
2,000
3,040
780
6,640
2,160
1,660
3,140
(58,040)
13,070
Lesson Two
51
x
x
x
x
x
Current Assets
Stock/inventories
Debtors trade
Debtors others
Cash at bank
Cash at hand
Current Liabilities
Bank overdraft
Creditors trade
Creditors others
Net current assets
Net Assets
x
x
x
x
x
x
x
x
x
(x)
x
x
Capital
Add: Net profit
x
x
x
Less: Drawings
(x)
x
x
x
52
Final Accounts
P Boones
Balance Sheet as at 30 Sept 2002
50,000
3,500
18,000
71,500
Current Assets
Stock
Debtors
Cash at bank
29,460
38,960
4,820
73,240
Current Liabilities
Creditors
Net Current Assets
Net Assets
Capital
Add: Net Profit
Less: Drawings
(17,310)
55,930
127,430
126,360
13,070
139,430
(12,000)
127,430
`
D) BOOKS OF PRIME ENTRY
The diagram below shows the components of an accounting system for a firm that
carries out trading activities from the source documents that record the evidence
of transactions, where the documents are recorded and the postings to made.
Lesson Two
53
Source
Final
Documents
Accounts
Sales
Invoice
The
Books of
The
Prime entry
Ledger Balances
Recorded Sales
Journal
List of the
Sales
Ledger
THE
Trading
Account
Purchas
e
Invoice
Recorded
Purchase
s
Journal
TRIAL
Credit
note
Recorded
The
Return
Inwards
Journal
Purchases
Ledger
Profit
Debit
Loss
Note
Account
Other
Correspo
Balance
ndence
BALANC
E
Recorded
Receipt
s
Cheque
s
Petty
&
Return
Outwards
journal
Loss
The
cashbook
&
Recorded
Petty
cashbook
General
Ledger
Recorded General
Journal
Balance Sheet
54
Final Accounts
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 Two
55
Sales invoice
Purchases invoice
Credit note
Debit note
Receipts, cheques and petty cash vouchers
Other correspondences.
56
Final Accounts
The
Debtor
The
Creditor
(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:
i.
ii.
iii.
iv.
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 firms 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 firms bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments
(payments of small value in the firm which require cash payments e.g. fuel, busfare, office snacks), which is approved by a senior manager and filed for record
purpose. It shows:
Lesson Two
57
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.
(vii) Other correspondence
These include information received within or outside the firm that has a
financial implication in the accounts.
Examples are:
i. Letters from the firms lawyers about a debtors balance.
ii. Hire-purchase/credit sale or credit purchase agreements that relate to
non-current assets.
iii. Memorandum from a senior manager requiring changes to be made in
the accounts.
iv. Bank statement from the bank, e.g. bank charges.
BOOKS OF PRIME ENTRY
They record the source documents.
Sales Journal
It is also called a Sales Day Book. It records all the sales invoices issued by the
firm during a particular financial period. The format is as follows (with simple
records of invoice).
SALES JOURNAL
Date 19x8
1st March
3rd March
5th March
Total
Detail
S. Spikes
T. Binns
L.Thompson
Page 5
Folio
Amount
SL.10
SL.19
200.00
350.00
SL,8
150.00
700.00
The individual entries in the sales journal are posted to the debit side of the
debtors accounts in the sales ledger and the total is posted on the credit side of
the sales account in the general ledger.
58
Final Accounts
S Spikes
19x
8
Sale 200
s
General Ledger
19x
8
Sales Ledger
19x
8
3/3
19x
8
3/3
Sal
es
General Account
19x
8
5/3
Credit sales
for period
700
General Ledger
T Binus
19x
8
350
L Thompson
19x
8
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
3
6
10
17
19
27
31
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
sales
sales
sales
sales
sales
sales
sales
sales
to
to
to
to
to
to
to
to
J Gordon
G Abrahams
V White
J Gordon
F Williams
U Richards
V Wood
L Simes
1,870
1,660
120
550
2,890
660
280
780
Lesson Two
59
Answer
SALES JOURNAL
Date (2003)
1/3
3/3
6/3
10/3
17/3
19/3
27/3
31/3
Page 10
Detail
Folio
J. Gordon
G. Abrahams
V. White
J. Gordon
F. Williams
U. Richards
V. Wood
L. Simes
Amount
1,870.00
1,660.00
120.00
550.00
2,890.00
660.00
280.00
780.00
8,810.00
Sales Ledger
J Gordon
20
03
157
0
550
20
03
1/3
10/
3
200
3
3/3
200
3
6/3
G Abrahams
200
3
Sal
1,6
es
60
Sal
es
U White
200
3
120
F Williams
20
03
19/
3
200
3
27/
3
200
3
31/
3
Sal
es
Sal
es
Sal
es
U Richards
20
03
660
V Wood
200
3
280
L Simes
200
3
750
Sales a/c
60
Final Accounts
200
3
200
3
17/
3
Sal
es
200
3
200
3
289
0
Cre
dit
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).
Date 19x6
1/5
2/5
PURCHASES JOURNAL
Description/Detail
C. Kelly
L. Smailes
Page 15
Amount
Folio
PL. 10
400
PL. 20
TOTAL
350
750
The individual entries in the purchases journal are posted to the credit side of
the creditors 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:
19x
6
19x
6
C Kelly
19x
6
1/5 Purchas
es
L Smailes
19x
6
2/5 Purchas
es
40
0
25
0
19x
6
31/
5
Purchases a/c
19x
6
Sundry
75
Credito
0
rs
Lesson Two
61
It is also called the returns inwards day-book. It records all the credit notes raised
by the firm and sent to customers during a particular financial period, it has the
following format.
RETURNS INWARDS JOURNAL
Date
1 March
2 March
5 March
Detail
Folio
S. Spikes
C. Kelly
T. Bills
SL. 22
TOTAL
Pg 10
Amount
20
SL. 18
SL. 9
18
15
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.
Sales Ledger
General Ledger
S. Spikes a/c
1/
3
Returns
In
20
C Kelly a/c
2/
3
Returns
In
18
31/
3
Sundry
53
Debtors
T. Bills a/c
5/
3
Retur
ns In
15
62
Final Accounts
Lesson Two
63
DETAILS
FOLIO
2 May
3 May
4 May
L. Thompson
M. Hyatt
T. Bills
PL. 10
AMOUNT ()
PL. 15
12
PL. 7
TOTAL
14
19
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.
Purchases Ledger
General Ledger
L. Thompson a/c
Outwards a/c
`
Returns
31/5
35
M. Hyatt a/c
T. Bills a/c
19
64
The following example 2.5 shows how the four journals are used.
Final Accounts
Lesson Two
65
3
5
8
12
14
20
24
31
31
DETAIL
AMOUNT ()
3 July
3 July
3 July
8 July
8 July
8 July
20 July
20 July
20 July
E. Rigby
E. Phillips
F. Thompson
A. Green
H. George
J. Ferguson
E. Phillips
F. Powell
E. Lee
510
246
356
307
250
185
188
310
420
TOTAL
2,772
Sales Ledger
19x
5
3/7
Sal
es
E Rigby
19x
5
51 3/7 Retur
0
ns
Inwar
ds
30
19x
5
3/7
20/
7
E Phillips
19x5
Sal
es
246 14/7
Returns
18
Sal
es
188 31/7
Retuns
in
27
66
Final Accounts
J. Ferguson
19x
5
3/7
F. Thompson
19x
5
Sal
35 14/ Retur
es
6 7
ns in
19x
5
8/7
Sal
es
Green
19x
5
30
7
Sal
es
H George
19x
5
25
0
19x
5
8/7
22
19x
5
8/7
19x
5
20/
7
19x
5
20/
7
19x5
Sal
es
185
F. Powell
19x5
Sal
es
310
Sal
es
E Lee
19x5
420
PURCHASES JOURNAL
DATE
1 July
1 July
1 July
5 July
5 July
5 July
5 July
24 July
24 July
DETAIL
K. Hill
M. Norman
N. Senior
R. Mortan
J. Cook
D. Edwards
C. Davies
C. Ferguson
K. Ennevor
Total
Purchases Ledger
AMOUNT ()
380
500
106
200
180
410
66
550
900
3,292
Lesson Two
67
N. Senior
1995
1995
12/7
Returns out
16
Returns out
30
Returns out
13
1/7
500
Purchases
5/7
Purchases
180
C. Davies
1995
1995
31/7
22
J. Cook
1995
1995
31/7
Purchases
M. Norman
1995
1995
30/7
1/7
Returns out
11
5/7
Purchases
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
68
Final Accounts
K. Ennevor
1995
1995
24/7
Purchases
900
DETAILS
E. Phillips
F. Thompson
E. Phillips
E. Rigby
AMOUNT
18
22
27
30
97
July
July
July
July
M. Norman
N. Senior
J. Cook
C. Davies
30
16
13
11
70
General Ledger
Sales a/c
1995
1995
1995
Purchases a/c
1995
1995
Lesson Two
69
1995
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.
There are two types of cashbooks:
i.
ii.
Cash in hand cashbook, which records the cash transactions in the firm or
business.
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
Date Details
Bank
Cash
()
Bank
()
Date
Details
()
Cash
()
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:
70
Final Accounts
Date Details
Bank
Cash
Discount Cash
Allowed
()
Bank
Date Details
()
Discounts
Received
()
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
May
1
2
3
4
5
7
9
11
15
16
19
22
26
30
31
Cash Book
Capital
F Lake
Cash
1000
Bank
5000
Cash
Bank
Lesson Two
(loan)
Sales
N Miller
Sales
G Moores
Cash C
Sales
Bank C
Capital
F. Lake
(Loan)
Sales
N Miller
Sales
G Moores
71
980
620
530
650
Cash
1000
650
Cash C
Sales
Bank C
363
0
Cash Book
Bank
Rent
5000 B McKenzie
980 B Burton
620 Bank C
530 F Lake
(loan)
Motor
Expenses
500 Cash C
660 Wages
1000 Balances c/d
7310
Cash
100
Bank
650
220
500
1000
120
100
970
1840
3630
4540
7310
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
per
cent cash discount: N Black 360; P Towers 480; C Rowse
300.
10
Paid motor expenses in cash 44.
72
Final Accounts
12
15
18
21
24
25
29
31
Lesson Two
73
Answer
Disct
Bank
Bal b/d
R Burton
E Taylor
R Harris
J Cotton:
loan
H Hankins
C Winston
R Wison &
Son
H Winter
Bank
Commission
Cash
230
7
11
15
3
13
17
23
350
89
580
Cash Book
Bank
Disct
4756
133
209
285
1000
Rent
N Black
P Towers
C Rowse
Motor
expenses
74 Wages
247 Cash
323 Drawings
3/1
Sundry
Debtors
Bank
120
351
468
780
9
12
20
44
160
350
120
437 T Briers
Fixtures
88 Balances c/d
7552
Discounts Received
3/1 Sundry
Creditors
Cash
133
48
123
580
650
4833
7552
48
Discounts Allowed
89
Expenses
The
74
Final Accounts
Amount
Postage Stationery
Traveling
Ledger
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.
The Imprest system
This system of accounting operates on a simple principle that the cashier is
refunded the exact amount spent on the expenses during a particular financial
period. At the beginning of each period, a cash float is agreed upon and the
cashier is given this amount to start with. Once the cashier makes payments for
the period he will get a total of all the payments made against which he will claim
a reimbursement of the same amount that will bring back the amount to the cash
float at the beginning of the period.
This is demonstrated as follows:
1,000
(720)
280
720
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
2nd March paid bus fare for
2nd March cleaning materials
3rd March bought fuel
3rd March cleaning wages
4th March bought stamps
4th March paid L. Thompson (creditor)
80
120
240
150
300
200
400
Lesson Two
75
76
Final Accounts
Answer
Receipt
s
Date
()
2000 1/3
1/3
2/3
2/3
3/3
3/3
4/3
4/3
5/3
1640 5/3
5/3
3640
2000 6/3
Detail
Payment
s
Amount
()
Bal b/d
Stamps
Bus Fare
Cleaning
Materials
Fuel
Cleaning
wages
Stamps
L Thompson
Fuel
Bal c/d
Expenses
Postag
e ()
80
120
240
Cleani
ng ()
THE
LEDGE
R
Travel
()
()
80
120
240
150
300
150
300
200
400
150
1640
200
.
280
.
540
150
420
400
.
400
2000
3640
Bal b/d
Detail
Account to be debited
Account to be credited
(Narrative)
Debit
Credit
x
x
Lesson Two
77
78
Final Accounts
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 Two
79
a. Answer
GENERAL JOURNAL
Date (19x5)
1/5
Detail
Debit ()
Credit ()
Motor Vehicle
6,790
Motors Ltd
6,790
Motor vehicle bought on credit
from Motors Ltd
_________________________________________________________________________
3/5
Bad debts
34
N Smart - Debtors
34
Amount due from N Smart
written off as bad
_________________________________________________________________________
8/5
Wood offices
490
Furniture
490
Office Furniture returned to
Wood offices
_________________________________________________________________________
12/5
Bad debts
111
W. Hayes
111
Amount owed now written off
as bad debt.
________________________________________________________________________
14/5
Drawing for goods
45
Purchases
45
Goods taken from the
business for personal use.
_________________________________________________________________________
8/5
Drawings
76
Insurance Expenses
76
Insurance relating to private house
now transferred to drawings
_________________________________________________________________________
28/5
Machinery
980
Xerox Machines
980
Machinery bought from
Xerox Machines
80
Final Accounts
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
IMPERSONA
L
ACCOUNTS
PERSONAL
ACCOUNS
REAL
ACCOUNTS
DEBTORS
(for
goods)
NORMAL
a/cs
CREDITORS
(For goods)
Other
Non-current
Liabilities
assets
Other
Inventories/
Assets
Stocks
Income
Expenses
Lesson Two
Capital
81
82
Final Accounts
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.
During May the following transactions took place.
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)
b)
c)
d)
Lesson Two
83
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages
bookshop.
Endpages Bookshop
Trial balance as at 31 December 2002
Dr
Sales
Purchases
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising
Telephone
Rates
Discount allowed
Discount received
Rent received
Returns inwards
Returns outwards
Stock at 01 Jan 2001
Premises
Stock as at 31 Dec
2001
Fixtures and fittings
Debtors and Creditors
Cash in Hand
Cash in bank
Capital
Drawings
Stock as at 31 Dec
2001
Cr
151,500.00
103,500.00
18,700.00
2,500.00
1,100.00
600.00
2,400.00
3,500.00
800.00
3,000.00
100.00
200.00
2,000.00
1,500.00
3,500.00
46,000.00
80,000.00
41,000.00
5,000.00
4,800.00
200.00
7,500.00
12,000.00
11,000.00
14,000.00
________
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)
84
Final Accounts
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
1,816,000
Cr
9,234,000
6,918,500
42,000
157,000
64,000
1,024,000
301,500
62,400
21,600
40,500
31,800
2,000,000
1,432,000
816,000
285,000
297,000
11,500
762,000
5,088,800
152,028
152,028
Lesson Two
85
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
3,095,500
Capital
842,000
Drawings
311,500
Cash at bank
29,500
Cash in hand
1,230,000
Debtors
937,000
Creditors
2,391,000
Stock 30 September
410,000
2001
625,000
Motor van
1,309,000
Office equipment
9,210,000
Sales
55,000
Purchases
21,500
Returns inwards
30,700
Carriage inwards
30,900
Returns outwards
163,000
Carriage outwards
297,000
Motor expenses
40,500
Rent
1,281,000
Telephone charges
49,200
Wages and salaries
137,700
Insurance
Office expenses
28,400
Sundry expenses
17,153,200
17,153,200
86
Final Accounts
QUESTION ONE
The books of Mr T, a trader in tea showed the following balances as at 31 March
1998:
Opening stock of tea
Purchases Tea
Salaries paid
Buildings
Cash in hand
Cash at bank
Rent, rates and council taxes
Insurance premium paid
Miscellaneous receipts
Sales
Discounts allowed
Bad debts
Building repairs
Miscellaneous expenses
Advertisement
Commission to sales manager
Furniture and fittings
Air conditioners
Sundry debtors
Sundry creditors
Loan on mortgage
Interest paid on the above
Prepaid expenses
Drawings
Bills payable (Current liability)
Bank charges
Legal charges
Motor vehicles
Travelling and conveyance
Capital
Shs.
100,000
400,000
80,000
95,000
2,000
135,000
15,000
3,000
10,000
720,000
4,750
3,250
2,900
8,700
20,000
32,400
35,000
30,000
100,000
80,000
70,000
3,000
4,000
18,000
30,000
2,000
6,000
80,000
10,000
280,000
Lesson Two
87
164,900
93,382
71,518
During the year ended 30th June 1998 purchases and sales of lorries were as
follows:
88
Final Accounts
Purchases:
1997
July 30th
Oct 1st
1998
Feb 25th
June 24th
Sales:
Reg.No
H11
7,000
H13
9,000
H14
5,900
Purchased on:
1,592
H4
Cost (Shs)
H1
2,560
H6
H7
8,500
H12
Reg.No
Proceeds (Shs)
1997
July 30th
300
Oct 1st
1998
Mar 1st
4,600
June 25th
Cost (Shs)
850
8,000
3,648
2,700
Required:
Write up the following accounts in the books of the company for the year ended
30th June 1998:
a) The Motor lories account
b) Motor lorries provision for depreciation account
c) Motor lorries disposal account.
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader,
at 31st December 1997:
Drawings/Capital
Debtors/Creditors
Purchases/Sales
Rent and Rates
Light and heat
Salaries and wages
Bad debts
Provision for bad debts
Stock in trade 31st Dec 1996
Insurance
General Expenses
Shs
2,148
7,689
62,10
1
880
246
8,268
247
Shs.
20,27
1
5,462
81,74
2
326
9,274
172
933
Lesson Two
89
Bank balances
Motor van at cost/Provision for
depreciation
Proceeds on sale of van
Motor expenses
Freehold premises at cost
1,582
8,000
3,600
0
250
861
15,00
0
Rent received
Provision for depreciation on
buildings
750
5,000
117,4
01
117,4
01
Required:
A Trading Profit and Loss account for the year ended 31 st 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:
Three moths rental in advance;
A further charge of 2 pence per copy made during the quarter just ended.
The rental agreement began on 1st August 19X4, and the first six quarterly bills
were as follows
Bills and dates received
(Shs)
1 August 19X4
1 November 19X4
0
1,500
Total cost
2,100
3,600
90
1
1
1
1
Final Accounts
February 19X5
May 19X5
August 19X5
November 19X5
2,100
2,100
1,400
1,800
2,700
2,700
3,500
3,900
1,650
1,950
4,350
4,650
Required:
Given that Batley Printing shop ends its accounting year on 31 August,
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.
Show the entries in the ledger of the Batley Printing Shop.
QUESTION FIVE
The historical cost convention looks backwards but the going concern convention
looks forwards.
Required:
a) Explain clearly what is meant by:
Acknowledgement
91
LESSON THREE
ACCOUNTING THEORY
(a) International Accounting Standards and International Financial
Reporting Standards.
The foreword to accounting standards defines Accounting Standards as
Authoritative statements of how particular types of transaction and other events
should be reflected in financial statements. Accounting Standards are developed
to achieve comparability of financial information between and among different
organizations. International Accounting Standards (IASs) and International
Financial Reporting Standards (IFRS) are meant to apply to most organizations in
the world. IASs and IFRSs are produced by the International Accounting
Standards Board (IASB) whose objectives are:
(a) To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements and to promote their
worldwide acceptance; and
(b) To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of
financial statements.
The IASB is an affiliate of the International Federation of Accountants (IFAC)
established in 1977 which co-ordinates the Accounting profession worldwide.
Most accounting bodies of countries are members of IFAC.
The IASC develops IASs through an international process that involves the
worldwide accountancy profession, the preparers, users of financial statements
and national standard setting bodies and other interested parties.
The IASB sets up a steering committee to develop a statement of principles, an
Exposure Draft and ultimately an Accounting Standards once a new topic is
suggested. The process includes:
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.
Currently the IASB has developed about 40 IASs. Examples include:
FINANCIAL ACCOUNTING 1
92
Accounting Theory
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:
a) Use of IASs adds credibility to the financial statements as they can be
compared with others globally.
b) Facilitates communication within an enterprise that has foreign branches
or subsidiaries due to harmonized reporting by the separate entities in the
group.
c) Adds value to the financial statements incase an entity is sourcing for
foreign capital.
d) Incase an entity wishes to be quoted on the Stock Exchange Market more
so for companies.
(c)Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic
financial accounts of business enterprises. Examples of concepts include:
i)
ii)
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 companys 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.
The accruals concept (or matching concept): states that revenue and
costs must be recognized as they are earned or incurred, not as money is
Lesson Three
93
received or 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.
94
Accounting Theory
Assets
Stock (at cost, i.e. 2 x 5)
Debtors (18 x 10)
10
180
190
Liabilities
Creditors
100
90
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.
Essentially, the accruals concept states that, in computing profit, revenue
earned must be matched against the expenditure incurred in earning it.
iii)
Lesson Three
95
(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)
96
Accounting Theory
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.
Lesson Three
vii)
97
viii)
98
Accounting Theory
xi)
xii)
xiii)
Duality: Every transaction has two-fold effect in the accounts and is the
basis of double entry bookkeeping.
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:
a) The sale transaction is for a specific quantity of goods at a known price,
so that the sales value of the transaction is known for certain.
b) The sale transaction has been completed, or else it is certain that it will
be completed (e.g. in the case of long-term contract work, when the job is
Lesson Three
c)
99
well under way but not yet completed by the end of an accounting
period).
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.
100
Accounting Theory
Lesson Three
cases where there is a very high risk of the bank refusing to honour the
cheque.
101
102
Accounting Theory
II) Bases
Bases are the methods that have been developed for expressing or applying
fundamental accounting concepts to financial transactions and items. Examples
include:
Lesson Three
103
changes in the accounts. Compliance with accounting standards also helps achieve
this comparability.
The Accounting Profession in Kenya
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)
104
Accounting Theory
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) To prepare syllabuses for accountants and secretaries examinations, to
make rules with respect to examinations, to arrange and conduct
examinations and issue certificates to candidates who have satisfied
examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding
functions.
Example 3.2 PILOT PAPER OCTOBER 1991
Briefly explain the meaning and the significance of the following:
(i) Accounting concepts.
(ii) Accounting bases.
(iii)
Accounting policies.
(iv)
Accounting standards.
(Total: 20 Marks)
(Covered adequately in the text).
Lesson Three
105
4 marks
4 marks
4 marks
4 marks
106
Accounting Theory
Lesson Three
107
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:
Fundamental accounting concepts
Accounting bases
Accounting policies
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)
(b)
Neutrality
Money measurement
Accruals
Substance over form
Consistency
(15 marks)
marks)
(20
Question Three
If the information in financial statements is to be useful, regard must be had to the
following:
Materiality
Comparability
Prudence
Objectivity
Relevance
108
Accounting Theory
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 Three
109
Question Four
a)
b)
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)
d)
Acknowledgement
110
LESSON FOUR
ADJUSTMENTS TO FINAL ACCOUNTS
a) ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as
money is received or 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. Therefore all
incomes and expenses that relate to a particular financial period will be
matched together to determine the profit for the year.
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
Feb (rent 4 Jan)
Mar (rent 4 Feb)
April (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 Jun)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
22,000
FINANCIAL ACCOUNTING 1
Lesson Four
111
Year 1
Rent Income
Year 1
Jan
C/B
Feb C/B
Mar C/B
April C/B
May C/B
Jun
C/B
July C/B
Aug C/B
Sept C/B
Oct C/B
Nov C/B
Dec Accrued c/f
24,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
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.
Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not
yet been paid during that period.
An accrued expense should be charged in the P&L account and shown in the
balance sheet as a current liability.
Assume in the above example that the firm is meant to pay the rent, thus it
becomes an expense with the facts still the same i.e. 2,000 payable in arrears.
The ledger account will be as follows.
Year 1
Cashbook
Year 1
Feb (rent 4 Jan)
Mar (rent 4 Feb)
Apr (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 June)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
112
Rent Expenses
Year 1
C/B Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
31/12 Bal c/d
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct.
Nov
2,000
2,000
Year 1
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
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 firms rental income began in 1 st March and the financial year,
end is on 31st Dec. The ledger accounts will be:
15,000
15,000
15,000
1.3
1.3
15,000
1.6
15,000
1.9
1.12
Lesson Four
113
Cashbook
Year 1
1/3
Rent
1/6
Rent
1/9
Rent
1/12 Rent
Year 1
15,000
15,000
15,000
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
60,000
60,000
15,000
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:
Year 1
Cashbook
Year 1
1/3
Rent
1/6
Rent
1/9
Rent
1/12
Rent
15,000
15,000
15,000
15,000
Rent Expenses
Year 1
1/3
C/B (Mar, April, May)
1/6
C/B (June, July, Aug)
Year 1
15,000
15,000
114
1/9
1/12
P&L
(10 x 5,000) 50,000
31/12 Bal c/d (2 x 5,000) 10,000
60,000
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 Four
115
- Charge as
Current
an expense
Liability
Expense
Prepaid - Not charged
Current
In P& L
Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in
the Balance Sheet as follows:
Balance Sheet Extracts
Current Assets
Stock
Debtors
Accrued Incomes/Prepaid Expenses
Cash at bank
Cash in hand
x
x
x
x
x
x
Current Liabilities
Bank overdraft
x
Creditors
x
Prepaid Incomes/Accrued Expenses
x
X
116
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)
19X6
31/12
Cashbook
Bal c/d
b)
7220
7200
280
Insurance
19x6
Cashbook
19x7
1/1
c)
Motor Expenses
19X6
7,440
280 P/L a\c
7200
19x7
1/1 Bal b/d
19x6
4,200
31/12
31/12
4,200
Bal b/d
350
===
Stationery
P&L a/c
Bal c/d
3850
350
4200
Lesson Four
19x6
Cashbook
31/12 Bal c/d
20,400
117
19x6
18,000 1/1
Bal b/d
4,900
22,900
====
2,500
P&L a/c
22,900
====
19x7
1/1Bal b/d
4,900
118
d)
Rates
19x6
1/1
Bal b/d
Cashbook
19x6
2200
P&L
9500 31/12 Bal c/d
11,700
8800
2900
11,700
19x7
1/1
Bal b/d
e)
2900
Rent Income
19x6
1/1
Bal b/d
P&L
19x7
1/1
Bal b/d
19x6
1800
Cashbook
5800
31/12 Bal c/d
7600
5500
2100
7600
2100
Lesson Four
119
120
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 1 st year of trading (1st year of
making provision):
i.
ii.
