Financial Accounting 1

SUBJECT NO. 1 Study Pack

STRATHMORE UNIVERSITY
DISTANCE LEARNING CENTRE
P.O. Box 59857, 00200, Nairobi, KENYA. Tel: Fax: +254 (02) 606155 +254 (02) 607498

Email: dlc@strathmore.edu

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ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent of the copyright owner.
© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992

Acknowledgement ACKNOWLEDGMENT

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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).

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INSTRUCTIONS FOR STUDENTS
This study guide is intended to assist distance-learning students in their independent studies. In addition, it is only for the personal use of the purchaser, see copyright clause. The course has been broken down into eight lessons each of which should be considered as approximately one week of study for a full time student. Solve the reinforcement problems verifying your answer with the suggested solution contained at the back of the distance learning pack. When the lesson is completed, repeat the same procedure for each of the following lessons. At the end of lessons 2, 4, 6 and 8 there is a comprehensive assignment that you should complete and submit for marking to the distance learning administrator. SUBMISSION PROCEDURE 1. 2. 3. 4. After you have completed a comprehensive assignment clearly identify each question and number your pages. If you do not understand a portion of the course content or an assignment question indicate this in your answer so that your marker can respond to your problem areas. Be as specific as possible. Arrange the order of your pages by question number and fix them securely to the data sheet provided. Adequate postage must be affixed to the envelope. While waiting for your assignment to be marked and returned to you, continue to work through the next two lessons and the corresponding reinforcement problems and comprehensive assignment.

On the completion of the last comprehensive assignment a two-week period of revision should be carried out of the whole course using the material in the revision section of the study pack. At the completion of this period the final Mock Examination paper should be completed under examination conditions. This should be sent to the distance-learning administrator to arrive in Nairobi at least five weeks before the date of your sitting the IASNEB Examinations. This paper will be marked and posted back to you within two weeks of receipt by the Distance Learning Administrator.

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Acknowledgement
CONTENTS
ACKNOWLEDGMENT............................................................................................ii INSTRUCTIONS FOR STUDENTS...........................................................................iii FINANCIAL ACCOUNTING I COURSE DESCRIPTION.................................................vi LESSON ONE.......................................................................................................1 INTRODUTION TO ACCOUNTING............................................................................................1 LESSON TWO....................................................................................................44 FINAL ACCOUNTS................................................................................................................44 LESSON THREE.................................................................................................86 ACCOUNTING THEORY........................................................................................................86 LESSON FOUR.................................................................................................104 ADJUSTMENTS TO FINAL ACCOUNTS.................................................................................104 LESSON FIVE..................................................................................................175 FURTHER ADJUSTMNETS TO ACCOUNTS...........................................................................175 LESSON SIX....................................................................................................224 OTHER ASPECTS OF FINAL ACCOUNTS..............................................................................224 LESSON SEVEN...............................................................................................295 PARTNERSHIPS..................................................................................................................295 LESSON EIGHT................................................................................................368 COMPANY ACCOUNTS.......................................................................................................368 LESSON NINE..................................................................................................427 REVISION AID....................................................................................................................427

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FINANCIAL ACCOUNTING I COURSE DESCRIPTION
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

STRATHMORE UNIVERSITY ● STUDY PACK

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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. i. The following are the users of accounting information: 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.

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This information will enable them to assess how the managers of the business are performing whether the business is profitable or not and whether to make drawings or put in additional capital. ii. Customers Customers rely on the business for goods and services. They would like to know how the business is performing and its financial position. This information would enable them to assess whether they can rely on the firm for future supplies.

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Course Description

Suppliers They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like to have information on the financial performance and position so as to assess whether the business would be able to pay up for the goods and services provided as and when the payments falls due. iii. Managers The managers are involved in the day-to-day activities of the business. They would like to have information on the financial position, performance and changes in financial position so as to determine whether the business is operating as per the plans. In case the plan is not achieved then the managers come up with appropriate measures (controls) to ensure that the set plans are met. 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. The Government and its agencies The Government is interested in the financial performance of the business to be able to assess the tax to be collected in the case there are any profits made by the business. The other government agencies are interested with the financial position and performance of the business to be able to come with National Statistics. This statistics measure the average performance of the economy. The Financial Analyst and Advisors Financial analyst and advisors interpret the financial information. Examples include stockbrokers who advise investors on shares to buy in the stock market and other professional consultants like accountants. They are interested with the financial position and performance of the firm so that they can advise their clients on how much is the value their investment i.e. whether it is profitable or not and what is the value. Others advisors would include the press who will then pass the information to other relevant users. 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. The Public Institutions and other welfare associations and groups represent the public. They are interested with the financial performance of the firm. This
FINANCIAL ACCOUNTING 1

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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 firm’s activities on the environment.

c) THE ACCOUNTING EQUATION A business owns properties. These properties are called assets. The assets are the business resources that enable it to trade and carry out trading. They are financed or funded by the owners of the business who put in funds. These funds, including assets that the owner may put is called capital. Other persons who are not owners of the firm may also finance assets. Funds from these sources are called liabilities. The total assets must be equal to the total funding i.e. both from owners and nonowners. This is expressed inform of accounting equation which is stated as follows: ASSETS = LIABILITIES + CAPITAL Each item in this equation is briefly explained below. Assets: An asset is a resource controlled by a business entity/firm as a result of past events for which economic benefits are expected to flow to the firm. An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will flow towards the firm i.e. in form of cash once the customers pays. Assets are classified into two main types: i) Non current assets (formerly called fixed assets). ii) Current assets. Non current assets are acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in business for a period of more than one year. Major examples include:  Land and buildings  Plant and machinery  Fixtures, furniture, fittings and equipment  Motor vehicles Current assets are not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. Examples include:  Stock of goods – for purpose of selling.  Trade debtors/accounts receivables – owe the business amounts as a resort of trading.

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Current liabilities last for a period of less than one year and therefore will be paid within one year. An example is when a business buys goods on credit.5 Course Description    Other debtors – owe the firm amounts other than for trading. 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. i) ii) Non-current liabilities (or long term liabilities) Current liabilities. The Accounting equation can be expressed in a simple report called the Balance Sheet. This includes long-term loans from banks or other financial institutions. The basic format is as follows: Name Balance sheet as at 31. furniture & fittings Motor vehicles xx xx Current Assets Stocks Debtor’s Cash at bank xx xx xx Sh xx xx xx xx xx FINANCIAL ACCOUNTING 1 . Other creditors . Cash at bank. Cash in hand.owed amounts for services supplied to the firm other than goods.12. then the firm has a liability called creditor. 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. Sh Capital Non Current Liabilities Loan Current liabilities Overdraft xx Creditors xx Capital and Liabilities Sh Sh Non Current Assets Land & Buildings Plant & Machinery xx Fixtures. Bank overdraft . Major examples:  Trade creditors/ or accounts payable – owed amounts as a result of business buying goods on credit. Non-current liabilities are expected to last or be paid after one year.   Capital: This is the residual amount on the owner’s interest in the firm after deducting liabilities from the assets.amounts advanced by the bank for a short-term period. Liabilities are also classified into two main classes.

Course Description 6 Cash in hand xx xx xx Total assets xx STRATHMORE UNIVERSITY ● STUDY PACK .

FINANCIAL ACCOUNTING 1 . from Land and Buildings to motor vehicles. The Current Liabilities are listed in order of payment i. The Non Current assets are listed in order of permanence as shown i. not yet realised yet) then when it is sold we either get cash or a debtor (if sold on credit). Example . Bank overdraft is payable on demand by the bank. Net assets should be the same as the total of Capital and Non Current Liabilities.e.stock is not yet sold. which is due for payment first. which asset is far from being converted into cash. This is added to Non Current assets. Name Balance sheet as at 31. Note that in the vertical format. The Current Assets are listed in order of liquidity i.12. which give us net assets.e. current liabilities are deducted from current assets to give net current assets. (i. then followed by creditors. Non Current Assets Land & Buildings Plant & Machinery Fixtures.7 Course Description 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. When the debtor pays then the debtor may pay by cheque (cash has to be banked) or cash. 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 Sh xx (xx) xx xx Capital Non Current Liabilities Loan (from bank or other sources) xx xx xx Please pay attention to the format.e.e.

000.500 35.800 Stocks 8.2002 £ Buildings 11.500 Capital 30.800 5.2 L Stokes sets up a new business.600 1. After the events just described and before trading starts. £ STRATHMORE UNIVERSITY ● STUDY PACK .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 Assets Stock Debtors Cash at bank Cash in hand Creditors Net Current Assets Net Assets Capital Non-Current Liabilities Loan £ £ 11.500) 13.000 5. You are given the following information as at 31. Before he actually sells anything he has bought motor vehicles of ₤3. he had ₤300 cash in hand and ₤600 cash at bank. stock of goods ₤2.600 Cash a bank 1.800 Example 1.000.Course Description 8 Example 1.1 B Kelly has a business that has been trading for some time.12.500 Motor Vehicles 5.800 30.000 from D Evans.500 5. He still owes ₤800 in respect of them.500 Cash in hand 400 Creditors 2.000 (2.500 400 16. premises of ₤7.800 Loan 5. He had borrowed ₤4.800 22.300 8.000.000 Furniture & Fittings 5.500 Debtor 5.500 5.000 35.

Liabilities Total Assets = ₤12. To get capital we rearrange the equation as follows: Capital = Assets . Solution: Assets: Motor Vehicle Premises Stock Cash at bank Cash in hand Liabilities: Creditors Loan .000 7. Debtors £6.800.9 Course Description You are required to calculate the amount of his capital.800) 8.800 = ₤ 8.000 2. the first week of July 2002: He bought extra stock of goods £1.100 You are to draw up a balance sheet as on 7 July 2002 after the above transactions have been completed.900 and Cash in hand £240. Fixtures £7.000. Motor Vehicles £8.000 600 300 12. One of the debtors paid him £560 in cash.200. Stock of goods £9.100 Example 1.900 Total Liabilities = ₤4.540 on credit. c. During a.100 8.4.900 800 4.000. He bought extra fixture by cheque £2.000 (4.3 C Kings has the following items in his balance sheet as on 30 June 2002. Cash at bank £12. b.900.900 . Capital £41. ₤ ₤ 3.500. FINANCIAL ACCOUNTING 1 .400. Creditors £3.800 Capital = ₤ 12.D Evans Capital Remember the Accounting equation: Assets = Liabilities + Capital.

400 17.400 9.540 and because this is bought on credit the creditors increase by £1.900 240 Increase/(Decrease) 1.800 4.Course Description 10 First we need to look at the effect of the above transactions on the assets and liabilities of C Kings.000 8. For (a) Buying extra stock increases the level of stock by £1.900 800 29.740) 24.800 £ STRATHMORE UNIVERSITY ● STUDY PACK .540 2. (b) Amount received from the debtor means that the level of debtors reduces and cash increases by £560.800 3.440 6.400 11.000 10.000 8.000 1.740 9.200 7. (c) Extra fixtures bought by cheque.140 (4. will increase the fixtures and reduce the cash at bank by £2.540 also.000 10.000.540 (560) (2000) 560 Closing Balances £ 41.560 12.900 6. This can be summarized as follows: Opening Balances £ 41.900 800 Capital Creditors Fixtures Motor Vehicles Stock Debtors Cash at bank Cash in hand Given these closing balances then the balance sheet can be drawn as follows: C Kings Balance sheet as at 7 July 2002.400 11.440 6.000 8.800 41.400 41. 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.

11 Course Description From the illustration remember that any change in the items of the balance sheet will have a double effect on the accounting equation has a double effect and therefore the equation will always balance. FINANCIAL ACCOUNTING 1 .

d.800 = £132.160 Stock 24.000 Motor Vehicle 25.360 by cheque and £240 by cash. Paid creditors by cheque £3.000 Creditors 15. c.600 Debtors 23. Bought extra stock by cheque £2. b.800 Motor Vehicle 25.600 and increases the cash at bank and cash in hand by £3. Solution: (i) Using the accounting equation of Assets = Liabilities + Capital.Course Description 12 Example 1.160. then assets and liabilities can be listed as follows.080 Cash at bank 29.000 cash as capital.520.360 and £240 respectively. Required: a.£15. Debtors paid £3. Draw up a balance sheet after the above transactions have been completed.120 Cash in hand 160 During the first week of May 2002 Moody: a.120 Capital = Assets – Liabilities = £148.280.800 Equipment 46.280 and the balance at bank reduces by the same. Buying extra equipment means that the equipment balance will increase by £5. e. d.120 Cash in hand 160 148. we consider the effect of the above transactions on the relevant balances: a. Paying creditors by cheque reduces the balance on the creditors account and also reduce the amount at the bank. b. c.080 Cash at bank 29. Buying extra stock by cheque means that the level of stock goes up by £2. Moody put in extra £1.320 (ii) To draw up the balance sheet.520 and the creditors will also increase by the same amount. b.600 Debtors 23.120 .4 D Moody has the following assets and liabilities as on 31 April 2002: £ Creditors 15. Bought extra equipment on credit for £5.160 Stock 24. STRATHMORE UNIVERSITY ● STUDY PACK . Determine the capital as at 1st May 2002. Assets £ Liabilities £ Equipment 46. Debtor paying the firm reduces the debtors balance by £3.

Additional cash of £1.13 Course Description e.000 increases the cash in hand balance by £1. FINANCIAL ACCOUNTING 1 .000 and the capital balances.

800 (+5.520 51.000 +5.080 -3.320 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 Current Liabilities Creditors Net Current Assets Net Assets Capital £ £ 51.680 26.320 133.160) 18.160 25.320 +1.160 76.280 – 3.600 +2.600 19.520 – 3.040 Cash in hand 160 (+240 + 1000) 1.520 Motor Vehicle 25.640 133.160 Stock 24.Course Description 14 This is also summarized as follows: Opening Adjustment Closing Balance Increase/Decrease Balance Assets/Liabilities £ £ £ Equipment 46.320 Double Entry Aspects The Accounting equation forms the basis of double entry and therefore it should always be maintained.880 19.000 133.040 1.520 25.160) 56.160 + 3.120 (-2.160 Capital 132.400 Creditors 15. Name Debit Date Detail Folio Amount Credit Date Detail Folio Amount STRATHMORE UNIVERSITY ● STUDY PACK .280 26.360) 27. Any change in assets.800 (18.400 74. If the owners put in additional capital then this will increase the cash at bank and the capital amount therefore the equation is still maintained.880 Debtors 23.480 Cash at bank 29. liabilities or capital will have a double effect such that assets will always be equal to liabilities plus capital.480 27.

iii. c.900. Compute the balance on the capital account as at 30 November 2002. Creditors etc. ii.e. The detail column (also called the particulars column) shows the nature of the transaction and reference to the corresponding account.e. Debtors. Jump: a. During the first week of December 2002. Paid creditors by cheque £7. All assets are shown or recorded on the debit side while all the liabilities and capital are recorded on the credit side.700. Bought extra stock by cheque £5. iii. Therefore there should be an account for Premises.700. Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should be the same as credits.5 H Jumps has the following assets and liabilities as on 30 November 2002: Creditors £39.500. Plant and Machinery. When we make a debit entry we are either: i. the balance brought forward. Increasing the value of an asset. liability or capital.500. Reducing the value of capital. FINANCIAL ACCOUNTING 1 . Equipment £115. It will also show the date when a transaction took place (i. For the double entry to be reflected in the accounts. either an asset was bought or liability incurred). Motor vehicle £62. Reducing the value of a liability. Example 1. b. When we make a credit entry we are either: i.800 and Cash in hand £400. Debtors £57. The amount column shows the amount of the asset.900. Stock.800. ii.Cash at bank £72. Reducing the value of an asset. Stock £61. The left side of the account is called the debit side and the right side is called the credit side. Each type of asset or liability must have its own account whereby all transactions affecting them are recorded in this account.000. The transactions affecting these accounts are posted in the account as debit entry and credit entry to complete the double entry.15 Course Description In this account the date will show the opening period of the asset . The Folio Column for purposes of detailed recording shows the reference number of the corresponding account. Increasing the value of capital.liability or capital i. Increasing the value of a liability. every debit entry must have a corresponding credit entry. Bought extra equipment on credit for £13.

You are to draw up a balance sheet as on 7 December 2002 after the above transactions have been completed.400 by cheque and £600 by cash. Received from debtors £8. STRATHMORE UNIVERSITY ● STUDY PACK . e.500 cash as capital. Put in an extra £2.Course Description 16 d.

900 39.500 57.900 2002 £ 1.500 39.50 0 Capital = £371.300 .000 Creditor s 62.900 1.900 1.800 400 371.300 £ £ 39.12 £ 2002 £B 2002 1.12 Bal b\d Creditors £ 128.000 13.800 Stock a/c 2002 61.12 Bal b/d Bal b/d 62.17 Course Description Answer: Capital = Assets – Liabilities Assets Equipment Motor vehicle Stock Debtors Cash at bank Cash in hand Liabilitie s 115.900 61.500 2002 1.12 Bal 62.800 7.700 72.12 Bal c/d 31.800 Creditors A/C a/c 2002 £ Bank 7900 c/d 62.£39.500 Equipment a/c 2002 115.200 FINANCIAL ACCOUNTING 1 Motor Vehicles £ 39.600 62.12 Bal c\d 67.12 Bal b\d Bank .800 128.800 £ 67.12 Bal c\d 128.500 5700 7.200 2002 £ 1.500 = £330.200 67.

200 2002 £ 1.600 81.Course Description 18 2002 £ 1.800 Creditors Of Equipment 2002 13800 Equipment 13.800 £ 13800 13.700 Bank Cash 570 7.12 Bal b\d 333300 Cash 128.400 600 48.12 Bal b\d £ 330800 2500 128.12 Bal b\d Debtors Cash at Bank a/c 2002 £ 72.700 57.12 Bal c\d 3500 Capital 2002 1.900 67.700 £ 8.700 7.700 2002 £ 1.12 Bal b\d Bank Debtors a/c 2002 57.12 400 Debtors Capital Bal 3500 3500 2002 £ 7.800 Stock Creditors 8.800 2002 £ 7.12 Bal c\d 57.200 Cash in hand a/c 2002 £ b\d 600 2500 7.12 Bal c\d 81.12 Bal b\d H Jump Balance sheet as at 7 December 2002 Non Current Assets £ £ £ STRATHMORE UNIVERSITY ● STUDY PACK .400 7.800 5.

700 67.000 333.800 31.000 (45.300 FINANCIAL ACCOUNTING 1 .19 Course Description Equipment Motor vehicles Current Assets Stock Debtors Cash at Bank Cash in Hand Current Liabilities Creditors of equipment Creditors Net Current Assets Net Assets Capital 128.700 61.200 48.600 3.500 187.800 62.000 13.900 191.400) 141.300 333.

Course Description 20 Example 1.000 58.000 20000 Fixtures £ 2002 young Cash Bank Bal c/f 7.000 Motor Van 2002 2/6 12.000 50.000 30/6 Bal c/f 34. “ 25 Paid £8.6 Write up the asset.000 1/6 Van 12.000.000 in the bank.000 £ Bank Super M 30/6 20. capital and liability accounts in the books of M Crash to record the following transactions: 2002 June 1 Started business with £50.000 cash is received from J Marcus.000 2/6 8.000 of the cash in hand into the bank account.600 Bal £ c/f 20000 50.000.000 15/6 600 30/6 3000 £ STRATHMORE UNIVERSITY ● STUDY PACK .000. “ 8 Bought a van on credit from Motor Cars Ltd £8. “ 15 Bought Fixtures paying by cash £600.000 out of the bank and put it into the cash till. “ 12 Took £1.000 12/6Cash Cash at 2002 5/6 4. “ 30 Bought more Fixtures paying by cheque £3.000 58. “ 19 Paid Motor Cars Ltd by cheque £8000.000 8/6 8.000 3.000 19/6Motor ltd 8. “ 21 A loan of £10.000 2002 1/6 12/6 £ Capital Cash 2002 £ 50. Capital a/c bank a/c 2002 £ 2002 30/6 Bal c/f 50.000 1.000 30/6 Fixtures £ Bank 50.000 on credit from Office Masters Ltd. “ 2 Bought motor van paying by cheque £12. “ 5 Bought Fixtures £4.

Marcus Cash in hand £ 2002 Cash 15/6 600 25/6 Bank 10000 30/6 Bal c/f 11000 J. Marcus .400 36.Creditor £ 2002 B\f 8/6 Fixtures 4000 4000 7.600 2002 19/6 8000 Motor Car Ltd – Creditors £ 2002 Bank 8/6 Van 8000 2002 30/6 Office Masters Ltd .000) 32.Loaner £ 2002 c\f 21/6 Cash 10000 £ Cash 800 2400 11000 £ 10000 2002 30/6 Note that the difference between the debit side and the credit side is the balancing figure.600 £ 8000 8000 £ 4000 4000 2002 12/6 1.000 21/6 J.000 2. A simple balance sheet from these balances will be as follows: M Crash Balance Sheet as at 30th June 2002 £ Non Current Assets Fixtures Motor vehicles Current Assets Cash at bank Cash in hand Current Liabilities Creditors – others Net Current Assets £ 7.21 Course Description 7.000 27.400 (4.400 FINANCIAL ACCOUNTING 1 . Most assets will have a balance on the credit side and most liabilities and capital accounts will have a balance on the debit side.600 20.600 34.

i. Purchases can also be for cash or on credit. the following entries are made:  Debit cash in hand/at bank. rent income. Incomes: A firm may have other incomes apart from that generated from trading (sales). A new account for sales is opened and credited with cash or credit sales. Debit purchases. Sales: This is the sell of goods that were bought by a firm (the goods must have been bought with the purpose of resale). Credit sales account. the following entries are to be made. When a cash sale is made. Accounting for sales.  Credit income account. interest income. Credit cash at bank/cash in hand For credit purchases. we: i. For cash purchases: i. ii. Credit sales account. ii. ii.000 10. STRATHMORE UNIVERSITY ● STUDY PACK . Debit purchases. Such incomes include:  Rent  Bank interest  Discounts received. Sales are divided into cash sales and credit sales.g. When the firm receives cash. Purchases: Buying of goods meant for resale. Each type of income should have its own account e.000 60. A new account is also opened for purchases where both cash and credit purchases are posted.000 50. NOTE: NO ENTRY IS MADE INTO THE STOCKS ACCOUNT.Course Description 22 Net Assets Capital Non Current Liabilities Loan – J Jarvis 60. Debit cash either at bank or in hand. For a credit sale: i. purchases. ii. Credit creditors for goods.000 Let us now consider other transactions that take place in a business and the accounting entries to be made. incomes and expenses. Debit debtors/ Accounts receivable account. from these incomes.

Expenses decrease the value of capital and thus the posting is made on the debit side of their accounts. ii. why they are Expenses: These are amounts paid out for services rendered other than those paid for purchases. Each expense should also have its own account where the corresponding entry will be posted. FINANCIAL ACCOUNTING 1 . Examples include: • Postage and stationery • Salaries and wages • Telephone bills • Motor vehicle running expenses. The following diagram is a simple summary of the entries made for incomes and expenses. Debit the expense account. When a firm pays for an expense.23 Course Description Incomes increase the value of capital and that is the reason posted on the credit side of their respective accounts. • Bank charges. we: i. Credit cash at bank/in hand.

Goods returned may relate to cash sales or credit sales. Excess goods being delivered. Debit creditors. They may be for cash purchases or for credit purchases. Credit returns outwards. iii. i. For cash purchases a cash refund given to the firm by the supplier. Debit returns inwards. Debit returns – inwards ii. the following entry is to be made. They may be defective/damaged. ii. Being of the wrong type .Course Description 24 Debit cash book/bank/in hand INCOME INCOMES/EXPENSES Credit Debit Expense A/C EXPENCE 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. Returns Outwards: These are goods returned to suppliers/creditors. ii. STRATHMORE UNIVERSITY ● STUDY PACK . For goods returned that relate to credit sales. i. For credit purchases and no refund has been made: i. ii. Debit the cashbook (cash at bank/hand). Credit debtors.g. ii. For the goods returned in relation to cash sales and cash is refunded to the customer the following entries are made: i. Credit cashbook. Credit returns outwards. no cash has been given to customer. i.

“ 12 Bought stationery £27. “ 6 Bought goods on credit £114 from P Scot.8 You are to enter the following transactions.25 Course Description Diagrammatically shown as follows: Debit returns inwards. “ 2 Purchased goods £175 on credit from M Rooks. paying in cash. “ 31 The proprietor took cash for himself £44. Example 2002 £ 1/5 2. “ 23 Sold goods on credit to U Foot for £77.000 21/5 Bank a/c 2002 £ Capital 3/5Furn& 150 24/5 300 Rent 31/5 FINANCIAL ACCOUNTING 1 Credit cashbook. “ 18 Goods returned to M Rooks £23.000 in the bank. completing the double entry in the books for the month of May 2002. Cash Inwards Credit Credit debtors Debit cash Returns Outwards Credit Credit returns outwards Now lets us take one example that includes most of the above transactions. 2002 May 1 Started business with £2. “ 21 Let off part of the premises receiving rent by cheque £5. “ 3 Bought furniture and fittings £150 paying by cheque. “ 24 Bought a motor van paying by cheque £300. Debit returns inwards Cash Credit returns outwards Debit creditors fitting Motor Bal vehicle c/f . “ 10 Paid rent by cash £15. Example 1. “ 30 Paid the month’s wages by cash £117. “ 5 Sold goods for cash £275.

005 2.555 2.000 Bal 1.005 31/5 2. Foot 77 150 Sales a/c £ 2002 352 5/5 23/5 352 31/5 Bal c/f 352 Cash in hand a/c 2002 £ 2002 £ 5/5 Sales 275 10/5 Rent £ 15 2002 P Scot a/c £ 2002 STRATHMORE UNIVERSITY ● STUDY PACK .000 Capital a/c c/f 1/5 Bank 2002 £ 2/5M 175 6/5 114 Purchases a/c 2002 £ Rooks P Scot 31/5 289 289 Bal c/f 289 2002 £ 18/5 23 31/5 152 Returns Bal Creditor – M Rooks a/c 2002 £ in 2/5 175 c/f 175 Purchases 175 Furniture & Fittings a/c 2002 £ 2002 £ 3/5 Bank 150 31/5 Bal c/f 150 2002 £ Cash 275 150 U.Course Description 26 5 2.

27 Course Description 12/5 Stationery 27 6/5Purchases 114 30/5 Wages 31/5 Bal c/f 275 114 Expenses – Rent a/c 2002 11/5 Bal c/f 27 27 £ 2002 15 10/5 Cash £ 15 2002 12/5 Cash 117 116 275 31/5 Bal c/f 114 114 Expenses – Stationery a/c £ 27 2002 £ 31/5Bal c/f 27 FINANCIAL ACCOUNTING 1 .

Sometimes the owner may take over some of the assets of the business e. iii) Personal expenses. vehicle or converting business premises into living quarters or not paying into the business STRATHMORE UNIVERSITY ● STUDY PACK .g.Course Description 28 Returns – Out a/c 2002 £ 2002 £ £ 31/5 Bal c/f 23 18/5 M Rooks Bank 5 2002 23 21/5 Income – Rent a/c £ 2002 Bal c/f 5 31/5 Debtors – U Foot a/c 2002 £ 2002 £ 23/5 Sales 77 31/5 Bal c/f 300 77 Motor vehicle a/c 2002 £ 2002 £ 24/5 Bank 300 31/5 Bal c/f Expenses – Wages a/c a/c 2002 £ 2002 £ £ 30/5 Cash 117 31/5 Bal c/f c/f 44 Drawings 2002 117 31/5 Cash £ 44 31/5 200 Bal Accounting for drawings. Drawings The owner makes drawings from the firm in various ways: i) Cash or bank withdrawals When the owner withdraws money from the business we debit drawings and credit cashbook (cash in hand or cash at bank). ii) Taking goods for own use and When the owner takes out some of the goods for his own use. paid by the business Here we debit the drawings and credit expense account Taking some of the other assets from the business e. motor vehicles or using part of the premises.g. discounts allowed and discounts received. we debit drawings and credit purchases.

g. FINANCIAL ACCOUNTING 1 . motor vehicles.29 Course Description cash collected personally from the customers. premises or some building or even debtors. When this happens we debit drawings and credit the relevant asset e.

The amounts deducted from the sales invoice.g.000 STRATHMORE UNIVERSITY ● STUDY PACK . B decides to take up the offer and pays the amount within the given time.000 under the terms of sale. When a discount is given by the supplier then we debit creditor’s account and credit discounts received e.000 1.000 Bank £ 950 2002 £ Sales a/c 2002 £ 50 Discount Debtor 1. A. In the previous example when A Ltd issued the discount and was taken up by B the entries will be: i.000 Discount received 50 1000 £ Purchases 1000 1.000 1.discount allowed ii.debtors . 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. Credit . B will record the transaction as follows. B Ltd.Course Description 30 Discounts Discounts received. Debit .B Ltd. Ltd sells some goods on credit to B Ltd.000 2002 £ A Ltd A. Debit: Creditor – A Ltd Credit: Discounts Received Creditor Purchases a/c 2002 £ 2002 2002 £ Bank 950 1. Ltd a/c Discounts Received a/c 200 £ 2002 £ Bal c/f 50 A Ltd Ltd 950 £ 50 2002 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. will receive a discount of 5% if they pay the amount due within one month. 2002 Sales Debtors B Ltd a/c £ 2002 1. ₤1. It is an amount deducted from the invoice price.

if not then there is an error in one or more of the accounts. The debits of the trial balance should be the same as the credits. The next example is a detailed one that shows extracting of trial balance once all the postings have been made in the relevant accounts.8 would be extracted as follows: Name Trial balance as at 31 May 2002 Debit Credit £ £ Rent – income 5 Debtor – U Foot 7 Motor vehicle 300 Bank 1555 Purchases 289 Wages 117 Capital 2000 Creditor – M 152 Rooks Furniture & 150 Fittings Sales 352 Cash in hand 72 Creditor – P Scot 114 Expenses – Rent 15 Expenses – 27 Stationery Returns Outwards 23 Drawings 44 . Capital. Example 1.e.31 Course Description 2002 Debtor Discount allowed a/c £ 2002 50 Bal c/f £ 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. the trading. 2464 2464 From the trial balance please note that assets and expenses are on the debit side. liabilities and incomes are normally listed on the credit side.9 Write up the following transactions in the books of S Pink: FINANCIAL ACCOUNTING 1 . profit & loss account and a balance sheet. The trial balance in example 1.

Capital a/c a/c 2003 £ 2003 £ 2003 £ £ 31/3 Bal c/d 1. Paid motor expenses in cash £15.549 Purchases a/c 2003 £ 2003 £ 2/3 A Hanson 296 31/3 Bal c/d 421 28/3 Cash 125 2003 £ 421 Purchases 296 421 14/3 Returns out 17 2/3 Creditors – A Cliks ac £ 2003 STRATHMORE UNIVERSITY ● STUDY PACK .500 1/3 Capital 28 11/3 Sales 1.500 49 20/3 3/3 Rent 4/3 Bank Repairs 28/3 Purchases exp.000 of the cash of the firm into a bank account. J Simpson returned goods to us £14. Bought a motor vehicle paying by cheque £395. Cash sales £49. Paid A Cliks by cheque £279.000 18 Cash in hand 2003 1.000.549 1. Cash purchases £125.Course Description 32 2003 March “ “ “ “ “ “ “ “ “ “ “ “ “ “ “ Solutions 1 2 3 4 5 7 11 14 17 20 22 27 28 29 30 31 Started business with cash £1. Sold goods on credit to J Simpson £54. Bought fixtures £120 on credit from R west. Bought goods on credit from A Cliks £296. Sold goods on credit to P Lutz £29. Goods returned by us to A Cliks £17.500 1/3 Cash 1. Paid rent by cash £28. Paid for repairs to the building by cash £18. Paid £1. Bought stationery £15 paying by cheque. 363 15 125 30/3 31/3 Motor Bal c/d 1.

000 5/3 Stationery 27/3 A. Hanson 29/3 Motor van 4/3 Cash 395 31/3 311 1.33 Course Description 27/3 Bank 296 Rent –Expenses a/c 2003 £ 3/3 15 279 £ 2003 Cash 28 31/3 £ Bal c/d 2003 28 £ 279 296 Bank a/c 2003 1.000 Debtor – J Simpson a/c a/c 2003 £ 3/3 Sales JSimpson 54 49 17/3 P Lutz 29 54 54 132 132 £ 2003 54 £ 2003 14 31/3 ` £ 2002 Bal c/d 132 5/3 Sales Bal c/d 22/3 Returns in 31/3 Bal c/d 40 11/3 Sales FINANCIAL ACCOUNTING 1 .000 1.

Course Description 34 2003 7/3 Bank £ Stationery a/c £ 2003 £ 15 31/3 Bal c/d Returns outwards a/c 15 2003 31/3 Bal c/d £ 2003 A 17 14/3 Cliks 17 P Lutz – Debtor a 2003 £ 2003 £ 17/3 Sales 29 21/3 Bal c/d c/d 18 £ 29 2003 Building repairs .Inwards 2003 £ 2003 £ 22/3 J Simpson 14 31/3 Bal c/d 395 2003 14 £ 29/3 Bank Motor vehicle 2003 £ 395 31/3 Bal c/d R West – Creditor (others) 2003 31/3 Bal c/d 15 £ 2003 £ 120 31/3 Fixtures 120 2003 Motor expenses £ 2003 30/3 Cash 15 £ 31/3 Bal c/d 2003 31/3 A.expenses £ Cash 18 2003 31/3 Bal 20/3 Returns . Webster Fixtures £ 2003 £ 120 31/3 Bal c/d 120 STRATHMORE UNIVERSITY ● STUDY PACK .

Mobile £110. “ 31 Paid rent by cheque £18. Pcombs £87. “ 6 Paid rent by cash £12. Sims £64. J Role £25.10 The following transactions took place during the month of May: 2003 May 1 Started firm with capital in cash of £250. R Kelley £54. “ 18 Bought goods on credit from P Combs £43.35 Course Description 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 421 363 311 28 132 120 40 29 395 15 14 15 18 1769 17 1769 Credit (£) 1500 120 Example 1. “ 4 Sold goods on credit to: C Blanes £43. I. B Long £62. “ 15 Paid carriage by cash £23. “ 10 F Skin paid us £150 by cheque. “ 9 C Blanes paid us his account by cheque £43. F Skin £176. “ 12 We paid the following by cheque: J Role £25. “ 2 Bought goods on credit from the following persons: R Kelly £54. FINANCIAL ACCOUNTING 1 . D Mobile £76. “ 21 Sold goods on credit to B Long £67.

18/5 Purcha ses 130 £ 12 23 21 5 25 0 £ 87 4 3 13 0 Bal c/d 200 3 12/ 5 Creditor R Kelly £ 200 3 Bank 54 2/5 Purcha ses £ 54 200 3 31/ 5 200 3 12/ 5 Creditor – J Role £ Bank 25 2/5 Purcha ses £ 25 200 3 31/ 5 Creditor – D Mobile £ 200 3 Bal 186 2/5 Purcha c/d ses . Blares £ 200 3 Sales 43 4/5 Bank £ 76 11 0 18 6 £ 43 200 3 31/5 Bal c/d Creditor I Sims £ 200 3 64 2/5 Purcha ses £ 64 200 3 4/5 200 3 4/5 21/ 5 Debtor B Long £ 200 3 Sale 62 31/ Bal c/d s 5 Sale 67 s 129 £ 129 .Course Description 36 Answer 200 3 31/ 5 Capital £ 200 3 250 1/5 Cash £ 250 200 3 1/5 Cash in Hand £ 200 3 Capit 250 6/5 Rent al 15/ Carriag 5 e . 31/ Bal c/d 5 176 £ 15 0 2 6 17 6 STRATHMORE UNIVERSITY ● STUDY PACK . 18/ Purcha 5 ses 186 Debtor C. 129 200 3 4/5 Debtor F Smith £ 200 3 Sales 176 10/ Bank 5 . 31/ Bal c/d 5 250 Creditor P Combs £ 200 3 Bal c/d 130 2/5 Purcha ses .

37 Course Description 200 3 2/5 2/5 2/5 2/5 2/5 18/5 18/5 Purchases £ 200 3 R Kelly 54 31/ Bal 5 c/d P Combs 87 J Role 25 D Mobile L Sims P Combs D. 30 Cash Bank Trial Balance as at 31/5/2003 Capital Debit Credit 250 FINANCIAL ACCOUNTING 1 . 19 3 Rent £ 19x 6 12 31/ 5 1 8 3 0 £ 45 9 200 3 31/ 5 Bal c/f Sales £ 200 3 348 4/5 4/5 4/5 4/5 £ C Blanes F Long F Skin B Long 43 62 17 6 67 . Mobile 76 64 43 10 0 45 9 Bank £ 200 3 43 12/5 15 12/5 0 31/5 31/5 . 459 Carriage Expenses £ 200 3 Cash 23 31/ Bal c/d 5 200 3 9/5 10/5 £ J Role R Kelly Rent Bal c/d 25 54 18 9 6 19 3 2003 15/5 £ 23 C Blanes H F Skin 19x 6 6/5 31/ 5 £ Bal c/d 30 . 34 8 .

Course Description 38 Cash Creditor – R Kelly Creditor – P Combs Creditor – J Role Creditor – D Mobile Creditor – L. Long Debtor. Simms Debtor – C. Blanes Purchases Sales Debtor.B.F Skin Bank Carriage Rent 215 459 129 26 96 30 978 130 186 64 348 978 STRATHMORE UNIVERSITY ● STUDY PACK .

39 Course Description 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 $1.808 1. The following transactions took place during the first Januar y $ Suppliers’ invoices: Live 468 Negative Earth 692 Capital introduced Bankings of cash (from cash sales) 908 Expenditure out of cash sales before banking: Withdrawals on account 130 Stationery 12 Travelling 6 Petrol and van repairs 19 FINANCIAL ACCOUNTING 1 four months of 19X1 Februar Marc April y h $ $ $ 570 87 500 940 120 14 10 22 390 103 187 766 160 26 11 37 602 64 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.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. out of which he pays various expenses before banking the balance.031 150 21 13 26 .

Credit customers also pay by cheque one month after receipt of invoice.0 STRATHMORE UNIVERSITY ● STUDY PACK .000.000.0 0 (12. and receives a settlement discount of 15% from each supplier. Required: Write up the ledger accounts of Spark for the four months to 30 April 19X1.000.00 29.0 0 Current Assets: Stock Debtors Cash at bank Cash in hand Current liabilities: Creditors 11.000.000. Question Two Mary Balance Sheet as at 31 December 2000 Non Current Assets Premises Plant £ £ 25.000.000.0 17.0 0 37. and are given a settlement discount of 10% of the invoice price.000.000.00 3. and extract a list of account balances after balancing off the accounts.0 0 10.0 0 12.Course Description 40 Sundry expenses Postage Cleaner’s 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 5 12 60 66 120 44 40 62 - 4 10 60 22 140 38 49 47 800 - 7 15 65 10 130 20 59 20 220 - 3 19 75 12 180 48 66 106 12 Spark pays for goods by cheque one month after receipt of invoice.000.0 0 5.

00 i) Creditors were paid a total of £36. e) Electricity for the year paid by cheque totaled £2.0 0 54. Required: Prepare a revised balance sheet.200 1 £ 20.000.00 6.000.000.000.200 1 £ 20.0 0 20.000.00 in cash b) Stock in trade was bought.12.000.000.00. k) The bank charged interest on the loan deducting £3.000. for £34. d) A total of £16.00 FINANCIAL ACCOUNTING 1 .0 0 34.000.00 all in cheques.000.00 were on credit and £9.000.00 was drawn from the bank in cash to the cash till.41 Course Description 0) Capital Non Current Liabilities: Loan from bank 0 54.000.01.00 for cash.00 9.00 all by cheque j) Debtors paid a total of £54.000.00 h) Sundry expenses all paid in cash totaled £2.000.000. all on credit.000.00 During the year to 31 December 2001 the following total transactions occurred: a) Mary withdrew a total of £10.000.00 of stock in trade which had cost £37.000.000.00. Of these sales £51.000. (20 marks) 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 Property Machinery 01.00 f) Rates for the year paid by cheque totaled £1.00 g) Wages for the year all paid cash totaled £10.000.000.00 31.00 c) Sales were made totaling 60.

000.Course Description 42 26.000.00 3.000. 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 Returns inwards Returns outwards £ 47.00 29.0 0 500.000.00 5.0 0 650.00 (2.00 5.0 0 700.00 STRATHMORE UNIVERSITY ● STUDY PACK .000.500.00 150. 00 1.000.00 11.000.00) 20.000.900.000.00 8.00 1.000.0 0 2.00 1.500.00 Additional capital introduced by the owner £5.800.500.000.0 0 1.00 12.200.000. 00 22.500.00 1.000.500.000.00 9.00 200.00 7.00 Drawings during the year amounted to £4.600.850.00) 26.900.00 9.150.00 Question Four Brian Barmouth is a sole trader.00 Current Assets: Debtors Cash Current Liabilities: Creditors Overdraft Net Current Liabilities Net Assets 4.00 (6.000.00 6.

from the above list of balances. 00 4. 00 5.000.000.0 0 12.000.000. 00 7.400. 00 60.000. 00 12.0 0 3.0 0 10.500.0 0 550.000.800.00 Construct a trial balance.43 Course Description Premises Plant and Machinery Motor Vehicles Debtors Bank balance Creditors Loan-long term loan Capital Drawings for the year Closing stock Required: 40. CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK FINANCIAL ACCOUNTING 1 .

Format for the trading account: Name Trading Account for the year ended 31 Dec. The gross profit is then taken up in the profit and loss account as part of the income.900 387.700 4. ₤ Sales Less: Returns Inwards Less: Cost of Sales Opening stock Purchases Add: Carriage Inwards Less: Returns Outwards Cost of stock available for sale Less: Closing stock Gross Profit ₤ ₤ x (x) x x x x x x x x x (x) x Example: 2.Acknowledgement 44 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. which was his first year in business.330 74.890 .1 From the following details draw up the trading account of Springs for the year ended 31 December 2002. ₤ Carriage inwards Returns outwards Returns inwards Sales Purchases Stock of goods: 31 December 19x7 6.950 8.420 333.

896 Cost of goods available for sale ₤ ₤ 94.397 1.623 68.896 53.420 8.228 16.700 340.2 The following details for the year ended 31 March 2003 are available. £ Stocks: 1 April 2002 Returns inwards Returns outwards Purchases Carriage inwards Sales Stocks: 31 March 2003 Answer R Sings Trading Account for the year ended 31 Mar 19x8 ₤ Sales Less: Returns Inwards Less: Cost of sales Opening Stock Purchases Add: Carriage Inwards 16.900 378.190 £ 387.080 74.600 (1.890 260.146 .600 14323 333.519 Less: Returns Outwards 2.372 2.122 54.397 1.030 4.122 94.Lesson One 45 Springs Trading Account for the year ended 31 Dec 2002 £ Sales Less: Returns Inwards Less cost of sales Purchases Add: Carriage Inwards Less: Returns outwards Less: Closing stock Gross Profit 118.372) 93.330 6.520 51.330 Example 2.523 1. Draw up the trading account of R Sings for that year.523 53.950 335.

504 43. In practice. the trading account is combined together with the net profit and loss account into one report so that the format is as shown below: Name Trading.586 (b) PROFIT AND LOSS ACCOUNT It shows the net profit or net loss that the business has made from all the activities during a financial period.46 Introduction to Accounting Less: Closing stock (49. Profit and Loss Account for the year ended 31/12/19xx £ Sales Less: Returns Inwards Less: Cost of sales Opening stock Purchases Add: Carriage Inwards Less: Returns Outwards Cost of goods available for sale Less: Closing stock Gross Profit Discount received Rent received Interest received Other incomes 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) x x x x x x x x (x) x x x x x x £ £ x x x . The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same financial period.642) Gross Profit 18.

000 Fixtures and fittings 3.050 Returns outwards 3.960 Creditors 17.3 From the following trial balance of P Boones draw up a trading and profit and loss account for the year ended 30 September 2002.140 Premises 50. Dr Cr £ £ Stock 1 October 19x8 23.040 Insurance 780 Motor expenses 6.660 General expenses 3.220 Purchases 118.360 332.890 332.000 Capital 126.160 Lighting and heating expenses 1. and a balance sheet as at that date.000 Salaries and wages 38.820 Drawings 12.680 Carriage outwards 2.640 Office expenses 2.890 .310 Cash at bank 4.Lesson One 47 Example 2.100 Returns inwards 2.000 Carriage inwards 3.740 Sales 186.000 Motor vehicles 18.620 Rent 3.500 Debtors 38.

160 1.070 23.300 29.000 3.220 118.950 .620 142.660 3.1840 3.040) 13.050) 183.620 2.680 118.040 780 6. Profit and Loss Account as at 30 September 2003 £ Sales Less: Returns Inwards Less: Cost of sales Opening stock Purchases Add: Carriage inwards Less: Returns Outwards Cost of goods available for sale Less: Closing stock Gross Profit Less Expenses Salaries & wages Carriage outwards Rent Insurance Motor expenses Office expenses Lighting & heating General expenses Net Profit 38.100 12.2840) 71.740 3.000 (2.110 £ £ 186.640 2.48 Introduction to Accounting Answer P Boones Trading.460 (11.140 (58.

Furniture & Fittings Motor vehicles 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 Capital Add: Net profit x Less: Drawings x Non Current Liabilities Loan (s) x The balance Sheet of P Boones in example 2.3 will be produced as follows: x (x) x x x (x) x x x x x x x x x x x x x x x £ £ .Lesson One 49 (c) BALANCE SHEET This is a simple report that shows the assets and liabilities of the business and the capital of the owner as at a certain point in time. The format is at shown below: Name Balance sheet as at 31/Dec/19xx £ Non Current Assets Land & Buildings Plant & Machinery Fixtures.

(17.430 29.070 139.930 127. where the documents are recorded and the postings to made.500 £ .500 18.360 13.000) 127.240 50.820 73.460 38.430 (12.50 Introduction to Accounting P Boones Balance Sheet as at 30 Sept 2002 £ Non Current Assets Premises Fixtures & fittings Motor vehicles Current Assets Stock Debtors Cash at bank Current Liabilities Creditors Net Current Assets Net Assets Capital Add: Net Profit Less: Drawings ` 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.000 3.000 71.430 126.960 4.310) 55.

SOURCE DOCUMENTS .Lesson One 51 Source Final Documents Accounts Sales Invoice The Trading Account Purchas e Invoice Credit note The Profit Loss Debit Loss Note Account Recorded Recorded Books of Prime entry Recorded Sales Journal The Ledger Balances List of the Sales Ledger THE Purchases Journal TRIAL Recorded Return Inwards Journal Purchases Ledger Return Outwards journal & BALANCE Receipt s Cheque s Petty Other Correspo Balance ndence Recorded The cashbook & Petty cashbook General Ledger Recorded General Journal Balance Sheet A brief description of each component is explained below.

filed and posted in the books of prime entry. They are collected.52 Introduction to Accounting This shows the evidence transactions. Example. if a firm sells goods on credit. then an invoice is raised. The source documents as shown in the above include: .

e. Date of the purchase (invoice date) iv. Terms of sale (iii) Credit note A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to the firm. Invoice number v. Name and address of the buying firm iii. Name and address of the firm ii. Credit note number v. Reason for credit e. Description of goods sold vii.g. Date of making the sale – invoice date. The sales invoice contains the following: i. Amount due (net of trade discount) vi.Lesson One 53       Sales invoice Purchases invoice Credit note Debit note Receipts. the amount due to the firm has been reduced or cancelled. The purpose of the credit note is to inform the debtor or customer that the debtor’s account with the firm has been credited i. Name and address of the debtor iii. Name and address of the firm iii. cheques and petty cash vouchers Other correspondences. Name and address of the firm ii. Terms of sale (ii) Purchases Invoice A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It’s contents include: i. Amount due vi. (iv) Debit note This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. Name and address of the creditor . Description of goods sold vii. Amount of credit iv. Name and address of the firm ii. if goods sent but of the wrong type. From the context we can assume that all credit notes are issued when goods are returned. It includes the following items: i. The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors. iv. Name and the address of the creditor/seller ii. It shows the following: i. (i) Sales Invoice The sales invoice is raised by the firm and sent to the debtor/customer when the firm makes a credit sale. Invoice number v.

Debit Note number v. It shows: The name and address of the firm The date of the receipt Amount received (cash or cheque or other means of payment) Receipt number. iii. it authorizes the bank to honour payments against the firm’s account with the bank. iv. The cheque contains the following information: i. busfare. The cheques allow the firm to make payments against the account with the bank.54 Introduction to Accounting iii.g. It shows: i. Name of the payee (creditor) iv. ii. The date of the cheque iii. 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. Cheques When a firm opens a current account with the bank. a chequebook containing cheques issued. Name and account number of the firm (account holder) ii. . which is approved by a senior manager and filed for record purpose. When a firm issues a cheque to its creditors for payments. Reason for the debit The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or cancelled. Name of the firm’s bank v. The cheque number vii. office snacks). Amount of debit iv. fuel. The Firm Credit sales (sales invoice) The Debtor Returns inwards (credit note) Credit purchase (purchase invoice) The Firm Returns outwards (debit note) 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. Amount payable in words and figures vi.

bank charges. Authorized signature(s): v. (vii) Other correspondence These include information received within or outside the firm that has a financial implication in the accounts. Memorandum from a senior manager requiring changes to be made in the accounts. bus ticket e. Sales Journal It is also called a Sales Day Book. Amount paid iii. ii.10 SL. iv.Lesson One 55 i.t.Thompson Folio SL. Spikes T.g.8 Page 5 Amount £ 200. Examples are: i. Binns L. Letters from the firm’s lawyers about a debtors balance. Hire-purchase/credit sale or credit purchase agreements that relate to non-current assets.g.00 Total 700. It records all the sales invoices issued by the firm during a particular financial period. Date of payment ii. Person approving vi.00 The individual entries in the sales journal are posted to the debit side of the debtor’s accounts in the sales ledger and the total is posted on the credit side of the sales account in the general ledger.c. e.00 150. Bank statement from the bank.19 SL. Reason for payment iv.00 350. The format is as follows (with simple records of invoice). fuel receipt. Person receiving The person receiving the money must then return a document supporting how the money was utilized e. SALES JOURNAL Date 19x8 1st March 3rd March 5th March Detail S. . iii. BOOKS OF PRIME ENTRY They record the source documents.

870 £1.660 £120 £550 £2.4 You are to enter up the sales journal from the following details.56 Introduction to Accounting This is shown below: Sales Ledger 19x 8 1/3 S Spikes £ 19x 8 Sale 200 s Sales Ledger 19x 8 3/3 T Binus £ 19x 8 350 £ 19x 8 £ General Ledger General Account 19x 8 5/3 Credit sales for period General Ledger £ 700 Sal es 19x 8 3/3 L Thompson £ 19x 8 Sal 150 es £ Example 2.890 £660 £280 £780 . 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.

00 280. Richards V. Gordon G. Williams U. Wood L.00 660.00 1.890. Simes Folio Page 10 Amount 1.00 8.870.6 es 60 £ 200 3 27/ 3 Sal es V Wood £ 200 3 280 £ 200 3 6/3 Sal es U White £ 200 3 120 £ 200 3 31/ 3 Sal es L Simes £ 200 3 750 £ 200 F Williams £ 200 £ 200 Sales a/c £ 200 £ .00 120.810.00 550.00 780. White J. Abrahams V.00 2. Gordon F.660.Lesson One 57 Answer SALES JOURNAL Date (2003) 1/3 3/3 6/3 10/3 17/3 19/3 27/3 31/3 Detail J.00 Sales Ledger 20 03 1/3 10/ 3 J Gordon £ 20 03 157 0 550 £ 20 03 19/ 3 U Richards £ 20 03 660 £ Sal es 200 3 3/3 G Abrahams £ 200 3 Sal 1.

This is shown below: 19x 6 C Kelly £ 19x 6 1/5 Purchas es £ 40 0 19x 6 31/ 5 Purchases a/c £ 19x 6 Sundry 75 Credito 0 rs £ 19x 6 L Smailes £ 19x 6 2/5 Purchas es £ 25 0 Returns Inwards Journal 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. Smailes PL. It has the following format (including records of invoices). it has the following format. Kelly L. 10 PL. . PURCHASES JOURNAL Description/Detail C. 20 750 Page 15 Amount 400 350 Date 19x6 1/5 2/5 TOTAL Folio The individual entries in the purchases journal are posted to the credit side of the creditor’s accounts in the purchases ledger and the total is posted to the debit side of purchases account of the general ledger. It records all the purchase invoices received by the firm during a particular financial period.58 Introduction to Accounting 3 17/ 3 3 Sal es 289 0 3 3 Cred it Sale s Purchases Journal Purchases journal is also called a purchases day-book.

Bills Folio SL. 9 £53 Pg 10 £18 £15 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 returninwards account of the general ledger. Bills a/c £ 5/ 3 Retur ns In £ 15 . Spikes a/c £ 1/ 3 Returns In £ 20 31/ 3 Returns Inwards a/c £ Sundry 53 Debtors £ C Kelly a/c £ 2/ 3 Returns In £ 18 T.Lesson One 59 RETURNS INWARDS JOURNAL Date 1 March 2 March 5 March TOTAL Detail S. Spikes C. Sales Ledger General Ledger S. Kelly T. 18 SL. 22 Amount £20 SL.

7 12 19 AMOUNT (£) 14 TOTAL 35 Individual entries are posted on the debit side of the creditors account in the purchases ledger and on the total to credit side of the returns outwards account in the general ledger. Hyatt a/c £ 3/5 Returns out 12 £ T. Thompson a/c Outwards a/c ` £ 2/5 Returns out 14 sundry editors 35 General Ledger Returns £ £ £ 31/5 cr M. It has the following format. RETURNS OUTWARDS JOURNAL DATE 2 May 3 May 4 May DETAILS L. It records all the debit notes received by the firm from the creditors during a particular financial period. Purchases Ledger L.60 Introduction to Accounting Returns Outwards Journal It is also called the returns outwards daybook. Bills a/c £ 4/5 Returns Out 19 £ . Thompson M. Bills FOLIO PL. 10 PL. Hyatt T. 15 PL.

Lesson One 61 The following example 2. .5 shows how the four journals are used.

Returns inwards from: E Phillips £27. Ferguson E. M Norman £500. J Ferguson £185.62 Introduction to Accounting Example 2. Returns inwards from: E Phillips £18. H George £250. Credit sales to: A Green £307. Credit sales to: E Rigby £510. Returns outwards to: J Cook £13. Rigby £30. J Cook £180. Thompson A. 19x5 July 1 “ 3 5 “ “ “ “ “ “ “ 8 12 14 20 24 31 31 Credit purchases from: K Hill £3800. F Powell £310. Credit purchases from: Ferguson £550. N Senior £16. Study the solution provided: SALES JOURNAL DATE 3 July 3 July 3 July 8 July 8 July 8 July 20 July 20 July 20 July TOTAL Sales Ledger 19x 5 3/7 E Rigby £ 19x 5 51 3/7 0 £ Retur ns Inwar ds 30 19x 5 3/7 E Phillips £ 19x5 Sal es Sal es 246 14/7 Returns £ 18 DETAIL E. E Lee £420. Credit sales to: E Phillips £188. Returns outwards to: M Norman £30. D Edwards £410. E. Lee AMOUNT (£) 510 246 356 307 250 185 188 310 420 2. Phillips F. C Davies £11. F Thompson £356. C Davies £66. Powell E. Green H. F Thompson £22. and show transfers to the general ledger. post to personal accounts. K Ennevor £900. Phillips F. Credit purchases from: R Morton £200. Rigby E. (Frankwood adapted) You are to enter the following items in the books. N Senior £106.772 Sal es 20/ 7 188 31/7 Retuns in 27 . E Phillips £246. George J.

