CHAPTER FIVE ADJUSTMENTS IN THE FINAL ACCOUNTS Introduction The preparation of financial statements may require several adjustments

to the book of accounts balances. The basic financial statements covered in the previous chapter were grossly simplified to illustrate the accounting framework. The real business world is a lot more complex and several adjustments are required. These adjustments are the subject of this chapter. Objective ! A"ter tud#in$ t%i c%&'ter #ou %ou(d be &b(e to! Identi"# t%e need "or &dju t)ent o" &ccount M&*e v&riou &dju t)ent in con"or)it# +it% &ccru&( conce't o" &ccountin$ Adju t &ccount "or c&rri&$e, di count , b&d debt &nd dr&+in$ .& ic &ccountin$ "or de'reci&tion e/'en e E t&b(i % t%e tructure o" 'ro"it &nd (o &ccount &nd b&(&nce %eet Dr&+ )ore co)'(e/ 'ro"it &nd (o &ccount &nd & b&(&nce %eet o" & o(e 'ro'rietor-

0e# ter) ! C&rri&$e! Cost of transporting goods to the business premises or to customers C& % Di count! Allowance given in the form of debt reduction as a result of prompt payment .&d debt ! A debt owed to a business that is not expected to be received. Return in+&rd ! returns. Goods sold but returned by customers. Also known as sales

Return out! Goods bought but returned to suppliers. Also known as purchases returns. Dr&+in$ ! Cash or goods taken out of business by the owner for personal use Accru&( ! xpenses incurred but not paid for by the end of the accounting period

Pre'&#)ent ! incurred.

xpenses paid for in advance of the period in which they will be

De'reci&tion! Amount charged to the profit and loss account to reflect the wearing out of a fixed asset over its useful life as a result of its usage! obsolescence or passage of time. The purpose of depreciation is to comply with the accruals concept in the allocation of the cost of a long"term asset. Provi ion "or De'reci&tion! cumulatively from the date of its acquisition. Net boo* v&(ue! Cost of a fixed asset less the cumulative amount of depreciation at the balance sheet date. #ixed assets are stated in the balance sheet at their net book value $or written down value% . C&rri&$e in &nd c&rri&$e out A business may incur cost of bringing goods bought to its premises $or warehouse%. This is a separate cost from other transport cost and is described as carriage"inwards $expenses%. Carriage"inwards is associated with the purchases of goods! therefore it is added to the purchases in the computation of cost of sales. &otice that the cost of transporting goods to the premises from the supplier can be incurred by the supplier who in turn charges the business a bill inclusive of that transport cost. Alternatively the business may make its own transport arrangement and buy the goods from the supplier net of transport cost. 'n either case! the transport cost is part of the cost of the goods bought. The purpose is to ensure comparability. (usiness may also incur transport expenses of distributing goods sold to the customers. The cost involved is separated from other transport costs. 't is described as carriage outwards. Carriage outwards! unlike carriage inwards is charged directly to the profit and loss account. Trading )rofit and *oss a+c ,ales ,ales -eturns .pening stock )urchases xxx xxx 2 xxx $xxx% xxx The depreciation provision is the amount of depreciation that has been charged to the profit and loss account! relating to a fixed asset!

Carriage in )urchases returns Closing stock Gross profit xpenses .ther expenses Carriage out &et profit .&d debt

xxx $xxx% $xxx% xxx xxx

$xxx% xxx xxx xxx

Goods on credit may be paid or may not be paid for by their respective customer. ,ome customers may eventually fail to pay. /hen the goods were sold! the entire credit sale had been recogni0ed as sales revenue. 'f any of the customers fails to pay! then the revenue recogni0ed will not be reali0ed. That part of revenue that will not be reali0ed should be written off. This will be the bad debt. (ad debts are written off against profits as an expense. xample of instances in which debts are declared bad $uncollectible% are1 " The customer in question dies and there2s nothing to recover from his estate - 'f the customer is declared bankrupt and nothing is recovered from any of his property - 'f the customer becomes insane and no property can be attached. The book entry for bad debts is as follows1 3ebtor2s a+c (al b+f ,ales xxx xxx xxx (ad debts a+c 3ebtor2s account xxx )rofit and loss xxx ,ales return Cash (ad debts (al c+f xxx xxx xxx xxx xxx

Provi ion "or b&d &nd doubt"u( debt

(ad debts are those debts that the business is not able to collect. These are written off as an expense. ,ome debtors may not qualify to be bad but their collection may be in doubt. These may include debtors that have taken longer than the normal +agreed credit period. 't may also include debt held by people whose ability to pay is in doubt. )rudence requires that such debts be set aside as doubtful at least at the moment. A provision for bad and doubtful debts is set! at the end of the period. 't is compared with the amount of provision set in the previous period. 'f there is an increase in the provision! then such an increase is charged to profit and loss account as an expense. 'f it is a decrease! then the decrease amount is a credit to the profit and loss account. 'n the balance sheet! provision for bad and doubtful debts at the end of the year is deducted from the debtors figure. )rovision for bad 4 doubtful debts (al c+f xxx xxx (al b+f )rofit 4 loss a+c xxx xxx $increase% xxx