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
Bad debts
(x)
x
Specific Provision (x)
x
General Provision (x)
x
A firm started trading in the year 1999, the balance on the debtors 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:
Debtors
1999
1999
1999
1999
Lesson Four
121
400,000
22,750 31/12
122
1999
Debtors
Bad debts
1999
40,000 31/12
P&L
40,000
Debtors
Bad debts
Specific Provision
General Provision (5%)
400,000
(40,000)
360,000
(5,000)
355,000
(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/debts
22,750
360,000
(22,750)
337,250
337,250
337,250
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
Bad debts
General Provision (5%)
500,000
(50,000)
450,000
22,500
427,500
Lesson Four
123
124
Debtors
2000
500,000 Bad Debts
______ Bal c\d
500,000
2000
Bal b\d
50,000
450,000
500,000
2000
P\L
Bal c\d
22,750
22,750
Bad Debts
2000
50,000 31\12 P& L
2000
Debtors
50,000
Incomes
Decrease in provision for D/debts
250
Expenses
Bad debts
50,000
Current Assets
Debtors
Provision for bad debts
450,000
(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
Bad debts
600,000
(50,000)
550,000
Lesson Four
125
General provision %
(27,500)
522,500
2001
Bal b\
600,000
Debtors
2001
Bad Debts
50,000
550,000
600,000
2001
Bal c\d
Bad Debts
2001
50,000 31\12 P& L
2001
Debtors
22,500
5,000
27,500
50,000
Profit And Loss Account (Extract) for the year ended 31/12/2001
Expenses
Bad debts
Increase in provision
50,000
5,000
Current Assets
Debtors
Less: Provision for Doubtful Debts
550,000
(27,500)
522,500
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:
30 April
31 August
31 October
H Gordon
D Bellamy Ltd
J Alderton
1,100
640
120
126
Lesson Four
127
Bad Debts
Debtors
70,036
2002
2002
Bad debts
1860
(1,860)
Bad debts
68,500
D/Debt (2,200)
66,300
2,200
Expenses
Bad debts
Increase in provision for Doubtful debts
1,860
2,200
Current Assets
Debtor
Less: Provision for D/Debts
8,500
(2,200)
6,300
Example 4.2
A business started trading on 1 January 2001. During the two years ended 31
December 2001 and 2002 the following debts were written off to the Bad Debts
Account on the dates stated:
31
30
28
31
30
August 2001
September 2001
February 2002
August 2002
November 2002
W Best
S Avon
L J Friend
N Kelly
A Oliver
850
1,400
1,800
600
2,500
128
i.
ii.
The Bad Debts Account and the Provision for Doubtful Debts Account for
each of the two years.
The relevant extracts from the Balance Sheet as at 31 December 2001 and
2002.
Solutions
Bad debts =
Provision
2,250
405,000
(5,500)
399,500
Bad Debts
2001
850
1400 31\12 P&L
2250
2001
31\8 W.Best
30\9 S.Aron
2250
2250
2001
31\12 Bal c\d
2001
1\1
550
2001
1\1 Bal b\d
600 31\12 P&L
600
Bal c\d
550
50
600
2001
28/2 J. Friend
31/8 N. Kelly
30/11 A. Oliver
Bad Debts
2001
1,800
600
2,500
31/13 P&L
4,900
4,900
4,900
Lesson Four
129
Expenses
Bad debts
Provision for Doubtful Debts
2,250
5,000
19x7
Bad debts
4,900
Increase in provision for D/Debts
500
Current Assets
Debtors
Less provision
405,000
(5,500)
399,500
19x7
Debtors
Less: provision
473,000
(6,000)
467,000
x
(x)
x
(x)
x
(x)
x
(x)
x
130
Incomes
Decrease in provision for D/Debts
Decrease in provision for discounts allowed
Expenses
Bad debts
Increase in provision for D/Debts
Increase in provision for discounts allowed
x
x
x
x
x
x
(x)
(x)
Debtors
30,000 Bad Debt Recovered
10,000
P\L
20,000
30,000
30,000
Bad Debt
10,000 Debtors
10,000
Lesson Four
131
Stale cheques
Insufficient funds
132
Lesson Four
133
x
x
x
x
x
x
x
(x)
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.
134
Format 2
Name:
Bank Reconciliation Statement as at 31/12
x
x
x
x
x
x
(x)
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:
Cashbook Bank
19X9
Bank charges
280
ABC (standing order)
1890 31/3 Bal C/D
40,850
550
40,020
40,850
Lesson Four
135
40,020
1,170
41,190
(6,060)
35,130
=====
The following are extracts from the cashbook and the bank statement of J
Richards. You are required to:
a) Write the cashbook up to date, and state the new balance as on 31
December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.
2002
Dec 1
Dec 7
Dec 22
Dec 31
Dec 31
Dr
Balance b/d
J Map
J Cream
115
K Wood
M Barrett
Cashbook
2002
Cr
1,740 Dec 8
A Dailey
88
Dec 15
R Mason
73
Dec 28
249
Dec 31
349
33
G Small
Balance c/d
178
1,831
2,328
2,328
Bank Statement
2002
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dr
1
7
11
20
22
31
31
Balance b/d
Cheque
A Dailey
349
R Mason
33
Cheque
Credit transfer: J Walters
Bank charges
Cr
88
Balance
1,740
1,828
1,479
1,446
73
54
22
1,519
1,573
1,551
Cashbook Bank
2002
31/12 Bal b/d
31/12 J. Walters (C/T)
1,863
2002
1,831
31/1 Bank charges
54
31/12 Bal C/D
22
136
1,885
1,885
Lesson Four
137
J. Richards
Bank Reconciliation Statement as at 31/12/2002
1,863
115
1,978
249
178
(427)
1,551
1,551
249
178
1,978
(115)
1,863
138
Required:
i.
A statement showing Ssemakulas 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
2001
Sh.
2001
Bal b/d
3,000
Receipts omitted
2,366,500
Bank charges
26,500
Standing orders
Sh.
62,000
cheques)
Payment overstated
15,000
4,500
Debtors (dishonored
329,250
329,250
44,000
1,615,000
Lesson Four
139
Sh.
Cash at bank as per the updated cashbook
Add: Unpresented cheques
Less: Uncredited cheques
Error on bank statement
Balance as per the bank statement
98,500
832,500
Sh.
1,615,000
22,500
1,637,500
(931,000)
706,500
140
Particulars
Debit
Sh.
Credit
Sh.
October 1
2
334,875
2
331,327
2
318,327
2
400,327
4
4
4
340,212
4
347,492
7
7
288,992
7
325,092
8
8
344,092
October 9
9
9
387,512
15
15
405,272
16
340,272
16
358,286
Balance b/d
Cheque no. 63
31,000
Cheque no. 67
3,548
Cheque no. 65
13,000
Deposit
82,000
365,875
Cheque no. 69
Cheque no. 68
Cheque no. 64
Deposit
Cheque no. 66
Deposit
394,327
391,212
7,000
51,500
340,492
9,000
316,092
36,100
28,000
Cheque no. 72
Cheque no. 73
Deposit
51,000
Cheque no. 74
Deposit
20,560
1,330
6,250
2,800
Cheque no. 75
Deposit
6,000
3,115
51,000
7,280
Cheque no. 70
Cheque no. 71
Deposit
Balance
Sh.
65,000
18,014
342,762
336,512
384,712
Lesson Four
141
17
392,786
19
384,286
19
427,036
21
21
412,120
21
21
401,620
21
410,620
23
394,380
23
457,380
26
455,880
26
26
527,130
28
491,630
28
481,230
28
454,230
28
431,730
28
444,755
31
31
472,055
Deposit
34,500
Cheque no. 76
8,500
Deposit
42,750
Cheque no. 79
Cheque no. 77
Cheque no. 78
Cheque no. 81
6,500
Deposit
9,000
2,410
12,506
424,626
4,000
408,120
Cheque no. 82
16,240
Deposit
63,000
Cheque no. 84
1,500
Dividends
Deposit
8,750
62,500
Cheque no. 88
Standing order
464,630
35,500
10,400
(Insurance)
Cheque no. 85
27,000
Cheque no. 87
22,500
Deposit
13,025
Service charge
Deposit
750
28,050
444,005
Balance b/d
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
bank
bank
bank
bank
bank
bank
bank
365,875
7,280
36,100
28,000
51,000
20,560
18,014
34,500
October 1
1
1
2
4
5
5
7
Credit
Sh.
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
no.
no.
no.
no.
no.
no.
no.
no.
65 13,000
66
9,000
67
3,548
68
3,115
69
6,000
70
7,000
71 51,500
72
1,330
142
17
19
19
22
24
27
28
29
31
Deposited
Deposited
Deposited
Deposited
Deposited
Deposited
Deposited
Deposited
Deposited
at
at
at
at
at
at
at
at
at
bank
bank
bank
bank
bank
bank
bank
bank
bank
42,750
15,700
9,000
36,000
26,500
13,025
28,050
171,010
31,525
22
23
26
28
28
28
28
30
31
31
31
934,889
8
Cheque no. 73
6,250
10 Cheque no. 74
2,800
11 Cheque no. 75 65,000
15 Cheque no. 76
5,800
18 Cheque no. 77 12,506
19 Cheque no. 78
4,000
19 Cheque no. 79
2,410
19 Cheque no. 80 3,860
19 Cheque no. 81
6,500
Cheque no. 82 16,240
Cheque no. 815,000
Cheque no. 84
1,500
Cheque no. 85 27,000
Cheque no. 86 10,520
Cheque no. 87 22,500
Cheque no. 88 53,500
Cheque no. 89 2,500
Cheque no. 90 64,529
Cheque no. 91 15,500
Balance c/d 502,481
934,889
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 Four
143
No 96 Q4
CASHBOOK (ADJUSTED)
1996
31.10 Bal b/d
10,400
Dividends
750
Error on deposit
15,700
Error on cheque 88
538,381
565,231
Sh.
1996
502,481
8,750
Sh.
Standing order (insurance)
Service charge
36,000
18,000
565,231
Bal c/d
Sh.
365,875
31,000
51,000
82,000
447,875
(82,000)
365,875
Sh.
538,381
3,860
15,000
10,520
2,500
64,529
15,500
27,000
138,909
677,290
171,010
31,525
2,700
(205,235)
472,055
144
Lesson Four
h)
i)
j)
k)
l)
145
Revenue expenditure
Revenue expenditure
Capital expenditure
Revenue expenditure
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.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of
depreciation to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting
practice, accounting standards and suit the firms non-current assets. There are 2
main methods of estimating depreciation and 5 others that will apply in a firms
situation.
The main methods are: Straight-line method and Reducing Balance method. The
other 5 methods include:
146
i.
ii.
iii.
iv.
v.
Lesson Four
147
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:
Depreciation for year
20,000
100,000 8
= 10,000 per
year.
Cost of Asset Residual Value
Estimated useful life of asset.
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.
Estimated Useful Life
The period the asset is expected to be used in the firm.
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
148
Lesson Four
149
Year 1
Cost
Depreciation 20% of 100,000
Balance to YR 2
80,000
(16,000)
P&L YR 2
64,000
Year 3
Depreciation 20 % of 64,000
Balance to YR 4
P&L YR 1
80,000
Year 2
Depreciation 20% of 80,000
Balance to YR 3
100,000
(20,000)
64,000
(12,800)
P&L YR 3
51,200
Cashbook 100,000
31/12 Bal c/d
P&L
10,000
100,000
150
Depreciation:
Buildings
x
Plant and machinery
Furniture, Fixtures and Fittings
Motor vehicles
10,000
x
x
Cost
Land
x
Buildings
x
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles
x
Total
Depreciation ()
(x)
x
x
x
x
x
(x)
(x)
(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 months ownership needs one months
depreciation.
2002
2002
1/1
Cashbook
1/7
Cashbook
38,000
2002
24,000
14,000
31/12
38,000
Bal c/d
38,000
Lesson Four
151
24,000 x 20 x 12
100 12
= 1,400 )
152
2002
6,200
31/12
P&L
6,200
Depreciation:
Motor vans 6200
Cost
38,000
Total
Depreciation
(6200)
NBV
31,800
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31
December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999 1 January
2000 1 July
1 October
2002 1 April
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 Four
153
Plant a/c
199
8000
31/12
1999
1/1
Cashbook
2000
1/1
Bal b/d
1/7
Cashbook
1/10 Cashbook
Bal c/d
2000
8000
10,000
6,000
24,000
2001
1/1
Bal b/d
24,000
2002
1/1
Bal b/d
1/4
Cashbook
8000
31/12
2001
24,000
Bal c/d
31/12
2002
24,000
2,000 31/12
26,000
24,000
24,000
Bal c/d
Bal c/d
26,000
26,000
800
2000
10,000 x 10/100 x 6/12
500
150
=
800
1,450
2001
24,000 x 10/100 x 12/12
2400
2002
24,000 x 10/100 x 12/12
2400
150
2,250
Accumulated Depreciation
800
2,250
4,650
7,200
154
1999
31/12 Bal c/d
2000
2000
1/1
Bal b/d
2,250
P&L
2,250
2001
800
1,450
2,250
2001
1/1
Bal b/d
4,650
P&L
4650
2002
2,250
2,400
4650
2002
1/1
Bal b/d
7,200
P&L
7,200
4,650
2,550
7,200
Cost
Total
Depreciation
NBV
1999
Motor vans
8,000
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
(800)
7,200
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.
Lesson Four
155
156
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:
Debit asset disposal a/c
Credit P&L a/c
With the balance in the account.
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.
Bal b/d
Disposals
Cashbook
1,000
Motor vehicle
P&L
a/c
1,000
Provision for depreciation
100
Motor vehicle
300
1,100
1,100
JOURNAL ENTRIES
800
1,000
800
800
500
300
200
Lesson Four
157
100
100
In case of a loss,
Debit P&L a/c
Credit asset disposal a/c
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.
1999 Bought plant costing 900 on 1 January.
Bought plant costing 600 on 1 October.
2001 Bought plant costing 550 on 1 July.
2002 Sold plant which had been bought for 900 on 1 January 1999 for the
sum of
275 on 30 September 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
1999
1/1
Cashbook
1/10 Cashbook
900
600
1,500
2000
1/1
Bal b/d
1,500
2001
1/1
Bal b/d
1/7
Cashbook
2,050
Plant a/c
1999
2001
1,500
550 31/12
1,500
1,500
31/12
Bal c/d
Bal c/d
158
2,050
2002
1/1
Bal b/d
900
2,050
2002
2,050
31/12
30/9
Disposal
Bal c/d
1,150
2,050
2,050
Bal c/d
1999
210
31/12
Bal c/d
2000
1/1
510
2000
31/12
P&L
210
Bal b/d
P&L
210
300
510
2001
31/12
510
2001
1/1
865
Bal c/d
Bal b/d
P&L
865
2002
31/12
Disposals
Bal c/d
675
1,230
510
355
865
2002
1/1
555
Bal b/d
P&L
365
1,230
865
Cost
1999
1/1
1/10
900
600
12
3
=
=
210
180
30
Lesson Four
2000
1/1
300
2001
1/1
300
1/2
159
1,500
12
1,500
12
550
55
355
2002
30/9
31/12
31/12
900
550
600
2002
Plant a/c
P&L
9
12
12
900
50
950
=
=
=
365
30/9
Provision for depreciation
30/9
Cashbook
275
950
135
110
120
675
1,500
Cost
(210)
Depreciation
1,290
NBV
2000 Plant
1,500
(510)
990
2001 Plant
2,050
(865)
1,695
2002 Plant
1,150
(555)
595
160
the number of estimated useful years. In the 4th year, the estimated useful life of
the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried
down for year 4. Change for 10yr 8 yr is same as change from 10% to 12.5%
Lesson Four
161
Bal c/d
10,000
Year 1
10,000
Year 2
31/12
Year 2
1/1
20,000
Bal c/d
10,000
20,000
Year 3
1/1
30,000
Year 3
31/12
Bal c/d
10,000
31/12
Bal b/d
31/12
Bal c/d
Year 4
1/1
31/12
44,000
10,000
P&L
20,000
Bal b/d
31/12
30,000
Year 4
P&L
20,000
P&L
30,000
Bal b/d
P&L
44,000
30,000
14,000
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.
Required: Show the provision of depreciation account in year 4
162
Year 1
10,000
Bal c/d
10,000
Year 2
31/12
31/12
Year 2
1/1
20,000
Bal c/d
10,000
P&L
Bal b/d
10,000
P&L
20,000
Year 3
31/12
20,000
Year 3
Bal c/d
30,000
1/1
Bal b/d
20,000
_____
P&L
10,000
30,000
30,000
Year 4
Year 4
1/1 Bal b/d
30,000
31/12
7,000
Bal c/d
37,000
31/12
P&L
37,000
37,000
Cost
Depreciation
Lesson Four
163
(a)
Land
(b)
Buildings
1,000,000
800,000
40,000
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
(c)
900,000 800,000)
Bal B/D
Revaluation
reserve
1,000,000
__200,000
Bal C/D
1,2000,000
1,200,000
1,200,000
Buildings a/c
Bal B/D
800,000
Revaluation
reserve
100,000
Bal C/D
900,000
164
900,000
900,000
Bal C/D
340,000
Land
200,000
Buildings
100,000
340,000
40,000
340,000
Revaluation
40,000
Bal B/D
40,000
Bal c/d
45,000
P&L
45,000
85,000
85,000
The balances in the Land and Building a/c will be shown as cost in the
Balance Sheet and the revaluation reserve a/c appears together with the
capital as a revaluation reserve (especially used in company accounts.
Land
Buildings
340,000
Lesson Four
165
Year 3
1,200,000
Year 3
31/12 Revaluation
200,000
P&L
100,000
________
Bal C/D
__900,000
1,200,000
1,200,000
Buildings
Year 3
1/1 Bal B/D
900,000
_______
Year 3
31/12
Revaluation
100,000
P&L
100,000
Bal C/D
700,000
900,000
900,000
Revaluation Reserve
Year 3
Year 3
1/1/ Bal B/D
31/12 Land
200,000
340,000
31/12 Building
100,000
_40,000
_______
340,000
340,000
166
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle
KE was purchased for Shs.840,000. In March 1994 another vehicle KF was
purchased for
Sh.960, 000.
The firms 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 firms
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)
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
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
0
1,280,00
0
2,160,00
0
1,360,00
0
2,600,00
0
320,00
0
320,00
0
540,00
0
340,00
0
650,00
0
Depreciation at
25%
1994
Lesson Four
167
Motor Vehicle
1990
1/3
Sh
Cashbook
1,280,00
0
1991
1/1
31/12
Sh
Bal c/d
1,280,000
Bal c/d
1,280,000
1991
Bal b/d
1,280,00
0
1992
1/1
1990
31/12
1992
bal b/d
1,280,00
0
1/2
Disposal
Cashbook
1,600,00
0
31/12
Bal c/d
2,880,00
0
1993
1/1
720,000
2,160,000
2,880,000
1993
Bal b/d
2,160,00
0
1/11
Disposal
________
31/12
Bal c/d
2,160,00
0
1994
800,000
1,360,000
2,160,000
1994
1/1
Bal b/d
1,360,00
0
1/1
Cashbook
840,000
1/3
Cashbook
960,000
3,160,00
31/12
Bal c/d
3,160,000
3,160,000
168
Sh
Balc/d
320,000
1991
1990
31/12
Sh
P&L
320,000
1/1
Bal b/d
320,000
31/12
P& L
320,000
1991
1992
31/12
Bal c/d
640,000
640,000
1992
640,000
1992
1/2
Disposal
360,000
1/1
Bal b/d
640,000
31/12
Bal c/d
820,000
3/12
P&L
540,000
1,180,00
0
1993
1,180,000
1993
1/11
Disposal
200,000
1/1
Bal b/d
820,000
31/12
Bal c/
960,000
31/12
P&L
340,000
1,160,00
0
1994
1,1
60,000
1994
31/1
31/12
Bal c/d
1,610,00
0
1,610,00
0
Bal b/d
960,000
P&L
650,000
1,610,000
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
Lesson Four
169
Pentland Limited complies its financial statements for the year to 30 June each
year.
At 1 July 1999 the companys balance sheet included the following figures:
l
Accumulate
d
Net book
Depreciatio
n
Value
000
000
000
Land
4,000
Nil
4,000
Buildings
2,200
800
1,400
Plant and
machinery
1,600
600
1,000
600
200
400
Cost
Motor vehicles
Nil
Buildings
2%
15%
20%
170
(16 marks)
Land
1999
1/7
1999
Bal b/d
4,000
2000
1/1
2000
Revaluation
1,200 30/6
Bal c/d
5,200
1999
1/7
Bal b/d
2000
1/1
Revaluation
2000
30/6
Bal C/D
30/6
5,200
Buildings
1999
2,200
2000
1,200 30/6
3,400
Bal c/d
Revaluation Reserve
2000
1/1
Buildings
2,022 1/1
Provision for
depr.
2,022
3,400
3,400
1,200
822
2,022
1/7
Bal b/d
800
1999
2000
1/1
5,200
Revaluation
Bal c/d
2000
82 30/6
2
34
_
P&L
2,200 x x
15
3,400 x x
15
56_
Lesson Four
171
85
6
1999
1/7
2000
1/1
Plant
1999
1,600
Bal B/D
2000
400 1/1
_____ 30/6
2,000
Cashbook
Disposal
Bal c/d
1999
1/7
Bal b/d
1/4
1/4
2000
1/4
2000
Disposal
Cash book
Motor Vehicle
P&L
1999
Disposal
Bal c/d
300
1,700
2,000
1999
2000
1/1
856
2000
252.50 30/6
595.00
847.50
P&L
1/4
30/6
247.50
847.50
Motor Vehicles
1999
600
12
18
630
600
2000
Disposal
Bal C/D
20
610
630
13
12
25
200
172
2000
1/4
30/6
2000
1/1
P&L
Disposal
Bal c/d
Plant
2000
13 1/4
307.5 30/6
320.50
P&L
Bal C/D
Plant - Disposal
2000
300 1/1 Provision for
depr.
2.50 Cash book
25
120.5
______
320.50
252.50
50___
302.50
Lesson Four
Cost/
Valuation
173
Bal as at
1/1/01
Additions
Revaluations
(gains)
Reclassificati
ons
Disposals
Bal as at
31/12/01
Depreciation
/
Amortization
Bal as at
1/1/10
Change for
year
Revaluation
Eliminated
on Disposal
Bal as at
31/12/01
N.B. V as at
31/12/01
NBV as at
31/12/01
Total
Short
lease
()
x
Machine
ry ()
And fittings
()
()
Long
leases
()
x
xx
xx
xx
-
xx
-
xx
-
xx
-
xx
xx
(xx)
xx
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
(xx)
xx
(xx)
xx
(xx)
xx
(xx)
xx
xx
xx
xx
xx
xx
xx
174
Lesson Four
Furniture
Trucks
Plant and machinery
Land
Buildings
175
Acquisition
Accumulated
Cost
Sh.
900,000
3,525,000
7,387,500
2,775,000
2,925,000
Depreciation
Sh.
300,000
1,470,000
4,462,500
292,500
Depreciatio
n
Rates
%
12.5
25
10
Nil
2.5
176
Total
Sh.
3,225,000
Sh.
17,512,500
450,000
(248,250)
3,726,750
1,800,000
450,000
(435,750)
19,326,750
300,000
112,500
1,470,000
931,687.5
6,525,000
2,110,687.5
-______
(124,125)
(161,625)
5,784,000
412,500
8,474,062.5
8,332,500
8,916,000
600,000
487,500
2,277,562.
5
2,055,000
1,449,187.
5
4,755,000
1,066,500
(37,500)
NBV 1/5/99
NBV 30/4/2000
Motor
10,987,500
10852,687.
8
Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle
= cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5
Buildings
At 2.5%
4%
= (292,500 + 600,000) x 4%
= 141,000
= 2,925,000 x 2.5% x 4 = 292,500
= 292,500 x 4% x 4
= 468,000
175,500
Machinery: cost
Lesson Four
177
178
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
1999: Debit
386,430
190
Credit
Sales
Cash received
Discounts allowed
Sales returns inwards
Credit balances at 30
September 1999
Purchases ledger:
Balances at 1 September
1999: Credit
163,194
158,288
2,160
590
370
184,740
520
Debit
Purchases
Cash payments
Discounts received
Purchases returns outwards
Debit balances at 30
September 1999
98,192
103,040
990
1,370
520
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.