Powell £ 19x5 Sal es 310 £ 19x 5 8/7 Sal es H George 19x 5 25 0 £ 19x 5 20/ 7 £ Sal es 420 E Lee 19x5 £ PURCHASES JOURNAL DATE 1 July 1 July 1 July 5 July 5 July 5 July 5 July 24 July 24 July Total DETAIL K. Ferguson K. Thompson 19x 5 3/7 £ 19x 5 35 14/ 6 7 £ Retur ns in 22 19x 5 8/7 J. Ferguson £ 19x5 Sal es 185 £ Sal es 19x 5 8/7 Sal es Green £ 19x 5 30 7 £ 19x 5 20/ 7 F. Ennevor AMOUNT (£) 380 500 106 200 180 410 66 550 900 3. Cook D. Hill M. Senior . Senior R. Davies C.Lesson One 63 F. Edwards C.292 Purchases Ledger N. Norman N. Mortan J.

Ferguson 1995 £ 27/7 Purchases 550 1995 K. Ennevor 1995 . Hill 1995 £ 1/7 Purchases 380 £ 1995 31/7 1995 1995 £ R. Davies 1995 £ Returns out 11 £ 5/7 Purchases 60 K. Norman 1995 £ Returns out 30 £ 1/7 500 Purchases 1995 30/7 1995 31/7 £ Returns out 13 J. Edwards 1995 £ 5/7 Purchases 410 1995 £ C. Morton 1995 £ 5/7 Purchases 200 1995 £ D.64 Introduction to Accounting 1995 12/7 £ Returns out 16 1995 £ 1/7 Purchases 22 M. Cook 1995 £ 5/7 Purchases 180 C.

Senior J. Phillips E.Lesson One 65 £ 24/7 Purchases £ 900 RETURNS INWARDS JOURNAL DATE 14 July 14 July 31 July 31 July DETAILS E. Rigby AMOUNT 18 22 27 30 97 RETURNS OUTWARDS JOURNAL 12 12 31 31 July July July July M. Norman N. Cook C. Davies 30 16 13 11 70 General Ledger Sales a/c 1995 £ 31/7 Sundry debtors 2772 Purchases a/c 1995 £ 1995 £ 1995 £ 31/7 Sundry creditors 3292 1995 £ 31/7 Sundry debtors 97 1995 £ Returns Inwards a/c 1995 £ Returns Outwards a/c 1995 £ 31/7 Sundry creditors . Thompson E. Phillips F.

There are two types of cashbooks: i. 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). 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 bank. The cash at bank cashbook and cash in hand cashbook are combined together to get a two-column cashbook. Cash at bank cashbook. The format is as follows: Two-column cashbook. ii. which records the cash transactions in the firm or business. The format is as follows: Date Details Bank Cash (£) Discount Cash Allowed (£) (£) Bank Date Details Discounts £) Received . The cashbook will also show us the cash at bank and cash in hand position of the firm. Cash in hand cashbook. which records the transactions at/with.66 Introduction to Accounting 70 CASH BOOKS A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of income) and all the payments (to creditors or suppliers and other expenses) for a particular financial period.

G Moores paid us in cash £650. Example 2.000 cash from the bank for business use. Withdrew £1. (the firm owes the bank some money).000 by cheque. Cash sales £980. 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. paid by cheque. F Lake lent us £5.000. Cash sales paid direct into the bank £530. We paid B McKenzie by cheque £650.Lesson One 67 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. We repaid F Lake £1. We paid B Burton in cash £220. Paid rent by cash £100. N Miller paid us by cheque £620. Paid motor expenses by cheque £120. Cash sales paid direct into the bank £660. Cash Book Capital F Lake (loan) Sales N Miller Sales G Moores Cash C Sales Bank C Cash 1000 980 620 530 650 Bank 5000 Cash Bank . 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. 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 Started business with capital in cash £1.000.7 Write up a two-column cashbook from the following details. We took £500 out of the cash till and paid it into the bank account. Paid wages in cash £970.

000 paying by cheque. R Wilson & Son £340. C Rowse £300. “ 2 The following paid their accounts by cheque. “ 29 Bought fixtures paying by cheque £650. Bank £4. by cheque £74. “ 18 The following paid their accounts by cheque. E Taylor £220. P Towers £480. “ 6 J Cotton lent us £1.68 Introduction to Accounting Capital F. Lake (Loan) Sales N Miller Sales G Moores Cash C Sales Bank C Cash 1000 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 100 220 500 120 970 1840 3630 Bank 650 650 1000 100 363 0 4540 7310 Example 2.756. having deducted £7 cash discount. in each case deducting 5 per cent cash discount: C Winston £260. and the relevant discount accounts in the general ledger shown. by cash £133. in each case deducting 5 percent discounts: R Burton £140. “ 24 Cash Drawings £120. “ 12 H Hankins pays his account of £77. R Harris £800. “ 4 Paid rent by cheque £120.7(Frankwood adapted) A three-column cashbook is to be written up from the following details. 19x8 Mar 1 Balances brought forward: Cash £230. “ 21 Cash withdrawn from the bank £350 for business use. “ 15 Paid wages in cash £160. balanced off. “ 25 Paid T Briers his account of £140. “ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per cent cash discount: N Black £360. “ 10 Paid motor expenses in cash £44. deducting £3 cash discount. H Winter £460. .

Lesson One 69 “ 31 Received commission by cheque £88. .

Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. Petty Cash Book Receipts Date Detail Payments Expenses The The format is as shown: . The petty cash vouchers will show summary expenses paid by the cashier and this information is listed and classified in the petty cash book under the headings of the relevant expenses such as:    Postage and stationery Traveling Cleaning expenses.70 Introduction to Accounting 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 7 11 15 3 13 17 23 350 89 580 Cash 230 Cash Book Bank 4756 133 209 285 1000 Rent N Black P Towers C Rowse Motor expenses 74 Wages 247 Cash 323 Drawings Disct 9 12 20 44 160 350 120 7 48 133 123 580 650 4833 7552 Cash Bank 120 351 468 780 437 T Briers Fixtures 88 Balances c/d 7552 Discounts Received 3/1 Sundry Creditors 48 3/1 Sundry Debtors Discounts Allowed 89 Petty Cash Book and the imprest system of Accounting.

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. then the totals of the expenses will also be posted on the credit side of the cash in hand cashbook. This is demonstrated as follows: £ Start with (float) Expenses paid Balance Reimbursement Cash float Example 2.Lesson One 71 Amount Ledger Postage Stationery Traveling The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand. 80 120 240 150 300 200 400 150 for a refund of the cash spent and this 1.000 (720) 280 720 1. a cash float is agreed upon and the cashier is given this amount to start with.000 in the month of March (that is the cash float).000 . 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. 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. The totals of the expenses are posted to the debit side of the expense accounts. At the beginning of each period. If a firm operates another cashbook in addition to the petty cash book. Thompson (creditor) 5th March – fuel costs On the 5th of March the cashier requested amount was reimbursed back.8 A cashier in a firm starts with £2.

as they would appear on the General Ledger. .72 Introduction to Accounting Required: Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the relevant expense accounts.

The type of transactions recorded here are: i. 280 . 400 Expenses Postag e (£) 80 120 240 150 300 Cleanin g (£) Travel (£) THE LEDGER (£) (£) 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 Bal b/d Stamps Bus Fare Cleaning Materials Fuel Cleaning wages Stamps L Thompson Fuel Bal c/d Bal b/d The General Journal It records information from other correspondence (information that is not recorded in the above books of prime entry). iii. Drawings for goods or other assets from the business by the owner. It explains the type of entries that will be made in the ledger accounts giving a reason for these entries. not cash drawings.Lesson One 73 Answer Receipt s Date Detail Payment s Amount (£) 80 120 240 150 300 200 400 150 1640 2000 3640 200 . 540 150 420 400 . Purchase or sale of non-current assets on credit. ii.g. The format is as shown: The General Journal GENERAL JOURNAL Date 1/3 Detail Account to be debited Account to be credited (Narrative) Debit x x Credit . Writing off of assets from the accounts e. bad-debts.

.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. 2003 May 8 Furniture bought by us for £490 was returned to the supplier Wood Offices. 2003 May 28 Some time ago we paid an insurance bill thinking that it was all in respect of the business.74 Introduction to Accounting Example 2. We now discover that £76 of the amount paid was in fact insurance of our private house. He is declared bankrupt and we received £39 in full settlement of the debt. 2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt. 2003 May 14 we take £45 goods out of the business stock without paying for them. 2003 May 12 we are owed £150 by W Hayes. as it was unsuitable.790. Full allowance will be given us. 2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.

Lesson One 75 a. Hayes 111 Amount owed now written off as bad debt. _________________________________________________________________________ 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 8/5 .790 Motors Ltd 6.790 Motor vehicle bought on credit from Motors Ltd _________________________________________________________________________ 3/5 Bad debts 34 N Smart . Answer GENERAL JOURNAL Date (19x5) 1/5 Detail Debit (£) Credit (£) Motor Vehicle 6.Debtors 34 Amount due from N Smart written off as bad _________________________________________________________________________ Wood offices 490 Furniture 490 Office Furniture returned to Wood offices _________________________________________________________________________ 12/5 Bad debts 111 W. ________________________________________________________________________ 14/5 Drawing for goods 45 Purchases 45 Goods taken from the business for personal use.

Sales Ledger. The Ledger is classified into 3 main classes. liability. which has the accounts of all the creditors. 3. Purchases Ledger.e. which has the accounts of all the debtors. Has all the other accounts i. incomes and expenses and capital. The General Ledger. 1. other assets. 2. The ledger accounts can also be classified as follows: LEDGER ACCOUNTS IMPERSONAL ACCOUNTS PERSONAL ACCOUNS REAL ACCOUNTS DEBTORS (for goods) CREDITORS (For goods) Non-current assets Inventories/ Assets Stocks Income Expenses Capital NORMAL a/cs Other Liabilities Other .76 Introduction to Accounting THE LEDGER The ledger is simply the accounts.

000.00 May 2 Purchased goods on credit from Abel £650.Lesson One 77 REINFORCING QUESTIONS QUESTION ONE Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital of £5.00 May 24 Received from Hill £200. Post the entries in the ledger accounts Balance the ledger accounts where necessary Extract a trial balance as at 31 May 2000.00 May 13 Cash sales paid into bank account £200. .00 May 18 Sold goods on credit to Nailor £360.00 May 4 Sold goods on credit to Bruce £700.00 May 19 Sent Cheque to Abel in settlement of his account May 20 Paid rent by cheque £200. May 1 Bought shop fittings and fixtures from store fitments Ltd for £2. Required a) b) c) d) Record the transactions in the books of prime entry. During May the following transactions took place.00 May 16 Received cheque from Bruce in settlement of his account May 17 Purchased goods on credit from Kay £800.00 on account May 30 Drew cheque for personal expenses £200.00 and assistant wages £320.00 May 21 Paid delivery expenses by cheque £50.00 May 9 Purchased goods on credit from Green £300.00 May 31 Settled the account of Green.00 with which he opened a bank account for his business.00 May 11 Sold goods on credit to Hill £580.000.

000.500.78 Introduction to Accounting QUESTION TWO The following trial balance has been drawn up from the accounts of Endpages bookshop.00 18.00 5.00 Cr £ 151.00 14.00 11.500.00 80.500.00 328.000.00 1.00 41. 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 103.00 ________ 328.000.00 12.500.00 800.00 3.500.00 Required Prepare a Trading and profit and loss account for the year ended 31 December 2002 and a balance sheet as at that date.00 2.00 600.000.000.00 4.700.400.000.00 200.000.00 1.800.700.00 7.00 2.00 200.700.00 41.00 100.00 2. (20 marks) .100.00 46.00 3.500.00 3.000.000.500.000.

000 1.000 1.000.028 Cr £ 9.024.000 64.028 152.Lesson One 79 QUESTION THREE The following is the trial balance of KSmooth as at 31 March 2002.000 Stock 1 April 2001 Sales Purchases Carriage inwards Carriage outwards Returns outwards Wages and salaries Rent and rates Communication expenses Commissions payable Insurance Sundry expenses Buildings Debtors Creditors Fixtures Cash at bank Cash in hand Drawings Capital .000 285.800 2.000 816.000 11. Dr £ 1. Draw up a set of final accounts for the year ended 31 March 2002.088.500 62.000 5.000 157.234.800 152.918.000 6.816.432.000 301.600 40.500 762.400 21.000 297.500 31.500 42.

000 Office equipment 1.000 Purchases 55.000 Stock 30 September 2.200 17.000 Wages and salaries 49.000 Returns inwards 21.500 Telephone charges 1.500 Carriage inwards 30.153.000 Motor van 625.400 17.000 Motor expenses 297.230.210.200 Insurance 137.309.700 Returns outwards 30.000 Rent 40.000 Cash at bank 311.500 Cash in hand 29.095. Dr Cr £ £ Capital 3.900 Carriage outwards 163.000 2001 410.500 Debtors 1.153.80 Introduction to Accounting QUESTION FOUR Skates drew up the following trial balance as at 30 September 2002.281.200 CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK . 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.391.700 Office expenses Sundry expenses 28.500 Drawings 842.000 Creditors 937.000 Sales 9.

1 TO BE SUBMITTED AFTER LESSON 2 To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.000 4. The following further information was obtained : .000 80.900 8.000 400.000 10.000 4.000 32. 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.000 18.000 95.000 10.000 720.000 3. 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.000 280.000 70. ANSWER ALL QUESTIONS QUESTION ONE The books of Mr T.000 80.000 2.000 TIME ALLOWED: THREE HOURS.400 35.000 135. 100.750 3.Lesson One 81 COMPREHENSIVE ASSIGNMENT No.000 30.000 100. EXAMINATION PAPER.000 3.000 2.700 20.250 2.000 30.000 6.000 80.000 15.

11.518 During the year ended 30th June 1998 purchases and sales of lorries were as follows: Purchases: 1997 July 30th Oct 1st Reg. Shs. with a full year’s depreciation being made in the year of purchase.No H11 H12 7.5% of the total sales. Further bad debts of Shs. 000 due from the sale of furniture.15.82 Introduction to Accounting 1.5% Furniture and Fittings 10% Air conditioners 15% Motor vehicles 20% 12. 3. Required: Prepare a trading.900 93.000.Miscellaneous receipts represent sales proceeds of furniture. which was found totally spoilt.12. 2.5. An extract from the company’s balance sheet as on 30th June 1997 showed the following: Shs Motor Lorries at cost: Less provision for depreciation: Net book Value: 164. 000 due to the same party). However any bad debts incurred during the year are deductible from such commission entitlements. which makes up its accounts to 30th June each year.000. 800. 4.5.000 has been accepted by the insurance company. QUESTION TWO Hall Ltd. 9.18. Travelling and conveyancing include proprietor’s personal travelling for which he is charged Shs. whose written down value was Shs. 13.500 . profit and loss account for the year ended 31st March 1998 and a Balance Sheet as at that date. 000. Purchases include 4000 kg tea valued at Shs.55. 000 due from M & C0 (Creditors include Shs. 5..10.382 71. but no charge in the year of sale.000 for the cost of stamps and registration of a new building acquired during the year.20. Closing stock was Shs.Provision for bad debts is to be created at 2% of net amount outstanding from trade debtors.2. Annual depreciation on motor lorries is calculated at a rate of 25% on the reducing balances.4.Depreciation is chargeable as follows: Buildings 2. has a fleet of motor lorries. 000 10. 8. An insurance claim of Shs. The sales manager is entitled to commission of 7. Shs. 6.Prepaid expenses include insurance premiums for the next year.000 Cost (Shs) 8. Debtors include: 7. Legal charges include Shs.

700 850 Sales: Reg.462 81.600 0 250 .000 3.600 June 25th Required: 14th May 1993 10th July 1994 9th March 1996 21st Sept 1996 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.268 247 9.000 Purchased on: Cost (Shs) 1.582 8.No Proceeds (Shs) H1 H4 H6 H7 1997 July 30th 300 Oct 1st 1998 Mar 1st 4.560 8.148 7. a sole trader.00 0 Shs. 20.000 861 15.74 2 326 3. QUESTION THREE The following trial balance was extracted form the books of Rodney.689 62.10 1 880 246 8.274 172 933 1. 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 Bank balances Motor van at cost/Provision for depreciation Proceeds on sale of van Motor expenses Freehold premises at cost Shs 2.592 2.648 2.27 1 5.900 9.Lesson One 83 1998 Feb 25th June 24th H13 H14 5.

100 2. 8. and the first six quarterly bills were as follows Bills and dates received 1 August 19X4 1 November 19X4 1 February 19X5 1 May 19X5 1 August 19X5 1 November 19X5 Required: Given that Batley Printing shop ends its accounting year on 31 August.250 to “Proceeds of sale on van” account.000 117.700 Cost of copies (shs)Total cost (Shs) 0 2. 1. Shs.4 01 750 5.000 on 1st January 1994 was sold for Shs250.600 1. On 1st January 1997 a van which had been purchased for Shs. The only record of matter is the credit of Shs.100 2.172.950 4.100 2.400 3. Required: A Trading Profit and Loss account for the year ended 31st December 1997 and a Balance Sheet as at date using vertical format. 5. 3. The rental agreement began on 1st August 19X4. 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.350 1.85 Provision for doubtful debts to be increased to Shs. Depreciate buildings Shs. 7. A further charge of 2 pence per copy made during the quarter just ended. is an item for Shs82 for motor insurance and this amount should be transferred to motor expenses.9. 2. Shs.650 4.900 1. Rental (Shs) 2.884 Rates paid in advance at 31st December 1997.250 Lighting and heating due at 31st December 1997.800 3.100 1.650 .700 2.500 3.388 Included in the amount for insurance Shs.40 Rent receivable due at 31st December 1997.100 2. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.1. 6.500 1.500 9. sh.4 01 The following matters are to be taken in to account: Stock in trade at 31st December 1997 was Shs. 4.84 Introduction to Accounting Rent received Provision for depreciation on buildings 117.

QUESTION FIVE “The historical cost convention looks backwards but the going concern convention looks forwards.Lesson One 85 Calculate the charge for photocopying expenses for the year to 31 August. c) Which do you think a shareholder is likely to find more useful – a report on the past or an estimate of the future? Why? END OF COMPREHENSIVE ASSIGNMENT No. using the historical cost convention.1 NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING . b) Does traditional financial accounting. Show the entries in the ledger of the Batley Printing Shop. make the going concern convention unnecessary? Explain your answer fully. 19X5 and the amount of prepayments and / or accrued charges as at that date.” Required: a) Explain clearly what is meant by: • • The historical cost convention The going concern convention.

accounting standards and procedures relating to the presentation of financial statements. Examples include: . consultation with the member bodies’ standard setting bodies and other interested groups. Currently the IASB has developed about 40 IASs. The IASB sets up a steering committee to develop a statement of principles. − Public Exposure of the draft Accounting Standard. users of financial statements and national standard setting bodies and other interested parties. an Exposure Draft and ultimately an Accounting Standards once a new topic is suggested. − Studying national and regional accounting requirements and practice.Acknowledgement 86 LESSON THREE ACCOUNTING THEORY (a) International Accounting Standards and International Financial Reporting Standards. − Evaluation by the steering committee and the board of the comments received on exposure drafts. 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. The process includes: − Identifying and reviewing of all the issues associated with the topic. Accounting Standards are developed to achieve comparability of financial information between and among different organizations. International Accounting Standards (IAS’s) and International Financial Reporting Standards (IFRS) are meant to apply to most organizations in the world. the preparers. The IASC develops IAS’s through an international process that involves the worldwide accountancy profession. IAS’s and IFRS’s 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. Most accounting bodies of countries are members of IFAC. The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which co-ordinates the Accounting profession worldwide.

The main significance of the going concern concept is that the assets of the business should not be valued at their ‘break-up’ value. not as money is received or . 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. and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations. which were developed and published by ICPAK (Institute of Certified Public Accountants of Kenya). Accountants used to prepare the financial statements in accordance with Kenya Accounting Standards (IASs). However in the current practice is to refer to all standards as International Financial Reporting Standard. In Kenya. c) Adds value to the financial statements incase an entity is sourcing for foreign capital. (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) The going concern concept: implies that the business will continue in operational existence for the foreseeable future. ii) The accruals concept (or matching concept): states that revenue and costs must be recognized as they are earned or incurred. This were later dropped and International Accounting Standards adopted.Lesson Two 87 − IAS 1 Presentation of Financial Statements − IAS 2 Inventories − IAS 16 Property plant and equipment. Previously new standards were called International Accounting Standards but from 2003 any new standards will be called International financial Reporting Standards. which is the amount that they would sell for it they were sold off piecemeal and the business were thus broken up. b) Facilitates communication within an enterprise that has foreign branches or subsidiaries due to harmonized reporting by the separate entities in the group. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise. 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. d) Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.

it is likely to make a profit on the sale. Therefore.88 Final Accounts paid. leaving a profit of £90. however. only the purchase cost of eighteen units (£90) should be matched with the sales revenue. . If the firm intends to sell them later. 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. the firm had only sold eighteen units. there is still two units in stock. They must be matched with one another so far as their relationship can be established or justifiably assumed. If. it would have been incorrect to charge profit and loss account with the cost of twenty units. and dealt with in the profit and loss account of the period to which they relate.

in computing profit. however the firm had decided to give up selling units. the one selected should be the one that gives the most cautious presentation of the business’s financial position or results. In this example. 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.g. Therefore. e. 2 x £5) Debtors (18 x £10) 10 180 190 Liabilities Creditors 100 90 Capital (profit for the period) 90 If. revenue earned must be matched against the expenditure incurred in earning it. i. 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.e. or alternative valuations. are possible. iii) The Prudence Concept: The prudence concept states that where alternative procedures. if the two unsold units were now unlikely to be sold at more than their cost of £5 each (say. This shows the application of the prudence concept. the likely eventual sales price less any expenses incurred to make them saleable. the accruals concept states that. because of damage or a fall in demand) then they should be recorded on the balance sheet at their net realizable value (i. Similarly. (See below). the concepts of going concern and matching are linked.Lesson Two 89 The balance sheet would therefore look like this: £ Assets Stock (at cost. Essentially. revenue and profits are not anticipated but are recognized by inclusion in the profit and loss account only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty: provision is made for all liabilities . paint) rather than cost.e.

000. At 31 December there are debts outstanding of £15. This includes amounts owing from debtors. . and then recognize the £300 loss. The company should make a provision for doubtful debts of £6.90 Final Accounts (expenses and losses) whether the amount of these is known with certainty or is best estimate in the light of the information available. v) The entity concept: The concept is that accountants regard a business as a separate entity. monetary values can be attributed to such assets as machinery (e. iv) The consistency concept: The consistency concept states that in preparing accounts consistency should be observed in two respects.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. but a balance must be achieved to prevent the material overstatement of liabilities or losses. Because there is some uncertainty that the sales will be realized in the form of cash. The concept applies whether the business is a limited company (and so recognized in law as a separate entity) or a sole proprietorship or partnership (in which case the business is not separately recognized by the law. provided that there is a reasonable certainty that the debtors will eventually pay up what they owe. distinct from its owners or managers.000. in the balance sheet of a business. a) Similar items within a single set of accounts should be given similar accounting treatment.000 during the year to 31 December. This enables valid comparisons to be made from one period to the next.g.000 should not be included in the profit for the year. It is not enough to wait until the stock is sold. A company begins trading on 1 January 20X2 and sells goods worth £100. the original cost of the machinery. but the provision for doubtful debts would be a charge of £6. Of these. b) The same treatment should be applied from one period to another in accounting for similar items.000. the company is now doubtful whether £6. Assets and profits should not be overstated. For example. The other aspect of the prudence concept is that where a loss is foreseen. If a business purchases stock for £1. the prudence concept dictates that the £6.000.000 will ever be paid. vi) The money measurement concept: The money measurement concept states that accounts will only deal with those items to which a monetary value can be attributed. Sales for 20x5 will be shown in the profit and loss account at their full value of £100. it must be recognized as soon as it is foreseen. it should be anticipated and taken into account immediately. 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.

A business may have intangible assets such as the flair of a good manager or the loyalty of its workforce. the original cost of goods. The monetary measurement concept introduces limitations to the subject matter of accounts.Lesson Two 91 or the amount it would cost to replace the machinery) and stocks of goods (e. the price at which the goods are likely to be sold). theoretically. These may be important enough to give it a clear superiority over an otherwise identical business.g. but because they cannot be evaluated in monetary terms they do not appear anywhere in the accounts. or. .

Materiality depends on the nature and size of the item.000 balance and a £55. ix) The historical cost convention: A basic principle of accounting (some writers include it in the list of fundamental accounting concepts) is that resources are normally stated in accounts at historical cost. viii) The materiality concept: An item is considered material if it’s omission or misstatement will affect the decision making process of the users.e. i. the profit and loss account of a business will show the expenses incurred by he business grouped under suitable captions (heating and lighting expenses.000’. An example in the accounts of a limited company might be the amount of remuneration paid to directors of the company. whereas an error of £20. the 50 figures must then be aggregated and the total is the stock figure which should appear in the balance sheet. but in the case of very small expenses it may be appropriate to lump them together under a caption such as ‘sundry expenses’. each component item of the asset or liability must be determined separately. Example: a) If a balance sheet shows fixed assets of £2 million and stocks of £30. a valuation must (in theory) be arrived at for each item separately. An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial.92 Final Accounts vii) The separate valuation principle: The separate valuation principle states that. In other words. b) If a business has a bank loan of £50. These separate valuations must then be aggregated to arrive at the balance sheet figure. incorrect presentation may amount to material misstatement even if there is no monetary error. In other words. For example. so that time and money are not wasted in the pursuit of excessive detail. it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.000 in the stock valuation probably would be.000 an error of £20. the total of which the erroneous item forms part must be considered.000 in the depreciation calculations might not be regarded as material. In preparing accounts it is important to assess what is material and what is not. at the amount that the . rent and rates expenses etc). But some items disclosed in accounts are regarded as particularly sensitive and even a very small misstatement of such an item would be regarded as a material error. Determining whether or not an item is material is a very subjective exercise. It is common to apply a convenient rule of thumb (for example to define material items as those with a value greater than 5% of the net profit disclosed by the accounts). if a company’s stock comprises 50 separate items.000 balance on bank deposit account. because a more detailed breakdown would be inappropriate for such immaterial amounts. The assessment of an item as material or immaterial may affect its treatment in the accounts. For example. There is no absolute measure of materiality. in determining the amount to be attributed to an asset or liability in the balance sheet.

when the job is well under way but not yet completed by the end of an accounting period).1 It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading. or else it is certain that it will be completed (e. For example. Historical cost means transactions are recorded at the cost when they occurred. Example 3. The concept states that revenue and profits are not anticipated but are recognized by inclusion in the income statement only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty. it is reflected in the accounts as an asset and depreciation provided for in the normal accounting way. x) Objectivity (neutrality):An accountant must show objectivity in his work. .g. accountants prefer to deal with costs. xiii) Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form e.Lesson Two 93 business paid to acquire them. This means he should try to strip his answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. a non current asset on Hire purchase although is not legally owned by the enterprise until it is fully paid for. This is because valuations tend to be subjective and to vary according to what the valuation is for.g. so that the sales value of the transaction is known for certain. In practice objectivity is difficult. In general. rather than with ‘values’. It was to combat subjectivity that accounting standards were developed. At the end of two years the company is preparing a balance sheet and has decided what monetary amount to attribute to the asset. suppose that a company acquires a machine to manufacture its products. profit and loss account when: a) The sale transaction is for a specific quantity of goods at a known price. The machine has an expected useful life of four years. xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double entry bookkeeping. Two accountants faced with the same accounting data may come to different conclusions as to the correct treatment. Objectivity means that accountants must be free from bias. An important advantage of this procedure is that the objectivity of accounts is maximized: there is usually objective. in the case of long-term contract work. b) The sale transaction has been completed. The result of this should be that any number of accountants will give the same answer independently of each other. xi) The realization concept: Realization: Revenue and profits are recognized when realized. They must adopt a neutral stance when analysing accounting data. documentary evidence to prove the amount paid to purchase an asset or pay an expense.

94 Final Accounts c) The critical event in the sale transaction has occurred. The critical event is the event after which: i) It becomes virtually certain that cash will eventually be received from the customer. ii) Cash is actually received. .

(b) A customer places a firm order for goods. and the debt is legally enforceable. Required Given that prudence is the main consideration. it is not yet certain that the sale transaction will go through. The prudence concept is applied here in the sense that revenue should not be anticipated. (d) The customer is invoiced for goods. discuss under what circumstances.Lesson Two 95 Usually. (a) Goods have been acquired by the business. by signing a delivery note). nor when it will take place. The customer may cancel an order. (b) The customer promises to pay on or before a specified future date. if any. revenue might be recognized at the following stages of a sale. Such a precaution would only be justified in cases where there is a very high risk of the bank refusing to honour the cheque. and so the cash is received at the same time. and included in the trading. (d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. Answer (a) A sale must never be recognized before a customer has even ordered the goods.g. Even though the order will be for a specific quantity of goods at a specific price. before it is reasonably certain to ‘happen’. for a completed sale transaction. . ii) The sale is on credit and the customer accepts delivery (e. (b) A sale must never be recognized when the customer places an order. unless the customer is a high credit risk and there is a serious doubt about his ability or intention to pay. profit and loss account. (f) The customer’s cheque in payment for the goods has been cleared by the bank. It would be too cautious or ‘prudent’ to await cash payment for a credit sale transaction before recognizing the sale. (c) A sale will be recognized when delivery of the goods is made only when: i) The sale is for cash. both take place at the same time. (e) The customer pays for the goods. (e) The critical event for a cash sale is when delivery takes place and when cash is received. (f) It would again be over-cautious to wait for clearance of the customer’s cheques before recognizing sales revenue. the supplier might be unable to deliver the goods as ordered or it may be decided that the customer is not a good credit risk. even if it is virtually certain that goods will be sold. revenue is ‘recognized’ (a) When a cash sale is made. which it confidently expects to resell very quickly. There is then a legally enforceable debt payable on specified terms. There is no certainty about the value of the sale. (c) Goods are delivered to the customer.

Users must also be able to compare the financial statements of different accounting policies.g. d) Include some degree of caution especially where uncertainties surround some events and transactions (prudence). Comparability: users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. LIFO and AVCO) III) Policies Accounting policies are the specific accounting bases judged by business enterprises to be the most appropriate to their circumstances and adopted by them for the purpose of preparing their financial accounts. free from bias. The relevance of information is affected by its nature and materiality. For these reason users are assumed to have a reasonable knowledge of business and economic activities and accounting. present or future events or confirming or correcting their past evaluations. To be reliable then the information should: a) Be represented faithfully.96 Final Accounts II) Bases Bases are the methods that have been developed for expressing or applying fundamental accounting concepts to financial transactions and items. Examples include: − Depreciation of Non current Assets (e.e. Compliance with accounting standards also helps achieve this comparability. by straight line or reducing balance method) − Treatment and amortization of intangible assets (patents and trade marks) − Stocks and work in progress (FIFO. Qualities of Useful Financial Information The four principal qualities of useful financial information are understandability. b) Be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. Understandability: an essential quality of the information provided in the financial statements is that it is readily understandable by users. Reliability: information is useful when it is free from material error and bias and can be depended upon by users to represent faithfully that which it purports to represent or could reasonably be expected to represent. changes in the various policies and the effect of these changes in the accounts. The Accounting Profession in Kenya . relevance.e. c) Be neutral i. An omission can cause information to be false. must be within the bounds of materiality and cost. e) Be complete i. reliability and comparability. Relevance: information has the quality of being relevant when it influences the economic decisions of users by helping them evaluate past.

Lesson Two 97 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) .

b) To promote research into the subjects of accountancy and finance. which consists of the Chairman. b) To promote recognition of its examinations in foreign countries. and f) To do anything incidental or conducive to the performance of any of the preceding functions. journals and articles in connexion therewith. to make rules with respect to examinations. and c) To do anything incidental or conducive to the performance of any preceding functions. (Total: 20 Marks) (Covered adequately in the text). The Registration of Accountants Board (RAB) functions include issuing out practicing certificates and registration of qualified persons as members of the institute. . (iv) Accounting standards. a) To promote standards of professional competence and practice amongst members of the institute. to arrange and conduct examinations and issue certificates to candidates who have satisfied examination requirements. nine members from the institute and one member appointed by the Minister of finance.2 PILOT PAPER OCTOBER 1991 Briefly explain the meaning and the significance of the following: (i) Accounting concepts. (iii) Accounting policies. e) To carry out any other functions prescribed for it under any of the provisions of the Act or under any other written law. (ii) Accounting bases. Example 3. c) To promote the international recognition of the institute. A council known as the Council of the institute governs the Institute.98 Final Accounts The following are the functions of ICPAK as outlined by the Act. and related matters. The Act also outlines the following as the functions of IASNEB: a) To prepare syllabuses for accountants’ and secretaries’ examinations. d) To advise the Examinations board on matters relating to examination standards and policies. and the publication of books. periodicals.

4 marks Solution: (i) The Going Concern Concept The concept of going concern is that an entity will continue trading into the foreseeable future at a similar level as it does when the accounts are prepared. it provides a focus on the significant items. (i) (ii) (iii) (iv) The Going concern concept Business entity concept Materiality Realization 4 4 4 4 marks marks marks marks (b) Two accounting concepts or conventions could clash or there could be inconsistency between them. This concept prevents any confusion between the owner’s private finances and those of the entity. hence the option of drawings when a proprietor effectively reduces the capital of the entity. this is only a guide. (iii) Materiality Materiality relates to significant amounts and items in the financial statements. Financial statements are prepared to reflect the activities of the entity. A rough guide to what material amount is 5% of pre tax profits.Lesson Two 99 Example 3. (iv) Realization The realization concept involves recognizing amounts in the financial statements at the point at which they crystallize. Profit should not be reflected in the profit and loss account until it has been earned. If a business is to cease trading after the period of account the financial statements should be prepared on a break up basis as all liabilities will be due and assets will be valued at net realizable value. Give two examples of such situations and explain how the inconsistency should be resolved. cash in hand is offset against the overdraft balance this is a material misstatement. The realization concept means that the profit in the financial statements should be reasonably stated. (ii) . Going concern has implications for the value of the entities assets and the way the user may read the financial statements. Materiality prevents time being wasted on items which do not impact on the results of the entity. If say.3 PILOT PAPER JULY 2000 (a) Define the following accounting concepts and for each explain their implication in the preparation of financial statements. The Entity Concept The organization preparing accounts is a distinct and separate entity. However.

100 Final Accounts (c) Clashes between accounting concepts Accruals and prudence The accruals concept requires future income (e. why is it important for an Accountant to make use of International Accounting Standards? (4 marks) (Total: 19 marks) (Covered adequately in the text) . (5 marks) (b) What are accounting standards and why are they important? (5 marks) (c) Describe the role of the Institute of Certified Public Accountants of Kenya.g. no accrual should be made. The prudence concept dictates that caution should be exercised. Consistency and prudence If circumstances change. Example 3. prudence may conflict with the consistency concept. prudence must prevail. in relation to credit sales) to be accrued. so that if there is doubt about the subsequent receipt. In both situations. (5 marks) (d) In addition to the Kenya Accounting Standards.5 DECEMBER 1994 QUESTION FIVE (a) Explain the nature of the Accounting Equation. which requires the same treatment year after year.

 Neutrality  Money measurement  Accruals  Substance over form  Consistency marks) (b) (15 Give two examples of situations in which there is a clash or inconsistency between two accounting concepts or conventions. you need not confine yourself to considering the concepts listed in part (a)) (5 marks) (20 marks) Question Three If the information in financial statements is to be useful. and explain how the inconsistency should be resolved. regard must be had to the following:      Materiality Comparability Prudence Objectivity Relevance . (In answering this part of the question. 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. Required: (a) Define and explain the relevance of the following accounting concepts.Lesson Two 101 REINFORCEMENT QUESTIONS Question One Explain. some of which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting Standards Committee. with examples.

(Four marks for each of (a) to (e).) ( 20 marks) .102 Final Accounts Required Explain the meaning of each of these factors as they apply to financial accounting including in your explanations one example of the application of each of them.

(4 marks) Explain what makes information in financial statements relevant to users. (5 marks) CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK . 2. (5 marks) d) One of the requirements of financial statements is that they should be free from material error. which may exist. inside or outside a company to ensure that the financial statements are free from material error. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’. Suggest three safeguards. (6 marks) Explain what is meant by materiality in relation to financial statements and state two factors affecting the assessment of materiality.Lesson Two 103 Question Four a) b) c) 1. Explain how a possible conflict between them could arise and how that conflict should be resolved. Explain the meaning of these two terms.

000 2.000 2. They must be matched with one another so far as their relationship can be established or justifiably assumed. ACCRUALS Income: Accrued Income This is income that relates to the current year but cash has not yet been received.000 2. not as money is received or paid.000 2.000 2. assuming that this is the first year of renting and rent is received in arrears (rent 4 January is received early Feb).000 2.000 2.000 2. 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.000 2. Therefore all incomes and expenses that relate to a particular financial period will be matched together to determine the profit for the year.000 per month. and dealt with in the profit and loss account of the period to which they relate. 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) £ 2.1 A firm lets out part of its properties and receives rent of £2. Example 4.000 2.000 22.000 .Acknowledgement 104 LESSON FOUR ADJUSTMENTS TO FINAL ACCOUNTS a) ACCRUALS AND PREPAYMENTS Revenue and costs must be recognized as they are earned or incurred.

000 2.000 2. An accrued expense should be charged in the P&L account and shown in the balance sheet as a current liability. the full rental income of £24.000 will be reported in the balance sheet as a current asset.000 2.000 2.000 2.000 2.000 2. £2.000 2.000 2.000 24. thus it becomes an expense with the facts still the same i.000 2.000 2.000 2.000 2.000 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 £ 2.000 Although the cashbook is showing that rent received amounts £22.Lesson Three 105 Year 1 31/12 P&L 24. 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 payable in arrears.000 2.e.000 24.000 2.000 2.000 2. Assume in the above example that the firm is meant to pay the rent.000 2.000 2. 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.000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of £2. The ledger account will be as follows.000 2.000 .000.000 2.

Rent payable 3 months in advance.000 15. rent for Dec being the accrued expense will be shown in the balance sheet as a current liability.106 Accounting Theory 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.000 2. This happens where an income is payable in advance e. PREPAYMENTS Prepaid Income This is income that is not yet due but cash has been received for it.3 1.12 .000 24.000 1.000 2.000 Year 1 £ 2. However in the P&L a/c we should report rent for the full year of £24.000 2.9 1.g. Assuming that the firm’s rental income began in 1st March and the financial year.000 31/12 P&L 24. The accounting treatment will be to show it as a current liability.000 15.000 2. 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.000 2.000 2.6 1.000 15.000 The cashbook shows that the rent for the 11 months was paid for. The ledger accounts will be: 15.000 2.000 2.000 per month payable quarterly in advance. end is on 31st Dec.000.2 A firm receives rent income of £5. Nov £ 2.000 24.000 and the £2.000 2. Example 4.000 2.000 15.3 Cashbook 1.

000 31/12 Bal c/d 10.000 60.000 1/9 C/B (Sept.000 P&L (10 x 5.000) 50. Feb) 15. Aug) 15.000 15. that all the facts are as stated except that rent is an expense. April. rent for 2 months is pre-paid.000 15.000 1/12 C/B (Dec.000 15.000 1/6 Cashbook 15.000 .000 15.000) 10.000 is not charged in the P&L but is carried forward as current liability in the balance sheet. Jan.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. May) 15.000) 50. Prepaid Expenses A prepaid expense is an expense that is not payable but cash has already been paid.000 15.000 15.000 1/12 Cashbook 60. This £10. Oct.000 1/9 Cashbook 15.Lesson Three 107 Year 1 1/3 Rent 1/6 Rent 1/9 Rent 1/12 Rent £ 15.000 P&L (10 x 5. July.000 Year 1 £ Rent – Income Year 1 £ Year 1 £ 1/3 Cashbook 15.000 £ 15. Example Assume as in the previous illustration.000 1/6 C/B (June.000 15.000 60.000 31/12 Bal c/d (2 x 5. 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. Nov) 15.000 60. The ledger accounts is as follows: Year 1 £ Cashbook Year 1 1/3 Rent 1/6 Rent 1/9 Rent 1/12 Rent Rent – Expenses Year 1 £ Year 1 £ 1/3 C/B (Mar.

.108 Accounting Theory Rent of £10.000 for 2 months is carried forward to the next financial period and shown in the balance sheet as a current asset.

Report as Current Income Assets Income Prepaid -Not reported Current Liability Accruals/ Prepayments Accrued 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 Current Liabilities Bank overdraft x Creditors x Prepaid Incomes/Accrued Expenses x X x x x x x x £ .Lesson Three 109 The following is the summary of treatment for Accruals and Prepayments: P&L B/Sheet Accrued .Charge as .

Prepaid as at 31 December 2001 £2.800 on 31 December 2001 and £2.440. e) Seamers sub-lets part of the premises.900. Prepaid as at 31 December 2002 £3.110 Accounting Theory The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that the correct amount of expense or income is reported in the profit and loss account for the year.500.4 The financial year of H Seamers ended on 31 December 2002.000. d) Rates: Paid during 2002 £95. Receives £5. c) Stationery: Paid during 2002 £18. Example 4. Show the ledger accounts for the following items including the balance transferred to the necessary part of the final accounts.500 .200 Bal b/d 350 === Stationery £ 19x6 18.000.800. b) Insurance: Paid in 2002 £42. Owing as at 31 December 2001 £25.100 on 31 December 2002 a) 19X6 31/12 Cashbook Bal c/d Motor Expenses £ 19X6 7.440 280 P/L a\c 7200 19x7 1/1 Bal b/d £ 7220 7200 280 b) 19x6 £ Cashbook 19x7 1/1 c) 19x6 Cashbook Insurance £ 19x6 P&L a/c Bal c/d 4200 3850 350 4.000 1/1 Bal b/d £ 2. Tenant owed Seamers £1.200. Prepaid as at 31December 2002 £2. also the balances carried down to 2003: a) Motor expenses: Paid in 2002 £7. Owing as at 31 December 2002 £49.000.000. Owing at 31 December 2002 £2.200 31/12 31/12 4.000.500 during the year ended 31 December 2002.

400 22.900 ==== 19x7 1/1Bal b/d 4.900 P&L a/c 22.900 .Lesson Three 111 31/12 Bal c/d 20.900 ==== 4.

Accounting For Bad & Doubtful Debts. Debit Profit and Loss Account. ii.112 Accounting Theory d) 19x6 1/1 Bal b/d Cashbook 11. In practice a firm may also be unable to collect all the amounts due from debtors. These debts that the firm may not collect are called doubtful debts. A firm should therefore provide for such debts by charging the provision in the profit and loss account. Furthermore the amount that will not be collected may also be difficult to ascertain.g. . Bad debts When a debt becomes bad the following entries will be made: Debit bad debts account Credit debtors account with the amount owing. i.700 £ £ 8800 2900 2900 Rent – Income 19x6 1800 Cashbook 5800 31/12 Bal c/d 7600 2100 £ £ 5500 2100 7600 b) BAD AND DOUBTFUL DEBTS Some debtors may not pay up their accounts for various reasons e. a debtor may go out of business. When a debtor is not able to pay up his/her account this becomes a bad debt. This is because a section of the debtors will not honor their obligations.700 19x7 1/1 Bal b/d e) 19x6 1/1 Bal b/d P&L 19x7 1/1 Bal b/d Rates 19x6 2200 P&L 9500 31/12 Bal c/d 11. Therefore the business/firm should write it off from the accounts and thus it becomes an expense that should be charged in the profit & loss account. Specific relate to a debtor whom we can identify and we are doubtful that he may pay the debt (if one of our debtor goes out of business). Provision for doubtful debts maybe specific or general. The problem posed by this situation is that it is difficult to identify the debtors who are unlikely to pay their accounts.

Lesson Three 113 Credit bad – debts account to transfer the balance on the bad – debts account to the Profit and Loss Account. .

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. Bad debts amounting to £40. ii. Debit provision for doubtful debts. The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be as follows.e.000 Bad debts 40. Credit provision for doubtful debts (with increase only). A specific provision is where a debtor is known and chances of recovering the debt are low. Debit P&L a/c. If it is the 1st year of trading (1st year of making provision): i.750 31/12 P&L . If it is an increase: i. the balance on the debtor’s account was £400.000 were written off from this balance.114 Accounting Theory Doubtful Debts A provision for doubtful debts can either be for a specific or a general provision. Debtors less Bad debts and specific provision. Debit P&L a/c. If it is a decrease: i. The ledger accounts of 1999 were as follows: Debtors 1999 £ 1999 £ Bal B/d 400. ii.000 Provision for doubtful debts 1999 £ 31/12 Bal c/d 1999 £ 22. Credit P&L a/c (with the decrease in provision only).000 22. In the subsequent periods. The general provision is where a provision is made on the balance of the total debtors i. ii.000. Example Debtors Bad debts Specific Provision General Provision x (x) x (x) x (x) x A firm started trading in the year 1999. Credit provision for doubtful debts (with total amount of the provision). it will depend on whether if it is an increase or decrease required on the provision. there was a specific provision of £5.750 Bal c/d 360.

000 400.Lesson Three 115 400.000 .

000) 360.500 .000) 450.000 (5.000 (17.000 £ Debtors Bad debts Specific Provision General Provision (5%) 400.000 needs to be written off there is no specific provision but the general provision is to be maintained at 5%.000 (40.250 337.000 31/12 £ P&L 40.116 Accounting Theory 1999 Debtors Bad debts £ 1999 40.750) 337.000 22. The ledger accounts will be as follows: Debtors Bad debts General Provision (5%) 500.000 Increase in provision for D/debts22.000 (50.250 Profit & Loss A/C (Extract) for the year ended 31/12/99 £ Expenses: Bad debts 40.750) 337.000.000 from which bad debts of £50.250 £ In the year 2.000 (22.750 £ Balance Sheet (Extract) as at 31/12/99 £ Current Assets Stocks Debtors Provision for D/debts x 360.000) 355.500 427.250 337. the debtors balance goes up to £500.

000 from which bad debts of £50.500 £ .500 22.750 Bad Debts £ 2000 50.000 General provision % (27.000 Provision for Doubtful Debts £ 2000 250 1\1 Bal b\d 22.000 31\12 P& L £ 50. £ £ Incomes Decrease in provision for D/debts Expenses Bad debts 50.750 22.000 450.500) 427.000) 550.750 £ 50.000 250 Balance Sheet (Extract) as at 31/12/2002 £ Current Assets Debtors Provision for bad debts 450.500) 522.000 need to be written off.000 (22.Lesson Three 117 2000 Bal b\d Debtors £ 2000 500.500 In the year 2001 the debtors balance goes up to £600. 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 (50.000 500.000 £ 22.000 Bad Debts ______ Bal c\d 500.000 2000 P\L Bal c\d 2000 Debtors Profit And Loss Account (Extract) for year ended 31/12/2002.

000 600.500) 522.100 £640 £120 550.500 Bad Debts £ 2001 50. and it is decided to make a provision for doubtful debts of £2.6 In a new business during the year ended 31 December 2002 the following debts are found to be bad. amounting in total to £68.000 £ Balance Sheet (Extract) as at 31/12/2001 £ Current Assets Debtors Less: Provision for Doubtful Debts Example 4.000 27.200.118 Accounting Theory 2001 Bal b\ 600.000 Profit And Loss Account (Extract) for the year ended 31/12/2001 £ Expenses Bad debts Increase in provision 50.000 550.000 (27. and are written off on the dates shown: 30 April 31 August 31 October H Gordon D Bellamy Ltd J Alderton £1.500.500 £ On 31 December 2002 the schedule of remaining debtors. is examined.500 P& L 22.500 2001 Debtors £ 50.000 5.000 Provision for Doubtful Debts £ 2001 1\1 Bal b\d 27.000 £ Debtors 2001 Bad Debts £ 50.000 31\12 P& L 2001 Bal c\d £ 22.000 ______ Bal c\d 600. .500 5.

Lesson Three 119 You are required to show: a. b. The relevant extracts from the Balance Sheet as at 31 December 2002. and the Provision for Doubtful Debts Account. . c. The charge to the Profit and Loss Account. The Bad Debts Account.

500.000. You are required to show: .200 Profit & Loss Account (Extract) £ Expenses Bad debts Increase in provision for Doubtful debts Balance Sheet (Extract) £ Current Assets Debtor Less: Provision for D/Debts Example 4.2 A business started trading on 1 January 2001. It was decided to make a provision for doubtful debts of £6.860 2.400 £1.200 £ On 31 December 2001 there had been a total of debtors remaining of £405.036 2002 Bad Debts £ 2002 1860 31/12 P\L Provision for Bad debts Provision for doubtful debts 2002 £ 2002 31/12 Bal c/d 2.200) 66.120 Accounting Theory £ Debtors £ Bad debts 1860 D/Debt (2.000.800 £600 £2.000.500 (2.500 70. It was decided to make a provision for doubtful debts of £5.500 8.300 (1. 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 £1.300 £ 1. On 31 December 2002 there had been a total of debtors remaining of £473.200 31/12 £ P&L 2.200) 6.860) 68.

800 600 2. Kelly 30/11 A.500) 399.900 . The relevant extracts from the Balance Sheet as at 31 December 2001 and 2002.500 Bad Debts £ 2001 850 1400 31\12 P&L 2250 £ 2250 2250 2001 31\8 W.000 (5.900 4. Friend 31/8 N. The Bad Debts Account and the Provision for Doubtful Debts Account for each of the two years.Best 30\9 S.250 405. ii. Solutions Bad debts = Provision 2.Aron 2001 31\12 Bal c\d 2001 1\1 Bal c\d Provision for D/Debts £ 2001 550 31\12 P&L 2001 1\1 Bal b\d 600 31\12 P&L 600 600 Bad Debts £ 2001 1.Lesson Three 121 i.900 £ £ 550 £ 550 50 2001 28/2 J. Oliver £ 4.500 31/13 P&L 4.

000 (5.900 Increase in provision for D/Debts 500 Balance Sheet as at 19x6 £ Current Assets Debtors Less provision 19x7 Debtors Less: provision 405.500 £ 467. The accounting treatment is similar to accounting for provision for doubtful debts.000 Provision for discounts allowable.000 (6. This happens where a firm anticipates that some of the debtors may take up cash discounts offered by the firm.500) 473.122 Accounting Theory Profit & Loss Account (Extract) 19x6 Expenses Bad debts Provision for Doubtful Debts 2.000 £ £ 19x7 Bad debts 4.000) 399. Debtors Bad debts Specific provision x (x) x (x) x (x) x (x) x Provision for discount allowed (on balance) .250 5. In some cases a firm may create a provision for discounts allowable in addition to provision for doubtful debts. The provision should be made after creating a provision for doubtful debts (debtors figure less either general/specific provision for doubtful debts).

Debit – Debtors Credit – credit bad debts recovered account – to restore the bad debt recoverable.000 P\L 20. In the same financial period the firm writes off bad debts amounting £30.000 30. Debit – bad debts recovered account.Lesson Three 123 Profit & Loss Account (Extract) £ 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 Balance Sheet (Extract) Current Assets Debtors Less: provision for Doubtful Debts Less: provision for discounts allowed Bad Debts Recovered A firm may be able to recover a debt that was previously written off. Debit – Cashbook Credit – Debtors with the cash received.000 that had been written off in the previous periods. iii.000 Bad Debt Recovered 10.000 £ x (x) (x) £ x x x x x x £ Bad Debt Bad debts recovered £ 10. Credit – P & L account with the same balance as bad debts account. ii.000 .000.000 30. The following entries will be made if this happens: i. N/B: This should be the amount to be recovered.000 Debtors £ 10. The ledger accounts will be as follows: Bad debts £ £ Debtors 30. Example: A firm recovers debts amounting to £10.

e. Interest charges on overdrafts. Errors made in the cashbook These include: • Payments over/understated • Deposits over/understated • Deposits and payments misposted • Overcastting and undercasting the Bal c/d in the cashbook. Dishonored cheques A cheque would be dishonored because: • Stale cheques • Post – dated cheques • Insufficient funds • Differences in amounts in words and figures. this is not the case and the two (balance as per the bank and firm) are different. ii) Items appearing in the bank statement and not reflected in the cashbook: Bank charges: These charges include service. the movements of the account held with the bank. the records as per the bank and the cashbook should be the same and therefore the balance carried down in the cashbook should be the same as the balance carried down by the bank in the bank statement.124 Accounting Theory c) BANK RECONCILIATION STATMENTS The cashbook for cash at bank records all the transactions taking place at the bank i. Uncredited deposits/cheques: These are cheques received from customers and other sources for which the firm has banked but the bank has not yet availed the funds by crediting the firm’s account. The bank will send information relating to this account using a bank statement for the firm to compare. Direct credits Interest Income/Dividend incomes . Ideally. Causes of the differences: Items Appearing In The Cashbook And Not Reflected In The Bank Statement. commission or cheques.g. to pay Alico insurance. A bank reconciliation statement explains the difference between the balance at the bank as per the cashbook and balance at bank as per the bank statement. Direct Debits (standing orders) e. In practice however. Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but have not been presented to the firm’s bank for payment.

g.g. To update the cashbook with the items appearing in the bank statement and not appearing in the cashbook except for errors in the bank statement. 2. • Deposits • Withdrawals The Purposes of a bank reconciliation statement. interest charges and dishonoured cheques and make adjustments for any errors reflected in the cashbook.Lesson Three 125 Errors of The Bank Statement (Made By The Bank). 3. an understated deposit or an overstated payment by the bank. Compare the debit side of the cashbook with the credit side of the bank statement to determine the uncredited deposits by the bank. Prepare the bank reconciliation statement which will show: a) Unpresented cheques b) Uncredited deposits c) Errors on the bank statement d) The updated cashbook balance. 1. 2. Steps in preparing a bank reconciliation statement. . The format is as follows: (Format 1) Name: Bank Reconciliation Statement as at 31/12 £ Balance at bank as per cashbook (updated) Add: Un presented cheques Errors on Bank Statement (see note 1) Less: Uncredited deposits x Errors on Bank Statement (see note 2) Balance at bank as per Balance Sheet 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. or making an unknown payment.g. 3. 4. Adjustments should also be made for errors in the cashbook. Compare the credit side of the cashbook with the debit side of the bank statement to determine the unpresented cheques. To detect and prevent errors or frauds relating to the cashbook. an overstated deposit or an understated payment by the bank. bank charges. Note 2: These types of errors will have an effect of decreasing the balance at bank e. Such errors include: • Overstating/understating. To update the cashbook with some of the items appearing in the bank statement e. To detect and prevent errors or frauds relating to the bank. 1.

060 Bank charges on bank statement but not yet in cashbook 280 Un presented cheques C Clarke 1170 Standing order to ABC Ltd entered on bank statement.020 40.8 Draw up a bank reconciliation statement. but not in cash book 550 Credit transfer from A Wood entered on bank statement.960 Bankings made but not yet entered on bank statement 6. ascertaining the balance on the bank statement. after writing the cashbook up to date.850 £ £ x x x x x x === (x) x 550 40.890 Solution 19X9 31/3 Bal b/d 38960 A Wood (credit transfer) Cashbook – Bank £ 19X9 Bank charges 280 ABC (standing order) 1890 31/3 Bal C/D 40.126 Accounting Theory Format 2 Name: Bank Reconciliation Statement as at 31/12 £ Balance at bank as per bank statement Add: Uncredited deposits x Add errors on bank statement (note 2) Less: Unpresented cheques Errors on bank statement (note 1) Balance at bank as per cashbook (updated) Example 4. from the following as on 31 March 2003: £ Cash at bank as per bank column of the cashbook (Dr) 38.850 Bank Reconciliation as at 31/03/2003 . but not yet in cashbook 1.

831 31/1 Bank charges 54 31/12 Bal C/D 1.Lesson Three 127 £ Balance at bank as per cashbook Add: Unpresented cheques Less: Uncredited deposits Balance at bank as per Balance Sheet Example 4.519 1.740 Dec 8 A Dailey 88 Dec 15 R Mason 73 Dec 28 249 2.170 41.060) 35.446 73 54 22 1.328 Bank Statement 2002 Dec Dec Dec Dec Dec Dec Dec 1 7 11 20 22 31 31 Dr £ Balance b/d Cheque A Dailey 349 R Mason 33 Cheque Credit transfer: J Walters Bank charges 88 Cr £ 1.863 1.328 Dec 31 £ 349 33 G Small 1.828 1.190 (6. You are required to: a) Write the cashbook up to date.885 £ 22 .740 Dr Balance b/d J Map J Cream 115 K Wood M Barrett Cashbook £ 2002 Cr 1. 2002 Dec 1 Dec 7 Dec 22 Dec 31 Dec 31 2.831 Balance c/d 178 Cashbook –Bank 2002 31/12 Bal b/d 31/12 J.885 £ 2002 1.020 1.573 1. and b) Draw up a bank reconciliation statement as on 31 December 2002.130 ===== The following are extracts from the cashbook and the bank statement of J Richards. and state the new balance as on 31 December 2002.9 £ 40.551 Balance £ 1.479 1. Walters (C/T) 1.