The determination of the amount of provision for bad and doubtful debts is a matter of policy and may vary from one firm to the other. ,ome of the methods that may be used are1 i% 3ebt ageing analysis ii% )ercentage of credit sales iii% )ercentage of debt outstanding. 3ebt ageing Analysis According to this method an analysis of outstanding debtors account balances is carried out according to periods of time that each of these debts are outstanding. #or this purpose an ageing schedule or an age analysis report is developed. An age analysis report is simply a list of outstanding debts! which originated in a specific period! but which is still outstanding as at the end of the accounting period. The business may set a policy that those debts outstanding beyond a specified period are deemed to be doubtful. ,uppose 5imani &gothos had the following debt ageing analysis as at 67 st 3ecember 899:. 3ebt Ageing Analysis -eport #igures in 5sh 5sh. ;999< Customer &ame Total debt Current 69 to days=9 to 4 days>9 to days ? >9 days to 67+78+9:

@usa .mondi 5inyua Cherimo Colita Total

87A99 79B99 77=99 >999 D999 B>>99

:999 8999 :999 B999 B999 89999

67+78+9: :999 7999 6999 " " A999

67+78+9: A999 6999 8B99 8999 8999 7DB99

67+78+9: B999 :999 7B99 7999 " 77B99

A99 B99 =99 7999 " 8>99

'f it is the business policy to take all debts outstanding for more than >9 days as doubtful! then the amount of doubtful debts as at 67 st 3ecember 899: is 5sh 8!>99!999. )ercentage of credit sales. This method is normally used if a trend of bad debts in relation to credit sales is identified. #or example a business may observe out of experience $statistical analysis% that an average of 8E of the total of the credit sales turn out to be bad debts. 'f the total credit sales for a specific financial year are 5sh 79!999!999! the provision for bad debts is 5,h 899!999 $calculated as 8E of 5sh79! 999!999%. This is a very simple method for estimating the provision for bad debts. Cowever it may bear no relationship to the amount owing by the debtors. )ercentage of .utstanding debtors This method relates doubtful debts to the outstanding debts. 't is used if a trend of bad debts in relation to outstanding debtors. #or example if 5imani &gotho2s business above had observed that an average of B E of the outstanding debtors turn out to be bad debts! then the provision for bad and doubtful debts for the period to 67 st 3ecember 899: is 8!>>B!999 $obtained as BE x B>!>99!999%. E/&)'(e @r @anyani balance of debtors as at 67 st 3ecember 899: is 5sh 8!999!999. @r @anyani observed that BE of the debtors are doubtful. At the close of the previous accounting year on 67st 3ecember 8998 the debtors stood at 5sh 7!B99!99 and the bad and doubtful were believed to be 6E. Re1uired1 3raw the provision for bad and doubtful debts account. )rovision for bad and doubtful debts at 67 st 3ecember 89961 6E x 7!B99!999 F :B!999 )rovision for bad and doubtful debts at 67 st 3ecember 899:1 BE x 8!999!999 F 799!999 )rovision or bad and doubtful debts a+c

(alance c+f

(alance b+f 799!999 )rofit and loss 799!999

:B!999 BB!999 799!999

,h BB!999 will be charged $debited% to profit and loss account as increase in provision for bad and doubtful debts. E/&)'(e @rs @usau balance of debtors as at 67 st 3ecember 899: is 5sh B!999!999. @r @anyani observed that 8 E of the debtors are doubtful. At the close of the previous accounting year on 67st 3ecember 8998 the debtors stood at 5sh 6!999!999 and the bad and doubtful were believed to be BE. Re1uired! 3raw the provision for bad and doubtful debts account. )rovision for bad and doubtful debts at 67 st 3ecember 89961 BE x 6!999!999 F 7B9!999 )rovision for bad and doubtful debts at 67 st 3ecember 899:1 8E x B!999!999 F 799!999 )rovision or bad and doubtful debts a+c (alance b+f )rofit and loss (alance c+f B9!999 799!999 799!999 7B9!999 799!999