Lesson Four
179
180
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.
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 years 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 Georges 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 Georges balance sheet at 31 March 1999.
Lesson Four
181
(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)
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.
2. Statement of corrected profit.
3. Suspense account.
(8 marks)
(2 marks)
(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:
182
Capital
Purchases
Sales
Salaries
Opening stock
Insurance
Rent
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission
40,000
26,154
36,246
4,814
4,307
820
965
25,000
14,500
6,140
1,060
_____
82,795
4,638
__946
82,795
Adjustments:
1.
2.
3.
4.
5.
6.
7.
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 companys control accounts for the month of December
1994 are listed below:
Balance at 1 December 1994:
Sales ledger
6,185,0 (debit)
00
52,500 (credit)
Lesson Four
Purchases ledger
Transactions during December
1994:
Sales on credit
Purchases on credit
Returns inwards
Returns outwards
Bills of exchange payable
Bills of exchange receivable
Cheques received from
customers
Cheques paid to suppliers
Cash paid to suppliers
Bill payable dishonoured
Charges on bill payable
dishounered
Cash received from credit
customers
Bad debts written off
Cash discounts allowed
183
16,500 (debit)
4,285,0 (credit)
00
8,452,0
00
5,687,5
00
203,50
0
284,00
0
930,00
0
615,00
0
7,985,0
00
4,732,0
00
88,500
400,00
0
10,000
153,00
0
64,500
302,00
0
88,500
44,000 (credit)
23,500 (debit)
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)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK
Acknowledgement
184
LESSON FIVE
FURTHER ADJUSTMNETS TO ACCOUNTS
(a) CONTROL ACCOUNTS
Control accounts are so called because they control a section of the ledgers. By
control we mean that the total on the control accounts should be the same as the
totals on the ledger accounts. There are two main types of control accounts:
(i)
(ii)
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.
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.
1400 CashBook
Bal C/D
1400
700
700
1400
SALES LEDGER
Debtor A a/c
Sales
200 C/B
Bal c/d
200
50
150
200
Debtor B a/c
Sales
400 C/B
Bal c/d
400
250
150
400
Debtor C a/c
Sales
300 C/B
Bal c/d
FINANCIAL ACCOUNTING 1
100
200
Lesson Five
185
300
300
186
Debtor D a/c
Sales
500 C/B
Bal c/d
500
300
200
500
1900 Purcha
ses
700
2600
2600
2600
PURCHASES LEDGER
Creditor A
C/B
Bal c/d
400 Purcha
ses
200
600
600
600
Creditor B
C/B
Bal c/d
450 Purchas
es
250
700
700
700
Creditor C
C/B
Bal c/d
350 Purchas
es
150
500
500
500
Creditor D
C/B
Bal c/d
700 Purchas
es
100
800
Lesson Five
187
800
800
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 debtors a/c and the customer is not a
creditor too.
The entry will be:
188
1000 Cashbook
950
100 Discounts
50
Returns
100
1100
1100
If the firm has not paid this amount owed to the customer, then its carried forward
to the next period then is a credit balance in the customers 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).
Sales
(Refunds) C/B
2000 Contrapurchases
Bal c/d
2000
1000
1000
1100
Creditor (A)
Contra Debtor
1000 Purchases
1000
Lesson Five
189
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
36,760
422,570
10,980
387,650
8,870
190
June 30
Solution
2003
Returns out
Bank
Discounts received
Bal c/d (30/6)
Example 5.2
Prepare a sales ledger control account from the following:
2003
May 1
May 31
Debit balances
Totals for May:
Sales journal
Cash and cheques received from debtors
Discounts allowed
Debit balances in the sales ledger set off
against credit balances in the purchases
ledger
Debit balances
Credit balances
64,200
128,000
103,700
3,950
1,450
?
500
Solution
2003
1/5
Bal b/d
Sales
31/5
Bal c/d
Sales
2003
64,20
0
128,0
00
500 31/5
192,7
00
103,70
0
3,950
1,450
83,600
192,70
0
Lesson Five
191
9,123,00
0
211,000
4,490,00
0
88,000
(debit)
(credit)
(credit)
(debit)
18,135,0
00
629,000
27,370,0
00
36,755,0
00
1,105,00
0
15,413,0
00
3,046,00
0
6,506,00
0
1,720,00
0
489,000
4,201,00
0
53,000
732,000
136,000 (credit)
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)
192
(a)
i)
ii)
iii)
iv)
Lesson Five
193
Kopesha Ltd
199
7
1/11
Bal b/d
Sales
Dishonored
cheques
Refunds to
customers
30/1
1
199
7
1/11
Bal c/d
Bal b/d
Allowances from
suppliers
Discounts
received
Bank
Contra settlement
30/1
1
Bal c/d
136,000 30/1
1
46,556,0
00
Contra
Bills of exchange
receivable
Allowances
Cash
Discounts allowed
Bal c/d
Sh
211,000
27,370,00
0
3,046,000
6,506,000
720,000
4,201,000
732,000
2,770,000
46,556,00
0
Sh
4,490,000
18,135,000
67,000
22,692,000
194
-Sales ledger
178,000
Purchases
ledger
189,000
Credit purchases
2,450,000
Credit sales
4,563,000
3,140,000
1,367,000
1,994,000
352,000
68,000
Discounts received
104,000
Discounts allowed
169,000
234,000
Refunds to debtors
62,000
Returns outwards
138,000
Returns inwards
231,000
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 dont affect the trial balance
Errors that affect the trial balance
Errors that dont affect the trial balance
The trial balance produced from the accounts appears to be okay/correct, i.e the
debits are the same as the credits. However, on taking a close check on the
balances and transactions posted, errors may have been made and therefore the
balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that dont affect the trial balance and these are
explained as follows:
Lesson Five
195
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 debtors account and the sales account
i.e. both debit of 400 in debtors 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:
Debiting debtors
Crediting sales
400
400
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
Thompsons account for an amount of 200. Instead of a debit to T Thompsons
account it is made to L Thompsons account and the corresponding credit in the
sales account is correct.
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 Thompsons account to T Thompson
by:
(i)
(ii)
200
200
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
d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the
accounts i.e. a debit is posted as a credit and a credit is posted as a debit.
196
Example: cash drawn from the bank of 150 for business use is posted as a debit in
the bank account and credit in cash in hand.
To correct this error, two entries are made in the relevant accounts:
(i)
Correct the error
(ii)
Post the transaction correctly
The entries will therefore be as follows:
(i)
To correct the error of 150 posted in the wrong sides of these account
(ii)
Debit cash by
150
Credit bank by
150
To post the entries correctly
90
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:
Lesson Five
Purchases
197
3,980
3,890
(90)
Fixtures
4,450
(4,540)
90
Extra capital of 10,000 paid into the bank had been credited to Sales account.
Goods taken for own use 700 had been debited to General Expenses.
Private insurance 89 had been debited to Insurance account.
A purchase of goods from C Kelly 857 had been entered in the books as 587.
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
Charltons account.
h) A sale of a motor van 1,000 had been credited to Motor Expenses.
198
Solution
THE JOURNAL
Debit
10,000
Sales
Capital
Additional capital passed into
sales a/c now transferred to
capital a/c
Drawings
General expenses
Drawings debited in general
expense now transferred to
drawing a/c
Drawings
Insurance
Private insurance transferred
from insurance a/c to drawings
a/c
Purchases
C Kelly
Purchases and creditors amount
to 857 initially entered as 587
Bank
Cash
Correct error in posting
Bank
Cash
To post the cash banked correctly
Bank
Cash
Cash drawings correctly started
from bank to cash
J Charlton
M McCarthy
Returns in from McCarthy
entered in error in J Carlton now
transferred to his a/c
Motor expenses
Motor disposal a/c
To correct error in recording
sales proceeds In expense
account
Credit
10,000
700
700
89
89
270
270
390
390
390
390
400
400
168
168
1000
1000
Lesson Five
199
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
Sh000
Capital 1 April 1999
Profit for the year
ended 31 March
2000
Deduct: drawings
Creditors
Bank overdraft
450
150
Sh000
1,890 Land and
buildings (at
valuation)
Machinery (at
cost)
300 Deduct:
depreciation
630 Stock at cost
270 Debtors
3,090
Sh000
Sh00
0
1,650
1,200
750
570
420
450
990
3,090
200
(7
(Total: 25 marks)
Solution
a)
THE JOURNAL
Debit
2,500
Trading account
Stock
Being a reduction in stock for damaged
goods
Profit and loss(Bad debts)
Debtors
Debtors gone bankrupt written off
Profit and loss)
Provision for doubtful debts
Being a provision for doubtful debts created
at 20%.
Provision for depreciation
Profit and loss
A change in estimated lifespan for machinery
Profit and loss( wages )
Accrued expenses
Wages owing omitted in the accounts
Profit and loss (Bank overdraft
charges)
Bank overdraft
Changes for overdraft not reflected in the
accounts.
Drawings
Credit
2,500
20,000
20,000
10,000
10,000
150,000
150,000
9,500
9,500
8,000
8,000
100,000
Lesson Five
201
100,000
20,000
20,000
Sh
450,000
170,000
620,000
2,500
20,000
10,000
9,500
8,000
(50,000)
570,000
Sh
1,650,000
500,000
2,150,000
60,000
202
2,210,000
Capital
Add Net Profit
1,890,000
570,000
2,460,000
Less drawings
(250,000)
2,210,000
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 debtors
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 creditors 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 debtors 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.
Lesson Five
203
Example:
DR
240
240
Total
Suspense
CR
200
40
240
Suspense a/c
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.
Total
Suspense
Difference as per
T/B
DR
260
40
300
CR
300
300
Suspense a/c
40
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:
Balance
Debit
Credit
Material
Show as an asset (eg)
other debtors
Show as a liability (eg)
other creditors
Not Material
Charge in P& L as an
expense
Report as income in
P&L
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:
(i)
(ii)
(iii)
(iv)
204
(v)
The sale of a motor vehicle at book value had been credited in error to Sales
account 3,600.
1,000
Suspense
Sales
Sales under cast of 100 now corrected
J Church
J Chane
Sale to J Church posted to J Chane corrected
Rent
Suspense
Under cast in rent balance now corrected
Suspense
Discount received
Under cast in discount received balance now
corrected
Sales a/c
Disposal
Sale of motor vehicle entered in sales a/c now
corrected
Sales
Discount received
Suspense a/c
,1000
2,500
2,500
700
700
3,000
3,000
3,600
,3600
3,300
700
4,000
PROFIT
79,000
4,000
(4,300)
78,700
Lesson Five
205
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.
206
Your are asked to help and after inspection of the ledgers discover the following
errors:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Solution
Opening balance
Sales - under
record
Suspense a/c
1,536.0 Debtors
0
360.00 Cashbook under cast
Creditors error
Creditors (correct)
Cashbook: smiths debt
paid
1,896.0
0
87.00
720.00
179.00
179.00
731.00
1,896.00
i.
Increase total for debtors by 87.
ii.
Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an
increase in
profits.
iii. Increase sales by 360.
iv. Reduce the creditors by 358.
v.
accruals by 152 and reduce profits by the same.
vi. Increase the cash balance by 731.
Lesson Five
207
3.
4.
5.
6.
The total of the sales daybook for December 2001 was overcast by Sh 25,700.
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.
A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the
creditors account.
A payment of Sh. 4,500 for telephone expenses was debited to telephone
account as Sh 5,400.
An amount of Sh 15,000 received from a debtor was not posted to the debtors
account from the cashbook.
Purchases daybook for October 2001 was under cast by Sh 28,000.
208
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
Fixed assets cost
Stock - 1 January 2001
Trade debtors
Prepayments
Trade creditors
Bank overdraft
Accruals
Drawings
Capital
Sales
Provision for
depreciation
Purchases
Operating expenses
Provision for doubtful
debts
Discounts received
Discounts allowed
Suspense account
Sales
Suspense
Office equipment
Purchases
Sh
832,000
148,000
76,000
10,000
Sh
34,600
15,200
16,000
359,600
1,054,000
1,043,200
166,400
733,000
126,000
3,800
5,000
5,800
47,800
2,338,200
_______
2,338,200
THE JOURNAL
Dr
25,700
Cr
25,700
40,000
40,000
Lesson Five
209
2,000
2,000
Creditors
Suspense
Creditors
Suspense
8,500
8,500
8,500
8,500
Suspense
Telephone
900
900
Suspense
Debtor
15,000
15,000
Suspense
Discounts allowed
2,500
Suspense
Discounts received
2,500
2,500
2,500
Purchases
Suspense
2001
1 Jan
Bal b/d
Telephone
Debtors
Discount
allowed
Discount
received
Bal c/d
28,000
28,000
SUSPENSE ACCOUNT
Sh 2001
47,800 1 Jan
Sales
900
Creditors
15,000
Creditors
2,500
Purchases
2,500
2,000
70,700
______
70,700
Sh
25,700
8,500
8,500
28,000
Sh
85,800
40,000
900
5,000
45,900
131,700
25,700
2,000
28,000
(55,700)
210
76,000
Lesson Five
211
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:
(i)
First In First Out (FIFO)
The business assumes that items of stocks that were purchased first are sold first
and therefore, items left as part of closing stock were purchased recently.
(ii)
Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average
of the cost of similar items at the beginning of the period and the cost of similar
items purchased during the period.
(iii)
Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first
and therefore, the closing stock shows items that were bought first.
Net Realizable Value (SP- Expenses)
This is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either
actual or estimated under the different methods) and if the firm was to sell the
stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net
realizable value.
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
212
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 Five
213
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:
TRIAL
BALANC
E
Dr
Cr
ADJUSTME
NT
Dr
Cr
TRADING
ACCOUN
T
Dr
Cr
PROFIT &
LOSS
ACCOUNT
Dr
Cr
BALANCE SHEET
Assets Liabilities +
Capital
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
The following additional information as at 30 April 19X7 is available:
214
(a)
(b)
(c)
(d)
(e)
Required:
MR CHAI
Trial Balance
WORKSHEE
T
Dr
Cr
83,887
Dr
Capital
Sales
Trade
creditors
Returns
outwards
Provision for
B debts
Discounts
allowed
Discounts
received
Purchases
Returns
Inwards
Carriage
outwards
Drawings
Carriage
inwards
Rent, rates &
insurance
Heating &
lighting
Postage,
stationery
and
telephone
Advertising
Salaries and
wages
Bad debts
Cash in hand
Adjustments
Trading
account
Cr
Dr
Cr
259,87
0
19,840
259,8
70
13,407
13,40
7
Dr
223
2,306
1,750
1,750
135,68
0
5,624
135,6
80
5,624
4,562
4,562
18,440
18,44
0
11,830
11,83
0
25,973
5,980
38,521
2,008
534
Cr
83,8
87
735
2,
306
2,410
Dr
19,8
40
512
11,010
Cr
6,55
5
1,360
19,41
8
12,37
0
2,410
5,980
38,52
1
2,008
534
Lesson Five
Cash at bank
Stock at 1
May 19X6
Trade
debtors
Fixtures &
fittings at
cost
Provision for
depreciation
Depreciation
4,440
15,654
4,440
15,65
4
24,500
24,50
0
120,7
40
120,74
0
63,020
63,0
20
12,074
442,28
6
Stocks
30.04.19X7
asset
Stocks
30.04.19X7
Cost of Sales
Insurance
prepaid
Heating and
lighting
accrued
Rates
prepaid
Provision for
bad debts
215
12,07
4
442,28
6
17,75
0
17,7
50
17,75
0
1,120
1,120
1,36
0
1,36
0
5,435
5,435
223
25,88
8
Gross profit
(Balancing
figure)
17,75
0
223
25,8
88
122,2
39
291,0
27
122,2
39
291,0
27
Net profit
(Balancing
figure)
24,11
7
123,9
89
123,9
89
24,1
17
192,9 192,
59 959
216
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:
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 noncurrent
Lesson Five
217
assets
Reduction
in
provision
for
doubtful
debts
Reduction
in
provision
for
discount
allowable
Interest
on
overdue
debtors
balances
XX
XX
XX
XX
Less
Expenses
Bad debts
Depreciat
ion: (eg)
Plant
XX
XX
XX
Motor
vehicle
Increase
in
provision
for
doubtful
debts
Increase
in
provision
for
discount
allowable
Loss on
disposal
of non
current
assets
Loss of
other
assets
(eg) stock
Interest
XX
XX
XX
XX
XX
218
charged
by
creditors
Other
expenses:
Rent
Insurance
Postage
Interest
on loan
etc
NET
PROFIT
XX
XX
XX
XX
(XX)
XX
Non current
assets
Land
Buildings
Plant and
machinery
Fixtures,
furniture and
fittings
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
(XX)
XX
Motor vehicle
XX
(XX)
XX
XX
Current assets
Stock
Debtors
Less provision for
doubtful debts
XX
XX
(XX)
XX
Accrued income
XX
Prepaid expenses
XX
Cash at bank
XX
Cash in hand
XX
XX
XX
Lesson Five
219
Current
liabilities
Bank overdraft
XX
Trade creditors
XX
Prepaid income
XX
(XX)
Net current
assets
Net assets
X
X
XX
Capital
Add net profit
XX
X
X
XX
(XX)
Less drawings
XX
Non current
liabilities
Loan
X
X
XX
Non current
liabilities
Loan
XX
X
X
Non current
liabilities
Loan
X
X
XX
Non current
liabilities
Loan
XX
Non current liabilities
Loan
X
X
XX
220
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
Openin
15,654
g stock
Purchas
135,680
es
Add
carriag
e 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
89
Less
Expens
Lesson Five
es
Discoun
t
allowed
Carriag
e
outward
s
Rent,
rates
and
insuran
ce
Heating
and
lighting
Postage
,
statione
ry and
telepho
ne
Advertis
ing
Salaries
and
Wages
Bad
debts
Provisio
n for
bad
debts
Provisio
n for
depreci
ation
fixtures
and
fitting
Net
profit
Mr Chai
Balance Sheet as at 30 April 19X7
221
2,306
4,562
19,418
12,370
2,410
5,980
38,521
2,008
223
12,074
99,87
2
24,11
7
222
Non
current
asset
Fixtures
and
fittings
Current
assets
Stock
Debtors
Less
provision
for
doubtful
debts
Prepaym
ents
Cash at
bank
Cash in
hand
Current
liabilitie
s
Creditors
Accruals
120,7
40
(63,020)
57,720
17,750
24,50
0
(735)
23,765
6,555
4,440
5
34
53,044
19,84
0
1,360
(21,200)
31,844
89,564
83,887
24,117
Capital
Add net
profit
108,004
(18,440)
Less
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
Purchases
82,350
138,078
Lesson Five
Carriage
Drawings
Rent, rates and insurance
Postage and stationery
Advertising
Salaries and wages
Bad debts
Provision for bad debts
Debtors
Creditors
Cash in hand
Cash at bank
Stock at at 1 June 19X5
Equipment
At cost
Accumulated depreciation
Capital
223
5,144
7,800
6,622
3,001
1,330
26,420
877
130
12,120
6,471
177
1,002
11,927
58,000
______
216,770
19,000
53,091
216,770
224
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
Current Assets
Stocks
Debtors
Less provision for doubtful
debts
Prepayments
Cash in hand
Cash at bank
Current Liabilities
Creditors
Accruals
Capital
Add: Net Profit
Less Drawings
58,000
(27,700)
30,300
13,551
12,120
(170)
11,950
880
177
1,002
27,560
6,471
210
6,681
20,879
51,179
53,091
5,888
58,979
(7,800)
Lesson Five
225
51,179
226
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
Property at cost
Equipment at cost
Provision for depreciation (as at 1
June 20X8)
Property
Equipment
Stock as at 1 June 20X8
Purchases
Sales
Discounts allowed
Discounts received
Wages and salaries
Bad debts
Loan interest
Carriage out
Other operating expenses
Trade debtors
Trade creditors
Provision for bad debts
Cash on hand
Bank overdraft
Drawings
13% loan
Capital, as at 1 June 20X8
Dr
90,000
57,500
Cr
12,500
32,500
27,400
259,600
405,000
3,370
4,420
52,360
1,720
1,560
5,310
38,800
46,200
33,600
280
151
14,500
28,930
______
612,901
12,000
98,101
612,901
Lesson Five
227
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Discounts received
Decrease in provision for bad
debts
27,400
258,560
285,960
(25,900)
405,000
(260,060)
144,940
4,420
____49
149,409
Less expenses
Depreciation: Property
Equipment
Discounts
allowed
Wages and
salaries
Bad debts
Loan interest
Carriage out
Other operating
expenses
NET PROFIT
900
8,625
3,370
52,500
1,720
1,560
5,310
38,500
(112,485)
86,924
Herbert Howell
Balance Sheet as at 31 May 2000
90,000
57,500
147,50
0
(13,400)
(41,125)
54,525
Current Assets
Stock
Debtor
Less provision
Prepayments
25,900
46,200
(231)
45,969
500
76,600
16,375
92,975
228
151
Cash in hand
72,520
Current liabilities
Bank overdraft
14,500
Creditors
33,600
Accruals
__340
(48,440)
24,080
117,055
Capital
98,101
36,924
135,025
Less drawings
(29,975)
105,055
12,000
117,055
Workings:
1) Depreciation for:
Property
Equipment
1% X 90,000
15% X 57,500
=
=
900
8,625
Lesson Five
Accruals
5) Purchases:
Drawings:
229
8,300
200
8,500
259,600 1,040
28,930 + 1,040
=
=
258,560
29,990
230
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March
2001
Sales
Discount Received
Rent Received
Returns outwards
Creditors
Bank Overdraft
Capital
Purchases
Salaries and Wages
Office expenses
Insurance premiums
Electricity
Stationery
Advertising
Telephone
Business Rates
Discounts allowed
Returns Inwards
Stocks as at 1 April 2000
Warehouse, shop and office
Fixtures and fittings
Debtors
Cash in till
Drawings
378,500.00
2,400.00
7,500.00
7,700.00
18,700.00
30,000.00
287,500.00
261,700.00
45,700.00
8,400.00
3,100.00
1,600.00
6,200.00
8,400.00
2,100.00
7,500.00
600.00
4,100.00
120,600.00
210,000.00
12,800.00
13,000.00
500.00
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.
Lesson Five
231
232
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December
20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
Debit
Capital at 1 January
20X0
Debtors
Cash In Hand
Creditors
Fixtures and fittings at
cost
Discounts allowed
Discounts received
Stock at 1 January 20X0
Sales
Purchases
Motor Vehicles at cost
Lightning and heating
Motor expenses
Rent
General expenses
Balance at bank
Provision for
depreciation
Fixtures and
fitting
Motor vehicles
Drawings
The following information as
Credit
26,094
42,737
1,411
35,404
42,200
1,304
1,175
18,460
491,620
387,936
45,730
6,184
2,862
8,841
7,413
19,861
_26,568
591,646
2,200
15,292
_______
591,646
Lesson Five
233
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
Sales
Purchases
Carriage inwards
Carriage outwards
Wages and salaries
Rent and rates
Heat and light
Stock at 1 July 20X8
Drawings
Equipment at cost
Motor vehicles at cost
Provision for
depreciation:
Equipment
Motor vehicles
Debtors
Creditors
Bank
Sundry expenses
Cash
Capital
Cr
427,726
302,419
476
829
64,210
12,466
4,757
15,310
21,600
102,000
43,270
22,250
8,920
50,633
41,792
3,295
8,426
477
______
626,873
122,890
626,873
Required
234
Prepare Brenda Baileys trading and profit and loss account for the year ended
30June 20X9 and her balance sheet at that date.
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for
December 19X9. The statement showed the following.
MIDWEST BANK
F Mercer: Statement of Account
Date
Particulars
19X8
Dec 1
Balance
Dec 5
417864
Dec 5
Dividend
Dec 5
Bank Giro
Dec 8
Credit
Dec 10
417866
Dec 11
417867
Dec 14
Sundry Credit
Dec 20
Standing Order
Dec 20
417865
Dec 21
Bank Giro
Dec 21
Credit
Dec 24
417868
Dec 27
416870
Dec 28
Bank charges
Dec 29
Bank Giro
Dec 29
Credit
Dec 31
Direct Debit
417873
Bank Giro
Credit
417871
Debits
$
Credits
$
243
26
212
174
17
32
307
185
95
161
18
118
88
12
47
25
279
Balance
$
1,862
1,619
1,645
1,857
1,683
1,666
1,851
1,819
1,512
1,630
1,535
1,374
1,356
1,403
1,315
1,303
1,582
1,557
Lesson Five
235
Balance
b/d
J
Shannon
M Lipton
Dec 4
Dec 9
Dec
Dec
Dec
Dec
Dec
19
26
27
29
30
G Hurst
M Evans
J Smith
V Owen
K
Walters
$ 19x8
1,862 Dec 1
212 Dec 2
185 Dec 5
118
47
279
98
134
Dec
Dec
Dec
Dec
Dec
6
10
14
16
20
Dec 21
Dec 22
Dec 31
_____
Cheque
No
Electricit
y
P
Simpson
D
Underhill
A Young
T Unwin
B Oliver
Rent
M Peters
L Philips
W
Hamilton
Balance
c/d
$
243
864
865
307
866
174
867
868
869
870
871
17
95
71
161
25
872
873
37
12
1,793
2,935
2,935
Required
a)
b)
236
Acknowledgement
237
LESSON SIX
OTHER ASPECTS OF FINAL ACCOUNTS
(a)INCOMPLETE RECORDS
An incomplete record situation is whereby, the accounting system falls short of the
double entry. This may be due to:
Lack of records at all; or
Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and
maintaining an accounting system (records and procedures).
b) It may not be economical for the business to maintain accounting records
due to the volume or/and nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.