128 Accounting Theory .

15.551 1. 000 had not been entered in the cashbook.Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account. a sole trader received his bank statement for the month of June 2001.74.978 (115) 1.500 whereas his cash book balance was Sh. Barret Less: Unpresented cheques Balance at bank as per cashbook – bank Exam Type Question: Nov 2001 Q4 QUESTION FOUR (a) Explain the term “bank reconciliation” and state the reasons for its preparation. 6. Bank charges of Sh.863 115 . A cheque for Sh.2.22. 2. 400. the bank had 249 178 (427) 1. 500 had not yet been presented to the bank. 4.3. He had not entered receipts of Sh. Richards Bank Reconciliation Statement as at 31/12/2002 £ Balance at bank as per cashbook – bank Add: Unpresented cheques – (G Small) 1.79. 10. 9.978 Less: Uncredited deposits K Wood M. 000 had been written back in the cashbook but the bank had already honored it. 7. 3. 500 paid into the bank on 30 June 2001. In the cashbook Ssemakula had entered a payment of Sh. An old cheque payment amounting to Sh. Wood M. 900 as Sh. At that date the bank balance was Sh. 5. Unfortunately. 250 as a debit balance instead of a credit balance.26. The bank had not credited Mr Ssemakula with receipts of Sh. 8. 500 in his cashbook. Ssemakula had brought forward the opening cash balance of Sh. Standing order payments amounting to Sh. Barret Balance at bank as per balance sheet OR: Balance at bank as per balance sheet Add: Uncredited deposits: K.366. 000 had not been entered into the cashbook.44.98.863 £ 1.551 249 178 1. 706. Cheques drawn by Ssemakula totaling Sh. His accountant investigated the matter and discovered the following discrepancies: 1.Lesson Three 129 J.62. 000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cashbook.500. (b) Ssemakula.329.

To update the cashbook with some of the relevant entries in the bank statement. A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001.000 4. 2001 .397.366. Reasons for preparing a bank reconciliation statement are: 1. (9 marks) ii.130 Accounting Theory credited some deposits amounting to Sh. 3.000 1.832.500 26. Sh. (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.500 2.000 cheques) Payment overstated 15.500 Debtors (dishonored 329. However acting on information from his customers Ssemakula had actually entered the expected receipts from the debtors in is cashbook. 500 to another customer’s account. Required: i. To detect and prevent errors or frauds that relate to the cashbook.250 329.500 Bank charges Standing orders ADJUSTED CASHBOOK Sh. 2. A bank reconciliation statement as at 30 June 2001. b) 2001 Sh.000 Receipts omitted 62.397.615.500 SSEMAKULA Bank Reconciliation Statement as at 30 June 2001.000 Error on opening balance Balance C/F Cheque payment Balance C/D 2. Sh. 2. To detect and prevent any errors or frauds that relate to the bank. Bal b/d 3.250 44.

500 .000) 706.500 (931.500 1.637.500 1.500 832.000 22.Lesson Three 131 Cash at bank as per the updated cashbook Add: Unpresented cheques Less: Uncredited cheques Error on bank statement Balance as per the bank statement 98.615.

800 20.327 2 400.000 6.250 51.327 4 4 4 340.272 16 358.327 391.272 16 340. 70 Cheque no. 74 Deposit Cheque no. 73 Deposit Cheque no.548 13.992 7 325.115 51.875 2 331.492 7 7 288.100 9. 64 Deposit Cheque no. 72 Cheque no.762 336. 365.492 Debit Sh.286 17 392.286 Particulars Balance b/d Cheque no. 67 Cheque no.327 2 318. 75 Deposit Deposit Cheque no. 68 Cheque no.092 October 9 9 9 387.500 340. 31.000 1.500 36.092 8 8 344. Credit Sh.712 342. 76 18.000 82.132 Accounting Theory Exam type Question: Nov 96 Q4 QUESTION FOUR (a) What is the purpose of preparing a bank reconciliation statement? (4marks) (b) The following is the bank statement of Kakamega Retail Traders for the month of October 1996: Date 1996 October 1 2 334.330 6.512 316.000 3.875 .560 65.280 7.512 15 15 405.014 34.000 394.092 7.000 28.212 4 347. 69 Cheque no.212 Balance Sh. 65 Deposit Cheque no. 66 Deposit Cheque no.500 8.000 3.000 384.000 2. 71 Deposit Cheque no.786 19 384. 63 Cheque no.000 51.

036 21 21 412.630 28 481.250 74 2.Lesson Three 133 19 427.000 76 5.620 21 410.130 28 491.500 8. 77 Cheque no. no.000 20.730 28 444.100 28.000 1.500 13.000 22. 79 Cheque no. 81 Deposit Cheque no.000 6. no.410 12.700 9.380 23 457.400 27.050 444.230 28 454.750 2.880 26 26 527.280 36.240 63.000 66 9. no.626 408.800 75 65.000 70 7.000 71 51.500 72 1. 1996 October 1 1 3 5 8 10 15 15 17 19 19 22 Balance b/d Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at Deposited at bank bank bank bank bank bank bank bank bank bank bank 365. 65 13.330 73 6.875 7. no.120 The following is the bank column of the cashbook: Date Particulars Debit Date Particulars 1996 Sh.750 15. no.120 21 21 401. 87 Deposit Service charge Deposit 42.800 Cheque Cheque Cheque Cheque Cheque Cheque Cheque Cheque Cheque Cheque Cheque Cheque . no. 84 Dividends Deposit Cheque no.025 750 28. no.055 Deposit Cheque no.500 9.000 36.014 34.560 18.500 10. no. no. no.000 16.000 67 3. no.230 28 431.000 51.548 68 3.750 62.115 69 6. 88 Standing order (Insurance) Cheque no.620 23 394.506 4.755 31 31 472.005 464. 85 Cheque no.630 424.380 26 455. no.000 October 1 1 1 2 4 5 5 7 8 10 11 15 Credit Sh.500 42.500 35. 78 Cheque no. 82 Deposit Cheque no.

respectively. 88 53. 500 and Sh. 82 16. (8 marks) (Total: 20 marks) . 80 3. 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.860 19 Cheque no.15.36.050 171. 84 1. 800 and Sh. 91 15. 79 2. 89 2.010 31. 500 and Sh. 86 10. A cheque from Mkulima for Sh.240 Cheque no.500 Balance c/d 502.506 19 Cheque no.000 Cheque no. 000 had been entered in the cashbook as Sh.134 Accounting Theory 24 27 28 29 31 Deposited Deposited Deposited Deposited Deposited at at at at at bank bank bank bank bank 26.500 Cheque no.62. 87 22.5.500 Cheque no. 4. Counterfoils for cheques no.500 Cheque no. 90 64. 3. 77 12.525 22 23 26 28 28 28 28 30 31 31 31 934. Required: a) A correct cashbook balance.025 28.63.36.529 Cheque no.889 Notes: 1.410 19 Cheque no.500 Cheque no. (8 marks) b) A bank reconciliation statement on 31 October 1996. 88 showed they had been drawn for Sh. 000.26.62. 76 and no.33.000 19 Cheque no. 500 respectively. 700 was deposited on 18 October 1996 but was dishonored and the advice was received on 4 November 1996.000 Cheque no.500 Cheque no.500 13.889 18 Cheque no. 78 4. Deposits of Sh. 2.481 934. 85 27. 500 and Sh. 815.520 Cheque no. 81 6. 000 and in the bank statement as Sh.

1996 502. 80 Cheque no.500 64.400 Dividends Error on deposit 15. 538.381 31.700 Error on cheque 88 Sh.875 Sh. 89 Cheque no.10 Bal b/d 10.520 2.010 31.700 (205.000 10.000 18. Balance as per the cashbook Add: Unpresented cheques 63 64 Less: Uncredited cheques Deposits Balance as per the bank statement Bank Reconciliation Statement as at 31 October 1996 Sh.875 82. Balance as per the correct cashbook Add: Unpresented cheques Cheque no.000 138. 86 Cheque no. 91 Error on bank statement Less: Uncredited Cheques Deposits “ Error in bank statement Balance as per the bank statement 3.529 15.860 15.909 .055 Sh. (Previous period) Sh.000 447.875 (82.500 27.Lesson Three 135 No 96 Q4 CASHBOOK (ADJUSTED) 1996 31. 90 Cheque no.000) 365.525 2.235) 472. 83 Cheque no.231 Sh. Standing order (insurance) 8.381 565.750 Service charge 750 Dishonored cheques (debtor) Bal c/d 538. 365.231 Bank Reconciliation Statement as at 1 October 1996.481 36.290 171.000 51.000 565.000 677.

a wholesaler. iii. ii. ii. iii.g.g. Carriage outwards (sales). assembly. k) Fire insurance premium. g) Carriage costs on purchases. a) Capital expenditure b) Revenue expenditure c) Capital expenditure d) Capital expenditure e) Revenue expenditure f) Capital expenditure g) Revenue expenditure h) Revenue expenditure i) Revenue expenditure j) Capital expenditure . Installation v. Costs incurred to get the asset in use (e. i) Legal costs of collecting debts. iii. Adopting or upgrading the production process to improve or reduce costs. Revenue Expenditure: There’s an amount spent by the firm in the normal trading process or to assist in earning revenues or income. Solution. Examples: i. ii. Delivery/carriage inwards costs (e. f) Carriage costs on bricks for new warehouse extension. Modify plant to increase its useful life. d) Painting extension to warehouse when it is first built. lease agreement) Examples of expenses incurred in adding value to an asset: i.136 Accounting Theory d) CAPITAL AND REVENUE EXPENDITURE Capital Expenditure: This is the amount spent on the acquisition of a non-current asset or adding value to a non-current asset. j) Legal charges on acquiring new premises for office. which had fallen down. Legal fees incurred in acquisition of a new asset (e.g. Example 4. h) Carriage costs on sales. b) Cost of rebuilding warehouse wall. Architect fees for construction and supervision vii. testing) iv. vi. shipping charges or import taxes). classify the following between ‘capital’ and ‘revenue’ expenditure: a) Purchase of an extra motor van. e) Repainting extension to warehouse three years later than that done in (d). l) Costs of erecting new machine. Postage and stationery. c) Building extension to the warehouse. Repairs and maintenance. Upgrading plant to improve quality of output. Purchase price/cost of the asset. Demolition costs in order to construct a new building.10 For the business of K Spinns. Examples of expenses incurred in acquisition: i.

Lesson Three 137 k) Revenue expenditure l) Capital expenditure. The other 5 methods include: i. it will be charged in the P&L A/C. 4. The methods chosen by a firm should be in accordance with the agreed accounting practice.g. properties on lease. There are 2 main methods of estimating depreciation and 5 others that will apply in a firm’s situation. Depletion This occurs when some assets have a wasting character due to extraction of raw materials. Also some machines that are unable to manufacture a large number of goods. IAS 16 on property. machinery and motor vehicles. accounting standards and suit the firm’s non-current assets. 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. 3. ii.g. Some machines.g. oil wells. b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e. minerals or oil. Causes of Depreciation 1. Economic Factors a) Inadequacy: Some assets lose value due to them becoming inadequate e. Physical Factors a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime e. The main methods are: Straight-line method and Reducing Balance method. computers. 2. .g. Time Factors Some assets have a legal fixed time e.g. when a business grows or expands then some buildings may become inadequate due to space. 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. b) Obsolescence: Some assets become obsolete due to change in technology or different methods of production e. Revaluation method – applies to a non-current asset of low value. Sum of the digits methods – uses a formular. and quarries. Under the matching concept. e) DEPRECIATION It is the loss of value of a non-current asset throughout its period of use by the firm. Such assets include mines. plant and equipment defines depreciation as the allocation of a depreciable amount of a non-current asset over its estimated useful life.

. Unit of output method – depreciation is based on the number of units a machine is expected to produce. Machine-Hour method – depreciation is based on number of hours a machine is expected to operate (manufacturing process). v. iv.138 Accounting Theory iii. Depletion of units – depreciation is based on number of units extracted from the asset.

Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation. (Cost of asset – total depreciation provided to date).000 will be charged in the P&L account as depreciation expense on the machine. 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. also called Sales Value / Scrap Value.12 Estimated useful life . Under the straight-line method.000 per year. buildings use straight-line method.g. After the eight years the machine will be sold for £20. the depreciation amount will be computed as follows: This means for this asset £10.000 = Cost of asset – Residual Value = £100.000. Example 4.000 8 = £10.000 which it expects to use in the firm for eight years. Cost of Asset – Residual Value Estimated useful life of asset. Estimated Useful Life The period the asset is expected to be used in the firm. 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. Residual Value The amount the firm expects to sell the asset after the period of use in the firm.Lesson Three 139 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. 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.1 A firm buys a machine for £100. The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value of the asset.

a.000 and provides depreciation on machines at 20% p. on reducing balance method.140 Accounting Theory Assume a firm buys machinery for £100. The depreciation charged to the P&L will be as follows for the next 3 years. .

000 80.000 31/12 Bal c/d P&L 10.000 Provision for Depreciation Machinery £ £ 100.000 (16.000 Balance to YR 3 64.000 being depreciation provided for the machine.000 31/12 Bal c/d 10.g.  Motor vehicles.000) P&L YR 1 Year 2 Depreciation 20% of 80. ACCOUNTING TREATMENT ON DEPRECIATION When non-current assets are depreciated. a new account for each type of asset is opened.000 Balance to YR 2 80. furniture and fitting.800) P&L YR 3 Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of an asset are higher in the first periods of use and lower in the latter periods e.000 P&L YR 2 Year 3 Depreciation 20 % of 64.  Fixtures. The ledger accounts will be as follows: Machinery £ £ Cashbook 100.000) 100.000 Credit – Provision for depreciation. Example on straight-line method The entries will be as follows: Debit – P&L a/c with £10.000 Balance to YR 4 51.000 (20. this account is called a provision for depreciation whereby the following entries will be made: Debit – P&L a/c Credit – Provision for depreciation a/c With the amount of depreciation charged for the period.Lesson Three 141 Year 1 £ Cost Depreciation 20% of 100.200 64. Machines a/c with £10.000 (12.000 .  Plant and machinery.

000 x 20 x 12 100 12 = £4.000 .13 A company starts in business on 1 January 2002.000 31/12 38.800 + 1/7( 14. Motorcars a/c 2002 1/1 Cashbook 1/7 Cashbook 38. Fixtures & fittings Motor vehicles x Example 4. Depreciation is at the rate of 20 per cent per annum.000 x x Land x Buildings x Plant and Machinery Furniture. Fixtures and Fittings Motor vehicles (b) Balance sheet (Extract) as at________ Non Current Assets Cost £ Total NBV (Net Book Value) Depreciation (£) £ (x) x x x x (x) (x) (x) x x x x x x £ 10.000 14. 2002 Bought two motor vans for £12.000 Calculation for depreciation 1/1 24.000 each on 1 January Bought one motor van for £14.000 on 1 July.000 £ Bal c/d 38.400 ) £ 2002 24. Using the basis of one month’s ownership needs one month’s depreciation.000 x 20 x 6 100 12 = 1.142 Accounting Theory The final accounts extracts will be shown as follows: (a) Profit And Loss Account (Extract) for the year ended Expenses £ Depreciation: Buildings x Plant and machinery Furniture. 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.

800 + 1.200 .400 = £6.Lesson Three 143 = £4.

Expenses £ Depreciation: Motor vans 6200 £ Balance Sheet (Extract) as at 31/12/2002 Non-current Assets Motor vans Example 4. The plant account.200 Profit And Loss Account (Extract) for the period. plant being depreciated for each proportion of a year. The machinery bought was: 1999 1 January 2000 1 July 1 October 2002 1 April 1 2 1 1 plant plant plant plant costing costing costing costing £8. The provision for depreciation account. c.Depreciation for Motor cars A/c £ 2002 £ 6. 2000. using the straight-line method.000 £2.14 A company starts in business on 1 January 1999.000 each £6.000 £5.000 Total Depreciation (6200) NBV 31. 2001. b.144 Accounting Theory 2002 31/12 Bal c/d Provision. You are to show: a.200 31/12 P&L 6.800 Depreciation is at the rate of 10 per cent per annum. the financial year end being 31 December.000 Cost 38. . 2002. The balance sheet extracts for each of the years 1999.

000 Bal c/d 26.000 x 10/100 x 6/12 £6.000 6.000 2001 24.250 4.000 31/12 Bal c/d 2002 24.000 Calculation for Depreciation 1999 £8.000 x 10/100 x 12/12 2000 £10.000 31/12 Bal c/d Bal c/d £ 8000 24.000 26.Lesson Three 145 1999 1/1 Cashbook 2000 1/1 Bal b/d 1/7 Cashbook 1/10 Cashbook 2001 1/1 Bal b/d 24.000 24.000 x 10/100 x 12/12 2002 £24.000 x 10/100 x 3/12= £8.000 x 10/100 x 12/12 2001 £24.650 Accumulated Depreciation 800 800 500 = 150 2.250 2400 7.000 24.200 .000 2.000 x 10/100 x 12/12 £2.000 2002 1/1 Bal b/d 1/4 Cashbook Plant a/c £ 199 8000 31/12 2000 8000 10.000 31/12 26.000 x 10/100 x 9/12= £ = = 150 = 800 1.450 = 2400 2.

146 Accounting Theory 1999 31/12 Bal c/d 2000 31/12 Bal c/d Provision – Depreciation Machines £ 1999 £ 800 31/12 P&L £ 2.250) 21.800 DISPOSALS OF ASSETS A firm may dispose off its non-current assets in the following 3 ways: i.250 P&L 2001 1/1 Bal b/d 4.750 24.200 2001 31/12 Bal c/d £ 4650 2002 31/12 Bal c/d £ 7.200 P&L £ 800 800 1.550 7.000 (4. Asset being written-off from damage/accident/theft.000 (7. Asset is scrapped/not used anymore.250 £ 2.000 (2.450 2.650 P&L 2002 1/1 Bal b/d 7.650 2.250 2000 1/1 Bal b/d 2. iii. .400 4650 £ 4.350 26.250 2.200) 18.200 24. Selling the asset.000 Total Depreciation (800) NBV 7.650) 19. ii.200 Balance Sheet (Extract) as at 31/12/99 – 31/12/02 Non Current Assets 1999 Motor vans 1999 Motor vans 1999 Motor vans 1999 Motor vans Cost 8.

.Lesson Three 147 When an asset is disposed and is no longer used by the firm. (a) Debit – asset disposal a/c Credit – asset a/c With the cost of the asset damaged. Debit – provision for depreciation for asset Credit – asset disposal a/c With the total depreciation provided to date. Credit – asset disposal a/c With the total depreciation provided to date on the asset. Credit – asset disposal a/c With the cash received on disposal. When the asset is sold. Credit – asset disposal a/c If the asset is not used anymore or scrapped by the firm. If it was insured and the insurance company accept liability but by the end of the period the insurance company has not yet paid. (b) Debit – provision for depreciation of asset a/c. If the insurance pays before the end of the financial period. the following entries will be made: (a) Debit – asset disposal a/c Credit – asset a/c With the cost of the asset being disposed. (b) Debit – provision for depreciation of asset a/c Credit – asset disposal a/c (c) Debit – insurance receivable a/c Credit – asset disposal a/c With the amount expected from the insurance. it will not be necessary to create an insurance debtor so the following entries will be made: Debit – cashbook. Debit – asset disposal a/c Credit – asset a/c With the cost of the asset no longer in use. the appropriate entries should be made in the asset account and the total depreciation provided to date on the asset and the entries required will depend on the type of disposal. When an asset is written off as a result of damage/accident/theft. (c) Debit – cashbook. the appropriate entries will be made in the asset account and provision for depreciation a/c only.

The entry will be: Debit – asset disposal a/c Credit – P&L a/c With the balance in the account.100 1. A credit balance represents a profit on disposal.100 £ £ 800 300 Bal b/d Disposals Cashbook 1. which is reported in the profit and loss a/c together with other incomes.500 ===== ==== Motor Vehicle Disposal a/c Motor vehicle P&L a/c £ 1.148 Accounting Theory The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. The supplier of the new vehicle agree with the firm that the old motor vehicle is worth £300.000 Provision for depreciation 100 Motor vehicle 1. 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.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 £500.000 Motor vehicle disposal 300 200 Bal c/d 500 1.000 Credit – motor vehicles a/c (Motor vehicle being traded in now transferred to disposal a/c) Debit – Provision for depreciation – motor vehicles Credit – Motor vehicle disposal a/c (Total depreciation provided for motor vehicle) Debit – Motor vehicle a/c Credit – Asset disposal a/c . therefore the difference will be paid by cash.15 A firm has a motor vehicle costing £1.000 JOURNAL ENTRIES £ 1.Cashbook (New motor vehicle acquired by trade-in value of £300 and cheque payment of £200) Debit – Asset disposal a/c 500 800 800 300 200 100 . Example 4. Motor vehicle a/c £ £ 1.000 Debit – motor vehicles disposal 1.500 1.

500 1. Debit – P&L a/c Credit – asset disposal a/c 100 If the firm trades in an old asset for a new one. 2000.050 2002 £ 900 600 1. 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.500 2001 1/1 Bal b/d 1/7 Cashbook 2.16 A company depreciates its plant at the rate of 20 per cent per annum.e.500 £ 1. Debit – asset a/c (value of the new asset) Credit – cashbook (cash paid as difference of new value i.050 £ . Example 1999 1/1 Cashbook 1/10 Cashbook 2000 1/1 Bal b/d 1. Bought plant costing £600 on 1 October. From the following details draw up the plant account and the provision for depreciation account for each of the years 1999. 2001 and 2002.050 2002 2001 1.500 550 31/12 2. 2001 Bought plant costing £550 on 1 July.500 £ Plant a/c 1999 31/12 Bal c/d 2000 1. 2002 Sold plant which had been bought for £900 on 1 January 1999 for the sum of £275 on 30 September 2002. for each month of ownership. straight line method. trade in value of old asset) Asset disposal a/c (with trade-in value of old asset) Example 4.500 £ 31/12 Bal c/d £ Bal c/d 2. the following entries will be made in addition to the movements in the asset and depreciation a/c. 1999 Bought plant costing £900 on 1 January.Lesson Three 149 Credit – P&L (Profit made on disposal) In case of a loss.

050 2.500 12 20/100 x 1.230 Calculation for Depreciation Date 1999 1/1 1/10 2000 1/1 300 2001 Cost 900 600 12 3 Months Depreciation charge 20/100 x 900 x 12/12 20/100 x 600 x 3/12 = = 210 = £ 180 30 2002 1/1 555 Bal c/d 510 2001 1/1 865 Bal b/d P&L 865 Bal b/d P&L 365 1.050 Bal c/d Plant Provision for Depreciation a/c 1999 31/12 2000 31/12 2001 31/12 2002 31/12 Bal c/d 865 Disposals Bal c/d 675 1.050 31/12 30/9 Disposal 1.230 865 £ Bal c/d 1999 210 31/12 2000 1/1 510 P&L £ 210 210 300 510 510 355 Bal b/d P&L 1.150 Accounting Theory 1/1 900 Bal b/d 2.150 2.500 x 12/12 .

000 for which it expects to use for the next 10 years.Lesson Three 151 1/1 300 1/2 55 1. When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation to be charged in the Profit and loss account .17 A firm buys a machine for £100.500 550 12 6 20/100 x 1.IAS 16 requires that depreciation should be based on the remaining net book value at the start of the period.695 595 CHANGE OF DEPRECIATION POLICY A firm may change its depreciation policy in several ways e.500 2. This change should be disclosed in the financial statements.g. or it may increase/decrease the number of estimated useful years of an asset. Example 4.500 1. from straight line to reducing balance or vice versa.050 1.5% .290 990 1. year. The firm depreciates the machines on a straight-line basis on the years of the number of estimated useful years. In the 4th year. A firm should always follow the depreciation policy adopted consistently and incase there is need to change the policy may be due to a new accounting standard or change in circumstances.150 Total Depreciation (210) (510) (865) (555) NBV 1. Required: Show the charge in the provision for depreciation a/c and the balance carried down for year 4.500 x 12/12 20/100 x 550 x 6/12 = = 355 2002 30/9 31/12 31/12 900 550 600 9 12 12 20/100 x 900 x 9/12 20/100 x 550 x 12/12 20/100 x 600 x 12/12 = = = 365 135 110 120 2002 Plant a/c P&L £ 900 50 950 Plant Disposal a/c 2002 £ 30/9 Provision for depreciation 675 30/9 Cashbook 275 950 Balance Sheet (Extract) Non Current Assets 1999 Plant 2000 Plant 2001 Plant 2002 Plant Cost 1. Change for 10yr – 8 yr is same as change from 10% to 12. the estimated useful life of the machine is now reduced to 8 years.

152 Accounting Theory .

000 Bal c/d 10.000 Year 3 1/1 30.000 20.000 = 14.000.Lesson Three 153 Provision for Depreciation Year 1 31/12 Year 2 31/12 Year 3 31/12 Bal c/d 10.000 Bal b/d P&L £ 31/12 P&L Bal b/d P&L 10.000 20.000 (100.000 Workings: The net book value at the beginning of Year 4 is £ 70.000 Year 2 1/1 20.3 years).000 P&L 30.000 Bal b/d 31/12 20.000). Required: Show the provision of depreciation account in year 4 .000 14. And the remaining useful life is 5 (8 years.000 30.000 Year 4 31/12 Bal c/d Year 4 1/1 31/12 44. 5 Assuming that in this example the life of the machine does not decrease but increases from 10 years to 13 years.000 £ Year 1 10.000 44.000. The charge for year 4 for depreciation will be £ 70.000 Bal c/d 10.000 44.000 30.30.

000 Year 3 31/12 Bal c/d 20. Land is not depreciated.000.000 .000 Year 3 1/1 Bal b/d P&L 30. but for buildings.g.000 Year 4 30.000 _____ 30.000 20.000 31/12 P&L 37.000 30. land and buildings.000 Year 2 1/1 20. IAS 16 on property.000 Year 1 10. and therefore the adjustments required are minimal.000 31/12 7.000 10.18 A firm has the following assets as part of the non-current assets: Asset (a) Land Cost Depreciation - £1.000 37.000 20.154 Accounting Theory Provision for Depreciation Year 1 31/12 £ Bal c/d 10.000 Bal c/d Year 4 1/1 Bal b/d 37.000 £ 31/12 P&L Year 2 31/12 Bal c/d 10.000 REVALUATION OF NON CURRENT ASSETS Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.000 Bal b/d P&L 10. changes should be made at the cost and depreciation reserve account is usually opened for the purpose of these adjustments. Example 4. plant and equipment requires that such assets may be carried in the accounts at the revalued amounts (may be based on the their market price).

£ 200.200.000 100.£100.000 1.000 Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c The ledger a/c will be as follows: Land a/c £ Bal B/D Revaluation reserve 1.200.00 Buildings -£ 900.000 Bal C/D 900.£ 200.£100.000 900.000 Illustration 1 The firm decides to revalue these two assets to reflect their current market prices and these are revalued at: Land -£ 1.000 (Revaluation gain on buildings ⇒ 900.2000.000 900.000 __200.Lesson Three 155 (b) Buildings £800.200.000 – 1.000 £ .000 Credit – Revaluation Reserve a/c with the same .000 40.000.000) (b) Debit – Building a/c with revaluation gain .000 (Revaluation gain on the land ⇒ 1.000 – 800.000.000) (c) Debit – Provision for depreciation for buildings a/c with £ 40.200.000 The following entries would be made (a) Debit – Land A/c – with revaluation gain .000 £ Bal C/D 1.000 Credit – Revaluation Reserve a/c with the same .000 Buildings a/c £ Bal B/D Revaluation reserve 800.000 1.000 Credit – Revaluation Reserve a/c with the same £ 40.

000 Any depreciation to be charged for the buildings should be based on the revalued amount (900.000 45.000 900.000 40. The Ledger accounts will be as follows: Land Year 3 £ Year 3 £ . £ 200.000.000 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.156 Accounting Theory Revaluation Reserve a/c £ Land Buildings Bal C/D 340.200.000) If we assume depreciation of 5% for buildings.000 = 200.000 45.000 = 140.000 – 760.000 340.000 charged in the P & L and will also be the Bal c/d in the provision for depreciation a/c.000 85. we shall have £45.000 340.000 Bal B/D P&L £ 40.000 85.000 – 1.000 Provision for depreciation (Buildings) £ Revaluation Bal c/d 40.000 Buildings: £700. Assume again that the firm decides to revalue its non-current assets or land and buildings downwards in year 3 to the following values: Land : £900.000 Provision for depr.000 100.000 340. Land Buildings 1.000 These amounts are to be reflected in the accounts for year 3.

In the same year the firm purchased two vehicles.000 Year 3 1/1/ Bal B/D £ 340. £ 200.000 ________ Bal C/D __900. The insurance company paid the firm Sh.000. For depr.000 100.000 Bal C/D £ 100.200.000 1.000 1.200. 000 respectively earlier in the year.000 900.000 31/12 Revaluation 200.000 Exam Type Question 4.000 . 000.000 Revaluation Reserve Year 3 31/12 Land 31/12 Building 31/12 Prov.720. In November 1993 vehicle KC was sold for Sh. which had been purchased forSh.000 700.200.19 (December 1995 ) Question 4 James Mbuvi started a taxi business in Nairobi March 1990 under the firm name Mbuvi Taxis. 000 each.716.Lesson Three 157 1/1 Bal B/D 1.000 P&L 100.000 Buildings Year 3 1/1 Bal B/D £ 900. 000 for the vehicle. In January 1994 vehicle KE was purchased for Shs.560. and Sh. 000.000 _40.000 100.800. In February 1992 vehicle KB was involved in an accident and was written off. In March 1994 another vehicle KF was purchased _______ 340.840.000 Year 3 31/12 Revaluation P&L _______ 900.000 340. KC and KD for Sh.160. The firm had two vehicles KA and KB.

280.280.000 840.000 2.000 800.280.960.00 0 1991 560.000 800. The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of the year irrespective of the date of purchase.00 0 540.000 1.160.000 720000 1.00 0 650.000 720. (5 marks) (Total: 20 marks) a Vehicle KA KB KC KD KE KF Total cost Depreciation at 25% 1990 560.280.00 0 320.158 Accounting Theory for Sh.00 0 340.360. 000.000 . (7 marks) b) Prepare the motor vehicle account (at cost).00 0 1994 Motor Vehicle 1990 1/3 Cashbook Sh 1.00 0 800.000 800.000 1.600. Required: a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years.000 960.00 0 320.00 0 1990 31/12 Bal c/d Sh 1. (8 marks) c) Calculate the profit and loss on disposal of each of the vehicles disposed of by the company. Depreciation is not provided for vehicle disposed of during the year.000 2. The firm’s year ends on 31 December.00 0 1993 560.00 0 1992 560.

360.160.880.360.000 3.280.00 0 840.00 0 2.000 960.160.000 2.000 .00 0 1.160.160.000 31/12 Bal c/d 3.160.280.000 1993 1/11 31/12 Disposal Bal c/d 800.880.000 2.600.000 1994 Bal c/d 1.00 0 1994 1/1 1/1 1/3 Bal b/d Cashbook Cashbook 1.000 2.160.00 0 1991 31/12 1992 1/2 31/12 Disposal Bal c/d 720.00 0 ________ 2.Lesson Three 159 1991 1/1 1992 1/1 bal b/d Cashbook 1.00 0 1993 1/1 Bal b/d 2.000 3.160.00 Bal b/d 1.000 1.280.

= 25% x 2. So depreciation .000 960.160.000 1.000 650.600.610.610.00 0 1.so no depreciation is charged for that asset.160 Accounting Theory Provision For Depreciation – M/V 1990 31/12 1991 1992 31/12 1992 1/2 Disposal 360.000 640.000 1993 1/11 31/12 Disposal Bal c/ 200.000 Exam type Question Pentland Limited complies its financial statements for the year to 30 June each year.000 340.180.000 1994 31/1 Bal b/d P&L 960.1 60.00 0 1993 1/1 31/12 Bal b/d P&L 820.00 0 1994 31/12 Bal c/d 1.000 = 650.000 640.000 1. At 1 July 1999 the company’s balance sheet included the following figures: .000 31/12 Bal c/d 820.000 Note: KA is fully depreciated by 1994.000 1.000 31/12 P& L 320.000 1990 31/12 1991 1/1 Bal b/d 320.000 1.000 1992 1/1 Bal b/d 640.000 Bal c/d 640. Cost still remains until the asset is disposed.00 0 3/12 P&L 540.610.180.000 1.000 P&L Sh 320.000 Balc/d Sh 320.

000 2. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999 of £10.400 1. at an agreed value of £12.000. which had cost £20.000 was sold for £50. I January 2000 The company decided to adopt a policy of revaluing its buildings. 3.4m.000.000 Required: Prepare ledger accounts to record these transactions in the records of Pentland Limited.000 400 Depreciation is charged at the following annual rates (all straight line): Land Buildings Motor vehicles Nil 2% 15% 20% Plant and machinery Appropriate depreciation charge is made in the year of purchase. sale or revaluation of an asset During the year ended 30 June 2000 the following transactions took place: 1.000.000 was paid in cash. (16 marks) . and they were revalued to £3. the balance of £18.000 1. 1 April 2000 A new motor vehicle was purchased for £30.000. 1 January 2000 Plant which has cost £300.New plant was purchased at a cost of £400. part of the purchase price was settled by part exchanging another motor vehicle. Accumulated depreciation on this plant at 30 June 1999 amounted to £230.Lesson Three 161 l Accumulate d Cost £000 Land Buildings Plant and machinery Motor vehicles 4. 4.000.600 600 Depreciatio n £000 Nil 800 600 200 Net book Value £000 4.000. 2.200 1.

200 822 2.200 5.400 2000 30/6 Bal C/D Revaluation Reserve £ 2000 1/1 Buildings 2.400 3.162 Accounting Theory Land 1999 1/7 2000 1/1 Revaluation 5.022 1999 2000 1/1 Provision for Depreciation .200 2000 1.Building £ 1999 £ 1/7 Bal b/d 800 Revaluation 2000 82 30/6 2 34 _ 85 6 P&L 2.000 2000 1.200 x ½ x 15 3. 2.022 £ 1.022 1/1 Provision for depr.200 30/6 3.200 Bal b/d £ 1999 4.400 Bal c/d £ 3.200 30/6 Bal c/d 5.400 x ½ x 15 30/6 Bal c/d 56_ 856 1999 Plant £ 1999 £ .200 £ 1999 1/7 2000 1/1 Bal b/d Revaluation Buildings £ 1999 2.

50 P&L Bal C/D 2000 1/1 Plant Plant . 5 1/4 Motor Vehicle 25 Provision for depreciation .Plant £ 1999 1/7 Bal b/d Disposal Bal c/d 2000 252.5 ______ 320.50 P&L £ 600 247.50 £ 252.700 2.50 1/7 1999 Bal b/d 2000 Disposal Cash book Motor Vehicles £ 1999 600 2000 Disposal Bal C/D £ 1/4 1/4 12 18 630 1/4 30/6 20 610 630 2000 1/4 Motor Vehicle P&L Motor Vehicle Disposal £ 2000 20 1/4 Provision for depr.000 Disposal Bal c/d 300 1.5 30/6 320.600 2000 400 1/1 _____ 30/6 2.50 Disposal Bal c/d 2000 13 1/4 307.Lesson Three 163 1/7 2000 1/1 Bal B/D Cashbook 1.Vehicle £ 1999 1/7 Bal b/d £ 13 12 25 1999 2000 1/4 30/6 £ 200 120.000 1999 2000 1/1 Provision for Depreciation .50 30/6 595.50 847.Disposal £ 2000 300 1/1 Provision for .00 847.

Plant and Equipment Schedule (Formerly fixed asset movement schedule) The property.50 Cash book 25 50___ 302.164 Accounting Theory P&L depr.50 Property. plant and equipment schedule is a summary report on the balances and transactions of the asset and provision for depreciation account as per the requirements of IAS 16 to be reported in the published accounts of companies. The format is as follows: . 2.

g. This is a reclassification from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the long lease class and on addition in the short lease class Exam Type Questions May 2000 Question Three a) Briefly explain the nature and purpose of accounting for depreciation.Lesson Three 165 Cost/ Valuation Property. Furniture And fittings (£) x xx (xx) xx Total (£) x xx xx (xx) xx 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.) some of the properties hold under long leases (over 50 years) will be transferred to the short leases classes when their term becomes less than 50 years. Plant and Equipment Schedule: Freehold Leasehold Property Plant and property (£) Long leases (£) x xx (xx) (xx) xx Short lease (£) x xx xx (xx) xx Machiner y (£) x xx (xx) xx Fixture. V as at 31/12/01 NBV as at 31/12/01 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 Additional information is in this schedule called reclassifications where some of the non-current assets are transferred into a different class.B. (e. .

He has decided to seek your professional advice and presented the following balances of fixed assets as at 1 May 1999: .166 Accounting Theory b) The chief accountant of Jitegemea Ltd has encountered difficulties while accounting for fixed assets and the related depreciation in the company’s draft accounts for the year ended 30 April 2000.

5.000 Required: A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company’s accounts for the year ended 30 April 2000.925. 900.000 Accumulated Depreciation Sh. 3.500 was sold for sh.750.000 was paid to have the assets revalued by a professionally qualified valuer. IAS 16 on property plant and equipment defines depreciation as allocation of a depreciable amount of a non-current asset throughout its useful life. Sh.387. The revaluation indicated the following market values. 6.Lesson Three 167 Acquisition Cost Sh. Land. then the loss of value should be marched with these revenues.250 was traded in during the year at a value of sh.90.000 4.15. A three year old machine acquired for sh. Depreciation is fully charged in the year of acquisition and none in the year of disposal. 300.775. 2.000 2.000.157.5 25 10 Nil 2.470. It is the company’s policy to write off cost of the assets using above percentages on cost. buildings and machinery were acquired for sh.000 Machinery 300. At the time of acquisition sh. 4. all revenues should be matched with all the expenses that relate to a particular financial period and therefore because the firm to earn revenue or income uses the assets.000 7.500 in part exchange of the new delivery truck costing sh. . Land 900.525. (10 marks) (Total: 15 marks) SOLUTION Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm.000 1.350.500 Furniture Trucks Plant and machinery Land Buildings Depreciatio n Rates % 12.1. Under the matching concept. A used delivery truck purchased three years ago for sh. A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.000 from a company that went out of business.000 3.000 Buildings 600.248.500 2.462.5 The following additional information was also available: 1.450.500 292. It has been decided to adjust and charge depreciation on buildings at 4%.187.

562.000 450.449.000 Depreciation Bal as at 1/5/99 Charge for the year Eliminated on disposal Bal as at 30/4/2000 NBV 1/5/99 NBV 30/4/2000 4.000 1.000 x 2.474.000 1.000 x 12.000 – (187.700.000 900. 8 Workings: Depreciation on Furniture = 900.750 6.000 x 10% = 750.500.5 (124.500) 5.055.687.350.500 1.000 .750 1.750) 19.000 3.784.5 = (292.062.5% x 4 = 292.525.750 x 25% = 931.500 600. 5 2.187.000 00 Additions 1.800.5 (161.500 8. Furniture Buildings And Machinery Sh.000 (248. Plant & Equipment Schedule: Cost/Valuation Land.000 Add 450.500 Motor Total Sh.470.500 = 292.000 2.987.5 10.168 Accounting Theory Property.625) 8.525.512.225. 17.500 10852.500 x 4% x 4 = 468.277.500 Buildings At 2.726.726.500 + 600.5% = 112.000 Disposals (187500) _____Bal as at 30/4/2000 14.500 -______ 412. 5 Sh.000 175.066.500 Motor vehicle = cost 3.000 = 2.000) x 4% = 141.110.687.5% 4% Machinery: cost c/f + Additions – Disposals = Bal x 10% 73.000 Revaluation 450.000 487.755.332. 3.687.687.000 300.787. Sh.000 450.250) 3.125) 2. Bal as at 1/5/99 13.000 112.925.916.000 931.326.5 900.000 8.087.000 (435.500 + 300.500) = 7.500 (37.

During the month. was mistakenly treated as a payment to a supplier.192 103. 3. A purchases invoice for £1. Bad debts totaling £1.386 have been omitted from the records. 4. and there are also several adjustments to be made. 6.000 on 26 September. B Jones.288 2. 7. A payment of £2. No entry has yet been made for this.360 are to be written off.130 to a supplier.370 520 Although the control accounts agree with the underlying ledgers. a number of errors have been found. settlement was reached with a supplier over a disputed account.Lesson Three 169 REINFORCING QUESTIONS QUESTION ONE Otter Limited operates a computerized accounting system for its sales and purchases ledgers. 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. A Smith Limited.194 158.430 190 163. A cash refund of £350 paid to a customer. As a result. Four sales invoices totaling £1. was mistakenly entered to the account of R Jones. 5. A Smith. 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 Credit Sales Cash received Discounts allowed Sales returns inwards Credit balances at 30 September 1999 Purchases ledger: Balances at 1 September 1999: Credit Debit Purchases Cash payments Discounts received Purchases returns outwards Debit balances at 30 September 1999 386. These errors and adjustments are detailed below: 1. the supplier issued a credit note for £2.395 was keyed in as £1.359. 2.740 520 98.040 990 1.160 590 370 184. .

Discounts received of £50 had been debited to Bell’s sales ledger account. In preparing the accounts for the year to 31 October 20X3 the accountant discovers that the total of all the personal accounts in the sales ledger amounts to £12. Cash received of £250 had been debited to a personal account. but no adjustment had been made in the control account. QUESTION THREE George had completed his financial statements for the year ended 31 March 1999.Cash received of £80 had been credited to a personal account as £8.208. 9. the following errors were discovered: 1. Sales for the week ending 27 March 20X3 amounting to £850 had been omitted from the control account. A contra item of £400 with the purchase ledger had not been entered in the control account. bringing down the amended balance as at 1 November 20X3. 7. Cash received of £750 had been entered in a personal account as £570. whereas the balance on the sales ledger control account is £12. A debtor’s account balance of £300 had not been included in the list of balances. for the errors and adjustments listed. Discounts allowed totaling £100 had not been entered in the control account. A bad debt of £500 had not been entered in the control account. Required: Prepare a corrected sales ledger control account. In order to control its debtor collection system. 4. Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended sales ledger control account balance.Returns inwards valued at £200 had not been included in the control account. the company maintains a sales ledger control account. Upon investigating the matter. Required: Prepare the sales ledger and purchases ledger control accounts as they should appear after allowing. 10. The supplier concerned cannot now be traced and it has been decided to write off this balance. which showed a profit of £81. 8. when he realized that no bank reconciliation statement had been prepared at that date. 3.A cheque for £300 received from a customer had been dishonored by the bank.170 Accounting Theory 8.550. 5. 6.802. A personal account balance had been undercast by £200. QUESTION TWO April showers sells goods on credit to most of its customers. . 11. 2. 12. where necessary. A debit balance of £420 existed in the purchases ledger at the end of August 1999.

4. Prepare a bank reconciliation statement as at 31 March 1999. The cashbook showed a debit balance of £4. with a full year’s charge calculated on the balance at the end of each year. George had instructed his bank to credit the interest of £160 on the deposit account maintained for surplus business funds to the current account.000. using a cheque drawn on George’s personal bank account.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. Prepare an adjusted cash book showing the revised balance which should appear in George’s balance sheet at 31 March 1999. (8 marks) . a trade supplier. 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.890 before any correcting entries had been made. The total of the payments side of the cash book had been understated by £1. 2. 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. to clear his account in the purchases ledger. Depreciation at 25% per annum (straight line) is charged on motor vehicles. No entries have yet been made for this transaction. Cheques from customers totaling £2. On further investigation it was found that the debit side of the purchases account had also been understated by £1. George had also mistakenly paid £540 to Paul. A cheque for £1.000 had been entered in the cashbook but had not yet been presented. A cheque for £12. George had mistakenly paid an account for £870 for repairs to his house with a cheque drawn on the business account. A cheque for £2. 5. Required: 1.890 entered in the cashbook on 31 March 1999 were credited by the bank on 1 April 1999.Lesson Three 171 When checking the cashbook against the bank statement and carrying out other checks.900. (6 marks) 2. Draw up a statement for George showing the effect on his profit of the adjustments necessary to correct the errors found. Bank charges of £320 appear in the bank statement on 30 March 1999 but have not been recoded by George. 7. 3. Depreciation of £290 had been charged in the profit and loss account for this plant.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. The balance in the bank statement is to be derived in your answer. he found the following: 1. The entry in the cashbook had been debited to repairs to premises account. 6. This the bank had done on 28 March. (2 marks) 3.000.

• Goods destroyed by fire amounting to Sh 12. (8 marks) The trial balance of S Juma. (4 marks) QUESTION FOUR 1.814 4. 64.000 . Required: 1. During audit.154 36. did not balance on 30 April 1995. a sole trader. Narratives are required. Name and explain four types of errors which are not disclosed by the trial balance. • Discount allowed of Sh 500 was entered in the discount-received account. Prepare journal entries to correct items (9) and (10). a sole trader. 4. the following errors were noted: • A loan from ABD Bank of Sh 10. Statement of corrected profit.500. • Prepaid insurance of Sh 220 had been included in the profit and loss account.307 820 965 25.000 £ 40. 3. The difference was put in the suspense account.246 4. • Closing stock was overvalued by Sh 1.000 was entered correctly in cash book but was not posted to the ledger.000 were written off in the profit and loss account. The final accounts which were then prepared showed a net profit of Sh.000.000 for rent was not entered in the books. • The opening stock was understated by Sh 3. the insurance company has agreed to compensate the full amount.172 Accounting Theory 4. However. • A cheque of Sh. Suspense account. Journal entries to correct the errors. on 31st December 2002: £ Capital Purchases Sales Salaries Opening stock Insurance Rent Buildings 26.200. 2. (8 marks) (2 marks) (2 marks) (Total: 20 marks) QUESTION FIVE The following Trial Balance was taken from the ledger of P Spike.

3.285. £350 Insurance was paid for one year up to 31st March 19-2.0 00 5. The balances and transactions relating to the company’s control accounts for the month of December 1994 are listed below: Balance at 1 December 1994: Sales ledger Purchases ledger Transactions during December 1994: Sales on credit Purchases on credit Returns inwards Returns outwards 6. 4.060 _____ 82.50 0 284.687. 2. Furniture to be depreciated by 10%. Commission accrued but not yet received.0 00 8.0 00 52.500 6.638 __946 82. 6. £165.500 4.5 00 203.795 Salaries due.452. 14.795 4.Lesson Three 173 Furniture Debtors Other expenses Creditors Commission Adjustments: 1.185.500 16. Required: Prepare a 10 column worksheet. 5. 7. Stock on 31st December 19-1 was valued at £5. QUESTION SIX 1. £120. Explain the purposes for which control accounts are prepared in a business organization. 5% of debtors are doubtful. Rent received for January 19-2.008. (3 marks) XML Ltd maintains control accounts in its business records.00 0 (debit) (credit) (debit) (credit) .140 1.

500 302.732.00 0 88.00 0 615.500 44.500 400.00 0 10.00 0 7.000 153. (17 marks) CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK .00 0 64.0 00 4.985.174 Accounting Theory 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 Bill receivable dishonoured Balances at 31 December 1994: Sales ledger Purchases ledger Required: 930.0 00 88.500 (debit) 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 1994.000 (credit) 23.

There are two main types of control accounts: (i) Sales ledger control Account – also called total debtors. By control we mean that the total on the control accounts should be the same as the totals on the ledger accounts.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. The balance on the sales ledger control account should be the same as the total of the balances in the sale ledger. (ii) Example (Sales Ledger Control a/c) Sales Ledger Control A/c Sales 1400 CashBook Bal C/D 1400 700 700 1400 Sales = 200 + 300 + 400 + 500 Cashbook = 50 + 100 + 250 + 300 Balance c/d = 150 + 150 + 200 SALES LEDGER Debtor A a/c Sales 200 C/B Bal c/d 200 Debtor B a/c Sales 400 C/B Bal c/d 400 Debtor C a/c Sales 300 C/B Bal c/d 100 200 250 150 400 50 150 200 .Acknowledgement 175 LESSON FIVE FURTHER ADJUSTMNETS TO ACCOUNTS (a) CONTROL ACCOUNTS Control accounts are so called because they control a section of the ledgers. Purchases Ledger Control Account – also called total creditors .

176 Adjustment to Final Accounts 300 300 .

Lesson Four 177 Debtor D a/c Sales 500 C/B Bal c/d 500 300 200 500 Example: Purchases Ledger Control a/c Purchases Ledger Control a/c C/B Bal c/d 1900 Purcha ses 700 2600 2600 2600 PURCHASES LEDGER Creditor A C/B Bal c/d 400 Purcha ses 200 600 Creditor B C/B Bal c/d 450 Purchas es 250 700 Creditor C C/B Bal c/d 350 Purchas es 150 500 Creditor D C/B Bal c/d 700 Purchas es 100 800 800 800 500 500 700 700 600 600 .

Total credit balances of the sales Ledger carried forward Refunds to Customers Sometimes a firm can refund some cash on the customers account. Total credit balances of the sales ledger brought forward 2. Dishonored cheques (from cashbook) 5. Total returns-inwards (returns-inwards journal) 5. Cash received from bad debtors recovered (cash book) 8. The entry will be: Dr. Refunds to customers (from cashbook) 4.Total debit balance carried down to the next period – to be derived after posting all those transactions 6.) 2. Total credit sales for the period (from the sales journal) 3. To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors. 4. Balance b/d of the total debit balances from previous period 2. Purchases Ledger contra 9. To facilitate delegation of duties among the debtors and creditors clerks. Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger. Bad debtors written-off (from general journal) 7.178 Adjustment to Final Accounts Purpose of Control Accounts 1. This takes place when there is a credit balance on the debtor’s a/c and the customer is not a creditor too. To detect and prevent errors and frauds in the customers and suppliers account. Debtor’s a/c . Allowances to customers (price reduction in excess to discounts allowed) 10. 3. Bad debts recovered (from general journal) 1. Total cash discount allowed to customers (from cash book) 6. Total cash received from credit customers/debtors (from cash book) 3. FORMAT OF A SALES LEDGER CONTROL Sales Ledger Control a/c 1. Total cheques received from credit customers/debtors (from cash book) 4.

this information will be shown in the control a/cs as total balance c/f (debit side). then it’s carried forward to the next period then is a credit balance in the customer’s a/c. then the credit balance is transferred from their creditors a/c to their debtors a/c as a contra entry. Total credit balance brought purchases ledger brought forward (of purchases ledger forward from previous period from the previous period) Total cash paid to creditors 2. 3. 2. Therefore. Purchases Ledger Control A/C Total debit balances from 1. Sales (Refunds) C/B Contra against the purchases ledger balances: Some debtors may also be creditors in the same firm and therefore. 4. if a firm has several customer. Total credit purchases for the (from cash book) period (from purchases journal) Total cheques paid to creditors 3. Refunds from suppliers (from cash book) (from cash book) Total cash discounts received . Cashbook Example: Debtor A £ £ 1000 Cashbook 950 100 Discounts 50 Returns 100 1100 1100 If the firm has not paid this amount owed to the customer. if the amount due to them as creditors is less than what they owe as debtors. Example: Debtor (A) Sales 2000 Contrapurchases Bal c/d 2000 Creditor (A) Contra Debtor 1000 Purchases 1000 1000 1000 1100 FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT 1.Lesson Four 179 Cr.

180 Adjustment to Final Accounts (from cash book) 5.650 8. 2003 June 1 Purchases ledger balances Totals for June: Purchases journal Returns outwards journal Cheques paid to suppliers Discounts received from suppliers Purchases ledger balances £ 36. Total debit balances (of the purchases ledger carried forward) 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. increase or decrease in provisions for doubtful debts will not affect this account. 2) Only cash discounts (allowable & receivables) should be included. 5) Interest due that is charged on over due customers’ account may also be shown on the debit side of the sales ledger control. Trade discounts should NOT be included. However when trying to determine the turnover under incomplete records then it is wise to omit it. Example 5. i. 4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. Sales ledger contra 7.980 387. Total returns outwards (from returns-outwards journal) 8. The balance of the account is to be taken as the amount of creditors as on 30 June. However in some cases it can be included especially where there are incomplete records (Topic to be covered later).760 . Allowances by suppliers 6. 3) Provision for doubtful debts is NOT included in the sales ledger control a/c.1 You are required to prepare a purchases ledger control account from the following for the month of June.980 Bal b/d (1/6) 36.870 ? June 30 Solution 2003 Returns out Purchases Ledger Control A/C £ 2003 £ 10.760 422. Total credit balance (to be derived after posting entries) 4.e.570 10.

330 Example 5.830 Purchases 459.0 00 500 31/5 192.Lesson Four 181 Bank Discounts received Bal c/d (30/6) 387.200 128.70 0 31/5 Bal c/d .7 00 Ledger Control A/C Cash book Discounts allowed Purchases contra Bal c/d £ 103.950 1.700 3.570 459.450 ? 500 May 31 Solution 2003 1/5 Bal b/d Sales Sales £ 2003 64.20 0 128.870 51.000 103.95 0 8.33 0 422.450 83.2 Prepare a sales ledger control account from the following: £ 2003 May 1 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 64.70 0 3.950 1.600 192.

123.720.0 00 629.0 00 36.135.00 0 53.105.000 (credit) 67.413.506.00 0 489. (17 marks) (Total: 20 marks) 9.00 0 6.490.3 (Exam type question – November 1997 Question 2) (a) Explain the purposes for which control accounts are prepared.370.000 18.00 0 211.201.000 (debit) (debit) (credit) (credit) (debit) . (3 marks) (b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of November 1997 are listed below:Sh.755.000 27.000 732.182 Adjustment to Final Accounts Example 5.0 00 1.0 00 3.000 4.000 4. Balances on 1 November 1997: Sales ledger Purchases ledger Transactions during November 1997: Purchases on credit Allowances from suppliers Receipts from customers by cheques Sale on credit Discount received Payments to creditors by cheques Contra settlements Bills of exchange receivable Allowances to customers Customers cheques dishonored Cash received from credit customers Refunds to customers for overpayments Discounts allowed Balances on 30 November 1997 Sales ledger Purchases ledger 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 1997.000 136.00 0 15.046.00 0 88.00 0 1.

) To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors. To facilitate delegation of duties among the debtors and creditors clerks. .Lesson Four 183 (a) i) ii) iii) iv) Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger. To detect and prevent errors and frauds in the customers and suppliers account.

00 0 15.556.000 Example 5.00 1/11 Bal b/d 0 36.413.123.000 2.000 27.135.0 00 Sh 4.201.000 4.046.00 0 Bal b/d Sales Dishonored cheques Refunds to customers 30/1 1 Bal c/d 136.000 53.370.105.000 22.770.692.000 30/1 1 46.000 6.00 30/1 Bal c/d 0 1 22.0 00 199 7 1/11 Bal b/d Allowances from suppliers Discounts received Bank Contra settlement 30/1 1 Bal c/d Purchases Ledger Control A/C Sh 199 7 88.000 720.000 46.490.755.000 67.000 1/11 Bal b/d Purchases 629.0 00 3.000 732.000 1.00 0 3.506.411.000 -Purchases 196.692.00 0 2.000 -Purchases 569.000 ledger .046.4 (Exam Question – May 2000 Question 4) Poesha Limited keeps sales and purchases control accounts in the General Ledger.000 Contra Bills of exchange receivable Allowances Cash Discounts allowed Bal c/d Sh 211.0 Bank 00 489.000 18. The transactions for the month ended 30 April 2000 were as follows: Sh Credit balances on 1 April 2000 -Sales ledger 154.184 Adjustment to Final Accounts Kopesha Ltd 199 7 1/11 Sales Ledger Control A/C Sh 199 7 9.556.000 ledger Debit balances on 1 April 2000 -Sales ledger 956.