,h B9!999 will be credited to profit and loss account as decrease in provision for bad and doubtful debts .&d debt Recovered 't may happen that the debts! which were previously written"off as bad debts or irrecoverable debts! may be recovered. The receipt is a bad debt recovered and is recogni0ed as an income in period of recovery. This is an amount not generated from normal business activities and should be credited to a bad debts recovered account with a corresponding debit in the debtors accounts to restore the debt! the cash receipt for the same is debited in cash account and credited to the debtors account in the usual way. The balance in the bad debts recovered account is either credited to profit and loss account or to bad debts accounts. The effect on the profit is the same. Dr&+in$ The business owner may take home part of the cash from the business or any assets such as stock for personal use. This is known as drawings. 3rawings is a reduction to 6

the amount of capital. &otice that profit earned in the business increases the capital of the business! but drawings reduce it. The stock drawings are deducted from the goods available for sale in the trading account to get cot of sales. The capital adjustment with respect to drawings is normally adjusted in the balance sheet as follows1 Capital balance b+f Add1 &et profit for the year *ess1 3rawings Capital balance c+f GGG GGG $GGG% GGG

GA@)* 5 5 runs a distribution firm in astland2s market. Ce2s trial balance for the years ended 67+78+96 is as follows. 3r. 5sh. ;999< >!999 A!999 8!999 6!999 8:!999 7!999 8!999 7!B99 7!999 7!999 =!999 B!999 8!999 7!999 8!999 7!999 7!999 6!999 87!999 =D!B99 =D!B99 Cr. 5sh. ;999< :9!999 B99

*and and buildings @otor vehicles ,ales -eturns outwards #ixtures ,tock $7+7+96% )urchases -eturns inwards Carriage in Carriage out (ad debts )rovision for bad debts 3ebtors Creditors Cash lectricity ,alaries 4 /ages /ater Telephone 3rawings Capital

Additional info1 7. )rovision for bad and doubtful debt is to be set at 89E of debtors 8. ,tock at 67+78+9: amount to 5sh. :!999!999 7

Re1uired! i% 3raw 5. 5s Trading ! profit and loss account for year ended 67+78+9: and ii% 3raw balance sheet as at 67+78+9: 3r. )rovision #or bad and doubtful debts 5sh. H9992 (al b+f 7!899 ) 4 * a+c 7!899 7!999 899 7!899 Cr 5sh. H9992

(al c+f

55s (usiness Trading! )rofit and *oss account for year ended 67+78+9: ,h.5sh. H9992 ,h. 5sh. H9992 ,ales :9!999 -eturn inwards $7!999% &et sales 6>!999 .pening stock 6!999 )urchases 8:!999 Carriage in 8!999 -eturn outwards $B99% Closing stock :!999 $8:!B99% Gross profit 7:!B99 xpenses1 Carriage out 7!B99 (ad debts 7!999 )rovision for bad 4 3oubtful debts 899 lectricity 7!999 ,alaries 4 wages 8!999 /ater 7!999 Telephone 7!999 $D!D99% &et profit =!A99 55s (usiness (alance sheet as at 67+78+9: 5sh. H9992 #ixed assets1 *and 4 building @otor vehicles #ixtures Current assets1 8 5sh. H9992 5sh. H9992 >!999 A!999 8!999

,tock 3ebtors $net% Cash Current liabilities1 Currents &et assets #inanced by1 Capital &et profit 3rawings

:!999 :!A99 8!999 B!999 79!A99 $B!999% 8:!A99 87!999 =!A99 $6!999% 8:!A99 B!A99

Di count received &nd &((o+ed 3iscount is an incentive given to a customer by a supplier either for bulk purchases $trade discount% or for prompt payment$ cash discount%. Trade discount is negotiated before the transaction and therefore it does not form part of the book entries. ,ales and purchases are recorded net of trade discount. Cash discount is granted after the transaction and normally gives option to pay within a specified time to earn it. 't is therefore recorded in the books of accounts because it is awarded after the sale or purchase as the case may be. Accordingly there are two types of cash discountsI discount received and discount allowed. 3iscount allowed is the incentive granted to the business debtors for prompt payment. 't reduces amount of debtors and therefore is an expense charged to profit and loss account. The book entries for discount allowed are as follows1 3r. (alance b+f ,ales 3ebtors a+c xxx xxx (ad debts xxx ,ales return xxx Cash+bank xxx 3iscounts Allowed xxx (alance c+f xxx Cr.

xxx

xxx 3r. 3ebtors

3iscount allowed a+c xxx ) 4 * a+c xxx

Cr xxx xxx

3iscount received is an allowance granted by the supplier+creditor to the business for prompt payment. 't reduces the obligation to pay and therefore is an income credited to the profit and loss account. The book entries for discount received are as follows1 3r. )urchases returns Cash 3iscounts received (alance c+f Creditors a+c xxx (alance b+f xxx xxx )urchases xxx xxx Cr xxx xxx xxx Cr. xxx xxx