There are 4 main approaches in preparing final accounts where there are
insufficient records.
a) Estimating income from the net assets.
b) Estimating income from the use of ratios.
c) Use of a simple cashbook and bank statement.
d) Use of control accounts.
N/B: approach number c and d are normally used together.
(a) Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a
reasonable complete cash summary, the only method of estimating the profits or
loss for the period, is to prepare statement of affairs showing the net worth of the
business at the beginning and at the end of the period.
The profit/loss is estimated by use of the following formulas:
Profit or loss = Closing
Capital
Opening
Capital
Drawings
Additional
Capital
Or where there are no non current liabilities then this optional formula can be used
Profit or loss = Closing
Additional
Net Asset
Opening
Net Asset
FINANCIAL ACCOUNTING 1
Drawings
Capital
238
Example: 6.1
A sole traders capital position is as follows:
31 December
Motor vehicle:
Cost
Depreciation
Stock
Debtors
Bank
Cash
Creditors
Net assets
19X2
19X3
7,500
3,000
4,500
2,960
1,150
925
__263
9,798
2,860
6,938
7,500
4,500
3,000
3,450
2,060
2,125
___54
10,689
3,340
7,349
He has estimated his drawings for 19X3 at 12,500. Estimate his net profit for the
year.
Solution:
Net profit =
Closing
- Opening
Net Asset
Net Asset
+ Drawings
Net assets
Additional
Lesson Six
239
= 25 x 100
100
= 25%
240
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
= Gross Profit x 100
Cost of Sales (cost price per unit)
In the above example, the mark up will be:
= 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.
The formula is:
Average stock
Cost of Sales
Average Stocks
expressed as number of times
=
20,000
300,000
30,000
Lesson Six
241
Stock Turnover
= 300,000
25,000
= 11.6 times
Example 6.2
M Jones gives you the following information as at 30 June 2002
Sales
63,000
Less cost of sales
(42,000)
Gross profit
21,000
Expenses
(14,700)
Net profit
6,300
Example 6.3
W Whites business has a rate of turnover of 7 times. Average stock is 12,600.
Trade discount (i.e. margin allowed) is 33% off all selling prices. Expenses are
66 % of gross profit.
242
Lesson Six
243
Solution:
Profit schedule
Turnover
Cost of goods sold
Gross profit
Expenses
Net profit
132,300
88,200
44,100
(29,400)
14,700
= Cost of Sales
12,600
244
Reciepts
Balance 1 Jan
19X8
Cheques for sales
Cash banked
Balance 31 Dec
19X8
Payments
572 Purchases
10,007
13,17 Expenses
9
14,00 Drawings
5
3,751 Delivery van
31,50
7
2,950
11,250
7,300
31,507
62
16,300
1,850
375
65
Unknown
1,850
1,250
2,650
31 Dec
19X8
2,070
1,420
2,990
CURRENT ASSETS
Cash at bank
Cash in hand
Debtors
Stock
CURRENT LIABILITIES
572
62
1,850
2,650
5,134
Lesson Six
245
Creditors
Net Assets
(1,250)
3,884
Capital
3,884
Balance b/d
Sales
1,850
Cash
16,300
Takings
29,69
Bank
13,179
9
______
Bal c/d
2,070
31,54
31,549
9
246
Cash purchases
1,850 Bal b/d
1,250
Bank
10,00 Purchases
12,027
7
13,27
13,277
7
Balance b/d
62 Creditors
Debtors/sales
16,30 Expenses
0
Bank
Bal c/d
_____ Drawings
16,36
2
1,850
375
14,005
65
___67
16,362
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
Lesson Six
Fixed Assets
Delivery van
247
Hobbs
Balance Sheet as at 31 December 19X8
Cost Depreciation
NBV
7,300
1,460
5,840
Current Assets
Stock
Debtors
Cash
Less current liabilities
Creditors
Bank overdraft
Financed by:
Capital
Add net profit
Less drawings (11,250 + 67)
2,990
2,070
___65
5,125
1,420
3,751
5,171
5,794
3,884
13,2
27
17,111
11,317
5,794
2.
3.
4.
5.
6.
248
the year. Insurance premium for the year to 30 June 2001 was Sh 160,000. All
these expenses have been paid by cheque.
7.
8.
9.
Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
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 familys
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.
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.
marks)
(b) Balance sheet as at 31 March 2001.
marks)
(10
(10
(Total: 20 marks)
Solution:
Capital
Loan
Debtors
Cash
Bal c/d
Cash
Sh
1,200,00
0
400,000
5,080,00
0
560,000
book Bank
Salary
Drawings
Timber
Equipment
Electricity
Motor vehicle
expenses
General expenses
Insurance
________ Bal c/d
7,240,00
0
Capital
Sh
Bank
1,860,00 Pick up
0
1,860,00
0
Sh
120,000
936,000
1,960,000
960,000
240,000
182,000
270,000
160,000
1,812,000
7,240,000
Sh
1,200,000
660,000
1,860,000
Lesson Six
249
Sales
Sales
Debtors
Sh
6,178,00 Bank
0
Bad debts
________ Bal c/d
6,178,00
0
Cash book - cash in hand
Sh
726,000 Bank
Drawings
Drawings
General Expenses
______ Bal c/d
726,000
Sh
5,080,000
17,000
1,081,000
6,178,000
Sh
5,080,000
17,000
1,081,000
36,900
30,100
726,000
250
Loan interest
Rates
36,000 x 9/12
Accruals
Electricity bills
Rates
=
Agency fees =
Loan interest
=
48,000
27,000
55,000
=
45,000
175,000
27,000
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
Lesson Six
251
Kimeu
Balance Sheet as at 31 March 2001
Sh
Sh
960,000
192,000
660,000
220,000
1,620,000
412,000
Current Assets
Stock
Debtors
Insurance prepayments
Cash at bank
Cash in hand
Sh
768,000
440,000
1,208,000
158,000
108,000
40,000
181,200
30,000
3,121,100
175,000
Capital
Add net profit
2,946,100
4,154,100
1,860,000
2,929,100
4,789,100
1,035,000
3,754,100
Less drawings
Non current liability
Loan 15%
400,000
4,154,100
Sh
4,747,50 Takings
0
565,000
152,500
5,465,00
0
Sh
5,465,000
________
5,465,000
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,
252
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.
3.
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.
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.
The total expenses also include:
5.
6.
7.
8.
9.
10.
11.
12.
13.
Mr. Abi takes Sh. 5,000 per week from the business for his wifes personal
expenses. This excludes the amount indicated in note 8.
Mr. Abi draws Sh. 750 per week for cigarettes and beer.
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.
An insurance policy for Mr. Abis life matured and realized Sh. 320,500.
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.
Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh.
55,000 for income tax.
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.
Lesson Six
253
Required:
(a) Mr. Abis balance sheet for the business at 30 June 1993.
(4 marks)
(b) Mr. Abis profit and loss account for the year ended 30 June 1994.
(12 marks)
(c) Mr. Abis balance sheet for the business at 30 June 1994.
(6 marks)
(Total: 20 marks)
254
Solution:
Abi
Balance Sheet as at 30 June 1993
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities
Creditors
Sh
97,500
229,00
0
78,000
22,500
1,304,5
00
Sh
(139,50
0)
1,165,0
00
1,165,0
00
Capital
Balance b/d
Sales ledger control
a/c
Insurance (drawings)
Drawings
Drawings
Debtors
1,165,0
00
Cash at Bank
Sh
78,000 Drawings personal expense
for wife
12,500 Drawings cigarettes and
beer
320,500 Expenses
50,000 Drawings second hand car
20,000 Cash in hand
5,591,00 Drawings friend
0
Creditors
Dishonored cheque
drawings
Drawings
Income tax
________ Balance c/d
6,072,00
0
Cash in Hand
Balance b/d
Sh
22,500
Drawings
Sh
15,000
Sh
260,000
39,000
565,000
141,500
6,500
50,000
4,747,500
50,000
48,000
55,000
109,500
6,072,000
Lesson Six
Drawings betting
Bank
Balance b/d
Bad debts recovered
Credit sales
Bank
Balance c/d
Rent
Motor running
expenses
Decoration
Alterations
Other expenses
255
12,500
6,500
58,500
Balance c/d
43,500
58,500
A/c
Sh
178,000
12,500
33,500
5,591,000
245,500
6,060,500
Expenses
Business
52,000
-
30,000
80,000
359,500
565,000
20,000
80,000
359,500
532,500
Private
26,000
17,500
10,000
_____
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
256
359,500
Other expenses
Bad debts
165,500
Accountancy fees
21,000
Net profit
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current Liabilities
Creditors
Accruals
Capital
Add net profit
Less drawings
(698,000)
366,500
Abi
Balance Sheet as at 30 June 1994
Cost Depreciatio Book Value
n
950,000
245,500
109,500
43,500
1,348,500
121,500
21,000
(142,500)
1,206,000
1,165,000
366,500
1,531,500
(325,500)
1,206,000
Instead of a cashbook, the clubs will maintain a receipts and payments which
has similar entries to those of a cashbook.
Instead of profit and loss account, we have an income and expenditure account.
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.
Lesson Six
257
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.
258
XX
Subscriptions
XX
XX
Donations
XX
XX
XX
Expenditure
Depreciation
XX
XX
XX
XX
XX
SURPLUS/( DEFICIT )
(XX)
XX/(XX)
Lesson Six
BALANCE SHEET
Non current Assets
Buildings
Fixtures, fittings and
equipment
Motor vehicle
259
NAME
AS AT 31 DECEMBER
XX
(XX)
XX
XX
(XX)
XX
XX
XX
Investments
Current Assets
Stocks
Debtors
Prepayments and accrued
income
Cash at bank/hand (receipts +
payments)
(XX)
(XX)
XX
XX
XX
XX
XX
XX
XX
XX
Current liabilities
Creditors
Accrued expenses and prepaid
income
Bank overdraft
XX
XX
XX
(XX)
XX
XX
XX
XX
XX
XX
XX/(XX)
XX
XX
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.
260
If the club is investing with no specific intention (i.e a general investment) then
income from this investment should be reported in the income and expenditure
account.
If the investment is for a specific purpose and relates to a specific fund (e.g
building fund) it will not be reported in the income and expenditure account but
credited directly to the fund.
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.
Life Membership Fund
Some members may pay some amount to become life members of the club and if
this happens, there may be a need to spread out this income over the expected life
of the members in the club.
Depending on the policy of a club, the following accounting treatment may be
allowed:
i. The full amount is reported in the Income and Expenditure account in the
year it is received and therefore no balance is retained in the life
membership account.
ii. The amount is shown separately in the life membership fund with no
transfer in the Income and Expenditure account and hence no balance in
the life membership account.
iii. To transfer some amounts from the life membership funds to the income
and expenditure account over the expected life of membership to the club.
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
19X0
Entrance fees
Subscriptions:
19X0
19X1
19X2
Bar Sales
4,434
416
186
128
33
18
Lesson Six
261
Sale of
investments
46
Payments on
account of new
furniture
Balance at bank,
_____ 31 December
19X1
6,486
450
775
6,486
31 December
19X0
Bar stock, at cost
Creditors for bar purchases
Rent due
Heating and lighting
expenses due
Subscriptions due
Insurance paid in advance
31 December
19X1
272
306
18
16
25
5
315
358
36
19
40
7
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
Subscriptions due
Insurance prepaid
Investments
Furniture
Balance at bank
272
25
5
500
300
102
262
1,204
Liabilities
Creditors
Rent due
Heating and lighting expenses
Accumulated fund
Receipts and
payments
Balance c/d
306
18
16
Creditors
(340)
864
306
4,486
4,792
Subscriptions
Balance b/d
Income &
expenditure
Balance c/d
25 Receipts &
payments
345
365
35 Balance c/d
405
40
405
Lesson Six
263
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
Sales
5,227
272
4,486
4,758
(315)
(4,443)
784
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
264
Friendship Club
Balance Sheet as at 31 December 19X1
764
315
40
7
775
1,137
398
35
55
70
(518)
619
1,383
864
519
1,383
Lesson Six
265
Receipts
Payments
Sh
Balance brought
forward
Subscriptions
Year: 1999/2000
2000/2001
2001/2002
Sh
New equipment
254,000
565,000
124,000
415,000
168,000
Dinner dance
723,000 Purchase of
beverages
497,000
Beverage sales
315,000
Investments income
400,000 Refund of
subscriptions
45,000
Sports prizes
25,000
Transport
Investments
_______ Balance carried
forward
248,000
1,500,000
_405,000
4,561,000
4,561,000
31 March
2000
31 March
2001
240,000
Equipment (net)
690,000
Balances as at
266
3,500,000
Subscriptions in
arrears
300,000
375,000
Salaries accrued
68,000
72,000
162,000
184,000
85,000
Investment at cost
Stock of beverages
Subscriptions in
advance
Additional information:
1.
2.
3.
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:
Mamba Sports Club
Statement of Affairs
Assets
Sh
Sh
240,000
Equipment
690,000
288,000
Investment at cost
3,500,000
Subscriptions in arrears
300,000
Stock of beverages
162,000
Lesson Six
267
5,180,000
Liabilities
Subscriptions accrued
85,000
Accrued salaries
68,000
(153,000)
5,027,000
268
Subscriptions
Sh 2001
300,000 Balance b/f
45,000 Receipt and
payment
2,465,000 Income &
expenditure
194,000 Balance c/f
3,004,000
Sh
657,000
(475,000)
182,000
85,000
2,493,00
0
51,000
375,000
3,004,00
0
Sh
182,000
2,465,000
723,000
400,000
125,000
3,895,000
Lesson Six
269
270
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 Six
271
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September
2000
Sh
Sales
Less cost of sales
Opening stock
Add purchases
Less closing stock
Profit to the income and
expenditure
Sh
7,674,000
473,600
4,450,800
4,924,400
(642,800)
(4,281,600)
3,392,400
Sh
Sh
992,400
100,000
1,450,000
108,000
495,000
3,146,200
920,000
194,000
19,000
358,000
17,000
277,000
867,200
880,000
64,000
43,600
(3,139,800)
6,400
272
Sh
3,700,000
1,874,000
190,400
5,764,400
Sh
(478,000)
(73,400)
551,400
Sh
3,700,000
1,396,000
117,000
5,213,000
642,800
18,400
1,000,000
724,800
2,386,000
(221,400)
2,164,600
7,377,600
5,771,200
___6,400
5,777,600
1,600,000
7,377,600
(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)
Direct Costs/Prime Costs
This is a cost that can be traced directly to a unit that has been produced. This
include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but
cannot be traced directly to any particular unit. Example:
1) Rent for the factory
Lesson Six
273
274
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
XX
Note 1
finished goods)
FACTORY PROFIT
XX
Finished goods at a transfer price
XX
Note 2
Sales
Less returns inwards
Less cost of sales
Opening stock finished goods
Factory cost of production/transfer price
Less closing stock of finished goods
Gross profit
Add factory profit
Other incomes discount received
- Profit on disposal
XX
(XX)
XX
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
XX
Lesson Six
275
Less expenses
Salaries and wages administration &
non production
Rent for administration building
Depreciation - Delivery vans
- Fixtures and distribution
Other selling and distribution costs
Net profit/(net loss)
XX
XX
XX
XX
XX
(XX)
XX/(XX)
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
Work in progress
Finished goods
XX
XX
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.
276
Example 6.10
B spikes
Trial Balance as on 31 December 2002
Stock of raw materials 1.1.2002
Stock of finished goods 1.1.2002
Work in progress 1.1.2002
Wages(direct 180,000: factory
indirect145,000)
Royalties
Carriage inwards (on raw materials)
Purchases of raw materials
Productive machinery (cost
280,000)
Accounting machinery (cost 20,000)
General factory expenses
Lighting
Factory power
Administrative salaries
Sales representatives salaries
Commission on sales
Rent
Insurance
General administration expenses
Bank charges
Discounts allowed
Carriage outwards
Sales
Debtors and creditors
Bank
Cash
Drawings
Capital as at 1.1.2002
Dr
21,000
38,900
13,500
325,000
Cr
7,000
3,500
370,000
230,000
12,000
31,000
7,500
13,700
44,000
30,000
11,500
12,000
4,200
13,400
2,300
4,800
5,900
142,300
56,800
1,500
20,000
______
1,421,800
1000,000
125,000
29,680
1,421,800
Notes at 31.12.2002
1.
2.
3.
Required:
Lesson Six
277
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002.
278
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002
Raw Materials
Lesson Six
279
Discounts allowed
Carriage outwards
Net profit
4,800
5,900
(117,850)
89,800
B Spikes
Balance Sheet as at 31 December 2002
COST
Non current Assets
Productive machinery
Accounting machinery
Current Assets
Stock: raw materials
Finished goods
Work in progress
Debtors
Cash at bank
Cash in hand
Current liabilities
Creditors
Capital
Add net profit
Less drawings
280,000
20,000
300,000
24,000
40,000
15,000
DEPRECIATIO
N
(78,000)
(10,000)
88,000
NET BOOK
VALUE
202,000
10,000
212,000
79,000
142,300
56,800
1,500
279,600
(125,000)
154,600
366,600
296,800
89,800
386,600
(20,000)
366,600
280
Cr
Sh
171,120
86,000
5,400
92,000
60,000
150,360
12,000
60,000
24,000
36,000
18,400
16,000
276,800
144,000
4,000
3,200
9,200
138,400
24,000
228,000
20,000
829,440
66,400
8,000
16,000
24,000
1,261,360
_______
1,261,360
Lesson Six
281
Raw materials
Work in progress
Finished goods
Sh. 15,200
Sh. 30,400
Sh. 45,600
282
debts
Rent and rates
9,600
1,600
36,000
1,840
65,600
Administration expenses
150,360
Advertising expenses
12,000
Net profit
278,400
156,480
Bibi Maridadi
Balance Sheet as at 31 January 1986
COST
Non current Assets
Plant and equipment
Furniture and fittings
Motor vehicle
Current Assets
Stock: Raw materials
Work in progress
Finished goods
Debtors
Less: provision for doubtful
debts
Prepayments
Cash in hand and bank
Current liabilities
Creditors
Accruals
Capital
Add net profit
Less drawings
276,800
18,400
144,000
439,200
15,200
30,400
45,600
92,000
(4,600)
DEPRECIATIO
N
(193,760)
(11,040)
(60,000)
(264,800)
NET BOOK
VALUE
83,040
7,360
84,000
174,400
91,200
87,400
800
5,400
184,800
86,000
5,600
(91,600)
93,200
267,600
171,120
156,480
327,600
(60,000)
267,600
Lesson Six
283
284
Gross profit
Add: factory profit
Add: other expenses
Less expenses
Other expenses
Increase in unrealised profit on
closing stock
Net profit
X
X
X
X
X
X
(X)
X
Decrease in UPCS
Profit and Loss Account (extract) for year ended
Gross profit
Add: factory profit
Add: other incomes
Add: decrease in UPCS
Less expenses
Other expenses
Net profit
X
X
X
X
X
(X)
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.
Opening Stock:
100,000 (marked up)
=
120%
(16,667)
=
(20%)
83,333
=
100%
Closing Stock
160,000 (marked up)
=
120%
(26,667)
=
(20%)
133,333
=
100%
Balance
c/d
UPCS
Balance b/f
26,667 Profit and loss
a/c
26,667
16,667
10,000
26,667
Lesson Six
285
286
Sh
10,000
Sh
Sh
X
X
160,000
(26,667)
133,333
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Other incomes
Less expenses
Salaries and wages
Depreciation
Other expenses
Managers
commission
NET PROFIT
Department A
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department B
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department C
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Lesson Six
287
The balance sheet will reflect the position of the whole organization and therefore
a departmental balance sheet is not required.
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.
Type of Expense
1) Rent, rates, heat, light, repairs
to buildings,
depreciation of buildings and
insurance.
Basis of apportionment
Floor area occupied by each
department.
4) Carriage inwards.
Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and
childrens games and toys. For the purposes of his accounts, he wishes the
business to be divided into two departments:
Department A
Department B
The following balances have been extracted from his nominal ledger at 31 March
19X9:
Dr
Sales Department A
Sales Department B
Cr
15,000
10,000
288
250
Stocks Department A, 1 April
19X8
Stocks Department B, 1 April
19x8
200
Purchases Department A
Purchases Department B
Wages of sales assistants
Department A
Wages of sales assistants
Department B
Newspaper delivery wages
General office salaries
Rates
Fire insurance buildings
Lighting and air conditioning
Repairs to premises
Internal telephone
11,800
8,200
1,000
Cleaning
Accountancy and audit charges
General office expenses
30
120
60
25,000
750
150
750
130
50
120
25
25
25,000
Lesson Six
289
290
Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Department A
15,000
250
11,800
12,500
(300)
Gross profit
Less expenses
Wages
Newspaper delivery
wages
General office salaries
Rates
Fire insurance
buildings
Lighting and airconditioning
Repairs to premises
Internal telephone
Cleaning
Accountancy or audit
charges
General office
expenses
NET PROFIT
(11,750
)
3,250
Department B
10,000
200
8,200
8,400
(150)
(8,250)
Department C
25,000
450
20,000
20,450
(450)
1,750
1,000
150
750
-
1,750
150
450
26
10
300
104
40
750
130
50
24
96
120
5
5
6
72
20
20
24
48
25
25
30
120
36
(1,784)
24
(1,426)
1,466
Workings:
1) General Office Salaries:
A = 1/5 X 130 = 26
B = 4/5 X 130 = 104
3) Fire Insurance:
A = 1/5 X 50 = 10
B = 4/5 X 50 = 40
324
60
(20,000
)
5,000
(3,210)
1,790
Lesson Six
291
4) Lighting:
A = 1/5 X 120 = 24
B = 4/5 x 120 = 96
5) Repairs:
A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
292
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.
1)
Department A
1,466
Department B
324
Total
1,790
(73.3)
(16.2)
(89.5)
1,392.7
307.8
1,700.5
Department A
1,466
Department B
324
Total
1,790
(69.8)
(15.4)
(85.2)
Lesson Six
@ 5%
Net profit after
commission
293
1,392.2
308.6
1,704.5
Note:
If we use percentage for each commission assuming a 5% rate, the commission will
be computed as follows:
Before
charging
commission
100
After charging
commission
__5
95
__5
100
105
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
bank
892
27,380
475
100
210
800
120
900
180
993
32,050
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
294
2.
3.
4.
5.
6.
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.
Cheques drawn payable to trade creditors, but not presented at 1 January
19X6, amounted to 280 and at 31December 19X6 to 320.
All dishonoured cheques were re-presented and honoured during the year.
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.
Discounts allowed by trade creditors amounted to 480 and those allowed to
debtors were 520.
Other balances at 1 January and 31 December 19X6 are given below:
1 January
Stocks
Trade debtors
Accrued general
expenses
Rates paid in advance
Fixtures valued at
Trade creditors
Creditors for heating
and lighting
7.
4,500
2,800
240
40
2,800
1,800
80
31
December
5,800
3,200 (including a bad debt of
200 to be written off)
190
50
2,550 (including those
purchased during the
year)
2,200
70
1,000
7,000
3,000
750
Lesson Six
valuation
Equipment for grounds person
cost
depreciation
Subscriptions due
Bank current account
- deposit account
Claims
Accumulated fund
Creditors bar and caf stocks
- Sports ware
295
5,000
3,500
1,500
200
1,000
10,000
23,150
1,000
300
296
The bank account summary for the year to 31.12.95 contained the
following items:
Receipts:
Subscriptions
Bankings bar and sale
Sale of sports ware
Hire of sports ware
Interest on deposit account
Payments
Rent and repairs of clubhouse
Heating oil
Sports ware
Grounds person
Bar and caf purchases
Transfer to deposit account
11,000
20,000
5,000
3,000
800
6,000
4,000
4,500
10,000
9,000
6,000
10
230
40
10
20
90
200
Subscriptions due for more than 12 months should be written off with
effect from 1.1.95
Asset balances at 31.12.95 include:
Heating oil for club house
Bar and caf stocks
New sports ware, for sale, at cost
Used sports ware, for hire, at
valuation
700
5,000
4,000
1,000
800
Lesson Six
297
450
200
/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 firms 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%
240,000
p.a)
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
298
855,000
Purchases raw materials for
lampshades
- other goods
Wages
Rent and rates
Water and electricity
Motor expenses
Repairs
Interest on loan
Bank charges
Insurance
Sundry expenses
2,400,000
254,000
96,000
47,000
60,800
12,000
18,000
4,000
18,000
21,200
5,597,000
_______
5,597,000
Lesson Six
299
Additional Information:
(i) Rent and rates include a prepayment of rates of Sh. 6,000.
(ii) The insurance includes a premium for the period ending 31 October 1988.
(iii)
A trade debt of Sh. 14,000 is not expected to be realized.
(iv)
During the year a pick-up van, which was bought for Sh. 86,000, was
sold for Sh. 30,000, and replaced with another pick-up van costing Sh.
152,000. Both transactions have been posted to the motor vehicle account.