000 68. both debit of £400 in debtor’s account and credit of £ 400 in the sales account.000 1. (20 marks) ERRORS ON ACCOUNTS There are two types of errors in accounts: • Errors that don’t affect the trial balance • Errors that affect the trial balance Errors that don’t affect the trial balance The trial balance produced from the accounts appears to be okay/correct. To correct this error.000 234.367. under/over stated.140.000 Required: Sales ledger and purchases ledger control accounts for the month ended 30 April 2000. However.g.000 104. i.994. 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.000 138.e. on taking a close check on the balances and transactions posted.563.000 3.000 4. Example: a credit sale to T Thompson is posted to L Thompson’s .e the debits are the same as the credits.000 231. There are 6 main types of errors that don’t affect the trial balance and these are explained as follows: a) Error of omission Here.Lesson Four 185 Credit balances on 30 April 2000 Debit balances on 30 April 2000 Credit purchases Credit sales Cheques received from debtors Cash received from debtors Cheque payments to creditors Cash payments to creditors Bad debts written off Discounts received Discounts allowed Contra entry to sales ledger from purchases ledger Refunds to debtors Returns outwards Returns inwards -Sales ledger Purchases ledger 178.000 62. a transaction is completely omitted from the accounts and therefore the double entry is not made e.000 189.000 169.e. The effect of the error is understates both the debtors and the sales.000 2.450.000 1. errors may have been made and therefore the balances shown on the trial balance may be incorrect i.000 352. a sales invoice of £400 is not posted in the sales journal therefore no entry is made in the debtor’s account and the sales account i.

Although the debit entry is made into the wrong account.e. the two accounts are of the same class i.g. Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c. To correct this error a transfer is made from L Thompson’s account to T Thompson by: £ (i) (ii) Debit T Thompson a/c Credit L Thompson a/c 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. a debit is posted as a credit and a credit is posted as a debit. (Instead of debiting motor vehicles. Therefore a capital expenditure has been posted as revenue expenditure.e. 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. To correct this error.186 Adjustment to Final Accounts account for an amount of £ 200. and motor vehicles expenses a/c is an expense account. Instead of a debit to T Thompson’s account it is made to L Thompson’s account and the corresponding credit in the sales account is correct. 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) Debit Cash in hand by £150 Credit bank by £150 To correct the error of £ 150 posted in the wrong sides of these account (ii) Debit cash by Credit bank by £150 £150 . 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. debtors. 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.

450: .g. E.890 and another error carried to the trial balance of fixture amounting to £4. To correct this error.e.980 but shown in the trial balance as £3. In some cases.g. hence canceling out each other.e. we will: £ Debit cash book Credit debtors 90 90 f) Compensating Errors These are errors that tend to cancel out each other i.540 instead of £4. it is either under/over stated. the amount understated or overstated is posted to these accounts to reflect the correct balance.Lesson Four 187 To post the entries correctly e) Error of Original entry Here a transaction is posted to the correct accounts but the amount posted is not correct i. In this case. this is known as a transposition error e. cash received from a debtor of £980 is credited/posted to the customer’s account as £890. if the balance c/d of the purchases a/c is £3. 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.

Example 5.188 Adjustment to Final Accounts Purchases £ 3.5 Give the journal entries needed to record the corrections of the following. Goods taken for own use £ 700 had been debited to General Expenses. Narratives are required. a) b) c) d) e) Extra capital of £ 10. f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.450 (4.000 had been credited to Motor Expenses.890 (90) £ 4. A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.540) 90 Fixtures This type of error is corrected by use of a suspense account.000 paid into the bank had been credited to Sales account. Private insurance £ 89 had been debited to Insurance account. Cash banked £ 390 had been credited to the bank column and debited to the cash column in the cashbook.980 3. g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account. . h) A sale of a motor van £ 1.

Lesson Four 189 Solution 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 THE JOURNAL Debit 10.000 700 700 89 89 270 270 390 390 390 390 400 400 168 168 1000 1000 Example 5. as at 31 March 2000 was as follows: .6 (Exam type question – May 200 Question 2) The balance sheet of N Patel. a sole trader.000 Credit 10.

000 in respect of a customer who has gone bankrupt. 2.890 Land and buildings (at valuation) Machinery (at cost) 300 Deduct: depreciation 630 Stock at cost 270 Debtors 3.090 Sh’000 Sh’00 0 1. A more realistic estimate indicates that the life span will be 10 years. 20.190 Adjustment to Final Accounts Sh’000 Capital 1 April 1999 Profit for the year ended 31 March 2000 Deduct: drawings Creditors Bank overdraft Sh’000 1.7.090 450 150 Further investigation reveals the following information: 1. Debtors include Sh. Required: a) Journal entries to correct errors and omissions. amounting Sh 8. a drawing of Sh 100.000 have an estimated sale value of Sh. Charges for the bank overdraft. 10. (8 marks) c) A revised balance sheet as at 31 March 2000. Sh 20.000 paid to Mr. although they had cost Sh. 500.200 750 570 420 450 990 3. 6. In arriving at the profit for the period. (7 marks) (Total: 25 marks) Solution . Patel had been deducted as an expense. 4. The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-line basis over eight years. Patel for the letting of part of his business premises to external party had not been received and no entry had been made in the books in respect of this item. 3.000 have not been reflected in the accounts. 7.500 but this has not been reflected in the accounts. (10 marks) b) A statement of revised profit for the year ended 31 March 2000. 5.000 rent owing to Mr. Wages owing at 31 March 2000 amounted to Sh. A provision for doubtful debts of 2 ½% is also required on the balance of the debtors. The closing stock includes damaged goods which. 9.650 1.

Drawings Profit and loss Drawing to Mr.000 8.000 20.500 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%.Lesson Four 191 a) THE JOURNAL Debit 2.000 150.000 Credit 2.000 20. Patel deducted as an expense.500 8.500 9.000 100.000 100. .500 20.000 10.000 10.000 20.000 150. 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.000 9. Accrued income Profit and loss (rent income) Rent receivable owing not reflected in the accounts.

890.000 .000 (917.000 Less: Stock reduction Bad debts Provision for doubtful debts Accrued expenses Bank charges Net profit (revised) 2.200.000 (50.650.000 Add: Current Assets Stock 567.500 Less Current liabilities Creditors 630.00 Less: Provision for doubtful (10.000 Sh 450.150.500 Debtors 400.000 Machinery 1.000 REVISED BALANCE SHEET AS AT 31 MARCH 2000 Sh Sh Land and buildings 1.850.500 20.000 2.000) 2.500 8.000 (700.000 620.000 9.210.000 1.000 2.000 700.000 170.000 500.000) 2.000 977.500 Bank overdraft 278.000 (250.192 Adjustment to Final Accounts b) STATEMENT OF ADJUSTED NET PROFIT Sh Net profit as per the account Add: Provision for depreciation 50.500) Capital Add Net Profit Less drawings Sh 1.000) 390.000 570.000 Drawings 100.460.000) 570.000 60.000 debts Accrued rent income 20.000 10.000 Accrued income (rent) 20.650.000 Accrued wage expense 9.000 2.210.

e. Example a payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s accounts. 6.e. Transaction is posted on one side of the accounts i.e.e. two debits or two credits. The debits may be more than the credits and vice versa. The difference in the accounts is posted to this account and the entries to correct the accounts are posted here. i.Lesson Four 193 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.e. . 2. The balance may also be brought down as an overdraft instead of a debit balance in the trial balance. To correct the above errors. Example: Total Suspense DR 240 240 CR 200 40 240 Suspense a/c £ Difference as per T/B £ 40 If the credits are more than the debits this is a debit balance and therefore we require an amount to be added to the total of the debits for the two side to be same. This is a credit balance and will be taken to the suspense account on the credit side. Example cash received from a debtor is debited to the cashbook and no other entry is made in the account. 4. 5. 3. debit is not the same as the credit. This debit balance is posted to the debit side of the suspense a/c. A transaction is posted on one side of both the accounts i. instead of a debit in the trial balance. an overdraft. A balance is omitted from the trial balance on the accounts in total. If the debits > credits. Examples include: 1. The balance to be shown on the suspense accounts depends on which side the error is shown on the trial balance.e. no credit entry on the debtor’s a/c. only a debit entry or a credit entry. Error on balances of accounts – i. understatement or overstatement of an account balance due to mathematical errors. A transaction is posted correctly but different amounts i. Example – cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £ 540 in the debtor’s a/c. then an amount is included on the credit side of the trial balance so that the debits = credits. the appropriate or the adjusting entries are made through an account called a suspense account. Example Bal c/d in the cash book for cash at bank of £ 2000 is shown as a credit i. 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.

The sale of a motor vehicle at book value had been credited in error to Sales account £3.500 to J Church had been debited in error to J Chane account. Sales of £2. after checking for all errors that can affect the trial balance. In January 2003 the following errors made in 2003 were found: (i) (ii) (iii) (iv) (v) Sales daybook had been undercast by £1. A suspense account was opened for the difference. Rent account had been undercast by £700.300.194 Adjustment to Final Accounts Total Suspense DR 260 40 300 CR 300 300 Difference as per T/B Suspense a/c £ 40 £ Posting the correct entries should eliminate the balance on the suspense account.000 for the year ended 31 December 2002.600. show the calculations of the corrected net profit Solution Suspense Sales THE JOURNAL £ 1. You are required to: a) Show the journal entries necessary to correct the errors.000. a shortage on the credit side of the trial balance. c) If the net profit had previously been calculated at£79. Discounts received account had been under cast by £3. the suspense a/c has a balance.000 £ . This balance depends on whether it is a credit or debit and whether it is material or not for purposes of proper accounting treatment.7 A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3. b) Draw up the suspense account after the errors described have been corrected.000. In some cases. 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 5.1000 .

500 700 700 3.300) Corrected net profit 78.700 Example 5.000 Rent 4.000 2.Lesson Four 195 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 Suspense a/c £ 1. A trial balance is extracted at the end of each month.300 700 4.000 Discount received 3. This month.000 account Add: Sales 1.000 STATEMENT OF CORRECTED NET PROFIT £ £ Net profit as per 79.600 .536.600 (4.000 3. however.000 3.000 Bal b/d 3. and a profit and loss account and balance sheet are computed. the trial balance did not balance.000 4. the credits exceeding debits by £1.3600 Sales Discount received £ 3.500 2.8 Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books.000 Less: Rent 700 Sales 3. .

accruals by 152 and reduce profits by the same. whereas the correct amount was £8. Increase the cash balance by 731. Smith. the total of which was entered as debtors in the trial balance. An electricity bill in the sum of £152. Mr. Add 1. . A small piece of machinery purchased for £1.00 720. is discovered in a filing tray.536. not yet accrued for. The recipiets’ side of the cashbook had been under cast by £720. His personal account has been credited but the cheque has not yet passed through the cashbook. A credit note for £179 received from a supplier had been posted to the wrong side of his account.00 179. Debtors 00 360.00 179.896.196 Adjustment to Final Accounts Your are asked to help and after inspection of the ledgers discover the following errors: (i) (ii) (iii) (iv) (v) (vi) (vii) A balance of £87 on a debtor’s account has been omitted from the schedule of debtors. The total of one page of the sales daybook had been carried forward as £8. at last paid £731 to clear his account. vi.00 i. iv.200 had been written off to repairs. Reduce the creditors by 358.200 therefore an increase in profits.0 0 Solution Opening balance Sales . ii. whose past debts to the company had been the subject of a provision.under record £ 87.200 to fixed assets and reduce repair costs by 1. Suspense a/c £ 1. iii. v.00 Cashbook under cast Creditors error Creditors (correct) Cashbook: smiths debt paid 1.896. Increase total for debtors by 87.00 731. Increase sales by 360.154.514.00 1.

8.800 debts Discounts received 5.400. On July 2001.054.500 was erroneously credited to the creditor’s account.400 2.000 Provision for doubtful 3.000 Prepayments 10. .548. He placed the difference in a suspense account as shown below: Wanji trial balance as at 31 December 2001 Sh Sh Fixed assets – cost 832.400 depreciation Purchases 733.000 Stocks: 1 January 2001 148.700. On 31 December 2001.400 2.800 Suspense account ________ 369.800 2001 Trade debtors 76.200 Provision for 166. 3.000 Drawings 359. These were debited to purchases account.400 Investigations carried out after preparing the above trial balance detected the following errors: 1.000 Sales 1. 4.200 Accruals 16.600 Capital 1.9 (Exam type question – May 2002 question 1). 2. Due to errors committed by the bookkeeper. Purchases daybook for October 2001 was under cast by Sh 28. 5. a sole trader extracted a trial balance.000.000. A payment of Sh. 6. the trial balance failed to balance by Sh 369.000 31 December 98.548.500 for telephone expenses was debited to telephone account as Sh 5.Lesson Four 197 Example 5.000 Operating expenses 126. 4.043.600 Bank overdraft 15. An amount of Sh 15.400. the business purchased office equipment for Sh 40. The total of the sales daybook for December 2001 was overcast by Sh 25.000 Trade creditors 34.000 Discounts allowed 5. A payment to a creditor by cheque of Sh. an inexperienced bookkeeper working for Wanji. 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.000 received from a debtor was not posted to the debtor’s account from the cashbook.

000 Sales Suspense Office equipment Purchases Provision for depreciation Profit and loss THE JOURNAL Dr 25.800 2.338.000 2. (4 marks) Solution: Adjusted Trial Balance Fixed assets – cost Stock .200 166.000 40.000 148.000 3. (4 marks) (d) The adjusted net profit for the year.338.198 Adjustment to Final Accounts Assume the business had reported a net profit of Sh 85.000 1.000 76.000 10.000 5.700 40.200 _______ 2.000 359.800 before adjusting for the above errors.800 47.000 Sh 34.200 16. (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. Required: (a) The adjusted trial balance and the correct balance of the suspense account.800 5.400 733.000 126.043.600 1.200 Cr 25.000 2.600 15.054.700 .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 Sh 832.

700 Sh 85.700 8.000 Bal b/d Telephone Debtors Discount allowed Discount received Bal c/d STATEMENT OF ADJUSTED NET PROFIT Sh Net profit as per the accounts Add Purchases Telephone expenses Discount allowed + received Less Sales Depreciation Purchases Corrected Net Profit c) 40.000 28.000 STOCK VALUATION (IAS 2 INVENTORIES) .500 900 900 15.000 45.000 28.700 2.000 25.700 Sh 25.500 Purchases 2.500 8.500 8.000 70.700 ______ 70.700) 76.000 15.500 2.800 (55.000 2.500 8.000 900 5.900 131.500 28.000 Creditors 2.500 28.800 1 Jan Sales 900 Creditors 15.000 SUSPENSE ACCOUNT Sh 2001 47.500 2.500 2.500 8.500 2.Lesson Four 199 Creditors Suspense Creditors Suspense Suspense Telephone Suspense Debtor Suspense Discounts allowed Suspense Discounts received Purchases Suspense 2001 1 Jan 8.

000 units .g. stocktaking was carried out and the following units were available: Product A 200. costs of conversion (e. as it does not form part of the double entry. The cost of inventories should include all costs of purchase. At the end of year 2002. work in progress or raw materials available or in the stores/warehouse/saleroom. (Purchase price and other taxes like import duties). The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of units available. Inventories or stock is a sensitive area. Example. shs. direct labour) and other costs incurred in bringing the inventories into their present location and condition (carriage inwards).400 each respectively.200 Adjustment to Final Accounts inventories in a firm includes: (a) Finished goods (assets held for sale) (b) Work in progress (assets still in production for purposes of sale) (c) Raw materials (to be used in production process). In most cases either carrying out stocktaking or checking the stock records that the firm is kept determines the value of stock at the end of the financial period.200. A firm has three products A.000 units Product C 30.000 units Product B 20. B and C whose costs are shs.300 and shs. Stocktaking involves counting the number of units of finished goods.

000 x 200) + (20. then it will fetch an amount below this cost. For those units that the business cannot identify the specific cost due to the number of transactions and changes in the cost price.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.000 x 400) = shs. IAS 2 requires that closing stock should be stated at the lower of cost or net realizable value.58.000 NRV (22-4) 18.000 x300) + (30.000 is damaged. 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. Sh Cost 20.000 after repairs and packaging that will cost Sh 4. Solution: (200. (iii) Last In First Out (LIFO) This method assumes that items of stock which were purchased last are sold first and therefore.000 Repairs 4.000.000 Selling price 22. the closing stock shows items that were bought first. This stock can fetch the firm Sh 22. items left as part of closing stock were purchased recently.Lesson Four 201 Required: Compute the cost of stock to be included in the final accounts. Example: A firm has a closing stock of Sh 300. 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. Net Realizable Value (SP.000 . Required: What value will be attached on this damaged units and the total closing stock for the final accounts purposes. 000. (ii) Weighted Average Cost (AVCO) Under this method.000 (cost) out of which stock valued Sh 20. 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. In some cases.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.

000 – 4.000 and therefore.000.000 of the damaged stock will be included in the final accounts and shown together as Sh 298. The balance of the stock of Sh 280.202 Adjustment to Final Accounts The NRV (22. .000. this damaged unit will be shown as Sh 18.000) is lower than the cost of Sh. 20.000 + 18.

the end of his most recent financial year.440 Carriage inwards 11.887 Sales 259.410 Advertising 5.750 Purchases 135.562 Drawings 18.654 Trade debtors 24.973 Heating and lighting 11.624 Carriage outwards 4. The following list of balances has been extracted from his ledger as at 30 April 19X7. A work sheet has 8-10 columns and the simple headings are as follows: TRIAL BALANC E Dr Cr £ £ ADJUSTMEN T Dr Cr £ £ TRADING ACCOUNT Dr Cr £ £ PROFIT & LOSS ACCOUNT Dr Cr £ £ BALANCE SHEET Assets Liabilities + Capital £ £ Example 5.407 Provision for bad debts 512 Discounts allowed 2.Lesson Four 203 d) WORKSHEETS A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form.440 Stock as at 1 May 19x6 15.306 Discounts received 1.840 Returns out 13.870 Trade creditors 19.074 The following additional information as at 30 April 19X7 is available: .500 Fixtures and fittings – at cost 120.521 Bad debts 2.10 Mr Chai has been trading for some years as a wine merchant.008 Cash in hand 534 Cash at bank 4. stationery and telephone 2. £ Capital 83.980 Salaries and wages 38.680 Returns inwards 5.020 Depreciation 12.010 Postage.830 Rent.740 Provision for depreciation on fixtures and fittings – as at 30 April 19X7 63. rates and insurance 25.

980 38.521 2.008 534 4. rates & insurance Heating & lighting Postage.37 0 2.750 735 Required: MR CHAI Trial Balance WORKSHEET Capital Sales Trade creditors Returns outwards Provision for B debts Discounts allowed Discounts received Purchases Returns Inwards Carriage outwards Drawings Carriage inwards Rent.973 11.440 5.360 6. Heating and lighting is accrued by £1.44 0 1.830 25. The provision for bad debts is to be adjusted so that it is 3% of trade debtors.008 534 4.840 13.8 70 19.980 38.55 5 11. Insurances have been prepaid by £1. 306 £ Cr 83.306 1.83 0 19.410 1.41 8 12.750.87 0 19.887 259.010 2.68 0 5.8 40 13.407 512 2.624 4.6 80 5.562 18.440 .750 135.435.360. Adjustments £ Dr Trading account £ £ Cr Dr Profit & loss Balance a/c sheet £ £ £ £ Cr Dr Cr Dr 259. Rates have been prepaid by £5.410 135.52 1 2.8 87 5. stationery and telephone Advertising Salaries and wages Bad debts Cash in hand Cash at bank £ Dr £ Cr 83.562 18.624 4.204 Adjustment to Final Accounts (a) (b) (c) (d) (e) Stock at the close of business was valued at £17.440 11.40 7 223 2.120.

2 39 291.0 27 122.28 6 17.2 39 291.04.7 50 1.0 27 24.9 89 This marks the end of the session on preparing final accounts with adjustments. Some adjustments will affect the format of final accounts and therefore they will look as follows: .Lesson Four 205 Stock at 1 May 19X6 Trade debtors Fixtures & fittings at cost Provision for depreciation Depreciation 15.28 6 442.19X7 – asset Stocks 30.9 89 24.74 0 63.1 17 192.120 1.7 40 63.36 0 5.75 0 17.074 442.500 120.8 88 15.435 223 25. In the next session we shall prepare the final accounts incorporating these adjustments.120 1.75 0 17.04.75 0 1.50 0 120.9 192.65 4 24.020 12.36 0 5.435 223 122.88 8 25.07 4 Stocks 30.11 7 123.0 20 12. 59 959 Net profit (Balancing figure) Prepare a worksheet for the year to 30 April 19X7 Solution 123.19X7 – Cost of Sales Insurance prepaid Heating and lighting accrued Rates prepaid Provision for bad debts Gross profit (Balancing figure) 17.654 24.

206 Adjustment to Final Accounts FORMAT OF FINAL ACCOUNTS WITH ADJUSTMENTS NAME TRADING. dividends) Profit on XX disposal of noncurrent assets Reduction XX in provision for doubtful debts Reduction XX in . interests. PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC … £ £ £ Sales XX Less (XX) Returns inwards XX Less cost of sales Opening XX stock Purchases XX Add XX carriage in XX Less (XX XX Returns ) out XX Less (XX) (XX) closing stock Gross XX profit Discount XX received Other XX incomes (rent.

Lesson Four 207 provision for discount allowable Interest on overdue debtors balances Less Expenses Bad debts Depreciati on: (eg) Plant 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 charged by creditors Other expenses: Rent Insurance Postage Interest XX XX XX XX XX XX XX XX XX XX XX XX XX XX (XX) .

Non current assets Land Buildings Plant and machinery Fixtures.208 Adjustment to Final Accounts on loan etc NET PROFIT XX BALANCE SHEET AS AT 31 DEC……. furniture and fittings Motor vehicle Current assets Stock Debtors Less provision for doubtful debts £ XX XX XX XX £ (XX) (XX) (XX) £ XX XX XX XX XX XX (XX) XX XX XX XX XX (XX) XX Accrued income Prepaid expenses Cash at bank Cash in hand XX XX XX XX .

Lesson Four 209 Current liabilities Bank overdraft Trade creditors Prepaid income Net current assets Net assets Capital Add net profit Less drawings Non current liabilities Loan XX XX XX (XX) X X XX XX X X XX (XX) XX X X XX Non current liabilities Loan XX Non current liabilities Loan XX Non current liabilities Loan XX X X X X X X .

757 goods availabl e for sale Less (17.11 Given the question 5.680 es Add carriage in 147. 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 259.750) (132.407) 134.8 70 Less (5.9 .2 46 Less cost of sales Opening 15.103 Returns out Cost of 149.2 profit 39 Add: 1.210 Adjustment to Final Accounts Non current liabilities Loan XX Example 5.654 stock Purchas 135.750 Discoun t receive d 123. closing 007) stock Gross 122.510 Less (13.62 Returns 4) inwards 254.10.

980 38.87 2 24.418 12.521 2.306 4.074 99.562 19.370 2.410 5. rates and insuran ce Heating and lighting Postage .Lesson Four 211 89 Less Expens es Discoun t allowed Carriag e outward s Rent. 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 2.008 223 12.11 7 .

564 Example 5.7 40 £ (63.350 5. a sole trader.078 .004 (18.360 (21.750 24. Yousef Trading and Profit and Loss Account for the year ended 31 May 19X6. Yousef.800 £ 138. Mr.844 89.144 7.564 83.720 17.887 24.020) £ 57.440 5 34 53.12 The following trial balance has been extracted from the ledger of Mr.50 0 (735) 23. £ Sales Purchases Carriage Drawings 82.200) 31.765 6.212 Adjustment to Final Accounts 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 Capital Add net profit Less drawings £ 120.440) 89.044 19.117 108.555 4.84 0 1.

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 6.Lesson Four 213 Rent. (c) £2. (b) Rates have been prepaid by £880.001 1.927 58.000 ______ 216.091 216.211 of carriage represents carriage inwards on purchases.000 53.622 3. (d) Equipment is to be depreciated at 15% per annum using the straight line method.770 19. (e) The provision for bad debts to be increased by£40. Required: Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a balance sheet as at that date.420 877 130 12.770 The following additional information as at 31 May 19X6 is available: (a) Rent is accrued by £210.330 26. Solution: .471 177 1.002 11.551. (f) Stock at the close of business has been valued at £13.120 6.

420 Bad debts 877 Increase in provision for bad 40 debts Depreciation – equipment 8.300 .330 Salaries and wages 26.091 5.000 12.560 6.141 Less expenses Carriage outwards 2.179 53.700) 13.927 Purchases 82.888 58.879 51.120 (170) £ (27.950 880 177 1.001 Advertising 1. £ £ £ Sales 138. Yousef Trading and Profit and Loss Account for the year ended 31 May 19X6.002 27.561 96.888 Mr.700 (49.551 (82.551 11.078 Less cost of sales Opening stock 11.800) £ 30.952 Postage and stationery 3.681 20.471 210 6.488 Less closing stock (13. rates and insurance 5. £ 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 58.211 84.933 Rent.937 ) Gross profit 55.350 Carriage inwards 2.253 Net profit 5.979 (7. Yousef Balance Sheet as at 31 May 19X6.214 Adjustment to Final Accounts Mr.

Lesson Four 215 51.179 .

901 12.13 The following trial balance has been extracted from the ledger of Herbert Howell.800 46.400 259. (f) Purchases include goods valued at £1.420 52.720 1.000 98. the end of his most recent financial year. Required: .370 4.500 Cr £ 12.5% of trade debtors as at 31 May 20X9.101 612.930 ______ 612.000 57. Other expenses included under this heading are accrued by £200.216 Adjustment to Final Accounts Example 5.900. which were withdrawn by Mr Howell for his own personal use.600 405.040. (d) Other operating expenses include certain expenses prepaid by £500. as at 31 May 20X9.500 27.15% using the straight-line method (c) Wages and salaries are accrued by £140. as at 1 June 20X8 Dr £ 90.560 5. a sole trader.600 280 151 14.901 The following additional information as at 31 May 20X9 is available: (a) Stock as at the close of business was valued at £25. 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. (e) The provision for bad debts is to be adjusted so that it is 0.500 32. (b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows: Property 1% using the straight-line method Equipment .000 3.310 38.200 33.360 1.500 28.

500 1.000 (260.485) 86.924 Herbert Howell Balance Sheet as at 31 May 2000 £ £ Non current Assets Property Equipment Current Assets Stock Debtor Less provision Prepayments Cash in hand Current liabilities Bank overdraft 25. (20 marks) Solution: £ Sales Less cost of sales Opening stock Purchases Less closing stock Gross profit Discounts received Decrease in provision for bad debts Less expenses Depreciation: Property Equipment Discounts allowed Wages and salaries Bad debts Loan interest Carriage out Other operating expenses NET PROFIT 27.900 46.960 (25.370 52.000 57.560 285.50 0 (13.060) 144.525 £ 76.500 (112.200 (231) 45.125) 54.969 500 151 72.Lesson Four 217 Prepare Mr.400 258.560 5.975 14.625 3. Howell’s trading and profit and loss account for the year ended 31 May 20X9 and his balance sheet as at 31 May 20X9.600 16.500 .940 4.400) (41.500 147.520 90.720 1.310 38.420 ____49 149.900) £ 405.409 900 8.375 92.

360 Accruals 140 52.300 Accruals 200 8.600 – 1.930 + 1.040 = = 258.625 2) Provision for bad debts 0.055 12.000 15% X 57.600 __340 (48.200) =231 Decrease in provision for bad debts 280 – 231= 49 3) Wages and salaries Paid 52.5% X (46.440) 24.000 117.040 28.101 36.800 Pre-paid (500) 8.025 (29.560 29.218 Adjustment to Final Accounts Creditors Accruals Capital Add net profit Less drawings Non current liabilities Loan (13%) Workings: 1) Depreciation for: Property Equipment 33.975) 105.924 135.990 .500 4) Other operating expenses Paid 8.080 117.055 98.055 1% X 90.500 5) Purchases: Drawings: 259.500 = = 900 8.

00 Business rates prepaid £ 1.100.Lesson Four 219 REINFORCEMENT QUESTIONS QUESTION ONE David Dolgellau.00 500.00 Insurance premiums paid in advance £ 900.00 600.00 Advertising expenses accrued £ 500. .00 13.500.00 26.500.700.500.00 120.00 8.00 45.00 Electricity charges accrued £ 700.400.00 210.00 4.00 261. 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.700.000. trading.00 3.00 287.00 2.000. shop and office Fixtures and fittings Debtors Cash in till Drawings 378.700.00 7.600.00 7.00 6.400.00 7.00 12.200.500.00 30.600.00 8.00 18.00 2.00 The following further information was obtained: • • • • • Closing stock was £ 102.000. profit and loss account for the year ended 31 March 2001 and balance sheet as at that date.400.700.100.00 Required: Prepare a trial balance.500.000.100.800.500.00 1.

646 The following information as at 31 December is also available: a) £218 is owing for motor expenses.404 42.620 387.200 1.411 35. .926.094 _26.841 7.304 1.175 18.862 8.737 1. Required Prepare Donald Brown’s trading and profit and loss account for the year ended 31 December 20X0 and his balance sheet at that date.413 19. extracted the following trial balance on 31 December 20X0.460 491.292 _______ 591.861 2. b) £680 has been prepaid for rent.730 6.220 Adjustment to Final Accounts QUESTION TWO Donald Brown. c) Depreciation is to be provided of the year as follows: Motor vehicles: 20% on cost Fixtures and fittings: 10% reducing balance method d) Stock at the close of business was valued at £19.200 15.646 Credit £ 26.184 2.568 591.936 45. 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 42. a sole trader.

920 50.270 22.295 8. 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 302.890 626.Lesson Four 221 QUESTION THREE The following trial balance has been extracted from the accounts of Brenda Bailey.000 43. .873 122.633 41.873 Cr £ 427.250 8.480 Required Prepare Brenda Bailey’s trading and profit and loss account for the year ended 30June 20X9 and her balance sheet at that date.792 3.10% on cost Motor vehicles .757 15. £620 has been prepaid for rent and rates.466 4. Depreciation is to be provided for the year as follows: Equipment .419 476 829 64.20% on cost Stock at the close of business was valued at £16. a) b) c) d) £350 is owing for heat and light.426 477 ______ 626.726 The following information as at 30 June 20X9 is also available.210 12. a sole trader.310 21.600 102.

The statement showed the following.303 1.582 1. MIDWEST BANK F Mercer: Statement of Account Date Particulars 19X8 Dec 1 Balance Dec 5 417864 Dec 5 Dividend Dec 5 Bank Giro Credit Dec 8 417866 Dec 10 417867 Dec 11 Sundry Credit Dec 14 Standing Order Dec 20 417865 Dec 20 Bank Giro Credit Dec 21 417868 Dec 21 416870 Dec 24 Bank charges Dec 27 Bank Giro Credit Dec 28 Direct Debit Dec 29 417873 Dec 29 Bank Giro Credit Dec 31 417871 Debits $ 243 26 212 174 17 32 307 95 161 18 88 12 25 185 118 Credits $ Balance $ 1.374 1.403 1.851 1.645 1.222 Adjustment to Final Accounts QUESTION FOUR On 10 January 19X9.819 1.512 1.630 1.857 1.557 47 279 . Frank Mercer received his monthly bank statement for December 19X9.315 1.535 1.683 1.862 1.666 1.619 1.356 1.

935 Required a) b) Bring the cash book balance of $1.793 up to date as at 31 December 19X8. CASH BOOK 19x8 Dec 1 Dec 4 Dec 9 Dec Dec Dec Dec Dec 19 26 27 29 30 Balance b/d J Shannon M Lipton 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 Dec Dec 6 10 14 16 20 21 22 Electricity P Simpson D Underhill A Young T Unwin B Oliver Rent M Peters L Philips W Hamilton Balance c/d 864 865 866 867 868 869 870 871 872 873 Cheque No $ 243 307 174 17 95 71 161 25 37 12 1.935 Dec 31 _____ 2.Lesson Four 223 His cashbook for the corresponding period was as follows. (10 marks) Draw up a bank reconciliation statement as at 31 December 19X8 (5 marks) CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK .793 2.

There are 4 main approaches in preparing final accounts where there are insufficient records. the accounting system falls short of the double entry. through fire).g. or − Insufficient records that will facilitate the preparation of final accounts. d) Use of control accounts. b) Estimating income from the use of ratios. c) Use of a simple cashbook and bank statement.e. 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). This may be due to: − Lack of records at all. 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. the only method of estimating the profits or loss for the period. stolen or misplaced. is to prepare statement of affairs showing the net worth of the business at the beginning and at the end of the period. N/B: approach number c and d are normally used together. it is impossible to compile a reasonable complete cash summary. a) Estimating income from the net assets. 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 + Drawings Capital Net Asset .Acknowledgement 224 LESSON SIX OTHER ASPECTS OF FINAL ACCOUNTS (a) INCOMPLETE RECORDS An incomplete record situation is whereby. (a) Estimating Income from the Net Assets Where the available records are so deficient (i.

340 7.500 2.349 He has estimated his drawings for 19X3 at £12. Solution: Net profit = Closing Net Asset Net Asset .500 = £12.150 925 __263 9.000 3.500 3.000 4.938 + 12. Estimate his net profit for the year.500 4.Lesson Five 225 Example: 6.911 (b) Use of Ratios There are 3 important ratios to be looked at: 1) Gross profit margin 2) Mark up 3) Stock turnover If a firm has a uniform Gross Profit for all the items sold then any information available on sales or purchases can be used to derive the total Gross Profit for the period and incase there is sufficient information on expenses.500 3.1 A sole trader’s capital position is as follows: 31 December 19X2 £ Motor vehicle: Cost Depreciation Stock Debtors Bank Cash Creditors Net assets 7.860 6.060 2.500.798 2. then the Net Profit can also be derived.689 3.938 19X3 £ 7.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25.450 2.Opening + Drawings Net assets Additional = 7.125 ___54 10. The above ratios are computed as follows: 1) Gross Profit Margin = Gross Profit x 100 Sales (selling price) E. the Gross Profit Margin will be: = 25 x 100 100 .349 – 6.960 1.

226 Further Adjustments to Accounts = 25% .

Average Stock = 30.000 2) Mark up = Gross Profit x 100 Cost of Sales (cost price per unit) In the above example. The formula is: = Cost of Sales Average Stocks expressed as number of times = Opening Stock + Closing Stock 2 Average stock Example: A firm has the following data for the period: Opening stock Purchases Closing stock £ 20.000) = £25.000 = 290.000 2 = 25.000 Stock Turnover = 300.33% 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.000 .000 £ 30.000 Cost of sales = (20.000 units in a financial period.000 £300.000 Required: The Stock Turnover Ratio.Lesson Five 227 If a firm sells 1. the mark up will be: = 25 x 100 75 = 33.000 25.000 + 20.000) – 30.000 + 300. then the Gross Profit will be: = 25% (£100.

700) 6.000) 21.000 Gross profit = 50% Cost of Sales = 42.000 = 6. Solution a) Average Stock = Opening Stock + closing stock 2 12. Average stock is £12.000.000 (14.3 W White’s business has a rate of turnover of 7 times.000.e. . Draw up a trading and profit and loss account for the year ended 30 June 2002.2 M Jones gives you the following information as at 30 June 2002 £ Stock 1 July 2001 6.000 Purchases 54.000 – 6.000 (42.228 Further Adjustments to Accounts = 11. margin allowed) is 33¼% off all selling prices.600.000 Jones’s mark-up is 50% on cost of goods sold. His average stock during the year was £12.300 Example 6. Trade discount (i.000 Gross Profit = 50% 42. Expenses are 66 ¾% of gross profit. MEMORANDUM TRADING ACCOUNT Sales Less cost of sales Gross profit Expenses Net profit £ 63.000 = 18. b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a net profit on sales of 10%.6 times Example 6. a) Calculate the closing stock as at 30 June 19X7.000 + C 2 C = 24. You are to calculate: (a) Cost of goods sold.000 Gross Profit = 21.

. Turnover. Net profit.Lesson Five 229 (b) (c) (d) (e) Gross profit margin. Total expenses.

The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit sales and cash purchases or credit purchases. Steps in Preparing the Final Accounts 1) 2) Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to determine the beginning capital.300 88. any income received to the relevant income accounts. If there is sufficient information relating to cash payments and receipts. then a simple cashbook for both cash in hand and cash at bank can be prepared in confirmation of deposits and payments made from the bank statement.700 Cost of Sales = 88. 3) Make adjustments for any accruals or prepayments. the cashbook (for both cash in hand and bank). 5) Prepare the final accounts. Example 6.g. sales ledger control account and purchases ledger control account. 4) Extract a list of the balances.400) 14. Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in summary to the control accounts. (Trial balance). The information can then be posted to the relevant accounts e.4 Hobbs does not keep proper books of account.200 (c) Use of Cashbook and Bank Statement (in addition) Control Accounts.200 44.230 Further Adjustments to Accounts Solution: Profit schedule Turnover Cost of goods sold Gross profit Expenses Net profit Turnover = Cost of Sales Average stock Margin = Gross Profit Sales 7 = Cost of Sales 12. Any other account can be opened where necessary.100 (29. expenses to relevant expense accounts and assets and liabilities to relevant accounts.e.600 £ 132. Open and post the balances and transactions to these 3 relevant accounts (i. You ascertain that his bank payments and receipts during the year to 31 December 19X8 were as follows: .

250) 3.650 31 Dec 19X8 £ 2.Lesson Five 231 Reciepts Balance 1 Jan 19X8 Cheques for sales Cash banked Balance 31 Dec 19X8 Payments £ £ 572 Purchases 10.507 From a cash notebook you ascertain: Cash in hand 1 January 19X8 Cash takings Purchases paid in cash Expenses paid in cash Cash in hand 31 December 19X8 Drawings by proprietor in cash £ 62 16.950 11.300 31.50 7 2.250 7.300 1.134 .751 Delivery van 31. Statement of Affairs as at 1 January 19x8 £ CURRENT ASSETS Cash at bank Cash in hand Debtors Stock CURRENT LIABILITIES Creditors Net Assets (1.420 2.850 2.007 13.070 1.850 375 65 Unknown You discover that assets and liabilities were as follows: 1 Jan 19X8 Debtors Trade creditors Stock on hand £ 1.17 Expenses 9 14.850 1.990 Depreciation on the van is to be provided at the rate of 20% per annum.650 5.884 572 62 1.00 Drawings 5 3.250 2.

549 9 Balance b/d Sales .179 9 ______ Bal c/d 2.69 Bank 13.850 Cash 16.070 31.300 Takings 29.232 Further Adjustments to Accounts Capital 3.884 Sales Ledger Control Account £ £ 1.54 31.

850 Bal b/d 1.699 Less cost of goods sold: Opening stock 2.027 7 13.990) 11.850 375 14.012 Less Expenses: Expenses (375 + 2.460 (4.277 7 Cash in Hand Account £ Balance b/d 62 Creditors Debtors/sales 16. Hobbs Trading and Profit and Loss Account for the year ending 31 December 19X8 £ £ Sales 29.36 2 • • £ 1.250 Bank 10.27 13.785) NET PROFIT 13.Lesson Five 233 Purchases Ledger Control Account £ £ Cash purchases 1.362 The capital invested at any point of time in a business by the owner is represented by the difference between the assets and liabilities at that time.325 Depreciation 1.677 Less closing stock (2.30 Expenses 0 Bank Bal c/d _____ Drawings 16.227 .687 GROSS PROFIT 18.00 Purchases 12.650 Add purchases 12.005 65 ___67 16.950) 3.027 14. The difference between the capital at the end and the capital at the beginning of the trading period represents the trading profit made during that period. unless there were withdrawals or investments of additional capital.

250 + 67) Example 6. 5.000 worth of stock was retained in the workshop on 31 March 2001. he deposited Sh 1.990 2. At the commencement of business on 1 April 2000.300 1. 1. Motor vehicle expenses were Sh 182.317 5. Bills for the remaining two months were estimated to be Sh 48. To increase his working capital he borrowed Sh 400.5 (Exam Type Questions May 2001 Question 3) Kimeu commenced his business of making furniture on 1 April 2000. 720. He had drawn Sh 18.200.171 5. He also spent Sh 960. 6.884 13. 2.420 3. . On 1 April 2000.794 Less current liabilities Creditors Bank overdraft Financed by: Capital Add net profit Less drawings (11.000 out of which Sh 158.125 1.000.2 27 17.794 3.000 per week from the business account for private use during the year. Electricity bills received up to 31 January 2001 were Sh 240.111 11.000 into business bank account.000 on the purchase of some equipment at the commencement of the business which he estimates will last him five years.000 at 15% interest per annum on 1 July 2000 from his sister but no interest has yet been paid.234 Further Adjustments to Accounts Fixed Assets Delivery van Current Assets Stock Debtors Cash Hobbs Balance Sheet as at 31 December 19X8 £ £ £ Cost Depreciation NBV 7.070 ___65 5. 3.000 while general expenses amounted to Sh 270.000.460 5. 4.960. Due to his limited accounting knowledge he has not maintained proper books of account. You perform an examination of the records and from interviews with Kimeu you ascertain the following information.751 5. He purchased timber worth Sh 1. You have been engaged to examine his records and prepare appropriate accounts there from.000 per annum.000 and then that from 1 April 2000 it will have useful life of three years.000 for the year. Sally was employed as a clerk at a salary of Sh. On the same day he brought into the firm his pickup and estimated that it was worth Sh 660.840 2.

Kimeu used Sh 75. Insurance premium for the year to 30 June 2001 was Sh 160.240. 9.000 of the difference to pay for his family’s foodstuff.240.000 240.860.080.178.000 were abandoned during the year as bad.000 1.00 0 Debtors Sh Bal c/d Sh 1. Debt totaling to Sh 17. All these expenses have been paid by cheque.000 (10 (10 (Total: 20 marks) Capital Loan Debtors Cash Equipment Electricity Motor vehicle expenses General expenses Insurance ________ Bal c/d 7. bought Kenya Charity Sweepstake tickets worth 24.000 182.000.000 270.200. 8. marks) Solution: Cash Sh 1. Other customers for jobs too small to invoice have paid Sh 726.000 1.812.000 Sh . Sally sent out invoices to customers for Sh 6.100 which was left in the office on 31 March 2001.000 had been received by 31 March 2001.00 0 400.860.000 and Sally used the rest on general expenses except for Sh 30.960. Rates for the year to June 2001 were Sh 36.000 but these had not been paid.000 7.000 for accountancy fee.200.000 1.000 book – Bank Salary Drawings Timber Sh 120.080.000 660.00 0 560.00 0 Capital Sh Bank 1.Lesson Five 235 7.000 936. marks) (b) Balance sheet as at 31 March 2001.00 Pick up 0 1. Required: (a) Profit and loss account for the year ended 31 March 2001.000 in cash for work done of which Sh 560.000 960.860. You agree with Kimeu that he will pay you Sh 55.000 was banked.000 but only Sh 5.000 160.000 5.

236 Further Adjustments to Accounts Sales 6.000 Bank Drawings Drawings General Expenses ______ Bal c/d 726.000 1.00 Bank 0 Bad debts ________ Bal c/d 6.000 5.178.080.900 30.000 36.000 17.178.178.081.000 .000 6.100 726.cash in hand Sh 726.080.000 1.081.000 17.00 0 Cash book .000 Sales Sh 5.

000 (3.960.000 Loan interest 45.Equipment 192.000 36.000 = 45.000 Kimeu Profit and Loss Account For the year ended 31 March 2001 Sh Sh Sales (cash + credit) 6.000 Bad debts 17.000 Less expenses Timber used (1.000 Salary 720.000 158.929.000 55.000) Depreciation – motor vehicle 220.000 27.900) Net profit 2.000 Motor vehicle expenses 182.000 x 15% x 9/12 = 27.000 Accountancy fees 55.000 – 1.900 Insurance premium 120.100 .000 Rates 27.000 .000 General expenses 306.000 x 9/12 Electricity bills Rates = Agency fees = Loan interest = 48.000 175.000 Electricity bills 288.974.Lesson Five 237 Loan interest Rates Accruals = = = 400.904.802.

000 2.208.000 3. you ascertain the following information: 1.6 (Exam Type) June 1995 Question 2 Abi.860.50 Takings 0 565.000 192.154.100 1. Abi supplies you with his trading results for the year ended 30 June 1994 which are as follows: Payments for goods Payments for expenses Profits Sh 4.000 3.000 660. at irregular intervals Mrs.100 175.000 1.747.200 30. at the end of each day the cash is counted and recorded on a scrap of paper.465.100 1.000 220.00 0 Sh 5.000 412.620.000 152.000 158.100 Example 6. Abi transcribes the figures into a notebook.000 Abi instructs you to examine his records and prepare accounts. a batch of slips of paper was inadvertently destroyed before the figures had been written into the notebook.465.154.789.000 ________ 5.000 1.100 4.754.000 40.000 440. . He informs you that this year his bankers have insisted on a proper set of accounts.000 4.946. From your examination of the records and interview with your client.000 108.035.100 4.000 181. a proprietor of a grocery and general store has not previously engaged an accountant.238 Further Adjustments to Accounts Non current Asset Equipment Motor vehicle Kimeu Balance Sheet as at 31 March 2001 Sh Sh 960.500 5.929.121.000 Current Assets Stock Debtors Insurance – prepayments Cash at bank Cash in hand Less current liabilities Accruals Capital Add net profit Less drawings Non current liability Loan 15% 2.100 400.000 Sh 768.465. The takings are kept in a drawer under the counter.

11. Required: .500 recovered in respect of an old debt abandoned in the previous year. Abi bought a secondhand car (not for use in the business) from a friend. The living accommodation comprises one-third of the building.500 Balance at bank 109. spending Sh. N.500 per week for 52 weeks in a year. 33.500 running expenses of Abi’s private car. 17. Abi takes Sh. 6. Mr. Abi Sh. The total expenses also include: • • • Sh. the difference was settled by cheque. 48. 5. 13.000 975. 500 per week with cash taken from the drawer. Abi are made through his business account. the rent is included in expenses of Sh 565. 178.000 were abandoned during the year as bad. Mr. Mr.000 for a friend. Sh. He had paid Sh. 55.000 Debts totaling Sh.000 for exterior decoration of the whole premises.500 22.500 139. Mr.000 per week from the business for his wife’s personal expenses.500.500 78.000. 320.000 plus a further sum of Sh.000. You are to provide Sh. 50.000 for accountancy fees. 10.500 stock Stock at cost 950.500.465. Abi’s life matured and realized Sh. 12. 1.B. Mr. An insurance policy for Mr. 5.000 for income tax. 21.000 Creditors for purchases of 121. Abi carefully estimated their takings for that period.Lesson Five 239 2.500 for goods supplied from the business.000 Sales debtors 245. 50. 4. 20. 3. During the year. 5. the cheque was dishonored and the friend is repaying the Sh. the price agreed was Sh.000 by installments. 750 per week for cigarettes and beer. 80. Other private payments by cheque totaled Sh.000 for alterations to the premises to enlarge the storage accommodation. 30. All receipts and payments of Mr.500 229. His winnings totaled Sh. 7. Abi cashed a cheque for Sh. Mr.000 by 30 June 1994. 29. This excludes the amount indicated in note 8. Sh. And Mrs.000. but Mr. 175. 8. but as the friend owed Mr. Abi rents the shop for living accommodation at Sh. Abi involved himself in betting for 30 weeks of the year. the takings included Sh 12. The following balances are ascertained as correct: 30 June 1994 1993 Sh Sh Cash in hand 43. and the estimated figure is included in the total of Sh. Abi draws Sh. 9.

Abi’s balance sheet for the business at 30 June 1993. Abi’s profit and loss account for the year ended 30 June 1994. (6 marks) (Total: 20 marks) . (4 marks) (b) Mr. (12 marks) (c) Mr.240 Further Adjustments to Accounts (a) Mr. Abi’s balance sheet for the business at 30 June 1994.

500 1.000 39.Lesson Five 241 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 Drawings Balance c/d Sh 15.165.072.00 0 Cash in Hand Sh 260.304.500 Expenses 50.000 565.500 12.000 22.591.500 6.165.500 229.000 Drawings – personal expense for wife 12.000 48.500 50.000 109.165.500 .000 Cash in hand 5.0 00 Capital Balance b/d Sales ledger control a/c Insurance (drawings) Drawings Drawings Debtors Cash at Bank Sh 78.00 0 78.0 00 1.072.000 Drawings – second hand car 20.747.500 6.500 50.500 Drawings – cigarettes and beer 320.50 0) Sh 1.000 4.5 00 (139.00 Drawings – friend 0 Creditors Dishonored cheque – drawings Drawings Income tax ________ Balance c/d 6.000 43.000 141.0 00 1.500 6.000 Balance b/d Drawings – betting Bank Sh 22.000 55.

819.00 4.000 20.50 Balance c/d 139.500 0 Purchases Ledger Control A/c Sh Sh 4.819.500 Less expenses Rent 52.729.500 565.000 Expenses Business 52.500 purchases 4.500 Bank 12.500 0 121.000 _____ 53.000 80.869.500 57.869.242 Further Adjustments to Accounts 58.500 Bad debts 165.000 Alterations 80.000 80.500 532.060.500 6.500 30.000 17.500 58.591.500 5.000 359.754.000 17.064.000 Purchases 4.500 Gross profit 1.000 ________ Balance c/d 245.500 .50 6.000 359.729.000 0 Total 78.500 Less closing stock 950.500 10.500 Balance b/d Bad debts recovered Credit sales Sales Ledger Control A/c Sh Sh 229.500 0 Bank 5.040.000 Bad debts 178.00 Drawings 33.500 Bank Balance c/d Rent Motor running expenses Decoration Alterations Other expenses Abi Trading Profit and Loss Account for the year ended 30 June 1994 £ £ Sales 5.060.500 Private 26.500 Credit 4.747.000 4.000 12.000 Decoration 20.000 Other expenses 359.000 Less cost of sales Opening stock 975.

Instead of profit and loss account. These include clubs. income from investments to get an accumulated fund instead of capital. then the club has a surplus and not a net profit. 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. Because these organizations are not trading. From the income and expenditure account.g.206. Associations and Others) These are some form of organizations that are set up to promote or to cater for the welfare of the members involved and not to make a profit. football clubs. donations. sports clubs).000 245.500 109.000) 366.348.000 366.000 1.500 Current Assets: Stock Debtors Cash at bank Cash in hand Current Liabilities Creditors Accruals Capital Add net profit Less drawings Abi Balance Sheet as at 30 June 1994 Cost Depreciatio Book Value n £ £ £ 950.500 (325.165.500 43.500 21. 3.531. (e.500 121. Because the club is not formed by any one owner (has no owner).206. then the club has a deficit and not a loss.000 (698. if the incomes are more than the expenditures for the period. prepare a Bar Trading Account. Instead of a cashbook.000 (142.500) 1.500) 1. If the expenditure is more than incomes. Example: 1. we have an income and expenditure account.000 NON PROFIT MAKING ORGANIZATIONS (Club. the types of accounts to prepare are different from the ones of trading organizations. . welfare associations and any other societies (charitable institutions).500 1.500 1. then in addition to the income and expenditure account and the balance sheet. 2. it is funded by members’ contributions.Lesson Five 243 Accountancy fees Net profit 21. the clubs will maintain a receipts and payments which has similar entries to those of a cashbook.

raffles. festivals] XX XX Expenditure Depreciation Salaries and wages Expenses on other activities [prizes] Loss from trading activities All other expenses SURPLUS/( DEFICIT ) XX XX XX XX XX (XX) XX/(XX) £ £ XX XX XX XX .244 Further Adjustments to Accounts Format of the Final Accounts Name Income and Expenditure Account for the year ended 31 December …… Incomes Profit from trading activities Subscriptions Income from investments Donations Income from other activities [dinner dance.

treasury bills and any other investment that may be available. • It is income for the club and therefore reported in the income and expenditure account. It is often paid on an annual basis. Income from Investments: Some clubs invest excess cash in the bank (fixed deposit account). shares of limited companies. . Subscriptions: These are the amounts received by the club from the members to renew their membership. fittings and equipment Motor vehicle Investments Current Assets Stocks Debtors Prepayments and accrued income Cash at bank/hand (receipts + payments) Current liabilities Creditors Accrued expenses and prepaid income Bank overdraft Accumulated fund balance b/f Add/less surplus / deficit Other funds Life membership fund Building fund Education fund Notes To The Above Format: NAME AS AT 31 DECEMBER …… £ £ £ 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 1. • Any amounts prepaid are shown as prepaid (creditors for subscriptions). 2.Lesson Five 245 BALANCE SHEET Non current Assets Buildings Fixtures. • Some clubs will not report subscriptions as income until it is received in form of cash. • 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.

Depending on the policy of a club.227 Insurance 750 General expenses 4. there may be a need to spread out this income over the expected life of the members in the club.e a general investment) then income from this investment should be reported in the income and expenditure account. To transfer some amounts from the life membership funds to the income and expenditure account over the expected life of membership to the club. 3. Example 6. • Any incomes relating to these funds. building fund.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 19 X1 19 X2 Bar Sales Sale of investments 102 Bar purchases 42 Wages 25 Rent 305 Heating and lighting 35 Postage and stationery 5.g building fund) it will not be reported in the income and expenditure account but credited directly to the fund. ii. Life Membership Fund Some members may pay some amount to become life members of the club and if this happens. .434 416 186 128 33 18 46 i. They will be shown together with the accumulated fund. will be credited directly to the funds and any expenses will be taken off from these funds e. education fund. the following accounting treatment may be allowed: 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. 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. • If the investment is for a specific purpose and relates to a specific fund (e. Other funds • These are funds set up for a specific purpose and not general.g.246 Further Adjustments to Accounts • If the club is investing with no specific intention (i.

486 31 December 19X1 272 306 18 16 25 5 315 358 36 19 40 7 2) On 31 December 19X0.204 .1. 3) Furniture was valued at £300 on 31 December 19X0.19X1 Assets Stock Subscriptions due Insurance prepaid Investments Furniture Balance at bank Liabilities £ £ 272 25 5 500 300 102 1. Depreciation of all furniture is to be provided for at the rate of 10% per annum. these were sold for £750.486 The following information is also supplied: (1) Bar stock. On June 19X1. Required: (a) Prepare an income and expenditure account for the year ended 31 December 19X1. During the year ended 31 December 19X1. at cost Creditors for bar purchases Rent due Heating and lighting expenses due Subscriptions due Insurance paid in advance 31 December 19X0 450 775 6. Solution: Friendship Club Accumulated Fund As at 1.Lesson Five 247 Payments on account of new furniture Balance at bank. the club held investments which cost £500. the club purchased additional furniture at a cost of £520. _____ 31 December 19X1 6. (b) Prepare a balance sheet at that date.

486 4.248 Further Adjustments to Accounts Creditors Rent due Heating and lighting expenses Accumulated fund Creditors £ 4.434 Balance b/f 358 Purchases 4.792 Receipts and payments Balance c/d Balance b/d Income & expenditure Balance c/d £ 365 40 405 .792 Subscriptions £ 25 Receipts & payments 345 35 Balance c/d 405 306 18 16 (340) 864 £ 306 4.

Lesson Five 249 Friendship Club Bar.227 Friendship Club Income and Expenditure Account for the year ended 31 December 19X1 £ £ Profit from bar trading 784 Entrance fees 42 Subscriptions 345 Profit from sale of investments 250 1.421 Expenditure Wages 416 Rent 204 Heating and lighting 131 Postage and stationery 33 Insurance 16 General expenses 46 Depreciation – furniture 56 (902) Surplus 519 .443) 784 £ 5.486 4.758 Less closing stock Gross profit to income & expenditure a/c (315) (4. Trading Account for the year ended 31 December 19X1 £ Sales Less: Cost of Sales Opening stock Purchases 272 4.