3r. )4*

3iscount received a+c xxx Creditors xxx

G -C', Jogoo runs a wholesale business in &airobi. Cis trial balance for the year ended 67+78+9: is as follows 3r Cr. 5sh. ;999< 5sh. ;999< *and and buildings A!999 @otor vehicle =!999 ,tock $7+7+9:% 6!999 ,ales B9!999 )urchases 8A!999 -eturn inwards 8!999 -eturn out 7!999 3iscount received 8!999 3iscount allowed 7!B99 #ixtures :!999 3ebtors B!999 Creditors :!999 )rovision for bad and 3oubtful debts 6!999 (ad debts 8!999 General expenses 6!999 ,alaries 4 wages :!999 3rawings 8!999 Capital A!B99 =A!B99 =A!B99

10

Additional info1 7% Closing stock amount to 5sh. 8!999!999 8% )rovision for bad 4 doubtful debts is set at 69E of the debtors -equired a.% 3raw Jogoos Trading profit and loss account for the year ended 67+78+9: and b.% 3raw the balance sheet as at 67+78+9: 3r. )4* (al c+d )rovision for bad 4 doubtful debts a+c 5sh. H9992 7!B99 6!999 Jogoos Trading )rofit and *oss account for the year ended 67+78+9: 5sh. H9992 ,ales -eturn inwards &et sales .pening stock )urchases -eturns out Closing stock Gross profit 3iscounts . -eceived )rov. for bad 4 doubtful 3ebt xpenses1 3isc. allowed (ad debts General expenses ,alaries 4 wages &et profit 5sh. H9992 B9!999 $8!999% :A!999 (al b+d 7!B99 5sh. H9992 6!999 6!999 3r

6!999 8A!999 $7!999% $8!999% 89!999 8!999 7!B99 7!B99 8!999 6!999 :!999 $8A!999%

$79!B99% 76!999

Jogoos (alance sheet as at 67+78+9: #ixed assets1 *and and building @otor vehicles #ixtures Currents assets1 3ebtors 5sh. H9992 5sh. H9992 5sh. H9992 A!999 =!999 :!999

6!B99 11

,tock Current liabilities Creditors &et assets #inanced by1 Capital &et profit 3rawings

8!999 :!999

B!B99 $:!999% 7>!B99 A!B99 76!999 $8!999% 7>!B99 7!B99

Accru&( &nd Pre'&#)ent (usiness accounting is based on the accruals concept! which requires that revenues be recognised when earned! not when receive and expenses are recognised when incurred! not when paid for. 't is this concept that leads to accruals and prepayment. An accrual is an expenses incurred in a given period but not paid for by the end of that period. According to the accrual concept of accounting! expenses recogni0ed and charged to the profit and loss account is the amount incurred. 'f the amount paid is less than amount incurredI the difference is the accrued expense i.e. accruals. Accruals appear in the balance sheet as a current liability. 3r. Cash (al c+f $accrual% GA@)* 7 GKL rent amount to 5sh. 7!899!999! annually. GKL pays rent quarterly and at the end of the year! the rent paid was 5sh. >99!999. -equired1 3raw the rent a+c 3r. Cash (al c+f -ent a+c >99!999 699!999 7!899!999 )4* 7!899!999 7!899!999 Cr xpense $name% a+c xxx xxx xxx (al b+f ) 4 * a+c xxx $accrual% xxx xxx Cr

GA@)* 8

12

The unpaid electricity for GKL as at 7+7+96 was 5sh. 899!999. The bills for electricity for the year ended 67+78+96 amount to 5sh. 7!999!999. The amount paid for electricity amount to 5sh. >99!999. -equired1 3raw the electricity account. 3r Cash 67+7 (al c+f lectricity a+c >99!999 699!999 7!899!999 7+7 (al b+f ) 4 * a+c Cr 899!999 7!999!999 7!899!999

A prepayment is amount by which an expense is overpaid for a given period i.e. amount which the payment for an expense exceed the actual amount incurred. 't is a current asset in the balance sheet. 3r. Telephone a+c Cr xxx xxx $prepayment% xxx

(al b+f$prepayment xxx ) 4 * Cash xxx (al c+f xxx GA@)*

The telephone bills for the year ended 67+78+96 amount to 5sh. A99!999. at the beginning of the year telephone was overpaid by 5sh. 799!999. Total amount paid this year to 5sh. 7!999!999. -equired1 3raw the Telephone bills a+c 3r. (al b+f Cash Telephone (ills a+c 799!999 7!999!999 )+* a+c (al c+f 7!799!999 Cr A99!999 699!999 7!799!999