No disposal account has been opened. The straight-line rates of
depreciation based on cost are 25% p.a. for motor vehicle and 10% p.a. for
fixtures and fittings. A full years depreciation is charged in the year of
acquisition and none in the year of disposal.
(v) Accruals at 30 June 1988 were:
Water and electricity
Sh. 5,000
Sundry expenses
Sh. 4,000
(vi)
80,000
30,000
252,000
(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 lampshadesmaking 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
300
summarized the detailed entries into what I think you call a Receipts and Payments
Account, and have rounded the figures to the nearest 1.
At this point he supplied you with a copy of the following document:
Lesson Six
301
Balance c/d
73
Balance b/d
105
Membership fees:
(4) Insurance
premiums paid to
580
brokers
(1) Entrance
80
170 (7) Payments to
suppliers of
5,270
sporting requisites
(1) Annual
215 4,465 (5) Wages of grounds
3,600
subscriptions
man
(2) Life membership
530 (8) Postages and
692
telephones
(3) Training ground
454 7,206 (9) Stationery
629
fees
Insurance:
World-wide
Athletics Club
50
affiliation fee
(4) Premiums
638 (10) Rates of training
846
ground
(4) Commissions
53
Upkeep of training
ground
1,200
(11 Interest received
Transfers to bank
700
)
from investments
626
(12 Sale of office
370 (11) Purchase of
5,600
)
furniture
investments
(6) Sale of sporting
8,774 (11) Short term
3,000
requisites
deposits
Advertising revenue
603
Transfers from cash
____ __700
Balances c/d
122 2,563
822 24,1
822 24,1
35
35
Balances b/d
122 2,563
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.
302
(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.
Lesson Six
303
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
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 clubs
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 clubs Income and Expenditure Account for year ended 31 October
1983 and the Balance sheet at that date.
All workings must be shown.
*Freehold land is land held in perpetuity.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK
304
QUESTION ONE
The bank account of Fuller Ltd, prepared by the companys book-keeper, was as
shown below for the month of October 19-6:
Bank Account
1919-6
6
Oct
Oct
1
Balance c/d
91.40
2
Petty Cash
0623 36.15
13
3
McIntosh and Co
260.1
3
Fredas 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
Duncans storage
0623 106.7
Photographic
2
17
5
17 Puccinis 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 Graingers Garage
93.62 14 Trevors 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
Lesson Six
305
21
24
______
1,919.
37
Eastern Area
Electricity Board
28
Eastern Divisional
Gas Board
Petty Cash
30
Wages cash
31
Salaries transfer
Nov
1
Balance c/d
DD
108.6
4
DD
0623
23
0623
24
-
41.20
119.0
7
337.7
4
______
1,919.
37
221.5
2
306
Description
BCE
CR
Debit
Credit
Balance
90.45
175.02
265.47
062310
111.34
154.13
062312
9.18
144.95
062309
15.41
129.54
CR
062313
780.48
36.15
910.02
873.87
10
ADJ
12.90
15
062315
38.04
848.73
16
062314
141.17
707.56
17
CR
20
SO
504.22
646.90
21
062317
106.75
540.15
21
DD
196.83
343.32
21
062320
11.75
331.57
22
141981
212.81
118.76
22
ADJ
10.00
108.76
22
062319
28.42
80.34
443.56
886.77
1,151.12
Lesson Six
22
062320
22
CR
24
ADJ
27
27
307
11.75
68.59
93.62
162.21
212.81
375.02
26.35
348.67
062321
115.52
233.15
28
062322
44.09
189.06
28
DD
108.64
80.42
30
CGS
9.14
71.28
31
ADJ
Abbreviations:
BCE = Balance
Adjustment
INT = Interest
11.75
SO = Standing Order
DD = Direct Debit
83.03
CR = Credit
ADJ =
CGS = Charges
Required:
Prepare the companys bank reconciliation statement as at 31 October 19-6.
(Chartered Association of Certified Accountants)
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.
308
______
31,120
214,680
214,680
Lesson Six
309
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 Rudyerds 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 years accounts; and the other accounts
staff are too busy to assist you in preparing for the auditors 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.
310
(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 customers 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 companys 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 years 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);
Lesson Six
311
(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)
312
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31
December 19X9:
Ksh
Carriage inwards
Capital account at 1 January
19X9
Motor vans
Stock at 1 January 19X9
Balance at bank
Purchases
Sales
Trade debtors
Trade creditors
Rent and rates
Salaries
General expenses
Motor expenses
Discounts allowed
Discounts received
Insurance
Bad debts
Provision for doubtful debts 1
Jan 19X9
Provision for depreciation on
vans
Drawings
Disposal
Returns inwards
Ksh
6,310
500,000
200,000
164,000
116,860
1,593,690
2,224,000
290,000
157,600
56,080
350,400
44,720
25,600
40,400
37,600
17,600
30,400
8,000
60,000
50,000
7,140
2,993,200
6,000
_______
2,993,200
Lesson Six
313
(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.
(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 31 st December 19X9, and a
balance sheet as at 31 December 19X9.
QUESTION FIVE
The balance sheet of Johnsons shop at 1 October 19X7 was as follows:
Non current
assets
Shop premises
45,000
Shop fittings
Delivery van
12,000
4,000
Ksh
Current assets
Stock in trade
Cash in hand
14,000
2,000
Ksh
Ksh
Capital as at 1
Oct
Ksh
51,000
61,000
Current
liabilities
Trade creditors
16,000 Bank overdraft
77,000
12,000
14,000
26,000
77,000
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.
At 30 September 19X8 you discover the following:
314
1.
2.
3.
4.
Interest Ksh 2,500 due to Black for the year was unpaid.
Shop fittings are to be depreciated at 10% per annum on the total at the yearend; the delivery van is to be depreciated at 20% per annum of the total at the
year-end.
The rates payment during the year included Ksh 1,000 in respect of the period
1/10/19X8 to 31/3/19X9.
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.
Acknowledgement
315
LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying
on a business common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise
sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
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.
Accounting for partnerships.
The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is
expected to remain fixed. It will only change when the partners agree or incase of
any changes in the partnership like admission of or retirement of a partner.
The short-term interest is reflected in form of a current account which is affected
by the trading activities of the partnership (i.e.) the profits or losses and any
drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and
therefore the capital account becomes a fixed capital account. When there is no
FINANCIAL ACCOUNTING 1
Lesson Seven
316
distinction between a capital account and a current account then any short- term
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.
(Assume a firm of 3 partners A, B and C)
Loss or
revaluation
Goodwill written
off
Bal c/d
CAPITAL ACCOUNT
A
B
C
xx xx xx Bal b/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Additional capital
xx
(c/book or asset)
Gains on revaluation xx
Goodwill
xx
xx
Bal b/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
CURRENT ACCOUNT
B
C
A
xx
Bal b/d
xx
xx xx xx Interest on capital
xx
A
Bal b/d
Interest on
drawings
Drawings
Bal c/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
Salaries
xx
Share of profits xx
Loan interest
Bal c/d
xx
Bal b/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
317
Partnerships
xx
xx
xx
xx
xx
xx
xx
xx
xx
(xx)
xx
Less: Salaries
A
B
C
xx
xx
xx
(xx)
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.
xx
xx
xx
xx
xx
Net assets.
Capital: A
B
C
Current account A
B
C (debit balance).
Non-current liabilities
10% loan B
10% loan bank
xx
xx
(xx)
xx
xx
xx
xx
xx
xx
Lesson Seven
318
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:
Capital:
Partnership salaries:
Drawings:
A- 60,000;
A - 9,000;
A - 12,000;
B - 48,000.
B - 6,000.
B - 13,400.
6000
4800
(10,800)
22,040
Less: Salaries
A
9000
B
6000
(15,000)
Balance of profit to be shared in Profit Share Ratio
A
3520
B
3520
(7,040)
Drawings
12,86
0
Bal c/d
5,660
18,52
0
CURRENT ACCOUNT
B
13,400 Interest on
capital
Salaries
920 Profit shared.
14,320
7,040
6,000
4,800
9,000
3,520
6,000
3,520
18,520
14,32
0
319
Partnerships
Bal b/d
5,660
920
Lesson Seven
320
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:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December
2002
240
180
130
2,000
1,500
900
Less: Salaries
P
H
Balance of profit to be shared
W
50%
Pl
30%
H
20%
W
Interest on
draw
Drawings
240
2,000
3,500
10,500
6,300
4,200
30,350
550
30,900
(4,400)
26,500
(5,500)
21,000
(21,000)
Current Account
H
1,860
180
9,200
717
946
6,900
Interest on
2,000
900
321
Partnerships
7,100
capital
Salaries
Bal c/d
1,500
3,500
2,000
Share of
profits
Bal c/d
4,920
14,360
4,200
6,300
2,287
3,466
10,74
6
9,317
Net Assets
Capital
W
P
H
Current Accounts
W
Pl
H
10,000
14,360
10,74
6
9,317
xx
40,000
30,000
18,000
88,000
4,920
3,466
2,287
10,673
98,673
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.
Lesson Seven
Drawings:
Brick
Stone
Current account balances
At 1 October 19X8:
Brick
Stone
Capital account balances
At 1 October 19X8:
Brick
Stone
Debtors
Creditors
Balance at bank
322
24,000
11,000
3,600
2,400
credit
credit
33,000
17,000
9,300
8,400
7,700
Additional information
1. 10,000 is to be transferred from Bricks 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
322,100
323
Purchases
Rent and rates
Heat and light
Staff salaries
Telephone charges
Motor vehicle running expenses
Discounts allowable
Discounts receivable
Sales returns
Purchases returns
Carriage inwards
Carriage outwards
Fixtures and fittings at cost
Provision for depreciation
Motor vehicles at cost
Provision for depreciation
Provision for doubtful debts
Drawings: Brick
Stone
Partnerships
208,200
10,300
8,700
36,100
2,900
5,620
950
370
2,100
6,100
1,700
2,400
26,000
11,200
46,000
25,000
300
24,000
11,000
Lesson Seven
324
Current accounts:
Brick
Stone
Capital accounts:
Brick
Stone
Debtors
Creditors
Balance at bank
3,600
2,400
33,000
17,000
9,300
8,400
7,700
429,470
429,470
Sales
322,100
Less: Sales returns
2,100
320,000
less cost of sales
Opening Stock
23,000
Purchases (adjustment)
207,200
Add: Carriage inwards
1,700
208,900
Less: Purchases returns
(6,100)
202,800
225,800
Less: Closing Stock
(32,000)
(193,800)
Gross profit
126,200
Discount receivable
370
Less Expenses
Telephone charges (adjustment))
3,300
Printing and stationery and postage
3,500
Rent and rages (adjustment)
9,700
Heat and light
8,700
Staff salaries
36,100
Motor vehicle running expense
5,620
Discount allowable
950
Carriage outwards
2,400
Depreciation on fixtures and fittings
2,600
Depreciation on motor vehicles
9,200
Interest on loan (adjustment)
250
(82,320)
Net profit
44,250
Less: Salaries
Stone (adjustment)
(6,000)
Balance of profit to be shared
38,250
Brick 3 5
22,950
Stone
15,300
(38,250
325
Partnerships
Brick
24,00
0
Bal c/d
Stone
12,000
(adj)
11,700
Bal b/d
Interest on loan
Salaries.
Brick
3,600
250
2,800
Share profits
26,80
0
26,800
Stone
2,400
22,950
26,800
6,000
15,30
0
23,70
0
Lesson Seven
326
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.
327
Partnerships
Sales
1,236,500
Less cost of sales
Opening Stock
419,790
Add: Purchases
854,160
1273,950
Less: Closing Stock
(563,400)
710,550
Gross Profit
525,950
Reduction in provision for bad debts (400-300)
800
526,750
Less Expenses
10
Depreciation: Fixtures & Fittings (110,000-33,000 x 100
)7,700
Buildings
10,000
Carriage outwards
12,880
Discount allowed
1,150
Office expenses (24160 + 960)
25,120
Loan interest
40,000
Salaries and wages (18,9170 + 2000)
191,170
Bad debts
5,030 (293050)
Net Profit for the period
233,700
Add: Interest on drawings:
Mack
1,800
Spencer
1,200
3,000
236,700
Less: Salaries Mack
(8,000)
228,700
Less: interest on capital
Mack
35,000
Spencer
29,500
(64,500)
164,200
Balance of profits
Mack
82,100
Spencer
82,100
164,200
Mack Current Account
Drawings
64,000
balance b/d
13,060
Interest on drawings
1,800
salary
8,000
Interest on capital
35,000
Profit
82,100
bal c/d
72,360
138,160
138,160
Lesson Seven
328
Drawings
56,500
Interest on drawings
1200
Bal c/d
bal b/d
2980
Interest on capital 29,500
Profit
82,100
56,880
114,580
114,580
Cost
750,000
110,000
860,000
Current Assets
Stock
Debtors (16,243 320)
Cash at bank
Current Liabilities
Creditors
Accruals (200 + 96)
56,3400
15,9230
6770
72,9400
111,500
2,960
Depreciation
NBV
(260,000)
490,000
(40,700)
69,300
(300,700)
559,300
(114,460)
61,4940
1,174,240
35,000
29,500
64,500
56,880
129,240
72,360
400,000
1,174,240
329
Partnerships
Example 7.5
JUNE 1998 QUESTION 4
The balance sheet of the partnership of Kombo and Nzuki as at 31 March
1997 was as follows:
Capital accounts:
sh.
sh
Kombo
1,400,000
Nzuki
1,400,000
2,138,000
Current Accounts:
Kombo
136,000
Nzuki
(81,200)
Current Liabilities:
Creditors
501,600
Accruals
25,600
Suspense account
1,570,300
Shs.
Sh.
Fixed asset
54,800
Current Assets:
Stock
894,200
527,200 debtors
475,900
Provision
(46,400)
429,500
Prepayments
28,600
326,300 Bank and cash
281,000
3,708,300
3,708,300
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 customers 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. Kombos current account had been credited with a partnership salary of
Sh.60,000 which should have been credited to Nzukis 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 Seven
b)
330
331
Partnerships
SOLUTION
The following journal can be included although not required in the question.
DR
i)
ii)
iii)
iv)
DR:
CR:
DR:
CR:
DR:
CR:
DR:
CR:
v)
vi)
CR
26,400
26,400
26,400
26,400
200,000
200,000
13,500
13,500
DR:
CR:
DR:
CR:
DR:
CR:
DR:
CR:
39,200
11,200
31,200
31,200
3,280
3,280
60,000
60,000
39,200
Lesson Seven
(a)
332
Bal b/d
Kombo
Shs
-
Nzuki
Kombo
Shs.
136,00
0
-
60,000
Drawings
Bal c/d
39,200
198,12
8
86,352
297,32
8
167,55
2
(b)
Discount allowed
Discount received
Sales
Debtors
Motor vehicle disposal
Net profit
adjustments
Suspense Account
Shs.
26,400 bal b/d
26,400
200,000
13,500
60,000
326,300
Nzuki
Shs.
-
161,32
8
60,000
107,55
2
297,32
8
167,55
2
Shs.
326,300
326,300
333
(c)
Partnerships
Shs.
1,200,000
520,000
374,000
2,094,000
894,200
388,080
28,600
218,000
1,528,880
36,800
(538,400)
3,084,480
990,480
1,400,000
2,800,000
1,400,000
198,128
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.
EXAMPLE 7.6 JUNE 1997
Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not
maintain proper books of accounts. The following information has been obtained
from the available records on 31 March:
1996
1997
Sh.
Sh.
Balance at bank
94,800
169,680
Stock in trade
541,200
488,640
Trade debtors
612,000
?
Trade creditors
?
305,760
Furniture
360,000
Motor vehicles (book value)
1,920,000
Lesson Seven
334
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 Kefas 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
Additional capital by Kefa
Cash sales
Payments:
For purchases
Salaries paid
Rent paid (for 6 months to 30.9.96)
Rates paid (for 6 months to 30.6.97)
Electricity charges
Advertising
Motor vehicle expenses
Sundry expenses
Drawings Kefa
Mark
3,491,520
240,000
586,800
3,070,080
420,000
144,000
120,000
60,000
41,760
119,520
33,600
132,480
102,000
6,240
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) Partners capital accounts
(4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
KEFA and MARK
STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets
Sh.
Sh.
335
Partnerships
Bank
Stock
Debtors
Furniture
Motor vehicle
Liabilities
Creditors
Net Assets
Capital
94,800
541,200
612,000
360,000
1,920,000
3,528,000
(423,360)
3,104,640
Kefa
Mark
1,452,320
1,652,320
3,104,640
Trading, Profit and loss account for the year ended 31 March 1997
Sh
Sh.
3,849,120
Sales
Less cost of sales
Opening stock
Purchases
Less: Closing stock
Gross profit
Profit on disposal adjustment
541,200
2,952,480
488,640)
Less Expenses
Salaries
Rent adjustment
Rates
Electricity
Advertising
Motor vehicle
Sundry expense
Depreciation Furniture
- Motor vehicle
Net Loss should in PSR
Kefa
Mark
(3,005,040)
844,080
230,000
1,074,080
420,000
288,000
60,000
72,480
48,000
119,520
37,200
36,000
126,000
(66,560)
(66,560)
(1,207,200)
(133,120)
133,120
Sh.
360,000
1,620,000
Current Assets
Stock
Debtors Trade Adjustment
- others vehicle
Sh.
(36,000)
1,260,000
(162,000)
488,640
382,800
640,000
Sh.
324,000
(126,000)
1,134,000
1,458,000
Lesson Seven
336
Prepayments
Bank
Current Liabilities
Creditors
Accruals
Capital -
Kefa
Mark
60,000
169,680
1,741,120
305,760
166,320
(472,080)
1,269,040
2,727,040
1,243,280
1,483,760
2,727,040
337
Partnerships
Kefa
Shs.
Drawings
132,480
Disposal
Capital Account
Mark
Shs.
Bal b/d
102,000
Cash
250,000
Kefa
Shs.
1,452,3
20
mark
Shs.
1,652,3
20
240,000
Loss shared
Bal c/d
66,560
1,243,28
0
1,692,32
0
66,560
1,483,76
0
1,652,32
0
1,692,3
20
1,652,3
20
Lesson Seven
338
(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:
1) Goodwill is written off from the accounts
2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.
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.
339
Partnerships
CAPITAL ACCOUNT
B
Bal b/d
A
1,000,0
00
B
1,500,0
00
250,000
250,000
Goodwill(OPSR)
Bal c/d
2)
Goodwill
12,500,0
00
12,500,0
00
1,750,0
00
1,750,0
00
CAPITAL ACCOUNT
A
B
300,000
Bal b/d
A
1,000,000
B
1,500,00
Lesson Seven
340
(NPRS)
Bal c/d (NPSR)
200,000
1,550,00
0
950,000
12,500,00
0
0
Goodwil
l
(OPSR)
1,750,00
0
250,000
250,000
12,500,00
0
1,750,00
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 partners 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.
Assets/Liabilities
Buildings
Fixtures, Fittings & furniture
Motor vehicle
Stock
Debtors
(50,000)
Creditors
Loss
2,000,000
2,500,000
100,000
900,000
800,000
(100,000)
1,200,000
1,150,000
(50,000)
700,000
650,000
(50,000)
450,000
400,000
800,000
700,000
100,000
Required:
Prepare Revaluation account and the partners capital account given the
partners balances as
A 3,000,000
B 2,500,000
C 1,500,000
REVALUATION ACCOUNT
Fixtures
Motor vehicles
Stock
Debtors
Capital A/C A 2 5
B
100,000
50,000
50,000
50,000
140,000
140,000
buildings
Creditors
500,000
100,000
341
Partnerships
70,000
600,000
600,000
Goodwill
A
000
Bal c/d
3,140
3,140
CAPITAL ACCOUNT
C
000
Bal b/d
2,640 1,510 Revaluatio
n
2,640 1,570
B
000
A
000
3,000
140
B
000
2,500
140
C
000
1,500
70
3,140
2,640
1,570
62,379
34,980
___760
90,000
37,000
15,000
2,000
144,000
98,119
242,11
9
85,000
65,000
35,000
185,000
Lesson Seven
342
3,714
Alan
Bob
Charles
Loan Charles
Current liabilities
Creditors
Bank overdraft
(2,509)
4,678
5,883
28,000
19,036
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:
343
Partnerships
Goodwill
written
off
Motor
vehicle
Cashbook
Bal c/d
Don
Alan
Bob
12,0
00
-
18,00
0
-
12,0
00
-
21,00
0
67,00
0
106,0
00
67,0
00
79,0
00
Don
Alan
67,0
00
79,0
00
Bob
Charl
es
Capital Accounts
Don
Alan
- Bal b/d
3,900 Goodwil
l
38,10 Cash
0 book
42,00
0
Charl
Bob
Charl
es
85,00
0
21,00
0
-
65,0
00
14,0
00
-
35,00
0
7,000
106,0
00
79,0
00
42,00
0
79,0
00
79,0
00
Current Accounts
Don
Alan
Bob
Charl
Lesson Seven
Bal b/d
Cash
book
344
2,50
9
9,02
3
es
es
- Bal b/d
3,714
4,678
7,478 Revaluation
a/c
8,400
5,60
0
2,800
3,09
1
3,09
1
12,11
4
5,60
0
7,478
Cash book
Bal c/d
3,09
1
3,09
1
3,091
12,11
4
3,09
1
5,60
0
7,478
345
Plant
Stock
Debtors
Profits shared:
Alan
Bob
Charles
Partnerships
Revaluation Account
2,000 Premises
30,000
8,200
3,000
8,400
5,600
2,800
30,000
_____
30,000
Cash book
Bal b/d
Don - capital
account
Current account
Current
account
Alan capital
account
Current account
Bal c/d
38,100
8,000
7,478
21,000
9,023
******
Cash book
Don - capital
account
Current account
Bal b/d
79,000 Charles capital
account
3,091
Loan account
Current account
Alan capital
account
Current account
4,200
38,100
8,000
7,478
21,000
9,023
Lesson Seven
346
Cost
Depreciatio
n
Premises
Plant
Vehicles
Fixtures
120,000
35,000
1,100
2,000
168,100
Current Assets
Stock
Debtors
Cash
54,179
31,980
__760
86,919
Less Current
Liabilities
Creditors
Bank overdraft
19,036
5,710
Capital accounts
Alan
Bob
Don
67,000
67,000
67,000
Current Accounts
Alan
Bob
Don
Non current
liabilities
Loan Charles
NBV
3,091
3,091
3,091
(24,746)
62,173
230,273
201,000
9,273
210,273
20,000
230,273
NOTE:
i.
ii.
iii.
iv.
347
Partnerships
(d)
Admission of a new partner.
When a new partner is admitted into the firm, this marks the end of the old
partnership and the beginning of a new one.
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 partners account(only the old) and is again written off
by debiting the partners 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
Lesson Seven
2.
3.
4.
5.
6.
7.
8.
9.
348
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
349
Partnerships
Gross profit
S
TS
GP
Expenses
Dep. Motor
Vehicle
Furniture
Salaries
Accountancy
fees
1.3.20003.10.2000
Sh
Sh
1,858,00
0
1.11.200030.4.2001
Sh
Sh
2,787,00
0
Sh
160,0
00
160,00
0
320,00
0
15,00
0
483,7
50
15,000
30,000
483,75
0
52500
967,50
0
105,00
0
275,00
0
137,50
0
359,60
0
550,00
0
275,00
0
612,00
0
52,50
0
275,0
00
137,5
00
362,4
00
Wages
Rent, rates,
electricity
General
expenses
Prov. For
depreciation
30,00
0
(1,506,1
50)
10,000
(1,393,3
50)
40,000
Net Profit
351,850
Sh
4,645,00
0
2,899,50
0
1,745,50
0
1,393,65
0
Less: Interest on
capital
Rotich
37,50
0
37,500
75,000
25,00
0
-
25,000
50,000
Sinei
Tonui
(62,500)
Balance of profit
shared
Rotich
Sinei
18,750
289,350
192,9
00
96,45
0
(81,250)
18,750
1,312,40
0
524,96
0
717,86
0
524,96
0
621,41
0
(143,750
)
1,601,75
0
Lesson Seven
Tonui -
350
(289,350
)
262,48
0
(1,312,4
00)
262,48
0
(1,601,7
50
b)
Goodwill
w/o
Capital
A/C
R
Sh.
1,200,0
00
S
Sh.
1,200,0
00
Current Account
R
Bal b/d
Sh.
T
Sh.
600,00
0
375,00
0
Drawings
150,00
0
120,00
0
62,500
400,00
0
Cash
book
Goodwill
(2:1)
Interest
on
capital
Profit
share
Bal c/d
1,842,8
60
3,192,8
60
c)
651,41
0
1,971,4
10
S
Sh.
300,00
0
493,73
0
1,531,2
30
C
Sh.
-
1,250,00
0
2,000,0
00
1,000,0
00
75,000
50,000
18,750
717,86
0
621,41
0
262,480
3,192,8
60
1,971,4
10
1,531,23
0
Sh
2,250,000
1,600,000
4,150,000
Sh.
300,000
Sh.