137 398 35 55 70 £ 764 (518) 619 1.250 Further Adjustments to Accounts Friendship Club Balance Sheet as at 31 December 19X1 Non current Assets £ £ Furniture 820 (56) Current Assets Stock Subscriptions due Prepaid expense Cash at bank Current liabilities Creditors Prepaid subscriptions Accrued expenses Creditors fixtures Accumulated fund b/f Add surplus Example 6.383 (a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account. .8 (Exam Type) November 2001 315 40 7 775 1.383 864 519 1. (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.

000 25.000 415.561.000 Refund of subscriptions Sports prizes Transport Investments _______ Balance carried forward 4.000 _405.000 288.000 4.000 315.000 Dinner dance expenses 400.000 Office expenses 194.000 497.000 Repairs and maintenance 2.Lesson Five 251 Receipts Sh Balance brought forward Subscriptions Year: 1999/2000 2000/2001 2001/2002 Dinner dance Beverage sales Investments income Payments Sh 254.561.000 1.000 Purchase of beverages 657.000 690.000 Salaries and wages New equipment 249.000 31 March 2001 - .000 Balances as at Furniture and fittings (net) Equipment (net) 31 March 2000 240.500.050.000 248.000 124.000 45.000 565.000 Printing and stationery 723.000 168.

000 3. 500. 3.000 162.000 . (6 marks) (Total: 20 marks) Solution: Mamba Sports Club Statement of Affairs Assets Furniture and fittings Equipment Receipts and payments Investment at cost Subscriptions in arrears Stock of beverages Sh Sh 240.000 300.000 72. 625.000 300.180. were sold on 30 March 2001 for Sh.000 5. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively.252 Further Adjustments to Accounts Investment at cost Subscriptions in arrears Salaries accrued Stock of beverages Subscriptions in advance Additional information: 1. which had cost Sh. 3.500. Investments.000 85. Required: (a) Income and expenditure account for the year ended 31 March 2001.000 288.000.000 Liabilities Subscriptions accrued 85.000 375.000 68.500.000 184.000 - Subscriptions in arrears are written-off after twelve months. No entries have been made in the books in this respect. 2.000.000 162.000 690. (8 marks) (b) Balance sheet as at 31 March 2001.

000 .000 (153.Lesson Five 253 Accrued salaries 68.000) 5.027.

00 0 51.004.000 723.000 (475.000 659.000 2.465.895.3.000 375.000 3.2001 Sh Sales Less cost of sales Opening stock 162.000 .000) Profit to income and expenditure 2001 Balance b/d Receipts and payments Income & expenditure Balance c/f Sh 300.000 Less closing stock (184.465.000 400.000 3.004.000 2.000 2.000 3.000 125.000) 182.000 £ 85.254 Further Adjustments to Accounts Mamba Sports Club Trading Account for the year ended 31.493.000 Purchases 497.000 194.00 0 Mamba Sports Club Income and Expenditure Account for the year ended 31 March 2001 Incomes Profit from trading account Subscriptions Dinner dance Investment income Profit on sale of investments Sh 182.000 Subscriptions 2001 Balance b/f Receipt and payment Income & expenditure Balance c/f Sh 657.000 45.

800 Lecturer’s fees 920.000.000 Loan 1. Sh.9 (Exam Type) DECEMBER 2000 QUESTION 3 The following trial balance was extracted from the books of Literary and Philosophical Society as at 30 September 2000: Sh Sh Balance at bank: current account 724. 43.000 .Restaurant 1.000 Furniture and fittings 1. 43.700.400 equipment Depreciation of equipment 54. of the debtors for subscriptions. 19.000 Purchase of food 1.400 17. etc.000 .800 Stock – bar 1 October 1999 473. cameras.000 Projectors. 3. at cost 3.600 Bar receipts 4. Depreciation for the year is to be provided as follows: Furniture and fittings Sh.000 Lighting and heating 367.800 Additional information: 1.000 Provision for depreciation of furniture 284. .000 Deposit account – bank 1.400 Rates and water 277.000.000 expenses Donations 108. It is expected that.200 Land and buildings.000 Interest payable and receivable 36.642.800 as at 30 September 2000.565.000 Lecturer’s travel and accommodation 358.000 Restaurant receipts 3.842. 2.Lesson Five 255 Example 6. 194.200 Rental of rooms 495.874.450. cameras and audio 190. An invoice for Sh. 642.600.000 Wages – Caretaker 880.000 Camera and projector repairs 17. The loan is at a concessional rate of 4% while 10% has been earned on the deposit account.800 Accumulated fund 1 October 1999 5.600.000 Creditors for bar and food ________ 178.000 Projectors.651.000 Bar purchases 2. The bar stock was valued at Sh.000 & fittings Subscriptions 1. No changes have taken place all year in the principal sums involved. 4.651.Bar staff 800.800 17.032.771.000 of wine had been omitted from the records at the close of the year although the wine had been included in the bar stock valuation. Sh.600 will not be collectable.000 Debtors for subscription 62. The interest account is net. 5.

256 Further Adjustments to Accounts Required: (a) Bar and restaurant trading account for the year ended 30 September 2000 (6 marks) (b) An income and expenditure account for the year ended 30 September 2000 (8 marks) (c) A balance sheet as at 30 September 2000 (6 marks) (Total: 20 marks) .

400 100.000 19.281.000 1.800) 6.000 358.400 .000 277.000 17.392.000 43.400 (642.000 108. Camera repairs Rates and water Lighting and heating Caretakers wages Interest on loan Provision for subscription Surplus Sh Sh 992.139.000 3.600) 3.000 194.924.450.400 Literary and Philosophical Society Income and Expenditure Account for the year ended 30 September 2000 Income Profit on trading account Interest on bank deposit account Subscriptions Donations Rental of rooms Expenditure Lecturer’s fees Depreciation on furniture and fitting Equipment Lecturer’s travel and accommodation exp.600 (3.800) (4.000 495.200 Sh 7.200 880.000 64.450.000 920.146.600 4.Lesson Five 257 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 473.000 867.674.800 4.

profit and loss account.400 1.e.000 190. Example: 1) Rent for the factory 2) Salaries to supervisors and factory managers 3) Depreciation of plant and machinery used in production .400) 551.777. 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.377.Current a/c Current liabilities Creditors Accumulated fund b/f Add surplus Non current liabilities 4% loan Sh 3.000 1.000) (73. a new account called manufacturing account is shown before these others.000 7.000 (221.400 5.377.400) 2.700.386.000 (c ) Manufacturing Accounts Some firms may manufacture or produce goods rather than buy due to savings in operational costs.400 Sh (478. Therefore.000 1.600 Sh 3.600.400 5.396.700.000.000 5. The purpose of the manufacturing account is to report all the costs incurred in producing the goods. in addition to a trading.200 ___6. Due to additional costs involved in the production process.400 642. it is cheaper to produce the goods rather than buy). 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.600 1.800 2.600 7.213.771.000 117.764. additional information is reported in the final accounts.800 18.874.000 724.258 Further Adjustments to Accounts Literary and Philosophical Society Balance Sheet as at 30 September 2000 Non current Assets Land and buildings Fixtures and fittings Equipment Current assets Stock Debtors of subscription Balance at bank – deposit a/c . (i.164.600 5.

Lesson Five 259 The manufacturing account will show the factory cost of goods produced that will be shown in the trading account in place of purchases. .

Factory buildings XX Other expenses – Factory power XX Lighting and heating XX Water XX Cleaners wages XX XX Total cost of production XX Add: opening Work In Progress XX Less: closing Work In Progress (XX) XX Factory cost of production (cost of finished XX Note 1 goods) FACTORY PROFIT XX Finished goods at a transfer price XX Note 2 Sales 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 Less expenses Salaries and wages – administration & non production XX XX XX (XX) XX (XX) XX (XX) XX XX XX XX XX XX .260 Further Adjustments to Accounts FORMAT Name Manufacturing Trading Profit and Loss Account for the year ended 31 December £ £ Raw Materials Opening stock of raw materials XX Purchases of raw materials XX Add carriage inwards XX XX Less returns outwards (XX) XX Cost of raw materials available for use XX Less closing stock of raw materials (XX) Raw materials consumed XX Direct labour (factory wages) XX Direct expenses XX Prime cost XX Factory overheads Salary to factory manager XX Depreciation on – Plant and machinery XX .

Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of production. loan interest. 2) Selling and Distribution These are expenses incurred to generate sales income e. finance cost e. 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).g.e. legal and accounting fees. then this generates a factory profit.Lesson Five 261 Rent for administration building Depreciation .Fixtures and distribution Other selling and distribution costs Net profit/(net loss) XX XX XX XX (XX) XX/(XX) For the balance sheet.Delivery vans .g. to deliver goods to the customers Depreciation on motor vehicles (used for the delivery purpose) Advertising Bad debts . 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. depreciation of furniture and fixtures and equipment not used in production. • • • • • Salaries and commission to the sales manager and staff Carriage outwards (i. 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.

800 1000.900 142. 2. and rent and insurance are to be apportioned: factory 5/6ths. Stock of raw materials £24.500 370.400 2.12.300 4.10 B spikes Trial Balance as on 31 December 2002 Stock of raw materials 1.500 12.2002 Stock of finished goods 1.000 38.2002 Wages(direct £180.000 30.1.000) Royalties Carriage inwards (on raw materials) Purchases of raw materials Productive machinery (cost £280.800 Required: Prepare a manufacturing. administration 1/6th. 3.000 7.000 31.800 1.000 125.000 7.300 56.000) Accounting machinery (cost £20.000 ______ 1.500 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 1.000 12.000: factory indirect£145.500 13.800 5.262 Further Adjustments to Accounts Example 6.700 44.900 13.421.000.000.200 13.000 4. work in progress £15.1.000 Cr 29.000 11. Trading Profit and Loss Account for the year ended 31 December 2002.421. . stock of finished goods £40.000.1.500 325.000 230.2002 Notes at 31.1. Lighting.2002 Work in progress 1. Dr 21.680 1. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.2002 1.000 3.

000 General factory expenses 31.000 PRIME COST 550.000 Carriage inwards on raw materials 3.300 Discounts allowed 4.850) Net profit 89.400 Bank charges 2.900 Factory cost of production 793.500 373.000) Factory cost production per finished 793.500) 6.000 Royalties 7.450 Total cost of production 794.000 Less cost of sales Opening stock of finished goods 38.000) 10.200 ) 3.4.000 Insurance (1/6 x 4200) 700 General administrative expenses 13.450 goods Sales 1.700 Rent(5/6 x 12.450 832.650 Expenses Accounting machinery – depreciation 2.000 Lighting (1/6 x 7.500 Less: closing stock of raw materials (24.000) 792.500 Rent ( 1/6 x 12.000.250 Factory power 13.900 (117. Trading Profit and Loss Account for the year ended 31 December 2002 Raw Materials £ £ Opening Stock of raw materials 21.000 Lighting( 5/6 x 7.500 Factory Overheads Wages 145.350 Gross profit 207.350 Less closing stock of finished goods (40.250 Administrative salaries 44.Lesson Five 263 Solution: B Spikes Manufacturing.500) 1.500 24.000) Raw materials consumed 370.500 Direct wages 180.450 Less: closing work in progress (15.000 Insurance( 5/6 x 4.500 394.950 Add: opening work in progress 13.800 Carriage outwards 5.800 .000 Depreciation: productive machinery 28.000 Purchases 370.000 Commission on sales 11.000) 2.500 808.000 Sales representatives salaries 30.

800 1.000 20.000 10.264 Further Adjustments to Accounts B Spikes Balance Sheet as at 31 December 2002 COST DEPRECIATION 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) (10.000 300.800 89.000 £ (78.600 366.300 56.000) 88.000 NET BOOK VALUE £ 202.600 (20.000 79.800 386.600 296.600 .000 142.000 212.000) 154.000 24.000 15.500 279.000) 366.600 (125.000 40.

360 Cr Sh 171.1.200 9.000 1.000 24.400 Sh. 15. (ii) Inventories at 31 January 1986.400 24.000 36.600 Rent and rates Sh.000 60.000 829.261.600 .400 8.000 _______ 1.360 12.440 66. 800 for salesmen’s motor vehicle insurance.000 228. 30. 1 February 1985: − Raw materials − Work in progress − Finished goods 5.000 16.800 144.000 4. 45.000 276.11 (Exam Type – June 1986 Question Two) Bibi Maridadi owns and manages a small manufacturing business.120 86.261. were valued at cost as follows: Raw materials Work in progress Finished goods Sh.360 The following additional information is provided: (i) Accruals at 31 January 1986 were: Factory power Sh. The following balances have been extracted from her books of account at 31 January 1986: Dr Sh Capital at 1 February 1985 Accounts payable Bank and cash balance Accounts receivable Drawings Administration expenses Advertising expenses Factory direct wages Factory indirect wages Factory power Furniture and fittings (all offices) Heat and light Plant and equipment Motor vehicle (used by salesmen) Plant hire Provision for bad debts Provision for depreciation 1 February 1985: − Furniture and fittings − Plant and equipment − Motor vehicle Raw material purchases Rent rates Sales Selling and distribution expenses Inventories at cost.000 18.400 16. 4.000 20.200 Sh.000 24.000 3.Lesson Five 265 Example 6.200 138.000 60.400 92.000 There was also prepayment of Sh.000 150.

Trading and Profit and Loss Account for the year ended 31 January 1986 Direct materials Sh Sh Opening stock of raw materials 8.000 236.000 Heat and light 14. trading and profit and loss account for the year ended 31 January 1986 and a balance sheet as at that date.840 Selling and distribution expenses 65. (22 marks) Solution: Bibi Maridadi Manufacturing.560 Gross profit 434.160 Less closing stock of finished goods (45.200) Raw materials consumed 220.600 Heat and light 1.000 Add: purchases of raw materials 228.600 Depreciation: motor vehicle 36.000 PRIME COST 280.600 Plant hire 4.560 Less closing work in progress (30. motor vehicle.160 440.400 Rent and rates 14.160 Sales 829.400 debts Rent and rates 9.000 Less: closing stock of raw materials (15.000 Furniture and fittings 1. (iv) Expenditure on heat and light.440 Less cost of sales Opening stock of finished goods 24.000 446.400) Factory cost of production 416. furniture and fittings at the rates of 20%.000 Factory power 37.760 430.560 Add opening work in progress 16.266 Further Adjustments to Accounts (iii) Depreciation is to be charged on plant and equipment.800 Factory direct wages 60.800 Factory overheads Factory indirect wages 24. Required: Using the vertical method. (v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986. 25% and 10% per annum respectively on cost.360 149.600 .000 Add factory cost of production 416.400 Depreciation on plant 55.880 Less expenses Increase in provision for doubtful 1.600) 394. prepare Bibi Maridadi’s manufacturing. and rent and rates is to be apportioned between the factory and office in the ratio of 9 to 1 and 3 to 2 respectively.

360 12. then any changes in the value of closing stock will result in a reduction or an increase in the unrealised profits.600) 93.000 (4.120 156.400 800 5.480 COST DEPRECIATION 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 UNREALISED PROFITS ON CLOSING STOCK £ 276.600 171.400 144.360 84.000 174.800 86.200 30. then this reduction will be added to the gross profit in our profit and loss account.200 15.400 156.000 5.480 327.400 184.040) (60.400 45.600 (91.000 439.600 92. The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows .760) (11.000) 267.800 18.600 In most cases where business transfers finished goods at a profit to the selling department and the goods are reflected in the balance sheet at the transfer price.000 278. then this increase will be reduced from the gross profit from our profit and loss account and if there is a reduction in unrealised profits.400 91.600 (60. then the closing stock includes a profit that has not been earned or realised.600) £ (193. If there is an increase on unrealised profit on the closing stock.000) (264.200 267.200 87.040 7.Lesson Five 267 Administration expenses Advertising expenses Net profit Bibi Maridadi Balance Sheet as at 31 January 1986 150. If the mark up profit (the profit based on cost of production is always uniform. Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet.800) NET BOOK VALUE £ 83.

000 26.268 Further Adjustments to Accounts Increase in unrealised profit in closing stock (UPCS) Profit and loss (extract) Account for year ended……….000.000..667 . 100.000 (marked up) = 120% (16.000 (marked up) = 120% (26.667 Profit and loss a/c 26.160. The opening stock of finished goods for the period was valued at Sh.667 Balance c/d 16.667 10. (The marked up cost) The closing stock at the end of the financial period was Sh.333 = 100% UPCS Balance b/f 26.667) = (20%) 83. £ 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.333 = 100% Closing Stock 160.667) = (20%) 133. Opening Stock: 100.

667) Sh Sh 10. The accounts will be represented in columnar form and the format will be as follows: (Assume a firm has departments A and B).333 (d) DEPARTMENTAL ACCOUNTS Some organizations have various departments carrying out trade and therefore the profitability of each department needs to be established. profit and loss account should be prepared. Name Trading Profit and Loss account for the year ended 31 December Department A £ £ XX XX XX XX (XX) Department B £ £ XX XX XX XX (XX) Department C £ £ XX XX XX XX (XX) XX 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 (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 The balance sheet will reflect the position of the whole organization and therefore a departmental balance sheet is not required.000 133. For each department.Lesson Five 269 Profit and Loss (Extract) Less: Expenses: Sh Increase in unrealized profits on closing stock Balance Sheet (Extract) Current Assets Stock: Raw materials Work in progress Finished goods Less: UPCS Sh X X 160. The final accounts will be very important for the management to assess the performance of each department. trading. The expenses in relation to a specific department should be charged in the Profit and Loss account for that department.000 (26. .

000 10. 5) Advertising. Type of Expense 1) Rent. 1 April 19x8 Purchases Department A 250 200 11. The following balances have been extracted from his nominal ledger at 31 March 19X9: Dr Sales Department A Sales Department B Stocks Department A. he wishes the business to be divided into two departments: Department A Department B Books. toys and fancy goods. The following guidelines can be followed in apportioning the expenses among the departments. then rent expense should be apportioned among the departments.12 J Spratt is the proprietor of a shop selling books.800 Cr 15. repairs to buildings. Example 6. Number of employees in each department Purchases in each department. Basis of apportionment Floor area occupied by each department. Value of sales in each department. Cost or net book value of the equipment in each department. then the various expenses need to be apportioned between or among the different departments e. For the purposes of his accounts. 2) Depreciation.000 . depreciation of buildings and insurance. heat. canteen expenses. 6) Increase in provision for doubtful debts.270 Further Adjustments to Accounts When departments in a firm are sharing resources. 4) Carriage inwards. if the departments are sharing a building. depreciation and maintenance of delivery van. insurance and maintenance of equipment 3) Salaries. 1 April 19X8 Stocks Department B. Sales or debtors in each department. light. welfare and other expenses relating to employees. periodicals. rates. newspapers and children’s games and toys. periodicals and newspapers Games. bad debts and discounts allowed.g.

Lesson Five 271 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 Cleaning Accountancy and audit charges General office expenses 8. Accountancy. to show the Department profit or loss. where necessary.200 1. Telephone. The apportionment should be made by using the methods as shown: Area Rates. Lighting and air conditioning.000 Stocks at 31 March 19X9 were valued at: Department A £300 Department B £150 The proportion of the total floor area occupied by each department was: Department A one fifth Department B four-fifths Prepare J Spratt’s trading and profit and loss account for the year ended 31 March 19X9.000 25. Fire insurance.000 750 150 750 130 50 120 25 25 30 120 60 25. . apportioning the overhead expenses. Repairs. General office expenses. Cleaning: Turnover -General office salaries.

000 20.750 (20.000 1.750 ) 3.250) 1.784) 1.000 450 20.790 1) General Office Salaries: A = 15.400 (150) Department C £ £ 25.450 (450) Sales Less cost of sales Opening stock Purchases Less closing stock 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 Workings: (11.750 150 750 130 50 120 25 25 30 120 60 (3. Profit and Loss Account for the year ended 31 March 19X9 Department A £ £ 15.000 250 11.800 12.500 (300) Department B £ £ 10.000 B = 10.250 (8.000 200 8.200 8.000 ) 5.000 150 450 26 10 24 5 5 6 72 36 (1.000 X 750 = 450 25.426) 324 1.272 Further Adjustments to Accounts Solution: J Sprat Trading.000 2) Rates: 3) Fire Insurance: 4) Lighting: A = 1/5 X 130 = 26 B = 4/5 X 130 = 104 A = 1/5 X 50 = 10 B = 4/5 X 50 = 40 A = 1/5 X 120 = 24 B = 4/5 x 120 = 96 .210) 1.466 750 300 104 40 96 20 20 24 48 24 (1.000 X 750 = 300 25.

Lesson Five 273 5) Repairs: A = 1/5 X 25 = 5 B = 4/5 X 25 = 20 etc. .

If we assume that A sold goods to B amounting to £1.5 2) Percentage After Charging Commission Assume the commission is 5% of the net profit after charging such commission: Net profit before commission Managers commission @ 5% Net profit after commission Department A 1. the trading account for the whole firm will be as follows (other items will remain the same): £ £ Sales 24.392.6 Total 1.000 Less cost of sales Opening stock 450 Purchases 19.5 .5) 1.2) 307.000) Gross profit 5. in 4.466 (69. 1) Percentage Before Charging Commission If we assume in example 4.000 19.274 Further Adjustments to Accounts Interdepartmental Trading A department may buy goods from another department in the same firm and therefore the departments trade with one another. Interdepartmental sales and purchases should be excluded from the total sales and total purchases of the whole firm. before charging such commission.16 that the managers in each department is paid a commission of 5%.2 Department B 324 (15.790 (85.790 (89.8) 1.392.4) 308.16 above. Example.700.450 Less closing stock (450) (19.000 and this figure is included in sales of A and purchases of B. (Department B is buying from department A).2) 1.466 (73.704.8 Total 1. the commission will be as follows: Net profit before commission Managers commission @ 5% Net profit after commission Department A 1.7 Department B 324 (16. 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.000 Managers Commission A commission based on the net profit made in each department may reward managers of each department. department A sells goods to Department B.3) 1.

050 £ 892 27. was paid into the bank. Trading receipts consisted partly of cash and partly of cheques. together with cheques amounting to £250.914 and sundry expenditure of £140.050 Balance at 1 January 19X6 Payments to trade creditors Rent and rates Fixtures Lighting and heating General expenses Loan interest Drawings Customers’ cheques dishonoured _____ Balance at 31 December 19X6 32. The following was a summary of his bank statement for the year ended 31 December 19X6: Amounts credited by bank £ 32. the commission will be computed as follows: Net profit before commission Commission of 5% Net profit after commission Before charging commission 100 __5 95 After charging commission 105 __5 100 REINFORCEMENT QUESTIONS QUESTION ONE Dare is a grocer who had not kept a full set of books.380 475 100 210 800 120 900 180 993 32.Lesson Five 275 Note: If we use percentage for each commission assuming a 5% rate. which he had cashed out of his takings for the convenience of certain friends. The balance of his takings. wages for part-time staff amounting to £2.050 You are given the following information: 1. . out of his takings. Dare had paid. During the year. He retained between £2 and £5 per week pocket money and maintained a balance of £20 in the till for change.

but not presented at 1 January 19X6.000 7. for hire. You are required to prepare: (a) a statement of Dare’s capital on 1 January 19X6. 3. All figures are in £s. The summarized balance sheet on 31.000 750 5.000 . Bryant. All dishonoured cheques were re-presented and honoured during the year. 4.276 Further Adjustments to Accounts 2. 5. QUESTION TWO You have agreed to take over the role of bookkeeper for the AB Sports and Social Club. who had lent Dare £4. amounted to £280 and at 31December 19X6 to £320. The loan interest was paid to a close friend.500 2. Cheques drawn payable to trade creditors. at cost Used sports ware. (c) a balance sheet as on that date. Assets Heating oil for clubhouse Bar and café stocks New sports ware. (b) a profit and loss account for the year ended 31 December 19X6. at valuation Equipment for grounds person – cost 1. Other balances at 1 January and 31 December 19X6 are given below: 1 January 31 December £ 5.12.800 240 40 2.200 70 Stocks Trade debtors Accrued general expenses Rates paid in advance Fixtures valued at Trade creditors Creditors for heating and lighting 7.800 1. and the loan was still outstanding at the end of the year.550 (including those purchased during the year) 2.200 (including a bad debt of £200 to be written off) 190 50 2. The interest was duly paid half-yearly on 31st March and 30 September.000 3.000 some years ago at a nominal rate of interest of 3% per annum. 6. for sale.94 as prepared by the previous bookkeeper contained the following items.800 80 There is a standard gross profit margin of 25% on sales. Discounts allowed by trade creditors amounted to £480 and those allowed to debtors were £520.800 3. £ 4.

000 300 .500 200 1.000 23.deposit account Claims Accumulated fund Creditors – bar and café stocks .000 10.500 1.Lesson Five 277 depreciation Subscriptions due Bank – current account .Sports ware 3.150 1.

278

Further Adjustments to Accounts

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 café 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

You discover that the subscriptions due figure as at 31.12.94 was arrived at as follows: Subscriptions unpaid for 1993 Subscriptions unpaid for 1994 Subscriptions paid for 1995 Corresponding figures at 31.12.95 are: Subscriptions Subscriptions Subscriptions Subscriptions unpaid for 1993 unpaid for 1994 unpaid for 1995 paid for 1996 10 20 90 200 10 230 40

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 café stocks New sports ware, for sale, at cost Used sports ware, for hire, at valuation Closing creditors at 31.12.95 are: For bar and café stocks For sports ware For heating oil for clubhouse 800 450 200 700 5,000 4,000 1,000

Lesson Five

279

2

/3 rds of the sportswear purchases made in 1995 had been added to stock of new sportswear in the figures given in the list of assets above, and 1/3 had been added directly to the stock of used sportswear for hire. Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these older items into the stock of used sportswear, at a valuation of 25% of their original cost. No cash balances are held at 31.12.95. The equipment for the grounds person is to be depreciated at 10% per annum, on cost. Required: Prepare income and expenditure account and balance sheet for the AB Sports club for 1995, in a form suitable for circulation to members. The information given should be as complete and informative as possible within the limits of the information given to you. All workings must be submitted. (23 marks) QUESTION THREE Mr Cherono trades as a retailer of electric lamps and related products under the name of Chero Hardware. Most goods in which he trades are purchased from various suppliers in a finished form. In addition, a separate department of the firm manufactures various types of lampshades from purchased raw materials. When finished, the lampshades are transferred to the shop at an agreed transfer price for sale. No lampshades are sold other than through the shop. The firm’s Accounts Assistant presents you with the following trial balance at 30 June 1988: Sh Sh Capital account – Cherono 740,000 Drawings – Cherono 95,000 Long term loan (interest at 15% p.a) 240,000 Fixtures and fittings at cost 900,000 Accumulated depreciation at 1 July 350,000 1987 Motor vehicle at cost 208,000 Accumulated depreciation at 1 July 60,000 1987 Stock at 1 July 1987 (at cost): Raw materials for lampshades 40,000 Completed lampshades 20,000 Other goods 328,000 Trade debtors and creditors 122,000 Bank balance 98,000 Sales 4,100,000 Purchases – raw materials for 855,000 lampshades - other goods 2,400,000 Wages 254,000

280

Further Adjustments to Accounts

Rent and rates Water and electricity Motor expenses Repairs Interest on loan Bank charges Insurance Sundry expenses

96,000 47,000 60,800 12,000 18,000 4,000 18,000 21,200 5,597,000

_______ 5,597,000

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Additional Information: (i) (ii) (iii) Rent and rates include a prepayment of rates of Sh. 6,000. The insurance includes a premium for the period ending 31 October 1988. 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 year’s 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 Stocks at 30 June 1988 were: Sh. Lampshades raw materials Lampshades (at transfer price) Other goods at cost (vii) 80,000 30,000 252,000

(vi)

(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

282

Further Adjustments to Accounts

summarized the detailed entries into what I think you call a Receipts and Payments Account, and have rounded the figures to the nearest £1’. At this point he supplied you with a copy of the following document:

Lesson Five

283

Olympiad Athletics Club Receipts and Payments Account for 12 months ended 31 October 1983 Not Receipts Not Payments e e No. No. Cash Bank Cash Bank £ £ £ £ 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 subscriptions 215 4,465 (5) Wages of grounds 3,600 man (2) Life membership 530 (8) Postages and 692 telephones (3) Training ground fees 454 7,206 (9) Stationery 629 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.

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Further Adjustments to Accounts

(2) As an alternative to paying annual subscriptions, members can at any time opt to pay a lump sum, which gives them membership for life without further payment. Amounts so received are held in suspense in a Life Membership Fund account and then credited to Income and Expenditure Account in equal instalments over 10 years; the first such transfer takes place in the year in which the lump sum is received. On 31 October 1982 the credit balance on the Life Membership Fund Account was £4,720, of which £850 credited was as income for year ended 31 October 1983. (3) The club has a permanent training ground. Non-members can use the facilities on payment of a fee. In order to guarantee a particular facility, advance booking is allowed. Advance booking fees received before 31 October 1983 in respect of 1984 total £470. The corresponding amount paid up to 31 October 1982 in advance of 1983 was £325. Members can use the facilities free of charge. (4) Club members can take out insurances through the club at advantageous rates. Initially, premiums are paid by members to the club. Subsequently, the club pays the premiums to an insurance broker and receives commission. At 31 October 1982, premiums received but not yet paid over to the broker amounted to £102 and commissions due but not yet received were £11. The corresponding amounts at 31 October 1983 are £160 and £13 respectively. (5) The grounds man is employed for the six months April to September only. He is then paid a retaining fee to secure his services for the following year. At 31 October 1982 the grounds man had been paid a retainer (£250) for 1983. Included in the Wages figure (£3,600) is the retainer (£300) for 1984. (6) Sporting requisites are sold only on cash terms. There are therefore no debtors for these items. (7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163; the corresponding figure on 31 October 1983 was £202. (8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31 October 1983, was £927. In arriving at this latter figure, the sum of £137, representing damaged and unsaleable stock at cost price, had been excluded. (9) Postage stamps unused at 31 October 1983 totalled £4. (10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36 respectively. (11) Rates are payable to the District Council in two installments (in advance) each year. £360 had been paid on 1 October 1982, £390 on 1 April 1983 and £456 on 1 October 1983. (12) The club receives interest on investments bought a number of years ago at a cost of £7,400 (current valuation £7,550). At the end of October 1983, the club had acquired further investments which cost £5,600 (current valuation £5,600) and at the same time placed £3,000 in a short-term deposit account. (13) The written down value of the furniture which had been sold during the year was £350; it had originally cost £800. Other Matters: Initially, the training ground had been acquired freehold* from a farmer at an inclusive cost of £4,000. Subsequently, the club had some timber buildings erected

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to provide various facilities for members. The total cost of these buildings was £35,000; depreciation is calculated at the rate of 10% per annum on a straight-line basis. At 31 October 1982, the provision for depreciation account had a balance of £9,400. At 31 October 1982, the furniture and equipment etc. was recorded in the club’s books as £7,900 (cost) against which there was a provision for depreciation of £4,150 (calculated on the same basis as for buildings). Apart from the disposal referred to in note (12) above there had been no other disposals or acquisitions during the year. Required: Prepare the club’s Income and Expenditure Account for year ended 31 October 1983 and the Balance sheet at that date. 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

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Further Adjustments to Accounts

COMPREHENSIVE ASSIGNMENT No.2 TO BE SUBMITTED AFTER LESSON 6 To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University. EXAMINATION PAPER. ANSWER ALL QUESTIONS QUESTION ONE The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as shown below for the month of October 19-6: Bank Account 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 Freda’s Fashions 0623 141.1 1 14 7 3 Malcolm Brothers 112.8 6 Basford Ltd 0623 38.04 3 15 3 Cash sales 407.5 8 Hansler Agencies 0623 59.32 4 16 14 Rodney 361.0 9 Duncan’s storage 0623 106.7 Photographic 2 17 5 17 Puccini’s Cold Store 72.54 9 Aubrey plc 0623 18.10 Ltd 18 20 Eastern Divisional 10 Secretarial services 0623 28.42 Gas Board – rebate Ltd 19 (August direct 63.40 credit) 22 Grainger’s Garage 93.62 14 Trevor’s Auto 0623 11.75 repairs 20 29 Cash sales 235.3 15 Wages cash 0623 115.5 9 21 2 31 Balance c/d 221.5 16 Towers Hotel 0623 44.09 2 22 17 Bank charges - 12.36 (September) 20 Broxcliffe borough Council SO 504.2 2 21 Eastern Area Electricity Board DD 108.6 4 TIME ALLOWED: THREE HOURS.

Lesson Five

287

24 28 30 ______ 1,919. 37 31 Nov 1

Eastern Divisional Gas Board Petty Cash Wages cash Salaries transfer

DD 0623 23 0623 24 -

41.20 119.0 7 337.7 4 ______ 1,919. 37 221.5 2

Balance c/d

In early November, the company’s bank sent a statement of account which is reproduced below:

48 175.83 11.75 196.288 Further Adjustments to Accounts Statement of Account with Lowland Bank plc Account: Fuller Ltd Current Account No 10501191 Date of issue: 1 November 19-6 19-6 Oct Description Debit £ 1 2 2 3 3 3 7 10 15 16 17 20 21 21 21 22 22 22 22 BCE CR 062310 062312 062309 CR 062313 ADJ 062315 062314 CR SO 062317 DD 062320 141981 ADJ 062319 062320 504.41 780.00 28.18 15.90 540.42 11.76 108.75 38.34 9.59 .22 106.87 886.54 910.02 Credit £ Balance £ 90.76 80.81 10.151.56 1.73 707.56 36.57 118.12 646.75 212.45 265.34 68.90 111.77 848.04 141.17 443.15 343.32 331.13 144.02 873.15 12.47 154.95 129.

81 162.35 115.600 Capital as at 1 June 19X0 ______ 31.680 214.010 Motor vehicles at cost 26.21 375.Lesson Five 289 22 24 27 27 28 28 30 31 CR ADJ INT (loan a/c) 062321 062322 DD CGS ADJ 26.28 11.15 189.75 83.000 Debtors and creditors 25. £ £ Purchases and sales 104.310 146.03 Abbreviations: BCE = Balance Adjustment INT = Interest SO = Standing Order DD = Direct Debit CR = Credit CGS = Charges ADJ = Required: Prepare the company’s bank reconciliation statement as at 31 October 19-6.09 108.250 21.200 Stocks 3.500 Sundry expenses (including insurance and 3. a wholesale fruiter.52 44.06 80.02 348.680 .220 Advertising 2.42 71. at the end of his financial year ended on 31 May 19X1.67 233.64 9.960 at 1 June 19X0 Warehouse equipment at cost 20.62 212.14 93.960 Rent and rates 11. (Chartered Association of Certified Accountants) QUESTION TWO PAUL RUDYERD The following balances have been extracted from the accounting records of Paul Rudyerd.360 Provision for depreciation on motor vehicles as 12.200 Bank 3.120 214.200 Motor vehicle expenses 11.470 electricity) Drawings 6.

The motor vehicles at cost figure includes a new car purchased during the year for £9. using the reducing balance method. (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. (b) Depreciation on motor vehicles is normally charged at an annual rate of 20%. (e) A recording error has resulted in a second-hand delivery van. (3 marks) QUESTION THREE ABC LTD You have just been appointed as an accounting assistant to ABC Ltd. purchased on 2 June 19X0 for £9. but which is badly bruised and could be sold as juice pulp for £100. A week after your arrival the finance director is rushed into hospital. profit and loss account for Paul Rudyerd’s wholesale fruit business for the year ended 31 May 19X1 and a draft balance sheet as at 31 May 19X1. you cannot find any working papers for the previous year’s accounts. This amount includes a consignment of rare fruit from abroad which cost £300. in preparing the answer to part (a) for the new warehouse equipment purchased during the year. Required: (a) Prepare a draft trading.600. A provision for doubtful debts of 1% of outstanding debtors should be created.290 Further Adjustments to Accounts Additional information and opinions are given as follows: (a) Stocks at 31 May 19X1 were valued at £2. .000. 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. withdrawn from the business by Rudyerd for his personal use. (g) No adjustment should be made.000. which would normally sell for approximately £660.600 for Rudyerd’s personal use which it is estimated will last four years with an estimated residual value of £4. and the other accounts staff are too busy to assist you in preparing for the auditor’s visit. being treated as a motor vehicle expense. estimated to have cost £520. (c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows: Prepayments Accruals £ £ Rates 230 Rent 160 Insurance 180 Electricity 200 (d) A bad debt of £250 is to be written off. the auditors are about to arrive to prepare the accounts for the recently-ended financial year. (15 marks) (b) Briefly explain what accounting concepts and conventions would be important in considering the treatment of the new warehouse equipment. (f) No record has been made of fruit.

The sales and managing directors feel that this campaign will benefit the company for at least a further six months after the year end. conventions or concepts could be involved and give reasons.000.000 and has been fully paid for before the year-end. where there is a conflict between two or more of them. The chief engineer has advised that the machine is worn out and would need to be rebuilt to last more than another two years.000. (8 marks) (b) State what accounting assumptions.Lesson Five 291 (a) A supply of office stationery was purchased five months before the year-end at a cost of £1. using the straight-line method. (e) A freehold property was purchased on the first day of the financial year at a cost of £650.000.200 will have to be made to the goods. The directors have already decided the machine should not be rebuilt but scrapped one year after the end of the year under review. (b) An electronic typewriter was purchased during the year at a cost of £270. (9 marks) . It is estimated that the freehold land. (g) The debtors’ ledger shows balances totalling £52. totalling £2. who will pay £4. (f) A specialist machine was purchased seven years ago for £200. The goods cost £5. It is estimated to have a useful life of five years. The sales director recommends a general bad debt provision of 2% in respect of the remaining debtor balances.000. To the beginning of the year under review £120. Required: For each of the eight situations described above: (a) Describe what action should be taken in respect of: (i) (ii) The amount to be charged or credited to the year’s profit and loss account (if any). it is expected he will be able to pay 60p of every £ owed to his creditors. The company’s chief engineer is confident that sales of the new product will start in the next financial year and will last for at least four years. The building is estimated to have a useful life of ten years when it is expected it will have to be demolished for redevelopment. Another customer has gone into liquidation owing £3. their salaries for this period amount to £22.000. A buyer for the goods has been found. It has been depreciated.000. was worth £500. At the year-end it is estimated there is about £250 worth left in stock. At the year-end it is known that the design stage will take another month. after this the directors will decide whether the project should proceed to production and marketing.000 at the year-end. (d) Three technical staff have spent the last six months exclusively on a new product design project. to be followed by market research.500 but modifications costing £1. (c) A batch of goods was produced to a customer’s special order. at 10% per annum since then. why you have chosen the action you propose.000 depreciation has been provided. (h) The company has undertaken a heavy advertising campaign throughout the year under review to promote its corporate image and product range.000.800 but have not been delivered as it transpires the customer is now bankrupt. The value to be placed on the asset in the balance sheet at the year end (if any). are known to be bad. at the time of purchase. Two debts. You determine that the campaign cost £150.

200 The following matters should be taken into account: (a) After examination of the debtors account.993.400 8.470.690 2.000 157.860 1.000 50.000 _______ 2.224.600 40.993. Ksh 5.400 44.600 but Yeats expected to sell them at Ksh 232. (d) The rent of the premises is Ksh 40.000 from Coleridge Make a general provision of 5% on the debtors.000 7.600 17.400 37.000 a year.000 200. it was decided to: Write off a bad debt of Ksh 12.000.000 Make a specific provision in the accounts for the following doubtful debts. payable quarterly in arrears.292 Further Adjustments to Accounts QUESTION FOUR The following final balance was extracted from the books of J Yeats.310 500. a trader. (e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2.000 60. but the instalment due on 31 December 19X9 was not paid until 15 January in the next year.140 2.000 290.000 116.593.600 30.200 6. (c) Salaries accrued at 31 December 19X9 amounted to Ksh 32.000 from Wordsworth Ksh 3. . 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 6.000.080 350.720 25. (b) Goods unsold at 31 December 19X9 had cost Ksh 201.600 56.000 164.

000 2.000.000 by cheque. .000 The following is a summary of the transactions which took place during the year to 30 September 19X8: 1. 7. Prepare a trading and profit account for the year to 31st December 19X9. of Ksh 145. Electricity bills of Ksh.600 were paid by cheque.5% of the rent sand rates relate to private use.000 from Black. 1.000 were paid in cash. all for cash.900 were paid by cheque. At 30 September 19X8 you discover the following: 1.000 26.000 77.060 relating to the telephone account which is made up of: . (h) It has been agreed with Inland Revenue (Taxation Office) that 12. The stock in trade sold cost Ksh 83. 8. The loan is for 5 years.000 were paid in cash.000 in cash.000 61. 5. 2.000.500 due to Black for the year was unpaid. 3. The trade creditors were paid Ksh 73. 9.640. which was paid into the bank. all on credit for Ksh 78.000 Ksh 45. 10. Rates of Ksh 2.000 Current liabilities Trade creditors 16.000. 4.000 12. QUESTION FIVE The balance sheet of Johnson’s shop at 1 October 19X7 was as follows: Non current assets Shop premises Shop fittings Delivery van Current assets Stock in trade Cash in hand 14. (g) General expenses include Ksh 3. 420. Stock in trade bought.000 12.000 4.000 Bank overdraft 77. Johnson borrowed Ksh 30.Calls – three months ended 30 November 19X9 at Ksh 2.000 was taken from the till (cash register) and paid into the bank. . Sundry expenses of Ksh 6. 6. and a balance sheet as at 31 December 19X9. Interest Ksh 2. Wages of Kshs 17. Cash of Ksh 113.000 14.Lesson Five 293 (f) Depreciation is to be provided for on the motor truck at the rate of 20% per annum straight line on cost.Rent – three months in advance from 30 November 19X9 at Ksh. Sales were made.000 Ksh Capital as at 1 Oct Ksh Ksh 51. The owners of the business withdrew Ksh 9.

The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid. Shop fittings are to be depreciated at 10% per annum on the total at the yearend.000 in respect of the period 1/10/19X8 to 31/3/19X9. END OF COMPREHENSIVE ASSIGNMENT No. The rates payment during the year included Ksh 1.294 Further Adjustments to Accounts 2. 4. Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for the year to that date.2 NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING . 3. the delivery van is to be depreciated at 20% per annum of the total at the year-end.

) the profits or losses and any drawings made by the partners.e.term . The short-term interest is reflected in form of a current account which is affected by the trading activities of the partnership (i. 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. both a capital and a current account are maintained and therefore the capital account becomes a fixed capital account. Partnership deed Where two or more persons wish to form a partnership. In most partnerships. Reasons for partnership 1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.) lawyers. This is done in writing and signed off as agreed by all the partners and therefore it becomes a partnership deed or agreement.g. 2) Incase there is need for skills or expertise in certain areas of the business. Accounting for partnerships. 3) To involve more persons in the business especially for a family. The interest of the partners in the business is either long term or short-term. 6) Interests to be given to the partners on their capital balances. doctors. 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. then it is recommended that they agree on the terms upon which the partnership will be run and the relationship between each other.Acknowledgement 295 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. whose maximum membership is twenty (20) persons. accountants etc. When there is no distinction between a capital account and a current account then any short. Membership A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e. 7) Procedures to be taken on the retirement or admission of a partner. 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 long-term interest is the capital contributed by each partner and the balance is expected to remain fixed.

an expense for interest on loan given by one of the partners is included and the credit entry is made on the partner’s current account. a new section called the Appropriation account is included and this account shows how the partners share the Net Profit for the period. (Assume a firm of 3 partners A. Some of the transactions to be passed through the capital account and the current account are shown in the following formats. B and C) CAPITAL ACCOUNT A B C £ £ £ xx xx xx Bal b/d xx xx xx xx xx xx xx xx xx Loss or revaluation Goodwill written off Bal c/d A £ xx B £ xx xx xx xx xx xx C £ xx xx xx xx xx xx Additional capital xx (c/book or asset) Gains on revaluation xx Goodwill xx xx Bal b/d xx Bal b/d Interest on drawings Drawings Bal c/d CURRENT ACCOUNT A B C A £ £ £ £ xx Bal b/d xx xx xx xx Interest on capital xx xx xx xx xx xx xx xx xx xx Salaries Share of profits Loan interest Bal c/d Bal b/d xx xx xx xx B £ xx xx xx xx xx xx C £ xx xx xx xx xx xx xx Format For Final Accounts: Profit and Loss Account The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss account.296 Other Aspects of Final Accounts changes are passed through the capital account therefore the capital account becomes a fluctuating capital account.) The format for the Appropriation account is as follows: . (In addition to other expenses in the profit and loss.

Lesson Six 297 £ Net Profit for the year Add: Interest on drawings. A B C xx xx xx £ Less: Salaries A B C xx xx xx xx xx xx £ xx xx xx (xx) £ xx (xx) xx Balance of profit to be shared in percentage ratio A (ratio) xx B (ratio) xx C (ratio) xx (xx) Balance sheet The balance sheet also the same as that for a sole trader but the interest of each partner in the business should be shown separately and any loan given by a partner to the firm is also shown separately in the non-correct liability section therefore. £ Net assets. the format will be as follows. Non-current liabilities 10% loan – B 10% loan – bank xx xx (xx) xx xx xx xx xx xx £ £ xx xx xx xx xx . Capital: A B C Current account A B C (debit balance). A B C Less: Interest on capital.

000) Balance of profit to be shared in Profit Share Ratio 7.£9.32 0 92 0 .840.840 Less: Interest on capital A B 6000 4800 (10.000 3.52 0 CURRENT ACCOUNT B £ 13.86 0 5.£6.520 18. The firm’s net profit for the year was £32.660 B £ 4. The following balances were taken from the books on that date: Capital: Partnership salaries: Drawings: A.1 Read the following and answer the questions below.000. Interest on capital is to be allowed at 10% per year.298 Other Aspects of Final Accounts Example 7. A .800) 22.520 5.66 0 18. SOLUTION A and B Profit and Loss Appropriation account for the year ended 31 Dec 2002 £ £ Net Profit for the year 32.000. Their first financial year ended on 31 December 2002.000.400 Interest on capital Salaries 920 Profit shared. B .£60. B . B .£48.000.000 9.000.040 Less: Salaries A 9000 B 6000 (15. Profits and losses are to be shared equally. (a) From the information above prepared the firm’s appropriation account and the partners’ current accounts.400.520 14.800 6. A .£12.040) Drawings Bal c/d A £ 12.320 Bal b/d A £ 6. A and B own a grocery shop. 14.040 A ½ 3520 B ½ 3520 (7.£13.000 3.

000 Drawings: W £9.500 10. v.000 1. iv.000 3.00 0 H £ 717 900 3. Current accounts: balances b/f W £1. H £900 Interest to be charged on drawings. P £30. P £180.Lesson Six 299 EXAMPLE 7.300 4.000) W Interest on draw Drawings Bal c/d £ 240 9.500 2.200 Current Account H £ 130 Bal b/d 6.900 (4. H £3.860.860 P £ 94 6 1. ii. from the following: i.100. viii.10 0 W £ 1.500. P £946.400) 26.2 Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet extracts at the date.500 900 2. P 30%.350 Interest to be charged on capitals: W £2.500 6. H20%.500) 21. SOLUTIONS W. W £240. vi.350 550 30. vii. H £18.000.900 Interest on capital Salaries £ 30. iii.000.500 (5.200 P £ 18 0 7.000 .500.200. H £717 Capital accounts: balances b/f W £40. P £7. P £1.900.50 0 2. H £6. H £130 Salaries to be credited: P £2.000. Net profits £30.P and H Profit and Loss Appropriation Account for the year ended 31 December 2002 £ Net profit for the year Add: Interest on drawings W P H Less: Interest on capital W P H Less: Salaries P H Balance of profit to be shared W 50% Pl 30% H 20% 240 180 130 2. Profits to be shared: W 50%.000.000 (21.

200 Motor vehicles: at cost 46.000 Current account balances .317 10. £ Printing.100 Purchases returns 6.100 Carriage inwards 1.673 98. trading partnership.287 10.100 Stock in hand at 1 October 19X8 23.920 14.620 Discounts allowable 950 Discount receivable 370 Sales returns 2.200 10. stationery and postage 3.400 Fixtures and fittings: at cost 26.500 Sales 322. sharing the balance of profits and losses in the proportions 3:2 respectively.360 3.30 4.000 Provision for depreciation 11.100 Telephone charges 2.900 Motor vehicle running costs 5.000 Purchases 208.200 Rent and rates 10.000 4.287 9.46 6 10.673 Example 7.700 Carriage outwards 2.000 0 14.74 6 9.3 The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and Stone.317 Balance sheet (extract) as at 31 Dec 2002 £ Net Assets Capital W P H Current Accounts W Pl H £ £ xx 40.000 18.000 Provision for depreciation 25.300 Staff salaries 36.000 88.466 2.300 Other Aspects of Final Accounts Share of profits Bal c/d 4.000 30.74 6 2.920 3.000 Provision for doubtful debts 300 Drawings: Brick 24.360 6.000 Stone 11.

000 for his own use.500 Sales Stock (1 October 19X8) 23.300 8. Stone is to be credited with a salary at the rate of £12. Stock in hand at 30 September 19X9 has been valued at cost at £32. During the year ended 30 September 19X9 Stone has taken goods costing £1. 3.000 17. 5.100 10. 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. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at that date. £10.000 per annum from 1 April 19X9.000 9.700 Additional information 1.200 Rent and rates Heat and light Staff salaries 36. Note: In both (a) and (b) vertical forms of presentation should be used.000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1 July 19X9. Trial Balance As At 30 September 19x9 Debit £ Printing and stationery and postage 3.600 2.000.620 Credit £ 322.400 credit credit 33. SOLUTION Brick And Stone. 7. 4.300 8.Lesson Six 301 At 1 October 19X8: Brick Stone Capital account balances At 1 October 19X8: Brick Stone Debtors Creditors Balance at bank 3. 6.700 .100 Telephone charges 2.000 Purchases 208.400 7.900 Motor vehicle running expenses 5. Interest at 10 per cent per annum on the loan is to be credited to Brick. 2. (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.

302 Other Aspects of Final Accounts 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 950 370 2.000 .000 11.700 2.100 1.000 300 24.000 25.200 46.100 6.400 26.000 11.

470 429.800) Gross profit 126.950 15.Lesson Six 303 Current accounts: Brick Stone Capital accounts: Brick Stone Debtors Creditors Balance at bank 3.250 Less: Salaries Stone (adjustment) (6.300 (38.200 Discount receivable 370 Less Expenses Telephone charges (adjustment)) 3.000 less cost of sales Opening Stock 23.100 Motor vehicle running expense 5.600 2.000) (193.250 Brick 3 5 22.400 33.900 Less: Purchases returns (6.700 429.400 Depreciation on fixtures and fittings 2.500 Rent and rages (adjustment) 9.000 9.800 225.700 Heat and light 8.000 Purchases (adjustment) 207.600 Depreciation on motor vehicles 9.320) Net profit 44.800 Less: Closing Stock (32.400 7.300 8.250 Stone 2 5 .000) Balance of profit to be shared 38.100 320.100) 202.100 Less: Sales returns 2.000 17.470 TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9 £ £ £ Sales 322.700 208.300 Printing and stationery and postage 3.200 Interest on loan (adjustment) 250 (82.700 Staff salaries 36.200 Add: Carriage inwards 1.620 Discount allowable 950 Carriage outwards 2.

00 0 2.800 72.000 Current: Brick adjustment 2.500 Capital Brick (adjustment) 23.700 14.600 250 22.00 0 15.500 64.300 Less: Provision (300) 9.30 0 23.800) 12.700 49.500 Current Account Drawings Bal c/d Brick £ 24.000 Payments 600 Cash at bank 7.500 Non-Current Liabilities 10% loan – Brick 10.70 0 Stone £ 2. Share profits 26.200) 11.80 0 26.700 Bal b/d Interest on loan Salaries.000 24.000 Stone 17.000 (13.800 6.400 Accruals 400 (8.500 54.800 Stone 11.304 Other Aspects of Final Accounts Balance sheet as at 30 September 19X9 Non current Asset £ £ £ Fixtures and fittings 26.000 (34.800) 40.000 Debtors 9.000 Current Asset Stock 32.800 Brick £ 3.000 48.000 (adj) 11.950 26.80 0 Stone £ 12.200 Motor vehicles 46.000 64.400 .300 Current Liabilities Creditors 8.

000) 500. .770 Stock at 30 June 19X8 419. Cr.880 Discount allowed 1. Not yet entered Interest on drawings: Mack£1. Interest on capital account balances at 10 per cent.000 Reduce provision for bad debts to £3.430 Creditors 111.160 Carriage outwards 12.040 2.000 Office expenses 24. 30 June 2003.000 Capitals: Mack 350.000 to Mack.030 Provision for bad debts 4.000 Current accounts: Mack 13.446.500 Purchases 854.236.040 Required: Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance sheet as at that date. a) b) c) d) e) f) g) Stock.500 2. £ £ Buildings (cost £750.500 Cash at bank 6.000 Depreciate fixtures 10 per cent on reducing balance basis.160 Salaries and wages 189. Spencer £1.060 Spencer 2.000 Spencer 290. buildings £10.200.800.890 Drawings: Mack 64. The following is the trial balance as at 30 June 2003. Wages £2.000 Fixtures at cost 110.150 Loan interest: King 40.000 Loan from J King 400. Partnership salary: £8.000 Spencer 56.170 Bad debts 5.4 Mack and Spencer are in partnership sharing profits and losses equally.446. Dr.200.000 Provision for depreciation: Fixtures 33.400 Expenses to be accrued: Office Expenses £960. £563.000 Debtors 162.790 Sales 1.Lesson Six 305 EXAMPLE 7.

100 164.000 236.9170 + 2000) 191.306 Other Aspects of Final Accounts Mack and Spencer Q 5.2 Trading and Profit Loss Account for the year ended 30 June 2003 £ £ £ Sales 1.160 1273.160 138.200 Balance of profits Mack ½ 82.150 Office expenses (24160 + 960) 25.030 (293050) Net Profit for the period 233.000 balance b/d 13.800 Spencer 1.790 Add: Purchases 854.700 Less: Salaries – Mack (8.000 Profit 82.160 .700 Less: interest on capital Mack 35.700 Add: Interest on drawings: Mack 1.200 3.400) 710.360 138.000) 228.500 (64.880 Discount allowed 1.800 salary 8.060 Interest on drawings 1.170 Bad debts 5.950 Less: Closing Stock (563.550 Gross Profit 525.500 Less cost of sales Opening Stock 419.000 x )7.000 Interest on capital 35.000-33.200 Mack – Current Account £ £ Drawings 64.750 Less Expenses 10 Depreciation: Fixtures & Fittings (110.120 Loan interest 40.700 100 Buildings 10.500) 164.950 Reduction in provision for bad debts (400-300) 800 526.236.100 Spencer ½ 82.000 Spencer 29.000 Salaries and wages (18.100 bal c/d 72.000 Carriage outwards 12.

4940 1.000 (40.960 £ Cost 750.174.360 56.174.3400 15.500 .500 2.500 72.9230 6770 72.000 860.240 Capital Accounts: Mack Spencer Current Accounts: Mack Spencer Loan from J.000 29.100 56.000 1.580 114.000 110.000 £ £ Depreciation NBV (260.700) 559. King 35.460) 61.700) 69.9400 (114.580 Balance Sheet as at 30 June 19X9 Non Current Assets Buildings Fixtures Current Assets Stock Debtors (16.500 Profit 82.300 56.Lesson Six 307 Spencer – Current Account £ Drawings 56.000) 490.240 129.880 400.243 – 320) Cash at bank Current Liabilities Creditors Accruals (200 + 96) 111.880 114.300 (300.500 Interest on drawings 1200 Bal c/d £ bal b/d 2980 Interest on capital 29.240 64.