'nformation about accruals and prepayments is normally provided after the trial balance is extracted. Therefore the charge to profit and loss account is the expenses as per trial balance adjusted for the accruals and+or prepayments accordingly. Accrued Inco)e The above discussions deals only with expenses accrued or prepaid. The same situation can occur with respect to income such as investment incomes. 'ncome 13

received in advance needs to be deferred until the next period $thus not credited to profit and loss but rather recogni0ed in the balance sheet as a liability%. 'ncome earned but not yet received $i.e. accrued income% is recogni0ed in the current period as part of the profit and carried in the balance sheet as a current asset. De'reci&tion xpense the amount of resource consumed in the running of business activities in a given period. *ong"term assets like motor vehicles are used over a number of accounting periods. The cost incurred in acquiring such assets should not be charged $at least not the full amount% to the year of acquisition or one specific year. The cost of long"term assets should be allocated to all the years that the asset is used. This process of allocation is known as depreciation. The amount allocated to a given year is known as depreciation expense. The aggregate amount of cost allocated to the various years is known as accumulated depreciation. 3epreciation allocations are largely an estimate and thus may vary from one business to the other. The methods of deprecation will be covered in chapter ten! accounting for fixed assets. The depreciation expense is charged to profit and loss account and credited to accumulated depreciation account. The accumulated depreciation is deducted from the value of the respective assets in the balance sheet. xample. 5aguta acquired a motor vehicle at shillings 699!999 paid in cash on 7 st January 899:. The company depreciates the motor vehicle at 79E on cost per year. -equire1 i% ii% ,olution. 3epreciation expense F 79E G 699!999F 69!999 3epreciation expense Accumulated depreciation 69!999 )rofit and loss a+c 69!999 69!999 69!999 Compute deprecation 3raw the depreciation depreciation account. expense! account and accumulated

Accu)u(&ted de'reci&tion &2c 14

(alance c+f

69!999 3epreciation exp. 69!999 69!999 69!999

&otice that in the balance sheet the motor vehicles will appear at cost minus accumulated depreciation i.e. 699!999" 69!999 F 8D9!999 E/&)'(e .uma @usa carries a business dealing with sale of household goods. Cis total balances for the year ended 67+78+96 are as follows. 3r. 5sh. ;999< 6!999 8!999 7!999 D!999 7!999 7!999 B99 :99 B99 =99 7!999 :!999 8!999 B99 B99 7!999 8B!B99 Additional info. 7. 8. 6. :. B. =. -ent outstanding at the end of the year amount is 5sh. 899!999 ,alaries and wages paid in advance amount to 5sh. 799!999 Accrued electricity is 5sh. B9!999 )repaid telephone bills is 5sh. 799!999 ,tock as at 67+78+96 amount to 5sh 6!999!999 )rovision for bad and doubtful debts is to be set at 79E of debtors 15 =!999 8B!B99 Cr. 5sh. ;999<

@otor vehicles #ixtures ,tock 7+7+96 ,ales )urchases -ent ,alaries 4 wages lectricity Telephone @otor Mehicle expenses 3iscounts -eturns 3ebtors Creditors Cash (ad debts )rov. #or bad 4 3oubtful debts 3rawing Capital

7B!999

B99 B99 6!999

D. 3epreciation is provided on motor vehicles and fixtures at 79 and 89E respectively on cost. -equired1 a% Trading! profit and *oss a+c for year ended 67+78+96 b% (alance sheet as at 67+78+96 Su$$e ted o(ution -ent a+c 3r. Cash (al c+d Cr 7!999 ) 4 * 899 7!899 7!899 7!899

3r. )4* (al c+f

)rov. #or bad 4 doubtful debts Cr (al b+f 799 :99 B99 B99 B99

.N@A @N,A T-A3'&G )-.#'T 4 *.,, A+C #.- K A- &3 3 67+78+96 5sh. H9992 ,ales -eturn in &et sales .pening stock 7!999 )urchases D!999 -eturns out $B99% Closing stock $6999% Gross profit )rovision for bad and doubtful debts 3iscount received xpenses -ent 7!999 .utstanding 899 7!899 ,alaries 4 wages 7!999 Advance $799% >99 lectricity B99 Accrued electricity B9 BB9 Telephone :99 16 5sh. H9992 7B!999 $7!999% 7:!999

$:!B99% >!B99 799 B99

Advance $799% @otor vehicle expenses 3iscount allowed (ad debt 3epreciation &et profit ,alaries and /ages a+c Cash 7!999 7!999 )4* (al c+d

699 B99 =99 B99 D99

$B!8B9% :!AB9

>99 799 7!999

Cash (al c+d

lectricity a+c B99 )4* B9 BB9 Telephone a+c

BB9 BB9

Cash

:99 :99

)4* (al c+d

699 799 :99

OUMA MUSA .&(&nce %eet & &t 34245263 5sh. H9992 #ixed assets1 Cost @otor vehicles 6!999 #ixtures 8!999 Current assets1 ,tock 6!999 3ebtors 6!=99 Cash 8!999 )repayments Current liabilities1 Creditors 6!999 Accruals 8B9 $6!8B9% 5sh. H9992 Acc. 3ep. 699 :99 5sh. H9992 &(M 8!D99 7!=99