2,250,000
(130,000)
(620,000
980,000
(750,000) 3,400,000
351
Partnerships
Current Assets
Stock
Debtors
Less Provision
Prepayments
Balance at bank
Current Liability
Creditors
Accruals
1,275,000
193,000
(40,000)
1,070,000
15,000
153,000
50,000
820,000
2,298,000
(1,085,000)
1,213,000
4,613,000
Capital: Rotich
Sinei
Tonui
Current Account: Rotich
Sinei
Tonui
(d)
750,000
500,000
375,000
1,625,000
1,842,860
651,410
493,730
2,988,000
4,613,000
(e)
Retirement of a partner
When a partner retires (i.e.) leaves the firm and the others partners are left to
continue with the business then the retirement marks the end of one
partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This
include:
1)
Capital balance
This will be all the amounts the partner has invested in the firm. Some firms
may not be able to refund the amount in full and therefore it may be
transferred t o a loan account whereby interest will be paid on the balance.
2) Goodwill
Because this partner contributed to the improvement (existence) of the
partnership therefore it will be fair to pay him his share of the goodwill.
Goodwill is introduced to the accounts in the old profit sharing ratio ((i.e.)
credited to all the partners capital accounts in the old profit sharing ratio),
then written off from the accounts by debiting the capital accounts of the
remaining partners in the new profit share ratio.
Lesson Seven
352
353
Partnerships
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
Creditors
156,000
156,000
Wakil obtained a loan from a commercial bank and paid into the partnership
the net amount
due for him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200,
000 but was not to be maintained in the books of the partnership of Kyamba
and Onyango.
4.
After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the
following terms and details of the new partnership.
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 Seven
354
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh
Net profit for the year
Less: Interest on capital
Kyamba
Onyango
Sh.
240,000
20,000
20,000
(40,000)
200,000
Less: Salaries
Kyamba
72,000
Onyango
60,000
Balance of profits shared in PSR
Kyamba
34,000
Onyango
34,000
b)
(2) Goodwill
in New PSR
(4) Fixed
Assets
K
100,00
0
O
100,00
0
Stocks
Debtors
Bal c/d
200,00
0
(132,000)
68,000
(68,000)
CAPITAL ACCOUNT
K
Bal b/d
160,0
00
306,0 (1)Goodwill in
00
old PSR
80,00
0
157,0 Cashbook
00
48,00
0
165,0 Profit on
00
transfer in
12,00
old PSR
0
Creditors
W
200,00
0
O
140,0
00
W
200,0
00
80,00
0
40,00
0
-
68,00
0
12,00
0
156,0
00
Current
account (3)
53,00
0
Cash book
(**)
300,00
0
c)
3000,0
00
628,0
00
CURRENT ACCOUNT
6,000
300,0
00
300,0
00
173,0
00
628,0
00
355
Partnerships
Capital
K
Sh
-
O
Sh
-
W
Sh
53,000
Bal b/d
K
Sh
65,300
O
Sh
49,00
0
Drawing
s
85,00
0
70,000
Interest on
capital
Salaries
20,000
W
sh
53,00
0
-
20,00
0
72,000
60,00
0
Bal c/d
106,3
00
93,000
191,3
00
163,00
0
Share of
profits
53,000
34,000
191,300
Sh.
Sh.
205,000
228,000
135,300
394,300
599,300
200,000
200,000
400,000
Current:
Kyamba
Onyango
106,300
93,000
b)
199,300
599,300
Bank
Working capital
Kyamba- capital
Onyango capital
Increase
34,00
0
173,000
Bal b/d 48,700
48,000
Drawings
68,000 Kyamba
85,000
50,000 Onyango
10,000
_______ Bal c/d
135,300
339,000
339,000
163,0
00
53,00
0
Lesson Seven
356
Workings:
Non Current Assets:
Bal b/f
Transfer
Balance
465,000
260,000
205,000
Stock:
Bal b/f
Transfer
Increase
294,000
(166,000)
100,000
228,000
Bal b/f
Transfer
Increase
209,000
(172,000)
90,000
127,000
Bal b/f
Transfer
252,000
156,000
96,000
Debtors:
Creditors:
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 Upps 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
357
Partnerships
Stocks
3,500
Upp: private expenses paid (on 31 March 19 2)
459,000
500
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;
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.
2.
Lesson Seven
358
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
179,750
500
750
1,250
181,000
Less:
Interest on capital
Upp [15% x 60,000]
Downe [15% x 40,000
Less: Salary Downe
Balance of profits shared
in PSR
Capital Upp (1/2)
- Downe (1/2)
9,000
6,000
(15,000)
166,000
(16,000)
150,000
75,000
75,000
150,000
_____-
359
Partnerships
(b)
Upp
Capital Accounts
Downe
Balances b/d
500
750
Loan interest
12,000
15,000
Appropriation
-salary
400
-interest on
capital
-residual profit
Appropriation
- interest on
drawings
Salary
Drawings
Private
expenses/goods
Car
Revaluation (deficit)
(W1)
[see workings after
(c)]
Loan (balancing
figure)
Balance c/d
Goodwill written
back (W2)
Balances c/d
20,00
0
500
10,00
0
20,00
0
103,0
00
_____154,0
00
Side
10,00
0
65,00
0
75,00
0
Upp
60,00
0
10,00
0
Downe
40,000
16,000
9,000
6,000
75,00
0
75,000
88,850
137,00
0
______
154,0
00
______
137,00
0
Downe
30,000
Balance b/d
Side
Downe
88,850
58,850
Cash
75,00
0
75,00
0
____-
20,000
88,850
(c)
Balance Sheet as at 1 April 19-2
50,000
88,850
Lesson Seven
360
Current liabilities
Creditors [35,000 + 4,750]
39,750
Working capital
150,350
200,350
58,850
65,000
123,850
Loan
Upp (W4)
_76,500
200,350
Workings
W1
Revaluation
Debtors
Fixed assets (cost)
Stocks
Legal etc expenses
Creditors
201,00
0
200,00
0
3,500
4,750
35,000
______
444,25
0
Balance b/d
40,000
_____
40,000
Creditors
Provision for
depreciation
Capital Upp (car)
Fixed assets
Stocks
Debtors
Goodwill
Balance c/d (deficit)
Capital
-Downe (1/2)
-Upp (1/2)
29,250
90,000
10,000
50,000
5,000
180,00
0
40,000
40,000
444,25
0
20,000
20,000
40,000
W2
Goodwill
Revaluation
40,000
Capital
-Downe (75%)
30,000
361
Partnerships
_____
40,000
-Side (25%)
10,000
40,000
W3
Cash
Balance b/d
Capital
-Side
Bal b/d
6,600
75,000
81,600
5,100
Loan
-Upp [1/2 x
153,000]
Balance c/d
76,500
5,100
81,600
W4
Loan - Upp
Cash
Balance c/d
76,500
76,500
Balance b/d
Capital
-Upp
153,00
0
Balance b/d
50,000
103,00
0
153,00
0
76,500
Lesson Seven
362
REINFORCEMENT QUESTIONS
QUESTION ONE
1.
1992:
Sh.
Freehold factory at cost
Factory plant, at cost
Provision for depreciation 1 April 1991
Delivery van, at cost
Provision for depreciation 1 April 1991
Stocks at 1 April 1991
Raw materials
Work-in-progress
Toys completed (30,000 at Sh.40)
Sales (45,500 toys)
Purchases of raw materials
Factory wages
Sales department wages
Expenses:
Factory
Sales Department
Provision for doubtful debts 1 April 1991
Trade debtors and creditors
Bank overdraft
Capital accounts:
Kimeu
Maingi
Drawings:
Kimeu
Maingi
Sh.
1,053,750
843,750
151,250
401,250
86,250
100,700
85,000
1,200,000
2,775,500
716,250
375,500
150,750
301,750
250,500
450,000
40,000
150,000
176,200
1,400,000
1,425,000
150,000
125,000
6,204,200
6,204,200
363
Partnerships
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-inprogress 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:
Lesson Seven
364
Amis
1,000
Lodge
900
Pym
720
6. According to the partnership agreement, Pym is allowed a salary of 13,000
per annum. This amount was owing to Pym for the year to 31 March 19-8,
and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital
account at a rate of 10% per annum. There were no movements on the
respective partners capital accounts during the year to 31 March 19-8, and
the interest had not been credited to them as at that date.
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
365
Partnerships
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.
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 Seven
366
280,000
210,000
140,000
7,000
6,000
28,000
24,000
15,000
50,000
2,000,000
1,400,000
180,000
228,000
120,000
20,000
200,000
250,000
30,000
240,000
420,000
38,000
3,143,000
50,000
350,000
3,143,000
367
Partnerships
10%
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.
For accounting purposes, each of these three activities is treated as a separate
department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos
comprised:
Cash sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Credit sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Stocks (at 1 October 1985):
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Credit purchases:
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Fixed assets (at 1 October 1985):
*Freehold buildings:
Workshop
Petrol and oil
Showroom
Plant, equipment and vehicles:
Workshop
Petrol and oil
32,125
32,964
8,500
65,892
41,252
81,914
1,932
3,018
20,720
23,860
41,805
52,100
12,600
14,200
38,000
65,180
22,900
Lesson Seven
Showroom
Provisions for depreciation (at 1 October
1985):
Freehold buildings:
Workshop
Petrol and oil
Showroom
*Note Freehold held in perpetuity
Plant, equipment and vehicles:
Workshop
Petrol and oil
Showroom
Fixed asset acquisitions during year (at
cost):
Plant and equipment:
Workshop
Petrol and oil
Showroom
Fixed asset disposal proceeds during the
year (see note (3)):
Plant and equipment:
Workshop
Salaries:
Showroom
Rates
Electricity
General expenses
Wages:
Direct:
Workshop
Petrol and oil
Indirect:
Workshop
Showroom
Creditors:
Workshop
Petrol and oil
Showroom
Bank/Cash:
Workshop
Petrol and oil
Showroom
Debtors:
Workshop
Petrol and oil
Drawings:
Duke
Earl
Current accounts (at 1 October 1985)
(credit balances):
368
17,450
5,060
7,100
19,390
48,254
17,077
9,451
26,210
4,250
1,060
5,200
10,200
26,738
9,453
10,692
34,050
5,602
6,810
4,160
4,225
5,602
15,250
316
1,605
30,470
1,365
537
12,190
9,740
369
Partnerships
Duke
Earl
Capital accounts:
Duke
Earl
9,750
10,477
50,000
40,000
Lesson Seven
370
Wages:
Direct:
Workshop
113
Petrol and oil
83
Indirect:
Workshop
214
Showroom
231
Electricity
517
General expenses
1,304
5) Prepayments at 30 September 1986
Rates
13,300
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;
a) A departmental trading and profit and loss account for Aristocratic Autos for
the year ended 30 September 1986.
(20
marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September
1986.
(14 marks)
(Total: 34 marks)
371
Partnerships
Lesson Seven
372
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:
Capital
accounts:
Reg
Sam
Ted
Current
Accounts:
Reg
Sam
Ted
(debit)
Creditors
Buildings
9,000
8,000
8,000
Equipment
Stock
Debtors
25,00 Bank
0
17,000
3,300
900
2,020
2,840
140
200
340
100
240
___82
0
26,06
0
_____
26,060
buildings
17,000
Equipment (including additions of 400)
Stock
1,100
Debtors
2,230
Bank balance
3,370
Creditors
980
3,480
373
Partnerships
There were no additions to, or reductions of, the capital accounts during the four
months, but the following drawings have been made:
Reg
Sam
Ted
2,000
1,600
1,800
Lesson Seven
374
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.
375
Partnerships
TIME ALLOWED:
Payments
Ban
k
Cash
Bank
Opening balances
b/d
Debtors:
members
Joining fees
(note 1)
Annual
subscriptions
(Note 2)
31
190
285
522
83
Lesson Seven
Annual concert
(note 3)
Takings
Sales of goods
(note 4)
Musical
instruments
Prize moneys
(note 7)
Sponsorship grant
(Note 5)
Refreshment sales
Raffle profits
PAC grants (note
6)
Revenue
Capital
376
1,791
287
190
113
64
Purchase for
resale
(Note 4)
Sheet music
118
Annual concert
(note 3)
Hall booking fees
490
Printing of
publicity
300
Posters
Hire professional
Soloists
Musicians
100
Adjudication fees
400 Musical Festivals
(note 7)
2,91
Entrance fees
0
Hire of buses
Honoraria (note 8)
Secretary
Treasurer
R.M.F.C affiliation
fee
(Note 9)
Rent of societys
premises
(Note 10)
Refreshment
purchases
Bank charges
Sundry expenses
Transfers to bank
a/c
Transfers from
cash a/c
4,24
9
112
236
174
250
281
150
100
72
510
72
42
60
2,910
49
723
3,091
4,249
377
Partnerships
fifth of each joining fee is credited to Income and Expenditure account each
year.
New members statistics are
During the
year
Ended 31
May
1981
1982
1983
1984
1985
Number
of
new
members
No.
20
24
32
27
35
Joining fees in
Suspense at 31
May 1984
20
48
192
216
Nil
476
Capital
grants
Suspense
30
70
Lesson Seven
1983
1984
378
120
120
340
Payment
120
120
120
120
1985
31 March
150
510
1984
Fixed assets
Musical instruments
Trophies
Purchases for resale
Sheet music
Musical instruments
2) Subscriptions
Payments in advance included in the
actual receipts for the year
3) Stocks at 31 May
Goods for resale
1985
79
119
23
14
45
13
20
39
30
40
379
Partnerships
Sheet music
31
52
Musical instruments
70
94
Refreshments not brought into account on the grounds that
It is not material in amount
4) Fixed assets (at cost) at 31 May
musical instrument
Trophies
1,378
247
5 years
10 years
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
1980
1
Balance b/
32,000
Oct.
1981
Lesson Seven
30
Sept.
380
Balance c/d
57,600 30
Sept.
57,600
Profit and
loss
57,60
0
1982
30
Sept.
Disposals
Balance c/d
1983
30
Sept.
Disposals
Balance
1
Oct.
10,800 1982
Balance b/d
73,440 30
Sept.
Profit and
loss
includes
10,000
(depreciation
on 1982
acquisitions)
26,640
___
__
84,24
0
29,280 1
Oct.
79,328 1983
30
Sept.
1
Oct.
Vehicles
(vehicles
Originally
acquired
On 1
October
57,600
_____
84,24
0
_______
108,6
08
1982
30
Sept.
25,600
Disposals
1982
30
Sept.
30,000
Balance b/d
73,440
Profit and
loss
(includes
20,000
Depreciation
on
1983
acquisitions)
35,168
Balance b/d
______
10860
8
79,328
Provision for
Depreciation
10,800
Bank
16,000
381
Partnerships
1979)
Profit and
loss
______
30,00
0
______
30,00
0
1983
30
Sept.
Vehicles
(vehicles
Originally
acquired
On 1
October
1979)
Profit and
loss
3,200
1983
300
Sept.
60,000
Provision for
Depreciation
29,280
Bank
42,000
11,280
______
71,28
0
______
71,28
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:
Sales ledger control account 110,172
Purchase ledger control account
Suspense account (debit balance)
78,266
2,315
The sales ledger debit balances total 111,111 and the credit balances total
1,234.
Lesson Seven
382
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 Ys
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 Ys
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)
383
Partnerships
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.
On 30 September 1984, the trial balance of the firm was:
19,750
8,470
155,43
0
72,100
232,60
0
127,00
0
Repair charges
Wages and salaries (employees):
Shop and offices
Workshop
Prepaid expenses (at 30 September
1984)
Accrued expenses (at 30 September
54,640
18,210
640
3,160
Lesson Seven
1984)
Provision for doubtful debts at 1 October
1983
Rent and rates:
Shop and offices
Workshop
Stationery, telephones, insurance:
Shop and offices
Workshop
Heating and lighting:
Shop and offices
Workshop
Debtors
Creditors
Bank
Cash
Other general expenses:
Shop and offices
Workshop
Depreciation:
Shop and offices (including vehicles)
Workshop
Shop fittings (cost)
Workshop tools and equipment (cost)
Vehicles (cost)
Discount received:
Shop
Workshop
Bank loan (repayable in 1988)
Loan from Harry UII
Capital Accounts:
R. Dyo
H. UII
V. Vez
Current Accounts (after drawings have
been debited):
R. Dyo
H. UII
V. Vez
Loan interest:
Bank loan
Loan from H. UII
Provision for depreciation:
Shop fittings
Workshop tools and equipment
Vehicles
384
920
7,710
8,450
2,980
1,020
4,640
3,950
4,460
15,260
48,540
960
3,030
2,830
2,400
2,580
17,060
55,340
27,210
420
390
15,000
10,000
40,000
40,000
20,000
290
1,040
920
2,400
500
3,190
10,020
5,670
525,5
90
525,5
90
385
Partnerships
Lesson Seven
386
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
Depreciation to date
Motor Van: cost
Depreciation to date
Stock of materials
Debtors
Rent of premises paid in advance to 30
September 1997
Insurance paid in advance to 31 December
1997
Bank balance
Cash in hand
Liabilities
Creditors for supplies
Telephone bill owing
Electricity owing
12,600
5,800
9,000
6,500
14,160
9,490
750
700
1,860
230
3,460
210
180
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998
are as follows:
Receipts
Opening balances
Receipts from
customers
Loan received
Proceeds of sale of
vehicles
Cash
Bank
83,99
0
3,600
1,600
8,400
387
Partnerships
48,26
0
24,04 Telephone
0
Electricity
2,100 Wages of repair staff
Miscellaneous expenses
Drawings by Ernie
Refund to customer
Cash paid into bank
Cash withdrawn from
bank
Closing balance
101,1
30
12,80
0
860
191,8
80
890
68,20
0
1,280
8,000
400
24,04
0
890
101,1
30
48,26
0
29,80
0
191,8
80
Suppliers
4,090
Telephone
240
Electricity
220
Miscellaneous expenses
490
6) At 30 June 1998, amounts due from customers totaled 10,860. Of this
amount, Ernie considered that debts totaling 1,280 were bad and should be
written off.
7) Stock of materials at 30 June was 12,170
8) Ernie agreed to pay his wife 5000 for her assistance with his office work
during the year. This amount was actually paid in August 1998.
Required:
Prepare Ernies trading profit and loss account for the year ended 30 June
1998 and a balance sheet as at that date.
Lesson Seven
388
Acknowledgement
389
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 owners 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.
There are 2 main types of share capital
Preference share capital
This is made up of preference shares and a preference share carries the right to a
final dividend, which is expressed as a percentage of their par value. E.g. 10%
preference shares.
Preference shares do not carry a right to vote and therefore no control in the
company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are
entitled to residual value of the business during winding up, and all profits after
the claim on all of the preference dividend have been paid. The more the no. of
ordinary share held, the higher the control.
FINANCIAL ACCOUNTING 1
Lesson Eight
390
391
Company Accounts
150,000 20 p = 30,000
Paid up share capital
150,000 50p = 75,000
The principal distinctions between unlimited partnerships and limited companies
are:
Unlimited Partnerships
Limited Companies
Number of partners
limited to 20 except for
professional firms.
Lesson Eight
The partners contribute
the capital by
agreement. The amount
need not be fixed.
A share in a partnership
cannot be transferable
except by the consent of
all partners.
A partnership is not
obliged to keep statutory
books of account and an
audit is not compulsory.
392
Sales
x
Less Returns inwards
(x)
x
Less Cost of Sales
x
Opening Stock
x
Purchases
x
Add Carriage in
x
(x)
x
Less purchase returns
x
(x)
(x)
Less Closing stock
x
Gross Profit
393
Company Accounts
Add incomes
Discount received
Profit on disposal (sale of Assets)
Income from investment (can also be
shown below)
Other incomes e.g. interest received from
bank
Less Expenses
Other expenses
Directors salaries/fees/---Audit fees
Debenture Interest
Amortization of good will
Operating profit for the period
Add investment income
Profit before tax
Taxation: Corporation tax
Transfer to deferred tax
Under or over provision
Profit after tax
Less: transfer to the general reserve
Less: Dividends
Preference dividend:
Final proposed
x
x
x
x
x
x
x
x
Ordinary dividend:
Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
B Limited
Balance sheet as at 31.12
Intangible Assets
Goodwill
Copyrights, patents
(Longterm) Investments (mkt
value sh x)
x
x
x
x
x
(x)
x
x
x
Interim paid
x
x
x
x
x
x
x
x
x
x
x
(x)
(x)
(x)
(x)
x
x
x
x
x
x
x
x
x
(x)
(x)
x
x
x
x
x
(x)
x
(x)
x
(x)
x
x
x
Lesson Eight
Current Assets
Stock
Debtors
Less provision for bad debts
Prepayments
(Short term) Investments
Cash at bank
Cash in hand
Current liabilities
Bank overdraft
Creditors
Accruals
Interest payable(debenture
interest)
Tax payable
Dividends payable
394
x
x
(x)
x
x
x
x
x
x
x
x
x
x
x
x
(x)
x
x
x
(x)
x
Financed by
Authorized share capital
100,000 ordinary shares of 1
each
100,000 preference shares of 1
each
Issued and Fully paid
80,000 ordinary shares of 1 each
50,000 10% preference shares of
1 each
Capital Reserves
Share premium
Revaluation Reserve
Capital Redemption Reserve
Revenue Reserves
General Reserve
Profit and loss A/C
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
395
Company Accounts
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.
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).
(e.g.)
Taxation Account
Cashbook
Bal c/d
Under provision
Corporation tax
160,000
140,000
300,000
Bal b/d
150,000
Appropriation
150,000
300,000
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.
Lesson Eight
396
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
A
Cr Sahre Premium /C
(100,000 0.5)
50,000
Issue of shares at a premium of 0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets
especially for Land and buildings. When company sills its property to realize the
gain, the amount is transferred to the Profit and Loss Account.
Capital Redemption Reserve: A reserve created after redemption or purchase of
Preference shares without issuing new shares. The transfer is made from either
the share premium or the profit and loss account.
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.
397
Company Accounts
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.
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
Dr share premium A/C [20,000 1 ] 20,000
Cr ordinary share capital
20,000
A bonus issue of 20,000 shares
Balance sheet (extract)
Ordinary shares of 1
Capital Reserves
Share premium
120,000
30,000
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
Lesson Eight
398
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
Balance sheet (extract)
140,000
Ordinary shares @ 2
Capital Reserves
Share premium
80,000
280,000
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.
The following is the trial balance of Transit Ltd at 31 March 19X8.
399
Company Accounts
311,1
22
22
A profit and loss account for the year ended 31 March 19X8:
A balance sheet at that date.
(22 marks)
Lesson Eight
400
Solution:
Transit Ltd
Profit and Loss A/C for the year ended 31.3.19X8
Gross profit
Profit on disposal of van
Rent Receivable
Less: Expenses
Depreciation on motor vans
Administration expenses
Distribution expenses
Debenture interest
Bank interest
Trading profit for the year
Add investment income
Profit before tax
Taxation
Profit after tax
Less: Dividends
Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
500
32,65
0
10,00
0
1,050
162
1,260
4,200
72,45
0
190
3,600
76,24
0
(44,3
62)
31,87
8
340
32,21
8
(12,7
00)
19,51
8
(5,46
0)
14,05
8
17,85
2
31,91
0
401
Company Accounts
Transit Ltd
Balance sheet as at 31.3.19X8
Non-Current Assets
Leasehold properties
Motor vans
75,000
2,400
77,400
(960)
960
75,000
1,440
76,440
6,750
83,190
Investments
Current Assets
Stock
Debtors
16,700
31,000
47,700
Current liabilities
Bank overdraft
Creditors
Tax payable
Proposed dividends
980
24,100
12,700
4,200
Financed by:
Authorized issued and fully paid
42000 ordinary share of 1
Revenue Reserves
Profit and Loss A/C c/f
31,910
73,910
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
Disposal
550
5,720
88,910
42,000
Non-Current liabilities
7% Debentures
(41,980
)
1,000
500
1,500
2,500 Disposal
900
Lesson Eight
Cashbook
Disposal
P&L
402
2,400
3,300
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd
At 31 December 19X5
59,00
0
80,00
0
15,00
0
650
6,750
13,93
0
6,615
12,39
5
4,000
13,12
7
3,258
700
108,4
40
644
5,846
243,6
05
275
11,38
0
142,7
70
2,430
243,6
05
403
Company Accounts
Lesson Eight
404
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
Sales
Opening stock
Purchases
Less: Closing stock
Cost of goods sold
Directors remuneration
Wages and salaries
Motor and delivery expenses
Rates (700 - 140)
Legal expenses (644 - 380)
General expenses
Bad debts
Loss on disposal
Depreciation
Net profit
Proposed dividend
Retained profit brought forward
Retained profit carried forward
13,93
0
108,4
40
122,3
70
14,60
0
4,000
13,12
7
3,258
560
264
5,846
1,150
80
3,019
142,7
70
107,7
70
35,00
0
31,30
4
3,696
4,000
(304)
2,430
2,126
405
Company Accounts
Non-Current Assets
Freehold properties
Motor vans
59,380
15,095
74,475
---(9,294)
(9,294)
59,380
5,801
65,181
Current Assets
Stock
Debtors and prepayments, less
provision for doubtful debts
Cash at bank
14,600
11,110
6,615
32,325
Current liabilities
Creditors
Proposed dividends
11,380
4,000
15,380
16,945
82,126
Share capital
Ordinary shares of 1 each
Profit and loss account
80,000
2,126
82,126
Workings
Bad debts
Debtors
1,075
Balance c/f
350
Balance b/f
275
Profit and loss account
1,150
1,425
1,425
Motor vans
Balance b/f
15,000
Additions
775
Disposals
680
Balance c/f
15,095
15,775
15,775
Disposals
475
Balance c/f
9,294
9,769
Balance b/f
6,750
Profit and loss account
3,019
9,769
Lesson Eight
406
Disposals
Motor vans
680
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 companys sales staff.