200.200 had not been written off an provision for bad debts should have been maintained at 10% of debtors. 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) .600 326.200 debtors 475.200.31.000 Current Accounts: Kombo 136. Sh. Fixed asset (at cost less depreciation 2.000 Vehicles 418.000 54.000 Equipment 520.900 Provision (46. An accrual of Sh. 5. A credit sale of Sh.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.800. A vehicle bought originally for sh. 8.600 Suspense account 1.11. Kombo’s current account had been credited with a partnership salary of Sh.400 had been debited to discounts allowed.400.200.708.20.308 Other Aspects of Final Accounts Example 7.300 After a lengthy check of all the entries.000 Premises 1.570. sh Kombo 1. 9.138.42.000 but no entries.500 Prepayments 28. A bad debt of Sh. other than in the bank account had been passed through the books.26.400) 429. 2.000.000 which should have been credited to Nzuki’s current account. The sales account had been under cast by sh.000 3. the following errors were identified 1. Kombo had withdrawn.000 Nzuki 1.140. 3. 4. for personal use.000 2.29.900. Discounts received.200) Current Liabilities: Creditors 501.60.000 four years ago and depreciated at 20% by straight line method on an assumed residual value of Sh.400.200 527. 7.300 3.300 Shs. No entries had been made in the books.000 had been sold at Sh.39.300 Bank and cash 281.600 Accruals 25.200 for electricity charges had completely been omitted. goods to the value of Sh.60. 6.708. sh.800 Current Assets: Stock 894.400 had been debited to a customer’s account as Sh.000 Nzuki (81.

Lesson Six 309 b) A suspense account showing how the balance is eliminated from the books. (2 marks) c) A corrected balance sheet as at 31 March 1997. (8 marks) .

200 .000 11.200 31.310 Other Aspects of Final Accounts SOLUTION The following journal can be included although not required in the question.000 13.000 Asset Disposal Account 60.400 200.000 Profit and Loss Account 16.000 Asset Disposal Account 16.400 26.200 v) DR: Profit and Loss Account CR: Accrue expenses Account DR: CR: DR: CR: vi) Profit and Loss Account Debtors Account Provision for doubtful debts Account Profit and Loss Account Kombo’s Current Account Nzuki’s Current Account Kombo’s Current Account Profit and Loss Account (Purchases) DR: CR: DR: CR: 39.200 31.200 11.400 26.200 3.280 60.000 Provision for depreciation Account Asset Disposal Account Suspense Account 60. DR i) DR: Suspense Account CR: Discount Allowed Account DR: Suspense Account CR: Discount receive Making the correct in the accounts ii) DR: Suspense Account CR: Sales Account Sales undercast now corrected DR: Suspense Account CR: Debtors Account Being an overstatement of debtors account now corrected DR: CR: DR: CR: DR: CR: DR: CR: CR 26.400 26.000 60.000 39.000 Asset Account 140.500 iii) iv) Asset Disposals Account 140.000 200.280 3.500 13.

000 13.400 Discount received 26.00 Kombo 0 39.300 Shs.32 8 167.32 8 Nzuki Shs. 136.55 2 297.200) Decrease in provision for bad debts 3.32 8 167.000 Accrued electricity charges (11.55 2 Kombo Shs.00 0 107. Sh.880 Bal b/d Nzuki Drawings Bal c/d Partners Current Account Kombo Nzuki Shs Shs. 60.000 Profit on disposal of asset 16.55 2 (b) Discount allowed Discount received Sales Debtors Motor vehicle disposal Suspense Account Shs. Adjustments Discount allowed 26.20 Net profit 0 adjustments 198. 81. 326.280 Drawings (goods) 39.300 326.400 bal b/d 26.20 Bal b/d 0 60.400 Sales undercasted 200.00 0 161.400 200.200 Net adjustments to Net Profit 268.35 8 2 297.12 86.000 326.Lesson Six 311 (a) Kombo and Nzuki Partnership Statement of Corrected Net Profit for the year Sh.300 .500 60.200) Bad debts (31. 26.

The following information has been obtained from the available records on 31 March: 1996 1997 Sh.128 86.400) 3.600 Accruals (25.400.880 36.680 Stock in trade 541. Balance at bank 94. Sh. The next example is still on past paper and combines both incomplete records and partnerships.800 (538.000 374.000 Motor vehicles (book value) 1.084.920. Shs.480 990. 1.800 169.600 218. They do not maintain proper books of accounts. Premises Equipment Vehicles Current Assets Stocks Debtors (431.094.080 28.352 2.200) Capital Accounts Kombo Nzuki Current Accounts Kombo Nzuki Shs.000 198. EXAMPLE 7.000 ? Trade creditors ? 305.480 3.084.200 488.200.120) Prepayments Bank and Cash Current Liabilities Creditors 501.000 2.000 894.200 388.400.000 520.760 Furniture 360.800.640 Trade debtors 612.480 NB This is a very good question on partnership as it combines both errors on the accounts and Partnerships.312 Other Aspects of Final Accounts (c) Kombo and Nzuki Balance Sheet as at 31 March 1997 Fixed Assets Shs.480 1.000 284.000 1.6 JUNE 1997 Question 1 Kefa and Mark are partners sharing profits and losses equally.600 + 11.200 – 43.528.000 . Please study it carefully and follow up the entries and adjustments.000 1.

480 Advertisement Sundry expenses 3.96) Rates paid (for 6 months to 30.000 6. the transaction has not been recorded in the books.200. 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. Required: a) Trading.600 132.520 240.849.000 60.240 3.000 less than that of Mark. Electricity charges 12. No depreciation is to be provided for the vehicles.660.120 while purchases.070.080 420. (8 marks) c) Partner’s 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.250.800 3. On 31 March 1996 Kefa’s capital was Sh.3. One vehicle was sold on credit for Sh. 000.6. (10 marks) b) Balance sheet as at 31 March 1997. profit and loss account for the year ended 31 March 1997.200 Debtors 612. Bank 94. which were disposed of.600 On 20 March 1997 the firm decided to dispose of two of its motor vehicles.640.000 .491.800 Stock 541.000.000 41.000 144.97) Electricity charges Advertising Motor vehicle expenses Sundry expenses Drawings Kefa Mark On 31 March 1997 liabilities were as follows: Sh.000 120. all on credit for the same period were Sh. Sh. 000 while the other was taken over by Kefa at a valuation of sh.480.760 119.480 102.9.Lesson Six 313 Total sales during the year ended 31 March 1997 amounted to Sh.520 33. Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March 1997.000 586. the combined book value of the two vehicles was Sh.952.2.

452.000 119.000 (126.320 1.480 488.000 126.others vehicle Prepayments Bank Sh. Profit and loss account for the year ended 31 March 1997 Sh Sales Less cost of sales Opening stock Purchases Less: Closing stock Gross profit Profit on disposal adjustment Less Expenses Salaries Rent adjustment Rates Electricity Advertising Motor vehicle Sundry expense Depreciation – Furniture .Motor vehicle Net Loss should in PSR Kefa Mark 420.120) 133. 3.849.000 288.000 1.120 (3.000) 1.680 1.314 Other Aspects of Final Accounts Furniture Motor vehicle Liabilities Creditors Net Assets Capital 360.640 Kefa Mark 1.652.952.000 488.528.620.200) (133.000 (66.080 230.080 (1.207.000 72.005.000 1.000 3.920.560) 541. (36.000 169.000 60.560) (66.120 .741.040) 844. 360.000 Sh.000) Sh.200 36.074.458.000 1.260.104.360) 3.000 (423.640 382.640 Trading.104.320 3.000 1.480 48.000 (162. 324.640) Sh.800 640.200 2.134.000) 1.120 Balance sheet as at 31 March 1997 Non-current Assets Furniture Motor vehicle Current Assets Stock Debtors – Trade Adjustment .000 60.520 37.

483.040 2.727.Lesson Six 315 Current Liabilities Creditors Accruals Capital Kefa Mark 305.243.280 1.040 .269.760 166.760 2.040 1.080) 1.727.320 (472.

3 20 1.3 20 1. goodwill is very important for ascertaining the element or the share of a partner’s effort to improve the business. Due to this subjective estimate. (e. .3 20 240.56 0 1. Marketing 4. 1.00 Bal b/d 0 Cash 66.) A new business may not make profits easily during the first year of trading.652.483. Quality of products/Services 2. 2. this type of goodwill is not maintained or shown in the accounts.0 00 mark Shs. “Judge Warey in Hull V Frases” Goodwill is the element that arises from a business due to its reputation and therefore.g. whatever it may be. There are two types of goodwill: 1. enjoys benefits that a new business may not get. Purchased goodwill This is less subjective because it is the excess amount paid for a business above its net assets.76 0 1. This is less subjective because it is the excess amounts paid for a business above its net assets.652. 102.32 0 Kefa Shs.32 0 Capital Account Mark Shs.243. The problem is normally to ascertain the value or cost of goodwill.692. 132. There are various approaches to these. Non-Purchase goodwill Non.316 Other Aspects of Final Accounts Drawings Disposal Loss shared Bal c/d Kefa Shs.692. Location 5.3 20 (c) GOODWILL AND REVALUATION OF ASSETS This is defined as the advantage.56 0 1.48 0 250.purchased goodwill is determined by using subjective estimates.652.452. In accounting.00 0 66.28 0 1. Goodwill maybe arrived at by taking the average profits for lets say three previous years of trading. 1. Good personnel 3. Factors that contribute to goodwill 1. a person gets by continuing to be entitled to represent to the outside would that he is carrying on a business which has been carried on for sometime previously.

e.5 m to acquire the net assets (i.3. 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.g) If a business pays Sh. 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.Lesson Six 317 (e. Purchased goodwill can be treated in the following three main ways: 1) 2) 3) Goodwill is written off from the accounts Is carried at its value an amortized over a period of time Carried at its value without being amortized.

They decided to change profit sharing ration to 3:2.750. Solution: 1) A CAPITAL ACCOUNT B Bal b/d Goodwill(OPSR) Bal c/d 12.0 00 A 1.0 00 1.500.0 00 250.0 00 1.318 Other Aspects of Final Accounts In a partnership.000 200.500.000 Goodwill has been agreed at Sh.00 A 1. Required: The partner’s capital balances assuming that: 1) Goodwill is to be retained in the accounts 2) Goodwill is to be written off form the accounts.1. On retirement of an old partner.000 B 1.500. If the goodwill is to be written off from the accounts.00 Bal b/d .000.Sh. there are normally three situations where goodwill is accounted for in the accounts: If there is a change in the profit sharing ratio. Goodwill account Cr.0 00 2) Goodwill CAPITAL ACCOUNT A B 300. The capital balances are: A: .000 B: .0 00 250. Example (when there is a change in profit sharing ratio) When there is a change in the profit sharing ratio.) The goodwill may remain in the accounts and therefore no partner entries will be made.Sh.500.1. then goodwill is introduced in the accounts by Dr.500.000. On admission of a new partner.000.750. Partner’s capital account ( the credit is based on the old profit sharing ratio.500.00.0 00 12.0 00 B 1. this will be done by Debiting partner’s capital account (in the New profit sharing ratio) Crediting goodwill account Example: A and B have been trading as partners sharing profits and losses equally.

000 B 2 5 140.750.000 100.00 0 REVALUATION OF ASSETS.000) 1.000 B £2.000 .000 900.00 0 0 Goodwill (OPSR) 250.000) Creditors Book value £ 2.000 100.200. Assets/Liabilities Buildings Fixtures. Example: (A.000 C £1.500. Any revaluation gains or losses are passed through a new account (i.500.00 0 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.000 1.) based on market price.000 800. The business may revalue some of the assets to reflect their fair values (e. Fittings & furniture Motor vehicle Stock Debtors (50.000 50.750.000 700.000) 400.000 800.550.000 50.500.000 100.000 450.000 12.000 Market price/Agreed value Gain) £ Loss 2.500.g.Lesson Six 319 (NPRS) Bal c/d (NPSR) 950.000 12.000 (100.000.00 0 1.000 (50.000) 650.00 0 0 1.500.00 0 250.000 (50. and C are trading as partners sharing profits and losses in the ratio of 2:2:1. B.000 50.000 £ buildings Creditors 500.000 5 140.000 Required: Prepare Revaluation account and the partner’s capital account given the partner’s balances as A £3.000 REVALUATION ACCOUNT Fixtures Motor vehicles Stock Debtors Capital A/C A 2 £ 100.000 700. The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.150.e) a Revaluation account and the balance on this account profit or low on revaluation is transferred to the partner’s capital accounts in the existing profit sharing ratio.000.

Partner’s capital account Cr.000 5 70. Revaluation in the profit share ratio EXAMPLE 7.000 144.000 35.640 1.570 B £ 000 A £ 000 3.320 Other Aspects of Final Accounts C 1 600.500 140 2.640 C £ 000 1.140 B £ 000 2.640 1.500 70 1.000 15.140 CAPITAL ACCOUNT C £ 000 Bal b/d 2.980 ___760 98. then the profit will be transferred to the partner’s capital account by: Dr.000 65.140 3.11 9 85.570 If there is a profit on revaluation.000 37.379 34.119 £242.510 Revaluatio n 2.000 Goodwill Bal c/d A £ 000 3.000 185.000 2.000 140 3.000 62.000 600.7 Alan. Revaluation Cr.000 . Fixed Assets Premises Plant Vehicles Fixtures Current Assets Stock Debtors Cash Capital Alan Bob Charles £ £ 90. Partner’s capital account in the profit share ratio If there is loss then Dr. Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively. The balance sheet for the partnership as at 30 June 19X6 is as follows.

509) 4.714 (2.11 9 Charles decides to retire from the business on 30 June 19X6. and Don is admitted as a partner on that date.000 19.883 28.036 4.Lesson Six 321 Current account Alan Bob Charles Loan – Charles Current liabilities Creditors Bank overdraft 3. The following matters are agreed: .678 5.200 £242.

00 0 106. f) The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned.0 00 79.00 0 Don Alan Bob Charl Current Accounts Don Alan Bob Charl .10 Cash 0 book 42.00 0 21.000.0 00 79.000 Stock £54.000 - .00 0 7. d) Alan and Bob are to share profits in the same ratio as before.00 0 Bob £ 65. The partners in the new firm do not wish to maintain a goodwill account so that amount is to be written back against the new partners’ capital accounts. e) Charles is to take his car at its book value of £3. b) Draft a balance sheet for the partnership of Alan. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.Bal b/d 3. Solution: Don £ Goodwill written off Motor vehicle Cashbook Bal c/d 12.00 0 67.0 00 79.0 00 67.0 00 14.0 00 Charl es £ Capital Accounts Don Alan £ 79.900 in part payment.900 Goodwil l 38.000 which he is willing to leave as a loan account.0 00 Charl es £ 35. Required. and Don is to have the same share of profits as Bob.179 b) Provision is to be made for doubtful debts in the sum of £3. Bob and Don as at 30 June 19X6. and the balance of all he is owed by the firm in cash except £20. Premises £120.0 00 106. c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42.00 0 21. including goodwill and retiring partners’ accounts.0 00 42. a) Account for the above transactions.0 00 £ 85.0 00 Bob £ 12.000.0 00 79.000 Plant £35.0 00 Alan £ 18. Don is to contribute cash to bring his capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.322 Other Aspects of Final Accounts a) Certain assets were revalued.00 0 67.

09 1 £ 3.50 9 es £ .09 1 £ - £ 2.714 8.09 1 5.091 12.09 1 3.09 1 3.60 0 7.60 0 - es £ 4.Lesson Six 323 Bal b/d Cash book Bal c/d £ 9.478 .Bal b/d 7.11 4 5.02 3 3.478 12.400 - £ 5.678 2.60 0 7.478 Revaluation a/c Cash book £ 3.11 4 3.800 - 3.

000 Charles – capital account 3.000 Premises 30.capital account Current account Bal b/d 79.capital account Current account £ 760 Charles – capital account 79.100 8.478 21.100 8.000 7.091 Current account Alan – capital account Current account Bal c/d Cash book £ Don .600 2.000 Cash book Bal b/d Don .200 3.000 _____ 30.324 Other Aspects of Final Accounts Plant Stock Debtors Profits shared: Alan Bob Charles Revaluation Account £ £ 2.000 9.023 £ 38.400 5.800 30.000 Loan 3.200 38.000 8.000 8.000 9.000 7.478 21.091 Loan account Current account Alan – capital account Current account £ 4.023 ****** .

173 230. ii. Same case applies for any gain or loss in the revaluation of assets.000 1. Goodwill written off in the new profit sharing ratios against the capital accounts only for the new partners. iii.273 NOTE: i.100 (24.273 20.746) 62.710 67. Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios. iv.980 __760 86. (d)Admission of a new partner.000 35.000 168.273 210.Lesson Six 325 Alan. his balance remains in the business as a loan. Bob and Don Partnership Balance Sheet as at 30 June 19X6 Fixed Assets Premises Plant Vehicles Fixtures Current Assets Stock Debtors Cash Less Current Liabilities Creditors Bank overdraft Capital accounts Alan Bob Don Current Accounts Alan Bob Don Non current liabilities Loan – Charles 54.000 3.091 Cost Depreciatio n NBV 120.100 2.273 201.000 67.000 67.036 5.091 3. this marks the end of the old partnership and the beginning of a new one.179 31. . When there is no enough cash to be paid to the retiring partners.000 9.091 3.919 19.000 230. When a new partner is admitted into the firm.

326

Other Aspects of Final Accounts

The new partner will have to bring in the capital that is due from him as per the agreement and also pay for a share of the goodwill. Goodwill is credited to the partner’s account(only the old) and is again written off by debiting the partner’s account(inclusive of the new one in the new Profit Sharing Ratio). If the admission is taking place part way through the financial period, then the new partner will be entitled to the profits or losses for the remaining part of the financial period. (i.e from the point of joining the partnership). Care should be taken when apportioning interest on capital, salaries and profits because of the changes Example: The following was the partnership trial balance as at 30 April 2001: Sh. Sh. Fixed capital accounts Rotich 750,000 Sinei 500,000 Current accounts Rotich 400,000 Sinei 300,000 Leasehold premises (purchased 1 May 2000) 2,250,000 Purchases 4,100,000 Motor vehicle (cost) 1,600,000 Balance at bank 820,000 Salaries (including partners’ drawings) 1,300,000 Stocks: 30 April 2000 1,200,000 Furniture and fittings (cost) 300,000 Debtors 225,000 Accountancy and audit fees 105,000 Wages 550,000 Rent, rates and electricity 310,000 General expenses (Sh.352,400 for the six months to 31 October 2000) 660,000 Cash introduced – Tonui 1,250,000 Sh. Sh. Sales (Sh.3,500,000 to 31 October 2000) 8,750,000 Accumulated depreciation: 1 May 2000 Motor vehicle 300,000 Furniture and fittings 100,000 Creditors 1,070,000 13,420,000 13,420,000 Additional information: 1. On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be shared on the ratio 2:2:1. For the purposes of this admission, the value of goodwill was agreed at Sh.3, 000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 more into the firm of which Sh.375,000

Lesson Six

327

2. 3. 4. 5. 6. 7.

comprised his fixed capital and the balance was credited to his current account. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated were to be apportioned on a time basis. A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost. On 30 April, the stock was valued at Sh.1,275,000. Salaries included the following partners’ drawings: Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500 A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expenses, which was later found to be due to the following clerical errors: • Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account of the customer concerned; • The purchases journal had been undercast by Sh.80,000 Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.

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 30 April 2001 (4 marks) c) Balance sheet as at 30 April 2001 (7 marks) (Total: 20 marks) Solution a) ROTICH, SINEI AND TONUI TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2001 Sh. Sh. Sales 8,750,000 Less: cost of sales Opening stock 1,200,000 Purchases 4,180,000 5,380,000 Less: Closing stock (1,275,000) 4,105,000 Gross Profit 4,645,000

328

Other Aspects of Final Accounts

Gross profit S TS Expenses Dep. Motor Vehicle Furniture

×GP

1.3.20003.10.2000 Sh Sh 1,858,00 0

1.11.200030.4.2001 Sh Sh 2,787,00 0

Sh

Sh 4,645,00 0

Salaries Accountancy fees Wages Rent, rates, electricity General expenses Prov. For depreciation Net Profit Less: Interest on capital Rotich Sinei Tonui Balance of profit shared Rotich 2 3 Sinei

160,0 00 15,0 00 483,7 50 52,5 00 275,0 00 137,5 00 362,4 00 30,0 00

160,00 0 15,00 0 483,75 0 52500 275,00 0 137,50 0 359,60 0 10,00 0

(1,506,1 50) 351,8 50

(1,393,3 50) 1,393,6 50

320,00 0 30,00 0 967,50 0 105,00 0 550,00 0 275,00 0 612,00 0 40,00 0

2,899,50 0 1,745,50 0

37,5 00 25,0 00 -

37,50 0 25,00 0 (62,50 0) 289,35 0 0 524,9 60 524,9 60 262,4 80 18,75 (81,2 50) 1,312,4 00 0 0 0

75,00 50,00 18,75 (143,75 0) 1,601,75 0

2

5 5

1

3 1

2 5

Tonui -

192,9 00 96,4 50 -

(289,3 50)

(1,312,4 00)

717,86 0 621,41 0 262,48 0

(1,601,7 50

b) R Sh. S Sh. T Sh. Current Account R Bal b/d Sh. S Sh. C Sh.

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329

Goodwill w/o Capital A/C Drawings

1,200,0 00 150,0 00

1,200,0 00 120,0 00

600,0 00 375,0 00 62,5 00

400,0 00 Cash book Goodwill (2:1) Interest on capital Profit share 2,000,0 00 75,0 00 717,8 60 3,192,8 60

300,00 0 1,000,0 00 50,0 00 621,4 10 1,971,4 10

1,250,0 00 18,7 50 262,4 80 1,531,23 0

Bal c/d

1,842,8 60 3,192,8 60

651,4 10 1,971,4 10

493,7 30 1,531,2 30

c)

Rotich, Sinei and Tonui Balance Sheet as at 30 April 2001 Non-Current Assets Leasehold premises Furniture and Fittings 170,000 Motor vehicle Current Assets Stock Debtors Less Provision Prepayments Balance at bank Current Liability Creditors Accruals Capital: Rotich Sinei Tonui 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 1,275,000

193,000 (40,000)

153,000 50,000 820,000 2,298,000 (1,085,000) 1,213,000 4,613,000 750,000 500,000 375,000

1,070,000 15,000

330

Other Aspects of Final Accounts

1,625,000 Current Account: Rotich Sinei Tonui (d) 1,842,860 651,410 493,730 2,988,000 4,613,000

The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any introduction of goodwill and revaluation of assets Some of the adjustments may also be made in the current accounts if adjustments are made in the capital account and the admission is partway through the financial period, then any interest to be charged on capital will be based on the adjusted capital balance. If the adjustments are made in the current account then there will be no change on the capital balance and therefore no change on the interest charged on the capital balances.

(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 partner’s 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. 2) Credit balance on the current account This amount due to the partner is paid directly from the cashbook or transferred to the capital account whereby the total cash payable is to be determined. The transfer is made by: Dr. Current account Cr. Capital account 4) Share of profits If the retirement takes place during the financial period, then the retiring partner is entitled to take profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared in profit share ratio will be credited to the partner’s current account.

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331

Therefore the profit and loss account will be split between the two periods and appointment of profits done and this will be based on the terms of the partnership in each period. EXAMPLE 7.9 May 2002 Question 3 Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively Given below is the balance sheet Balance sheet as at 31 March Assets Non-current assets: Fixed assets Current assets: Stock Debtors Capital and liabilities: Capital accounts: Kyamba Onyango Wakil Current accounts: Kyamba Onyango Wakil Current Liabilities: Bank overdraft Trade creditors of the partnership as at 31 March 2001. 2001 Sh. Sh. 465,000 294,000 209,000 503,000 968,000

160,000 140,000 200,000 500,000 65,300 49,000 53,000 167,300 667,300 48,000 252,000 300,700 968,000

Additional information: 1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while Kyamba and Onyango continued in partnership. 2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango continued with the retail business The assets and liabilities transferred to Wakil were as follows: Net book value Transfer value Sh Sh. Fixed assets 260,000 306,000 Stocks 166,000 157,000 Debtors 172,000 165,000

332

Other Aspects of Final Accounts

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. • Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively. • Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001 and the balance of the profits be shared equally after allowing for annual salaries of Sh.72, 000 to Kyamba and Sh.60, 000 to Onyango. 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. a) b) c) Required: Profit and loss and appropriation account for the year ended 31 March 2002. (4 marks) Capital accounts for the year ended 31 March 2002 (4 marks) 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)

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333

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 Less: Salaries Kyamba Onyango Balance of profits shared in PSR Kyamba ½ Onyango ½ b) (2) Goodwill in New PSR (4) Fixed Assets Stocks Debtors K 100,00 0 O 100,00 0 W 306,0 00 157,0 00 165,0 00 Bal b/d (1)Goodwill in old PSR Cashbook Profit on transfer in old PSR Creditors Current account (3) Cash book (**) 300,00 0 3000,0 00 628,0 00 300,0 00 300,0 00 20,000 20,000 72,000 60,000 34,000 34,000 Sh. 240,000 (40,000) 200,000 (132,000) 68,000 (68,000)

CAPITAL ACCOUNT K 160,0 00 80,0 00 48,0 00 12,0 00 O 140,0 00 80,0 00 68,0 00 12,0 00 W 200,0 00 40,0 00 6,0 00 156,0 00 53,0 00 173,0 00 628,0 00

Bal c/d

200,00 0

200,00 0

c) Capital Drawings K Sh 85,0 00 O Sh 70,00 0

CURRENT ACCOUNT W Sh 53,000 Bal b/d Interest on capital K Sh 65,300 20,000 O Sh 49,0 00 20,0 00 W sh 53,00 0 -

334

Other Aspects of Final Accounts

Salaries Bal c/d 106,3 00 191,3 00 93,00 0 163,00 0 53,000 Share of profits

72,000 34,000 191,300

60,0 00 34,0 00 163,0 00

53,00 0

KYAMBA AND ONYANGO Balance Sheet as at 31 March 2002. Non-Current Assets Current Assets Stock Debtors 127,000 Bank 490,300 Liabilities Creditors (96,000) Capital: Kyamba Onyango Current: Kyamba Onyango b) Working capital Kyamba- capital Onyango – capital Increase Bank 106,300 93,000

Sh. Sh. 205,000 228,000 135,300 394,300 599,300 200,000 200,000 400,000 199,300 599,300

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

Workings: Non Current Assets: Bal b/f Transfer Balance Stock: Bal b/f Transfer 294,000 (166,000) 465,000 260,000 205,000

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335

Increase Debtors: Bal b/f Transfer Increase Creditors: Bal b/f Transfer

100,000 228,000 209,000 (172,000) 90,000 127,000 252,000 156,000 96,000

EXAMPLE 7.10 Upp and Downe are in partnership. The following trial balance has been extracted from their books of account as at 31 March 19 –2 after their trading and profit and loss account has been prepared, but before any consequent adjustments have been made to the partners’ respective capital accounts. Dr. Cr. Capital accounts (as at 1 April 19 – 1): £ £ Upp 60,000 Downe 40,000 Cash 6,600 Creditors 29,250 Debtors 201,000 Downe: goods withdrawn 400 Drawings: Upp (all at 31 December 19 – 1) 20,000 Downe (all at 30 September 19 – 1) 15,000 Fixed assets: at cost 200,000 Accumulated depreciation 90,000 Accrued interest on Upp’s Loan account 10,000 Loan account: Upp 50,000 Net profit for the year to 31 March 19 – 2) 179,750 Salary: Downe 12,000 Stocks 3,500 Upp: private expenses paid (on 31 March 19 – 2) 500 £459,000 459,000 Additional information 1. The partnership agreement contains the following provisions: a) Profits and losses are to be shared equally; b) Current accounts are not to be kept; c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a rate of 15% per annum; d) The partners will be charged interest on any cash drawings made during the year at a rate of interest of 10% per annum; e) Downe is to be allowed a salary of £16,000 per annum;

000 Goodwill 40. and c. Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan in the new partnership.750 3.000 Remaining fixed assets taken over by the new partnership 50. 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. Side agreed to pay £75.000 Creditors 35. Upp and Downe’s profit and loss appropriation account for the year to 31 March 19 – 2.000 into the new partnership as at that date as his capital contribution.000 Debtors 180. Upp decided to retire at 31 March 19 – 2.000 Stocks 5. It may be assumed that all of the transactions relating to the changes in the respective partnerships take place on 1 April 19 – 2.336 Other Aspects of Final Accounts f) A specific loan made by any partner is to bear interest at a rate of 20% per annum. Required: Prepare: a. Profits and losses are to be shared in the proportion Downe 75% and side 25%. Downe invited Side to join him in partnership as fro 1 April 19 – 2. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions have been settled. In accordance with the partnership agreement. b. Upp. (Detailed working should be submitted with your answer). 2. Downe and Side’s respective capital accounts sufficient to reflect all of the above transactions. SOLUTION (a) Upp and Downe Profit and loss appropriation account for the year ended 31 March 19-2 £ Net profit b/d Add interest on drawings Upp [3/12 x (10% x 20. 5. the other half being paid to him in cash. Following Upp’s decision to retire. the assets and liabilities were revalued as follows: £ Car (to be retained by UPP) 10.000)] £ 500 £ 179.000 Legal and other expenses connected with the partnership change 4. 4. Goodwill is not to be retained in the books of the partnership. The legal and other expenses connected with the partnership changes were due for payment on 30 April 19 – 2.750 .

250 181.Lesson Six 337 Downe [16/12 x (10% x 15.000 Less: Salary – Downe Balance of profits shared in PSR Capital – Upp (1/2) .000] Downe [15% x 40.000 (15.000 (16.000 6.000) 166.000 75.Downe (1/2) 9.000) 150.000 _____- .000 150.000)] Less: Interest on capital Upp [15% x 60.000 750 1.000 75.

00 0 75.00 0 65.00 0 Downe £ 40.850 Goodwill written back (W2) Balances c/d Balance b/d Cash (c) Balance Sheet as at 1 April 19-2 £ Non current assets Current assets Stocks 5.000 20.00 0 500 10.00 0 20.850 88.100 £ 50.00 0 Upp £ 60.000 58.0 00 _____154.00 0 Capital Accounts Downe £ Balances b/d 750 12.850 ______ 154.000 400 Loan interest Appropriation -salary -interest on capital -residual profit 9.000 Cash (W3) __5.850 ____88.000 88.00 0 Downe £ 88.00 0 103.100 190.00 0 10.000 15.000 .0 00 Side £ 75.000 75.000 Debtors 180.850 137.0 00 Side £ 10.000 6.00 0 ______ 137.00 0 Downe £ 30.00 0 75.000 16.338 Other Aspects of Final Accounts (b) Upp £ Appropriation .interest on drawings Salary Drawings Private expenses/goods Car Revaluation (deficit) (W1) [see workings after (c)] Loan (balancing figure) Balance c/d 500 20.000 75.

500 4.000 444.25 0 Balance b/d 40.000 £ Capital -Downe (75%) -Side (25%) 30.000 + 4.000 10.000 40.750 150.000 123.00 0 200.350 200.00 0 3.000 W2 Capital -Downe (1/2) -Upp (1/2) Goodwill Revaluation £ 40.000 Creditors Provision for depreciation Capital – Upp (car) Fixed assets Stocks Debtors Goodwill Balance c/d (deficit) £ 29.500 200.000 5.000 40.000 .000 10.000 50.350 Workings W1 Revaluation Debtors Fixed assets (cost) Stocks Legal etc expenses Creditors £ 201.00 0 40.850 65.Lesson Six 339 Current liabilities Creditors [35.750] Working capital Net assets employed Financed by Capital Downe Side Loan Upp (W4) 39.000 40.350 58.000 ______ 444.250 90.750 35.25 0 20.850 _76.000 _____ 40.000 20.000 _____ 40.000 180.

600 5.Upp Cash Balance c/d £ 76.00 0 153.600 .500 153.000 81.100 81.500 76.600 75.000 103.00 0 Balance b/d Balance b/d Capital -Upp £ 50.000] Balance c/d 76.340 Other Aspects of Final Accounts W3 Cash Balance b/d Capital -Side Bal b/d W4 Loan .500 £ 6.100 £ Loan -Upp [1/2 x 153.500 5.00 0 76.

Kimeu and M. 1.200 1.750 301.000 125.750 250.204.775.250 86.40) Sales (45.250 100. at cost Provision for depreciation 1 April 1991 Stocks at 1 April 1991 Raw materials Work-in-progress Toys completed (30.425.000 176.750 151.750 843.500 150.200.204.000 6.053.500 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. Kimeu being responsible for the factory and Maingi for the sales. Profits are shared on the following basis: Factory Sales Department Kimeu 80% 40% Maingi 20% 60% The following trial balance has been extracted from the books at 31 March 1992: Sh.000 at Sh. Freehold factory at cost Factory plant. Maingi are in partnership as manufactures of Tick Toys.000 150. at cost Provision for depreciation 1 April 1991 Delivery van. All completed toys are transferred from the factory to sales department at agreed price.000 40. K.500 716.250 375.000 150.000 1.200 .000 1.400.000 2.700 85.250 401.500 450.Lesson Six 341 REINFORCEMENT QUESTIONS QUESTION ONE 1.200 6.

45 each were manufactured and transferred to Sales Department during the year.000 Lodge 15.000 Lodge 500 Pym 400 Discount allowed 10.a. ii Accrued expenses outstanding at 31 March 1992: Factory Sales Department Sh.000 toys at Sh.000 Pym 5.000 Accumulated depreciation (at 1 April 19-7) 20. 45 each.530 Drawings: Amis 25.900 Current accounts: Amis 1. on cost iv The general provision for bad debts is to be maintained at 10% of the trade debtors. Required: Manufacturing.000 Carriage outwards 12.a.000 Factory wages 7. Stock of raw materials was Sh.000 Cash at bank 4. (20 marks) QUESTION TWO Amis.126. Sh. Tys in stock at the end of the year were to be valued at Sh. The following trial balance has been extracted from their books of accounts as at 31 March 19-8: £ £ Bank interest received Capital accounts (as at 1 April 19-7): Amis 80.250 27.000 . Expenses 52. trading and profit and loss accounts for the year ended 31 March 1992 and a balance sheet as at that date.000 Pym 15.000 iii Provision for depreciation is to be made as follows: Factory plant 10% p.79. on cost Delivery van 20% p.50 and work-inprogress was valued at prime cost of Sh.000 Lodge 22.000 Discount received 4. Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2.000 Motor vehicles: 80.342 Other Aspects of Final Accounts Additional information: i 38. 250 at 31 March 1992.000 Carriage inwards 4.

Lesson Six 343 Office expenses 30.500 Trade debtors 14. heat and light 8. This amount was owing to Pym for the year to 31 March 19-8. 5. Pym is allowed a salary of £13.000 Provision for bad and doubtful debts (at 1 April 19-7) 420 Purchases 225. Stock at 31 arch 19-8 was valued at £35. 4. 7. . There were no purchases or sales of fixed assets during the year to 31 March 19-8. Interest on drawings and on the debit balance on each partner’s current account is to be charged as follows: £ Amis 1. There were no movements on the respective partners’ capital accounts during the year to 31 March 19-8. An office expense of £405 was owing at 31 March 19-8. and some rent amounting to £1. The partnership agreement also allows each partner interest on his capital account at a rate of 10% per annum. Motor vehicles – 25% on the reduced balance b.800 Sales 404.500 Stock (at 1 April 19-7) 30.000 Rent. Plant and machinery – 25% on the original cost.000 Accumulated depreciation (at 1 April 19-7) 36.300 £583. According to the partnership agreement. 2.5000 had been paid in advance as at that date. These items had not been included in the list of balances shown in the trial balance. The provision for bad and doubtful debts is to be maintained at a level equivalent to 5% of the total trade debtors as at 31 March 19-8. Depreciation on the fixed assets is to be charged as follows: a. The regularly make up their accounts to 31 December each year. rates.300 Additional information: 1.300 £583. profit and loss account for the year ended 31 March 19-8 b) The partners current accounts and a balance sheet as at 31 March 19-8 QUESTION THREE Amber and Beryl are in partnership sharing profits in the ratio 60:40 after charging annual salaries of £20.000 Lodge 900 Pym 720 6. and the interest had not been credited to them as at that date.000 per annum.000 each. 3.000 Trade creditors 16. and needs to be accounted for. Required: a) Prepare the Partners trading.400 Plant and machinery: At cost 100.000.

344 Other Aspects of Final Accounts On July 1996 they admitted Coral as a partner and agreed profits shares from that date of 40% Amber. The salaries credited to Amber and Beryl ceased from 1 July 1996. . 40% Beryl and 20% Coral.

96 Wages and salaries of staff Sundry expenses Provision for doubtful debts at 1.1.000.000 on coral’s capital account consists of £100.1.000 3.000 paid for a 20% share of the goodwill of the partnership.000 In preparing the partnership accounts the following further information is to be taken into account: a) Closing stock at 31 December 1996 was £200.000.000 250.000.96: Amber Beryl Capital account Coral (see note (d) below) Current accounts as at 1.1. d) The balance of £140.1.1.000 210.143.000 420.000 6.000 30.000 50.96 Freehold land at cost (see not (e) below) Buildings: cost Aggregate depreciation 1.000 24.000 7.96 Plant.000 120.000 are to be written off and the provision for doubtful debts increased by £10.000 200.000 introduced as capital and a further sum of £40. and no goodwill account is to remain in the records. e) It was agreed that the freehold land should be revalued upwards on 30 June prior to the admission of Coral from £200. f) Amber’s loan carries interest at 10% per annum and was advanced dot the partnership some years ago.1. equipment and vehicles: cost Aggregate depreciation 1. The revised value is to appear in the balance sheet at 31 December 1996.000 38.143.96 Trade debtors and creditors Cash at bank £ 280.000 240.000 b) Debts totaling £16. The appropriate adjustments to deal with the goodwill payment are to be made in the capital accounts of the partners concerned.Lesson Six 345 The partnership trial balance at 31 December 1996 was as follows: £ Capital accounts as at 1.000 50.000 15.000. c) Provision is to be made for staff bonuses totaling £12. g) Provide depreciation on the straight-line basis on cost as follows: Buildings 2% .400.96 Amber Beryl Drawing accounts Amber Beryl Coral Loan account Amber Sales Purchases Stock 1.000 3.000 1.000 2.000 180.000 350.000 28.000 140.000 to £280.000 20.000 228.

018 20.100 12. 10% Require: a) Prepare a trading account.600 14. each of these three activities is treated as a separate department.932 3.125 32.805 52.892 41. equipment and vehicles: Workshop Petrol and oil 32. 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. 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. In addition to selling petrol and oil. (17 marks) b) Prepare the partners’ capital accounts and current accounts for the year in columnar form. For accounting purposes.860 41. profit and loss account and appropriation account for the year ended 31 December 1996 and a balance sheet as at that date.900 .964 8. (7 marks) (Total: 24 marks) QUESTION FOUR Duke and Earl are in partnership operating a garage business named Aristocratic Autos.720 23.914 1.346 Other Aspects of Final Accounts Plant.000 65.252 81. equipment and vehicles h) Profits accrued evenly during the year.180 22.500 65.200 38.

210 4.Lesson Six 347 Showroom Provisions for depreciation (at 1 October 1985): Freehold buildings: Workshop Petrol and oil Showroom *Note ‘Freehold’ – held in perpetuity Plant.100 19.602 15.692 34.740 .451 26.390 48.254 17.450 5.250 316 1.605 30.200 26.250 1.453 10.602 6.060 7.470 1. 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): 17.190 9.365 537 12.225 5.200 10.160 4.050 5.060 5.738 9.810 4.077 9.

000 .750 10.477 50.348 Other Aspects of Final Accounts Duke Earl Capital accounts: Duke Earl 9.000 40.

7) General expenses are apportioned over departments on the basis of turn over for the current year. (14 marks) (Total: 34 marks) b) .633) of the workshop plant sold during the year.Lesson Six 349 Notes at 30 September 1986 1) Stocks at 30 September 1986: Workshop 2. (20 marks) A departmental balance sheet for Aristocratic Autos as at 30 September 1986. 4) Accruals at 30 September 19861 £ Wages: Direct: Workshop 113 Petrol and oil 83 Indirect: Workshop 214 Showroom 231 Electricity 517 General expenses 1. Required: Prepare.304 5) Prepayments at 30 September 1986 £ Rates 13. The freehold buildings are temporary structures with a five year life. equipment and vehicles 20 The depreciation charges for the current year have not yet been posted to the accounts. 3) No entries have yet been made to transfer the cost (£19.500) and accumulated depreciation (£15. using the following rates: % Freehold buildings 20 Plant.976 Showroom 25. 8) Duke and Earl are credited with interest on their respective capital account balances at the rate of 5% per annum. using separate columns for each department and the business as a whole.310 2) Depreciation is calculated using the straight-line method (assuming no residual value) and is applied to the original cost of the asset at eh end of the financial year.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. a) A departmental trading and profit and loss account for Aristocratic Autos for the year ended 30 September 1986.752 Petrol and oil 2.

350 Other Aspects of Final Accounts .

Lesson Six

351

QUESTION FIVE Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on capital and partnership salaries is not provided. The position of the business at th end of its financial year is: Balance Sheet 30 June 19-6 £ £ Buildings 9,000 8,000 8,000 Equipment Stock Debtors 25,00 Bank 0 £ £ 17,000 3,300 900 2,020 2,840

Capital accounts: Reg Sam Ted Current Accounts: Reg Sam Ted (debit) Creditors

140 200 340 100 240 ___82 0 26,06 0 _____ 26,060

Reg died suddenly on 31 October 19-6. The partnership agreement provides that in the event of the death of a partner the sum to be paid to his estate will be the amount of his capital and current account balances at the last financial year-end adjusted by his share of profit or loss since that date together with his share of goodwill. A formula for calculation of goodwill is given, and its application produced a figure of £7,500. no goodwill account is to remain in the books after any change of the partnership constitution. The stock value at 31 October has been calculated and all other accounts balanced off, including provisions for depreciation, accrued expenses and prepaid expenses. This results in the following position at 31 October. £ buildings 17,000 Equipment (including additions of £400) Stock 1,100 Debtors 2,230 Bank balance 3,370 Creditors 980 3,480

There were no additions to, or reductions of, the capital accounts during the four months, but the following drawings have been made:

352

Other Aspects of Final Accounts

Reg Sam Ted

£2,000 £1,600 £1,800

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353

• •

It has also been agreed that the share of a deceased partner should be repaid in three equal installments, the first payment being made as on the day after the day of death. The surviving partners agree that Abe (son of Reg) should be admitted as a new partner with effect from 1 November, and it is agreed that he will bring into the business £4,000 as his capital together with a premium for his share of the goodwill (using the existing valuation). The new profit-sharing agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth. Show the partnership Balance Sheet as at 1 November 19-6, on the assumption that the above transactions have been completed by that date.

CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK

354

Other Aspects of Final Accounts

COMPREHENSIVE ASSIGNMENT No.3 TO BE SUBMITTED AFTER LESSON 7 To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the College. EXAMINATION PAPER. THREE HOURS. ANSWER ALL QUESTIONS QUESTION ONE The Dohray Amateur Musical Society has a treasurer who is responsible for receipts and payments, which he records in cash and bankbooks. Periodically, these books are handed over to the firm of certified accountants that employs you. One of your tasks is to prepare the final accounts of the Society. As a preliminary step, you have prepared the receipts and payments account (rounded to the nearest £1) for the year ended 31 May 1985. This is shown below, together with the explanatory notes which the treasurer has supplied to enable you to understand the nature o f some of the items. Dohray amateur Musical Society Receipts and Payments Account For the year ended 31 May 1985 Receipts Cash £ Payments Ban k £ Cash £ Bank £ TIME ALLOWED:

£ £ £ £ Opening balances b/d Debtors: members 31 309 Creditors: trade Fixed assets (note 4)

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Joining fees (note 1) Annual subscriptions (Note 2) 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 Transfers from cash a/c

190

160

Musical instruments Trophies

522 83

285 1,791 287 190

70 Creditors: trade Purchase for resale (Note 4) Sheet music Annual concert (note 3) Hall booking fees 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 society’s premises (Note 10) Refreshment purchases Bank charges Sundry expenses Transfers to bank a/c Closing balances c/d 118

490

112 236 174

113 64

250 281 150 100 72 510 72 42 60 2,910 49 3,091 723 4,249

3,091

4,24 9

Explanatory notes supplied by the treasurer

356

Other Aspects of Final Accounts

1) On joining the Society, members pay a non-returnable fee of £10 (before 1 June 1982, the fee had been £). It has been found from experience that, on average, members remain in the Society for five years. On this basis, one 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

2) Annual subscriptions are due on 1 June each year. It is Society’s policy to credit these to income and expenditure account on an actual receipts basis, not an accruals basis. However, if subscriptions are received in advance, the amounts are credited to income and expenditure account for the year, which they are paid. 3) The Society’s major money raising event is its annual public concert. This is given in a large hall, which the Society hires. The society also hires professional musicians and soloists and has to pay the fees of the adjudicators (judges). 4) The society buys trophies (silver bowls and shield) to present to the winners of individual musical items at the annual concert. It also buys musical instruments some of which are for use by the members and others for resale to the members. Musical scores and sheets are also bought for resale to the members. 5) A local building company has given a grant to the Society for a period of three years in return for publicity. This sponsorship grant was received in full on 1 June 1984 and is being credited to income and expenditure account in equal installments in each o the three years to 31 May 1987. 6) The performing Arts Council (PAC) has awarded the Society an annual grant towards the running costs. In addition the PAC makes capital grants. The society’s policy is to hold capital grants in suspense and to release each year’s grant to income and expenditure account over a period of five years, from the year of grants onwards. At 31 May 1984 capital grants held in suspense were analyzed as follows: In respect of year Ended 31 May Capital grants Suspense

Lesson Six

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1981 1982 1983 1984

£ 30 70 120 120 £340

7) Throughout the year, the Society competes at various musical festivals. Cash prizes won by individual members are retained by the Society and credited to income and expenditure account in order to reduce the cost of attending the festivals. 8) The offices of secretary and treasurer are unpaid but the society gives each of them an ex-gratia (honorary) cash award, termed an honorarium. 9) In order to participate in the musical festivals, the Society has to be affiliated to the Regional Musical Festival Community (RMFC). The annual fee, which has remained the same for a number of years, is paid on 1 March in each year. 10) The Society pays rent for its premises. The rental, which is inclusive of rates, heating, lighting, cleaning etc. is reviewed annually on 31 March. The payment shown in the receipts and payments account represents quarterly payments in advance, as follows: 1984 30 June 30 September 31 December 1985 31 March Payment £ 120 120 120 120 150 £510

The treasurer supplied further information as follows: 1) Creditors at 31 May £ 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 79 14 45 30 1984 £ 119 23 20 39 40 13 1985

358

Other Aspects of Final Accounts

3) Stocks at 31 May Goods for resale Sheet music 31 52 Musical instruments 70 94 Refreshments not brought into account on the grounds that It is not material in amount 4) Fixed assets (at cost) at 31 May musical instrument Trophies 1,378 247

There were no fixed asset disposals during the year 5) Provision for depreciation at 31 May Musical instruments 704 Trophies 96 Depreciation is calculated on the cost of these assets at the end of the financial year. The straight-line method is employed using the following assumed asset lives. Musical instruments Trophies 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: Provision for depreciation of vehicles £ 1980 £ 1 Balance b/ 32,000 Oct.

Lesson Six

359

1981 30 Sept.

Balance c/d

1981 57,600 30 Sept. 57,600 £

Profit and loss

25,600 £57,60 0

1982 30 Sept. Disposals Balance c/d

1 Oct. 10,800 1982 73,440 30 Sept.

Balance b/d

£ 57,600

Profit and loss includes £10,000 (depreciation on 1982 acquisitions)

26,640

_____ £84,24 0

___ __ £84,24 0

£ 1983 30 Sept. Disposals Balance 29,280 1 Oct. 79,328 1983 30 Sept. Balance b/d Profit and loss (includes £20,000 Depreciation on 1983 acquisitions) Balance b/d

£ 73,440 35,168

_____ __ £108,6 08 1 Oct. Disposals £ 1982 30 Sept. 30,000

___ ___ £10860 8 79,328

£ Provision for Depreciation Bank 10,800 16,000

1982 30 Sept.

Vehicles (vehicles Originally acquired On 1

360

Other Aspects of Final Accounts

October 1979) Profit and loss ___ ___ £30,00 0 £ 1983 30 Sept. Vehicles (vehicles Originally acquired On 1 October 1979) Profit and loss 1983 300 Sept. 60,000 11,280 ___ ___ £71,28 0 ___ ___ £71,28 0 Provision for Depreciation Bank 29,280 42,000 3,200 ___ ___ £30,00 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) You have been given the following information: i. The sales ledger debit balances total £111,111 and the credit balances total £1,234. £78,266 £2,315

Smith in the purchase ledger. and to reduce the provision for doubtful debts by £700. x. The purchase daybook had been overcast by £1. What further action do you recommend? (25 marks) . iii.546. The debit balance on the insurance account in the nominal ledger of £3. v. By mistake. iv. xi.111.200 had been included in the trial balance. as an overdraft. ix.456 had been included in the trial balance as £3.777 and the debit balances total £1. however. and the purchase ledger includes a credit balance of £800 relating to the same business X. A cash receipt from a credit customer for £345 had been entered in the cashbook as £245. Attempt to reconcile the sales ledger control account with the sales ledger balances. vi. 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. Included in the credit balance on the sales ledger is a balance of £600 in the name of H.Lesson Six 361 ii. Required: Record corrections in the control and suspense accounts. The purchase ledger credit balances total £77. The bookkeeper had been instructed to write off £500 from customer Y’s account as a bad debt. he had written off £700 from customer Y’s account and increased the provision for doubtful debts by £500. viii. An allowance of £300 against some damaged goods had been omitted from the appropriate account in the sales ledger. An invoice for £456 had been entered in the purchase daybook as £654. vii. The sales ledger includes a debit balance of £700 for business X. Only the net amount will eventually be paid.000. in error. This allowance had been included in the control account. The bank balance of £1. and the purchase ledger control account with the purchase ledger balances.

Dyo and UII had jointly contributed a deficiency of £1. the other.) Purchases: Radio and television sets Spares. Val Vez works full-time in the business with responsibility for general administration for which she receives a partnership salary of £4.210 640 3. All partners receive interest on capital at 5% per annum and interest on any loans made to the firm. trading under the name of Radtel Services. the trial balance of the firm was: £ Stocks at 1 October 1993: Shop (radio and television sets) Workshop (spares. a shop from which radio and television sets are sold.one. also at 5% per annum.00 0 £ . Radtel Services rents two sets of premises .362 Other Aspects of Final Accounts QUESTISON FOUR Ray Dyo.500. sharing profits and losses in the ratio one half.160 19. During the year ended 30 September 1983. components etc. The offices are situated above the shop and are accounted for as part of the shop. Harry UII and Val Vez are in partnership. It also had been agreed that Val Vez should receive not less than £4. one third and one sixth. components etc. 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. respectively.43 0 72.640 18. a workshop where repairs are carried out.750 8.100 232. is to be borne by Dyo and UII in the ratio in which they share profits and losses. Turnover: Sales of radio and television sets Repair charges Wages and salaries (employees): Shop and offices Workshop Prepaid expenses (at 30 September 1984) Accrued expenses (at 30 September 1984) 54.000 per annum in addition to her salary. The workshop and shop are regarded as separate departments and managed.470 155. Any deficiency between this guaranteed figurer and her actual aggregate of interest on capital.60 0 127. plus residual profit (or less residual loss) less interest on drawings. 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. respectively.000 per annum. as radio and television suppliers and repairers.

000 290 1.540 960 3.5 90 .000 20.450 2.060 55.210 420 390 15.400 2.460 15.5 90 £525.030 2.000 40.670 £525. 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. UII Provision for depreciation: Shop fittings Workshop tools and equipment Vehicles 920 7.950 4.000 40.260 48.580 17.040 920 2. Dyo H. Vez Current Accounts (after drawings have been debited): R.000 10.830 2.020 4.Lesson Six 363 Provision for doubtful debts at 1 October 1983 Rent and rates: Shop and offices Workshop Stationery.190 10. Vez Loan interest: Bank loan Loan from H.980 1.640 3.020 5.710 8.340 27. telephones. Dyo H.400 500 3. UII V. UII V.

Partnership salary (Vez). Closing stocks: shop £31. Vez £20. Residual profits/Losses. workshop £10. £540.364 Other Aspects of Final Accounts The following matters are to be taken into account: 1) 2) 3) 4) 5) 6) 7) Manager’s commissions.080.220.B. Dyo £70. Loan interest and the movement in the provision for bad debts are regarded as ‘shop’ items. . Provision for doubtful debts at 30 September 1984. N. Interest on partners’ drawings. Interest on partners’ capital accounts (these have not altered during the year). UII £30.

000 Purchase of new vehicle 24.000 6.600 8.500 14.00 Insurance (to 31.12.8 Rent of premises 80 10. (4 marks) (25 marks) QUESTSION FIVE Ernie is a building contractor.64 0 150.99 0 3. doing repair work for local householders. His wife keeps some accounting records but not on a double-entry basis.04 Telephone Cash £ Bank £ 83.98) 0 Purchase of plant and equipment 3.600 1.860 230 3.800 9.600 5.860 Suppliers 52.80 0 860 .Lesson Six 365 Required: a) Prepared columnar departmental trading and profit and loss accounts and a partnership appropriation account for he year ended 30 September 1984 and the partnership balance sheet at that date.400 12.160 9.460 210 180 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 Held at the beginning of year Cash paid into the Cash and Bank summary Cash Bank Payments £ £ 230 1. 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. (21 marks) b) Complete the posting of the partners’ current accounts for the year.490 750 700 1.

26 0 29.8 80 890 The following further information is available 1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance with a full year’s charge in the year of purchase. It carries interest at 10% per annum. 3) The rent of the premises was increased by 20 % from 1 October 1997. Of this amount.1 30 48.1 30 191.80 0 191. Ernie owed the following amounts: £ Suppliers 4.100 Wages of repair staff Miscellaneous expenses Drawings by Ernie Refund to customer Cash paid into bank Cash withdrawn from bank Closing balance 101.000 400 24. 2) The new motor vehicle was purchased on 1 January 1998. amounts due from customers totaled £10.000 was obtained from Ernie’s brother on 1 April 1998.170 8) Ernie agreed to pay his wife £5000 for her assistance with his office work during the year. 7) Stock of materials at 30 June was £12.280 were bad and should be written off. This amount was actually paid in August 1998.26 0 Electricity 2.366 Other Aspects of Final Accounts bank Cash withdrawn from bank Closing balance 0 48. . 4) The loan of £10. Ernie considered that debts totaling £1.280 8.20 0 1. payable on 30 September and 31 March.04 0 890 101. Required: Prepare Ernie’s trading profit and loss account for the year ended 30 June 1998 and a balance sheet as at that date.8 80 68.860. 5) At 30 June 1998.090 Telephone 240 Electricity 220 Miscellaneous expenses 490 6) At 30 June 1998. Ernie’s depreciation policy is to charge depreciation at 25% per annum on the straight-line basis with a proportionate charge in the year of purchase but not in the year of sale.

3 NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING .Lesson Six 367 END OF COMPREHENSIVE ASSIGNMENT No.

10% preference shares. and all profits after the claim on all of the preference dividend have been paid. The more the no. Public companies There much larger in size as compared to private companies. (e. they become owners. 100.000 shares of Sh. Ordinary Share capital These are the most common shares. . Partnerships were not suitable for such businesses because the membership is limited to 20 persons.Acknowledgement 368 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.) If a company decides to set up a share capital of Sh.000 shares of Sh. Preference shares do not carry a right to vote and therefore no control in the company. Types of companies There are 2 principle types of companies: Private companies These have the words limited at the end of the name. which is expressed as a percentage of their par value. they cannot invite the members of the public to invest in their ownership. 200.g. The share capital is divided into shares. of ordinary share held. They carry no right to a fixed dividend but are entitled to residual value of the business during winding up. The investor will then pay for and be issued with the shares and therefore. The owner’s interest in a limited company consists of share capital. 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. it may decide to issue: 200.000 shares of Sh. 2 each per value. They have the words public limited company at the end of their name. Share capital of a company.000. 1 each per value. 50 each per value. Each share has a flat value called Par value/face value/nominal value. the higher the control. 400. E. They can invite the members of the public to invest in their ownership and the companies may be quoted on the stock exchange. Being private.g.

the shareholders were able to pay 50p per share.000 Uncalled share capital This is part of the issued share capital for which the company has not requested for payment and therefore these amounts will be received in the future.000 Called up share capital 150.369 Partnerships Share capital may also have the following meaning: Authorized share capital Also called. Required: Determine the: • Authorized share capital • Issued share capital • Called up share capital • Uncalled up share capital • Paid up share capital Authorized share capital 200.000 × 20 p = £30.000.g. Paid-up share capital This is the total of the share capital.000 Paid up share capital 150.000 × 50p = £75.000 × 80p = 120.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p.000 share have been issued. (e. Illustration A limited has an authorized share capital of 200. In the above (e. registered or nominal capital.000 × £ = £200.000 = £40. therefore the uncalled capital is 40p × 100.000 × £1 = £150. Assuming that the issued 100. Although the firm requested the shareholders to pay 80p per share.000 shares of £1 each out of which only 150.) because the firm had not requested for 40p.000 . which has been paid for by the shareholders.000 Uncalled up share capital 150. A company cannot issue more shares than the amount that is authorized. Issued share capital This is the total of the share capital actually issued to the shareholders.g. then the called up share capital will be: 60p × 100. Is the total of the share capital which the company is allowed to issue to shareholders.000 shares.000 = £60. Called up share capital This is the amount the shareholders have been asked to pay where the amount of capital required is less than the issued share capital.000 Issued share capital 150.