899

A!A99

B!BB9 17

&et assets #inanced by1 Capital &et profit 3rawings

>!AB9 =!999 :!AB9 $7!999% >!AB9

E/&)in&tion 1ue tion

7ue tion one @usa Kubo2s runs a business in @ombasa. The trial balance for the period 67+78+97 is as follows1 3r. 5sh. H9992 6!999 8!999 8!999 D!999 7!999 B99 B99 B99 7!999 6!999 899 7!999 D99 B99 B99 88!D99 Addition 'nformation 7. ,tock as at 67+78+97 was shs. 6!999!999 8. )rovision for bad and doubtful debt is to be set at 79E of debtors. Re1uired! a% 3raw the trading! profit and loss account for the year ended 67+78+97 b% 3raw the balance sheet as at 67+78+97 D!999 88!D99 Cr. 5sh. H9992

@otor vehicles #urniture and fittings ,tock $7+7+97% )urchases ,ales -eturns in -eturns out Carriage in Carriage out (ad debts 3ebtors )rovision for bad and doubtful debt -ent lectricity ,alaries and wages 3rawing Capital

7B!999

Su$$e ted o(ution

18

@N,A KN(. T-A3'&G )-.#'T A&3 *.,, A+C #.- TC K A- &3 3 67+78+97 5sh. H9992. 5sh. H9992 ,ales -eturns inwards &et sales Cost of sales .pening stock 8!999 )urchases D!999 Carriage inwards B99 -eturns outwards $B99% Closing stock $6!999% Gross profit xpenses Carriage outwards B99 (ad debts 7!999 'ncrease in )rov. for bad and doubtful debts 799 -ent 7!999 lectricity D99 ,alaries and wages B99 &et )rofit @N,A KN(. (A*A&C ,C T A, AT 67+78+97 5sh. H9992 #ixed assets1 @otor vehicles #urniture and fittings Current assets ,tock 3ebtors Current liabilities &et Assets #inanced (y1 Capital &et profit 3rawings 6!999 8!D99 B!D99 " 5sh. H9992 5sh. H9992 6!999 8!999 B!999 5sh. H9992 7B!999 $7!999% 7:!999

=!999 A!999

$6!A99% :!899

B!D99 79!D99 D!999 :!899 $B99% 79!D99

)rovision for bad and doubtful debts a+c 19

5sh. H9992 (alance c+d 699 699

5sh. H9992 (alance b+d 899 )rofit 4 loss a+c 699

799

7ue tion T+o J.J carried business as a sole proprietor dealing with household goods. Cis trial balance for the year ended 67+78+96 was as follows1 3-. 5sh. H9992 :!999 6!999 8!999 7B!999 8!999 7!999 B99 B!999 :!999 7!999 7!B99 7!999 B99 B99 B99 899 :!999 699 8!999 :9!B99 C-. 5sh. H9992

*and and (uilding @otor vehicles ,tock $7+7+97% )urchases -eturns inwards ,ales -eturns outwards Carriage in Carriage out 3ebtors Creditors 3iscount received 3iscount allowed (ad debt )rov. #or bad 4 doubtful debt lectricity ,alaries 4 /ages /ater 3rawings Telephone Capital

68!999 7!999

:9!B99 Additional information 7. ,tock as at 67+78+9B amount to the 8!B99!999 8. )rovision for bad and doubtful debts is to be increased by BE the debtors. Re1uired! i. Trading! profit and loss account for year ended 67 st 3ecember 899B ii. (alance sheet as at 67st 3ecember 899B

Su$$e ted o(ution

J.J Trading! )rofit and *oss account 20

#or the year ended 67+78+96 5sh. H9992 ,ales ,ales returns &et sales1 Cost of sales .pening stock )urchases Carriage inwards )urchases returns Closing stock Gross profit 3iscount received xpenses1 Carriage outwards 3iscount allowed (ad debt 'ncrease in provision for bad 4 doubtful debt lectricity ,alaries and /ages /ater Telephone &et profit J.J (A*A&C ,C #ixed Assets1 *and 4 building @otor vehicles Current asset1 ,tock 3ebtors Current liabilities1 Creditors &et assets1 #inanced by1 Capital &et profit 3rawings 8!B99 :!8B9 T A, AT 67+78+96 5sh. H9992 5sh. H9992 68!999 $8!999% 69!999