The companys 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 companys financial year ended 30 September 1982, the assistant
accountant extracted the following balances from the ledgers.
407
Assets Account
Land and buildings (at cost)
Plant (at cost)
Vehicle (at cost)
Provision for depreciation (at 1 October
1981):
Land and buildings
Plant
Vehicles
Stock of consumable stores (at 30
September 1982)
Debtor for rentals
for charges
Bank
Cash
Liability Accounts
Trade Creditors
7% Debentures 2004/2012
Ordinary Share Capital (see note 7)
General reserve
Unappropriated profit (at 1 October
1981)
Share Premium
Revenue Accounts
Storage rentals long term contracts
Casual
Freezing charges
Transport charges
Expense Accounts
Wages, salaries and related expenses
Rates
Electricity
Transport costs
Repairs
Consumable stores
Postages, stationery, telephones
Insurance premium
Debenture interest
Sundries
Company Accounts
390,000
271,900
82,600
39,600
144,800
27,050
23,449
18,204
2,332
30,710
1,103
7,390
80,000
200,000
25,000
108,284
15,000
302,090
85,063
112,810
90,107
128,004
79,112
76,860
43,271
30,319
29,800
15,604
7,800
5,600
9,176
8,650
Other Accounts
Suspense (credit balance)
Notes at 30 September 1982:
At the beginning of the 1981-82 financial year, the company had sold refrigeration
plant (which had originally cost 26,000 and on which 20,800 had been provided
as depreciation to date of disposal) for 4,000. The only accounting entries relative
Lesson Eight
408
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 companys 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:
409
Company Accounts
Open the Suspense account and post the entries needed to eliminate the opening
credit balance.
(2 marks)
(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
(302,090 25631)
casual
Freezing charges
Transport charges
Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920)
Rates (79,112 28,820)
Electricity (76,860 5,757)
Transport costs (43,271 + 4,131 +
9,972)
Repairs (30,319 9,972)
Consumable stores (29,800 4,131)
Postages, stationery, telephones
Insurance premiums (7,800 - 600)
1,2
*Depreciation
Debenture Interest
Sundries
5
Profit (less loss) on disposal of
fixed assets
Net Profit For The Year
Retained profit brought forward
Distributed profit
Less:
Ordinary dividends proposed
Retained profit carried forward
Workings:
276,459
85,063
112,810
90,107
564,439
129,92
4
50,292
82,617
57,374
20,347
25,669
15,604
7,200
43,540
5,600
9,176
447,343
117,096
1,520
118,616
108,284
226,900
48,000
178,900
Lesson Eight
410
Land
270,0
00
Fixed Assets:
Balance 1 October 1981
(veh 82,600 (6,000 +
21,000))
Acquisitions (21,000
6,000)
Disposals
Balance 30 September
1982
Depreciation
-rate
270,0
00
2%
2,400
Buildin
gs
120,00
0
120,00
0
Plant
271,90
0
(26,00
0)
245,90
0
Vehicl
e
55,600
Total
717,50
0
27000
(16,40
0)
66,200
27,000
(42,40
0)
702,10
0
10
25
411
Company Accounts
39,600
2,400
42,000
Balance 30 September
1982
144,8
00
(20,8
00)
24,59
0
148,5
90
27,05
0
(13,1
20)
16,55
0
30,48
0
211,4
50
(33,9
20)
43,54
0
221,0
70
270,0
00
78,000
97,31
0
35,72
0
481,0
30
4,000
6,000
10,00
0
5,200
3,280
8,480
(1,2
00)
2,720
1,520
Lesson Eight
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
412
413
Company Accounts
Suspense
Sh.
125,00
0
130,00
0
Sh.
62,000
30,500
53,000
11,790
38,600
200,00
0
50,000
120,00
0
16,000
33,570
130,54
0
942,38
0
57,430
100,00
0
3,640
103,87
0
1,254,
760
33,060
57,660
107,86
0
6,400
4,890
9,430
108,37
0
22,560
16,280
10,970
90,000
3,240
Lesson Eight
414
1,360
8,580
24,320
3,040
36,1
60
2,003,
630
2,003,
630
415
Company Accounts
Additional information:
Sh.
860
270
780
139,630
82,450
124,320
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)
Lesson Eight
416
417
Company Accounts
Lesson Eight
418
Cost
125,000
130,000
53,000
38,600
346,600
Depreciat
ion
2,000
72,200
36,125
14,471
124,796
Net
123,000
57,800
16,875
24,129
221,804
139,630
82,450
124,320
346,400
117,486
33,570
1,050
498,506
57,430
15,860
24,000
97,290
401,216
623,020
200,000
50,000
120,000
153,000
323,020
523,020
100,000
623,020
15% debentures
Workings:
B/d
270
780
1,676
6,704
419
Company Accounts
9,430
9,430
Lesson Eight
420
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
Sale at a
Sale at per
Lump sum
Sale
2.
Lump sum
Sale
3.
Lump sum
Sale
4.
Lump sum
Sale
1.
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.
421
Company Accounts
The application firms must be accompanied by the 1st installment money when the
public respond to the companys 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:
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application
With
If there is an over-subscription, then the excess applications may either be rejected
outright and the applicants money refunded, or applications awarded on a prorata basis. (i.e. a lower number of shares allotted compared to the number applied
for)
If outright rejection, the company will:
DEBIT: Application
With refunded
CREDIT: Cashbook
money
If pro-rata issue, the company will:
DEBIT: Application
With amount required to
CREDIT: Allotment
close the application A/C.
This marks the end of the application stage.
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.
1st Call Stage
Here the company requests for the third installment from the public. As the
company does this, it will:
DEBIT: 1st Call A/C .
CREDIT: Share Capital.
When the public respond by bringing in the installment money, the company, will in
its books:
DEBIT: Cashbook
CREDIT: 1st Call A/C.
It is possible that some of the allotees do not pay their 1 st installment money on
time. When this is so,
DEBIT: Cashbook with money received
Lesson Eight
422
423
Company Accounts
on
on
on
on
application
allotment
first call
second call
Sh.1.00
Sh.3.00
Sh.4.00
Sh.2.00
Lesson Eight
424
Sh.
130,000
1,000,000
500,000
1,630,000
Sh.
Cashbook 1,630,000
1,630,000
Allotment A/C
Sh.
OSC
Allotment
Sh.
3,000,000 Application
Cashbook
3,000,000
500,000
2,500,000
3,000,000
1st Call
OSC
Sh.
Sh.
4,000,000 Calls in arrears
20,000
Cashbook
3,980,000
4,000,000
4,000,000
425
Company Accounts
2nd Call
OSC
Bal c/d
Sh.
Sh.
1,990,00 Calls in arrears
2,000
Cashbook
1,988,000
1,990,000
1,990,000
Share Premium
Sh.
Sh.
1,630,000 Share forfeiture
1,630,000
Sh.
Application 1,000,000
Share forfeiture
10,050,000
60,000
1st Call
2nd Call
Calls in Arrears
Sh.
`
Sh.
20,000
2,000 Share forfeiture 22,000
22,000
22,000
Lesson Eight
426
427
Company Accounts
LIQUIDITY RATIOS.
These measure the firms 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 managements
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
99,500
Opening stock
559,500
Purchases
659,000
(149,000)
(510,000)
Less: Closing stocks
340,000
Gross profit
Less expenses
30,000
Selling and distribution
10,000
Depreciation
135,000
(175,000)
Administration expenses
165,000
Earnings before interest & taxes
(15,000)
Interest
150,000
Earnings before tax
75,000
Tax @ 50%
75,000
Less ordinary dividend
(0.75 per share)
(15,000)
Retained profit for the year
60,000
ABC
Balance Sheet as at 31 December 1992
Non Current
Sh.
Assets
250,00
Land and
0
Buildings
80,000
Plant &
330,00
Machinery
0
75,000
Current Assets
(4,000) 149,00
Inventory
0
Debtors
Issued share
capital
(20000 share of
Sh, 10)
Reserve
Retained profit
Long term
Current liabilities.
Sh.
200000
90000
60000
100000
130000
580,000
Lesson Eight
Less provision
Cash
428
71,000
30,000
580,00
0
Additional Note
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
Current Ratio = 250,000 = 1.92 : 1
130,000
The higher the ratio then the more liquid the firm is.
Quick Ratio/Acid Test Ratio
= Current Assets - Inventories
Current Liabilities
= 250,000 149,000 = 101,000
130,000
130,000
= 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.
Net Working Capital Ratio.
= Net Working Capital
Net Assets
429
Company Accounts
Lesson Eight
430
This measures the proportion of the total net assets financed by the non-owner
supplied funds.
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
Debtor Turnover = 850,000 = 10.625
80,000
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.
431
Company Accounts
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
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.
Non Current Assets Turnover (Fixed Assets Turnover)
= Sales
Average Fixed Assets
A.F.A = 340,000 + 330,000 = 670,000 = 335,000
2
2
= 850,000 = 2.54 times
335,000
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.
Total Assets Turnover
= 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.
Net Profit Margin
= Net Profit after tax = 75,000 = 9%
Sales
850,000
The higher the margin, the more profitable the firm is.
Lesson Eight
432
433
Company Accounts
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 ABCS shares is Sh20/Share.
= 3.75 100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in
the business.
Dividend Per Share
= Total Dividend (ordinary shareholders)
Ordinary shares outstanding.
= 15,000
20,000
= 0.75 cts per share
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.
LIMITATIONS ON USE OF RATIOS
It is difficult to categorise firms in the various industries due to
diversification. This makes inter-company comparison difficult.
It is difficult to compare one company with others in case of monopolist
firms.
Different, firms use different accounting policies and methods e.g. on
depreciation, provisions and other estimates so this makes comparison of
companies difficult.
Ratios are compiled at a point in time and may be affected by short term
changes. Therefore ratios are used for short term planning.
Ratios are computed from historical data and therefore are not good
indicators of the future.
DEFINITIONS
TREND ANALYSIS Comparing or assessing a companys performance over time.
CROSS SECTIONAL ANALYSIS Comparing two or more companies in the same
industry.
Example 8.6 (ACCA DEC 98)
Lesson Eight
434
Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and
Omega Ltd. The companies trade as wholesalers, selling electrical goods to
retailers on credit. Their most recent financial statements appear below.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
Zeta Limited
000
Sales
Cost of sales
Opening stock
Purchases
Less: closing stock
200
3,200
3,400
400
800
4,800
5,600
800
3,000
1,000
Gross profit
Expenses
Distribution costs
Administrative expenses
Interest paid
Omega Limited
000
000
000
4,000
6,000
200
290
10
4,800
1,200
150
250
400
500
500
120
380
800
400
90
310
435
Company Accounts
000
Omega Limited
000
000
5,000
1,000
1,800
6,000
Current assets
Stock
Debtor trade
- sundry
Cash at bank
400
800
150
1,350
800
900
80
100
1,180
Current liabilities
Creditors trade
- sundry
Overdraft
Taxation
(800)
(80)
(200)
(120)
(800)
(100)
(90)
150
1,950
1,950
1,000
950
1,950
890
6,890
(4,000)
2,890
1,600
500
790
2,890
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:
Lesson Eight
436
PROFITABILITY
Gross profit margin
Gross profit 100%
Sales
Net profit margin
Net profit 100%
Sales
Return on capital employed
Profit before interest and tax
Capital employed
Return on shareholders capital
Profit before tax
Share capital and reserves
Asset turnover
Sales
Capital employed
LIQUIDITY
Current ratio
Current assets
Current liabilities
1000 100% =
25%
4000
1200 100% =
20%
6000
500 100% =
12.5%
4000
510 = 26.2%
1950
500 = 25.6%
1950
4000 = 2.1
times
1950
800 = 11.6%
6890
400 = 13.8%
2890
6000 = 0.9 times
6890
1880 = 1.9:1
990
Quick ratio
Current assets stock
Current liabilities
1350 = 1.1:1
1200
Gearing
Long term loans
Capital
950 = 0.8:1
1200
Interest cover
Profit before interest and tax
Interest charges
nil = nil
1950
1080 = 1.1:1
990
4000 = 58%
6890
800 = 2 times
400
510 = 51 times
10
WORKING CAPITAL
MANAGEMENT
Debtors days
Trade debtors 365 days
Sales
Creditor days
Trade creditors 365 days
Purchases
800 365 = 73
days
4000
900 365 = 55
days
6000
800 365 = 61
437
Stock days
Average stock 365 days
Cost of sales
Company Accounts
800 365 = 91
days
3200
300 365 = 37
days
3000
days
4800
800 365 = 61
days
4800
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. Omegas net margin is lower than Zetas. Omegas expenses are therefore
proportionally higher. It should be noted that Omegas bottom line profit is reduced
significantly by the interest charge.
Return on Omegas capital is around half of Zetas. Omega has a higher fixed asset
base due in part to a revaluation. It may be that a revaluation of Zetas 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, Zetas 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 Zetas 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.
Zetas 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. Omegas gearing
means that should profits fall they may not be in a position to pay the loan interest.
Zetas capital is entirely share capital and so a fixed return is not required.
Omegas 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.
Lesson Eight
438
439
Company Accounts
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 Eight
440
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
441
Company Accounts
358
2,470
124
568
269
289
10,492
167,39
8
167,39
8
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)
QUESTION THREE ACCA PILOT PAPER
The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996
were as follows:
31
December
1995 1996
Lesson Eight
Tangible fixed assets
Cost of valuation
Aggregate
depreciation
Current assets
Stock
Debtors
Cash
Current liabilities
Trade creditors
Corporation tax
Proposed dividend
Net current assets
Loans (due for
repayment 1999)
Called up share capital
Share premium
Revaluation reserve
Profit and loss account
442
000
126,300
(50,000)
000
76,300
12,000
10,500
1,400
23,900
000
000
162,4
00
(64,0
00)
98,40
0
15,00
0
14,00
0
2,000
31,00
0
6,800
3,400
4,000
14,200
9,700
86,000
(60,00
0)
26,000
6,000
1,000
19,000
26,000
9,400
5,000
6,000
20,40
0
10,60
0
109,0
00
(60,0
00)
49,00
0
10,00
0
3,000
8,000
28,00
0
49,00
0
443
Company Accounts
The summarized profit and loss accounts for the company for the years ended 31
December 1995 and 1996 were:
Sales
Cost of sales
Gross profit
Expenses
Net profit before tax
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 Eight
444
You are required to write up the necessary accounts, excluding those relating to
cash, to record these transactions.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK
445
Company Accounts
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
Nyingis practise to bank each Monday morning the balance in the till resulting
from the previous weeks 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.
You ascertain the following balances on 1 January 2001.
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
You also ascertain the following:
An analysis of the bank statement for the year ended 31 December 2001 showed
the following
Receipts
180,000.00
Banking from debtors cheques 4,116,000.00
Cash
4,296,000.00
Payments
Creditors for goods
Rent and expenses
3,748,000.00
232,000.00
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 Eight
446
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.
Sales Ledger balances as at 1 May 2002
Purchases Ledger balances as at 1 May 2002
Sales Ledger balances as at 31 May 2002
Purchases Ledger balances as at 31 May 2002
Credit Sales
Credit Purchases
Cash and cheques received
Sales Ledger
Purchases Ledger
Cash and cheques received
Sales Ledger
Purchases Ledger
Credit notes issued (for returns inwards)
Debit notes received (returns outwards)
Dishonoured cheques
Discounts allowed
Discounts received
Bad debts written off in December 2001 but now
recovered
Debit
1,672,000.
00
28,000.00
?
36,500.00
Credit
114,600.00
747,000.00
67,000.00
?
18,938,000.
00
670,000.00
1,549,700.0
0
13,000.00
47,000.00
632,000.00
119,800.00
24,000.00
32,000.00
43,000.00
33,800.00
14,200.00
447
Company Accounts
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.
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 companys trade debtors and trade creditors.
(3 marks)
c) Briefly explain the purpose of control accounts.
marks)
(3
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
Sales
Cost of sales
Gross Profit
Expenses (including loan
interest)
Net Profit
2000
Sh000
1,000.00
(600.00)
2001
Sh000
1,200.00
(720.00)
400.00
(200.00)
480.00
(300.00)
200.00
180.00
2002
Sh000
1,400.0
0
(980.00
)
420.00
(280.00
)
140.00
1999
Sh000
380.00
2000
Sh000
480.00
2001
Sh000
680.00
2002
Sh000
900.00
Current Assets
Stocks
Debtors
Balance at bank
Total Current Assets
140.00
100.00
900.00
330.00
160.00
180.00
130.00
470.00
200.00
400.00
390.00
990.00
290.00
520.00
160.00
970.00
(40.00)
-
(80.00)
-
(120.00)
(500.00)
(180.00)
(500.00)
Current Liabilities
Creditors
Lesson Eight
Loan (received on 31
May 2001)
Total Current Liabilities
Net Current Assets
Net Assets
Capital
Opening Capital
Add Net Profit
448
(40.00)
(80.00)
(620.00)
(680.00)
290.00
670.00
390.00
870.00
370.00
1,050.00
290.00
1,190.00
510.00
160.00
670.00
670.00
200.00
870.00
870.00
180.00
1,050.00
1,050.00
140.00
1,190.00
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 firms profit being shared equally. All wheelbarrows are sold at Sh.
680.00 each. No interest is credited or charged on capital accounts or drawings.
The following trial balance was extracted on 31 March 2002.
449
Company Accounts
Sh.
Capital Accounts
Bingwa
Shabiki
Drawings
Bingwa
Shabiki
Freehold factory (including land Sh.
300,000.00)
Factory Plant at cost
Delivery Van at cost
Provision for depreciation
Freehold Factory
Factory Plant
Delivery Van
Stocks on 1 February 2001
Raw materials
Work in progress
Wheelbarrows (1220 at Shs. 440)
Sales
Return inwards
Purchases of raw materials
PAYE
Factory wages
Office wages
Expenses Factory
Office
Provision for unrealized stock (in
warehouse)
Provision for doubtful debts
Debtors and creditors
Bank
96,000.0
0
87,400.0
0
708,800.
00
326,400.
00
82,000.0
0
42,000.0
0
40,200.0
0
536,800.
00
Sh.
482,000.
00
507,000.
00
307,040.
00
110,160.
00
38,400.0
0
1,237,60
0.00
13,600.0
0
291,600.
00
8,800.00
165,400.
00
48,000.0
0
126,800.
00
143,400.
00
48,800.0
0
19,200.0
0
109,200.
00
57,200.0
0
217,600.
00
2,926,00
0.00
Additional information:
2,926,00
0.00
Lesson Eight
450
Acknowledgement
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
MODEL ANSWERS TO REINFORCING QUESTIONS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
FINANCIAL ACCOUNTING 1
451
452
Revision Aid
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
Lesson Nine
453
Workings
Cash at bank
Opening balances
Bankings of cash (908 + 940 + 766 + 1,031)
Capital introduced
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44
+ 38 + 20) x 90%
672
3,643
500
729
5,546
(2,374)
1,703
Cash at Bank
Bal b/d
Sales (bal)
5 Bank
4,764 Drawings
Stationery
Travel
Petrol ad van
Sundry
Postage
Cleaner
Bal c/d
4,769
3,645
560
73
40
104
19
56
260
_12
4,769
Question 2
Mary Carter
Balance Sheet as at 31.12.2001
Non current assets
Freehold premises
Plant
Current assets
Stock
Debtors
Cash at Bank
Cash in hand
Current liabilities
Creditors
25,000
12,000
37,000
8,000
7,000
1,000
6,000
22,000
(10,000)
12,000
49,000
454
Revision Aid
29,000
20,000
49,000
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
Add profit
Less drawings
Profit:
Sales
Cost of sales
Electricity
Rates
Wages
Sundry expenses
Bank interest
Net profit
34,000
_5,000
39,000
(10,000)
29,000
60,000
(37,000)
(2,000)
(1,000)
(10,000)
(2,000)
(3,000)
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.
Capital b/f +
additional
Add net profit
(missing figure)
Less drawings
Capital c/f
25,000
6,000
31,000
(4,500)
26,500
Lesson Nine
455
456
Revision Aid
Question 4
Brian Barmouth
Trial balance as at 30 June 2000
Sales
Purchases
Office expenses
Insurance
Wages
Rates
Heating and lighting
Telephone
Discounts allowed
Opening stock
Return inwards
Returns outwards
Premiums
Plant and machinery
Motor vehicle
Debtors
Bank balance
Creditors
Loan long term loan
Capital
Drawings for the year
47,600
22,850
1,900
700
7,900
2,800
1,200
650
1,150
500
200
150
40,000
50,000
12,000
12,500
7,800
__4,000
121,150
3,400
10,000
60,000
______
121,150
NB: The closing stock does not appear in the trial balance.
Lesson Nine
457
LESSON 2
Question 1
(a)
1-May
13-May
16-May
24-May
(b)
4 May
11 May
18 - May
(c)
2 May
9 May
17 - May
Capital
Sales
Bruce
hill
5,000
200
700
200
1-May
19-May
20-May
21-May
30-May
30-May
31-May
_____ 31-May
6,100
Store fitments
Abel
Rent
Delivery exp
Drawings
Wages
Green
Balance c/d
2,000
650
200
50
200
320
300
2,380
6,100
SALES DAYBOOK
700
580
360
1,640
Bruce
Hill
Nailor
PURCHASES DAYBOOK
650
300
800
1,750
Abel
Green
Kaye
Check the account balances with the balances shown on the trial balance.
(d)
Cash
Sales
Purchases
Debtors
Creditors
Capital
Fixtures and fittings
Rent
Delivery expenses
Drawings
Wages
Dr
2,380
Cr
1,840
1,750
740
800
5,000
2,000
200
50
200
_320
7,640
____
7,640
458
Revision Aid
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
Fixtures and fittings
Current assets
Stocks
Debtors
Cash in hand
Current liabilities
Bank overdraft
Creditors
80,000
5,000
85,000
41,000
4,800
200
46,000
12,000
7,500
(19,500)
26,500
111,500
Lesson Nine
459
Capital
Add net profit
111,000
14,500
125,500
(14,000)
111,500
Less drawings
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
Sales
Less: Cost of sales
Opening stock
Purchases
Add carriage inwards
Less returns outwards
Less closing stock
1,816,000
6,918,500
42,000
6,960,500
(64,000)
6,896,500
8,712,500
(2,239,000)
Less expenses
Wages and salaries
Carriage outwards
Rent and rates
Communication
expenses
Commission payable
Insurance
Sundry expenses
Net profit
Current liabilities
Creditors
Capital
Add net profit
(6,473,500)
2,760,500
1,024,000
157,000
301,500
62,400
21,600
40,500
31,800
K Smooth
Balance Sheet as at 31 December 2002
Non current assets
Buildings
Fixtures
Current assets
Stocks
Debtors
Bank
Cash
9,234,000
(1,638,800)
1,121,700
2,000,000
285,000
2,285,000
2,239,000
1,432,000
297,000
11,500
3,979,500
(816,000)
3,163,500
5,448,500
5,088,800
1,121,700
460
Revision Aid
6,210,500
Less drawings
762,000
5,448,500
Lesson Nine
461
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
Motor van
Current assets
Stocks
Debtors
Bank
Cash
Current liabilities
Creditors
Capital
Add net profit
Less drawings
625,000
410,000
1,035,000
2,747,500
1,239,000
311,500
__29,500
4,318,500
(937,000)
3,381,500
4,416,500
3,095,500
2,163,000
5,258,500
(842,000)
4,416,500
462
Revision Aid
LESSON 3
Question 1Adequately 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 enterprises 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 businesss 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:
Lesson Nine
463
464
Revision Aid
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.
To be useful, information must be relevant to the decision-making needs of users.
Information is relevant when it influences the economic decisions of users by
helping them evaluate past, present or future events or confirming, or correcting
their past evaluations.
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 companys 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 Nine
Question 1
465
LESSON FOUR
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
102,500
272,100
stock
Gross profit
102,300
Add
Discount
2,400
received
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
600
(82,400)
allowed
Net profit
29,800
466
Revision Aid
210,000
12,800
222,800
102,500
13,000
2,400
500
118,400
18,700
1,200
30,000
(49,900)
68,500
291,300
287,500
29,800
317,300
(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
Lesson Nine
Depreciation (w)
Net profit
467
13,146
39,288
67,037
Working:
Depreciation charge:
Motor vehicles: 45,730 x 20% = 9,146
Fixtures and fittings: 10% x (42,200 2,200) = 4,000
Total: 4,000 + 9,146 = 13,146
Donald Brown
Balance Sheet as at 31 December 20X0
Cost
Depreciation
Non current
asset
s
Fixtures and
42,200
6,200
fittings
Motor vehicles
45,730
24,438
87,930
30,638
Current assets
Stock
19,926
Debtors
42,737
Prepayments
680
Cash in hand
1,411
64,754
Current
liabil
ities
Creditors
35,404
Accruals
218
Bank overdraft
19,861
55,483
Net current
assets
Net assets
Financed by
Capital
Net Profit for
year
Less drawings
Net
36,000
21,292
57,292
9,271
66,563
26,094
67,037
93,131
26,568
66,563
468
Revision Aid
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
Non current
assets
Equipment
Motor vehicles
Current assets
Stock
Debtors
Prepayments
Cash
Current liabilities
Bank overdraft
Creditors
Accruals
102,000
43,270
145,270
Net book
value
32,450
17,574
50,024
69,550
25,696
95,246
16,480
50,633
620
__477
68,210
3,295
41,792
350
45,437
Lesson Nine
469
22,773
118,019
Capital
Balance at 1 July
20X8
Add Profit for year
122,890
16,729
139,619
21,600
118,019
Less drawings
Balance at 30 June
20X9
Question 4
Frank Mercer
20X8
Dec 31
Balance b/f
Dec 31
Dividend
Cash book
20X8
1,793 Dec 31 Bank
charges
26 Dec 31 Standing
order
Dec 31 Direct
debit
____
Balance
c/d
1,819
1,557
98
134
232
Less unpresented
cheques:
B Oliver (869)
L Philips (872)
Balance per cash book
(corrected)
71
37
(108)
1,681
18
32
88
1,681
1,819
470
Revision Aid
LESSON FIVE
Question 1
Bal b/d
Sales (163,194 +
1,386)
Cash refund
Bal b/d
Cash paid (103,040 350)
Discounts received
Returns outwards (1,370
+ 2,000)
Contra
Balance c/d
2,160
590
870
1,360
388,272
551,730
184,740
98,228
2,160
___100
283,488
Question 2
(a)
Uncorrected balance b/f
Sales omitted (a)
Bank cheque dishonored
(1)
Balance b/d
100
400
500
200
12,500
13,700
Lesson Nine
471
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.