Number of partners limited to 20 except for professional firms. If the company is limited by share. He can legally bind the firm by his action. Copies of accounts must be registered with the Registrar of Companies A company is required to have a memorandum and articles of association which defines powers and duties of directors. A partnership is subject to the partnership Act which can be varied by mutual agreement. The partners contribute the capital by agreement. The amount need not be fixed. The authorized share capital is fixed by the memorandum of association. which is not affect by changes in its membership. The maximum number of shares is restricted to the company’s authorized share capital.Lesson Seven 370 The principal distinctions between unlimited partnerships and limited companies are: Unlimited Partnerships No separate Legal Entity apart from its members Limited Companies Separate legal entity. each shareholder is limited to the amount he has agreed to pay the company for share allotted. . Copy of accounts need not be filed with the Registrar of Companies Although a written Partnership deed is desirable it is not mandatory. It can be altered by passing ordinary resolution or by the court. A limited company must have at least 2 members. Rights to management are delegated to directors who alone can act on behalf of and bind the company. A company is subject to the Companies Act the provisions of which cannot be varied. sue or be sued in it’s own name. A company may contract. Every partner can normally take part in the management of the business. Liability of each member for debts of the firm is unlimited.

profit and loss and Appropriation Account for the year ended 31. the format will be as shown: Format for Company Accounts B Limited Trading.371 Partnerships A share in a partnership cannot be transferable except by the consent of all partners. but there are additional expenses that are unique to the company and therefore.g. interest received from x bank x x Less Expenses x . (e. In public companies shares are freely transferable.g.g. In private companies share transfer are subject to any restrictions imposed by the articles of association. A partnership is not obliged to keep statutory books of account and an audit is not compulsory. just like a partnership has an appropriation A/C which shows the allocation of the net profit for the period. goodwill • Debenture interest In addition to the P & L A/C. is the same as that of a sole trader.) • Director’s fees salaries and other expenses • Audit fees • Amortization e. A company is required to keep specialized accounting records and is subject to compulsory audit.12 £ £ £ Sales x Less Returns inwards (x) x Less Cost of Sales Opening Stock x Purchases x Add Carriage in x x Less purchase returns (x) x x Less Closing stock (x) (x) Gross Profit x Add incomes x Discount received x Profit on disposal (sale of Assets) x Income from investment (can also be shown x below) x Other incomes e. they should be included in the P & L A/C. Format Of Final Account The P & L of a company. Therefore.

Lesson Seven 372 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 Interim paid x x (x) x x x x x x (x) 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 (x) x x x B Limited Balance sheet as at 31. Furniture & Fittings Motor vehicle Intangible Assets Goodwill Copyrights. patents (Longterm) Investments (mkt value sh x) Current Assets Stock Debtors Less provision for bad debts Prepayments (Short term) Investments Cash at bank Cash in hand 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 .12……… £ Non current Assets Land & Building Plant and Machinery Fixtures.

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.000 ordinary shares of £1 each 100. .373 Partnerships Current liabilities Bank overdraft Creditors Accruals Interest payable(debenture interest) Tax payable Dividends payable Financed by Authorized share capital 100. This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.000 ordinary shares of £1 each 50.000 preference shares of £1 each Issued and Fully paid 80. 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. The debenture is classified under non-current liability.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 Deffered tax A/C Non Current Liabilities 10% debenture Other Long term Loans 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 Director’s salaries: Salaries. fees and other expenses in relation to the directors are expenses as far as company accounts are concerned.

000 300. (e.Lesson Seven 374 Corporation tax Companies pay corporation tax on the profirs they earn.000. Transfer to deferred tax is to cater for future possible tax liability.000. Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax). . which the company pays and at the end of the year 2000. 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.000 10.) after the 6 ----Final proposed Is paid after the year-end or after the completion to final accounts. 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 . A company may pay dividends in 2 stages during the cause of the financial period: Interim dividends Is paid part way --.000 (160 -150) 140.g.000 Appropriation 150.) Cashbook Bal c/d Under provision Corporation tax Taxation Account 160.000 140. Assume that a firm had estimated that the corporation tax for the year ended 31.000.g.the financial period.12. transfer to deferred tax corporation tax for the year).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. The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous period. the liability is now agreed at £160. In 2000.000 Bal b/d 150. the company estimates that the tax liability is £140. If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.99 is £150.000 300. (e.

The share Premium may be applied in: • • • Paying un issued shares.375 Partnerships CAPITAL RESERVES Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. Dr Cashbook (100. In a bonus issue the shareholder has no choice but to take up the shares. They are also called loan stock or loan capital.5) 50. the amount is transferred to the Profit and Loss Account. The following are the entries to be made in the A/C. REVENUE RESERVES This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. 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.000 A Cr Sahre Premium /C (100. Writing off preliminary expenses.000 × £1) 100.000 Cr Ordinary shares capital (100. Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non current assets. BONUS SHARES Shares issued to existing shareholders free of charge.5 each.5 Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. Write off discounts on shares.5) 150. Example: A Ltd wishes to raise capital by issuing 100. A debenture may either be redeemable of irredeemable.000 Issue of shares at a premium of £0. They are paid out from either the share premium. The transfer is made from either the share premium or the profit and loss account. A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. Debenture interest has to be paid whether profits are made or not. When company sills it’s property to realize the gain.000 × £1.000 ordinary shares at £1 each (per value) and the issue price (selling price) is £1. . Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without issuing new shares. and certificates called debenture certificates are issued to the lender. DEBENTURE LOANS The term debenture is used when a limited company receives money on loan. Redeemable is repayable at or by a particular date and irredeemable is payable when the company is officially terminated.000 × £0. balance of retained profits of the General Reserves. The General Reserves can also be used to issue bonus Shares.

000. The entries will be as follows: Shares to be issued: 100. Shares to be issued 100.000 trade up of 100.5 per share.000 A bonus issue of 20. It issues some bonus shares to existing shareholders at a rate of 1 share for every 5shares held.000 shares Balance sheet (extract) Ordinary shares of £1 Capital Reserves Share premium 120.000 Cr Share Premium [40.5 ] £100. Buy the new shares and exercise their rights Sell the rights in the market.000 × 1 =20. The balance on the share premium is £60.000 × £1 ] 20. Additional capital is raised by way of a right issue.000 × £2 ] £80.000 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.000 5 Dr share premium A/C [20.Lesson Seven 376 Example A Ltd has 100.5 ] £20.000.000 × £0.000 and a balance on the share premium A/C of £50.000shares of £2 each. This amount is to be financed by the share premium.000 × 2 =40. The term are: For every 5 shares held in the company.000 shares at £1 each to form an ordinary share capital of £100.000 . a shareholder can buy 2 shares at a price of £2. Required: The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and the relevant balance sheet extract. Example: A Ltd has a share capital of £200. Ignore the rights.000 30.000 shares 5 Dr cash book [40.000 Cr Ordinary share capital [40. A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by the company. 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.000 × £2.000 Cr ordinary share capital 20.

600 340 15.000 Ordinary shares @ £2 Capital Reserves Share premium 80.10 0 17. 31 March 19X7 31. 31 March 19X7 12.00 Purchases 0 Sales 138.1 22 You ascertain the following: All the motor vans were purchased on 1 April 19X5. The following is the trial balance of Transit Ltd at 31 March £ Issued share capital (ordinary shares of £1 each) 75.650 Administration expenses 10.500 Provision for depreciation on motor vans to 31 March 19X7 7.1 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.7 Directors’ remuneration (administrative) 50 Rents receivable Investments at cost 25.260 311. at cost (used for distribution) 2. was sold for £550. £ 42.050 Interim dividend paid 162 Profit and loss account. which had cost £900.85 2 311.000 280.00 Investment income 0 7% Debentures Debenture interest 6.000 The following examples will illustrate the preparation of final Account for companies. and is to be.00 Distribution expenses 0 Stock. subject only to the points we have added in this session. On 31 March 19X8 one van.750 Bank interest Bank overdraft Debtors and creditors 1. Example 8.000 206.00 0 730 24.1 22 19X8.00 Leasehold properties. provided at the rate of 20% per annum on cost from the date of purchase to the date of sale.00 0 1. Depreciation has been. at cost 0 Motor vans.377 Partnerships Balance sheet (extract) 140.5 00 3.00 0 1. as .

without taking into account the relevant statutory provisions: • • A profit and loss account for the year ended 31 March 19X8: A balance sheet at that date. but no entries with regard to these transactions were made in the books. (22 marks) . Stock at the lower of cost or net realizable value on 31 March 19X8 is £16. Required: Prepare.700.Lesson Seven 378 part settlement of the price of £800 of a new van. It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.700. The estimated corporation tax liability for the year to 31 March 19X8 is £12.

260 4.19X8 £ Gross profit Profit on disposal of van Rent Receivable A 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 32.3 62) 31.050 162 £ 72.21 8 (12.600 76.45 0 190 3.91 0 .7 00) 19.200 (44.85 2 31.05 8 17.65 0 10.51 8 (5.379 Partnerships Solution: Transit Ltd Profit and Loss /C for the year ended 31.3.24 0 1.00 0 1.46 0) 14.87 8 340 32.

700 31.700 4.000 500 1.750 83.19X8 £ Non-Current Assets Leasehold properties Motor vans Investments Current Assets Stock Debtors Current liabilities Bank overdraft Creditors Tax payable Proposed dividends Financed by: Authorized issued and fully paid 42000 ordinary share of £1 Revenue Reserves Profit and Loss A/C c/f Non-Current liabilities 7% Debentures 980 24.910 42.3.910 73.500 Disposal Disposal 550 1.980 ) 5.750 150.100 12.500 Less: Cost of sales Opening stock 12.440 6.000 1.000 88.440 76.450 Motor Vehicle – Depreciation Disposal 540 Bal b/d Bal c/d 960 P & L 1.050) Gross profit 72.400 77.720 88.190 (41.500 900 .910 Workings Sales 206.Lesson Seven 380 Transit Ltd Balance sheet as at 31.400 £ (960) 960 £ 75.000 2.910 15.200 16.000 47.700 75.750 Less Closing stock (16.500 Motor vehicle Bal b/f 2.000 31.000 Purchases 138.700) (134.

000 ordinary shares of £1 each Freehold premises at cost Motor vans Balance 1 January 19X5 at cost Additions less sale proceeds Provisions for depreciation of motor vans to 31 December 19X4 Stock in trade 31 December 19X4 Balance at bank Provision for doubtful debts 31 December 19X4 Trade debtors and creditors Directors’ remuneration Wages and salaries Motor and delivery expenses Rates Purchases Sales Legal expenses General expenses Profit and loss account: balance at 31 December 19X4 59. ii.: i.400 3.2 The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5 £ £ Share capital authorized and issued: 80.39 5 4.6 05 .381 Partnerships Cashbook 250 Bal c/d 3. iii.846 243.00 0 650 6.93 0 6. £140.258 700 108. Stock in trade.600.430 243. a motor van which had cost £680.750 13. 31 December 19X5.300 Disposal P&L Motor vehicle Disposal 900 Motor Vehicle 550 190 Depreciation 540 1090 1090 Example 8.300 2. Debts of £1.12 7 3.6 05 You are given the following information.4 40 644 5. 275 11. On 1 January 19X5. was sold for £125.00 0 15. 31 December 19X5.00 0 142.615 12.075 to be written off and the provision to be increased to £350.38 0 80.000 13. Rates paid in advance.7 70 2. iv. £14.

The balance on legal expenses account included £380 in connection with the purchase of one of the freehold properties. vi. Provide for depreciation of motor vans (including additions) at 20% of cost. Required: With particular emphasis on presentation. viii. prepare a trading and profit and loss account for the year 19X5. vii. Depreciation provided for this van up to 31 December 19X4 was £475. ignoring taxation. The directors have decided to recommend a dividend of 5%. (24 marks) . and a balance sheet at 31 December 19X5.Lesson Seven 382 v.

019 £ 142.000 (304) 2.380) General expenses Bad debts Loss on disposal Depreciation Net profit Proposed dividend Retained profit brought forward Retained profit carried forward 13.3 70 14.000 13.140) Legal expenses (644 .430 2.383 Partnerships 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 .696 4.30 4 3.12 7 3.93 0 108.150 80 3.7 70 35.00 0 31.258 560 264 5.60 0 4.126 Balance sheet at 31 December 19X5 .7 70 107.4 40 122.846 1.

075 Balance c/f 350 1.600 11.380 16.325 £ 59.294) (9.294 9.126 Share capital Ordinary shares of £1 each Profit and loss account 80.294) 14.Lesson Seven 384 £ Non-Current Assets Freehold properties Motor vans Current Assets Stock Debtors and prepayments.775 Disposals 680 Balance c/f 15.000 59.380 4.769 .425 Motor vans £ Balance b/f 15.475 £ ---(9.615 32.181 15.750 Profit and loss account 3.801 65.380 5.000 2.769 £ £ Balance b/f 275 Profit and loss account 1.775 Provision for depreciation £ Balance b/f 6.150 1.380 15.425 £ Disposals 475 Balance c/f 9.095 74.019 9.126 Workings Bad debts £ Debtors 1.095 15.945 82.000 Additions 775 15.126 82. less provision for doubtful debts Cash at bank Current liabilities Creditors Proposed dividends 11.110 6.

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).3 Owik-Freez p. Orders for these services are secured by the company’s sales staff. the assistant accountant extracted the following balances from the ledgers. A considerable amount of electricity from the public supply is used by the company in the freezing and storage operations. storage of the frozen produce and transport from frozen storage in refrigerated vehicles to any point within the country. In the event of a sudden failure in this supply. £ 680 .c. Services offered include the collection of produce.l. the company is able to generate its own emergency supplies from standby generators kept for this purpose.385 Partnerships Disposals £ Motor vans 680 Provision for depreciation 475 Proceeds 125 Loss on capital 80 680 Example 8. is a company which provides refrigerated storage facilities to local farmers. The company’s revenue consists of charges for transport and freezing. and of storage rentals. At the end of the company’s financial year ended 30 September 1982. the use of rapid freezing equipment. 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.

The only accounting entries relative .650 Notes at 30 September 1982: At the beginning of the 1981-82 financial year.000 271.810 90.600 144.050 23.000 and on which £20.204 2.000 108.103 7.860 43.319 29.000 302.000 25.390 80.000.800 had been provided as depreciation to date of disposal) for £4.600 39.332 30. salaries and related expenses Rates Electricity Transport costs Repairs Consumable stores Postages. telephones Insurance premium Debenture interest Sundries Other Accounts Suspense (credit balance) £ 390.Lesson Seven 386 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.271 30.604 7.004 79.000 200.800 5.800 27. stationery.710 1. the company had sold refrigeration plant (which had originally cost £26.900 82.284 15.176 8.063 112.112 76.600 9.107 128.449 18.090 85.800 15.

820 Electricity accrued 5.000 was granted in respect to this vehicle.for the year ended 30 September 1982 and a Balance Sheet at that date. 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. During the 1981-82 financial year. Required: Prepare.c. The insurance company has admitted liability under the policy but no further ledger entries have as yet been made. (31 marks) Open the Suspense account and post the entries needed to eliminate the opening credit balance. A replacement vehicle was acquired at a list price of £27.120 had been provided as depreciation to date of disposal. should be made for the following items: £ Storage rentals received in advance 25.000.l. The directors have recommended a dividend for the year of £0. (2 marks) . except that the trade-in allowance has been debited to Vehicles and credited to Suspense.757 Consumable stores include £4131 and Repairs include £9972 relating to vehicles. the compressor unit in No. Compensation of £1. Adjustments. which has originally cost £16. for internal circulation purposes. A trade-in (part exchange) allowance of £6.920 Rates prepaid 28.7 storage unit failed and as a consequence the contents deteriorated to such an extent that they had to be disposed of by incineration.12 per share.387 Partnerships to this disposal which have been made so far. The entries relating to the disposal of the old vehicle have not yet been made. are a debit to Bank and a credit to Suspense of the amount of the sale proceeds.000.631 Insurance premium prepaid 600 Wages and Salaried accrued 1. In April 1982.350 was paid to the farmer by Owik – Freez by cheque and debited to Suspense. The balance of the price of the new vehicle has been paid by cheque and debited to Vehicles account. a Profit and Loss account for Qwik-Freez p. the company replaced one of its refrigerated vehicles. not yet posted to the accounts. The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share. It is the company’s policy to provide for depreciation on a straight line basis calculated on the cost of fixed assets held at the end of each financial year and assuming no residual value. All workings must be shown.400 and on which £13.

757) Transport costs (43.200 Total £ 717.000 178.617 57. Profit and Loss Account for the year ended 30 September 1982 Workings: £ Revenue Storage rentals – long term (302.319 – 9.131) Postages.00 0 Plant £ 271.972) Repairs (30.292 82.520 118.000 – 6.800 .920) Rates (79.459 85.439 447.131 + 9.600) 1.176 £ 276.200 43.900 270. Salaries etc.800 – 4.c.810 90.374 20.669 15.000)) Acquisitions (21.540 5.860 – 5.50 0 27.900 48.Lesson Seven 388 (33 marks) Solution: Qwik-Freez (East Anglia) p.0 £ 00 120.600 9.000 + 21.90 0 (26.090 – 25631) casual Freezing charges Transport charges Less: Expenses Wages.972) Consumable stores (29.2 *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: Fixed Assets: Balance 1 October 1981 (veh 82.40 0) 702.600 27000 (16.000 (42.10 0 129.820) Electricity (76.l.096 1. (128.90 0 Vehicl e £ 55.600 – (6.616 108.40 0) 66.347 25.92 4 50.004 + 1.063 112. stationery.343 117.0 00 120.107 564.112 – 28.284 226.271 + 4. telephones Insurance premiums (7.604 7.00 0 .00 0) 245.000) Disposals Balance 30 September 1982 Land Building £ s 270.

59 16.389 Partnerships 10 25 £ £ £ -current year charge 24. Depreciation -rate £ - 2% £ 2.924.54 0 50 0 Alternatively the depreciation charge for vehicles (£16.550) can be classified as a transport cost.5 43. thereby increasing that figure to £73.400 .

72 0 6.000 5.120) Profit/(Loss) on disposals 270.48 0 £ 35.1 20) 16.54 0 221.0 70 £ 481.l.55 0 30.800) (16.8 00 (20.2 00) 27.4 50 (33.400 – 13.200 £(1.c Balance Sheet as at 30 September 1982 Workings: .5 90 £ 97.720 1.9 20) 43.000 144.Lesson Seven 390 Provision for Depreciation: Balance 1 October 1981 Disposals Current year charge Balance 30 September 1982 - 39.520 Qwik-Freez (East Anglisa) p.00 0 8.8 00) 24.400 £ Written down values at 30 September 1982 Proceeds from disposals Less: Written down values of disposals (26.0 30 10.000 – 20.000 £ 78.000 3.31 0 4.59 0 148.280 211.480 2.600 2.0 00 42.05 0 (13.

for rentals .590 30.4 Current Assets Stocks Debtors .070 . issued and fully paid.50 per share 16 Reserves Share Premium General Reserve Profit and Loss account Shareholders’ funds Long-term loan 7% Debentures 2004/2012 Cost £ 390. authorized. 400000 Ordinary shares of £0.391 Partnerships Fixed Assets Land and Buildings Plant Vehicles 1.480 Net £ 348.000 245.310 35.100 221.3.000 148.200 Depreciation £ 42.900 66.for insured losses Prepaid expenses (600 + 28.720 702.000 97.for charges .820) Bank Cash Less: Current Liabilities Creditors Accrued expenses (1920 + 5757) Advance receipts Proposed dividends Working Capital Net Assets employed Financed by: Share Capital.

790 38.00 0 53.87 0 1.500 942.970 90. at cost Depreciation – motor vehicle Fittings and fixtures.86 0 6.00 0 3. 10 each authorized.000 33.00 0 130. 125.560 16.4 Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family.000) Plant.600 200. 760 33.240 . 75.254.00 0 50.00 0 16. issued and fully paid Share premium General reserve Interim dividend paid Cash at bank and in hand Accounts receivable and payable 15% Debentures Discount received Profit and loss account 1 April 1992 Purchases of raw materials Sales of finished goods Inventories 1 April 1992: Raw materials Work in progress Finished goods Provision for doubtful debts Bad debts Rates and insurance Wages Factory power Light and water Plant maintenance Salaries Returns of raw material Sales returns Advertising Transport expenses (Sales department) Bank charges General expenses Sh.430 108.37 0 22.000 30.400 4.570 130.430 100.Lesson Seven 392 Suspense £ £ Fixed Asset Disposals: ` Plant 4000 Balance b/d 8650 Vehicle 6000 Debtors (insured loss) 1350 10000 10000 Example 8.890 9.000 120.660 107.38 0 3.000 11.060 57. at cost Depreciation – fittings and fixtures 20. at cost Depreciation Motor vehicle. at cost (land Sh. The following trial balance was extracted from the books of the company as at 31 March 1993: Freehold property.000 Ordinary shares of Sh.640 103.280 10.000 Sh.54 0 57. 62.

580 24. 630 .040 36. 630 2.360 8.003.393 Partnerships 1.320 3.1 60 2.003.

Lesson Seven 394 Additional information: • • • • Depreciation is to be provided for the year using the reducing balance method and applying rates of 15% on plant. 2 per share. The directors require provision for a final dividend which will bring the dividend for the year up to Sh. Electricity and wateer accrued was Insurance prepaid was Rates prepaid were Inventories were valued at: Raw materials Work in progress Finished goods • • 139. 860 270 780 Debenture interest has not yet been paid. insurance and general expenses are to be apportioned in the ratio 4:1 between factory and administrative overheads. Building is to be depreciated at the rate of 4% using the straight-line method. Required: Prepare in vertical form a Manufacturing. 25% on motor vehicle and 10% on fittings and fixtures.630 82. Trading and Profit and Loss Account for the year ended 31 March 1983 and a Balance Sheet as at that date. (Assume the whole building is used for manufacturing purposes). Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.320 Sh. (25 marks) . Light and water.450 124.

Fianl 24. Profit And Loss Account For The Year Ended 31 March 1993 Shs Shs Sales 1.000 40.712 General expenses 10.254.714 Less: Closing stocks (124.654 Depreciation .760 Less: Closing stocks (1.681 Dividend .000 Provision for bad debts 6.Interim 16.P.646 Debenture interest 15.860 Goods manufactured 902.P.970 28.Motor vehicle 5.I.570 Factory Overheads: Plant depreciation 10.I.150 Retained Profit brought forward 103.006 Discount received 3.360) 1.854 Trading.450) (24.704 Light and water 22.010.074 Opening W.000 Factory power 6.928 95.000 .625 .200 Rates and insurance 2.870 Retained Profit carried forward 153.140 Less Closing stocks (139.000 Retained Profit for the year 49.060 Purchases 942.854 1.140 972. (3.395 Partnerships MWANGA AND SONS LTD Manufacturing Account for the year ended 31 March 1993 Raw materials: Opening stocks 33.644 Less: Closing W. 57.400 Opening stock 107.Fittings and fixtures 2.870 .320) 886.560 Plant maintenance 13.630) Prime Costs 832.660 Goods manufactured (82. 927.240) 939.790) 902.380 Less Returns In.253.394 367.640 370.

600 346.finished goods Debtors.000 97.860 24.200 36.000 323.486 33.796 Net £ 123.875 24.050 498.430 270 780 1.320 346.020 . 10 Reserves: Share Premium General Reserve Profit and Loss account 15% debentures Workings: B/d Rate And Insurance 9.000 623.000 153.506 57.000 53.020 100.000 50.430 Cost £ 125.471 124.630 82.000 38. and issued share capital: 20.000 72.400 117.work in progress .804 139.216 623.600 Depreciat ion £ 2.020 200.129 221.570 1.125 14.000 120.000 57.020 523.704 9.000 130.430 Prepaid Prepaid Profit and Loss Account Factory 9. less provisions Cash at bank and in hand Prepaid expenses Current Liabilities Creditors Accruals Dividend proposed Net current assets Financed by: Authorized.Raw materials .000 Ordinary shares each Sh.290 401.450 124.Lesson Seven 396 Balance Sheet As At 31 March 1993 Fixed Assets Freehold property Plant Motor vehicle Fittings and fixtures Current Assets Stocks .800 16.676 6.430 15.

the company invites members of the public to send in applications for share they (the public) are interested in purchasing. (The application stage & 2nd Call stage allotment stage may be dealt with in a single account called the application/ Application Stage In this stage. an account is opened. Lump sum Sale 3. Each installment is collected through a comprehensive set of processed(called a stage).397 Partnerships 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 per Sale at a Lump sum Sale 2. When shares are sold in exchange for lump sum cash payment and this is at per value. The application firms must be accompanied by the 1st installment money when the public respond to the company’s offer. Lump sum Sale 4. The 4 possible stages are: Application stage For each stage. When the company requests members of the public to send in application forms & application money it will make the following entries in its books: . Lump sum Sale 1. Allotment stage This account must close at the end of 1st Call stage the stage. 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.

When the public respond by bringing in the installment money. Generally only the correct amount of money is collected at this stage. the company. This marks the end of the Call stage. CREDIT: Share Capital. the company will: DEBIT: Application With refunded CREDIT: Cashbook money If pro-rata issue. (i. the company will then DEBIT: Cashbook CREDIT: Application A/C There may be an over or under subscription. the stage is deemed to be over. DEBIT: Cashbook CREDIT: Application With If there is an over-subscription.e. a lower number of shares allotted compared to the number applied for) If outright rejection. 2nd Call Stage . As it requests for the second installment the entries to be made are: DEBIT: Allotment A/C. When this is so. the company will: DEBIT: Application With amount required to CREDIT: Allotment close the application A/C. If there is an under subscription. CREDIT: Allotment. or applications awarded on a pro-rata basis.Lesson Seven 398 DEBIT: Application A/C CREDIT: Share Capital When the public responds by sending funds. Allotment Stage In this stage. It is possible that some of the allotees do not pay their 1st installment money on time. CREDIT: Share Capital. This marks the end of the application stage. the company selects the applicants and informs them of their allotment. When the public respond by sending in the second installment money. It also requests them to bring in a second installment. then the excess applications may either be rejected outright and the applicants’ money refunded. it will: DEBIT: 1st Call A/C . the company. Since the account has closed by this stage. will in its books: DEBIT: Cashbook CREDIT: 1st Call A/C. 1st Call Stage Here the company requests for the third installment from the public. As the company does this. will in its books: DEBIT: Cashbook. DEBIT: Cashbook – with money received DEBIT: Calls in Arrears – with money not received CREDIT: 1st Call A/C – with total.

When a debtor for share money (calls – in –arrears) does not pay up his dues. If resold at a premium: DEBIT: Cashbook CREDIT: Share Capital.e. Forfeited shares may be resold as follows: At per value At a premium At a discount If resold at per: DEBIT: Cashbook. CREDIT: Share Capital. CREDIT: Share Premium. . it will: DEBIT: 2nd Call A/C CREDIT: Share Capital When the public respond by sending in the second call money. THIS MARKS THE END OF THE NORMAL ISSUE OF SHARES PROCEDURES. CREDIT: Share Capital with par value. The share sale will be expressly illegal unless: Amounts collected from previous allotee plus an amount collected from current allotee equals or is greater than the par value. If the condition is fulfilled and shares are sold at a discount.399 Partnerships this is very similar to the 1st Call whereby the company requests for the second (and last) call money. a condition will have to apply. Last entry in this exercise is to transfer any balance on the share forfeiture A/C to Share Premium A/C as follows: DEBIT: Share forfeiture . This is known as Share Forfeiture. CREDIT: Share premium When shares are sold at a discount. The entries to be made when shares are forfeited are: DEBIT: Share Capital CREDIT: Calls in Arrears CREDIT: Share forfeiture. as it does so. not refunded to him). then the company will: DEBIT: Cashbook CREDIT: 2nd Call A/C It is possible that some of the allotees do not pay up their 2nd Call money. When this is so: DEBIT: Cashbook – with money collected. DEBIT: Calls in arrears with money not received CREDIT: 2nd Call A/C. then DEBIT: Cashbook – with money received. his shares will be cancelled and any money he previously gave the company forfeited (i. DEBIT: Share forfeited – with deficit.

130. Articles of association state the rules under which the company will operate e.10 each.8 per share. It shows the object of the company.2.5 MAY 1999 QUESTION FOUR Give a brief definition of memorandum of association and certificate of incorporation.000. its location (its registered office) and the date of incorporation.3. Sh. The calls were made and paid in full with the exception of one member of one member holding 5. They were later reissued at a price of Sh. The shares were issued at par as follows: Payable Payable Payable Payable on on on on application allotment first call second call Sh.1. (5 marks) Radhi Tea Company Limited has an authorized share capital of Sh.630. the name. address.00 Sh.000.630.Lesson Seven 400 Example 8.00 Sh. and meetings.000 .000 shares.000 1. Certificate of incorporation is a document issued to the company when it is registered by the registrar of companies.000 ordinary shares of Sh. Required: The necessary ledger accounts to record these transactions (15 marks) (Total: 20 marks) Solution: Memorandum of association explains the relationship between the company and the outside world. the authorized share capital.g. Cashbook Cashbook OSC Allotment 1.000 shares who paid neither the first nor the second call and another member who did not pay the second call on 1. 10.000 Application A/C Sh.000 1.4. It explains the relationship between the different directors and shareholders.630. Radhi Tea Co.630. The excess application monies received from the successful applicants is not to be refunded but is to be applied to reduce the amount payable on allotment.000 1.000 shares. the number of directors. After requisite action by the directors the shares were forfeited.00 Applications were received for 1.000 500.000 shares and to allot all the shares on the basis of two for every three applied for. It was decide to refund applicants monies on 130. the structure.00 Sh.

000 3.000 .000 Cashbook 3.500.000 OSC Sh. 4.000 4.000. OSC Allotment Sh.401 Partnerships Sh.000 4.000 2.000.000 1st Call Allotment A/C 500. Sh.000. 3.000 Calls in arrears 20.000.000 Application Cashbook 3.000.980.000.

We analyse financial statements by the use of accounting ratios.988.990.000 OSC 50.000.630.990.000 Cashbook 1. Calls in arrears 22.000 Share forfeiture 10.000.000 Calls in Arrears Sh.000 Allotment 3.630. 1. Sh. It also includes a balance sheet that shows the financial position or status of a company and lastly a cash flow statement which shows changes in cash position of the entity. Sh.000.000 98. Share forfeiture A/C 50.000 Share Forfeiture A/C Sh.000 1.000 1st Call 2nd Call 22.000 22.000 Cashbook 48.000. Sh.990.000 60.00 Calls in arrears 2.000 2.000 Share forfeiture 22.000 nd 2 Call 1.000 Share forfeiture Bal c/d 1. 20.000 Application 1.050.000 Ordinary Share Capital Sh. ` Sh.000 1st Call 4.000 Bal c/d 10. There are 5 classes of ratios: • Liquidity • Leverage/Gearing ratios • Activity Ratios • Profitability .990. Sh.000 1.000 OSC 60.000 Share Premium 16.Lesson Seven 402 2nd Call OSC Sh.000 Share Premium Sh.000 98. 1.000 FINANCIAL STATEMENT ANALYSIS (RATIO ANALYSIS) Financial statements include a profit and loss A/C (income statement) that tells us the performance of a company throughout the financial period.000 10.050.

.403 Partnerships • Equity / Investor ratios.

Leverage/Gearing Ratios – These measure the extent to which a firm has been financed by non-owner supplied funds.000 (175.500 Purchases 559.75 per share) Retained profit for the year (15. Equity Ratios/Investor Ratios – They measure the relative value of the firm and returns expected by the owners of the firm.000 Depreciation 10.000 Less ordinary dividend 75. Profitability Ratios – These measure the efficiency with which the firm uses various funds to generate profits or returns. 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.00 Land and 0 Buildings 80.000) 149.000 Less expenses Selling and distribution 30.Lesson Seven 404 LIQUIDITY RATIOS.000) (510.000 Tax @ 50% 75.000 Plant & 330.000) 60. The following question will be used to illustrate the above classes of ratios ABC ltd Profit and Loss A/C for the year ended 31.000 (0.000 Administration expenses 135.000) Earnings before tax 150.000) Gross profit 340. Sh. These measure the firm’s ability to meet its short term maturing obligations.000 Interest (15.000 Less: Cost of Sales Opening stock 99.000 . 10) Reserve Retained profit Long term Current liabilities.00 Inventory 0 Debtors Issued share capital (20000 share of Sh.000 Current Assets (4. They also try to look at the overall performance of the firm and going concern of the firm. 200000 90000 60000 100000 130000 580.00 Machinery 0 75.1992 Sh Sh Sales 850.000) Earnings before interest & taxes 165.000 Less: Closing stocks (149. Assets 250. They also measure the management’s ability to control the various expenses in the firm.500 659.12.000 ABC Balance Sheet as at 31 December 1992 Non Current Sh.

000 580.000 = 101.000 – 149. Cash Ratio = Cash + Marketable Securities Current Liabilities = 30. LIQUDITY RATIOS Current Ratio = Current Assets Current Liabilities Current Ratio = 250.Inventories Current Liabilities = 250.000 = 0. = Net Working Capital Net Assets .000 130.000 The higher the ratio then the more liquid the firm is.78 : 1 this is a more refined ration that tries to recognize the fact that stakes may not be easily converted into cash.000 = 0. the better for the firm as it means an improved liquidity position.23 : 1 130.250.000 130. Required: Compute the relevant ratios. the better for the firm as the Liquidity position is improved.92 : 1 130. The higher the ratio.405 Partnerships Less provision Cash 71.000 = 0.000 = 1. The higher the ratio. Net Working Capital Ratio. Quick Ratio/Acid Test Ratio = Current Assets .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.00 0 Additional Note Cash purchases amount to 14.000 30.

for every 1 shilling contributed in the business by the owner.000=120.000 This measures the proportion of the total net assets financed by the non-owner supplied funds.000 = 0.000 40% is supplied by non-owners This ratio measures how much has been financed by the non-owner supplied funds in relation to the amount financed by the owners i. the creditor have put in 67 cents. The higher the financial risk. for every shilling invested in the business by the owners how much has been financed by the non-owner supplied funds. GEARING RATIOS These measure the financial risk of a firm (the probability that a firm will not be able to pay up its debts).27 : 1 450. . The higher the ratio. For ABC Ltd.000 = 0.2 450. Long Term Debt Ratio = Non Current Liabilities Net Assets = 100.66 350. = 230.000 40% is supplied by non owners Debt Equity Ratio = Total Liabilities Networth (share holders funds) = 230.000 = 0. Debt Ratio = Total Liabilities Total Assets This ratio measures the proportion of total assets financed by non owner supplied funds.000 = 0.000 Net Working Capital = 120.000 = 0.Lesson Seven 406 Net Working Capital =CA –CL = 250.27 : 1 The higher the ratio the better for the firm and therefore the improved Liquidity position.000-130.e. the higher the financial risk .4 580. The more debts a business has (non owner supplied funds) the higher the financial risk.

the better for the firm as it improves the liquidity position. 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 80. Creditors Turnover = Credit Purchases Average Creditors = 545.1 124. The higher the ratio the more active the firm is.000 = 4.000 and all sales are on credit Debtor Turnover = 850.250 .000 The higher the ratio. The lesser the period.407 Partnerships The higher the ratio. then the higher the financial risk. ACTIVITY RATIO Stock Turnover = Cost of Sales Average Stocks where Average Stocks = Opening Stock + Closing Stock 2 = 510.1 times This is the number of times stock has been converted to sales in a financial year.250 = 4.000 = 10.625 This measure the number of days it takes for debtors to pay up. 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 The higher the margin.000 = 9% Sales 850. PROFITABILITY RATIOS Profitability in Relation to Sales Gross Profit Margin = Gross Profit = 165.000 2 2 = 850. Margin affected by: Operating expenses for the period.F.000 = 19% Sales 850.A = 340.000 = 42 times The ratio tries to measure how many times we have creditors during a financial period.000 = 335. The lesser the ratio the better. Total Assets Turnover = Sales Total Assets = 850.000 = 1. Net Profit Margin = Net Profit after tax = 75. The higher the ratio the more active the firm.000 = 2. Profitability in Relation to investment . the more profitable the firm is.Lesson Seven 408 130.000 The higher the margin.000 + 330.046 times Measures the efficiency with which the firm is using its total assets to generate sales. the more profitable the firm is.000 The ratio measures the efficiency with which the firm is using its fixed/ Non Current Assets to generate sales.000 580.54 times 335. Non Current Assets Turnover (Fixed Assets Turnover) = Sales Average Fixed Assets A.000 = 670.

000 = 3. .000 20.409 Partnerships Return On Investment = Net Profit after tax Total Assets = 75.000 Shows how efficient the firm has been in using the total assets to generate returns in the business.000 = 13% 580. Earnings Yield = Earnings Per Share Market price per share Assume that the market price for the ABC’S shares is Sh20/Share. NOTE The higher the ratio the more efficient is the firm. Return On Capital Employed = Net Profit after tax Net Assets = 750.000 = 17% 450.000 850. = 75. of ordinary shares outstanding. EQUITY RATIOS Earnings Per Share (Eps) EPS = Earnings attributable to ordinary shareholders No.75 This is the return expected by an investor for every share held in the firm. Return On Equity = Earnings after tax Networth = 75.000 How efficient the firm has been in using the net assets to generate returns in the business.000 = 21% Efficiency of the firm in using the owner’s capital to generate returns.

CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same industry. Therefore ratios are used for short term planning. selling electrical goods to retailers on credit.75 × 100% 20 = 19% This is the return amount expected by a shareholder for every shilling invested in the business. the better for the firm. • It is difficult to compare one company with others in case of monopolist firms.g. Example 8. NOTE The higher the amounts. • Ratios are computed from historical data and therefore are not good indicators of the future. LIMITATIONS ON USE OF RATIOS • It is difficult to categorise firms in the various industries due to diversification. • Ratios are compiled at a point in time and may be affected by short term changes. This makes inter-company comparison difficult. The companies trade as wholesalers. Dividend Per Share = Total Dividend (ordinary shareholders) Ordinary shares outstanding. firms use different accounting policies and methods e. • Different. provisions and other estimates so this makes comparison of companies difficult. DEFINITIONS TREND ANALYSIS – Comparing or assessing a company’s performance over time. Zeta Ltd and Omega Ltd.000 = 0.000 20. = 15. Their most recent financial statements appear below.6 (ACCA DEC 98) Beta Ltd is reviewing the financial statements of two companies.75 cts per share This is the amount expected by an investor for every share held in the firm. on depreciation.Lesson Seven 410 = 3. PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8 Zeta Limited Omega Limited .

000 £’000 800 4.400 400 £’000 4.200 3.800 5.800 1.000 3.000 1.000 150 250 400 500 500 120 380 4.200 800 400 90 310 .600 800 £’000 6.411 Partnerships £’000 Sales Cost of sales Opening stock Purchases Less: closing stock Gross profit Expenses Distribution costs Administrative expenses Interest paid Profit before tax Taxation Net profit for the period 200 290 10 200 3.

890 (4.sundry Cash at bank Current liabilities Creditors – trade . What are the implications of this for the two companies? (4 marks) (20 marks) Solution: .000) 2.950 1.890 6.950 890 6.350 (800) (80) (200) (120) Omega Limited £’000 £’000 £’000 5. Show all workings. (8 marks) c) Omega Ltd is much more highly geared than Zera Ltd.180 (800) (100) (90) 150 1.890 1. compare the two companies as regards their profitability.Lesson Seven 412 Balance Sheets As At 31 March 20x8 Zeta Limited £’000 Fixed assets Tangible assets Warehouse and office 1.600 500 790 2.200 buildings 600 Equipment and vehicles Current assets Stock Debtor – trade .800 800 900 80 100 1.000 1. liquidity and working capital management.000 1. liquidity and management of the elements of working capital.000 Required: a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability.000 950 1. (8 marks) b) Based on the ratios you have calculated in (a).sundry Overdraft Taxation Long-term loan (interest 10% pa) Share capital Revaluation reserve Profit and loss account 400 800 150 1.950 1.

5% 4000 510 = 26.9:1 990 1080 = 1.1 times 1950 1200 × 100% = 20% 6000 400 × 100% = 6.6% 6890 400 = 13.8% 2890 6000 = 0.8:1 1200 nil = nil 1950 510 = 51 times 10 1880 = 1.2% 1950 500 = 25.6% 1950 4000 = 2.9 times 6890 1350 = 1.1:1 1200 950 = 0.7% 6000 800 = 11.1:1 990 4000 = 58% 6890 800 = 2 times 400 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 .413 Partnerships 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 Quick ratio Current assets – stock Current liabilities Gearing Long – term loans Capital Interest cover Profit before interest and tax Interest charges 1000 × 100% = 25% 4000 500 × 100% = 12.

000). The converse is true in times of rising interest rates. It may be that a revaluation of Zeta’s assets will partially close the gap. Working capital management Zeta is turning stock over more quickly than Omega.Lesson Seven 414 Note.000). Return on Omega’s capital is around half of Zeta’s. When you have the information use it. Omega’s net margin is lower than Zeta’s. Paying creditors within 60 days would have an adverse effect on cash flow of over £270.000 reducing the debtors balance to £658. Creditors should be paid at least as quickly as Omega pays theirs. 60 day collection would improve cash flow by over £140. It should be noted that Omega’s bottom line profit is reduced significantly by the interest charge. Omega’s gearing means that should profits fall they may not be in a position to pay the loan interest. Zeta risks damaging the goodwill it has with its suppliers.000(60/73 × £800. Omega has a higher fixed asset base due in part to a revaluation. Omega’s expenses are therefore proportionally higher. This means that in times of falling interest rates Omega will have higher interest costs than say. if Zeta borrowed the same amount. Zeta’s creditor and debtor days are a cause for concern. This may indicate a differing pricing policy.000. Zeta’s capital is entirely share capital and so a fixed return is not required. Omega is highly geared whereas Zeta has no long-term loans. .000 (60/91 × £800. Omega’s loan appears to be fixed rate. The creditors balance would be £527. Although both companies’ quick ratios are much closer. Zeta. Zeta’s liquidity does appear to be an issue especially as there is no cash at hand. Liquidity Omega has nearly twice as many current assets as current liabilities. We have used average stock here. As Zeta has no long-term loans they may be able to borrow in order to improve liquidity. Debtors should be collected within 60 days if not sooner. This is beneficial in a market which can be subject to obsolescence. It would be wise to examine projected cashflows to see how readily Zeta’s profits will improve this situation. Profitability Zeta has a higher gross margin than Omega.

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 . 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.415 Partnerships REINFORCEMENT QUESTIONS QUESTION ONE The chief accountant of AZ Limited has extracted the following trial balance as at 31 October 1999. Sh.

000 Share premium 350 10% premium 3.500 General reserve 2. (12 marks) Balance sheet as at 31 October 1999. Debenture interest has not been paid Depreciation is provided on straight-line method at 10% and 25% per annum on furniture and equipment.500 Provision for depreciation 265 Freehold property 44. 2000000 to a general reserve.470 Telephone and postage 124 Water and electricity 568 .’00 Sh. plant and machinery and motor vehicles respectively.000 Profit and loss account 1 November 1997 2. The overdraft interest of Sh.650 0 Furniture and fittings at cost 3. Required: Manufacturing.285 Vehicles running expenses 358 Bad debts 2.’00 Authorized and issued capital (shares of Sh. (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.850 Motor vehicles at cost 3.478 Provision for depreciation 1.45 Stock in hand 1 November 1997 95. trading.50 Trade debtors 0 Trade creditor 1. profit and loss account for the year ended 31 October 1999. 20 0’ 0’ each fully paid) 30.375 460 Purchases and sales 127. 725000 was communicated to the company by the bank on 5 November 1999 and therefore it has not been posted in the cash book.540 Goodwill 138 Rent receivable 500 Salaries and wages 385 General expenses 2.Lesson Seven 416 Notes: Closing stock includes – Finished goods – Raw materials – Work-in-progress Accrued salaries The directors recommended a dividend of 10% on the issued share capital and a transfer of Sh.

4.000 and Sh.39 8 Notes: 1. at 31 December 1995 and 1996 were as follows: 31 December 1995 1996 . Credit sales amounting to Sh.417 Partnerships Rates and insurance Cash at bank 269 289 10. The directors propose a dividend of 15% on issued share capital and a transfer of Sh.2.The debenture interest has not yet been paid.165. 7. 5.39 8 167. (13 marks) 2.000.000 had not been received from the tenant. Trading. 9. Rent for the month of October 1998 amounting to Sh. Returns outwards amounting to Sh. (7 marks) (Total: 20 marks) QUESTION THREE ACCA PILOT PAPER The balance sheet of Grand Limited. 8.500.55. Corporation tax should be provided at 35% of the net profit before tax. Accrued salaries and telephone bills amounted to Sh. Balance sheet as at 31 October 1998. 10. Provision for bad and doubtful debts of 5% on trade debtors should be made. Closing stock was valued at Sh.492 167. Required: 1.000 were made on 31 October 1998 but no entries were made in the books. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and 20% on cost respectively. 3. a wholesaler.000 were dispatched on 31 October 1998 but no entries were made in the books. 4. 2.000 to the general reserve. 6.134. profit and loss account for the year ended 31 October 1998.35.128.000 respectively.398.

000 31.40 0 10.000 19.000 14.00 0 14.000 6.60 0 109.500 1.40 0 9.800 3.000 8.200 £000 76.400 23.0 00) 49.00 0 10.700 86.00 0 £000 98.000 1.00 0) 26.00 0 3.4 00 (64.00 0 49.Lesson Seven 418 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 £000 126.300 (50.0 00) 15.000) 12.000.000 20.000 (60.00 0 2.000 26.400 5.0 00 (60.900 6.00 0 The stock at 31 December 1994 was £10.000 28.300 £000 162. .000.000 6.400 4.000 9.000 10.

400 10. These shares were forfeited on 29 September 19X1 and reissued as fully paid at 80p per share on November 19X1.000 20.000 108. £4.000 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. 40p on allotment and the balance on 1 May 19X1. f) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due.600 24. payable as to 50p on application (including the premium). because they benefit from the income produced by investing the money borrowed. by which date applications for 70.000 was applied to the amount due on allotment.000 12.000 shares had been received. The lists were closed on 10 February 19X1.400 14.000 75.419 Partnerships The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996 were: Year ended 31 December 1995 1996 £000 £000 64.000 40. (3 marks) (20 marks) QUESTION FOUR On 1 February 19X1 the directors of Alpha Ltd issued 50. (2 marks) e) State the extent to which you agree or disagree with the following and give brief reasons for your answers. with the exception of one allotee of 500 shares. g) A high gearing ratio is advantageous to shareholders. b) Show you full workings. Therefore the higher these ratios are the better placed the company is. All shareholders paid the call due on 1 May 19X1.000 32. (10 marks) c) Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them with those for 1995.000 ordinary shares of £1 each at 120p per share. . Of the cash received. the balance of which was paid on 16 February 19X1. (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.000 was returned and £6.

to record these transactions.Lesson Seven 420 You are required to write up the necessary accounts. CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK . excluding those relating to cash.

00 was still outstanding. 8.000. 336.00 Creditors 988.00.000. It had been Pesa Nyingi’s practise to bank each Monday morning the balance in the till resulting from the previous week’s transactions.000.000.000.980.000. Before banking the amounts. You ascertain the following balances on 1 January 2001.00.00 Cash 228.00 Bank 276.000. 4.000. were details of sales on credit and unpaid invoices for goods.000.00 Cash 4.000.000.00 Banking from debtors cheques 4.00 Debtors 344.00 Fixtures and Fittings 1.000. An amount of Shs.360. 13.000.000.5.000.296. The only records kept. On 2 January 2002.00 3. Stock 688.000.00 TIME ALLOWED: THREE HOURS. ANSWER ALL QUESTIONS QUESTION ONE Pesa Nyingi had a retail business and employed an assistant at a weekly wage of Shs. this assistant did not report for work and it was found that he had left. taking with him the balance in the till.116. Expenses Paid out of the till could be assumed to average Shs.000.000. Stock at the end of the period was valued at Shs.960. The debtors summary showed that credit sales for the period amounted to Shs.00 per week excluding wages.00 You also ascertain the following: An analysis of the bank statement for the year ended 31 December 2001 showed the following Receipts 180.00 for himself every week.000.421 Partnerships COMPREHENSIVE ASSIGNMENT No.000. EXAMINATION PAPER. Pesa Nyingi paid the assistant and took Shs.748.4 TO BE SUBMITTED AFTER LESSON 8 To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University. apart from the bank statement. . No float was maintained.00 Payments Creditors for goods Rent and expenses 3.00 232.00 Accrued expenses 100.

549.00 against a debt due to him of Shs.00 It has been decided to set off a debt due from a customer.00 1. 17 marks) QUESTION TWO Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger. 1. 1. A depreciation charge of 20% is to be charged on the value outstanding on the fixtures and fittings at the end of the year.000.00.000.00 ? 36.000.00 747. 00 28. 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 1.5% of the total debtors on 31 May.00. 10. (8 marks) b) Prepare a trading.120.000.000. Assume a 50 week year Required: a) Prepare workings showing your calculation of the amount of the theft.00 ? 18. profit and loss account for the year ended 31 December 2001 and a balance sheet as at that date.000. Unpaid invoices on 31 December 2001 amounted to Shs. The monthly accounts of the company for May 2002 are being prepared and the following information is available.000.672.000. Creditors for expenses were Shs.00 24. A Mutiso.00 32.000.000.00 43.00 Credit 114.00 119. goods had been returned against a cash receipt of Shs.0 0 13.00.00 14.000.Lesson Seven 422 Creditors for goods have always been paid by cheque.700.938. 120. 48.000.800.00 33.000 in the creditors ledger.600.00 was dishonored but this fact has not yet been reflected in the bank statement.500.00 632. The receipt has not been recorded There was a fixed margin of gross profit of 20% on selling price. 800.120. The insurance company has agreed to admit a claim for the amount of the theft.00 47.000.000. A cheque from one of the debtors of Shs.00 67.000. 00 670. The company has decided to create a provision for doubtful debts of 2. .000. 30.200.000.000.800.00. Although creditors were agreed at Shs. of Shs.

200.00 Sales Cost of sales Gross Profit Expenses (including loan interest) Net Profit .00 (300.00) 290.00 2002 Sh’000’ 1.00 160.423 Partnerships Required: a) Prepare the sales ledger control account and the purchases ledger control account for May 2002 in the books of Jambo Dealers Ltd. (14 marks) b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers Ltd relating to the company’s trade debtors and trade creditors.00) 200.00 870.00 2000 Sh’000’ 480.00 2001 Sh’000’ 680.00) (620. a sole trader.00 (200.00 470. (3 marks) QUESTION THREE The following are the summarized trading.00 970.00) (500.00) (500.00 200.00 ) 140.00 670.00 900.190.00 330.00 (600. Profit and Loss Accounts for the year ended 31 May 2000 Sh’000’ 1. 2000. 2002 and balance sheet as at 30 April 1999.00) (40.00 130.00 (180.00) 290.00 140. profit and loss accounts for the year ended 30 April 2000.00) (80. 2001.00 990.00) 390.00 400.00 1.00) 400.00 (720.400.0 0 (980.00 ) 420.00 Balance Sheets as at 31 May Non Current Assets Current Assets Stocks Debtors Balance at bank Total Current Assets Current Liabilities Creditors Loan (received on 31 May 2001) Total Current Liabilities Net Current Assets 1999 Sh’000’ 380.00 290.050.00 1. (3 marks) c) Briefly explain the purpose of control accounts.00 390.00 2002 Sh’000’ 900.00) 180.00 (280.00 2001 Sh’000’ 1.00 520.00 180.00 (80.00 (120. 2001 2002 for James Mwendapole.00 (40.00) (680.00 160.00 100. Trading.000.00) 480.00) 370.

he should continue trading and whether it was a sound decision to borrow the loan.00 160.190. Advise James MwendaPole whether.00 each.000.00 870. • Return on capital employed • Quick ratio • Stock turnover • Net Profit Margin (8 marks) 2. (6 marks) QUESTION FOUR Bingwa and Shabiki are in partnership as manufacturers of high quality wheelbarrows.00 670.00 would have been paid per year for the services rendered to the business by James MwendaPole.00 670. .00 140. 120. the following financial ratios.Lesson Seven 424 Net Assets Capital Opening Capital Add Net Profit 510.00 1. Bingwa and Shabiki are credited with one third of the manufacturing profit and 10% of the trading gross profit respectively and the balance of the firm’s profit being shared equally. No interest is credited or charged on capital accounts or drawings. All wheelbarrows are sold at Sh. Calculate for each of the years ended 31 May 2000. is the beneficiary of a small income from his grandfather and therefore has taken no drawings from his retail business. 680.00 180. Completed wheelbarrows are transferred from the factory to the warehouse at agreed prises. a man of modest tastes.00 200.050. The following trial balance was extracted on 31 March 2002. James MwendaPole is able to invest in a bank deposit account giving interest at the rate of 8% per year.00 1.00 870. Required: 1. Bingwa being responsible for the factory and Shabiki being responsible for sales.00 Additional information: James MwendaPole. It is estimated that Shs.00 1. on financial grounds. (6 marks) 3. Interest of 10% per annum has been paid on the loan from 1 June 2001. 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. 2001. 2001.050. All sales are on 30 days credit basis.

00 1.160.425 Partnerships Sh.400.0 0 536.400.200. 00 82.00 0.600.00) 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.200.0 0 291.200.800. 00 38.400.00 8.000.000.60 0.0 0 109. 00 57.800. 482.0 0 87.0 0 2.040.000.0 0 42.00 0.000.800. 00 326.0 0 126.237. 00 507.800.0 0 307. 00 13.400.00 48.600. 00 2.0 0 19.200.400. 300.000. 00 217.926. 00 143. 00 48.0 0 708. Capital Accounts Bingwa Shabiki Drawings Bingwa Shabiki Freehold factory (including land Sh. 00 110.800. 00 165.0 0 40.600.000. 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 Sh.000.926. 00 96.00 Additional information: .

200. Factory Plant 10% p.00 (including office Shs. Required: Manufacturing.00 )). 34. b) Wheelbarrows in stock being balance of the current year’s production. were valued at agreed price of Sh.400 (including office(Sh. 480 each were transferred to the warehouse during the year. c) The stock of raw materials was Sh.000.200.4 NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING . (20 marks) QUESTION FIVE State and explain the qualities of useful financial information. 1.800.Lesson Seven 426 a) 1540 wheelbarrows at Sh. e) Provision for depreciation is to be made as follows: Factory buildings 2% p. 480 each. trading and profit and Loss Accounts for the year ended 31 March 2002 and a balance sheet as at that date.a.a.3.600. The general provision for doubtful debts is to maintain at 10% of the trade debtors. 53. (5 marks) (25 marks) END OF COMPREHENSIVE ASSIGNMENT No. Motor vehicles 25% p.00 and work in progress is valued at Sh. (10 marks) To what extent do International Accounting Standards help achieve these qualities.00) and prepaid rates Sh.a.00 d) Accrued expenses on 31 March 2002 amounted to 62. 32.