8!999 7B!999 7!999 $7!999% $8!B99%

$7:!B99% 7B!B99 7!999 7=!B99

B99 7!B99 7!999 8B9 B99 B99 899 699

$:!DB9% 77!DB9

5sh. H9992

5sh. H9992 :!999 6!999 D!999

=!DB9 $:!999% 8!DB9 >!DB9 8!999 77!DB9 $:!999% >!DB9

21

7ue tion t%ree Abdul is a merchant operating in @ombasa. Cis trial (alance for the year ended 67+78+96 isI 3r. Cr. 5sh. H9992 5sh. H9992 @otor vehicles :!999 #urniture and fittings 6!999 ,tock $7+7+96% 8!999 ,ales 69!999 )urchases 89!999 -eturns 8!999 7!999 3iscounts 6!999 7!999 3ebtors+ Creditors A!999 :!999 (ad debts 7!999 )rovision for bad 4 3oubtful debts B99 @otor vehicles expenses 7!999 -ent B99 ,alaries 4 wages 7!999 lectricity 4 /ater 7!B99 Telephone 699 Carriage inwards 899 Carriage outwards 699 3rawings 6!999 Capital 7:!699 B9!A99 B9!A99 Additional information 7. ,tock at 67+78+96 amount to 5sh. 6!999!999 8. )rovision for bad 4 doubtful debts is set at BE of current debtors. 6. @otor vehicle expenses unpaid amount to 5sh. 699!999! rent paid in advance amount to 5sh. 799!999 and while salaries and wages prepaid was 5sh. 899!999. :. 1 4 of telephone paid relate to the year 899:. B. Nnpaid electricity 4 water amount to 5sh. 799!999. =. 3epreciation is provided on motor vehicles and fixtures at 89E and 79E respectively on cost. D. ,alary and rent prepaid were shillings 899!99 and 799!999 respctively. -equired i. Abdul Trading! )rofit and *oss account for year ended 67+78+96 and! ii. (alance sheet as at that date.

Su$$e ted o(ution

22

A(3N* T-A3'&G )-.#'T A&3 *.,, A+C #.- TC K A- &3 3 67+78+96 5sh. H9992 ,ales ,ales returns &et ,ales .pening stock )urchases Carriage inwards )urchases returns Closing stock Gross profit 3iscount received 3ecrease in provision for (ad and doubtful debts xpenses1 3iscount allowed (ad debts @otor vehicles expenses Add accruals -ent *ess prepaid 3epreciation ,alaries 4 wages *ess prepaid Telephone *ess prepaid Carriage outwards lectricity Add accrued & T )-.#'T A(3N*2, (A*A&C ,C A, AT 67+78+96 #ixed Assets1 @otor vehicles #urniture and #ittings 8!D99 Current assets1 3ebtors 5sh. H9992 69!999 $8!999% 8A!999

8!999 89!999 899 $7!999% $6!999%

$7A!899% >!A99 7!999 799 79!>99

6!999 7!999 7!999 699 B99 $799% 7!999 $899% 699 $DB% 7!B99 799 7!699 :99 7!799 A99 88B 699 7!=99 >!D8B 7!7DB

T 5sh. H9992 :!999 6!999 5sh. H9992 A99 699 B!>99 D!=99 23 5sh. H9992 6!899

,tock )repayments Current liabilities1 Creditors Accruals & T A,, T, 78!:DB #inanced by1 Capital &et profit 3rawings 78!:DB

6!999 6DB :!999 :99

79!>DB $:!:99% =!BDB

7:!699 7!7DB $6!999%

7ue tion Four @rs )embe runs a wholesale business in &airobi. Cer trial balance for the year ended 67+78+9: is as follows 3r Cr. 5sh. ;999< 5sh. ;999< *and and buildings A!999 @otor vehicle =!999 ,tock $7+7+9:% 6!999 ,ales B8!D99 )urchases 8A!999 -eturn inwards 8!999 -eturn out 7!999 3iscount received 8!A99 -ent 899 3iscount allowed 7!B99 #ixtures :!999 3ebtors B!999 Creditors :!999 Telephone 699 )rovision for bad and 3oubtful debts 699 (ad debts 8!999 lectricity 699 Carriage in 899 24

General expenses Carriage out ,alaries 4 wages 3rawings Capital

6!999 699 :!999 8!999 =>!A99 >!999 =>!A99

Additional info1 7. Closing stock amount to 5sh. 8!999!999 8. )rovision for bad 4 doubtful debts is to be increased by BE . 6. -ent outstanding at the end of the year amount is 5sh. 7B9!999 while salaries and wages paid in advance amount to 5sh. 7=9!999 :. lectricity and telephone bills prepaid were 5sh. B9!999 and 5sh. 7B9!999 respectively B. General expenses in areas amount to shillings 899!999 =. 3epreciation is provided on motor vehicles and fixtures at 7BE on cost. Re1uired ! a% 3raw @rs )embes Trading profit and loss account for the year ended 67+78+9: and b% (alance sheet as at 67+78+9: 7ue tion Five @wanaisha runs a wholesale business in the suburbs of @alindi town. Cer trial balance for the year ended 67+78+9: is as followsI 3r. Cr. 5sh. H9992 5sh. H9992 *and and (uildings =!B99 quipments B!999 #ixtures :!999 ,tock $7+7+9:% 6!999 ,ales 6B!999 )urchases 88!B99 ,alaries 4 wages 7!B99 lectricity 7!999 -eturns 8!999 7!999 Carriage outwards 699 3iscounts 7!B99 7!999 3ebtors+ Creditors D!999 :!999 (ad debts 6B9 )rovision for bad 4 3oubtful debts B99 @otor vehicles expenses 7!B99 25