(b)
Statement Of Adjustments To List Of Personal Account Balances
(b)
320
10,000
980
4,800
1,000
17,100
472
Revision Aid
Bank reconciliation
Balance per bank statement
Less lodgments not credited (2)
Add: dishonored cheque
Add: outstanding cheque (1)
Balance per cash book - overdrawn
12,800
2,890
9,910
980
1,000
11,890
Lesson Nine
473
81,208
320
1,000
980
2,100
600
1,000
320
__870
82,398
_6,300
76,098
____
6,300
(d)
Journal
George drawings
Repairs to premises
Repairs to Georges house
mistakenly charged as a business
expense
*Paul accounts payable ledger
account
George drawings
870
870
540
540
474
Revision Aid
Lesson Nine
475
(b)
(i)
DR (Sh)
10,000
Suspense
ABD Bank loan
CR (Sh)
10,000
Cashbook
P& L Rent received
4,000
1,500
4,000
1,500
500
500
3,200
3,200
220
220
12,000
12,000
(ii)
Statement of Corrected net profit
(Sh)
Net profit
Add: Rent received
Discount received
Prepaid insurance
Insurance receivable
4,000
500
220
12,000
1,500
500
3,200
(Sh)
64,000
16,720
80,720
(5,200)
75,520
Suspense A/c
Sh
10,000 Balance b/d
_____ Opening stock
10,000
Sh
6,800
3,200
10,000
476
Revision Aid
Question 5
ACCOUNTS
Pre-Adjusted
Trial Balance
Dr
Cr
Capital
Purchases
Furniture
Debtors
Other
expenses
Creditors
Commission
4,814
4,307
350
4,638
946
82,79
5
25,00
0
13,05
0
5,833
1,060
4,638
1,066
350
350
205
165
Bad debts
Closing stock
Net profit
800
4,638
1,066
350
205
205
165
165
120
120
1,45
0
307
1,450
1,450
307
307
83,26
5
5
4,063
43,12
0
7
2,59
7
3
2,59
7
4
40,00
0
615
25,00
0
13,05
0
5,833
1,060
120
Liab.
36,24
6
800
1,45
0
307
Asset
s
5,164
4,307
615
165
25,00
0
14,50
0
6,140
1,060
Salaries due
Prepaid
insurance
Rent recd in
adv.
Accrued
commission
Depreciation
Balance sheet
26,15
4
5,164
4,307
205
965
T&P&L
Account
Dr
Cr
36,24
6
820
40,00
0
26,15
4
36,24
6
82,79
5
Column
numbers
26,15
4
Sales
Salaries
Opening
stock
Insurance
Rent income
Buildings
40,00
0
WORKSHEET
Adjustmen
Adjusted
ts Trial Balance
Dr
Cr
Dr
Cr
120
83,26
5
6
5,008
5,008
43,12
0
8
49,21
6
9
49,21
6
10
Lesson Nine
477
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.
478
Bal b/d
Sales
Bills received
dishonored
Charges payable
Bal c/d
Bal b/d
Returns outwards
Bills payable
Bank
Cash
Balance c/d
Revision Aid
Sales
Sh
6,185,000
8,452,000
88,500
10,000 Cash
Bad debt
Discounts allowed
44,000 Bal c/d
14,779,000
Sh
52,500
203,500
7,985,000
153,000
64,500
302,000
5,404,000
14,779,00
0
Sh
4,285,000
5,687,500
400,000
___23,500
10,396,00
0
Lesson Nine
479
LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets
Stocks
Debtors
Rates prepaid
Fixtures
Liabilities
Bank overdraft (add
unpresented cheques)
Accrued expenses
Creditors
Loan
Accrued interest [4,000 x 3% x
3
/12]
Heating and lighting
4,500
2,800
40
2,500
10,140
1,172
240
1,800
4,000
30
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
480
Revision Aid
(c)
Dare
Balance Sheet as at 31 December 19X6
Non current assets
2,200
_290
2,550
5,800
3,000
50
673
__20
9,543
(2,490)
7,053
9,603
2,818
3,821
6,639
(1,036)
5,603
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 caf 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 Nine
481
482
Revision Aid
5,000
(4,000)
1,000
Current assets
Heating oil
Bar and caf stocks
Sports equipment for sale (4,000 2,000)
Sports equipment for hire (1,000 + 500)
Subscriptions in arrears
Bank deposit account
Bank current account
700
5,000
2,000
1,500
90
16,000
1,300
26,590
Current liabilities
Creditors for bar and caf purchases
Creditors for sportswear
Creditors for heating oil
Subscriptions in advance
800
450
200
_200
1,650
24,940
25,940
23,150
2,790
25,940
Workings:
Subscriptions
Arrears b/f 1.1.X5 (10 + 230)
Subscription income for year
(bal fig)
Advance c/f 31.12X5
SUBSCRIPTIONS
Sales
20,000
Lesson Nine
Cost of sales
Opening stock
Purchases*
483
7,000
8,800
15,800
(5,000)
Closing stock
10,800
Profit
9,200
*Note: Purchases are 9,000 + 800 1,000 = 8,800
484
Revision Aid
Sale of sportswear
Sales
Opening stock
Purchases (W4)
5,000
3,000
3,100
6,100
(4,000)
Closing stock
Closing stock
Gross Profit
Sportswear written
down
Net profit
(2,100)
2,900
(1,500)
1,400
Purchases of sportswear
4,500
450
(300)
4,650
For hire 1/3: 1,550
Bank
Add closing creditors
Less opening creditors
For sale 2/3: 3,100
Hire of sportswear
Receipts
Costs*
Opening stock
Purchases (W4)
3,000
750
1,550
2,300
(1,000)
Closing stock
(1,300)
1,700
Profit
*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
Purchases (4,000 +
200)
Less closing stock
1,00
0
4,20
0
5,20
0
(700
)
Lesson Nine
485
4,50
0
486
Revision Aid
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
Less cost of sales
Opening stock
Purchases and cost of goods
produced
Less closing stock
Gross profit
Profit on disposal of motor
vehicle
Factory profit
Less expenses
Interest on loan
Depreciation fixtures and
fittings
Motor vehicles
Wages
Rent and rates
Water and electricity
Motor expenses
Bad debt
Repairs
Bank charges
Insurance
Sundry expenses
Commission to lampshade
4,100,000
348,000
3,400,000
3,748,000
(282,000)
(3,466,000)
634,000
4,000
3,500
641,500
36,000
90,000
38,000
108,000
67,500
39,000
60,800
14,000
12,000
4,000
13,500
25,200
318
Lesson Nine
employee
Less UPCS
Net profit
487
__120
(508,438)
133,062
488
Cherono
Balance Sheet as at 30 June 1998
Non current assets
Fixtures and fittings
Motor vehicles
Current assets
Stock: Raw materials
Lampshades
Less UPCS
Other goods
Debtors
Prepayments
Bank balance
Current liabilities
Creditors
Accruals
Capital
Add net profit
Less drawings
Add loan
Revision Aid
Cost
900,000
152,000
1,052,000
80,000
30,000
(120)
252,000
107,000
27,318
Depreciatio
n
(440,000)
(38,000)
(478,000)
NBV
460,000
114,000
574,000
361,880
108,000
10,500
_98,000
578,380
(134,318)
444,062
1,018,062
740,000
133,062
873,062
(95,000)
778,062
_240,000
1,018,062
Lesson Nine
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
489
490
Revision Aid
Cost
4,000
35,000
7,100
46,100
Investments
Investments at cost (7,400 + 5,600)
(current valuation 13,150)
Current assets
Stocks sporting requisites
- stationery
- stamps
Debtors subscriptions
- insurance commissions
Prepayments (300 + 380)
Bank deposit account
- current account
Cash
Current Liabilities
Creditors prepaid subscriptions
- Prepaid training
- Ground fees
- Premiums
- Sporting requisites
Depreciati
on
12,900
4,410
17,310
Net
4,000
22,100
2,690
28,790
13,000
927
36
4
230
13
680
3,000
2,563
122
7,575
100
470
160
202
932
Working capital
Net assets employed
Financed by:
Accumulated fund: as at 31 October
1982
Add:
Surplus of income over expenditure
for the year
As at 31 October 1983
Life membership fund (4,720 + 530
(850 + 53)
6,643
48,433
36,945
7,141
44,086
4,347
48,433
Lesson Nine
491
4,000
25,600
3,750
7,400
866
191
550
___73
42,430
70
325
102
163
105
4,720
(5,485)
36,945
492
Revision Aid
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
1,119,950
Prime cost
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
Cost of sales
Opening stock of finished goods
Transfer price
Less closing stock of finished goods
2,775,500
1,200,000
1,710,000
2,910,000
(10,125,000
)
878,000
192,925
1,070,925
(1,897,500)
80,250
150,750
277,500
5,000
112,500
154,340
38,585
(626,000)
444,925
(192,925)
252,000
Lesson Nine
493
K
M
100,800
151,200
252,000
494
Revision Aid
Drawings
Bal c/d
K
15,00
0
105,1
40
255,1
40
30,000
38,000
(45,500)
22,500 x 45 =
10,125,000
M
125,00
0
54,785
Share of factory
profit
Balance of profit
189,78
5
K
154,34
0
100,80
0
255,14
0
Shs
M
38,585
51,200
189,785
Shs
1,053,750
608,125
234,750
1,896,625
Current Assets:
Stock: Raw materials
W.I.P
Finished goods
Debtors
Current Liabilities
Bank overdraft
Trade creditors
Accrued expenses and deferred income
79,500
126,250
900,000
405,000
1,510,750
(176,200)
(150,000)
(86,250)
(412,450)
1,098,300
2,994,925
1,400,000
1,425,000
2,825,000
Capitals: K
M
Current A/c: K
M
105,140
64,785
169,925
2,994,925
Lesson Nine
495
496
Revision Aid
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 198
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
Lesson Nine
497
Less
Share of residual profit
Amis ( 5/10)
Lodge (3/10)
Pym (2/10)
35,000
21,000
14,000
70,000
(b)
Balances
Drawings
Appropn
interest
Bal c/d
1,00
0
25,0
00
1,00
0
16,0
00
43,0
00
500
22,00
0
900
_____
23,40
0
Current Accounts
P
A
400 Appropn
salary
15,0
8,00
00 Interest
0
720
35,0
Residue
00
11,3 Bal c/d
_____
80
27,5
43,0
00
00
1,500
13,00
0
500
21,00
0
900
14,00
0
____-
23,40
0
27,50
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
__5
Amber
420
Net profit
200
Assume profit is earned proportionately throughout the year
498
Revision Aid
1/1X6 to 30.6.X6
Salaries
Share of profit:
80,000 (60:40)
1.7.X6 to 31.12.X6
100,000 (40:40:20)
Amber
000
Beryl
000
Coral
000
10
10
20
48
32
80
40
98
40
82
20
20
100
200
Total
000
368
242
Net book
value
280
215
166
661
250
911
50
861
Lesson Nine
499
Coral
100
710
82
64
_5
151
861
Proprietor funds
Goodwill
Balances c/f
A
00
0
B
00
0
80
368
80
242
448
322
CAPITAL ACCOUNTS
C
A
00
000
0
Balances b/f
280
40 Cash
100 Goodwill
120
(W1)
Revaluation
48
140
448
Balances b/f
368
B
000
C
000
210
140
80
32
322
242
140
100
500
Drawings
Balances c/f
Revision Aid
A
00
0
28
82
B
00
0
24
64
__
__
110
88
CURRENT ACCOUNTS
C
A
00
000
0
15 Balances b/f
7
5 Profit for
98
year
__ Loan
_5
interest
20
110
B
000
C
000
6
82
20
__
__
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
(2)
(1)
1,932
23,860
3,018
41,805
Less materials:
20,720 Opening stock
52,100 Purchases
25,792
44,823
72,820
(2,752)
(2,976)
23,040
41,847
47,510 Usage
34,163
57,203
5,685
47,532
40,814
26,684
1,333
42,147
26,684
- Profit on sale of
plant
42,904
Less
25,670
117,76
5
143,43
5
(31,038
)
112,39
7
39,848
152,24
5
110,40
2
1,333
111,73
5
Lesson Nine
(3)
(4)
(5)
(6)
(7)
501
7,024
2,613
1,939
4,477
16,898
32,951
9,196
2,945
2,185
3,389
8,324
16,843
9,841
4,391
10,200
7,880
5,846
4,130
11,302
43,749
(845)
Indirect wages
Salaries
Rates
Electricity
General expenses
Depreciation
Total
Net profit/loss for
year
Less appropriations
Interest on capitals
Duke (5% x
50,0000
Earl (5% x 40,000)
Residual profit*
Duke
Earl
11,415
10,200
13,438
9,970
11,996
36,524
93,543
18,192
(2,500)
(2,000)
13,692
(6,846)
(6,846)
*The equal division stipulated by the Partnership Act applies in the absence of
agreement to the contrary.
502
Revision Aid
Aristocratic Autos
Balance Sheet as at 30 September 1986
Working
Worksho Petrol/oil Showroo
s
p
m
(8)
(8)
(4)
(9)
5,020
24,891
4,260
4,859
29,911
9,119
2,752
1,365
2,586
316
7,019
2,976
537
2,915
1,605
8,033
4,225
915
5,140
1,879
31,790
5,602
564
6,166
1,867
10,986
Total
20,290
35,107
55,397
31,038
1,902
13,300
32,391
78,631
25,077
2,462
27,539
51,092
106,48
9
Financed by
Capital accounts
Duke
50,000
Earl
40,000
90,000
Current accounts:
Duke
6,906
Earl
9,853
(10)
(10)
16,489
106,48
9
Working
s
(1)
Plant disposal:
Cost
Accumulated depreciation
19,500
(15,633
)
Lesson Nine
503
34,050
113
34,163
6,810
214
7,024
5,199
(2,586)
Petrol/oil
showroo
m
5,602
83
5,685
______-
4,160
231
4,391
5,860
(2,915)
15,679
(7,799)
2,613
2,945
7,880
1,838
101
1,939
2,072
113
2,185
5,543
303
5,846
3,990
487
4,477
3,021
368
3,389
3,681
449
4,130
2,520
14,378
16,898
2,840
5,484
8,324
7,600
3,702
11,302
Petrol/oil
Showroo
m
14,200
_____14,200
38,000
_____38,000
Worksh
op
12,600
_____12,600
3,867
5,200
1,333
Total
39,652
___196
39,848
10,970
445
11,415
26,738
(13,300
)
13,438
9,453
517
9,970
10,692
1,304
11,996
12,960
23,564
36,524
64,800
_____64,800
504
Revision Aid
7,100
19,390
on freehold buildings:
At 1 October 1985
31,550
5,060
-
2,520
2,840
7,600
7,580
9,940
4,260
5,020
12,960
26,990
At 30 September 1986
44,510
11,010
20,290
22,900
17,450
26,210
4,520
1,060
(19,500)
_____-
____-
27,420
18,510
71,890
48,254
17,077
9,451
14,378
5,484
3,702
46,999
22,561
13,153
(15,633)
At 1 October 1985
At 30 September 1986
105,53
0
31,790
(19,500
)
117,82
0
74,782
(15,633
)
23,564
82,713
4,859
5,357
At 30 September 1986
(9) Accruals (per workings
above):
(2)
35,107
113
83
196
214
231
(3)
445
101
113
303
(5)
517
487
368
449
(6)
1,304
Lesson Nine
505
915
564
983
2,462
(10) Current accounts:
Earl
Duke
Opening balance
9,750
Interest on capital
2,500
Residual profit
6,846
Drawings
(12,190)
Closing balance
6,906
10,477
2,000
6,846
(9,740)
9,583
Question 5
WORKINGS
The first step is to derive the profit for the period:
Closing
Opening
Goodwill w/o
Closing
balances
Exors of
R decd
26,200
5,400
31,600
25,240
3,00
0
3,00
0
7,50
0
7,50
0
11,5
00
11,5
00
10,5
00
10,5
00
6,360
CAPITAL ACCOUNTS
A
R
S
1,5 Opening
9,000 8,00
00 balances
0
Goodwill
2,500 2,50
raised
0
4,0 Bank
00
Capital
- Premium (1/5
x 7,500)
5,5
00
11,50
0
10,5
00
CURRENT ACCOUNTS
8,00
0
2,50
0
4,00
0
1,50
0
4,00
0
1,50
0
10,5
00
5,50
0
506
Balance b/d
Drawings
Closing
balance
Exors of R
(decd)
Revision Aid
T A
100
- Balances b/d
140
200
2,00
0
-
1,60
0
720
1,80
0
720
- Appropriation
a/c
- (profit)
2,12
0
2,12
0
2,12
0
260
2,26
0
2,32
0
2,12
0
2,26
0
2,32
0
2,12
0
The Capital and Current Accounts are given as workings for the Balance sheet
figures.
LESSON 8
Question 1 (a)
AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31
October 1999
Sh000
Sh000
Raw Materials
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
Lesson Nine
finished goods
Sales
Less cost of sales
Opening stock finished goods
Factory cost of production
finished goods
Less closing stock finished
goods
Gross profit
Less expenses
Sales room expenses
Administration expenses
Office salaries and wages
Vehicle running expenses
Bad debts w/o
Overdraft interest
Debenture interest
Depreciation: furniture and
equipment
Motor vehicles
Less dividend
Net profit for the year
Add retained profit b/d
Less transfer to general reserve
Retained profit c/d
507
28,550
420
16,975
17,395
(610)
(16,785)
11,765
485
620
898
656
64
725
800
89
4,125
(8,462)
3,303
(4,000)
(697)
5,500
4,803
(2,000)
2,803
508
Revision Aid
AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets
Land & Buildings
Plant and machinery
Furniture and equipment
Motor vehicles
Sh000
30,000
25,800
890
16,500
73,190
Current Assets
Stock Finished goods
Raw materials
WIP
Current Liabilities
Bank overdraft
Creditors
Accruals
Debenture interest
Dividends accrued
Financed by:
Authorized and issued
capital
Capital reserve
Share premium
Revenue reserve
General reserve
Retained profit
Non current liability
8% debenture
Sh000
(11,460)
(274)
(7,525)
19,259
Sh000
30,000
14,340
616
8,975
53,931
610
465
695
7,360
9,130
1,175
1,000
783
800
4,000
(7,758)
1,372
55,303
40,000
500
2,000
2,803
45,303
10,000
55,303
Lesson Nine
509
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
510
Revision Aid
KK Ltd
Balance Sheet as at 31 October 1998
Shs 000
Shs 000
Non Current Assets
Freehold property
Furniture and fittings
Motor vehicles
44,500
1,540
3,500
49,540
(292)
(965)
(1,257)
Goodwill
Current Assets
Stock
Debtors
Less provision for doubtful debts
Rent receivable
Cash at bank
Current Liabilities
Creditors
Accrued expenses
Debenture interest
Tax payable
Proposed dividends
4,398
1,540
(77)
332
189
350
8,960
4,500
1,463
35
10,492
16,388
(14,331)
2,057
50,840
30,000
Capital reserves
Share premium
10% debenture
44,500
1,248
2,535
48,283
500
Revenue reserves
General reserve
Profit and loss account
Shs
000
350
4,500
12,490
16,990
47,340
3,500
50,840
Lesson Nine
511
512
Revision Aid
Question 3
(a)
1995
1996
Gross profit
percentage
Gross profit
Sales
24,000
64,000
Current ratio
Current assets
Current liabilities
23,900 = 1.68:1
14,200
31,000 = 1.52:1
20,400
Quick ratio
Current assets
less stock
Current liabilities
23,900 12,000 =
0.84:1
14,200
31,000 15,000 =
0.78:1
20,400
10,500 x 365 = 60
days
64,000
14,000 x 365 = 47
days
108,000
60,000____ = 70%
60,000 + 26,000
60,000____ = 55%
60,000 + 49,000
Debtors collection
period
Debtors x 365
Sales
Creditors payment
period
Trade creditors
x 365
Purchases (W)
Gearing ratio
Loan capital
Total capital
Cost of sales
Add: closing stock
Deduct: opening stock
Purchases
(b)
1995
000
40,000
12,000
52,000
10,000
42,000
= 37.5%
32,400 = 30%
108,000
1996
000
75,600
15,000
90,600
12,000
78,600
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).
Lesson Nine
513
(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
19X1
11 Feb
11 Feb
Cash
Share capital
(50,000 @
70p)
Share
premium
(50,000 @
20p)
4,000
10 Feb
Cash
35,000
16 Feb
Cash
10,000
______
49,000
49,000
514
19X1
29 Sep
1 Nov
Revision Aid
Forfeited
shares
Balance
carried
down
1 Nov
______
50,50
0
Bal c/d
19X1
1 May
Share
capital
Forfeited
shares reissued
1 Nov
35,000
15,000
___500
50,500
10,000
___250
10,250
15,000
Call account
19X1
1 May
Cash
_____
29 Sep
___150
Forfeited
shares
15,00
0
19X1
29 Sep
Forfeited Shares
19X1
29
Share capital (500
Sep
@ 1)
14,850
15,000
500
Call account
150
Forfeited
shares
reissued
350
____
500
500
Lesson Nine
19X1
1 Nov
1 Nov
Share
capital
Share
premium
515
500
250
750
Forfeited Shares
19X1
1 Nov
Cash
1 Nov
Forfeited shares
400
350
750
516
Revision Aid
STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I
The following should be done under examination condition.
Answer ALL questions. Marks allocated to each question are shown at the end of
the question. Show ALL your workings.
QUESTION ONE
Nafuu Foods Ltd. is a company in the hospitality industry. The following trial
balance has been extracted from its books on 31 October 2001.
Sh000
Revenue
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
Profit and loss account, 1 November 2000
9% debenture stock secured
Share premium
Capital redemption reserve
Trade debtors and creditors
63,860
Bad debts written off
240
Audit fees
400
Interest on loan and overdraft
13,900
Depreciation expense
17,300
Accruals
Interim dividends paid
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
Sh.000
816,160
104,000
77,600
160,000
18,000
56,400
61,520
900
26,000
1,294,580
Lesson Nine
517
4,800
960
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.
1)
2)
3)
4)
5)
518
6)
Revision Aid
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)
Lesson Nine
519
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.
The following was the partnership trial balance as at 30 April 2001:
Sh.
Sh.
750,000
500,000
Current accounts
Rotich
Sinei
400,000
300,000
Sh.
8,750,000
300,000
100,000
1,970,000
13,420,000 13,420,000
Additional information:
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.
520
Revision Aid
2.
Interest on fixed capitals was still to be allowed at the rate of 10% per annum
after Tonuis admission. In addition, after Tonuis admission, no interest was
to be charged or allowed on current accounts.
3.
4.
5.
6.
7.
8.
9.
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
Balance brought forward
Subscriptions:
Year 1999 2000
Maintenance
2000 2001
2001 2002
Dinner dance
Sh.
288,000
249,000
124,000
2,050,000
194,000
723,000
Payments
Salaries and wages
New equipment
Repairs and
Sh.
254,000
565,000
Office expenses
415,000
Printing and stationery168,000
Purchase ofBeverages197,000
Lesson Nine
Beverage sales
Investments income
521
657,000
400,000
4,561,000
522
Revision Aid
Balances as at
31 March 2000
Sh.
31 March 2001
Sh.
240,000
690,000
3,500,000
300,000
68,000
162,000
85,000
375,000
72,000
184,000
-
Additional information:
1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per
annum on furniture and fittings and equipment respectively.
3. Investments which had cost Sh.500,000 were sold on 30 March 2001 for
Sh.625,000. No entries have been made in the books in this respect.
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)
b)
Explain the term bank reconciliation and state the reasons for its
preparation.
(6 marks)
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.
Lesson Nine
523
10) Some of Ssemakulas 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 customers account.
However, acting on information from his customers, Ssemakula had
actually entered the expected receipts from the debtors in his cash book.
524
Revision Aid
Required:
i)
ii)
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:
a)
b)
c)
d)
e)
The
The
The
The
The
Required:
For each of the principles listed above:
a) Explain its meaning
b) Justify its use.
c) Explain any weaknesses associated with its use.
(5 marks)
(5 marks)
(5 marks)