Acknowledgement 427 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 .

Frey 250 Debtors – Brown 12 Blue 150 Stripe 48 Creditors – Live 602 Negative _____ 64 10.Lesson Eight SOLUTIONS TO REINFORCEMENT QUESTIONS Question 1 428 Check the balances on your ledger accounts with the trial balance as shown below: DR CR £ £ Cash at bank 1.764 Discount allowed 81 Provision for depreciation: 700 Motor van 250 Fixtures ad fittings Stock at 1 January 20X1 366 Loan .207 10.703 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 3.207 Workings .163 Discounts received 419 Credit sales 830 Cash sales 4.

2001 Non current assets Freehold premises Plant Current assets Stock Debtors Cash at Bank Cash in hand Current liabilities Creditors Capital [34.000] £ £ £ 25.643 500 729 5.000 49.769 3.000 (10.000 + 5.703 Question 2 Mary Carter Balance Sheet as at 31.000 22.031) Capital introduced Received from customers (160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 + 38 + 20) x 90% Less cheque payments (telephone.374) 1.12.000 .645 560 73 40 104 19 56 260 _12 4.000 6.000 12.000 29.000 7.769 £ 672 3. rates and van) Payments to suppliers (143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + 187) Cash at Bank £ £ Bal b/d Sales (bal) 5 Bank 4.000 – 10. electricity.000 1.000 37.429 Company Accounts Cash at bank Opening balances Bankings of cash (908 + 940 + 766 + 1.000) 12.546 (2.764 Drawings Stationery Travel Petrol ad van Sundry Postage Cleaner Bal c/d 4.000 8.

000 = 1.000 – 10.000 = 8.000 – 2.000 + 16.000) (3.000 6.000 Cash hand: 3.000 = 7.000 60.000) 29.000 – 37.000 .000 Cash at bank: 5.000) (10.500 – 5.500 – 20.000 + 54.000 430 Creditors = 12.000 + 4. Capital b/f + additional Add net profit (missing figure) Less drawings Capital c/f 25.500) 26.000 _5.000 31.000 – 16.000 (10.000 – 36.000) 5.000 + 34.000 Debtors: 10.000 (4.000 – 36.000 = 10.000 – 2.000 – 3.000 = 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. Remember that net assets will be the same as capital.000 – 10.000 39.000 Question 3 Apparent from the text Profit is determined by redrafting the second section of the balance sheet.000) (2.500 Profit may be also computed as follows: Net profit = closing capital (net assets) – opening capital + drawings – additional capital = 26.000 = £6.000 (37.000 49.Lesson Eight Non current liabilities Loan from bank Workings Stock: 11.000) (2.000 + 34.000 20.000) (1.000 + 51.000 – 1.000 – 54.000 + 9.

431 Company Accounts 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 22.600 __4.150 500 200 150 40.800 1.800 3.900 2.000 12. .000 50.000 60.400 10.900 700 7.000 12.850 1.500 7.150 £ 47.000 121.200 650 1.150 NB: The closing stock does not appear in the trial balance.000 ______ 121.

100 432 (b) 4 – May 11 – May 18 .May (c) 2 – May 9 – May 17 .000 650 200 50 200 320 300 2.380 6.100 Store fitments Abel Rent Delivery exp Drawings Wages Green Balance c/d £ 2.000 200 700 200 1-May 19-May 20-May 21-May 30-May 30-May 31-May _____ 31-May 6.640 Cr £ 1.May SALES DAYBOOK Bruce Hill Nailor £ 700 580 360 1.640 £ 650 300 800 1.380 1.750 PURCHASES DAYBOOK Abel Green Kaye Check the account balances with the balances shown on the trial balance.750 740 800 5.840 ____ 7.000 2.640 . (d) Cash Sales Purchases Debtors Creditors Capital Fixtures and fittings Rent Delivery expenses Drawings Wages Dr £ 2.Lesson Eight LESSON 2 Question 1 (a) 1-May 13-May 16-May 24-May Capital Sales Bruce hill £ 5.000 200 50 200 _320 7.

000 Discount received 200 Rent received 2.500 Less returns inwards (1.700 Office expenses 2.000 Discount allowed __100 (32.000 41.500) 150.12.000 7.000) Gross profit 45.000 (19.100 Electricity 600 Stationery 2.500) 26.02 £ £ £ Sales 15.500 111.500 Insurance 1.500) 100.000 47.500 .500 111.400 Advertising 3.500 Telephone 800 Rates 3.700) Net profit 14.000 Cost of sales Opening stock 46.500 £ £ 80.800 200 46.000 146.500 Less returns outwards (3.000 5.200 Expenses Salaries and wages 18.433 Company Accounts Question 2 End Papers Trading. Profit & Loss Account for the year ended 31.000 Purchases 103.000 85.000 14.000 4.500 125.000) (105.500 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 Capital Add net profit 12.000 Less closing stock (41.

500 (64.500 762.163.448.2002 £ Sales Less: Cost of sales Opening stock Purchases Add carriage inwards Less returns outwards Less closing stock Less expenses Wages and salaries Carriage outwards Rent and rates Communication expenses Commission payable Insurance Sundry expenses Net profit K Smooth Balance Sheet as at 31 December 2002 Non current assets £ £ Buildings Fixtures Current assets Stocks Debtors Bank Cash Current liabilities Creditors Capital Add net profit Less drawings 2.432.000) £ 9.500 3.500 31.000 .712.760.816.000 157.121.918.500 (2.600 40. Profit and Loss Account for the year ended 31.896.3.239.638.000 6.Lesson Eight Less drawings Question 3 K Smooth Trading.448.000 301.285.000) 1.500 8.500 62.000 5.000 285.500) 2.800 (6.000.000) 111.500 5.121.000 6.000 2.000) 3.239.000 297.000 1.800) 1.500 (1.500 42.024.700 6.473.500 434 6.088.000 (14.400 21.500 (816.960.800 1.979.500 5.500 £ 1.234.000 11.210.700 £ 2.

435 Company Accounts .

258.190.700) Net profit _2.000) 3.500 3.000) 13.500 Insurance 49.210.500 9.231.500 £ 625.416.Lesson Eight Question 4 436 Skates Trading.282.318.500 2.500 Less returns outwards __(30.000 5.500) (8.700 Less expenses Wages and salaries 1.500 (842.000) 4.200 Office expenses 137.027.416.000 Add carriage inwards ___21.900 Motor expenses 163.000 .163. Profit and Loss Account for the year ended 31 September 2002 £ £ £ Sales 13.000 Rent and rates 297.000 Cost of sales: Opening stock 2.800 Less closing stock (2.400 (2.000 410.000 Less: returns outwards __(55.000 1.500 4.090.381.500 1.747.844.239.000 Purchases 9.000 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 2.300) 4.035.500 __29.500 4.700) 9.500 (937.591.163.095.000 Carriage outwards 30.000 Telephone 40.200.391.000 311.747.035.700 Sundries 28.800 11.

Only items material in amount or in nature will affect the true and fair view given by a set of accounts. performance and changes in financial position. In other words.expenses and losses whether the amount of these is known with certainty or is a best estimate in the light of the information available. It is therefore necessary for similar events and states of affairs to be represented in a similar manner.’ Example: If there is any doubt as to the recoverability of debts outstanding at the year-end.000 and a £55. Question 3 Materiality Information is material if its omission or misstatement could influence users’ decisions taken on the basis of the financial statements. Comparability Users must be able to compare the financial statements of an enterprise over time to identify trends and with other enterprise’s statements to evaluate their relative financial position. a provision should be made so that the amount in question is not included in the profit for the year. provision is made for all known……. the ultimate cash realization of which can be assessed with reasonable certainty.437 Company Accounts LESSON 3 Question 1Adequately covered in the text. Question 2 Also covered adequately in the text. unless it becomes inappropriate. 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 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. the one selected should be the one which gives the most cautious presentation of the business’s financial position or results. Example: Depreciation policy must be consistent from one period to the next. it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5. are possible. Prudence The prudence concept states that where alternative procedures.000 balance on bank deposit account. Example: If a business has a bank loan of £50. Compliance with accounting standards helps to achieve comparability by ensuring that different entities account for similar transactions and events in a similar way. or alternative valuations. Objectivity: . incorrect presentation may amount to material misstatement even if there is no monetary error. IAS 1 describes the prudence concept as being that ‘revenue and profits are not anticipated.000’.

The result of this should be that any number of accountants will give the same answer independently of each other. .Lesson Eight 438 This means that accountants must be free from bias. They must adopt a neutral stance when analyzing accounting data. This means that they should try to strip their answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants.

In resolving the conflict. Information is relevant when it influences the economic decisions of users by helping them evaluate past. Safeguards to ensure that a company’s financial statements are free from material error: The fact that the financial statements have been audited by an independent professional. Prudence means that a degree of caution is needed in making estimates about certain items. or correcting their past evaluations. . as its value cannot be determined objectively. Factors affecting materiality are: • The size of the item. To be useful. 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. gains. Neutrality means that the information in financial statements should be free from deliberate or systematic bias. liabilities and losses. information must be relevant to the decision-making needs of users. The existence of sound internal controls within the company. Relevance The Statement of Principles for Financial Reporting states that to be useful. 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. Information is relevant when it has the ability to influence the decisions of users by helping them to evaluate past. • The nature of the item. The existence of an internal audit function within the company. a balance should be found that neither overstates nor understates assets.439 Company Accounts Example: Internally generated good will should not be capitalized in the balance sheet. 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. information must be relevant to the decision-making needs of users. present or future events or confirming.

300 Stationery 6.500 112.100 Business rates 6.300 Add Discount received 2.600 Purchases 261.200 premiums Electricity 2.400 Insurance 2.600 Less closing stock 102.700 Less returns out (7.500 272.400 Rent received 7.400 Less cost of sales Opening stock 120.800 440 .200 Less expenses Salaries and 45.400) Net profit 29.100 Gross profit 102.700 wages Office expenses 8.100) inwards 374.900 Telephone 2.000 Discounts allowed 600 (82.200 Advertising 8.700) 254.Lesson Eight LESSON FOUR Question 1 David Douglleu Trading and Profit and Loss Account for the year ended 31 March 2001 £ £ £ Sales 378.500 Less returns (4.000 374.

800 102.800 317.620 Less cost of sales Opening stock 18.926 386.460 Purchases 387.000 12.161 General expenses 7.500 291.150 Discounts received 1.700 1.184 Motor expenses 3.400 500 118.300 287.413 Depreciation (w) 13.000 2.146 39.200 30.441 Company Accounts Balance Sheet as at 31 March 2001 Non current assets £ Warehouse shop and office Fixtures and fittings Current assets Stocks Debtors Prepayments Cash in hand Current liabilities Creditors Accrued expenses Bank overdraft Capital Add Net Profit Less drawings 18.396 Closing stock 19.936 406.288 Net profit 67.080 Rent 8.500 13.037 .800 222.325 Less expenses: Discounts allowed 1.300 (26.000) 291.300 Question 2 Donald Brown Trading and Profit and Loss Account fro the year ended 31 December 20X0 £ £ Sales 491.470 Gross profit 105.304 Lighting and heating 6.900) 68.500 29.400 (49.000 £ £ 210.175 106.

Lesson Eight Working: Depreciation charge: Motor vehicles: £45.563 .404 Accruals 218 Bank overdraft 19.926 Debtors 42.094 67.200 fittings Motor vehicles 45.146 = £13.730 24.037 93.638 Current assets Stock 19.200) = £4.200 6.292 57.930 30.200 – 2.438 87.563 26.568 66.292 9.737 Prepayments 680 Cash in hand 1.483 Net current assets Net assets Financed by Capital Net Profit for year Less drawings 442 Net £ 36.131 26.146 Fixtures and fittings: 10% x £(42.000 + £9.000 Total: £4.861 55.730 x 20% = £9.146 Donald Brown Balance Sheet as at 31 December 20X0 Cost Depreciation Non current £ £ asset s Fixtures and 42.411 64.271 66.000 21.754 Current liabili ties Creditors 35.

270 145.633 620 __477 68.437 22.272 Net profit for the year 16.792 350 45.419 Carriage inwards 476 318.725 Gross profit 126.205 Less closing stock 16.757 + 5.200 equipment Motor 8.024 16.466 – 11846 620) Heat and light (4.000 43.107 350) Depreciation – 10.210 3.696 95.480 Cost of sales 301.550 25.426 109.654 vehicles Sundry expenses 8.001 Carriage outwards 829 Wages and salaries 64.443 Company Accounts Question 3 Brenda Bailey Trading and Profit and Loss Account for the year ended 30 June 20X9 £ £ Sales 427.574 50.295 41.270 £ 32.729 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 Net current assets £ 102.310 Purchases 302.210 Rent and rates (12.246 .450 17.773 118.019 Net book value £ 69.480 50.726 Opening stock 15.

Lesson Eight
Capital Balance at 1 July 20X8 Add Profit for year Less drawings Balance at 30 June 20X9 Question 4 Frank Mercer 20X8 Dec 31 Dec 31 Balance b/f Dividend Cash book £ 20X8 1,793 Dec 31 Bank charges 26 Dec 31 Standing order Dec 31 Direct debit ____ Balance c/d 1,819 £ 18 32 88 1,681 1,819 122,890 16,729 139,619 21,600 118,019

444

Bank reconciliation as at 31 December 20X8 £ Balance per bank statement Add unrecorded lodgments: V Owen K Walters Less unpresented cheques: B Oliver (869) L Philips (872) Balance per cash book (corrected) £ 1,557

98 134 232 71 37 (108) 1,681

445

Company Accounts

LESSON FIVE
Question 1 Sales Ledger Control A/C £ 386,430 Bal b/d 164,580 Cash received 350 Discounts allowed Returns inwards Contra Bad debts written off ______ Balance c/d 551,730 £ 190 158,288 2,160 590 870 1,360 388,272 551,730 £ 184,740 98,228 2,160

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 Question 2 (a) Uncorrected balance b/f Sales omitted (a) Bank – cheque dishonored (1)

Sales Ledger Control A/C £ 520 Bal b/d 102,690 Purchases (98,192 + 36) 990 Bad debts 3,370 870 175,048 Balance c/d 283,488

___100 283,488

Sales Ledger Control A/C £ 12,550 Discounts omitted (d) 850 Contra entry omitted (f) 300 Bad debt omitted (g) Returns inwards omitted (j) _____ Amended balance c/d 13,700 12,500

£ 100 400 500 200 12,500 13,700

Balance b/d

Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have no effect on the control account.

Lesson Eight

446

(b) Statement Of Adjustments To List Of Personal Account Balances £ £ Original total of list of balances 12,802 Add: debit balance omitted (b) 300 debit balance understated (e) 200 500 13,302 Less: transposition error (c ): understatement 180 of cash received cash debited instead of credited (2 x 500 £250) (h) discounts received wrongly debited to 50 Bell (i) Understatement of cash received (i) _72 __802 12,500 Question 3 (a) Balance Correction of error interest Balance George – Cash book £ 4,890 Bank charges (3) 320 Plant (4) 11,890 Cheque dishonored Correction of error in entering cheque (6) _____ Error in addition (7) 17,100 (b) Bank reconciliation Balance per bank statement Less lodgments not credited (2) Add: dishonored cheque £ 12,800 2,890 9,910 980 980 4,800 1,000 17,100 £ 320 10,000

447

Company Accounts

Add: outstanding cheque (1) Balance per cash book - overdrawn

1,000 11,890

Lesson Eight
Statement of effect on profit Profit per draft accounts Bank charges (3) Depreciation (4) Bad debt (5) Motor expenses (6) Additional depreciation (6) Purchases understated (7) Interest adjustment (8) Repairs to premises (9) £ 81,208 £ 320 1,000 980 2,100 600 1,000 320 __870 82,398 _6,300 76,098 ____ 6,300

448

(d) Journal George – drawings Repairs to premises Repairs to George’s house mistakenly charged as a business expense *Paul – accounts payable ledger account George – drawings Business account paid by personal cheque *Note: a debit to accounts payable ledger control account is also acceptable for this entry. Question 4 Four errors not disclosed by the Trial Balance: Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all. Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale posted in a wrong debtors account (e.g. to debtor 1 instead of debtor 2) Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense of plant repair posted to the plant account (an asset). Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a credit sale of £250 is posted to the debtor and sales account as £520. (Refer to the text for further details) £ 870 £ 870

540 540

449

Company Accounts

Lesson Eight
(b) (i) Suspense ABD Bank – loan Cashbook P& L – Rent received P& L –Trading account Closing stock P& L – discount allowed P&L – discount received P& L – Trading a/c opening stock Suspense Prepayments (prepaid insurance)) P& L Insurance receivable P& L - income (ii) Statement of Corrected net profit (Sh) Net profit Add: Rent received Discount received Prepaid insurance Insurance receivable Less: closing stock overvalued Discount allowed Opening stock Adjusted net profit (iii) ABD Loan Suspense A/c Sh 10,000 Balance b/d _____ Opening stock 10,000 4,000 500 220 12,000 1,500 500 3,200 (Sh) 64,000 DR (Sh) 10,000 4,000 4,000 1,500 1,500 500 500 3,200 3,200 220 220 12,000 12,000 CR (Sh) 10,000

450

16,720 80,720 (5,200) 75,520

Sh 6,800 3,200 10,000

451

Company Accounts

Question 5 ACCOUNTS Pre-Adjusted Trial Balance Dr Cr £ Capital Purchases Sales Salaries Opening stock Insurance Rent income Buildings Furniture Debtors Other expenses Creditors Commission Salaries due Prepaid insurance Rent rec’d in adv. Accrued commission Depreciation Bad debts Closing stock Net profit Column numbers 1 2 4,814 4,307 820 965 25,00 0 14,50 0 6,140 1,060 4,638 946 82,79 5 205 165 120 1,45 0 307 2,59 7 3 2,59 7 4 120 1,450 307 83,26 5 5 83,26 5 6 1,450 307 5,008 4,063 43,12 0 7 43,12 0 8 5,008 49,21 6 9 49,21 6 10 165 1,45 0 307 25,00 0 13,05 0 5,833 1,060 4,638 1,066 350 205 165 120 205 165 26,15 4 36,24 6 350 205 5,164 4,307 615 800 £ 40,00 0 WORKSHEET Adjustmen Adjusted ts Trial Balance Dr Cr Dr Cr £ £ £ 26,15 4 36,24 6 5,164 4,307 615 800 25,00 0 13,05 0 5,833 1,060 4,638 1,066 350 £ 40,00 0 T&P&L Account Dr Cr £ 26,15 4 36,24 6 £ Balance sheet Asset s £ Liab. £ 40,00 0

120 350

82,79 5

Lesson Eight
Question 6

452

Purpose of Control Accounts i. To provide for arithmetic check on the postings made in the individual account i.e. either the sales ledger or the purchases ledger. ii. To provide a quick total of the debtors and creditors balances to be shown in the trial balance. iii. To detect and prevent errors and frauds on the debtor and creditors account. iv. To facilitate delegation of duties especially where the debtors and creditors are many.

453

Company Accounts

Bal b/d Sales Bills received dishonored Charges payable Bal c/d

Sales Sh 6,185,000 8,452,000 88,500

Ledger Control A/C Bal b/d Returns inwards Bank Sh 52,500 203,500 7,985,000 153,000 64,500 302,000 5,404,000 14,779,00 0

10,000 Cash Bad debt Discounts allowed 44,000 Bal c/d 14,779,000

Bal b/d Returns outwards Bills payable Bank Cash Balance c/d

Purchases ledger control a/c Sh 16,500 Bal b/d 284,000 Purchases 930,000 Bills payable dishonored 473,200 88,500 _4,196,500 Balance c/d 10,396,000

Sh 4,285,000 5,687,500 400,000

___23,500 10,396,00 0

000 x 3% x 3 /12] Heating and lighting 1.500 10.818 454 £ 4.140 (b) Dare Profit and loss account for the year ended 31 December 1996 £ £ Gross profit 9.322) 2.000 30 80 (7.480 Less expenses Rent and rates 465 Fixtures and fittings 350 (depreciation) Lighting and heating 200 General expenses 450 Loan interest 120 Wages 2.172 240 1.821 .000 Discounts received 480 9.800 40 2.800 4.659) Net profit 3.914 Sundry expenses 140 Discounts allowed 520 Bad debt 200 (5.Lesson Eight 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 [4.500 2.

800 3.790 Expenditure Rent of clubhouse 6.000 9.700 Deposit account interest 800 23.000 Heating oil (W6) 4.821 6.818 3.000 x 10% 500 (21.200 Sale of sportswear (W3) 1.543 (2.500 Depreciation 5.000 50 673 __20 9.455 Company Accounts (c) Dare Balance Sheet as at 31 December 19X6 Non current assets £ Fixtures and fittings Current assets Stocks Debtors Prepayments Bank (less unpresented cheques) Cash Current liabilities Creditors Accruals Capital Net profit Less drawings Non current liabilities Loan – 3% Question 2 AB Sport and Social Club Income and Expenditure Account for the year ended 31 December 20X5 £ £ Income Subscriptions (W1) 10.400 Hire of sportswear (W5) 1.490) £ 2.000) Surplus of income over expenditure for 2.690 Bar and café profit (W2) 9.639 (1.603 .550 7.790 the year 2.603 2.036) 5.053 9.200 _290 £ 5.603 4.000 Groundsperson 10.

000 1.000 456 __200 Arrears c/f ___90 31.000 8.800 15.150 2.000) Sports equipment for hire (1.000 700 5.940 23.130 Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.590 800 450 200 _200 1.000 + 500) Subscriptions in arrears Bank deposit account Bank current account Current liabilities Creditors for bar and café purchases Creditors for sportswear Creditors for heating oil Subscriptions in advance Net current assets Net assets Accumulated fund b/f Surplus for the year Accumulated fund c/f Workings: Subscriptions Arrears b/f 1.940 25.000 2.000 1.650 24.12.800 £ 20.000 .X5 (10 + 230) Subscription income for year (bal fig) Advance c/f 31.1.790 25.000 (4.500 + 500) Current assets Heating oil Bar and café stocks Sports equipment for sale (4.X5 10.Lesson Eight AB Sport and Social Club Balance Sheet as at 31 December 20X5 £ Non current assets Equipment for grounds person: cost Depreciation (3.500 90 16.130 11.12X5 SUBSCRIPTIONS £ £ 240 Advance b/f 40 1. Bar and café profit £ Sales Cost of sales Opening stock Purchases* 7.1.X5 11.000) 1.000 – 2.690 Cash received 11.300 26.940 £ 5.

200 *Note: Purchases are 9.800 Profit 9.000 + 800 – 1.457 Company Accounts (5.000 = £8.000) Closing stock 10.800 .

20 0 5.000 3.100 (4.00 0 4.500) 1.550 2.000 + 200) Less closing stock Expense for year £ 1.000) (1.100 6.000) (2.900 (1.20 0 (700 ) 4.100) 2.000 458 *Note: While there is a case for treating the sportswear for hire as non current assets.400 £ 5.000 £ 4.300 (1.300) 1.100 Hire of sportswear £ Receipts Costs* Opening stock Purchases (W4) Closing stock Profit 750 1. Heating Oil Opening stock Purchases (4. in club accounts it is more usual to treat such items as stock in trade.Lesson Eight Sale of sportswear £ Sales Opening stock Purchases (W4) Closing stock Closing stock Gross Profit Sportswear written down Net profit Purchases of sportswear Bank Add closing creditors Less opening creditors For sale 2/3: £3.50 0 .700 £ 3.500 450 (300) 4.550 3.650 For hire 1/3: £1.

500 641.100.000 895.500 Transfer price 1.000 38.000) 634.000 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 employee Less UPCS Net profit 348.000 Rent and rates 22.0000 Purchases 855.459 Company Accounts Question 3 Mr Cherono Manufacturing Profit and loss Account for the year ended 30 June 1988 Raw materials Opening stock 40.000 4.200 318 __120 (508.000 3.500 Cost of goods completed 996.000 Wages _50.000 67.000 108.500 Water and electricity 13.062 4.000 (282.000 .000 3.500 Factory profit ___3.000.000 Less closing stock (80.000 12.466.000 131.400.000 13.000 3.000 90.500 36.000 4.748.500 39.438) 133.000 60.000 Factory overheads Wages 96.000) Raw materials consumed 815.000) (3.000 865.500 25.800 14.

Lesson Eight 460 .

018.000 152.062 (95.062 107.062 _240.461 Company Accounts 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 Cost 900.000 10.018.000) (478.000 1.318 .500 _98.000 574.380 (134.000) NBV 460.000 Depreciatio n (440.000 361.000 578.880 108.000 133.052.000 1.062 873.000 80.062 740.000 (120) 252.000 27.000 30.318) 444.062 1.000) (38.000) 778.000 114.

064 = 5.056) 5.309 (purchases) 5.900 – 800) __710 Total expenditure 16.056 Damaged stock etc 137 Wages of grounds man (250 + 3. equipment etc (10% x (7.774 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 (5.550 300) 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 1.680 + 70 + 230 – 4.515 Sales of sporting requisites 8.893 Training ground fees (7.200 Depreciation: buildings 3.309 + 811 – 1.270 + 202 – 163 = 5.660 – 470 + 325) 7.Lesson Eight Question 4 Olympiad Athletics Club Income and Expenditure Account for year ended 31 October 1983 £ £ Income Annual subscriptions (4.141 462 .345 Surplus of income over expenditure £7.500 Furniture.600 – 3.740 (140 + 100)) Entrance fees 250 Life membership fees credited (850 + 53) 903 5.

347 £48.000 927 36 4 230 13 680 3.000 35.643 48.100 46.100 2.086 4.Premiums .945 7.Sporting requisites 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 (4.400 + 5.310 £ Net 4.000 2.720 + 530 – (850 + 53) 100 470 160 202 932 6.Ground fees .Prepaid training .433 36.410 17.100 £ Depreciati on 12. equipment.563 122 7.current account Cash Current Liabilities Creditors – prepaid subscriptions .150) Current assets Stocks – sporting requisites . etc Investments Investments at cost (7.600) (current valuation £13.141 44.insurance commissions Prepayments (300 + 380) Bank – deposit account .575 .790 13.433 £ Cost 4.690 28.stamps Debtors – subscriptions .000 22.900 4.463 Company Accounts Olympiad Athletics Club Balance Sheet as at 31 October 1983 Non current assets Land Buildings Furniture.000 7.stationery .

720 464 4.600 3.Lesson Eight Accumulated fund b/f Assets: Land Buildings Furniture Investment Stocks Debtors Prepayments cash Liabilities Creditors: Subscriptions Training Premiums Sporting requisites Bank overdraft Membership fund 70 325 102 163 105 4.400 866 191 550 ___73 42.000 25.945 .750 7.485) 36.430 (5.

500 5.000 ) (1.897.500) Raw materials consumed 737.750 277.000 (38.000 438.119.Trading Profit and Loss account for the year to 31.000 (10.710.925) 252.250) (41.700 Factory overheads Depreciation on plant 84.950 Add opening w/p 85.925 (626.000 192.000 112.078.125.710.000 2.925 1.070.000 1.450 Factory wages 382.585 100.x 2 Shs Shs Raw materials Opening stock 100.910.517.500 Prime cost 1.200 2.075 Add factory profit ( missing figure) 192.340 38.500 154.465 Company Accounts LESSON 7 Question 1 Kimeu & Mwangi Manufacturing.925 (192.800 151.250 150.3.000) 444.925 Transfer price given in the question (par) 1.775.250) 1.950 Less stock of raw materials (79.200.375 Factory cost of completed goods 1.500 1.375 Factory expenses 354.000 x 45) Sales Cost of sales Opening stock of finished goods Transfer price Less closing stock of finished goods Add factory profit Expenses Depreciation on delivery van Sales department wages Selling department expenses Increase for provision for bad debts Provision for unrealized profits Net profit Share of factory profits K M Share of remaining profit K M 80.500) 878.700 Purchases 716.000 .250 816.000 252.000 Less closing w/p (126.

785 169.1 40 255.994.200) (150.425.250 – 86.34 0 100.000 2.925 1.250 = 234.250) (412.250 900. plant and equipment Freehold factory Factory plant ( 843.000 1.125) Delivery van ( 401.053.250 – 80.500 x 45 = 10.750) Current Assets: Stock: Raw materials W.400.896.925 The finished good is net of the unrealized profit on closing stock.500 126.750 1.00 0 105.78 5 Share of factory profit Balance of profit K 154.Lesson Eight Workings for closing stock of completed units Completed units b/f Units manufactured Less units sold Closing stock K 15.585 51.300 2.125 234.250 – 84.750 (176.1 40 30.00 0 54.80 0 255.125.450) 1.510.000 405.000 1.925 2.500) 22.098. .200 189.000 105.785 189.375 = 608.994.000 38.000 (45.P Finished goods Debtors Current Liabilities Bank overdraft Trade creditors Accrued expenses and deferred income Net current assets Capitals: K M Current A/c: K M Shs Shs 1.14 0 M 38.000) (86.750 608.I.825.000 M 125.625 79.140 64.750 – 151.785 466 Drawings Bal c/d Kimeu & Maingi Balance Sheet as at 31 March 1992 Non current assets Property.

000 Closing stock (35.500 Discount received 4.000 229.000)] Depreciation of plant 20.000 Lodge 1.500 Pym 500 23.500] Provision for bad debts increase [(5% x 14.000 – 20.000 Less Share of residual profit Amis ( 5/10) 35. Profit and loss appropriation account for year ended 31 March 198 £ £ £ Sales 404.380 Interest charged on drawings etc Amis 1.000) Cost of sales (224.000 [25% x (80.000 Purchases 225.000 Carriage inwards 4.000 + 405] 30.467 Company Accounts Question 2 Amis Lodge and Pym Trading.000 Residual profit 70.000 Interest on capital accounts Amis 8.780 Expenses Carriage outwards 12.530 Interest received ____750 185.000 Office expenses [30.300 [8.300) – 420] 295 (95.500 Less Opening stock 30.000 Plant depreciation 259.000) Gross profit 180.000 Less Salary – Pym 13.400) Net profit for year 90.000 . rates .000 [20% x 100.000 Lodge (3/10) 21. heat and light 7.000 Vehicle depreciation 15.000 Lodge 900 Pym 720 2.800 – 1.000] Discounts allowed 10.805 Rent.620 93.

X6 Beryl £’000 Coral £’000 Total £’000 . Profit and Loss Account for the year to 31 December 1996 £’000 £’000 Sales 2.5 43.0 00 43.00 00 Interest 0 720 35.40 0 P £ 13.00 0 25.0 00 1.3 Bal c/d _____ 80 27.50 0 14.500 21.00 0 ____27.00 0 500 14.00 0 900 23.400 1.000 468 Balances Drawings Appropn – interest Bal c/d Question 3 Amber.000 70.6.380 Gross profit 620 Expenses Wages and salaries (228 240 + 12) Sundry expenses 120 Bad and doubtful debts 26 Depreciation: Building 5 Plant and 24 equipment Interest on loan – Amber __5 420 Net profit 200 Assume profit is earned proportionately throughout the year Profit and Loss Appropriation Account Amber £’000 1/1X6 to 30.00 0 900 _____ 23. Beryl and Coral Trading.00 0 16.580 Closing stock (200) 1.0 Residue 00 11.000 Cost of sales Opening stock 180 Purchases 1.0 8.40 0 Current Accounts P A £ £ 400 Appropn – salary 15.0 00 00 L £ 1.Lesson Eight Pym (2/10) (b) A £ 1.0 00 L £ 500 22.

000 (40:40:20) 10 48 40 98 10 32 40 82 20 20 20 80 100 200 Amber.X6 £100.12.000 (60:40) 1.469 Company Accounts Salaries Share of profit: £80.7. Beryl and Coral Balance Sheet as at 31 December 1996 Cost or Aggregate valuation depreciatio n Non current assets Land at valuation 280 Nil Buildings 250 35 Plant.X6 to 31. equipment and 240 74 vehicles 770 109 Current assets Stock 200 Debtors (420 – 16) 404 Less: provision for doubtful 30 debts 374 Cash at bank 38 612 Current liabilities Trade creditor 350 Bonus 12 362 Net current assets Long term loan – Amber Represented by: Capital accounts: Amber Beryl Coral Current accounts: Amber Beryl Coral Proprietor funds 368 242 100 Net book value 280 215 166 661 250 911 50 861 710 82 64 _5 151 861 .

Lesson Eight A £’00 0 Goodwill Balances c/f 80 368 448 B £’00 0 80 242 322 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 £’000 210 140 80 32 322 242 140 100 C £’000 470 .

017 74.792 (2.823 (2.Profit on sale of plant 42.40 2 1.670 117.414 Total turnover 262.038 ) 112.964 8.892 41.805 44.904 Gross profit .163 57.914 Credit 189.471 Company Accounts Drawings Balances c/f A £’00 0 28 82 __ 110 B £’00 0 24 64 __ 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 6 82 __ 88 C £’000 20 __ 20 Question 4 The solution provided has the workings shown beside the accounts to make the comparison easier.Direct wages 47.43 5 (31.589 65.415 10.510 Cost of sales 42.438 . (a) Aristocratic Autos Trading and Profit and Loss Account for year ended 30 September 1986 Working Worksho Petrol/oil Showroo Total s p m £ £ £ £ Sales and charges: 32.848 152.945 Less materials: 20.333 111.200 13.847 5.252 81.024 2.100 Purchases 72.532 26.613 3.391 Indirect wages 10.685 47.216 90.684 26. Remember to adhere to previous partnerships and departmental formats.310) Closing stock 47.880 Rates 25.820 (25.64 7 1.24 5 110.125 32.510 Usage ____.720 Opening stock 52.976) 41.684 2.333 42.76 5 143.200 Salaries 7.39 7 39.814 (1) 1.05 8 98.203 40.860 25.500 Cash 73.752) 23.904 Less 4.018 41.147 (3) (4) 7.040 (2) 34.73 5 11.932 23.

951 9.524 93.Lesson Eight (5) (6) (7) 1.970 11.185 3.196 2.846 4. .192 472 (2.846) (6.898 32.843 9.302 43.939 4.846) *The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.543 18.477 16.324 16.500) (2.000) Residual profit* Duke Earl 9.996 36.0000 Earl (5% x £40.389 8.130 11.749 (845) Electricity General expenses Depreciation Total Net profit/loss for year Less appropriations Interest on capitals Duke (5% x £50.692 (6.000) 13.841 5.

602 564 6.915 1.225 915 5.038 1.470 Bank and cash 63. equipment and vehicles 16.019 4.473 Company Accounts Aristocratic Autos Balance Sheet as at 30 September 1986 Working Worksho Petrol/oil Showroo s p m £ £ £ (8) (8) 5.233 47.107 55.333 .462 27.365 2.799 Prepayments 30.631 25.790 4.010 Freehold buildings 5.906 Earl 9.867 5.000 Total £ 20.713 Net assets employed Financed by Capital accounts Duke 50.391 78.891 29.000 Earl 40.119 2.310 Stocks .000 (10) (10) Current accounts: Duke 6.140 1.020 24.397 31.346 Working capital 63.752 1.48 9 (4) (9) 90.902 13.633 ) 3.166 1.539 51.300 32.357 Plant.092 106.605 8.579 Current liabilities: 15.48 9 Working s (1) Plant disposal: Cost Accumulated depreciation Written down value Proceeds Profit on sale 19.500 (15.853 16.867 10.200 1.489 106.367 Current assets: 25.586 316 7.911 2.033 5.250 Creditors 983 Accruals 16.Debtors 7.077 2.986 Non current assets at written down value: 11.290 35.976 537 2.879 31.260 4.859 9.

692 1. equipment etc Total 474 Total £ 39.652 ___196 39.564 36.550 - .200 _____14.300 ) 13.543 303 5.378 16.072 113 2.600 _____12.163 6.438 9.415 5.000 _____38.685 showroo m £ ______4.846 26.050 113 34.160 231 4.302 Showroo m £ 38.021 368 3.060 - 7.389 3.915) 2.130 10.848 10.702 11.524 (8) Freehold buildings (cost): At 1 October 1985 Additions during year Disposals during year At 30 September 1986 Provision for depreciation on freehold buildings: At 1 October 1985 Disposals during year 64.860 (2.800 5.996 2.960 23.681 449 4.391 (2) Direct wages: Per list Accrual Total (3) Indirect wages: Per list Accrual (4) Rates (apportioned on basis of freehold buildings at (8) below: Per list Prepayment Total (5) Electricity apportioned on same basis as (4) above: Per list Accruals Total (6) General expenses (apportioned on basis of turnover: Per list Accruals Total (7) Depreciation: Charge for year per (8) below: Freehold buildings Plant.838 101 1.024 Petrol/oil £ 5.970 3.185 15.390 - 31.800 _____64.600 2.939 5.945 2.520 14.602 83 5.600 3.840 5.484 8.000 12.799) 7.613 1.453 517 9.586) 2.880 5.970 445 11.200 7.990 487 4.898 Worksh op £ 12.477 3.Lesson Eight Worksh op £ 34.100 - 19.738 (13.324 Petrol/oil £ 14.304 11.679 (7.199 (2.810 214 7.

891 113 214 101 487 915 17.740) 9.890 2.859 83 113 368 564 9.510 Charge for year At 30 September 1986 Written down value at 30 September 1986 Plant.633) 14.451 3.462 Earl 10.500) 71.153 5.702 13.583 Question 5 WORKINGS The first step is to derive the profit for the period:£ .180 26.477 2. (cost): At 1 October 1985 Additions during year Disposals during year At 30 September 1986 Provision for depreciation on plant.420 7.846 Drawings (12.790 (19.53 0 31.484 22.378 46.999 24.020 65.564 82.906 12.750 Interest on capital 2.260 22.107 196 445 517 1.520 _____27.960 44.600 26.077 5. equipment etc.561 4.010 17.713 35.846 (9.840 9.520 7.450 1.475 Company Accounts 2. equipment etc At 1 October 1985 Disposals during year Charge for year At 30 September 1986 Written down value At 30 September 1986 (9) Accruals (per workings above): (2) (3) (5) (6) (10) Current accounts: Duk e Opening balance 9.500 ) 117.304 2.580 5.357 231 303 449 983 74.190) Closing balance 6.290 105.940 4.510 20.210 (19.633 ) 23.254 (15.060 ____18.000 6.900 4.500 Residual profit 6.82 0 48.782 (15.990 11.

5 00 Balance b/d Drawings Closing balance Exors of R (decd) R £ 2.26 0 S £ 1.60 0 720 2.000 8.00 balances 0 Goodwill 2.800) Less assets minus external liabilities (26.50 0 10.32 0 2.Lesson Eight Closing Assets minus external liabilities (17.0 00 Closing balances Exors of R decd - CAPITAL ACCOUNTS R S £ £ Opening 9.50 0 4.12 0 CURRENT ACCOUNTS A R £ £ .00 0 7.50 0 11.100 + 2.50 0 10. LESSON 8 Question 1 (a) .5 00 A £ 1.12 a/c 0 .5 00 T £ 3.500) 5.00 0 260 2.600 25.5 00 11.480 + 1.230 + 3.600 + 1.26 0 S £ 200 2.360 476 Opening Goodwill w/o R £ - S £ 3.12 0 - The Capital and Current Accounts are given as workings for the Balance sheet figures.Balances b/d 140 .50 0 10.060 – 820) Profit for period (1st July to 31st October) 26.00 0 7.5 00 4.Appropriation 2.50 0 5.000 + 1.Premium (1/5 x 7.50 0 10.(profit) 2.5 00 11.5 00 A £ 4.12 0 A £ - 2.5 00 .00 0 1.200 5.000 + 3.80 0 720 2.32 0 T £ 100 1.500 2.370 – 980) Add back drawings (2.240 6.12 0 T £ 2.50 raised 0 Bank Capital T £ 8.00 0 2.400 31.00 0 1.

975 finished goods Sales 28.000) .415 Add: direct wages 1.I. Trading Profit and Loss Account for the year ended 31 October 1999 Raw Materials Sh’000 Sh’000 Opening stock – Raw material 380 Purchases – Raw material 9.160 Factory overheads Factory expenses 290 Indirect materials 350 Factory insurance 150 Depreciation – plant and 5.550 Less cost of sales Opening stock – finished goods 420 Factory cost of production – 16.803 Less transfer to general reserve (2.350 direct expenses _395 1.160 5.303 Less dividend (4.125 (8.500 4.880 Less closing stock – Raw material (465) Cost of raw materials consumed 9.000) Net profit for the year (697) Add retained profit b/d 5.462) 3.765 Less expenses Sales room expenses 485 Administration expenses 620 Office salaries and wages 898 Vehicle running expenses 656 Bad debts w/o 64 Overdraft interest 725 Debenture interest 800 Depreciation: furniture and 89 equipment Motor vehicles 4.785) Gross profit 11.P – Finished (695) goods Factory cost of production – 16.477 Company Accounts AZ Ltd Manufacturing .I.975 finished goods 17.110 Add opening W.670 Less closing W.395 Less closing stock – finished goods (610) (16.500 9.950 machinery Total cost of production 17.P 560 17.745 Prime Cost 11.

Lesson Eight Retained profit c/d 2.803 478 .

000 500 2.800 890 16.190 Sh’000 (11.000 55.175 1.479 Company Accounts AZ Ltd Balance Sheet as at 31 October 1999 Non current assets Land & Buildings Plant and machinery Furniture and equipment Motor vehicles 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 Sh’000 30.931 (7.259 610 465 695 7.130 1.525) 19.000 783 800 4.758) 1.000 Sh’000 30.303 10.500 73.000 25.000 2.460) (274) (7.303 40.340 616 8.803 45.303 .360 9.975 53.000 14.372 55.

300 27.780 Capital: Sam 7.230 Bank 4.950 8.100 Debtors 2.940 Estate of Reg.500 Ted 7.480 20.Lesson Eight STA Balance Sheet as at 1 November 19-6 £ £ Buildings 17.500 Abe 4. 7.480 Current assets Stock 1.840 27.000 Equipment 3.280 Current liabilities Creditors (980) 7.000 Current accounts: 720 Sam Ted 220 Abe __940 19.000 19.780 480 .

540 (77) 1.540 (292) (965) (1.500 1.283 500 332 189 350 8.492 16.248 2.840 .535 48.500 12.398 1.990 47.340 3.000 ordinary shares of Sh.500 50.463 35 10.057 50.331) 2.257) Shs ‘000’ 44.500 1.840 30.500 49.500. 20 each fully paid Capital reserves Share premium Revenue reserves General reserve Profit and loss account 10% debenture 4.000 350 16.388 44.960 4.481 Company Accounts KK Ltd Balance Sheet as at 31 October 1998 Shs ‘000’ Shs ‘000’ Non Current Assets Freehold property Furniture and fittings Motor vehicles 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 Authorized and issued share capital 1.490 4.540 3.500 (14.

78:1 20.000 10.000 = 0.Lesson Eight Question 3 (a) 1995 Gross profit percentage Gross profit Sales Current ratio Current assets Current liabilities Quick ratio Current assets less stock Current liabilities Debtors collection period Debtors x 365 Sales Creditors payment period Trade creditors x 365 Purchases (W) Gearing ratio Loan capital Total capital 24.000 31.000____ = 55% 60.600 60.000____ = 70% 60.400 482 23.84:1 14.200 10.000 = 0.000 78.000 90.000 + 49.000 12.52:1 20.000 1995 £’000 40.000 x 365 = 47 days 108.000 – 15.000 + 26. Possibly the firm has lowered the price of goods to increase sales.400 x 365 = 44 days 78.000 = 37.600 15.000 42.000 64.000 9. both profit and sales are higher.000 1996 £’000 75.000 52.900 – 12.400 = 30% 108.600 12.5% 1996 32. although in absolute terms.600 Cost of sales Add: closing stock Deduct: opening stock Purchases (b) • • The gross profit margin has fallen when compared with last year.68:1 14.200 23. this is no immediate cause for .000 6.800 x 365 = 59 days 42. There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios.000 14. However.400 31. although there may be other explanations (see part (c) below).000 60.500 x 365 = 60 days 64.000 = 1.900 = 1.

000 @ 70p) Share premium (50. The creditors payment period has shortened. The gearing ratio has reduced but it is still too high. Question 4 19X1 11 Feb 11 Feb £ 4.000 @ 20p) 19X1 29 Sep £ Forfeited . The reduction is mainly due to an increase in retained profits and in the revaluation reserve. and a company ought to be able to pay its debts as they fall due. There is some truth in this statement. High gearing involves greater risk for the shareholders. The debtors’ collection period. but also.000 10. Current assets should generally be kept as low as is compatible with efficient production and paying creditors as they fall due. an excessively high current ratio means that resources are tied up in stock.483 Company Accounts • • • concern as the company appears to be paying its creditors more promptly than last year. It is important that the percentage return to shareholders is greater than the percentage rate of interest being paid on the borrowings. has decreased still further from 60 to 47 days.000 35. High gearing means greater risk. in good times. greater returns. or perhaps it is purchasing goods on shorter credit terms.000 Cash Share capital (50. However.000 Ordinary Share capital account £ 19X1 500 11 Feb Application and Application and allotment account 19X1 £ 10 Feb Cash 16 Feb Cash ______ £49. Possibly the company has become more efficient at paying creditors. There is not enough information to say whether this is all due to good credit control.000 £49. Liquidity is important. debtors and cash instead of producing profits. or whether some sales are being made on shorter credit terms or for cash. Any two of the following: • • • An error in counting closing stock An increase in prices from suppliers not passed on to customers Deliberate reduction in margin in an attempt to increase sales volume (d) The position is not quite as clear-cut as this statement would suggest. already satisfactory.

850 ___150 £15.000 ___500 £50.000 @ 20p) 1 Nov Forfeited 10.500 484 Bal c/d Ordinary Share Premium Account 19X1 £ 11 Feb Application and allotment account 10.00 0 19X1 29 Sep 1 Nov Call account Forfeited shares reissued 150 350 £500 Forfeited Shares 19X1 29 Share capital (500 Sep @ £1) £ 500 ____ £500 19X1 1 Nov 1 Nov Share capital Share premium Forfeited Shares £ 19X1 500 1 Nov Cash 250 £750 1 Nov Forfeited shares £ 400 350 £750 .Lesson Eight shares 1 Nov Balance carried down 1 May 50.250 0 Call account 19X1 1 May Cash 29 Sep Forfeited shares 19X1 1 May £ 14.000 15.000 1 Nov ______ £50.25 shares reissued ___250 0 account £10.000 @ 30p) Forfeited shares reissued 35.25 £10.000 Share capital 15.000 _____ £15.50 0 allotment account (50.000 @ 70p) Call account (50.000 (50.

485 Company Accounts .

‘000’ 816.580 .400 61.200.600 160.440 Operating expenses 95.300 Accruals Interim dividends paid Freehold land and buildings 164.900 Depreciation expense 17.000 1.580 Sh. 486 Answer ALL questions. is a company in the hospitality industry.294.294.000 18. 1 November 2000 9% debenture stock – secured Share premium Capital redemption reserve Trade debtors and creditors 63. Show ALL your workings.900 Furniture and equipment 85.820 Investments 9.000 56.860 Bad debts written off 240 Audit fees 400 Interest on loan and overdraft 13.000 shares of Sh.160 104.600 Stock 46. Sh‘000’ Revenue Cost of sales 401.800 1.Lesson Eight STRATHMORE UNIVERSITY MOCK EXAMINATION CPA PART I\ CPS PART I FINANCIAL ACCOUNTING I The following should be done under examination condition. Marks allocated to each question are shown at the end of the question.180 Directors’ fees 960 Ordinary share capital.600 Leasehold land and buildings (over 50 years) 51. QUESTION ONE Nafuu Foods Ltd.600 Leasehold land and buildings (over 50 years)125.520 900 26.000 Wages and salaries 186.860 Insurance 1. The following trial balance has been extracted from its books on 31 October 2001.20 each fully paid Profit and loss account.400 Prepayments 720 Bank balance 2. 5.000 77.

The corporation tax on the year’s profit has been estimated at Sh. 3. Disposals during the year included the following: Cost Sh.800 52.800 960 All the sale proceeds have been included in the revenue: no other adjustment has been made.000 need to be provided for. Additional audit fees of Sh.200 5.000.1. Properties held on lease with less than 50 years to run are depreciated over the un-expired term.800 Furniture and equipment 150.450.‘000’ Sh ‘000’ 1. 1) 2) 3) 4) 5) Freehold land was revalued on an existing basis by a professional valuer but the surplus of Sh.10. ‘000’ Sh.500. Corporation tax on the previous years profit was finally agreed with the tax authorities to be Sh. .27.500. 2.300 Accumulated depreciationSale proceeds Sh.200 1. The total balance of cash at bank includes Sh.310. 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.600.800 3.6.000 is included in revenue.7. Income from the investments of Sh. The balances of fixed asset accounts as at the beginning of the year and additions during the year were as follows: Cost or valuation Accumulated depreciationAdditions 1 November 2000 during the year Sh.500.600 Leasehold land and buildings (over 50 years) 121.000 more than had been provided for in the profit and loss account of the year.000 overdraft on one of the accounts. ‘000’ Freehold land and buildings3.000 has not yet been brought into account.‘000’ Sh. Some of the leasehold property in the books costing Sh.800 The company does not provide for depreciation on freehold properties or properties held on lease with 50 years or more to run at the balance sheet date.000. The investments in the trial balance are temporary quoted securities.700 4.600 Leasehold under 50 years 2.000. Items of equipment are depreciated over their estimated useful life.487 Company Accounts You are provided with the following additional information: 1.800 Leasehold land and buildings (under 50 years) 60.000 7.000 had just 50 years remaining on the lease in October 2000 and has not yet been transferred to the under 50 years category.‘000’ Freehold land and buildings157.000. As at 31 October 2001 their market value was Sh.

5 per ordinary share Required: a) A schedule showing fixed assets movements for the year ended 31 October 2001. (5 marks) . (10 marks) b) Profit and loss account for the year ended 31 October 2001. (10 marks) c) Balance sheet at 31 October 2001.Lesson Eight 6) 488 The directors have decided to recommend a final dividend of Sh.

600. Tonui introduced Sh.250.200.000.000 Furniture and fittings (cost) 300.250.000 Salaries (including partners’ drawings) 1. For the purpose of this admission. Sh.500.420.000 Rent.000 into the firm of which Sh.000 Stocks: 30 April 2000 1.000 1.400 for the six months To 31 October 2000) 660.352. The following was the partnership trial balance as at 30 April 2001: Sh.000 400. Tonui was admitted as a partner and from that date. the value of goodwill was agreed at Sh.3. On 1 November 2000.000 Debtors 225.000 13. adjusting entries for transactions between the partners being made in their current accounts.100.000 comprised his fixed capital and the balance was credited to his current account.300.750.000 Balance at bank 820. but no interest was charged or allowed on current accounts. No account for goodwill was to be maintained in the books.000 Wages 550.000 Sh.420.000 Sh. rates and electricity 310. profits and losses were to be dated in the ratio 2:2:1.489 Company Accounts QUESTION TWO Rotich and Sinei have been in partnership for several years.375.000 13.000 .1.250.000 300.3.000 to 31 October 2000) Accumulated depreciation: 1 May 2000 Motor vehicle Furniture and fittings Creditors Additional information: 1.000 Motor vehicle (cost) 1. Sales (Sh.000.000 300.000 General expenses (Sh.000 Purchases 4. On that date.000 500.000 Accountancy and audit fees 105. Fixed capital accounts Rotich Sinei Current accounts Rotich Sinei Leasehold premises (purchased 1 May 2000) 2.000 Cash introduced – Tonui 1. 8. Interest on fixed capitals was allowed at the rate of 10% per annum. 750. sharing profits and losses in the ratio 2:1.000 100.970.

Lesson Eight 2.000 723.000 for electricity consumed was required. calculated on cost.1. A charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively. the stock was valued at Sh. 4.000 Purchase ofBeverages 197. Sinei Sh.000. On 30 April 2001.120.000 Transport 218.150.000.050. (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 Beverage sales Investments income Sh. 6.000. Salaries included the following partners’ drawings: Rotich Sh.000 124. 490 Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. (4 marks) c) Balance sheet as at 30 April 2001.62. 5. rates and rent paid in advance amounted to Sh. 8. 254. (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. In addition.000 Payments Salaries and wages New equipment Repairs and Sh.500.000 had been debited to sales returns but had not been posted to the account of the customer concerned : The purchases journal had been undercast by S.000 Refund of subscriptions 45.000 400.000 and Tonui Sh. Doubtful debts (for which full provision was required) amounted to Sh.15. Expenses.275.000 Printing and stationery168.50.40.000 657.000 194.000 as at 31 October 2000 and 30 April 2001 respectively.000 Dinner dance expenses315.000 249. unless otherwise indicated.48. 3. On 30 April 2001.000 had been written off at 30 April 2001 to general expense.000 Office expenses 415. were to be apportioned on a time basis. after Tonui’s admission. Any apportionment of gross profit was to be made on the basis of sales.32. (9 marks) b) Partners’ current accounts for the year ended 30April 2001.000 and a provision of Sh.000 565.80. no interest was to be charged or allowed on current accounts.000 .000 2.30. Required: a) Trading and profit and loss account for the year ended 30 April 2001.000 and Sh. 288.000 Sports prizes 25. A difference in the books of Sh. which was later found to be due to the following clerical errors: Sales returns of Sh. 7. 9.

500.561.561.000 Investments 1.000 .000 4.491 Company Accounts 4.000 Balance carried forward 405.

6) In the cash book Ssemakula had entered a payment of Sh.000 690. 8) Ssemakula had brought forward the opening cash balance of Sh. 240.15.98.000 68.500. 3.706. No entries have been made in the books in this respect.500 paid into the bank on 30mJune 2001.500 whereas his cash book balance was Sh.000 were sold on 30 March 2001 for Sh.000 184.500.Lesson Eight Balances as at Furniture and fittings (net) Equipment (net) Investments at cost Subscriptions in arrears Salaries accrued Stock of beverages Subscriptions in advance Additional information: 31 March 2000 Sh.000 - 492 1. 3) He had not entered receipts of Sh. . Investments which had cost Sh.22.625. 4) The bank had not credited Mr Ssemakula with receipts of Sh.000 31 March 2001 Sh.000 162.000 300.79. (8 marks) b) Balance sheet as at 31 March 2001.500 had not yet been presented to the bank. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively. 2. (6 marks) (Total: 20 marks) QUESTION FOUR a) b) Explain the term “bank reconciliation” and state the reasons for its preparation. 7) A cheque for Sh.500. 9) An old cheque payment amounting to Sh.3.366. a sole trader received his bank statement for the month of June 2001.000 had not been entered in the cash book.000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cash book. 375.000 72. At that date the bank balance was Sh. 2) Cheques drawn by Ssemakula totalling Sh.000 85.000 had been written back in the cash book but the bank had already honoured it.26.250 as a debit balance instead of a credit balance.62. His accountant investigated the matter and discovered the following discrepancies: 1) Bank charges of Sh.000.2.000 had not been entered into the cash book. (6 marks) Ssemakula.500 in his cash book.74.900 as Sh.400.000 3. 5) Standing order payments amounting to Sh.329.44. Subscriptions in arrears are written-off after twelve months. Required: a) Income and expenditure account for the year ended 31 March 2001.

the bank had credited some deposits amounting to Sh. Unfortunately. Ssemakula had actually entered the expected receipts from the debtors in his cash book.500 to another customer’s account.493 Company Accounts 10) Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account.832. acting on information from his customers. However. .

(9 marks) A bank reconciliation statement as at 30 June 2001.Lesson Eight Required: i) ii) 494 A statement showing Ssemakula’s adjusted cash book balance as at 30 June 2001. matching principle. Explain any weaknesses associated with its use. historical cost principle. Some of these conventions include: The The The The The business entity principle. a) b) c) d) e) Required: For each of the principles listed above: a) b) c) Explain its meaning Justify its use. END OF MOCK EXAMINATION NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING (5 marks) (5 marks) (5 marks) . Yet the application of the same conventions has been the source of criticism of the quality and relevance of information contained in financial reports. conservatism principle. monetary principle. (5 marks) (Total: 20 marks) QUESTION FIVE The accounting profession has for a long time relied on certain accounting conventions to guide accounting practice.

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