,undry expenses -ent Telephone -ent prepaid Carriage inwards 3rawings Capital

7!999 B99 699 7B9 899 8!B99 =9!A99 7>!699 =9!A99

Additional information 7. ,tock at 67+78+9: amount to 5sh. 6!999!999 8. )rovision for bad and doubtful debts is set at BE of current debtors. 6. Telephone and motor vehicle expenses paid in advance amount to 5sh. 799!999 and 899!999 respectively. :. 1 4 of sundry expenses relate to the year 899B. B. The prepaid rent in the trial balance relate to the year 8996 =. lectricity bill for the year was shillings A99!999. D. 3epreciation is provided on quipments and furniture and fittings at 7BE and 79E on cost respectively Re1uired! 3raw @wanaisha2s Trading! )rofit and *oss account for year ended 67+78+9: and! the balance sheet as at that date. 7ue tion Si/ Kakobo runs a business in follows1 *and and buildings @otor vehicles #urniture ,tock $7+7+9:% )urchases ,ales -eturns in -eturns out Carriage in -ent lectricity ,alaries and wages 3rawing 3iscounts ldoret. Cis trial balance for the period 67+78+9: is as 3r. 5sh. H9992 B!999 6!999 8!B99 8!899 D!B99 A99 :99 B99 >99 A99 =99 :99 =99 26 Cr. 5sh. H9992

7=!999

A99

Carriage out (ad debts 3ebtors and creditors )rovision for bad and doubtful debt Capital

B99 =99 6!=99 699 79!999 8>!B99 8!999

8>!B99 Addition 'nformation 7. ,tock as at 67+78+9: was shs. 6!B99!999 8. )rovision for bad and doubtful debt is to be set be increased by 8E of debtors. 6. @otor vehicle expenses and electricity unpaid amount to 5sh. 799!999 and 899!999 respectively. :. A fifth of the rent relate to the year 899B. B. Nnpaid salaries and wages amount to 5sh. 799!999. =. 3epreciation is provided on motor vehicles and furniture at 7BE and 79E respectively on cost. Re1uired! a% 3raw the trading! profit and loss account for the year ended 67+78+9: b% 3raw the balance sheet as at 67+78+9: $Total 89 marks% 7ue tion Seven The following trial balance was extracted from the books of @ohammed 5agame! a sole trader! as at 67 .ctober 899:1 ,h Capital 3rawings ,ales )urchases 3ebtors and creditors -ent and rate lectricity ,alaries and wages )rovision for doubtful debts $7 &ovember 8996% ,tock in trade $7 &ovember 8996% 'nsurance General expenses (ank balance Cash in hand @otor vehicle at cost )rovision for depreciation of motor vehicles $7 &ovember 8996% )roceeds from sale of motor vehicle @otor vehicle expenses )remises $at cost% 27 78A!AA9 :!>9:!B89 6!D8=!9=9 :D=!7=9 B8!A99 7:!D=9 :>=!9A9 BB=!::9 79!689 BB!>A9 >9!999 :!>89 BA9!999 87=!999 77B!999 B7!==9 =99!999 68D!D89 ,h 7!87=!8=9

7>!B=9

-ent received =!A::!9=9

:B!999 =!A::!9=9

Additional information1 7 ,tock in trade as at 67 .ctober 899: was valued at ,h B>6!9:9 8 -ates and insurance were prepaid to the extent of ,h 8!:99 and ,h 8!A89 respectively as at 67 .ctober 899: 6 lectricity due as at 67 .ctober 899: amounted to ,h =!999 : The provision for doubtful debts is to be adjusted to BE of the debtors remaining after taking into account that ,h 89!7=9 of the debtors were regarded as bad B -ent receivables as at 67 .ctober 899: was ,h 7B!999 = 3epreciation has been 79 E and is to be charged on mv only D 'n &ovember 8996! a motor vehicle which had been purchased for ,h 7=9!999 on &ovember 8999 was sold for ,h 77B!999. The only record of this disposal is the entry in the proceeds from sale of motor vehicle account -equired $a% Trading and profit account for the year ended 67 .ctober 899: marks% $b% (alance sheet as at 67 .ctober 899: $A marks% $Total1 89 marks% $78

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